ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
An investment in the ADSs involves risks. You should carefully consider
the risks described below, as well as the other information included or incorporated by reference in this annual report, before making
an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these
risks. The market or trading price of the ADSs could decline due to any of these risks, and you may lose all or part of your investment.
In addition, the risks discussed below also include forward-looking statements and our actual results may differ substantially from those
discussed in these forward-looking statements. Please note that additional risks not presently known to us, that we currently deem immaterial
or that we have not anticipated may also impair our business and operations.
Risk Factor Summary
Risks Related to Our Business
|
● |
compliance with the Implementation Rules materially and adversely affecting our business, financial condition, results of operations and prospect in the future; |
|
● |
our ability to execute our growth strategies or continue to grow as rapidly as we have in the past; |
|
● |
our ability to remain profitable or increase profitability in the future; |
|
● |
our corporate structure on contractual arrangements which has caused us to lose control of the Affected Entities; |
|
● |
limitations on our ability to maintain the operation of our kindergartens and to expand our kindergarten network; |
|
● |
our ability to obtain or update our learning centers’ educational
permits and business licenses; |
|
● |
acquisition related risks as a result of our acquisition strategy; |
|
● |
our ability to manage our business expansion and integrate businesses we acquire; |
|
● |
unknown or contingent liabilities related to the acquired businesses; |
|
● |
our ability to meet financial obligations due to the net current liabilities
as of August 31, 2022; |
|
● |
our ability to secure additional capital for our future expansion; |
|
● |
our ability to ramp up existing schools and successfully launch new schools; |
|
● |
our ability to engage with the Affected Entities to provide education services as we expected; |
|
● |
our ability to enroll and retain a sufficient number of students; |
|
●
| changes in international regulations, travel restrictions and sanctions; |
|
● |
accidents, injuries or other harm that may occur at our schools, learning
centers or the events we organize; |
|
● |
our ability to charge tuition or other fees at sufficient levels; |
Risks Related to Our Corporate Structure
|
● |
ownership structure and contractual arrangements being challenged by extensive regulation over private education service business in China; |
|
● |
uncertainties in the interpretation and implementation of the newly
enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business
operations; |
|
● |
contractual arrangements with the VIEs and their shareholders being ineffective in providing control as direct ownership; |
|
● |
uncertainties in the interpretation of newly issued rules, regulatory
actions and statements related to VIEs, private schools and complementary services, under which we may be unable to assert our contractual
rights over the assets of the VIE; |
|
● |
potential conflict of interest between us and our largest shareholders; and |
|
● |
additional taxes owed by us or the VIEs due to the PRC tax authorities’ scrutiny over our contractual arrangement. |
Risks Related to Doing Business in China
|
● |
overall economy in China or the education services market affected by PRC economic, political and social conditions, as well as changes in any government policies, laws and regulations; |
|
● |
uncertainties with respect to the PRC legal system; |
|
● |
any actions by the Chinese government may cause us to make material changes to the operation of our PRC subsidiaries or the VIE; |
|
● |
any increase in applicable enterprise income tax rates or the discontinuation of any preferential tax treatments currently available to us; |
|
● |
unfavorable tax consequences to us as a result of us being classified as a PRC “resident enterprise;” |
|
● |
significant uncertainties under the PRC enterprise income tax law relating to the withholding tax liabilities of our PRC subsidiaries; |
|
● |
significant uncertainties in the application and interpretation of the Law on the Promotion of Private Education, the Implementation Rules and their detailed implementation rules and regulations; |
|
● |
uncertainties with respect to indirect transfers of the equity interests in PRC resident enterprises by their non-PRC holding companies; and |
|
● |
restrictions on currency exchange. |
Risks Related to Our Ordinary Shares and
ADSs
|
● |
volatile ADS trading price; |
|
● |
decline in our ADS price due to substantial future sales or perceived potential sales of the ADSs; |
|
● |
decline in our ADS price due to techniques employed by short sellers; |
|
● |
limitation on your ability to influence corporate matter’s due to our dual-class share structure with different voting rights; and |
|
● |
decline in our ADS price due to inaccurate, unfavorable or little research about us. |
Risks Related to Our Business
Our compliance with the Implementation
Rules has materially and adversely affected and may continue to materially and adversely affect our business, financial condition, results
of operations and prospect in the future, and we have been subject to significant limitations on our ability to engage in the private
for-profit education business and may otherwise be materially and adversely affected by changes in PRC laws and regulations.
The Standing Committee of
the National People’s Congress amended the Law on the Promotion of Private Education on November 7, 2016, which became effective
on September 1, 2017 and were further amended on December 29, 2018 (the “Amended Law”). Pursuant to the Amended Law, sponsors
of private schools may choose to establish schools in China either as non-profit or for-profit schools. Sponsors of for-profit private
schools are entitled to retain the profits from their schools and the operating surplus may be allocated to the sponsors pursuant to the
PRC company law and other relevant laws and regulations. On the other hand, sponsors of non-profit private schools are not entitled to
any distribution of profits from their schools and all revenue must be used for the operation of the schools. As a holding company, our
ability to generate profits, pay dividends and other cash distributions to our shareholders under the existing and the Amended Law is
affected by many factors, including but not limited to the characterizations of our schools as for-profit or non-profit schools, the profitability
of our schools and other affiliated entities, and our ability to receive dividends and other distributions from our PRC subsidiary, Zhuhai
Bright Scholar, which in turn depends on the service fees paid to Zhuhai Bright Scholar from our schools and other affiliated entities.
If our schools are unable to be registered as for-profit private education entities, the approval of which is subject to the discretion
of government authorities, our contractual arrangements with such schools may be subject to more stringent scrutiny. Furthermore, pursuant
to the Amended Law, sponsors are not permitted to establish for-profit schools if such schools provide compulsory education services,
which cover grades one to nine. Nevertheless, prior to the deconsolidation of BGY Education Investment, income from compulsory education
services accounted for a significant portion of revenue. For further details, see “Item 4. Information on the Company—B. Business
Overview— Regulations—Regulations on Private Education in the PRC—The Law for Promoting Private Education and the Implementation
Rules.”
On May 14, 2021, the PRC State
Council announced the Implementation Rules, which became effective on September 1, 2021. Pursuant to the Implementation Rules, (1) foreign-invested
enterprises established in China and social organizations whose actual controllers are foreign parties shall not sponsor, participate
in or actually control private schools that provide compulsory education, (2) social organizations or individuals shall not control any
private school that provides compulsory education or any non-profit private school that provides pre-school education by means of merger,
acquisition, contractual arrangements, etc., and (3) private schools providing compulsory education shall not conduct any transaction
with any related party.
The
Implementation Rules have significantly impacted our business operations and our results of operations. After consultation with its PRC
legal counsel and external advisors, we reached the conclusion that, as a result of the effectiveness of the Implementation Rules, we
have lost control over the Affected Entities, which primarily include our private schools providing compulsory education, not-for-profit
kindergartens and other enterprises within China that are affected by the Implementation Rules. We have determined that, in substance,
we ceased to recognize revenues for all activities related to the Affected
Entities with compulsory education and discontinued all business activities with such entities, by August 31, 2021 while continuing to
provide essential services to keep these schools open. As a result, our ability to engage
in the private not-for-profit education in China has been materially and adversely affected, and we cannot assure you that
we will be able to restore such ability, which could materially and adversely affect our business, prospects, results of operations and
financial condition.
We may not be able to execute our growth
strategies or continue to grow as rapidly as we have in the past several years.
As of the date of this
annual report, the domestic school network under our continuing operations in China includes eight kindergartens in China, all of
which are registered as for-profit kindergartens. The discontinuation has caused our domestic school network to shrink drastically
due to the effectiveness of the Implementation Rules. We cannot assure you that we will be able to effectively expand our domestic
school network, which could materially and adversely affect our business, prospects, results of operations and financial condition.
For our continuing operations, we intend to enroll students, recruit teachers and educational staff, increase the utilization rates
of our existing and new schools and invest in overseas and complementary businesses. However, we may not be able to continue to grow
as rapidly as we did previously due to uncertainties involved in the process, for example:
|
● |
we may not be able to attract and retain a sufficient number of students for our existing and new schools; |
|
● |
we may not be able to successfully integrate complementary or acquired
businesses with our current service offerings and achieve anticipated synergies; |
|
● |
we may not be able to hire and retain principals, teachers, educational staff and other employees for our existing and new schools; |
|
● |
we may require more time than expected to obtain the accreditation for the education programs, particularly the international education programs, at our schools; |
|
● |
we may not be able to continue to refine our curricula and optimize
our students’ academic performance; |
|
● |
our business partner, Country Garden, a related party, may not be able
to develop new residential communities at districts with robust demand for private education or sell residential units to a sufficient
number of buyers seeking convenient access to private education; |
|
● |
the development of new schools may be delayed or affected as a result of many factors, such as delays in obtaining government approvals or licenses, shortages of key construction supplies and skilled labor, construction accidents, or natural catastrophes, some of which are beyond our control; |
|
● |
we may not be able to successfully build our brand name and launch
schools independent of Country Garden; |
|
● |
we may be subject to further limitation in our ability to engage in the private for-profit education business; and |
|
● |
we may not be able to successfully execute new growth strategies. |
These risks may increase significantly
when we expand into new cities or countries. Managing the growth of a geographically diverse business also involves significant risks
and challenges. We may find it difficult to manage financial resources, implement uniform education standards and operational policies
and maintain our operational, management and technology systems across our network. If we are unable to manage our expanding operations
or successfully achieve future growth, our business, prospects, results of operations and financial condition may be materially and adversely
affected.
We may not be able to achieve profitability
in the future.
We may not be able to achieve
profitability. In particular, some of our schools, especially those at the ramp-up stage and with comparatively low utilization rates,
are currently operating at loss and we may not be able to achieve profitability for these schools. Newly launched schools may negatively
impact our overall financial condition. Our ability to achieve profitability has been and will be affected by the deconsolidation of the
Affected Entities due to the effectiveness of the Implementation Rules.
Our ability to achieve profitability
and maintain positive cash flow will depend in large part on our ability to control our costs and expenses, which are expected to increase
as we further develop and expand our school network, as well as our ability to attract and retain educational talents to promote our business
success. We may incur significant losses in the future for a number of reasons, including the other risks described in this annual report.
We may also further encounter unforeseen expenses, difficulties, complications, delays and other unknown events. If we fail to increase
revenue at the rate we anticipate or if our expenses increase at a faster rate than the increase in our revenue, we may not be able to
achieve profitability.
Our corporate structure is built upon a
series of contractual arrangements which has caused us to lose control of the Affected Entities.
On August 17, 2020, the PRC
Ministry of Education (the “MOE”), and other four ministries and commissions promulgated the Opinions on Further Standardization
of Education Fee, which further strengthens the regulation of private education fees. The Opinions on Further Standardization of Education
Fee stipulates that private schools must publicize the itemized fees and standards at a prominent location in the school and indicate
the itemized fees and standards in the admissions brochure and admission notice. If fees that should be publicized are not publicized,
or the content of the publicity is not in compliance with the relevant policies, students are entitled to refuse the payment of the fees.
In addition, the Opinions on Further Standardization of Education Fee emphasizes that sponsors of non-profit schools shall not transfer
proceeds generated from operating such schools by way of related party transactions that fail to meet the requirements of being open,
fair or just, and other service fees charged to our students must be charged based on a reasonable basis and voluntary and non-profit
principles. If the regulatory authority deems otherwise, our operations may be adversely affected.
On September 7, 2020, the
MOE published the Draft Preschool Education Law for public comments which was then submitted for review to the State Council on April
12, 2021. The Draft Preschool Education Law, among other things, tightens restrictions over kindergartens in pursuing profits and prohibits
social capital from controlling state-run kindergartens and non-profit kindergartens through mergers and acquisitions, entrusted operation,
franchising, through variable interest entities or via contractual control, prohibits (a) kindergartens from being directly or indirectly
involved as assets of a company aiming at a listing, and (b) a listed company or its controlling shareholders to invest for-profit kindergartens
through capital market financing or purchase the assets of for-profit kindergartens by issuing shares or paying cash.
On July 24, 2021, the
General Office of Central Committee of the Communist Party of China and the General Office of State Council jointly promulgated the Opinions
on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education (the “Alleviating Burden
Opinion”). The Alleviating Burden Opinion prohibits foreign investors from controlling or holding interest (including through contractual
arrangements) in institutions providing after-school tutoring services on academic subjects in relation to the compulsory education (including
primary school education of six years and middle school education of three years).
In addition, pursuant to the
Implementation Rules, which became effective on September 1, 2021, social organizations and individuals are prohibited from controlling
a private school that provides compulsory education or a non-for-profit private school that provides pre-school education by means of
merger, acquisition, contractual arrangements, etc., and private school providing compulsory education shall not conduct any transaction
with any related party, and any other private school conducting any transaction with any related party shall follow the principles of
openness, fairness and impartiality, fix the price reasonably and regulate the decision-making, and shall not damage the interests of
the state and the school or the rights and interests of the teachers and students, which may impose restrictions on the above-mentioned
related party transactions. Such prohibition has significantly affected the enforceability of the exclusive management services and business
cooperation agreements with affiliated entities providing compulsory education. Therefore, we concluded that we lost control of the schools
providing compulsory education, not-for-profit kindergartens, and the sponsor entities (i.e. the Affected Entities) as from August 31,
2021 and such VIE contractual arrangements with them have become invalid since then and classified them as discontinued operations. Such
discontinuation has had a material and adverse impact on our business, financial condition and results of operations.
Our schools in China that
are involved in related party transactions may also be subject to strict supervision by relevant government authorities, and we may need
to establish corresponding information disclosure systems and incur greater compliance costs. Our contractual arrangements, which may
be deemed as related-party transactions, may be subject to scrutiny against the stipulated benchmarks by relevant government authorities.
If our existing group structure
or contractual arrangements are deemed to violate any rules, laws or regulations, we may be required to terminate or amend our contractual
arrangement. Our license to operate private schools may be revoked, cancelled or not be renewed. We may be subject to penalties as determined
by the relevant authorities. We may also be restricted from further expanding our schools or school network. For example, we may not be
able to acquire non-profit private schools. If any of the foregoing occurs, our business, financial condition and results of operations
would be materially and adversely affected.
Our ability to maintain the operation of
our kindergartens and to expand our kindergarten network may be limited due to our listing status as well as the PRC laws and regulations,
which may in turn affect our results of operations.
On November 7, 2018, the Central
Committee of the Communist Party of China and the State Council promulgated the Opinions on Regulating the Development and Deepening of
the Reform of the Pre-School Education (the “Opinions”), which limits the ability by kindergartens to obtain financing through
equity financing. It is unclear whether the Opinions will be applied retrospectively. In addition, we have not been notified of or been
subject to any material fines or other penalties under any PRC laws or regulations due to any alleged violation of the Opinions. However,
we cannot assure you that the Opinions will not be applied retrospectively, and that we will not be subject to adverse impact under the
Opinions or any laws or regulations promulgated pursuant to the Opinions in the future. Moreover, the Opinions prohibit private
kindergartens from listing as public companies by themselves or through packaging with other assets and restrict public companies
from acquiring for-profit kindergartens with funds raised in the capital markets. Even though the Opinions do not clearly provide whether
companies listed in capital markets outside the PRC fall under such restriction, we may be subject to this restriction, which would limit
our ability to carry out further expansion plans with regard to our kindergarten business.
In addition, on January
22, 2019, the General Office of the State Council issued the Circular on Initiating the Rectification of Kindergartens Affiliated to
Residential Communities in Urban Areas (the “Circular on Initiating the Rectification”), which requires existing
community-affiliated kindergartens to be handed over to local education authorities and shall be held by local education authorities
as public kindergartens or turn into inclusive kindergartens operated by authorized social entities. It also provides that
community-affiliated kindergartens shall be not-for-profit. As of the date of this annual report, the domestic school network under
our continuing operations in China includes eight kindergartens in China, all of which are registered as for-profit kindergartens,
as the discontinuation has caused our domestic school network to shrink drastically due to the effectiveness of the Implementation
Rules. See “—Our compliance with the Implementation Rules has materially and adversely affected and may continue to
materially and adversely affect our business, financial condition, results of operations and prospect in the future, and we have
been subject to significant limitations on our ability to engage in the private for-profit education business and may otherwise be
materially and adversely affected by changes in PRC laws and regulations.” As of the date of this annual report, we do not own
any not-for-profit community-affiliated kindergartens, and we do not plan to sponsor any not-for-profit community-affiliated
kindergartens in the future, as the Circular on Initiating the Rectification has significantly restricted our ability to sponsor
community-affiliated kindergartens. We cannot assure you that the domestic kindergartens we currently operate will not be
classified as community-affiliated kindergartens and thus become not-for-profit. If any of the kindergartens we operate is
classified as a community-affiliated kindergarten, we may become unable to continue to operate such kindergarten, which could
materially and adversely affect our business and results of operations. See “Item 4. Information on the Company—B.
Business Overview—Regulations—Regulations on Private Education in the PRC—Opinions on Regulating the Development
and Deepening of the Reform of Pre-school Education.”
Our learning centers may not be able to
obtain or update the required educational permits and business licenses, which may subject us to fines and other penalties, including
the suspension of operations in noncompliant learning centers and confiscation of profits derived from non-compliant operations.
According to the Amended Law,
which became effective on September 1, 2017, private schools for after-school tutoring can be established as for-profit private schools
at the election of the school sponsors. The Amended Law also deleted the provision stipulating that measures for administration of profit-making
non-state training institutions registered with the administrative department for industry and commerce shall be separately formulated
by the State Council. According to the Rules for the Implementation of Supervision and Management of For-profit Private Schools, jointly
issued by the Ministry of Education, the Ministry of Human Resources and Social Security and the State Administration for Industry and
Commerce, and came into force on December 30, 2016, for-profit private tutoring institutions shall be in compliance with the regulations
applicable to private schools. On February 13, 2018, the General Offices of the Ministry of Education and three other ministries in China
jointly issued the Notice to Launch Special Campaign towards After-school Tutoring Institutions on Practically Reducing Burdens for Primary
and Middle School Students, which requires after-school tutoring institutions with satisfactory conditions to obtain school operation
licenses and other permits. Further, on August 22, 2018, the State Council issued the Opinion on Supervising After-School Tutoring Institutions
(the “Circular 80”), which provides detailed guidance for these after-school tutoring institutions. Pursuant to the Alleviating
Burden Opinion, which was promulgated on July 24, 2021 and the Circular 80, institutions providing after-school tutoring services on academic
subjects in relation to the compulsory education are required to be registered as non-profit organization and institutions providing after-school
tutoring services shall obtain the private school operating permit. Council Circular 80 and the
Implementation Rules further require the learning centers of a training school providing after-school tutoring services to make filings
with the relevant education authorities. On September 7, 2021, to implement the Alleviating Burden Opinion,
the MOE published on its website that the MOE, together with two other government authorities, issued a circular requiring all institutions
providing after-school tutoring services on academic subjects in relation to the compulsory education to
complete registration as non-profit by the end of 2021, and all those institutions shall,
before completing such registration, suspend enrollment of students and charging fees. For the non-academic tutoring services,
the Alleviating Burden Opinion requires that local governmental authorities shall administer the non-academic after-school tutoring institutions
by classifying sports, culture and art, science and technology and other non-academic subjects, formulating standards among different
classification of non-academic tutoring and conducting strict examination before granting permission.
Therefore, we expect that
the Amended Law, accompanied with its relevant implementation rules and regulations as well as other administrative actions, will bring
significant changes to our compliance environment. A certain number of our entities, through which we operate our existing learning centers,
may be required to obtain new licenses and permits or update their existing ones.
As of the date of this
annual report, 17 out of 18 of our learning centers in China currently in operation need to obtain and update their operating
permits or business licenses required by the regulatory changes discussed above. If we fail to obtain and update such permits or
licenses in any event as required by relevant laws or regulations, we may be subject to fines or confiscation of profits derived
from non-compliant operations and we may be unable to continue the operations at our non-complying learning
centers, which could materially and adversely affect our business and results of operations.
We have in the past acquired several businesses
and intend to remain acquisitive while continuing our organic growth, which may expose us to acquisition related risks.
We are at all times pursuing
acquisition opportunities and these processes are, at any time, in various stages of completion. For example, we have completed several
acquisitions in the United Kingdom and will continue to seek opportunities in overseas markets and in complementary education services.
Our targets may cover a wide range of education, including independent schools, boarding schools, art institutes, pre-university education
service providers, language training centers and other education-related service providers. Our acquisition strategy exposes us to significant
acquisition-related risks. If we successfully complete several of these ongoing opportunities, the overall scope of our operations could
grow substantially in the near to mid-term future and would have a material impact on our business, results of operations and financial
condition. While there is no certainty as to whether any of the opportunities that we are currently pursuing, or any future opportunity,
will be completed, some of these opportunities may be completed in the near- or mid-term, if current challenges to the processes can be
overcome. Our acquisition-related risks include:
|
● |
failure to obtain sufficient financing on satisfactory commercial terms in a timely manner; |
|
● |
failure to successfully manage the increased leverage, interest expense, gearing and risks of default; |
|
● |
depletion of our resources and cash flows available for existing operations; |
|
● |
significant reduction in our cash flow and liquidity for financing the acquisitions; |
|
● |
unanticipated challenges in operating in jurisdictions in which we do not currently operate in or do not operate at a significant scale, such as failure to get accustomed to the political, cultural and legal environment of these new jurisdictions; |
|
● |
unforeseen challenges in operating new types of schools or programs and the failure to obtain relevant licenses for these new businesses; |
|
● |
failure to manage and integrate the acquired businesses into our current operations effectively and may require financial resources that would otherwise be available for the ongoing development or expansion of our existing operations; |
|
● |
failure to adjust our current business model to manage and operate at a more sizable scale and to realize the expected benefits from economies of scale; |
|
● |
diversion of our management’s attention from existing businesses
as they commit significant resources and efforts to the acquisition process; |
|
● |
incurrence of significant costs in pursuing each acquisition, even if transactions cannot be successfully pursued, such as legal and managerial costs in conducting due diligence on the targeted businesses, resulting in a deprivation of the value of the targeted businesses; |
|
● |
unforeseen contingent risks and latent liabilities of the targeted businesses that are not revealed to us in the due diligence process; |
|
● |
financial risks related to the acquisition processes due to the inaccuracy of our assumptions with respect to the cost of and schedule for completing the acquisitions; |
|
● |
potential loss of key personnel and students of the acquired business and failure to develop new relationships with students, teachers and other third parties in the overseas market; |
|
● |
failure to recover the cost of the acquisitions through the materialization of the expected value from the targeted businesses or to achieve synergistic effect; |
|
● |
regulatory risks related to the acquisition processes and to the operation of the newly acquired businesses, such as trade barriers and other restrictive or protective measures of our targeted overseas markets due to our lack of experience in dealing with the relevant authorities; |
|
● |
liabilities related to the acquisitions against the sellers if we are unable to fulfil our obligations to them pursuant to the relevant sell and purchase agreements resulting in unanticipated financial costs; |
|
● |
unanticipated increase in financing cost for the acquisitions due to fluctuation in foreign currencies and other foreign exchange restrictions or currency controls; and |
|
● |
failure to protect our minority interests in certain non-wholly owned schools or to increase our shareholdings by acquiring more equity interests and our interests may not be aligned with those of controlling shareholders’. |
We may not be able to effectively manage
our business expansion and successfully integrate businesses we acquire.
In recent years, we have expanded
rapidly through acquisitions in China and overseas. As part of our global expansion plan, we have been exploring merger and acquisition
opportunities abroad to expand our global school network, targeting quality K-12 private education providers and reputable schools in
our targeted overseas countries and jurisdictions. For further details, see “Item 4. Information on the Company—B. Business
Overview—Our Expansions and Investments.”
Our rapid expansion has resulted,
and will continue to result, in substantial demands on our management, personnel, operational, technological and other resources. The
sustainable post-acquisition organic growth is largely dependent on our ability to integrate operations, system infrastructure, existing
partnerships and management philosophies of acquired schools and businesses. The integration of acquired schools is complicated and time-consuming
and requires significant resource commitment, standardized integration process, and adequate planning and implementation. We cannot
assure you that the acquisitions will be as successful as intended, or at all. The main challenges involved in integrating acquired
schools and businesses include the following:
|
● |
implementing integration process and management systems to ensure management philosophies, group-wide strategies and evaluation benchmarks can be effectively carried out at each acquired school and business; |
|
● |
demonstrating to students at our acquired schools and more importantly
their parents that the acquisitions will not result in adverse changes in the service quality and business focus; |
|
● |
retaining local existing managerial and operational teams and qualified education professionals of our acquired schools and businesses; |
|
● |
integrating and streamlining different system infrastructure and data management systems; |
|
● |
integrating financial reporting systems, the failure of which could cause a delay in, or impact the reliability of, our financial statements; |
|
● |
maintaining adequate internal control over financial reporting and preventing failed or delayed integration of these acquired businesses into our internal control over financial reporting; |
|
● |
preserving strategic, marketing or other important relationships of the acquired schools; |
|
● |
obtaining requisite pre-acquisition and post-acquisition regulatory approvals in countries and jurisdictions in which our target schools and businesses are located in a timely manner or at all; and |
|
● |
competing with multinational education companies. |
Therefore, we cannot assure
you that we will be able to integrate the acquired schools and businesses with our existing operations in accordance with the expected
timetables, and we may incur significant financial expenses and commit significant resources to streamline the operation of the acquired
schools and businesses under our internal control requirements, and our pricing and profitability targets may not prove accurate or feasible,
which may result in adverse impact to our financial performance. Any difficulties or delays encountered in connection with the integration
of our and the acquired businesses’ operations could divert substantial management attention to the transition of the acquired schools
and businesses before achieving full integration and may result in delay or deferral by our management of important strategic decisions
for our existing businesses, which may adversely affect our business growth. In addition, the businesses and schools we acquire may be
loss-making or have existing liabilities or other risks that we may not be able to effectively manage or may not be aware of at the time
we acquire them, which may impact our ability to realize the expected benefits from the acquisition or our financial performance.
In addition, we plan to acquire
additional overseas schools to expand our global network. We have announced a number of international acquisitions and may undertake future
acquisitions or other corporate transactions in the future. We cannot assure you that we will be able to effectively and efficiently identify
new overseas school projects, manage acquired overseas schools and our overseas operations, or integrate the acquired overseas schools
with our existing operations. In addition, political and economic instabilities, tariffs, trade barriers and other restrictive actions
taken by the governments of our targeted markets, fluctuations in foreign exchange rates, our insufficient experience and knowledge of
the local markets as well as the relevant local laws and regulations may all affect our ability to operate our overseas schools and manage
our overseas operations, which in turn may have a material and adverse effect on our business, financial position and results of operations.
We may be subject to unknown or contingent
liabilities related to the acquired businesses, which may adversely affect our financial performance.
The businesses and
schools we acquired or plan to acquire may be operating at a loss or have existing liabilities or other risks that we may not be
able to effectively manage or may not be aware of at the time that we acquire them. Although consistent with industry practice, we
always conduct a review of assets prior to each acquisition, such reviews are inherently incomplete as it is generally not feasible
to review in depth every individual asset involved in each acquisition. Ordinarily, our due diligence focuses on higher-value
businesses or assets and will only conduct a sample due diligence on the remainder. Nonetheless, even an in-depth review of all
assets and records may not necessarily reveal an exhaustive list of existing and potential problems, nor will it permit us to become
sufficiently familiar with the assets to assess fully their deficiencies and capabilities. As we may have no recourse, or only
limited recourse, against the sellers for these unknown liabilities and risks, this may in turn affect our ability to realize the
expected benefits from the acquisition or our financial performance. Furthermore, even though the sellers may be required to
indemnify us with respect to breaches of the representations and warranties pursuant to the respective sell and purchase agreements,
such indemnification is limited and subject to various materiality thresholds and an aggregate cap on losses. As a result, we cannot
assure you that we will be able to recover any amount with respect to losses due to breaches by the sellers of their representations
and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with
the acquired business may exceed our expectations, along with other unanticipated adverse effects, all of which may adversely affect
our business, results of operations and financial condition.
We may not generate sufficient profit to
guarantee our ability to meet financial obligations due to the net current liabilities as of August 31, 2022.
As of August 31, 2022, we
had net current liabilities of RMB380.9 million (US$55.3 million) for our continuing operations. We cannot assure you that we will
not experience periods of net current liabilities in the future. We may record net current liabilities in future periods as we
expand. A net current liabilities position could expose us to liquidity risks, constrain our operational flexibility and adversely
affect our ability to obtain financing and expand our business. We cannot
assure you that we will always be able to generate
sufficient cash flow from our operations or obtain necessary funding to meet our future financial needs, including repaying our
loans upon maturity and financing our capital commitments. If we fail to meet our financial obligations, our business, liquidity,
financial condition and prospects could be materially and adversely affected.
As of the date of this
annual report, our management has concluded that we will have sufficient financial resources to support our operations and meet our
financial obligations and commitments as they become due. Therefore, our financial statements have been prepared assuming we will
continue on a going concern basis. However, our ability to continue as a going concern is dependent on our ability to generate
sufficient profits and/or obtain necessary funding from outside sources, and we cannot assure you that we will be able to generate
such profits or obtain such funding. Failure to continue as a going concern would require that our assets and liabilities be
restated on a liquidation basis, which could differ significantly from the going concern basis.
We may need additional capital for our future
expansion and our leverage profile may change significantly.
To the extent our existing
sources of capital are not sufficient to satisfy our existing and future needs, we may have to seek external financing sources. Our ability
to obtain additional capital from external sources in the future is subject to a variety of uncertainties, including our future financial
condition, results of operations and cash flows, regulatory considerations, general market conditions for capital raising activities and
economic, political and other conditions in jurisdictions where we operate. In particular, future debt financing, if can be obtained,
could include terms that may restrict our financial flexibility or our ability to manage our business freely, which may adversely affect
our business and results of operations. In addition, we have completed several overseas acquisitions in the past, such as the acquisitions
of Bournemouth Collegiate School (“BCS”), St. Michael’s School, Bosworth Independent School (“BIC”) and
CATS Colleges Holdings Limited (“CATS”) and may in the future enter into agreements in relation to future overseas acquisitions,
some of which may be funded by debt financing. In the event that the amount of debt drawn to fund such acquisitions is significant, this
could result in a significant change to our leverage profile and financing costs, which could impact our financial position and results
of operations in the future. Additional debt financing may also increase our interest expense, leverage and gearing, as well as potentially
require us to dedicate a substantial portion of our cash flow from operations to debt servicing. If we fail to repay our debt in a timely
manner, we may face risks of default which may also cause our other debt to be accelerated.
If we fail to ramp up our existing schools
or successfully launch new schools, our business growth and prospects could be materially and adversely affected.
As
of the date of this annual report, we have a network of eight kindergartens in China, among which five kindergartens are in the
ramp-up period. As the discontinuation has caused our domestic school network to shrink drastically, due to the effectiveness of the
Implementation Rules. See “—Our compliance with the Implementation Rules has materially and adversely affected and may
continue to materially and adversely affect our business, financial condition, results of operations and prospect in the future, and
we have been subject to significant limitations on our ability to engage in the private for-profit education business and may
otherwise be materially and adversely affected by changes in PRC laws and regulations.” Four of the five domestic
kindergartens currently in the ramp-up period are operating at a loss. We cannot assure you that we will be able to continue to
attract a sufficient number of students to enroll in these schools, recruit additional qualified teachers and educational staff to
meet the demands of the increased student enrollment or otherwise expand our operations at schools in a manner that ensures a
consistently high quality of education service. We or our partners may encounter difficulty in procuring the land and obtaining the
permits for construction. We cannot assure you that we will be able to apply our experience from the operation of our existing
schools to new schools or that we will be able to obtain the requisite permits, licenses or accreditations or recruit a sufficient
number of qualified teachers. If we fail to attract students to our existing schools or start new schools with the requisite
permits, licenses and accreditations and teachers, our business growth and prospects could be materially and adversely
affected.
We may be unable to engage with the Affected
Entities to provide education services as we expected.
Following
the effectiveness of the Implementation Rules, we have been engaging with the relevant government authorities and external advisors to
seek full compliance with the Implementation Rules and other applicable PRC laws and regulations. However, we are exploring the possibility
of continuing to engage with the Affected Entities in future cooperation on mutually acceptable terms and in full compliance with the
Implementation Rules and other applicable PRC laws and regulations. The
future cooperation may involve our provision of services to some of the Affected Entities, such as consultation for school operation,
property management and maintenance, administrative management, student recruiting and school branding.
However, the future cooperation
with the Affected Entities, if any, will be arm’s length transactions on mutually acceptable terms. We cannot assure you that the
cooperation under contemplation will be specifically permitted by competent government authorities or that we will be able to agree on
commercial terms satisfactory to us, and as such, we may be unable to effectuate the cooperation with the Affected Entities as we expect.
We had ceased to recognize revenues for all activities related to the Affected
Entities with compulsory education and discontinued all business activities with such entities, by August 31, 2021 while continuing to
provide essential services to keep these schools open.
Services provided to these
schools primarily include marketing and consulting, procurement support, human resources, finance and legal support, and information technology
support, all of which were conducted through our centralized management system. Our centralized management system provided services to the Affected
Entities without charges together with other kindergartens that we charged services fee for. As we did not track the costs incurred by
the centralized management system separately among different service recipients, and majority of the costs are staff costs incurred by
the centralized management system, there are significant limitations for us to accurately determine the costs attributable to providing
services to the Affected Entities.
It is not clear under the Implementation Rule whether the provision of
such services to the Affected Entities will be considered transactions with any related parties in spite of the fact that it is free of
charge. If the provision of such services to the Affected Entities is considered transactions with related parties, we may be subject
to penalty for our past provision of services to these entities, and we may be prohibited from providing such services to the Affected
Entities.
If we fail to enroll and retain a sufficient
number of students, our business could be materially and adversely affected.
Our ability to continue to
enroll and retain students for our schools is critical to the continued success and growth of our business. The success of our efforts
to enroll and retain students will depend on several factors, including our ability to:
|
● |
enhance existing education programs and services to respond to market changes and student demands; |
|
● |
develop new programs and services that appeal to our students and their parents; |
|
● |
maintain and enhance our reputation as a leading school operator offering quality education; |
|
● |
expand our school network and geographic reach; |
|
● |
effectively market our schools and programs to a broader range of prospective
students; |
|
● |
manage our growth while maintaining the consistency of our teaching quality; |
|
● |
develop and license additional high quality education content; and |
|
● |
respond to increasing competition in the market. |
Our business, financial condition
and results of operations could be materially and adversely affected if we cannot maintain or increase our student base as we expand our
school network.
Moreover, our ability to enroll
and retain a sufficient number of students may be adversely affected the declining birth rate in China. Continued decline in birth rate
may cause the demand for private education to decline and the competition among education service providers to intensify, leading to reduced
revenue and profitability.
Changes
in international regulations and travel restrictions have materially adversely affected and together with changes in sanctions could
continue to materially adversely affect international student enrollments.
We are subject to a wide range
of laws and regulations relating to our international operations. These include laws and regulatory regimes of the countries in which
we operate, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. These laws and regulations change frequently. Failure
to comply with these laws and regulations could result in significant penalties or the revocation of our authority to operate in the applicable
jurisdiction, each of which could have a material adverse effect on our operating results.
Further changes to the regulatory
environment, including changes to government policy or practice in oversight and enforcement, or other factors, including geopolitical
instability, imposition or extension of international sanctions, a natural disaster or pandemic in either the students’ countries
of origin or countries in which they desire to study, could continue to negatively affect our ability to attract and retain students and
negatively affect our operating results. Any significant changes to availability of government funding for education, visa policies for
students and their dependents, or other administrative immigration requirements, or the tax environment, including changes to tax laws,
policies and practices, in any one or more countries in which we operate our business available could negatively affect our operating
results.
A
substantial portion of our revenue comes from oversea schools. Our
ability to enroll students in oversea schools is directly dependent on our ability to comply with complex regulatory environments. For
example, the impact of Brexit on us over time will depend on the agreed terms of the U.K.’s withdrawal from the EU. Uncertainty
over the impact and terms of Brexit trade deals may materially diminish interest in traveling to the U.K. for study. If the U.K. is no
longer viewed as a favorable study destination, our ability to recruit international students would be adversely impacted, which would
materially adversely affect our results of operations and cash flows. Moreover, the outcome of general elections in the U.K. may affect
investors’ ability to access the U.K. market and impair our ability to expand our service offering in the U.K.
Changes to levels of direct
and indirect government funding for international education programs would also materially affect the success of our operations. For example,
if access to student loans or other funding were to be lost for our operations that admit students who are entitled to receive the benefit
of this funding, our operating results could be materially adversely affected.
In January 2021, President
Biden reversed a previously enacted ban on travel from certain countries to the U.S. and directed the State Department to restart visa
processing for individuals from the affected countries. There have since been new, unrelated travel restrictions into the U.S. due to
COVID-19, and those restrictions can be expected to continue changing. On September 25, 2020, the previous U.S. presidential administration
proposed significant changes to the visa rules governing entry of non-immigrant academic students and exchange visitors. In July 2021,
the Biden administration formally withdrew the notice of proposed rulemaking regarding these changes. Nevertheless, negative perceptions
regarding travel to the U.S. could continue to have a significant negative impact on our ability to recruit international students, and
our business could be materially adversely affected.
Accidents, injuries or other harm may occur
at our schools, learning centers or the events we organize, which could negatively affect our reputation and our ability to attract and
retain students.
There are inherent risks
of accidents or injuries in our business. We could be held liable if any student, employee or other person is injured in any
accident or incident at any of our schools, learning centers or the events we organize. Though we believe we have taken appropriate
measures to limit these risks, in the event of personal injuries, food poisoning, fires or other accidents or incidents suffered by
students or other people, we could nonetheless face claims alleging that we were negligent, that we provided inadequate supervision
or that we were otherwise liable for the injuries. In addition, if any of our students, teachers or instructors commits acts of
violence or otherwise behaves inappropriately, we could face claims alleging our failure to provide adequate security measures or
precautions to prevent such actions. Similar events and allegations may also arise with respect to events we organize, including
off-campus gatherings and overseas camp programs. Parents of our students may perceive our facilities or programs to be unsafe,
which may discourage them from sending their children to our schools, learning centers or programs. We have historically encountered
isolated student-related accidents on our school premises and compensated the injured students. Although we maintain liability
insurance, the insurance coverage may not be adequate to fully protect us from claims of all kinds and we cannot assure you that we
will be able to obtain sufficient liability insurance in the future on commercially reasonable terms or at all. A liability claim
against us or any of our employees could adversely affect our reputation and ability to attract and retain students. Even if
unsuccessful, such a claim could create unfavorable publicity, cause us to incur substantial expenses and divert the time and
attention of our management.
We may be unable to charge tuition or other
fees at sufficient levels to be profitable or raise tuition as planned.
Our results of
operations are affected in large part by the pricing of our education services. We charge tuition based on each student’s
grade level and the programs in which the student is enrolled. Subject to the applicable regulatory requirements, we generally
determine tuition based on the demand for our education services, the cost of our services, and the tuition and the fees charged by
our competitors. Although we have been able to increase the tuition in the past, we cannot assure you that we will be able to
maintain or increase our tuition in the future without adversely affecting the demand for our education services.
The tuition we charge
for some of our education programs is subject to regulatory restrictions. The regulatory authorities in China have huge power to
regulate the private education industry, including the tuition, room and boarding fees and other fees charged by schools. We have
occasionally encountered difficulty in persuading the local regulatory authorities to approve our tuition increase proposals in the
past. In light of the significant increase in tuition and other education related fees in China in recent years, regulatory
authorities may impose stricter price controls on education charges generally in the future. For example, in accordance with the
relevant local regulations, if we increase the tuition of our schools in Guangdong province in a certain school year, such increase
will generally not affect the existing students until they complete their current section of education at the same schools. If the
tuition we charge are required to be reduced or are not allowed to increase in line with increases in our costs, or if there are any
changes in the regulations which may otherwise negatively affect or restrict our ability to adjust our tuition, our business,
financial condition and results of operations may be materially and adversely affected. For example, the local government
authorities in implementing the Amended Law may impose additional limits on the tuition and fees our schools charge, restrict
proposed increase in fees as charged by any of our kindergartens if deemed community-affiliated kindergartens, or prevent us from
raising the tuition and fees to our desired levels or at all. For our complementary education services, we have more discretion in
determining the tuition, but we cannot assure you that the current regulatory regime will not change in a manner that may restrict
our ability to increase tuition for our complementary education services.
In addition, if we add new
kindergartens to our domestic school network in the future, we cannot assure you that we will be able to obtain the for-profit school
designation for such schools. As a result, we may not be able to maintain our current tuition fee rates and may not be able to raise any
of such fees for our kindergartens at our desired rates, times and places or at all in the future under the framework of the Amended Law.
Furthermore, the tuition we
are able to charge is subject to a number of other factors, such as the perception of our brand, the academic results achieved by our
students, our ability to hire qualified teachers, and general local economic conditions. Any significant deterioration in these factors
could have a material adverse effect on our ability to charge tuition at levels sufficient for us to remain profitable.
We
may not be able to renew kindergarten operation agreements or maintain favorable fee rates at our existing domestic kindergartens or enter
into kindergarten operation agreements for new domestic kindergartens on commercially reasonable terms, especially given the possible
limitation on cooperation with Country Garden.
We may launch new kindergartens
in China in collaboration with school development partners, including Country Garden, and on our own. We cannot assure you that we will
obtain leases for kindergarten premises, renew our kindergarten operation agreements or enter into new kindergarten operation agreements
on commercially reasonable terms, or at all. Country Garden has an internal policy that designates us as a preferred school operator partner,
under which we are entitled to a right of first refusal on school development projects in connection with its new residential properties.
We cannot assure you that Country Garden will faithfully implement this policy or will not amend it, and we do not have any standing to
require Country Garden to do otherwise. For new kindergartens we launch in the future, we may not offer tuition discounts to Country Garden
homeowners but may be required to pay fees, such as rent, for Country Garden’s kindergarten premises and facilities. This may increase
our revenues but also cost of revenue at the same time at a different level, which may adversely affect our profit margins.
In addition, the provision
of the Implementation Rules on private schools conducting transactions with any related party may limit our collaboration with Country
Garden. Limitations imposed upon our collaboration with Country Garden may adversely affect our business expansion and further adversely
affect our business, results of operations and financial condition. See “—Our compliance with the Implementation Rules has
materially and adversely affected and may materially and adversely affect our business, financial condition, results of operations and
prospect in the future, and we have been subject to significant limitations on our ability to engage in the private for-profit education
business and may otherwise be materially and adversely affected by changes in PRC laws and regulations.”
If we fail to help our students achieve
their academic goals, students’ and parents’ satisfaction with our education services may decline.
The success of our
business depends on our ability to deliver quality school experiences and help our students achieve their academic goals. Our
schools may not be able to meet the expectations of our students and their parents in terms of students’ academic performance.
A student may not be able to attain the level of academic improvement that he or she seeks and his or her performance may otherwise
not progress or decline due to reasons beyond our control. We may not be able to provide education that is satisfactory to all of
our students and their parents. Their satisfaction with our services may decline. In addition, we cannot assure you that our
students will be admitted to the higher-level education institutions of their choice. Any of the foregoing could result in a
student’s withdrawal from our schools, and dissatisfied students or their parents may attempt to persuade other students or
prospective students not to attend our schools. If our ability to retain students decreases significantly or if we otherwise fail to
continue to enroll and retain new students, our business, financial condition and results of operations may be materially and
adversely affected.
Our business is subject to the risks of
international operations.
We have entered into the overseas
markets, such as United Kingdom and the United States, through acquisition of established overseas schools, and we may expand our operations
in additional markets and regions in the future. We may have to adapt our business models to the local markets due to various legal requirements
and market conditions. Our international operations and expansion efforts have resulted and may continue to result in increased costs
and expenses and are subject to a variety of risks, including increased competition, uncertain enforcement of our intellectual property
rights, changes and evolutions in overseas market conditions, and the complexity of compliance with the local laws and regulations.
In addition, compliance with
applicable Chinese and foreign laws and regulations, such as education laws, anti-corruption laws, tax laws, foreign exchange controls
and cash repatriation restrictions, data privacy requirements, labor laws, restrictions on foreign investment, and anti-competition regulations,
increases the costs and risk exposure of doing business in foreign jurisdictions. Although we have implemented policies and procedures
to comply with these laws and regulations, a violation by us or our employees, contractors or agents could nevertheless occur. In some
cases, compliance with the laws and regulations of one country could violate the laws and regulations of another country. Violations of
these laws and regulations could materially and adversely affect our brand, international growth efforts and business.
We may not be able to recruit, train and
retain a sufficient number of qualified and experienced teachers and principals.
Teachers are critical to
maintaining the quality of our education and services and our brand and reputation. Our principals are also instrumental to the
successful operation of our schools. Our ability to continue to attract teachers and principals with the necessary experience and
qualifications is therefore a critical contributing factor to the success of our operations. There are a limited number of teachers
and principals in China with the necessary experience, expertise and qualifications that meet our requirements. In addition, we
strive to provide an immersive bilingual learning environment in our domestic schools, which requires a sizable pool of foreign
teachers. As the Chinese market for qualified foreign teachers is extremely competitive and the attrition rate of foreign teacher is
generally higher than that of Chinese teachers, we cannot assure you that we can increase the number of our foreign teachers to meet
the growing demand from our domestic schools when our student enrollment increases. In addition, as Chinese government process for
obtaining the work and residence permits for foreign teachers may be time-consuming, we may fail to apply for such permits for our
foreign teachers before they join us. We also face similar risks of shortage in supply of teachers and principals in the U.K. If we
are unable to attract and retain qualified teachers and principals, we may experience a decrease in the quality of our education
programs and services in one or more of our schools or incur increase in hiring and labor costs, which may materially and adversely
affect our business and results of operations.
If we lose the permits or licenses required
to provide our education or complementary education services or operate our schools or if we fail to obtain the accreditations, permits
or licenses for our new schools or complementary education services, our business could be materially and adversely affected.
We
must apply periodically to the local education bureaus and civil affairs bureaus to obtain or renew the permits or licenses to operate
our schools and ancillary services, including room and boarding services and school bus services. While we believe that we will be able
to obtain or renew such permits or licenses, we cannot assure you that such permits and licenses will be obtained or renewed in a timely
manner, or at all, or that new conditions will not be imposed. Any failure to obtain or renew the required permits or licenses to operate
our schools could give rise to administrative penalties including rectification or suspension of operations in non-complying schools
or confiscation of profits derived from noncompliant operations, which could materially and adversely affect our business, results of
operations and financial condition.
Severe competition in the private education
market may cause the enrollment at our schools to fall, bring up cost for recruiting and retaining teachers and limit our tuition cap,
and thus, reduce profitability.
We may face competition from
other existing or new schools targeting the children of affluent local families in the locations in which we operate. Some of our existing
and potential competitors may be able to devote greater resources than we can to the development and construction of private schools and
respond more quickly to changes in demands of students and their parents, admissions standards, market needs or new technologies. Moreover,
our competitors may increase capacity in any of the local markets to an extent that leads to an over-supply of placement positions at
private schools and downward pressure on tuition prices. Our existing or potential competitors may also provide higher compensation to
teachers in the same region, making it more difficult for us to recruit and retain competent and qualified teachers. Our existing or potential
competitors may also strategically price their tuition lower than ours to attract students and parents. Among other legislations and national
policies that encourage social forces to provide diversified education services (such as childcare services), the Amended Law may attract
more private school operators to offer non-compulsory education and further increase competition in this market.
Our complementary businesses,
including English proficiency training and extracurricular programs, may also face competition from other providers of comparable services
that may have stronger financial resources, technology, service performance or brand recognition.
If we are unable to differentiate
our services from those of our competitors and successfully market our services to students and their parents, we could face competitive
pressures that reduce our student enrollment. If our student enrollment falls, we may be required to reduce our tuition or increase spending
in order to attract and retain students, which could materially and adversely affect our business, prospects, results of operations and
financial condition.
Our business and financial performance may
suffer if we fail to successfully develop and launch new education services.
The future success of our
business depends partly on our ability to develop new education services. The planned timing or launch of new education services is subject
to risks and uncertainties. Actual timing may differ materially from originally proposed timeframes. Unexpected operational, technical
or other issues could delay or prevent the launch of one or more of our new education services or programs. In addition, significant investment
of human capital, financial resources and management time and attention may be required to successfully launch features of our new education
programs. For further details, see “Item 4. Information on the Company—B. Business Overview—Our Expansions and Investments.”
However, we cannot assure you that our students will choose us over third-party service providers or that we will be able to successfully
integrate such services with our schools and other complementary businesses without expending significant financial resources on marketing
and operational optimization. If we fail to manage the expansion of our portfolio of education services cost-effectively, our business
could be negatively affected.
We cannot assure you that
any of our new services will achieve market acceptance or generate incremental revenue. If our efforts to develop, market and sell our
new education services and programs to the market are not successful, our business, financial position and results of operations could
be materially and adversely affected.
Any deterioration in our relationships with
providers of overseas education services may adversely affect our business.
We have business collaborations
with various overseas schools and institutions. We derive direct benefits from these relationships such as the ability to offer more diverse
programs and classes, including summer and winter camps, and the ability to charge a premium for the programs we offer with other overseas
education service providers. We also derive indirect benefits from these relationships, including enhancement of our brand and reputation
and exposure to international education methods and experiences.
If our relationships with
any of these overseas education service providers deteriorate or are otherwise damaged or terminated, or if the benefits we derive from
these relationships diminishes, whether as a result of our own actions, actions of our partners, actions of any third party, including
our competitors, or of regulatory authorities or other entities beyond our control, our business, prospects, financial condition and results
of operations could be adversely affected.
Any damage to the reputation of any of our
business may adversely affect our overall business, prospects, results of operations and financial condition.
Our reputation could be adversely
affected under many circumstances, including the following:
|
● |
accidents, epidemics or other events adversely affect our students; |
|
● |
we fail to properly manage accidents or other events that injure our students; |
|
● |
our staff behave or are perceived to behave inappropriately or illegally; |
|
● |
our staff fail to appropriately supervise students under their care; |
|
● |
we fail to conduct proper background checks on our staff; |
|
● |
our third-party business partners may commit misconduct or other improper
activities that cause negative publicity concerning us or penalties from relevant authorities; |
|
● |
we lose any license, permit, accreditation or other authorization to
operate an education program, a school or a complementary education service; |
|
● |
we do not maintain consistent education quality or fail to enable our students to achieve strong academic results; |
|
● |
our schools do not meet the relevant standards during the regular inspections by governmental authorities; |
|
● |
our school facilities do not meet the standards expected by parents and students for private education; and |
|
● |
school operators of lower quality that abuse our brand name or those with brand names similar to ours conduct fraudulent activities and create confusion among students and their parents. |
The likelihood that any of
the foregoing may occur increases as we expand our school network. These events could influence the perception of our schools not only
by our students and their parents, but also by other constituencies in the education sector and the general public. Moreover, an event
that directly damages the reputation of one of our schools could adversely affect the reputation and operations of our other schools.
If our reputation deteriorates, our overall business, prospects, results of operations and financial condition could be adversely affected.
Our business is subject to seasonal fluctuations,
which may cause our results of operations to fluctuate from quarter to quarter, and in turn result in volatility in and adversely affect
the price of the ADSs.
Our business is subject to
seasonal fluctuations as our costs and expenses vary significantly throughout the fiscal year and do not necessarily correspond with the
timing of recognition of our revenues. Our students enrolled in our domestic kindergartens and overseas schools and their parents typically
pay the tuition and other fees prior to the commencement of a semester, and we recognize revenues from the delivery of education services
on a straight-line basis over a semester. We typically incur higher upfront operating expenses in the first fiscal quarter at the start
of each school year, and also typically recognize more revenue in the second half of fiscal years due to higher revenues from complementary
education services during the summer and, to a lesser extent, students who transfer into our schools for the second semester. As a result
of the combination of the foregoing, we have historically incurred net loss or significantly lower net income in the second and fourth
fiscal quarters, primarily due to our schools being closed during winter and summer holidays, when no revenue from our school operations
is recognized. We expect to continue to experience seasonal fluctuations in our results of operations. These fluctuations could result
in volatility in and adversely affect the price of the ADSs.
Our business could be disrupted if we lose
the services of members of our senior management team, key principals and teaching staff.
Our success depends in part
on the continued application of skills, efforts and motivation of our officers and senior management team. In 2023, we experienced changes
in our senior management team. We may in the future experience such changes for reasons beyond our control. In addition, key personnel
could leave us to join our competitors. Losing the services of key members of senior management or experienced personnel may be disruptive
to and cause uncertainty for our business. We depend upon the services of our senior management team, who collectively has significant
experience with our company and within the education industry. If one or more members of our senior management team are unable or unwilling
to continue in their present positions for health, family or other reasons, we may not be able to replace them easily or at all. If we
cannot attract and retain qualified senior management members, key principals and teaching staff in a timely manner, our business, results
of operations and financial condition could be materially and adversely affected.
Failure to adequately protect our intellectual
property could materially and adversely affect our business.
We have historically relied
upon the brand name of “Country Garden” to market our schools. As we expand our schools beyond the network of Country Garden’s
residential communities, we have created and begun to promote our own brands, including “Bright Scholar.” Since our inception,
we have also created other intellectual property, including education materials developed by our teaching staff. Unauthorized use of any
of our intellectual property may adversely affect our business and reputation. We rely on a combination of copyright, trademark and trade
secrets laws to protect our intellectual property rights. Nevertheless, despite our efforts, third parties may obtain and use our intellectual
property without proper authorization. The practice of intellectual property rights enforcement by the PRC regulatory authorities is in
its early stages and is subject to significant uncertainty. We may also need to resort to litigation and other legal proceedings to enforce
our intellectual property rights. Any such action, litigation or other legal proceedings could result in substantial costs and diversion
of our management’s attention and resources and could disrupt our business. In addition, we cannot assure you that we will be able
to exercise our intellectual property rights effectively or otherwise prevent others from the unauthorized use of our intellectual property.
Failure to adequately protect our intellectual property could materially and adversely affect our business, financial condition and results
of operations.
We operate schools and complementary education
services under several brands, which may have a dilutive effect on brand recognition among our students and their parents.
We operate our business under
several brands including “Country Garden,” our English proficiency training under “élan,” overseas study
counseling business under “Can-Achieve”, overseas career counseling business under “Dream Big Career,” and overseas
schools under “CATS,” “Worthgate,” “Guildhouse,” “Bosworth,” “St Michael’s”
and “Bounemouth Collegiate Schools.” We intend to otherwise promote a unified brand “Bright Scholar” as our corporate
image, which represents the full range of education services we offer in China. Maintaining multiple brands could dilute our brand recognition
among students and their parents and increase our overall marketing expenses as we allocate resources among different brands. We may transition
our individual brands to “Bright Scholar” in the future if the market responds positively to our new corporate image. We cannot
assure you, however, that our prospective students will embrace our new brand given its limited market exposure and recognition. We may
incur significant financial resources for, and divert considerable management attention to, the integration of our existing brands with
our new corporate image and the enhancement of brand recognition, which may adversely affect our business, results of operation and financial
condition.
We may be exposed to infringement claims
by third parties, which, if successful, could cause us to pay significant damages.
We cannot assure you
that education materials and content used in our schools and programs do not or will not infringe on intellectual property rights of
third parties. While we are not aware of any claims for intellectual property infringement with regard to the above-mentioned
education materials and content as of the date of this annual report, we cannot assure you that third parties will not claim that we
have infringed on their proprietary rights in the future.
We may also use
education materials designed in conjunction with our overseas associates and we cannot assure you that disputes will not arise over
the intellectual property rights associated with these materials.
Although we plan to vigorously
defend ourselves in any such litigation or legal proceedings, we cannot assure you that we will prevail in such matters. Participation
in such litigation and legal proceedings may also cause us to incur substantial expenses and divert our management’s time and attention.
If we are required to pay damages or incur settlement expenses, it could negatively impact our financial condition and results of operations.
In addition, if we are required to pay any royalties or enter into any licensing agreements with the owners of intellectual property rights,
we may find that the terms are not commercially acceptable, and lose the ability to use the related materials or content, which in turn
could adversely affect our education programs. Any similar claim against us, even ungrounded, could also damage our reputation and brand
image. Any such event could have a material adverse effect on our business, financial condition and results of operations.
Unauthorized disclosure of personal data
that we collect and retain, whether due to a system failure or otherwise, could damage our business.
We maintain records that include
personal data, including academic and medical records, address and family information. Our online services may store and process certain
personal and other sensitive data provided by students or their parents. There are numerous laws regarding privacy and the storing, sharing,
use, disclosure and protection of personally identifiable information and data. Specifically, personally identifiable and other confidential
information is increasingly subject to legislation and regulations in PRC and numerous foreign jurisdictions. The PRC government has enacted
a series of laws and regulations relating to the protection of privacy and personal information, which require internet service providers
and other network operators to clearly indicate the purposes, methods and scope of any information collection and usage, obtain appropriate
user consent and establish user information protection systems with appropriate remedial measures.
Internationally,
many jurisdictions have established data privacy and cybersecurity legal frameworks with which we may need to comply. For example,
the EU has adopted the General Data Protection Regulation (“GDPR”), which requires covered businesses to comply with
rules regarding the processing of personal data, including its use, protection and the ability of persons whose personal data is
processed to access, to correct or delete personal data about themselves. Failure to meet GDPR requirements could result in
penalties of up to 4% of annual worldwide turnover or EUR 20 million (whichever is the greater). Additionally, the U.K. General Data
Protection Regulation (“U.K. GDPR”) (i.e., a version of the GDPR as implemented into U.K. law) went into effect
following Brexit. While the GDPR and the U.K. GDPR are substantially the same, going forward there is an increasing risk for
divergence in application, interpretation and enforcement of the data privacy and cybersecurity laws and regulations as between the
EU and the United Kingdom, which may result in greater operational burdens, costs and compliance risks. Additionally, the GDPR and
the U.K. GDPR include certain limitations and stringent obligations with respect to the transfer of personal data from the EU and
the United Kingdom to third countries, and the mechanisms to comply with such obligations are also in considerable flux and may lead
to greater operational burdens, costs and compliance risks.
However, these regulatory
frameworks for privacy issues in China and worldwide are currently evolving and are likely to remain uncertain for the foreseeable future.
We cannot assure you that our existing privacy and personal protection system and technical measures will be considered sufficient under
applicable laws and regulations. We could be adversely affected if legislation or regulations in China or worldwide are expanded to require
changes in business practices or privacy policies, or if the PRC or foreign governmental authorities interpret or implement their legislation
or regulations in ways that negatively affect our business, financial condition and results of operations. In addition to laws, regulations
and other applicable rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new privacy standards
that we must comply with. The interpretation and application of privacy and data protection laws and privacy standards are still uncertain,
it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices.
Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws,
regulations and privacy standards, could result in additional cost and liability for us, damage our reputation, inhibit the use of our
services and harm our business.
If we were found to be in
breach of any international privacy and data protection laws and regulations, we could incur significant expenses in connection with rectifying
any security breaches, settling any resulting claims, payment of possible fines and providing enhanced protection to prevent additional
breaches. In addition, any failure to protect personal information may adversely impact our ability to attract and retain students, harm
our reputation and materially adversely affect our business, prospects and results of operations.
Failures or interruptions in our centralized
data management system may adversely affect our operations.
We have established a centralized data management system, the Oracle
ERP system, which collects and analyzes group-wide financial, procurement and student admission information and data. We are in the process
of gradually refining the features and functionalities of such enterprise resource planning system (“ERP system”) to enhance
efficiency. We are also expanding the application of such ERP system into entities we newly acquired in order to streamline our data and
information management system. However, we cannot assure you that such ERP system will not encounter technical failures and interruptions,
leading to our management’s failure to timely access accurate key operating data, which may adversely affect our operation. We may
encounter compatibility issues when incorporating newly acquired schools into our ERP system, which may compromise the overall accuracy
and value of the operating information generated from such ERP system and adversely affect the implementation of our growth strategies
as we expand our business and integrate new businesses.
We may fail to maintain the proper functioning
of or improve our technology infrastructure.
Our online teaching facilities
and internal systems rely on software that is highly technical and complex and depend on the ability of such software to store, retrieve,
process and manage immense amounts of data. Our systems are vulnerable to disruptions from design errors, execution errors, employee misconduct,
external fraud, security breaches, capacity constraints, software flaws, computer viruses, cyberattacks, power outages and similar events.
We cannot assure you that our information technology systems will always operate without interruptions. Some errors may only be discovered
after the code has been released for external or internal use. Any errors, bugs or defects discovered in the software on which we rely
could cause failures in our systems’ performance and result in disruptions in operations, slower response time and delays in information
processing, thereby compromising our ability to support our online teaching activities. If any of the above were to occur, our business,
financial condition and results of operations may be adversely affected. In addition, some of our subsidiaries and affiliates have historically
been targeted in cyberattacks. Although we have stepped up the protection of our information systems, we cannot assure you that we will
not become a target in cyberattacks again. Any such attacks could result in significant financial losses, damage to our reputation, disruption
to our operations, and loss of confidential information.
We will also continue to upgrade
and improve our information technology systems, software, mobile application and big data analytics in order to support our business growth
and optimize our operating efficiency. Adopting new technologies and maintaining and upgrading our technology infrastructure require significant
investment of time and resources, including adding new hardware, updating software and recruiting and training new engineering personnel.
However, we cannot assure you that we will be successful in implementing these upgrades and improvement plans. New technologies may not
be fully integrated with our existing systems on a timely basis, or at all. Our systems may experience slower response time and interruptions
during upgrades, which could impair the experience of our students and business partners, delay the reporting of accurate operating and
financial information, and result in material and adverse effects on our business, financial condition, results of operations and prospects.
In addition, the reliability
and availability of our platform depends on telecommunications carriers and other third-party providers for communications and storage
capacity, including bandwidth and server storage, among other things. If we are unable to enter into and renew agreements with these providers
on acceptable terms, if any of our existing agreements with such providers are terminated as a result of our breach or otherwise, or if
these service providers themselves experience service disruptions or cessations, the proper functioning of our platform could be adversely
affected.
We have limited insurance coverage with
respect to our business and operations.
We
are exposed to various risks associated with our business and operations, and we have limited insurance coverage. See “Item 4. Information
on the Company—B. Business Overview—Insurance” for more information. We are exposed to risks including, among other
things, accidents or injuries in our schools, loss of key management and personnel, business interruption, natural disasters, terrorist
attacks and social instability or any other events beyond our control. The insurance industry in China is still at an early stage. As
a result insurance companies in China offer limited business-related insurance products. We do not have any business disruption insurance,
product liability insurance or key-man life insurance. Any business disruption, legal proceeding or natural disaster or other events beyond
our control could result in substantial costs and diversion of our resources, which may materially and adversely affect our business,
financial condition and results of operations.
We face risks related to natural disasters,
health epidemics or terrorist attacks in regions where we operate.
Our business could be materially
and adversely affected by natural disasters, such as earthquakes, floods, landslides, tornados and tsunamis, outbreaks of health epidemics
such as avian influenza and severe acute respiratory syndrome, or SARS, COVID-19 virus, and Influenza A virus, such as H5N1 subtype and
H5N2 subtype flu viruses, as well as terrorist attacks, other acts of violence or war or social instability in the regions in which we
operate or those generally affecting China. If any of these occur, our schools and facilities may be required to temporarily or permanently
close and our business operations may be suspended or terminated. Our students, teachers and staff may also be negatively affected by
such event. In addition, any of these could adversely affect the economy and demographics of the regions where we operate, which could
cause significant declines in the number of our students in those regions and could have a material adverse effect on our business, financial
condition and results of operations.
An
outbreak of COVID-19 continues to spread within the PRC and globally. The new strain of coronavirus is considered highly contagious and
may pose a serious public health threat. On January 30, 2020, the World Health Organization reportedly declared this COVID-19 outbreak
a health emergency of international concern. In March 2020, the World Health Organization declared the COVID-19 a pandemic. After the
COVID-19 outbreak, the PRC government imposed various strict measures with the aim to contain the virus including, but not limited to,
travel restrictions, mandatory quarantine requirements, and postponed resumption of business operations. In response to the COVID-19
pandemic, many governments imposed student travel restrictions (applicable to exit and entry), made recommendations for their students
to return home and closed physical campus locations, all of which may have materially adversely affected our operations and resulted
in significant losses at us. Certain of these restrictions remained in place in 2022 and some may remain in place into 2023. The emergence
of new variants of COVID-19, and consequential changes to travel and study arrangements could further negatively affect our operating
results. Our domestic kindergartens were in ordinary operation in accordance with regulatory policies in the 2022 fiscal year. Our
overseas operations were most negatively affected amid the COVID-19 pandemic. As a large number of students opted to return to their
home countries during the pandemic, we partially refunded the accommodation fees to these students, which has adversely affected our
business, financial performance and results of operations. We consolidated our offline teaching sites to accommodate certain boarding
students in the United Kingdom, while the majority of the rest quickly shifted to online courses. As required by the UK government, all
schools in the United Kingdom were mostly closed from March 20, 2020 to September 7, 2020 and then again from January 5, 2021 to March
12, 2021. Additionally, CATS schools decided on a second lockdown to only resume offline teaching on April 12, 2021 following the Easter
holidays, to avoid unnecessary travels for international students. Throughout
the 2021 and 2022 school year, we ran the WeCare initiative highlighting pastoral and medical care and COVID preparedness and safety
measures in the schools. We permanently ceased the operation of the four language training institutions in the United States and sold
one language training institutions in the United Kingdom and two institutions in Canada. We also took this opportunity to reduce our
cost, upgrade our IT and management systems, realign our sales and marketing strategies and improve our education outcome. We believe
these measures will help put us in a more competitive position than our peers.
Following the PRC government’s
policy shift from its zero-COVID policy in late 2022 and phase-out of COVID-19 prevention measures by the rest of the world, our domestic
kindergartens and overseas operations are in ordinary operation as of the date of this annual report. Nonetheless, we are closely monitoring
the development of the COVID-19 pandemic and continuously evaluating any further potential impact on our business, results of operations
and financial condition, which we believe will depend on the duration and degree of the pandemic. If the outbreak persists or escalates,
we may be subject to further negative impact on our business operations and financial condition.
Our business, financial performance and
results of operations could be adversely affected by deterioration of the relation between China and the United States.
Recent international trade
disputes, including those between China and the United States, and the uncertainties created by such disputes may disrupt the transnational
flow of goods and significantly undermine the stability of the global and Chinese economy, thereby harming our business. International
trade disputes could result in tariffs and other protectionist measures that could adversely affect our business. Any escalation in existing
trade tensions or the advent of a trade war, or news and rumors of the escalation of a potential trade war, could affect consumer confidence
and have a material adverse effect on our business, results of operations and, ultimately, the trading price of the ADSs.
Political tensions between
the United States and China have escalated due to various reasons, including the COVID-19 outbreak, the PRC National People’s Congress’
passage of Hong Kong national security legislation, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong
Kong Special Administrative Region and the central government of the PRC, and the executive orders issued by U.S. President in August
2020 that prohibit certain transactions with ByteDance Ltd., Tencent Holdings Ltd. and the respective subsidiaries of such companies.
Rising political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between the
two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets.
Any of these factors could have a material adverse effect on our business, prospects, financial condition and results of operations. Furthermore,
there have been media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies
from accessing U.S. capital markets. If any such deliberations were to materialize, resulting legislation may have a material and adverse
impact on the stock performance of China-based issuers listed in the United States. It is currently unclear whether the proposed or additional
legislations would be enacted that would have the effect of potentially limiting or restricting China-based companies from accessing U.S.
capital markets.
We will continue to monitor
developments related to these political tensions and their potential impact on our business. Nonetheless, we cannot assure you that
we will not be adversely affected by any future legislative or regulatory changes or other developments related to these tensions.
Fluctuation in the exchange rate of the
British pound may affect international students’ affordability of our private education services.
Fluctuation in the exchange rate of British pound may affect international
students’ affordability of our private education services in the UK. International students need to pay more in their local currency
in exchange for British pounds when the British pound strengthens, and this increases the cost of studying and living in the UK for them.
Exchange rate fluctuations also impact the daily living expenses of international students in the UK. The exchange rate movements of the
British pound are complex and influenced by various factors such as economic conditions, political factors, and market expectations. If
the exchange rate of the British pound rises drastically or fluctuates in an unpredictable way, international students’ demand for
our services in the UK may decrease, and our business, results of operations and financial condition may be adversely affected.
If we grant additional employees share options
or other equity incentives in the future, our net income could be adversely affected.
We granted share options to
purchase a total of 3,509,242 Class A ordinary shares to certain school principals and management team members pursuant to our 2017 Share
Incentive Plan (the “2017 Plan”) from 2017 to 2022. We may grant additional share options under the 2017 Plan in the future.
We are required to account for share-based compensation in accordance with Financial Accounting Standards Board Accounting Standards Codification
Topic 718, Compensation-Stock Compensation, which generally requires a company to recognize, as an expense, the fair value of share options
and other equity incentives to employees based on the fair value of equity awards on the date of the grant, with the compensation expense
recognized over the period in which the recipient is required to provide service in exchange for the equity award. If we grant options
or other equity incentives in the future, we could incur significant compensation charges and our results of operations could be adversely
affected.
If we fail to implement and maintain an
effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and
investor confidence and the market price of the ADSs may be materially and adversely affected.
We are subject to reporting obligations under U.S. securities laws.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission, or
the SEC, every public company is required to include a management report on the company’s internal controls over financial reporting
in its annual report, which contains management’s assessment of the effectiveness of the company’s internal controls over
financial reporting. As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management
assessed the effectiveness of the internal control over financial reporting as of August 31, 2022 using criteria established in “Internal
Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management
is not permitted to conclude that the Company’s internal control over financial reporting is effective if there are one or more
material weaknesses in the Company’s internal control over financing reporting. A material weakness is a deficiency, or a combination
of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement
of a company’s annual or interim consolidated financial statements would not be prevented or detected on a timely basis.
In connection with the preparation of our consolidated financial statements
for 2022, we identified a number of adjustments to our consolidated financial statements in relation to lease accounting in our overseas
schools component that resulted in a restatement of previously issued financial statements. We identified the cause of these adjustments
was because of a material weakness in the design and implementation of the Company’s internal controls relating to lease accounting
due to the lack of comprehensive assessment process over lease accounting in the oversea business. In addition, there is another material
weakness in the design and maintenance of an effective control environment that commensurate with the Company’s financial reporting
requirements due to an insufficient complement of resources in the accounting/finance and IT department with an appropriate level of knowledge,
experience and training.
In addition, we also identified
two significant deficiencies in the 2022 fiscal year, together with other control deficiencies not identified as significant. The significant
deficiencies identified relates to lack of comprehensive documentation on goodwill and indefinite lived intangible assets impairment
assessment and lack of comprehensive assessment process over the valuation of equity method investments. As further described in “Item
15. Controls and Procedures—Changes in Internal Control over Financial Reporting.”, we have implemented and are continuing
to implement a number of measures to address our material weaknesses, significant deficiencies and other control deficiencies not identified
as significant. We cannot assure you, however, that these measures will fully address or fully remedy the material weaknesses, significant
deficiencies or other control deficiencies identified in our internal control over financial reporting. Our failure to correct these
control deficiencies or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial
statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings
on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price
of the ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly
hinders our ability to prevent fraud.
As a public company in the
United States, we are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 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. Our management has concluded that our internal control over financial reporting was
not effective as of August 31, 2022 due to the material weaknesses described above. See “Item 15. Controls and Procedures.”
It is possible that if our independent registered public accounting firm had conducted an audit of our internal control over financial
reporting, they might have identified additional material weaknesses and additional deficiencies. If we fail to maintain effective internal
control over financial reporting in the future, our management and our independent registered public accounting firm may also conclude
that our internal control over financial reporting is not effective. This could adversely impact the market price of the ADSs due to
a loss of investor confidence in the reliability of our reporting processes. We will need to incur additional costs and use management
and other resources in order to comply with Section 404. In addition, once we cease to be a non-accelerated filer as defined in Rule
12b-2 under the Exchange 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 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.
During the course of
documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002, we may identify other additional weaknesses and deficiencies in our internal control over financial reporting, and 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 of the Sarbanes-Oxley Act of 2002. 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 the ADSs. Additionally, ineffective internal control over
financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting
from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to
restate our financial statements from prior periods.
The
continuing impact of “Brexit” may have a negative effect on our business operated in the United Kingdom.
Following a national referendum
and enactment of legislation by the government of the United Kingdom, the United Kingdom formally withdrew from the European Union (“Brexit”)
and ratified a trade and cooperation agreement governing its future relationship with the European Union. The agreement, which became
effective in 2021, addresses economic arrangements, law enforcement, judicial cooperation and a governance framework including procedures
for dispute resolution, among other things. Because the agreement merely sets forth a framework in many respects and will require complex
additional bilateral negotiations between the United Kingdom and the European Union as both parties continue to work on the rules for
implementation, significant political and economic uncertainty remains about how the precise terms of the relationship between the parties
will differ from the terms before withdrawal. As a result, we face risks associated with the potential uncertainty and disruptions that
may follow Brexit and the implementation and application of the trade and cooperation agreement, including with respect to disruptions
to the free movement of people, data and capital between the United Kingdom and the European Union and potential material changes to the
regulatory regime applicable to our operations in the United Kingdom. In addition, Brexit could lead to legal uncertainty and potentially
divergent national laws and regulations as the United Kingdom determines which laws of the European Union to replace or replicate. These
developments have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial
markets and could significantly reduce global market liquidity and limit the ability of key market participants to operate in certain
financial markets.
The ongoing instability and
uncertainty surrounding Brexit and the implementation and application of the trade and cooperation agreement, could require us to restructure
our business operations in the United Kingdom, may increase our regulatory costs, and could have an adverse impact on our business and
staff in the United Kingdom.
Changes in
U.K. tax laws could have a material adverse effect on our business.
We
derive a substantial portion of our revenue from our operations in the U.K., and our subsidiaries in the U.K. have filed returns for
U.K. corporation tax on the basis that it is resident in the U.K. Such subsidiaries are subject to U.K. tax in respect of their worldwide
income and gains (subject to any applicable exemptions). Any change in such subsidiaries’ status or any change in U.K. tax laws
could materially affect our business, prospects, financial condition or results of operations.
Risks Related to Our Corporate Structure
Our private education service business is
subject to extensive regulation in China. If the PRC government finds that the contractual arrangement that establishes our corporate
structure for operating our business does not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
Our domestic private education
service business is subject to extensive regulations in China. The PRC government regulates various aspects of our business and operations,
such as curriculum content, education materials, standards of school operations, student recruitment activities, tuition and other fees.
The laws and regulations applicable to the private education sector are subject to frequent change, and new laws and regulations may be
adopted, some of which may have a negative effect on our business, either retrospectively or prospectively.
Foreign ownership in education
services is subject to strict regulations in China. The PRC government regulates the provision of education services through strict licensing
requirements. In particular, PRC laws and regulations currently prohibit foreign ownership of companies and institutions providing compulsory
education services at primary and middle school levels, and restrict foreign investment in education services businesses at the high school
and kindergarten level. We are a company incorporated in the Cayman Islands. Our PRC subsidiary, Zhuhai Bright Scholar, is a foreign-owned
enterprise and is currently ineligible to apply for and hold licenses to operate, or otherwise own equity interests in, our schools. Due
to these restrictions, we conduct our private education business in China primarily through contractual arrangements among (1) Zhuhai
Bright Scholar, (2) the VIEs, and (3) the ultimate shareholders of the VIEs, including Ms. Meirong Yang. We hold the required licenses
and permits necessary to conduct our private education business in China through the schools controlled and held by the VIEs. We have
been and expect to continue to be dependent on the VIEs to operate our private education business. See “Item 4. Information on the
Company—C. Organizational Structure” for more information.
If our ownership structure and contractual arrangements are found
to violate any PRC laws or regulations, including the Opinions on Deepening the Reform of Educational Teaching and Thoroughly Enhancing
the Quality of Compulsory Education and any legislations to be enacted (such as the Preschool Education Law), or if we are found to require
but failed to obtain any of the permits or approvals for our private education business, the relevant PRC regulatory authorities include
the MOE, which regulates the education industry, the PRC Ministry of Commerce, or MOFCOM, which regulates foreign investments, the Civil
Affairs Bureau, which regulates the registration of schools, and SAIC, which regulates the registration of for-profit schools. The authorities
would have broad discretion in imposing fines or punishments upon us for such violations, including:
|
● |
revoking the business and operating licenses of our group and/or the VIEs; |
|
● |
discontinuing or restricting any related-party transactions between our group and the VIEs; |
|
● |
imposing fines and penalties, or imposing additional requirements for our operations with which we, or the VIEs may not be able to comply; |
|
● |
requiring us to restructure the ownership and control structure or our current schools; |
|
● |
restricting or prohibiting our use of the proceeds of our equity offerings to finance our business and operations in China, particularly the expansion of our business through strategic acquisitions; or |
|
● |
restricting the use of financing sources by us or the VIEs or otherwise restricting our or their ability to conduct business. |
As of August 31, 2022, similar
ownership structure and contractual arrangements have been used by many China-based companies listed overseas, including a number of
education companies listed in the United States. To our knowledge, none of the fines or punishments listed above has been imposed on
any of these public companies, including companies in the education industry. However, we cannot assure you that such fines or punishments
will not be imposed on us or any other companies in the future. If any of the above fines or punishments is imposed on us, our business,
financial condition and results of operations could be materially and adversely affected. If any of these penalties results in our inability
to direct the activities of the VIEs and their respective subsidiaries that most significantly impact their economic performance, and/or
our failure to receive the economic benefits from the VIEs and their respective subsidiaries, we may not be able to consolidate the VIEs
and their respective subsidiaries in our financial statements in accordance with U.S. GAAP. However, we do not believe that such actions
would result in the liquidation or dissolution of our company, our wholly-owned subsidiaries in China or the VIEs or their respective
subsidiaries.
In addition, pursuant to the Implementation Rules, (1) foreign-invested
enterprises established in China and social organizations whose actual controllers are foreign parties shall not sponsor, participate
in or actually control private schools that provide compulsory education, (2) social organizations or individuals shall not control any
private school that provides compulsory education or any non-profit private school that provides pre-school education by means of merger,
acquisition, contractual arrangements, etc., and (3) private schools providing compulsory education shall not conduct any transaction
with any related party. Any private school conducting transactions with related parties must adhere to the principles of openness, fairness
and impartiality. Tuition and fees shall be set reasonable. And the decision-making process shall not damage the state interests, the
interests of the school or the rights and interests of the teachers and students. Failure to comply with these principles may result in
an order to make corrections within a specified time limit. Illegal gains obtained, if any must be confiscated, and collected fees returned.
If the circumstances are serious, the sponsor, actual controller and member of the decision-making body or supervisory body shall not
become the sponsor, actual controller or member of the decision-making body or supervisory body of other private school within one to
five years. In cases where the violations have an especially severe adverse social impact, such individuals may be permanently prohibited
from becoming sponsors, actual controllers, or members of decision-making or supervisory bodies of other private schools. If a violation
constitutes a public security administration offense, the public security organ will impose a punishment according to law. If a violation
constitutes a crime, criminal responsibility will be investigated in accordance with the law.
These regulations may challenge the validity of our contractual
arrangements that establish our corporate structure for operating our business. For example, the clause or provision of the exclusive
management services and business cooperation agreement in relation to related party transactions between Zhuhai Bright Scholar and the
VIE, namely BGY Education Investment, to the extent concerning private schools offering compulsory education are not legally enforceable
since September 1, 2021. Furthermore, our contractual arrangements may not be enforceable in the PRC if the PRC government authorities
view such contracts as contravening any mandatory provision of PRC laws and administrative regulations or are otherwise not enforceable
due to offending public order or good morals. In the event we are unable to enforce these contractual arrangements, for our continuing
operations, we may not be able to exert effective control over those VIEs and their respective shareholders, and our ability to conduct
our business may be materially and adversely affected. We are continuously assessing the impact of relevant regulations on our business
and making necessary measures and efforts to comply with the requirements under these regulations and implementations, including restructuring
corporate structure or unwinding contractual arrangements, etc. However, the relevant authorities have yet to promulgate any detailed
implementation rules and regulations under the Implementation Rules. It is still unclear whether the above provisions have any retrospective
effect for contractual arrangements over private compulsory education schools existing before September 1, 2021. Therefore, uncertainty
remains as to when and how the Implementation Rules will specifically be applied to our business.
Uncertainties exist with respect to the
interpretation and implementation of the PRC Foreign Investment Law and how it may impact the viability of our current corporate structure,
corporate governance and business operations.
On March 15, 2019, the National
People’s Congress approved the Foreign Investment Law (“Foreign Investment Law”), which came into effect on January
1, 2020 and replaced the Law on Chinese-Foreign Equity Joint Ventures, the Law on Chinese-Foreign Contractual Joint Ventures, and the
Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. On December 26, 2019, the
State Council issued the Implementation Rules of the Foreign Investment Law to clarify and elaborate relevant provisions of the Foreign
Investment Law, and the Supreme People’s Court of the PRC promulgated a judicial interpretation to address several issues concerning
the application of the Foreign Investment Law. The above Implementation Rules and the judicial interpretation became effective as of January
1, 2020.
The Foreign Investment
Law embodies an expected PRC regulatory trend to China’s foreign investment regulatory regime to align with international
standards and unify the corporate legal requirements for both foreign and domestic investments. However, uncertainties still exist
in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign
investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other
entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, we cannot assure
you that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities
under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by
foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council.
Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to
provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our
contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under PRC Laws.
Furthermore, if future laws, administrative regulations or provisions prescribe further actions to be taken by companies with
respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a
timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance
challenges could materially and adversely affect our business, results of operations or financial position.
We rely on contractual arrangements with
the VIEs and their shareholders for our operations in China, which may not be as effective in providing control as direct ownership.
We have relied and expect to continue to rely on the contractual arrangements
with the VIEs and their respective shareholders, including Ms. Meirong Yang, one of our largest shareholders, to operate our private education
business in China. For a description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational
Structure.” The revenue contribution of the VIEs from continuing operations accounted for 17.8% of the total revenues for our continuing
operations in the 2022 fiscal year. However, these contractual arrangements may not be as effective as direct equity ownership in providing
us with control over the VIEs. The VIEs and their shareholders may fail to take certain actions required for our business, or to procure
that newly established or acquired schools enter into the contractual arrangements in a timely manner, or to follow our instructions despite
their contractual obligations to do so. If they fail to perform their obligations under their respective agreements with us, we may have
to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, which may not be effective. Any
failure by the VIEs and the shareholders of the VIEs to perform their obligations under the contractual arrangements would have a material
adverse effect on the financial position and performance of our company. For example, the contractual arrangements are governed by PRC
law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance
with PRC law and any disputes would be resolved in accordance with arbitral procedures as contractually stipulated. The commercial arbitration
system in China is not as developed as some other jurisdictions, such as the United States. As a result, uncertainties in the commercial
arbitration system or legal system in China could limit our ability to enforce these contractual arrangements. In addition, if the legal
structure and the contractual arrangements were found to violate any existing or future PRC laws and regulations, we may be subject to
fines or other legal or administrative sanctions.
If the imposition of government
actions causes us to lose our right to direct the activities of the VIEs or our right to receive substantially all the economic benefits
and residual returns from the VIEs and we are not able to restructure our ownership structure and operations in a satisfactory manner,
we would no longer be able to consolidate the financial results of the VIEs.
As a holding company incorporated in the Cayman Islands with no
material operations, we conduct a substantial majority of our operations through our subsidiaries, the VIEs, and their subsidiaries in
China. We control and receive the economic benefits of our VIEs and its subsidiaries’ business operations through certain contractual
arrangements. Our ADSs listed on the New York Stock Exchange represents shares of our offshore holding company instead of shares of the
VIEs or their subsidiaries in China. We may not be able to continue to satisfy the applicable requirements and rules with respect to this
structure. If we are unable to satisfy the New York Stock Exchange criteria for maintaining our listing, our securities could be subject
to delisting.
If the PRC government determines that the
contractual arrangements constituting part of our VIE structure do not comply with PRC regulations, or if regulations change or are interpreted
differently in the future, we may be unable to exercise our contractual rights over the assets of the VIEs, and the ADSs or ordinary
shares may decline in value or become worthless.
Investors in the
ADSs are not purchasing equity securities of our subsidiaries that have substantive business operations in China but instead are purchasing
equity securities of a Cayman Islands holding company. We are a Cayman Islands holding company that conducts the majority
of its operations and operates its business in China through its PRC subsidiaries and VIEs through contractual
agreements. Such structure involves unique risks to investors in the ADSs.
Recently, the PRC government
adopted a series of regulatory actions and issued statements to regulate business operations in China, including those related to VIEs
and private schools, which may challenge the validity of our contractual arrangements. In the event that the PRC government determines
that the contractual arrangements constituting part of our VIE structure do not comply with PRC regulations, or if these regulations change
or are interpreted differently in the future, we may be unable to assert our contractual rights over the assets of the VIEs, and the ADSs
or ordinary shares may decline in value or become worthless.
On May 14, 2021, the PRC
State Council announced the Implementation Rules, which became effective on September 1, 2021. Under the Implementation Rules,
social organizations and individuals are prohibited from controlling a private school that provides compulsory education or a
non-profit private school that provides pre-school education by means of, among others, merger, acquisition, and contractual
arrangements, and a private school providing compulsory education is prohibited from conducting transactions with its related party.
In particular, the prohibition over related party transactions has significantly affected the enforceability of the exclusive
management services and business cooperation agreements with affiliated entities providing compulsory education. Therefore, we
re-assessed our control over the Affected Entities. Based on the relevant accounting standard in accordance with U.S. GAAP, we have
concluded that we have lost control of the Affected Entities since August 31, 2021, in view of the significant uncertainties and
restrictions the Implementation Rules impose on our ability to direct the range of ongoing activities that would most significantly
impact the returns of those entities and to be exposed to returns that are commensurate with a controlling interest, and that such
uncertainties and restrictions already had a significant impact on our ability to direct and its economic exposure from involvement
with such entities.
Except for the Affected Entities, the contractual arrangements enable
us to: (1) exercise effective control over the VIEs; (2) receive substantially all of the economic benefits of the VIEs in consideration
for the services provided by us; and (3) have an exclusive option to purchase all of the equity interests in the VIEs when and to the
extent permitted under PRC law. Therefore, we are able to consolidate the financial results of the VIEs in our consolidated financial
statements. However, our PRC legal counsel has advised us that as there are substantial uncertainties regarding the interpretation and
application of PRC laws and regulations, and we cannot assure you that the PRC government would agree that our corporate structure or
any of the above contractual arrangements comply with current or future PRC laws or regulations. PRC laws and regulations governing the
validity of these contractual arrangements are uncertain and the relevant government authorities may have broad discretion in interpreting
these laws and regulations. For a detailed description of the risks associated with our corporate structure, see “—Risks Related
to Our Corporate Structure” and “—Risks Related to Doing Business in China.”
Our largest shareholders may have potential
conflict of interest with us and not act in the best interests of our company.
Ms. Meirong Yang is the controlling
shareholder and a director of the VIEs. She and Ms. Huiyan Yang, our ex-chairlady, are also the largest shareholders of our company. We
cannot assure you that Ms. Meirong Yang and Ms. Huiyan Yang will always act in the best interests of our company. In addition, Ms. Meirong
Yang owes duties of loyalty and diligence to the VIEs as its director pursuant to PRC law. However, she does not owe a fiduciary duty
to our company as she is not an officer or director of our company. We provide no incentives to encourage Ms. Meirong Yang to act in our
best interest in her capacity as the shareholder of the VIEs. We rely on Ms. Meirong Yang to comply with the terms and conditions of the
contractual arrangements. Although Ms. Meirong Yang is obligated to honor her contractual obligations with respect to the VIEs, she may
nonetheless breach or cause our the VIEs to breach or refuse to renew the existing contractual arrangements which allow us to effectively
exercise control over the VIEs and to receive economic benefits from them. If Ms. Meirong Yang does not honor her contractual obligations
with respect to the VIEs, we may exercise our exclusive option to purchase, or cause our designee to purchase, all or part of the equity
interest in the VIEs to the extent permitted by PRC law. If we cannot resolve any disputes between us and the shareholders of the VIEs,
we would have to rely on arbitration or legal proceedings, which could result in disruption of our business and substantial uncertainty
as to the outcome of any such legal proceedings.
Contractual arrangements between the VIEs
and us may be subject to scrutiny by the PRC tax authorities and a finding that we or the VIEs owe additional taxes could materially reduce
our net income and the value of your investment.
Under PRC laws and regulations,
transactions between related parties should be conducted on an arm’s-length basis and may be subject to audit or challenge by the
PRC tax authorities. We could face material adverse tax consequences if the PRC tax authorities determine that the contractual arrangements
among our subsidiary in China, the VIEs and the shareholders of the VIEs are not conducted on an arm’s-length basis and adjust the
income of the VIEs through the transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in, for PRC
tax purposes, increased tax liabilities of the VIEs. In addition, the PRC tax authorities may require us to disgorge our prior tax benefits,
and require us to pay additional taxes for prior tax years and impose late payment fees and other penalties on the VIEs for underpayment
of prior taxes. To date, similar contractual arrangements have been used by many public companies, including companies listed in the United
States, and, to the best of our knowledge, no publicly available information has indicated that the PRC tax authorities have imposed any
material penalties on those companies. However, we cannot assure you that such penalties will not be imposed on any other companies or
us in the future. Our net income may be reduced if the tax liabilities of the VIEs materially increase or if they are found to be subject
to additional tax obligations, late payment fees or other penalties.
If any of the VIEs becomes bankrupt or
enter into liquidation proceeding, we may lose the ability to use and dispose assets held by such entity, which could materially and
adversely affect our business, financial condition and results of operations.
We currently conduct our operations
in China through contractual arrangements with the VIEs and the shareholders of the VIEs. As part of these arrangements, substantially
all of our education-related assets that are critical to the operation of our business are held by the VIEs. If any of these entities
goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue
some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations.
If any of the VIEs undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors may
claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and
adversely affect our business, our ability to generate revenue and the market price of the ADSs.
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 that our business relies on, are executed with validity when 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 PRC industry and commerce authorities.
In order to maintain the physical
security of our chops, we generally have them stored in secured locations accessible only to authorized employees. Although we monitor
such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that
our employees could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one
of our subsidiaries or affiliated entities. If any employee obtains, 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 and divert management from our operations.
PRC regulation of loans and direct investment
by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our public offerings and other financing
activities to make loans or additional capital contributions to our PRC subsidiaries and affiliated entities, which could harm our liquidity
and our ability to fund and expand our business.
As an offshore holding company of our PRC subsidiaries and affiliated
entities, in utilizing the proceeds of our initial public offerings and other financing activities, we may (1) make loans to our PRC subsidiaries
and affiliated entities, (2) make additional capital contributions to our PRC subsidiaries, (3) establish new PRC subsidiaries and make
capital contributions to these new PRC subsidiaries, and (4) acquire offshore entities with business operations in China in an offshore
transaction. For details on our use of offering proceeds, see “Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds—Use of Proceeds.”
However, most of these uses
are subject to PRC regulations and approvals. For example:
|
● |
loans by us to our wholly-owned subsidiaries in China, which are foreign-invested enterprises, cannot exceed statutory limits, which is the difference between the total investment amount and the registered capital of our wholly-owned subsidiaries, and must be registered with the State Administration of Foreign Exchange of the PRC, or SAFE, or its local counterparts; |
|
● |
loans by us to the VIEs, which are domestic PRC entities, over a certain threshold must be approved by the relevant government authorities and must also be registered with SAFE or its local counterparts; and |
|
● |
capital contributions to our wholly-owned subsidiaries in China must be filed with MOFCOM or its local counterparts and must also be registered with the local bank authorized by SAFE. |
As a result of the requirements
and limitations outlined above, the amount of funds that we can directly contribute to our operations in China through Zhuhai Bright Scholar,
a foreign-invested enterprise indirectly held by us, is limited.
In addition, on March 30,
2015, SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested
Enterprises (“Circular 19”), which came into effect from June 1, 2015. The notice requires that the capital of a foreign-invested
company settled in Renminbi converted from foreign currencies shall be used only for purposes within the business scope as approved by
the applicable government authorities and may not be used for equity investments in China unless such activity is set forth in the business
scope or is otherwise permissible under PRC laws or regulations. Furthermore, SAFE strengthened its oversight of the flow and use of such
capital of a foreign-invested company settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not
be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not
otherwise been used. On October 23, 2019, the SAFE issued the Notice of the State Administration of Foreign Exchange on Further Facilitating
Cross-border Trade and Investment, which, among other things, expanded the use of foreign exchange capital in domestic equity investment.
Non-investment foreign-funded enterprises are allowed to lawfully make domestic equity investments by using their capital on the premise
without violation of prevailing special administrative measures for access of foreign investments (negative list) and the authenticity
and compliance with the regulations of domestic investment projects. If our affiliated entity requires financial support from us or our
wholly owned subsidiary in the future, and we find it necessary to use foreign currency-denominated capital to provide such financial
support, our ability to fund our variable interest entity’s operations will be subject to statutory limits and restrictions, including
those described above.
On February 13, 2015, SAFE
promulgated the Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related
Foreign Exchange Administration Policies (“Circular 13”), which was implemented on June 1, 2015. Pursuant to Circular 13,
the registration of existing equity is required in lieu of annual foreign exchange inspection of direct investment. Circular 13 also grants
the authority to examine and process foreign exchange registration with respect to both domestic and overseas direct investments.
We expect that PRC laws and
regulations may continue to limit our use of proceeds from our initial public offerings and other financing activities or from other financing
sources. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all,
with respect to future loans or capital contributions by us to our entities in China. If we fail to receive such registrations or approvals,
our ability to use the proceeds of our initial public offerings and other financing activities and to capitalize our PRC operations may
be hindered, which could adversely affect our liquidity and our ability to fund and expand our business.
Risks Related to Doing Business in China
PRC economic, political and social conditions,
as well as changes in any government policies, laws and regulations, could adversely affect the overall economy in China or the education
services market, which could harm our business.
The majority of our operations
are conducted in China, and a significant portion of our revenues are derived from China. Accordingly, our business, prospects, financial
condition and results of operations are subject, to a significant extent, to economic, political and legal developments in China.
The PRC economy differs from the economies of most developed countries
in many respects. Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late
1970s, the PRC government continues to play a significant role in regulating the industry. The PRC government has significant control
over China’s economic growth through allocating resources, controlling the incurrence and oversight and discretion over the conduct
of our business and may intervene with or influence our operations as the government deems appropriate to further regulatory, political
and societal goals. The PRC government has recently published new policies that significantly affected industries such as the education
and internet industries, and we cannot rule out the possibility that more regulations or policies would be released, which could adversely
affect our business, financial condition and results of operations. For example, under the former Law on the Promotion of Private Education,
as amended on June 29, 2013 and on December 29, 2018, and its implementation rules, a private school should elect to be either a school
that does not require “reasonable returns” or a school that requires “reasonable returns.” A private school must
consider factors such as the school’s tuition, ratio of the funds used for education-related activities to the course fees collected,
admission standards and educational quality when determining the percentage of the school’s net income that would be distributed
to the investors as reasonable returns. On September 1, 2017, the Amended Law came into effect, under which the concept “reasonable
returns” is no longer applicable and a private school should opt to be either for-profit or non-profit. Sponsors of for-profit schools
may obtain operating profits, while sponsors of non-profit schools may not. However, pursuant to the Implementation Rules, sponsors are
not permitted to register for-profit schools that provide compulsory education services from grades one to nine. Such rules apply to a
significant portion of our domestic K-12 schools. Furthermore, the PRC government has recently indicated the intent to exert more oversight
and control over overseas securities offerings and other capital markets activities and foreign investment in China-based companies like
us. Any such action, once taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue
to offer securities to investors. This could result in a substantial decline in the value of such securities or, in the most extreme cases,
render them completely worthless.
While the PRC economy has grown significantly in the past two
to three decades, such growth has been uneven among various regions and among various sectors of the economy. Demand for our education
services depends, in large part, on economic conditions in China and especially the regions where we operate, including Guangdong province.
Any significant slowdown in China’s economic growth may adversely affect the disposable income of the families of prospective students
and cause them to delay or cancel their plans to participate in our schools, which in turn could reduce our revenues. In addition, any
sudden changes to China’s political system or the occurrence of social unrest could also have a material adverse effect on our business,
prospects, financial condition and results of operations.
Furthermore, our
company, the VIEs and their subsidiaries, and our investors may face uncertainty about future actions by the government of China
that could significantly affect the VIEs and their subsidiaries’ financial performance and operations, including the
enforceability of the contractual arrangements. As of the date of this annual report, neither our company nor the VIEs have received
or have been denied permission from Chinese authorities to list on U.S. exchanges. However, we cannot assure you that our company or
the VIEs will receive or not be denied permission from Chinese authorities to list on U.S. exchanges in the future.
Uncertainties with respect to the PRC legal
system could have a material adverse effect on us.
The PRC legal system is a civil law system based on written statutes.
Unlike the common law system, prior court decisions in a civil law system may be cited as reference but have limited precedential value.
Since 1979, newly introduced PRC laws and regulations have significantly enhanced the protections of interests related to foreign investments
in China. However, since these laws and regulations are relatively new and the PRC legal system evolves rapidly, the interpretations of
such laws and regulations may not always be consistent, and enforcement of these laws and regulations involves significant uncertainties.
Any of these could limit the available legal protections.
In addition, the PRC administrative and judicial authorities have
broad discretion in interpreting, implementing or enforcing statutory rules and contractual terms. As a result, it may be more challenging
to predict the outcome of administrative and judicial proceedings and the level of legal protection we may receive in the PRC than under
some more developed legal systems. These uncertainties may affect our decisions on the policies and actions to be taken to comply with
PRC laws and regulations, and may affect our ability to enforce our contractual or tort rights. In addition, the regulatory uncertainties
may be exploited through unmerited legal actions or threats to extract payments or benefits from us. Such uncertainties may therefore
increase our operating expenses and costs, and materially and adversely affect our business and results of operations.
The PRC government has significant oversight
and discretion over the conduct of our business and may intervene with or influence our operations as the government deems appropriate
to further regulatory, political and societal goals.
The PRC government has exercised and continues to exercise substantial
control over virtually every sector of the Chinese economy through regulation and state ownership. The ability of our subsidiaries and
the VIEs to operate in China may be impaired by changes in its laws and regulations, including those relating to education, taxation,
land use rights, foreign investment limitations, and other matters. We cannot assure you that government authorities in China will not
introduce enhanced regulation over the education industry that may lead to our inability to operate in China at all. Furthermore, the
PRC government has recently indicated an intent to exert more oversight and control over overseas securities offerings and other capital
markets activities and foreign investment in China-based companies like us. For example, on July 6, 2021, the relevant PRC government
authorities promulgated the Opinions on Strictly Scrutinizing Illegal Securities Activities in accordance with the Law, or the Opinions.
The Opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings
by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to
deal with the risks and incidents faced by China-based overseas-listed companies. On February 17, 2023, with the approval of the State
Council, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the
Trial Measures and five supporting guidelines, which came into effect on March 31, 2023. According to the Trial Measures, among other
requirements, (1) domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill the
filing procedures with the CSRC; if a domestic company fails to complete the filing procedures, such domestic company may be subject to
administrative penalties; (2) where a domestic company seeks to indirectly offer and list securities in an overseas market, the issuer
shall designate a major domestic operating entity responsible for all filing procedures with the CSRC, and such filings shall be submitted
to the CSRC within three business days after the submission of the overseas offering and listing application; and (3) where a listed issuer
seeks to indirectly offer and list securities in the same overseas market, such filings shall be submitted to the CSRC within three business
days after the completion of the overseas offering and listing. On the same day, the CSRC also held a press conference for the release
of the Trial Measures and issued the Notice on Administration for the Filing of Overseas Offering and Listing by Domestic Companies, which
clarifies that (1) on or prior to the effective date of the Trial Measures, domestic companies that have already submitted valid applications
for overseas offering and listing but have not obtained approval from overseas regulatory authorities or stock exchanges may reasonably
arrange the timing for submitting their filing applications with the CSRC, and must complete the filing before the completion of their
overseas offering and listing; (2) a six-month transition period will be granted to domestic companies which, prior to the effective date
of the Trial Measures, have already obtained the approval from overseas regulatory authorities or stock exchanges, but have not completed
the indirect overseas listing; if domestic companies fail to complete the overseas listing within such six-month transition period, they
shall file with the CSRC according to the requirements; and (3) the CSRC will solicit opinions from relevant regulatory authorities and
complete the filing of the overseas listing of companies with contractual arrangements which duly meet the compliance requirements, and
support the development and growth of these companies. Any such action, once taken by the PRC government, could significantly limit or
completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly
decline or, in extreme cases, become worthless. We did not have to complete such filings with the CSRC for our initial public offering
on May 19, 2017 and the follow-on offering on February 28, 2018 because the offerings made were before the enactment of the Trial Measures;
however, we will be obligated to complete such filings with the CSRC for our future offerings. If we cannot complete such filings with
the CSRC, we may not continue to offer securities to investors and cause the value of our securities to significantly decline or, in extreme
cases, become worthless.
Any increase in applicable enterprise income
tax rates or the discontinuation of any preferential tax treatments currently available to us may result in significantly higher tax burden
or the disgorgement of any benefits we enjoyed in the past, which could in turn materially and adversely affect our business, financial
condition and results of operations.
Under the former Law on the
Promotion of Private Education, as amended on June 29, 2013 and on December 29, 2018, and its implementing rules as promulgated on September
1, 2021, private schools, whether for-profit or non-profit, may enjoy national preferential tax treatment. The implementing rules provide
that non-profit private schools are eligible to enjoy the same preferential tax treatment as public schools. To date, however, no separate
policies, regulations or rules have been introduced by the authorities in this regard.
Preferential tax treatments
granted to us by local government authorities are subject to review and may be adjusted or revoked at any time in the future. For example,
two of our affiliate entities in Sichuan enjoy preferential enterprise income tax treatments. The discontinuation of any preferential
tax treatments currently available to us will cause our effective tax rate to increase, which will increase our income tax expenses and
in turn decrease our net income. In addition, we may not be granted preferential tax treatment by the local governments of additional
regions into which we may expand. The Amended Law, which became effective on September 1, 2017, no longer uses the term “reasonable
return.” Instead, under the Amended Law, sponsors of private schools may elect to register their schools as either non-profit or
for-profit, with the exception that private schools in compulsory education must be registered as non-profit private schools. Pursuant
to such Amended Law, non-profit private schools will be entitled to the same tax benefits as public schools, but taxation policies for
for-profit private schools are still unclear. However, it is unclear how the Amended Law and its potential implementation rules would
impact the tax treatment applicable to our schools and whether our schools would enjoy any preferential tax treatment in the future. Any
negative development could have a material adverse effect on our business, financial condition and results of operations.
Under the PRC enterprise income tax law,
we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our non-PRC
shareholders.
The PRC enterprise income
tax law and its implementing rules provide that enterprises established outside of China whose “de facto management bodies”
are located in China are considered “resident enterprises” under PRC tax laws. The implementing rules 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 issued Circular 82, which provides that a foreign
enterprise controlled by a PRC company or a group of PRC companies will be classified as a “resident enterprise” with its
“de facto management body” located within China if all of the following requirements are satisfied: (1) the senior management
and core management departments in charge of its daily operations function are mainly in China; (2) its financial and human resources
decisions are subject to determination or approval by persons or bodies in China; (3) its major assets, accounting books, company seals,
and minutes and files of its board and shareholders’ meetings are located or kept in China; and (4) at least half of the enterprise’s
directors with voting right or senior management reside in China. The State Administration of Taxation issued a bulletin on August 3,
2011 to provide more guidance on the implementation of Circular 82. The bulletin clarifies certain matters relating to resident status
determination, post-determination administration and competent tax authorities. Although both the circular and the bulletin only apply
to offshore enterprises controlled by PRC enterprises and not those by PRC individuals, the determination criteria set forth in the circular
and administration clarification made in the bulletin may reflect the general position of the State Administration of Taxation on how
the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises and
the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.
In addition, the State Administration
of Taxation issued a bulletin on January 29, 2014 to provide more guidance on the implementation of Circular 82. This bulletin further
provides that, among other things, an entity that is classified as a “resident enterprise” in accordance with the circular
shall file the application for classifying its status of resident enterprise with the local tax authorities where its main domestic investors
are registered.
As the tax resident status of an enterprise is subject to the determination
by the PRC tax authorities, if we are deemed as a PRC “resident enterprise,” we will be subject to PRC enterprise income tax
on our worldwide income at a uniform tax rate of 25.0%, although dividends distributed to us from our existing PRC subsidiaries and any
other PRC subsidiaries which we may establish from time to time could be exempt from the PRC dividend withholding tax due to our PRC “resident
recipient” status. This could have a material adverse effect on our overall effective tax rate, our income tax expenses and our
net income. Furthermore, dividends, if any, paid to our shareholders and ADS holders may be decreased as a result of the decrease in distributable
profits. In addition, if we were to be considered a PRC “resident enterprise,” dividends we pay with respect to the ADSs or
ordinary shares and the gains realized from the transfer of the ADSs or ordinary shares may be considered income derived from sources
within China and be subject to PRC withholding tax, which could have a material adverse effect on the value of your investment in us and
the price of the ADSs.
There are significant uncertainties under
the PRC enterprise income tax law relating to the withholding tax liabilities of our PRC subsidiaries, and dividends payable by our PRC
subsidiaries to our offshore subsidiaries may not qualify to enjoy certain preferential treatments.
Under the PRC enterprise income tax and its implementation rules,
the profits of a foreign-invested enterprise generated through operations, which are distributed to its immediate holding company outside
China, will be subject to a withholding tax rate of 10.0%. Pursuant to a special arrangement between Hong Kong and China, such rate may
be reduced to 5.0% if a Hong Kong resident enterprise owns more than 25.0% of the equity interest in the PRC company. Our current PRC
subsidiaries are wholly owned by our Hong Kong subsidiary. Moreover, under the Notice of the State Administration of Taxation on Issues
regarding the Administration of the Dividend Provision in Tax Treaties promulgated on February 20, 2009, the taxpayer needs to satisfy
certain conditions to enjoy the benefits under a tax treaty. These conditions include: (1) the taxpayer must be the beneficial owner of
the relevant dividends, and (2) the corporate shareholder to receive dividends from the PRC subsidiaries must have continuously met the
direct ownership thresholds during the 12 consecutive months preceding the receipt of the dividends. Further, the State Administration
of Taxation promulgated the Notice on Issues Relating to “Beneficial Owner” in Tax Treaties, or Circular 9, defines the “beneficial
owner” as a party who holds ownership of and control over the income of the entity, or the rights or assets from which such income
are derived. Circular 9 sets forth certain detailed factors in determining the “beneficial owner” status. Further, the State
Administration of Taxation promulgated the Notice on How to Recognize the “Beneficial Owner” in Tax Treaties on June 29, 2012,
which replaced the Notice on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties. Furthermore, the State
Administration of Taxation promulgated Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner”
in Tax Treaties (“Circular 9”) in February 3, 2018, which took effect on April 1, 2018, replaced the Notice on How to Understand
and Recognize the “Beneficial Owner” in Tax Treaties and provides guidance for determining whether a resident of a contracting
state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements.
Entitlement to a lower tax
rate on dividends according to tax treaties or arrangements between the PRC central government and governments of other countries or
regions is subject to inspection or approval of the relevant tax authorities. As a result, we cannot assure you that we will be entitled
to any preferential withholding tax rate under tax treaties for dividends received from our PRC subsidiaries.
Based on the recent development of PRC
law, there is significant uncertainty about the application and interpretation of the Law on the Promotion of Private Education, the
Implementation Rules and their detailed implementation rules and regulations. We may face significant limitations on our ability to engage
in the private education business, acquire private schools, or receive payments from the VIEs and may otherwise be materially and adversely
affected by changes in PRC laws and regulations.
Pursuant to the Law on the
Promotion of Private Education, sponsors of private schools may choose to establish schools as either non-profit or for-profit schools.
Sponsors are not permitted to establish for-profit schools that provide compulsory education services, which covers grades one to nine
and which accounts for a significant portion of our students as well as revenue during the reporting period. Sponsors of for-profit private
schools are entitled to retain the profits from their schools and any operating surplus may be allocated to the sponsors pursuant to
the PRC company law and other relevant laws and regulations. Sponsors of non-profit private schools are not entitled to any distribution
of profits from their schools and all revenue must be used for the operation of the schools.
Given the Law on the Promotion of Private Education, the Implementation
Rules and other relevant laws and regulations, as a holding company, our ability to generate profits, pay dividends and other cash distributions
to our shareholders are subject to many factors, including whether our schools are characterized as for-profit or non-profit, the profitability
of our schools, and our ability to receive dividends and other distributions from our PRC subsidiary, Zhuhai Bright Scholar, which in
turn depends on the service fees paid to Zhuhai Bright Scholar from the VIEs. Zhuhai Bright Scholar has exclusive management services
and business cooperation agreements with each of the VIEs, Ms. Meirong Yang and Mr. Wenjie Yang, the shareholders of the VIEs. Pursuant
to these agreements, Zhuhai Bright Scholar has the exclusive right to provide comprehensive technical and business support services to
the VIEs. As advised by our PRC counsel, as of August 2021, our right to receive the service fees from our schools and other affiliated
entities did not, to our knowledge, contravene any PRC laws or regulations then in force. Likewise, the payment of service fees under
our contractual arrangements should not be regarded as the distribution of returns, dividends or profits to the sponsors of our schools
under the PRC laws and regulations then in force.
However, according to the Implementation Rules, which came into
force on September 1, 2021, (1) foreign-invested enterprises established in China and social organizations whose actual controllers are
foreign parties shall not sponsor, participate in, or actually control private schools providing compulsory education; (2) social organizations
or individuals shall not control any private school providing compulsory education or any non-profit private school providing pre-school
education by means of merger, acquisition, contractual arrangements, etc.; and (3) private schools providing compulsory education shall
not conduct any transaction with any related party. Where a private school conducts any transaction with any related party, it shall adhere
to the principles of openness, fairness and impartiality, fix reasonable tuition and fees and regulate the decision-making, and shall
not damage the state and the school or the rights and interests of the teachers and students, otherwise, there is a risk of being ordered
to make corrections within a time limit. The illegal gains, if any, shall be confiscated after the fees collected are returned; if the
circumstances are serious, the sponsor, actual controller and member of the decision-making body or supervisory body shall not become
the sponsor, actual controller or member of the decision-making body or supervisory body of other private school within one to five years;
if the circumstances are especially serious with adverse social impact, the sponsor, actual controller and member of the decision-making
body or supervisory body shall not become the sponsor, actual controller and members of the decision-making body or supervisory body of
other private school permanently; if a violation of public security administration is committed, the public security organ shall impose
a public security administration punishment according to law; if a crime is committed, criminal responsibility shall be investigated in
accordance with the law.
Therefore, a private school providing compulsory education is
prohibited from conducting transactions with its related party. As a result, the clause or provision in the exclusive management services
and business cooperation agreements that pertains to related party transactions between a private school providing compulsory education
and Zhuhai Bright Scholar was not legally enforceable since September 1, 2021. Since then, we have stopped transacting with the Affected
Entities. However, to keep these private schools providing compulsory education in operations, we continued to provide essential services
without recognizing any revenues relating to such activities to schools providing compulsory education in our discontinued operations,
which are key to the normal daily operation of these schools. As of the date of this annual report, schools providing compulsory education
that we continue to provide services to have not received any further rectification requirements or penalty notices from the relevant
competent authorities,. The possibility and impact of illegal risks are still unable to be assessed clearly. We are continuously assessing
the impact of relevant regulations on our business and making necessary measures and efforts to comply with the requirements under these
regulations and implementations, including restructuring corporate structure or unwinding contractual arrangements, etc.
In particular, the validity of our contractual arrangements may be
challenged, and our corporate structure may need to be restructured to comply with the new regulations, which may be time-consuming and
expensive and impose additional restrictions on our business expansion and may further adversely affect our business operations and results
of operations. See “—Risks Related to Our Corporate Structure—Our private education service business is subject to extensive
regulation in China. If the PRC government finds that the contractual arrangement that establishes our corporate structure for operating
our business does not comply with applicable PRC laws and regulations, we could be subject to severe penalties.”
In July 24, 2021, the Alleviating Burden Opinion was promulgated.
The Alleviating Burden Opinion proposes certain measures intended to ease the workload of students in compulsory education and regulate
the relevant after-school tutoring services for the compulsory education stage in the PRC, including (1) institutions providing after-school
education service on academic subjects in China’s compulsory education system, or academic training institutions, need to be registered
as non-profit, no approval will be granted to new academic training institutions, and an approval mechanism will be adopted for online
academic training institutions; (2) foreign ownership in academic training institutions is prohibited, including through contractual arrangements,
and companies with existing foreign ownership need to rectify such status; (3) listed companies are prohibited from raising capital to
invest in businesses that teach academic subjects in compulsory education; (4) academic training institutions are prohibited from providing
tutoring services on academic subjects in compulsory education during public holidays, weekends and school breaks; and (5) academic training
institutions must follow the fee standards to be established by relevant authorities. The Alleviating Burden Opinion also provides that
institutions providing after-school tutoring services on academic subjects in high schools (which do not fall within China’s compulsory
education system) shall take into consideration the Alleviating Burden Opinion when conducting activities. If the corporate structure
and the business of our complementary education services are deemed to be in violation of the Alleviating Burden Opinion by relevant authorities,
our corporate structure and business operations may be adversely affected and may need to be restructured to comply with the Alleviating
Burden Opinion.
We face uncertainties with respect to indirect
transfers of the equity interests in PRC resident enterprises by their non-PRC holding companies.
The State Administration of Taxation issued Bulletin on Several
Issues concerning the Enterprise Income Tax on the Indirect Transfers of Properties by Non-Resident Enterprises (“Bulletin 7”),
on February 3, 2015. Under Bulletin 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise,
by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets if the arrangement does
not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result,
gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets”
include assets attributed to an establishment in China, immoveable properties in China, and equity investments in PRC resident enterprises.
In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected
with the PRC establishment and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise
income tax at a rate of 25.0%. If the underlying transfer relates to the immoveable properties in China or to equity investments in a
PRC resident enterprise that is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income
tax at 10.0% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements. The party
obligated to make the transfer payments has the withholding obligation. There is uncertainty as to the implementation details of Bulletin
7. If Bulletin 7 was determined by the tax authorities to be applicable to some of our transactions involving PRC taxable assets, our
offshore subsidiaries conducting the relevant transactions might be required to spend valuable resources to comply with Bulletin 7 or
to establish that the relevant transactions should not be taxed under Bulletin 7.
On October 17, 2017, the State Administration of Taxation issued
the Bulletin on Issues Concerning the Source-based Withholding of Enterprise Income Tax on Non-resident Enterprises (“Bulletin 37”),
which became effective on December 1, 2017. According to Bulletin 37, non-resident enterprises who voluntarily declare their enterprise
income tax shall at the same time confirm when they would make payments for the declared amount of tax. If the withholding agent fails
to or is unable to withhold the income tax in accordance with the law, the non-resident enterprise will be deemed to have cleared its
tax payment on time if it voluntarily declares and pays the tax before or within the time limit the tax authority orders it to do so.
If the taxable income before withholding on a source-basis falls within the form of dividends or any equity investment gains, the obligation
to settle such tax payments is triggered on the date of actual payment of the dividends or other equity investment gains. In addition,
on December 1, 2017, Bulletin 37 repealed the Notice of the State Administration of Taxation on Strengthening the Administration over
Enterprise Income Tax on Income of Non-resident Enterprises from Equity Transfer and Notice of the State Administration of Taxation on
Issuing the Interim Measures for the Administration of Source-based Withholding of the Enterprise Income Tax of Non-resident Enterprises
issued by the State Administration of Taxation on December 10, 2009 and January 1, 2009, respectively.
As a result, we and our non-PRC
shareholders may have the risk of being taxed for the disposition of our ordinary shares or ADS and may be required to spend valuable
resources to comply with Bulletin 7 and Bulletin 37 or to establish that we or our non-PRC shareholders should not be taxed as an indirect
transfer, which may have a material adverse effect on our financial condition and results of operations or the investment by non-PRC
investors in us.
Restrictions on currency exchange may limit
our ability to receive and use our revenue effectively.
Restrictions on currency
exchange may limit our ability to use revenue generated in Renminbi to fund any business activities we may have outside China in the
future or to make dividend payments to our shareholders and ADS holders in U.S. dollars. Under current PRC laws and regulations, Renminbi
is freely convertible for current account items, such as trade and service-related foreign exchange transactions and dividend distributions.
However, Renminbi is not freely convertible for direct investment or loans or investments in securities outside China, unless such use
is approved by SAFE. For example, foreign exchange transactions under our subsidiary’s capital account, including principal payments
in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls and the approval requirement
of SAFE. These limitations could affect our ability to obtain foreign exchange for capital expenditures.
Our PRC subsidiaries are permitted to declare dividends to our
offshore subsidiary holding their equity interest, convert the dividends into a foreign currency and remit to its shareholder outside
China. In addition, in the event that any of our PRC subsidiaries liquidates, proceeds from the liquidation may be converted into foreign
currency and distributed outside China to our overseas subsidiary holding its equity interest. Furthermore, in the event that any of the
VIEs liquidates, our PRC subsidiary, Zhuhai Bright Scholar, may, pursuant to the power of attorneys respectively executed by Ms. Meirong
Yang and Mr. Wenjie Yang, require such VIE to pay and remit the proceeds from such liquidation to Zhuhai Bright Scholar. Zhuhai Bright
Scholar then may distribute such proceeds to us after converting them into foreign currency and remit them outside China in the form of
dividends or other distributions. Once remitted outside of China, dividends, distributions or other proceeds from liquidation paid to
us will not be subject to restrictions under PRC regulations on its further transfer or use.
Other than the above distributions by and through our PRC subsidiaries,
which are permitted without further approvals, any conversion of the Renminbi-denominated revenue generated by the VIEs for direct investment,
loans or investment in securities outside China will be subject to the limitations discussed above. To the extent we need to convert and
use any Renminbi-denominated revenue generated by the VIEs not paid to our PRC subsidiaries and revenue generated by our PRC subsidiaries
not declared and paid as dividends, the limitations discussed above will restrict the convertibility of, and our ability to directly receive
and use such revenue. As a result, our business and financial condition may be adversely affected. In addition, we cannot assure you that
the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of Renminbi in the future, especially
with respect to foreign exchange transactions.
Our subsidiaries and affiliated entities
in China are subject to restrictions on making dividends and other payments to us.
As a holding company, we primarily rely on dividends paid by our
subsidiaries in China for our cash needs, including paying dividends and other cash distributions to our shareholders to the extent we
choose to do so, servicing any debt we may incur and paying our operating expenses. The income for our PRC subsidiaries, especially Zhuhai
Bright Scholar, in turn depends on the service fees paid by the VIEs. Current PRC regulations permit our subsidiaries in China to pay
dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations.
Under the applicable requirements of PRC law, our PRC subsidiaries may only distribute dividends after they have made allowances to fund
certain statutory reserves. These reserves are not distributable as cash dividends. Pursuant to the Law on the Promotion of Private Education,
sponsors of for-profit private schools are entitled to retain the profits from their schools, and the operating surplus may be allocated
to the sponsors pursuant to the PRC company law and other relevant laws and regulations. Sponsors of non-profit private schools are not
entitled to any distribution of profits from their schools. All revenue must be used for the operation of the schools. According to Implementation
Rules, a non-profit private school should allocate no less than 10% of its audited annual non-restricted net asset increase, or a for-profit
private school should allocate no less than 10% of its audited annual net income, to its development, respectively. In addition, prior
to the promulgation of specific Implementation Rules and other relevant regulations, at the end of each fiscal year, each of our private
schools in China is required to allocate a certain amount to its development fund for the construction or maintenance of the school properties
or purchase or upgrade of school facilities. In particular, our for-profit schools must allocate no less than 10% of their annual
net income, and our non-profit schools must allocate no less than 10% of their annual increase in the unrestricted net assets
of the school. However, the relevant authorities have yet to promulgate any detailed implementation rules and regulations under the Implementation
Rules. We remain uncertain as to the timing and substance of the rules under the Law on the Promotion of Private Education and Implementation
Rules to be promulgated, and how such rules will impact our operation. Furthermore, if our subsidiaries or the VIEs in China incur debt
on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments
to us. Any such restrictions may materially affect such entities’ ability to make dividends or make payments, in service fees or
otherwise, to us, which may materially and adversely affect our business, financial condition and results of operations.
Fluctuations in the value of the Renminbi
may have a material adverse effect on your investment.
The
change in value of the Renminbi against the U.S. dollar and other currencies is subject to various factors, including changes in China’s
political and economic conditions. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the
U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain
foreign currencies. Later on, the People’s Bank of China has decided to further implement the reform of the RMB exchange regime
and to enhance the flexibility of RMB exchange rates. Such changes in policy have resulted in a significant appreciation of the Renminbi
against the U.S. dollar since 2005. There is still significant international pressure on the PRC government to adopt a more flexible
currency policy, which could result in a further and more significant adjustment of the rate for Renminbi against the U.S. dollar.
Any significant appreciation or revaluation of the Renminbi may
have a material adverse effect on the value of, and any dividends payable on, the ADSs in foreign currency terms. More specifically, if
we decide to convert our Renminbi into U.S. dollars, the appreciation of the U.S. dollar against the Renminbi would have a negative effect
on the U.S. dollar amount available to us. To the extent that we need to convert U.S. dollars we receive from our initial public offering
into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount
we receive from the conversion. In addition, appreciation or depreciation in the exchange rate of the Renminbi to the U.S. dollar could
materially and adversely affect the price of the ADSs in U.S. dollars without giving effect to any underlying change in our business or
results of operations.
Certain PRC regulations, including the
M&A Rules and national security regulations, may require a complicated review and approval process which could make it more difficult
for us to pursue growth through acquisitions in China.
The Provisions on the Merger and Acquisition of Domestic Enterprises
by Foreign Investors (Revised in 2009), or the M&A Rules, established additional procedures and requirements that could make merger
and acquisition activities in China by foreign investors more time-consuming and complex. For example, MOFCOM must be notified if a foreign
investor takes control of a PRC domestic enterprise. In addition, certain acquisitions of domestic companies by offshore companies that
are related to or affiliated with the same entities or individuals of the domestic companies, are subject to MOFCOM approval. In addition,
the Implementing Rules Concerning Security Review on Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by
MOFCOM in August 2011, require that mergers and acquisitions by foreign investors in “any industry with national security concerns”
be subject to national security review by MOFCOM. In addition, any activities attempting to circumvent such review process, including
structuring the transaction through a proxy or contractual control arrangement, are strictly prohibited.
There is significant uncertainty regarding the interpretation
and implementation of these regulations relating to merger and acquisition activities in China. Therefore, complying with these requirements
could be time-consuming. The required notification, review or approval process may materially delay or affect our ability to complete
merger and acquisition transactions in China. As a result, our ability to seek growth through acquisitions may be materially and adversely
affected.
In addition, if MOFCOM determines
that we should have obtained its approval for our entry into contractual arrangements with the VIEs and the shareholders of the VIEs,
we may be required to file for remedial approvals. We cannot assure you that we would be able to obtain such approval from MOFCOM. We
may also be subject to administrative fines or penalties by MOFCOM that may require us to limit our business operations in China, delay
or restrict the conversion and remittance of our funds in foreign currencies into China or take other actions that could have material
adverse effect on our business, financial condition and results of operations.
Failure by the beneficial owners of our
shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits,
restrict our cross-border investment activities and subject us to liability under PRC law.
SAFE has promulgated regulations,
including the Notice on Relevant Issues Relating to Foreign Exchange Control on Domestic Residents’ Investment and Financing and
Round-Trip Investment through Special Purpose Vehicles (“Circular 37”), effective on July 4, 2014, and its appendices. Circular
37 requires PRC residents, including PRC institutions and individuals, to register with local branches of SAFE if they direct establish
or indirect control an offshore entity for the purpose of overseas investment and financing. Such domestic or offshore entities with PRC
residents’ legally owned assets or equity interests are referred to in Circular 37 as a “special purpose vehicle.” The
term “control” under Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights
acquired by the PRC residents in the offshore special purpose vehicles by means as acquisition, trust, proxy, voting rights, repurchase,
convertible bonds or other arrangements. Circular 37 further requires amendment to the registration in the event of any significant changes
with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or
exchange, merger, division or other material event. If a PRC shareholder holding interests in a special purpose vehicle fails to fulfill
the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may
be restricted in its ability to contribute additional capital into its PRC subsidiaries. Further, failure to comply with the various SAFE
registration requirements described above could result in liability under PRC law for foreign exchange evasion.
These regulations apply to
our direct and indirect shareholders who are PRC residents and may apply to any offshore acquisitions or share transfers that we make
in the future if our shares are issued to PRC residents. Additionally, in practice, different local SAFE branches may have different views
and procedures on the application and implementation of SAFE regulations, and there remains uncertainty with respect to its implementation.
As of the date of this annual report, all PRC residents known to us that currently hold direct or indirect interests in our company either
have completed the necessary registrations or are in the process of updating their necessary registration with SAFE as required by Circular
37. However, we cannot assure you that these individuals or any other direct or indirect shareholders or beneficial owners of our company
who are PRC residents will be able to successfully complete the registration or update the registration of their direct and indirect equity
interest as required in the future. If they fail to make or update the registration, our PRC subsidiaries could be subject to fines and
legal penalties, and SAFE could restrict our cross-border investment activities and our foreign exchange activities, including restricting
our PRC subsidiaries’ ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or
prevent us from contributing additional capital into our PRC subsidiaries. As a result, our business operations and our ability to pay
dividends could be materially and adversely affected.
Failure to
comply with governmental regulations and other legal obligations concerning data protection and cybersecurity may materially and adversely
affect our business, as we routinely collect, store and use data during the conduct of our business.
We routinely collect, store
and use data during our operations. We are subject to PRC laws and regulations governing the collecting, storing, sharing, using, processing,
disclosure and protection of data on the Internet and mobile platforms as well as cybersecurity. On April 13, 2020, the Office of the
Central Cyberspace Affairs Commission and 10 other government authorities jointly promulgated the Measures for Cybersecurity Review. On
August 17, 2021, the PRC State Council promulgated the Regulations on Protection of Critical Information Infrastructure, which became
effective on September 1, 2021. Pursuant to the Regulations on Protection of Critical Information Infrastructure, critical information
infrastructure shall mean any important network facilities or information systems of an important industry or field, such as public communication
and information service, energy, communications, water conservation, finance, public services, e-government affairs and national defense
science, which may endanger national security, peoples’ livelihood and public interest in the event of damage, function loss or
data leakage. In addition, relevant administration departments of each critical industry and sector (the “Protection Departments”),
shall be responsible to formulate eligibility criteria and determine the critical information infrastructure operator in the respective
industry or sector. The operators shall be informed about the final determination as to whether they are categorized as critical information
infrastructure operators. On January 4, 2022, the CAC announced the adoption of the Cybersecurity Review Measures, and effective February
15, 2022, online platforms and network providers possessing personal information of more than one million individual user must undergo
a cybersecurity review by the CAC when they seek listing in foreign markets. Furthermore, the Standing Committee of the National People’s
Congress passed the Personal Information Protection Law of the PRC, which became effective from November 1, 2021 and requires personal
information processing operators, among other regulatory requirements, to obtain a personal information protection certification issued
by recognized institutions in accordance with the CAC regulation before such personal information can be transferred out of China. As
of the date of this annual report, we have not been informed that we are identified as a critical information infrastructure operator
by any governmental authorities.
On August 20, 2021, the Standing
Committee of the National People’s Congress promulgated the Personal Information Protection Law, which became effective on November
1, 2021. The Personal Information Protection Law aims to protect personal information rights and interests, regulate the processing of
personal information, ensure the orderly and free flow of personal information in accordance with the law, and promote the reasonable
use of personal information. According to the Personal Information Protection Law, personal information includes all kinds of identified
or identifiable information related to natural persons recorded by electronic or other means, but excludes de-identified information.
The Personal Information Protection Law also specifies the rules for handling sensitive personal information, which includes biometrics,
religious beliefs, specific identities, medical health, financial accounts, trails and locations, and personal information of teenagers
under fourteen years old and other personal information, which may easily infringe the personal dignity or harm safety of livelihood and
property upon leakage or illegal usage. Personal information handlers are responsible for their personal information handling activities,
and must adopt necessary measures to safeguard the security of the personal information they handle. Otherwise, the personal information
handlers will be ordered for rectification or suspension or termination of provision of services, confiscation of illegal income, subject
to fines or other penalties.
We face regulatory uncertainties in China
that could restrict our ability to grant share incentive awards to our employees or consultants who are PRC citizens.
Pursuant to the Notices on
Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in a Stock Incentive Plan of an Overseas
Publicly-Listed Company issued by SAFE on February 15, 2012 (“Circular 7”), a qualified PRC agent (which could be the PRC
subsidiary of the overseas-listed company) is required to file an application with SAFE on behalf of “domestic individuals”
(both PRC residents and non-PRC residents who reside in China for a continuous period of not less than one year, excluding foreign diplomatic
personnel and representatives of international organizations) who are granted shares or share options by the overseas-listed company according
to its share incentive plan. The application is for conducting SAFE registration with respect to such share incentive plan and obtaining
approval for an annual allowance with respect to the purchase of foreign exchange in connection with the share purchase or share option
exercise. The foreign exchange income received from the sale of shares and dividends distributed by the overseas listed company and any
other income by such PRC individuals shall be fully remitted into a collective foreign currency account in China, which is opened and
managed by the PRC domestic agent before distribution to such individuals. In addition, such domestic individuals must also retain an
overseas entrusted institution to handle matters in connection with their exercise of share options and their purchase and sale of shares.
The PRC domestic agent also needs to update registration with SAFE within three months after the overseas-listed company materially changes
its share incentive plan or make any new share incentive plans.
We
have granted shares options under the 2017 Plan in the past and may continue to grant additional share options in the
future. When we do, we need to apply for or update our
registration with SAFE or its local branches on behalf of our employees or consultants who receive options or other equity-based
incentive grants under our share incentive plan or material changes in our share incentive plan. However, we may not always be able
to make applications or update our registration on behalf of our employees or consultants who hold any type of share incentive
awards in compliance with Circular 7. We cannot assure you that such applications or update of registration will be successful. If
we or the participants of our share incentive plan who are PRC citizens fail to comply with Circular 7, we and/or such participants
of our share incentive plan may be subject to fines and legal sanctions. There may be additional restrictions on the ability of such
participants to exercise their share options or remit proceeds gained from sale of their shares into China, and we may be prevented
from further granting share incentive awards under our share incentive plan to our employees or consultants who are PRC
citizens.
Labor contract laws in China may adversely
affect our results of operations.
The current PRC Labor Contract
Law imposes greater liabilities on employers and significantly increases the cost of an employer’s decision to reduce its workforce.
Moreover, it stipulates that the employment contract of an employee must be automatically terminated upon reaching the mandatory retirement
age. If we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact
such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely
affecting our financial condition and results of operations.
Increases in labor costs and employee benefits
in China may adversely affect our business and our profitability.
The PRC economy has been experiencing
significant growth, leading to inflation and increased labor costs. China’s overall economy and the average wage in China are expected
to continue to grow. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pensions,
housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government
agencies for the benefit of our employees. The determination of the relevant government agencies whether an employer has made adequate
payments of the requisite statutory employee benefits is within their discretion. Employers that fail to make adequate payments may be
subject to late payment fees, fines and/or other penalties. Future increases in China’s inflation and material increases in labor
costs and employee benefits may materially and adversely affect our profitability and results of operations unless we are able pass on
these costs to our students by increasing tuition.
Litigation and negative publicity surrounding
China-based companies listed in the United States may negatively impact the trading price of the ADSs.
Litigation and negative publicity
surrounding companies with operations in China listed in the United States have negatively impacted stock prices of these companies. Certain
politicians in the United States have publicly warned investors to shun China-based companies listed in the United States. The SEC and
the Public Company Accounting Oversight Board (United States), or the PCAOB, also issued a joint statement on April 21, 2020, reiterating
the disclosure, financial reporting and other risks involved in the investments in companies that are based in emerging markets, and the
limited remedies thereof. Furthermore, various equity-based research organizations have recently published reports on China-based companies
after examining their corporate governance practices, related party transactions, sales practices and financial statements. These reports
have led to special investigations and listing suspensions on U.S. national exchanges. Any similar scrutiny on us, regardless of its merit,
could cause the market price of the ADSs to fall, divert management resources and energy, cause us to incur expenses in defending ourselves
against rumors, and increase the premiums we pay for director and officer insurance.
If the PCAOB is
unable to inspect or investigate completely auditors located in China for two consecutive years, our ADSs will be delisted and prohibited
from trading in the over-the-counter market under the Holding Foreign Companies Accountable Act (HFCAA). The delisting of the ADSs, or
the threat of their being delisted, may materially and adversely affect the value of your investment.
As
part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law,
in particular China’s, the HFCAA has been signed into law on December 18, 2020. The HFCAA states that if the SEC determines that
we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for two
consecutive years, the SEC shall prohibit the trading of our ADSs on a national securities exchange or in the over-the-counter market
in the United States.
On December 2, 2021,
the SEC adopted final amendments to its rules implementing the HFCAA, which include requirements to disclose information, including the
auditor name and location, the percentage of shares of the issuer owned by governmental entities, whether governmental entities in the
applicable foreign jurisdiction with respect to the auditor has a controlling financial interest with respect to the issuer, the name
of each official of the Chinese Communist Party who is a member of the board of the issuer, and whether the articles of incorporation
of the issuer contains any charter of the Chinese Communist Party. These amendments also establish procedures the SEC will follow in identifying
issuers and prohibiting trading by certain issuers under the HFCAA, including that the SEC will identify an issuer as a “Commission-identified
Issuer” if the issuer has filed an annual report containing an audit report issued by a registered public accounting firm that the
PCAOB has determined it is unable to inspect or investigate completely, and will then impose a trading prohibition on an issuer after
it is identified as a Commission-Identified Issuer for two consecutive years.
In August 2022, the PCAOB,
the CSRC and the Ministry of Finance of the PRC signed the Statement of Protocol, which establishes a specific and accountable framework
for the PCAOB to conduct inspections and investigations of PCAOB-governed accounting firms in mainland China and Hong Kong. On December
15, 2022, the PCAOB announced that it was able to secure complete access to inspect and investigate PCAOB-registered public accounting
firms headquartered in mainland China and Hong Kong completely in 2022. The PCAOB Board vacated its previous 2021 determinations that
the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong
Kong. However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting
firms headquartered in mainland China and Hong Kong is subject to uncertainties. Several factors outside of our and our auditors’ control
may impact this access. The PCAOB continues to demand complete access in mainland China and Hong Kong. The organization is making plans
to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations
as needed. The PCAOB has also indicated that it will act immediately to consider the need to issue new determinations with the HFCAA if
needed. If the PCAOB is unable to inspect and investigate completely registered public accounting firms located in China and we fail to
retain a registered public accounting firm that the PCAOB is able to inspect and investigate completely for two consecutive years, or
if we otherwise fail to meet the PCAOB’s requirements, the ADSs will be delisted from the New York Stock Exchange, and our shares
will not be permitted for trading over the counter in the United States under the HFCAA and related regulations. If the ADSs are prohibited
from trading in the United States, we cannot assure you that we will be able to list on a non-U.S. exchange or that a market for the ADSs
will develop outside of the United States. Such a prohibition would substantially impair your ability to sell or purchase the ADSs when
you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of the ADSs. Moreover,
the HFCAA or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers,
including us, and the market price of the ADSs could be adversely affected. Also, such a prohibition would significantly affect our ability
to raise capital on terms acceptable to us, or potentially impede our ability to raise capital altogether, which would have a material
adverse impact on our business, results of operations and financial condition.
If the settlement reached between the SEC
and the big four PRC-based accounting firms, including the Chinese affiliate of our independent registered public accounting firm, concerning
the manner in which the SEC may seek access to audit working papers from audits in China of US-listed companies cannot be executed or
fails to obtain the approval of authorities in both China and the United States, we may be unable to timely file future financial statements
in accordance with the requirements of the Exchange Act.
In
late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act
of 2002 against the mainland Chinese affiliates of the “big four” accounting firms (including the mainland Chinese affiliate
of our independent registered public accounting firm). The initial trial of the proceedings in July 2013 in the SEC’s internal administrative
court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the four PRC-based accounting
firms including a temporary suspension of their right to practice before the SEC. However, the proposed penalty did not take effect as
it awaited review by the SEC Commissioners.. On February 6, 2015, before the Commissioners
could review the case, the Chinese accounting firms reached a settlement with the SEC, leading to a stay of the proceedings. Under the
terms of the settlement, the SEC accepted that future requests by the SEC for the production of documents would normally be made to the
CSRC. The Chinese accounting firms would receive requests similar to those outlined under Section 106 of the Sarbanes-Oxley Act of 2002,
and would be required to abide by a detailed set of procedures in facilitating production via the CSRC. The CSRC for its part initiated
a procedure whereby, under its supervision and subject to its approval, requested classes of documents held by the accounting firms could
be sanitized of problematic and sensitive content so as to render them capable of being made available by the CSRC to US regulators.
Under the terms of the settlement,
the underlying proceeding against the four PRC-based accounting firms was dismissed with prejudice after four years, starting from the
settlement date of February 6, 2019. Despite the conclusion of the proceedings, it is expected that all parties will continue to apply
the same procedures: i.e., the SEC will continue to make its requests for the production of documents to the CSRC, and the CSRC
will normally process those requests applying the sanitization procedure. We cannot predict whether the SEC will further challenge the
four PRC-based accounting firms’ compliance with U.S. law if the CSRC does not authorize production of requested documents to the
SEC. If additional challenges are imposed on the Chinese affiliates of the “big four” accounting firms, it may impede our
ability to timely file future financial statements in compliance with the requirements of the Exchange Act.
If the SEC were to resume
the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may
find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements
being determined to not be in compliance with the requirements of the Exchange Act, potentially leading to delisting. Moreover, any negative
news about any such future proceedings against these accounting firms may cause investor uncertainty regarding China-based, United States-listed
companies and the market price of the ADSs may be adversely affected.
If the Chinese affiliate of
our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC, and we were unable
to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, it could result in
our financial statements being deemed non-compliant with the requirements of the Exchange Act. Such a determination could ultimately lead
to the delisting of our ordinary shares from the NYSE (the “New York Stock Exchange”) or deregistration from the SEC, or both,
which would substantially reduce or effectively terminate the trading of the ADSs in the United States.
Risks Related to Our Ordinary Shares and ADSs
The trading price
of the ADSs may experience rapid and substantial volatility, which could result in substantial losses for investors.
The
trading price of the ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because
of broad market and industry factors, including 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 addition, factors specific to our operations
can contribute to the volatility of the ADSs. These factors may include, but are not limited to:
| ● | actual or anticipated variations
in our revenues, earnings, cash flow and changes or revisions of our expected results; |
| ● | fluctuations in operating metrics; |
| ● | announcements of new investments,
acquisitions, strategic partnerships or joint ventures by us or our competitors; |
| ● | announcements of new products,
services and courses and expansions by us or our competitors; |
| ● | changes in financial estimates
by securities analysts; |
| ● | announcements of studies and
reports relating to the quality of our product, service and course offerings or those of our competitors; |
| ● | changes in the performance or
market valuations of other education companies; |
| ● | detrimental negative publicity
about us, our competitors or our industry; |
| ● | additions or departures of key
personnel; |
| ● | release of lockup or other transfer
restrictions on our outstanding equity securities or sales of additional equity securities; |
| ● | regulatory developments affecting
us or our industry; |
| ● | general economic or political
conditions affecting China or elsewhere in the world; |
| ● | fluctuations of exchange rates
between the RMB and the U.S. dollar; and |
| ● | potential litigation or regulatory
investigations. |
Any
of these factors may result in significant and sudden changes in the volume and price of the trading of the ADSs. The securities of some
China-based companies that have listed their securities in the United States have experienced significant volatility since their initial
public offerings in recent years, including, in some cases, substantial declines in the trading prices of their securities. The trading
performances of these companies’ securities after their offerings may affect the attitudes of investors towards Chinese companies
listed in the United States in general, which consequently may impact the trading performance of the ADSs, 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 Chinese companies may also negatively affect the perceptions of investors towards Chinese companies
in general, including us, regardless of whether we have engaged in any inappropriate activities. In particular, the global financial crisis,
the ensuing economic recessions and deterioration in the credit market in many countries have contributed and may continue to contribute
to extreme volatility in the global stock markets.
Moreover,
recent instances of extreme stock price fluctuations, especially among companies with smaller public floats, have led to increased volatility
in the market. As we have a relatively small public float, we may experience greater stock price volatility, including aggressive price
run-ups and declines, lower trading volume and less liquidity, compared with companies with larger public floats. In particular, the ADSs
may be subject to rapid and substantial price volatility, low volumes of trades and large spreads in bid and ask prices. Such volatility,
including any stock run-up, may be unrelated to our actual or expected operating performance, financial condition or prospects, and industry,
market or economic factors, which makes it difficult for prospective investors to assess such rapidly changing value of the ADSs. In addition,
due to the potential low trading volumes, even small quantities of buying or selling can have a disproportionate impact on the price of
the ADSs. This low volume of trades could also cause the price of the ADSs to fluctuate significantly, with large percentage changes occurring
within a single trading day. Holders of the ADSs may also not be able to readily liquidate their investment or may be forced to sell at
depressed prices due to such low-volume trading. As a result of such volatility, investors may experience losses on their investment in
the ADSs. Such volatility also could adversely affect our ability to issue additional ADSs or other securities and our ability to obtain
additional financing in the future, as well as our ability to retain key employees, many of whom have been granted equity incentives.
Furthermore, the potential extreme volatility may confuse the public investors of the value of the ADSs, distort the market’s perception
of the price of the ADSs, and our financial performance and public image, and negatively affect the long-term liquidity of the ADSs, regardless
of our actual or expected operating performance.
In
the past, shareholders of public companies have often brought securities class action suits against companies following periods of instability
in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s
attention and other resources from our business and cost us significant expenses to defend the suit, which could harm our results of operations.
Any such class action suit, successful or not, 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 results of operations and financial condition.
Substantial future sales or perceived potential
sales of the ADSs in the public market could cause the price of the ADSs to decline.
Sales of substantial amounts
of the ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of the ADSs.
All of our outstanding ADSs are freely transferable without restriction or additional registration under the Securities Act. If any existing
shareholder or shareholders sell a substantial amount of ADSs, the prevailing market price for the ADSs could be adversely affected. Such
sales also might make it more difficult for us to sell in the future at a time and price that we deem appropriate.
Techniques employed by short sellers may
drive down the market price of the ADSs.
Short selling is a trading
strategy where an investor sells securities that they have borrowed from a third party, with the intention of buying back the same securities
at a later time to return to the lender. The short seller hopes to profit from a decrease in the value of the securities between the sale
of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it
received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish,
or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative
market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling
of shares in the market.
Public companies listed in the United States with a significant portion
of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered on allegations
of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate
corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. They may also be subject to external
investigations by regulatory bodies such as the SEC. Additionally, shareholders have initiated lawsuits against some of these companies.
We may be the subject of unfavorable
allegations made by short sellers in the future. Any such allegations may be followed by periods of instability in the market price of
our common shares and ADSs and negative publicity. Once we become the subject of any unfavorable allegations, whether true or not, we
would have to expend significant amount of resource to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks,
we may be constrained in the manner in which we can proceed given the principles of freedom of speech, the availability of injunctive
reliefs, applicable federal or state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming and
could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations
against us could severely impact our business operations and shareholders’ equity, and the value of any investment in the ADSs could
be greatly reduced or even rendered worthless.
Our dual-class share structure with different
voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control
transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
As
of May 31, 2023, Ms. Meirong Yang and Ms. Huiyan Yang,
our ex-chairlady, collectively hold approximately 98.6% of the aggregate voting power of our company. See “Item 6. Directors, Senior
Management And Employees—E. Share Ownership.” As a result of the dual-class share structure and the concentration of ownership,
Ms. Meirong Yang and Ms. Huiyan Yang have considerable influence over matters such as decisions regarding mergers, consolidations, sale
of all or substantially all of our assets, election of directors and other significant corporate actions. Their interests may not always
align with the best interests of the company or our other shareholders. This concentration of ownership may discourage, delay or prevent
a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium
for their shares as part of a sale of our company and may reduce the price of the ADSs. This concentrated control will limit your ability
to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions
that holders of Class A ordinary shares and ADSs may view as beneficial.
If securities or industry analysts do
not publish research or publish inaccurate or unfavorable research about our business, the market price for the ADSs and trading
volume could decline.
The trading market for the
ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research
analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades the ADSs
or publishes inaccurate or unfavorable research about our business, the market price for the ADSs would likely decline. If one or more
research analysts discontinue their coverage of our company or reduce the frequency of publishing reports on us, it may lead to a reduced
visibility of our company in the financial markets. This lack of visibility could adversely impact the market price and trading volume
of the ADSs.
Because our board has the complete discretion as to dividend distribution,
the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs.
We declared a cash dividend
of US$0.10, US$0.12 and US$0.12 per ordinary share on September 18, 2019, July 23, 2020 and July 21, 2021, respectively.
Our board of directors
has complete discretion as to whether to distribute dividends, subject to applicable laws. Even if our board of directors decides to
declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future
results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from
our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.
Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs.
We cannot assure you that the ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not
realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.
U.S. holders that own
10% or more of the vote or value of our ordinary shares or ADSs may suffer adverse tax consequences if any of our non-U.S. subsidiaries
are characterized as a “controlled foreign corporation,” or a CFC, under Section 957(a) of the U.S. Internal Revenue Code
of 1986, as amended, or the Code.
A non-U.S. corporation is considered a CFC if more than 50% of (1) the total combined
voting power of all classes of shares of such corporation entitled to vote or (2) the total value of the shares of such corporation, is
owned, or is considered as owned by applying certain constructive ownership rules, by U.S. shareholders (within the meaning of the Code)
on any day during the taxable year of such non-U.S. corporation. Certain U.S. shareholders of a CFC generally are required to include
currently in gross income such shareholders’ share of the CFC’s “Subpart F income,” a portion of the CFC’s
earnings to the extent the CFC holds certain U.S. property and a portion of the CFC’s “global intangible low-taxed income”
(as defined under Section 951A of the Code). Such U.S. shareholders are subject to current U.S. federal income tax with respect to such
items, even if the CFC has not made an actual distribution to such shareholders.
We believe that certain of our non-U.S. subsidiaries may
be classified as CFCs. In the event that any of our subsidiaries are a CFC, U.S. holders who hold 10% or more of the vote or value of
our ordinary shares or ADSs may realize adverse U.S. federal income tax consequences. If you are a U.S. holder who holds 10% or more of
the vote or value of our ordinary shares or ADSs, you should consult your own tax advisors regarding the U.S. tax consequences of acquiring,
owning or disposing our ordinary shares or our ADSs and the impact of the TCJA, especially the changes to the rules relating to CFCs.
We may be classified as a passive foreign
investment company for United States federal income tax purposes, which could result in adverse United States federal income tax consequences
to United States investors in the ADSs or ordinary shares.
We will be classified as
a “passive foreign investment company,” or PFIC, if, in any particular taxable year, either (1) 75.0% or more of our
gross income for such year consists of certain types of passive income, or (2) 50.0% or more of the average quarterly value of our
assets during such year produce or are held for the production of passive income. Although the law in this regard is unclear, we
treat the New VIEs as being owned by us for United States federal income tax purposes, not only because we exercise effective
control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and,
as a result, we consolidate their results of operation in our financial statements. Assuming that we are the owner of the New VIEs
for United States federal income tax purposes, and based upon our historical and current income and assets, we do not believe that
we were classified as a PFIC for the taxable year ended August 31, 2022.
The determination of
whether we are or will become a PFIC will depend upon the composition of our income (which may differ from our historical results
and current projections) and assets and the value of our assets from time to time, including, in particular, the value of our
goodwill and other unbooked intangibles (which may depend upon the market value of the ADSs or ordinary shares from time-to-time and
may be volatile). In estimating the value of our goodwill and other unbooked intangibles, we have taken into account our anticipated
market capitalization, which may fluctuate. Among other matters, if our market capitalization declines further, we may be
classified as a PFIC for the current or future taxable years. It is also possible that the IRS may challenge our classification or
valuation of our goodwill and other unbooked intangibles, which may result in our company being, or becoming classified as, a PFIC
for the current or future taxable years.
Finally, in determining our PFIC status, we have relied in our unaudited
and audited financials. If we are required to restate or amend our financials further, it is possible that our company may have been,
or we may determine that it is, a PFIC.
The determination of
whether we are or will be a PFIC may also depend, in part, on how, and how quickly, we use our liquid assets. Under circumstances
where we retain significant amounts of liquid assets, or if the New VIEs were not treated as owned by us for United States federal
income tax purposes, our risk of being classified as a PFIC may substantially increase. Because there are uncertainties in the
application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, we
cannot assure you that we will not be a PFIC for the current taxable year or any future taxable year.
If we are classified as a
PFIC in any taxable year, a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal
Income Tax Considerations”) may incur significantly increased United States federal income tax on gain recognized on the sale or
other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such
gain or distribution is treated as an “excess distribution” under the United States federal income tax rules, and such holders
may be subject to burdensome reporting requirements. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds
the ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years for which such U.S. Holder holds
the ADSs or ordinary shares. For more information, see “Item 10. Additional Information—E. Taxation—United States Federal
Income Tax Considerations.”
Our memorandum and articles of association
contains anti-takeover provisions that could have a material adverse effect on the rights of holders of our Class A ordinary shares and
ADSs.
Our memorandum and articles
of association contain provisions to limit the ability of others to acquire control of our company or prompt us to engage in change-of-control
transactions. While these provisions exist with the intention of safeguarding our interests, they may inadvertently limit our shareholders’
opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control
of our company in a tender offer or similar transaction. For example, our board of directors has the authority subject to any resolution
of the shareholders to the contrary, to issue preferred shares in one or more series and to fix their designations, powers, preferences,
privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend
rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the
rights associated with our Class A ordinary shares, in the form of ADS or otherwise. The issuance of preferred shares can be expedited
and structured in a manner that delays or prevents a change in control of our company or complicates the removal of management. If our
board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders of
our Class A ordinary shares and ADSs may be materially and adversely affected.
However, under Cayman Islands
law, our board of directors may only exercise the rights and powers granted to them by our memorandum and articles of association for
a proper purpose and for what they believe in good faith to be in the best interest of the Company.
You may face difficulties in protecting
your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman
Islands law.
We are an exempted company
incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the
Cayman Islands Company Act (As Revised) and the common law of the Cayman Islands. The rights of shareholders to take action against the
directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to
a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively
limited judicial precedent in the Cayman Islands as well as from the common law of England. English courts’ decisions are of persuasive
authority but not binding upon a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our
directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions
in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S.
states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition,
Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
The Cayman Islands courts
are also unlikely (1) to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions
of U.S. securities laws, or (2) to impose liabilities against us, in original actions brought in the Cayman Islands, based on certain
civil liability provisions of U.S. securities laws.
Although there is no statutory
enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are
not a party to any treaties for the reciprocal enforcement or recognition of such judgments), the courts of the Cayman Islands would generally
recognize as a valid, final and conclusive judgment in personam obtained in the United States. This recognition would apply to
judgments that require the payment of a sum of money is payable (excluding multiple damages, taxes or other charges of a like nature or
in respect of a fine or other penalty) or, in certain circumstances, in personam judgments for non-monetary relief, and would give
a judgment based thereon provided that (1) such courts had proper jurisdiction over the parties involved in the judgment, (2) such courts
did not contravene the rules of natural justice of the Cayman Islands, (3) such judgment was not obtained by fraud, (4) the enforcement
of the judgment would not be contrary to the public policy of the Cayman Islands, (5) no new admissible evidence relevant to the action
is submitted prior to the rendering of the judgment by the courts of the Cayman Islands, and (6) the correct procedures under Cayman Islands
laws are duly followed..
However, the Cayman Islands
courts are unlikely to enforce a punitive judgment of a United States court predicated upon the liabilities provision of the federal
securities laws in the United States without retrial on the merits if such judgment gives rise to obligations to make payments that may
be regarded as fines, penalties or similar charges.
As a result of the above,
our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of
the board of directors or large shareholders than compared to public shareholders of a company incorporated in the United States.
Certain judgments obtained against us by
our shareholders may not be enforceable.
As a Cayman Islands company,
substantially all of our assets are located outside of the United States. The majority of our current operations are conducted in the
United Kingdom and China. In addition, a majority of our current directors and officers are nationals and residents of countries other
than the United States. Most of the assets of these persons are located outside the United States. The SEC, U.S. Department of Justice,
or the DOJ, and other authorities often have substantial difficulties in bringing and enforcing actions against non-U.S. companies and
non-U.S. persons, including company directors and officers, in certain emerging markets, including China. Additionally, our public shareholders
may have limited rights and few practical remedies in emerging markets where we operate. Although shareholder claims are common in the
United States, such as class action, claims under securities law and fraud, it’s generally more difficult or impossible to pursue
as a matter of law or practicality in many emerging markets, including China. In China, there are significant legal and other obstacles
for the SEC, the DOJ and other U.S. authorities to obtaining information needed for shareholder investigations or litigation. Although
the competent authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another
country or region to implement cross-border supervision and administration, the regulatory cooperation with the securities regulatory
authorities in the United States has not been efficient in the absence of a mutual and practical cooperation mechanism. According to Article
177 of the PRC Securities Law which became effective in March 2020, no foreign securities regulator is allowed to directly conduct investigation
or evidence collection activities within the territory of the PRC. Accordingly, without the consent of the competent PRC securities regulators
and relevant authorities, no organization or individual may provide the documents and materials relating to securities business activities
to foreign securities regulators. As a result, it may be difficult or impossible for you to bring an action against us or against these
individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities
laws or otherwise. Even if an action is successfully brought, the laws of the Cayman Islands and of China may render it difficult to enforce
a judgment against our assets or the assets of our directors and officers.
We are a foreign private issuer within
the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic
public companies.
Because we are a foreign
private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States
that are applicable to U.S. domestic issuers, including:
|
● |
the rules under the Exchange Act requiring the filing
of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; |
|
● |
the sections of the Exchange Act regulating the solicitation
of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; |
|
● |
the sections of the Exchange Act requiring insiders
to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in
a short period of time; and |
|
● |
the selective disclosure rules by issuers of material
nonpublic information under Regulation FD. |
We 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 quarterly basis through press releases, distributed
pursuant to the rules and regulations of the New York Stock Exchange. 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 may be less
extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, investors may not
have access to the same level of protection or information that would be available were the investors to invest in a U.S. domestic issuer.
As
a “controlled company” under the rules of the NYSE, we are exempt from certain corporate governance requirements, which could
adversely affect our public shareholders.
Under the rules of the NYSE,
a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company
is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirement that a
majority of our directors be independent, as defined in the NYSE rules, and the requirement that our compensation and nominating and
corporate governance committees consist entirely of independent directors. In April 2017, Ms. Huiyan Yang, our ex-chairlady, and Ms.
Meirong Yang entered into an acting-in-concert agreement in which Ms. Huiyan Yang agrees with Ms. Meirong Yang when voting and deciding
on material matters in relation to the management of our company. Ms. Huiyan Yang and Ms. Meirong Yang are also joint settlors and members
of the two-member investment committee of Yeung Family Trust V, which holds approximately 1.4% of the outstanding Class A ordinary shares
and all of the outstanding Class B ordinary shares as of May 31, 2023. As a result, Ms. Huiyan Yang and Ms. Meirong Yang collectively
are the beneficial owners of a majority of the voting power of our issued and outstanding share capital as of May 31, 2023.
Therefore, we are a “controlled company” under the rules of the NYSE. We have elected to rely on certain exemptions under
the NYSE rules available to controlled companies, including the exemption from having a majority of our directors be independent, and
may continue to elect to do so as long as we remain a controlled company. As a result, you may not have the same protections enjoyed
by shareholders of companies that are subject to all of the NYSE corporate governance requirements.
As a company incorporated in the Cayman
Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly
from New York Stock Exchange corporate governance listing standards; these practices may afford less protection to shareholders than
they would enjoy if we complied fully with from New York Stock Exchange corporate governance listing standards.
As a Cayman Islands company
listed on the New York Stock Exchange, we are subject to New York Stock Exchange corporate governance listing standards. However, the
New York Stock Exchange rules allow a foreign private issuer like us to follow the corporate governance practices of its home country.
Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from New York Stock
Exchange corporate governance listing standards. Shareholders of Cayman Islands exempted companies like us have no general rights under
Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion
under the articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our
shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information
needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy
contest.
Certain corporate
governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies
incorporated in other jurisdictions such as the United States. We have followed and intend to continue to follow Cayman Islands
corporate governance practices in lieu of the corporate governance requirements of the NYSE that, for example, listed companies must
have a majority of independent directors and that the audit committee consists of at least three members. To the extent we choose to
follow home country practice with respect to corporate governance matters, our shareholders may have less protection than they
otherwise would under rules and regulations applicable to U.S. domestic issuers.
The voting rights of holders of ADSs are
limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote.
As a holder of the ADSs, you
will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions
of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of
your voting instructions, the depositary will vote the underlying Class A ordinary shares in accordance with these instructions. You will
not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our memorandum
and articles of association, the minimum notice period required for convening a general meeting is ten days. When a general meeting is
convened, you may not receive notice sufficiently in advance to withdraw the shares underlying your ADSs to allow you to vote with respect
to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver
our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the
depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions
or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you
may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
The depositary for the ADSs will
give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not vote at shareholders’
meetings, except in limited circumstances, which could adversely affect your interests.
Under the deposit agreement
for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our Class A ordinary shares underlying your
ADSs at shareholders’ meetings unless:
|
● |
we have failed to timely provide the depositary with
notice of meeting and related voting materials; |
|
● |
we have instructed the depositary that we do not wish
a discretionary proxy to be given; |
|
● |
we have informed the depositary that there is substantial
opposition as to a matter to be voted on at the meeting; or |
|
● |
a matter to be voted on at the meeting would have
a material adverse impact on shareholders. |
The effect of this discretionary
proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our Class A ordinary shares underlying your ADSs
from being voted, except in the circumstances described above. This may make it more difficult for shareholders to influence the management
of our company. Holders of our ordinary shares are not subject to this discretionary proxy.
You may not receive dividends or other
distributions on our Class A ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them
available to you.
The depositary of the ADSs
has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited
securities underlying the ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number
of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical
to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs
if such distribution consists of securities that require registration under the Securities Act but that are not properly registered or
under exemption. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally,
the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute
such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received
through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights
or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for
them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value
of the ADSs.
You may experience dilution of your holdings
due to inability to participate in rights offerings.
We may, from time to time,
distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute
rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt
from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities
Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights
to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file
a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared
effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings.
You may be subject to limitations on transfer
of your ADSs.
Your ADSs are transferable
on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient when
performing its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate
events such as a right offering, during which the depositary needs to maintain an exact number of ADS holders on its books for a specified
period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver,
transfer or register transfers of the ADSs generally when the share register or the books of the depositary are closed, or at any time
if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or
under any provision of the deposit agreement, or for any other reason.
ITEM 4. INFORMATION ON THE COMPANY
A. History and development of the company
We are an exempted company
with limited liability incorporated in the Cayman Islands. We conduct our business primarily through our subsidiaries and affiliated
entities in China, the United Kingdom, the United States and Canada. As of the date of this annual report, we have a network of eight
kindergartens in China and a number of learning centers for after-school programs through certain contractual arrangements with the VIEs,
which in turn controls and holds these kindergartens and learning centers. As of the date of this annual report, we operate eight overseas
schools and three language training institutions, which we may also refer to as international language schools, through Bright Scholar
(UK) Holdings Limited, a wholly owned subsidiary of ours. We trace our history back to the founding of Guangdong Country Garden School,
our first private school, in 1994. Over the past two decades, we have launched and acquired a number of schools and complementary education
services in China, the United Kingdom, the United States and Canada.
Beginning in 2016, we underwent
a series of restructurings. In particular:
|
● |
Incorporation of the listing entity. In December 2016,
Ms. Meirong Yang incorporated Bright Scholar Holdings in the Cayman Islands. |
|
● |
Acquisition of Impetus. In January 2016, we acquired Impetus Investment
Ltd. (“Impetus”), a Cayman Islands company from Mr. Junli He, our former director and executive vice chairman, and other selling
shareholders. |
|
● |
Incorporation of PRC subsidiary. In January 2017,
Time Education China Holdings Limited incorporated Zhuhai Bright Scholar, as our wholly-owned subsidiary in China. |
|
● |
Contractual arrangements. In January 2017, we, through
our PRC subsidiary, Zhuhai Bright Scholar, entered into a series of contractual arrangements with (1) BGY Education Investment and
the schools and subsidiaries it owns and operates, and (2) Ms. Meirong Yang and Mr. Wenjie Yang, the shareholders of BGY Education
Investment, to obtain effective control of BGY Education Investment and the schools and subsidiaries it owns and operates (the “2017
contractual arrangements”). |
In August 2021, shareholder
of BGY Education Investment, i.e., Ms. Meirong Yang and Mr. Wenjie Yang, established a few new entities, including Foshan Meiliang
Education Technology Co., Ltd., Foshan Shangtai Education Technology Co., Ltd., Foshan Renliang Education Technology Co., Ltd., Foshan
Yongliang Education Technology Co., Ltd., Foshan Zhiliang Education Technology Co., Ltd. and Beijing Boteng Consulting Co., Ltd. On August
13, 2021, a set of agreements supplementary to the 2017 contractual arrangements were entered into among Zhuhai Bright Scholar, BGY Education
Investment, Ms. Meirong Yang and Mr. Wenjie Yang, and these new entities to enable them, as well as their subsidiaries, to join the 2017
contractual arrangements and share the same rights and obligations, if applicable, of BGY Education Investment.
We have been advised by
our PRC legal counsel that the contractual arrangements among Zhuhai Bright Scholar, BGY Education Investment and the subsidiaries
and schools it held, and Ms. Meirong Yang and Mr. Wenjie Yang as the shareholders of BGY Education Investment were valid, binding and enforceable under PRC laws and regulations before August 31, 2021, and were not in violation of PRC laws or
regulations in effect as of August 31, 2021; and the respective contractual arrangements with Foshan Meiliang Education Technology
Co., Ltd., Foshan Shangtai Education Technology Co., Ltd., Foshan Renliang Education Technology Co., Ltd., Foshan Yongliang
Education Technology Co., Ltd., Foshan Zhiliang Education Technology Co., Ltd. and Beijing Boteng Consulting Co., Ltd. are valid,
binding and enforceable under PRC laws and regulations, and are not in violation of PRC laws or regulations currently in effect. If
the VIEs, Ms. Meirong Yang and Mr. Wenjie Yang fail to perform their obligations under the contractual arrangements, we could be
limited in our ability to enforce the contractual arrangements that give us the effective control over the VIEs. See “Item 3.
Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with
the VIEs and their shareholders for our operations in China, which may not be as effective in providing control as director
ownership.”
We have been advised by our PRC legal counsel, however, that there
are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. Accordingly,
the PRC regulatory authorities may in the future take a view that is contrary to the above opinion of our PRC legal counsel. We have been
further advised by our PRC legal counsel that if the PRC government finds that the contractual arrangements that establish the structure
for operating our education services business in China do not comply with relevant PRC government restrictions on foreign investment in
the education services industry, we could be subject to severe penalties, including being prohibited from continuing operations. For a
detailed description of the risks associated with our corporate structure, see “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business
in China.”
If we are unable to maintain effective control over the VIEs, we will
not be able to continue to consolidate the financial results of the VIEs into our financial results. We concluded that we have lost control
over the private schools among the Affected Entities since August 31, 2021 based on the relevant accounting standard in accordance with
U.S. GAAP due to the Implementation Rules that became effective on September 1, 2021. We have determined that, in substance, we had ceased to recognize revenues for all activities related to the Affected
Entities with compulsory education and discontinued all business activities with such entities, by August 31, 2021 while continuing to
provide essential services to keep these schools open. The revenue contribution of our continuing operations accounted for 43.9% of our total revenues in the 2020 fiscal
year and 37.8% in the 2021 fiscal year. Further, as a holding company, our ability to generate profits, pay dividend and other cash distributions
to our shareholders depends principally on our ability to receive dividends and other distributions from our PRC subsidiary, Zhuhai Bright
Scholar, which in turn depends on the service fees paid to Zhuhai Bright Scholar from our schools and other affiliated entities. We, through
our PRC subsidiary, Zhuhai Bright Scholar, have entered into an exclusive management services and business cooperation agreement with
each of the VIEs, pursuant to which we provide service to our schools in exchange for the payment of service fees. The services fees we
are entitled to collect under the agreement are calculated as the balance of general income less any costs, taxes and other reserved fees
stipulated by laws and regulations. In practice, we evaluate on a case-by-case basis the performance and future plans of individual schools
before determining the amount we collect from each school. We do not have unfettered access to the revenues from our PRC subsidiaries
or affiliated entities due to the significant PRC legal restrictions on the payment of dividends by PRC companies, foreign exchange control
restrictions, and the restrictions on foreign investment, among others. For example, under the applicable requirements of PRC law, our
PRC subsidiaries may only distribute dividends after they have made allowances to fund certain statutory reserves and each private school
in China is required to allocate a certain amount to its development fund prior to payments of dividend. In particular, our for-profit schools
must allocate no less than 10% of their annual net income, and our non-profit schools must allocate no less than 10% of their annual
increase in their unrestricted net assets for such purposes. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—Our subsidiaries and affiliated entities in China are subject to restrictions on making dividends
and other payments to us.”
We listed the ADSs
on the New York Stock Exchange under the symbol “BEDU” on May 18, 2017 and completed an initial public offering of
17,250,000 ADSs on June 7, 2017, raising approximately US$174.7 million in net proceeds after deducting underwriting commissions and
the offering expenses payable by us. On March 2, 2018, we completed a follow-on public offering of 10,000,000 ADSs, raising
approximately US$181.4 million in net proceeds after deducting underwriting commissions and the offering expenses payable by us.
In April 2018, our board
approved a share repurchase program (the “2018 Share Repurchase Program”) to repurchase up to US$100.0 million worth of our
outstanding ADSs within 12 months. The 2018 Share Repurchase Program has expired on April 30, 2019 and as of such date, we had repurchased
6,679,183 of our outstanding ADSs for an aggregate purchase price of approximately US$77 million, pursuant to the 2018 Share Repurchase
Program. In September 2019, our board approved a share repurchase program (the “2019 Share Repurchase Program”) to repurchase
up to US$30.0 million worth of our outstanding ADSs within 12 months. The 2019 Share Repurchase Program expired on November 19, 2020
and as of such date we had repurchased 1,200,000 of our outstanding ADSs for an aggregate purchase price of approximately US$9.4 million
pursuant to the program. In November 2020, our board approved a share repurchase program (the “2020 Share Repurchase Program”)
to repurchase up to US$50.0 million worth of our outstanding ADSs within 12 months.
In July 2019, we issued senior
notes in the aggregate principal amount of US$300.0 million, with interests of 7.45% per annum and maturing on July 31, 2022 at an issue
price of 100.0% in reliance on Regulation S under the Securities Act. We listed such senior notes on the Stock Exchange of Hong Kong
Limited by way of debt issues to professional investors (as defined in Chapter 37 of the Rules Governing the Listing of Securities on
The Stock Exchange of Hong Kong Limited and in the Securities and Futures Ordinance (Cap. 571) of Hong Kong) only. As of the date of
this annual report, we have redeemed all outstanding senior notes matured on July 31, 2022. Upon the completion of such redemption, all
senior notes have been cancelled and delisted from the official list of the Stock Exchange of Hong Kong Limited.
On April 29, 2022, our board
of directors received a preliminary non-binding proposal letter (the “Proposal”) dated the same date from Ms. Huiyan Yang,
our ex-chairlady, and Ms. Meirong Yang (collectively, the “Buyer Group”) proposing to acquire all of our outstanding Class
A ordinary shares, including Class A Shares represented by ADSs, and Class B ordinary shares that are not already beneficially owned
by the Buyer Group for a purchase price of US$0.83 per share in cash in a going private transaction (the “Proposed Transaction”),
subject to certain conditions. Our board of directors formed a special committee consisting of three then independent directors, Mr.
Peter Andrew Schloss, Mr. Jun Zhao and Mr. Ronald J. Packard, to evaluate and consider the Proposed Transaction. On December 29, 2022,
our board of directors received a letter dated the same date from the Buyer Group, informing us the decision
of the Buyer Group to withdraw the Proposal dated April 29, 2022 and forego the Proposal to privatize our company.
Effective on August 19, 2022,
we changed the ratio of the ADSs to Class A ordinary shares from the then ADS ratio of one ADS to one Class A ordinary
share to a new ADS ratio of one ADS representing four Class A ordinary shares.
Our principal executive office
is located at No.1, Country Garden Road, Beijiao Town, Shunde District, Foshan, Guangdong, zip code 528300, China. Our principal phone
number is (86)-757-2991-6814. Our registered office in the Cayman Islands is located at the offices of Conyers Trust Company (Cayman)
Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands. Investors should submit any inquiries to
the address and telephone number of our principal executive offices. Our website is www.brightscholar.com. The information contained
on our website is not a part of this annual report. Our agent for service of process in the United States is Law Debenture Corporate
Services Inc., located at 801 2nd Avenue, Suite 403, New York, New York 10017.
For information regarding our principal capital expenditures, see “Item
5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures.”
B. Business Overview
We are a global premier education
service company, which primarily provides quality international education service to global students and equip them with the critical
academic foundation and skillsets necessary to succeed in the pursuit of higher education. As part of our global expansion plan, we have
been actively exploring mergers and acquisition opportunities abroad to expand our global school network, targeting quality K-12 private
education providers and reputable schools in our targeted overseas countries and jurisdictions. As of the date of this annual report,
we have eight overseas school located in the United Kingdom and the United States. During the 2022 school year, we had an average of
3,548 students enrolled at our schools for our continuing operations. Bright Scholar Holdings, our ultimate Cayman Islands holding company,
does not have any substantive operations other than indirectly controlling the VIEs through certain contractual arrangements, and indirectly
holding Bright Scholar (UK) Holdings Limited, through which we operate our overseas schools.
Our continued business includes
domestic kindergartens and K-12 operation services, overseas schools and complementary education services. As a global premier education
service provider, we have built our global presence primarily through acquiring established overseas schools and language training institutions
in countries such as the United Kingdom and the United States. Leveraging our experience and insights into learning needs at different
stages, our kindergartens seek to lay the necessary foundation for our students’ future studies. We also offer a range of complementary
education services, primarily including camp programs, after-school programs, through our network of learning centers in China, as well
as international education consulting services.
For our continuing operations,
our revenue was RMB1,476.3 million, RMB1,401.8 million and RMB1,714.0 million (US$248.8 million) for the 2020, 2021 and 2022 fiscal years,
respectively; our net loss was RMB307.3 million, RMB535.1 million and RMB703.5 million (US$102.1 million) for the same periods, respectively.
We use adjusted net loss, which excludes share-based compensation expense, amortization of intangible assets, tax effect of amortization
of intangible assets, impairment loss on operating lease right-of-use assets, impairment loss on goodwill, impairment loss on intangible
assets, impairment loss on property and equipment, and income/(loss) from discontinued operations, net of tax, in evaluating our ongoing
results of operations. Our adjusted net loss was RMB283.6 million, RMB420.2 million and RMB141.7 million (US$20.6 million) for the 2020,
2021 and 2022 fiscal years, respectively. See “Item 5. Operating and Financial Review and Prospectus—A. Operating Results—Results
of Operations—Non-GAAP measures” for details.
Our Overseas Schools
As of the date of this annual
report, we have an overseas school network of eight schools, including seven schools in the United Kingdom and one in the United States,
with an average of 2,377 enrolled students for the 2022 school year. As a global premier education provider, we have built our global
presence primarily through overseas acquisition of schools and education services in countries such as the United Kingdom and the United
States.
In December 2018, we acquired
BCS, an established independent school located in the United Kingdom. BCS offers day and boarding education from two to 18 years of age,
and has a strong global inclusive philosophy based on a traditional UK education.
In July 2019, we acquired
CATS, which operates five overseas schools and three language training institutions across the United Kingdom and the United States as
of the date of this annual report. In addition, we granted a third party the right to use the brands
“CATS” and “Cambridge School of Visual & Performing Arts” for the operation of two campuses in Shanghai, China.
In September 2019, we acquired
St. Michael’s School and BIC located in the United Kingdom. St. Michael’s School offers day and boarding education from three
to 18 years of age, comprising predominantly day students and boarders from more than 15 countries. BIC provides independent boarding
education to pupils from the United Kingdom and other countries from 13 to 19 years of age.
The following table sets
forth certain information about each of our overseas schools.
Name |
|
Location |
|
Acquisition
Time |
|
Average number
of students enrolled
during the 2021
school year |
|
|
Average number
of students enrolled
during the 2022
school year |
|
|
Capacity as of September
1, 2022 |
|
Bournemouth
Collegiate School |
|
the United Kingdom |
|
December 2018 |
|
|
631 |
|
|
|
676 |
|
|
|
730 |
|
Guildhouse School London
(previously known as CATS London) |
|
the United Kingdom |
|
July 2019 |
|
|
195 |
|
|
|
167 |
|
|
|
400 |
|
CATS Cambridge |
|
the United Kingdom |
|
July 2019 |
|
|
279 |
|
|
|
208 |
|
|
|
525 |
|
The Worthgate School Canterbury
(previously known as CATS Canterbury) |
|
the United Kingdom |
|
July 2019 |
|
|
233 |
|
|
|
215 |
|
|
|
500 |
|
CATS Academy Boston |
|
the United States |
|
July 2019 |
|
|
227 |
|
|
|
326 |
|
|
|
700 |
|
Cambridge School of Visual
& Performing Arts |
|
the United Kingdom |
|
July 2019 |
|
|
246 |
|
|
|
220 |
|
|
|
525 |
|
St. Michael’s School |
|
the United Kingdom |
|
September 2019 |
|
|
420 |
|
|
|
423 |
|
|
|
480 |
|
Bosworth
Independent School |
|
the United Kingdom |
|
September 2019 |
|
|
112 |
|
|
|
142 |
|
|
|
400 |
|
Total |
|
|
|
|
|
|
2,343 |
|
|
|
2,377 |
|
|
|
4,260 |
|
Bournemouth Collegiate School (BCS)
Bournemouth Collegiate School
is an established independent school located in Bournemouth, Dorset, England. It offers day and boarding education from age 2—18
on two campuses. It has a strong global inclusive philosophy based on a traditional UK education. Bournemouth Collegiate School has an
average of 676 students enrolled for the 2022 school year, including local students and international boarders from 10 countries.
CATS Colleges
CATS Colleges is an international
school network focused primarily on the provision of quality education services to international students with a globally integrated
platform of campuses located across the United Kingdom and the United States. As of the date of this annual report, CATS Colleges comprised
five schools in Cambridge, London, Canterbury and Boston as well as three language training institutions in the United Kingdom. It has
a diverse mix of over 1,136 students from around 76 nationalities in the 2022 school year.
In July 2020, we decided
to permanently cease the operation of the four language training institutions in the United States as a resource conserving measure in
response to the challenges posed by the COVID-19 pandemic. In December 2021, we sold one language training institutions in the United
Kingdom and two institutions in Canada to focus on the operation of the remaining three language training institutions in the United
Kingdom.
St. Michael’s School
St. Michael’s School
is an established independent school in the United Kingdom. Located in Llanelli, Wales. It offers day and boarding education from age
three to 18. Established in 1923, the school has an inclusive philosophy for all its students based on a traditional UK education, and
was named Welsh Independent Secondary School of the Year 2019 in The Sunday Times Parent Power rankings and regularly ranking in the
United Kingdom’s top 30 Independent Schools for A level results. The school has an average of 423 students enrolled for the 2022
school year, comprised predominantly of day students as well as boarding students from more than 30 countries.
Bosworth Independent College (BIC)
BIC is a leading independent
boarding college in the United Kingdom. Located in Northampton, England, it provides independent boarding education to pupils from the
United Kingdom and abroad from 13 to 19 years of age. Established in 1977, it was ranked in the UK’s Top 100 Coeducational Boarding
Schools by A Level results in 2018. The school has an average of 142 students enrolled for the 2022 school year, including boarding students
from 10 countries.
Our Complementary Education Services
We provide complementary
education services to students from our schools and others. These complementary education services further enhance students’ overall
learning experience and generate synergies with our school operations.
Camp programs
We have organized summer
and winter camp programs in certain countries, including the United Kingdom, the United States and Australia. We also offer summer school
programs, which are more rigorous and allow our participants to study for specific courses or prepare for standardized tests.
As of the date of this annual
report, we have developed business collaborations with a number of overseas universities and high schools as the local hosts of our camps
or summer school programs. We work together with our partners to design programs and activities to improve the participants’ English
communication skills, expand their knowledge and develop a familiarity with college environments and international cultures.
Our overseas camp programs
typically take place on university campuses and include various activities, such as classes and excursions. For high school students,
we offer tours to different universities during our programs. These visits allow participants to become familiar with the overseas campuses,
talk with admissions officers and spend time with our alumni currently studying at each university. Some of our camp programs include
a homestay, which allows the participants to get an inside look at Western family dynamics and form supportive friendships in an immersive
English-speaking environment. We send our teachers to escort the students during their tours. By participating in the summer and winter
camps, we believe our students not only broaden their horizons and improve their English proficiency, but also clarify their academic
goals and enhance their motivation to pursue overseas studies after graduating from our schools.
In addition to overseas camps, we have launched our domestic camp
programs by opening our first campground, Lake Forest Camp, in Huizhou, Guangdong province at the beginning of 2019. Taking full advantage
of its outdoor adventure facilities, we provide different kinds of activities on the land and in the water, which encourage personal growth,
team cooperation and leadership. Lake Forest Camp targets students from both our own schools and schools outside our network. In June
2019, we acquired a 25% equity interest in Start Camp Education (“Start Camp”). Start Camp provides one-stop solution in camp
layout and program design for education department of local governments, education groups and real estate developers. In September 2020,
we entered into an agreement to acquire 60% equity interests in Jiangxi Leti Camp Education Technology Co., Ltd. (“Leti Camp”),
which specializes in providing summer and winter camp activities for teenagers and owns a comprehensive product offering in Hands-on Inquiry
Based Learning (HIBL) and camp business. We have launched our new camp programs in Fuzhou, Nanchang, Yichun, Pingxiang, Fengcheng and
Jiujiang, Jiangxi Province, Wuzhen and Jiaxing, Zhejiang Province, Xiangyang and Xianning, Hubei Province, Qingdao, Shandong Province,
Jurong, Jiangsu Province, Changsha, Hunan Province, and Huizhou, Guangzhou and Qingyuan, Guangdong Province. We plan to launch our new
camp programs in three to five provinces in the coming year. In the future, we plan to launch more domestic summer and winter camp programs,
which will target students enrolled in our schools as well as students outside our network and feature STEAM activities, i.e.,
activities related to science, technology, engineering, art and math.
Our overseas camp
programs were adversely affected by the COVID-19 pandemic due to the global travel freeze resulted therefrom. In response, we
developed domestic travel study programs, which are complementary to our students’ classroom education and allow students to
study and explore humanities, history, technology, nature, etc., depending on the theme of each program. As of the date of this
annual report, we provide options for 36 domestic camp programs and eight overseas camp programs. As of the same date, our domestic
camp programs include 22 summer school programs and 14 domestic travel study programs. In the 2022 fiscal year, approximately 45,000
students participated in our domestic and overseas camp programs as well as domestic travel study programs.
After-school programs
English proficiency training
We offer English proficiency
development courses to children aged from five to 15 through a network of 18 learning centers located in Beijing, Shanghai and Guangdong
province under the brand of “élan.” Our goal is to help children improve their general English proficiency. To this
end, we have adopted a holistic language learning approach, which immerses children in an English-speaking environment and requires them
to think, learn and communicate with the mindset of native speakers. Our learning centers are staffed only by native English speakers
as instructors and are equipped with libraries containing age-appropriate English-language books and audio materials suited to English
learners of different proficiency levels. In the 2022 school year, we had an average of 58 instructors in our learning centers. In the
2022 fiscal year, we had an average student enrollment of 2,757 for English proficiency training.
Extracurricular programs
We
offer a wide range of extracurricular programs primarily to children.
Our programs encompass popular subjects, such as art, soccer and programmable robotics. Our programs supplement in-classroom learning
and promote the well-balanced development of children. Our programs also help children tap into their interests and potential that benefit
their study or career goals. We work with our partners on these programs.
We have also strategically
invested in the acquisition of equity interest in Hangzhou Impression Arts Training Co., Ltd. (“Hangzhou Impression”), a Zhejiang-based
art training institution, to supplement the extracurricular programs we offer. See “—Our Expansions and Investments.”
Overseas Study Consulting Services
We offer overseas study education
consulting services to better serve our students in and outside of our network of schools. As of the date of this annual report, we have
strategically invested in the acquisitions of equity interests in several providers of education consulting services, including Can-achieve
(Beijing) Education Consulting Co., Ltd. (“Can-achieve”) and FGE Holdings Limited and its subsidiaries (“FGE”).
See “—Our Expansions and Investments.” Through these strategic acquisitions, we are able to provide a comprehensive
range of services covering K-12 education as well as consulting services from application to overseas universities, which we believe will
drive our future growth.
Career counselling and International Contest
Training Services
We also offer career counselling
and international contest training services to students. We have strategically invested in the acquisitions of equity interests in services
provider for career counselling and international contest training, such as Chengdu Yinzhe Education and Technology Co., Ltd. (“Chengdu
Yinzhe”) and Shanghai Huodai Business Information Consulting Co., Ltd. (“Linstitute”) to provide students around the
globe with access to high quality education.
Our Domestic Kindergartens
As of the date of this annual
report, we have eight kindergartens in China, all of which are registered as for-profit kindergartens. In the 2022 school year, our
kindergartens had an average of 1,171 students.
Our kindergartens provide
an active and healthy learning environment to help students develop their potential and personality, appreciate diverse cultures and
lay the foundation to drive future success. In our kindergartens, we integrate elements of traditional Chinese culture with international
cultural awareness through language classes and cultural activities.
The following table sets
forth certain information about each of our domestic kindergartens.
Name |
|
Location |
|
Establishment |
|
|
Average
number
of students enrolled
during the 2021
school year |
|
|
Average
number
of students enrolled
during the 2022
school year |
|
|
Capacity
as of
September 1,
2022 |
|
Baoding Baigou
New City Shenghua Country Garden Kindergarten |
|
Baoding, Hebei |
|
|
September 2017 |
|
|
|
203 |
|
|
|
243 |
|
|
|
300 |
|
Dongguan Qishi Country
Garden Kindergarten |
|
Dongguan, Guangdong |
|
|
November 2017 |
|
|
|
174 |
|
|
|
205 |
|
|
|
336 |
|
Dongguan Qingxi Country
Garden Kindergarten |
|
Dongguan, Guangdong |
|
|
November 2017 |
|
|
|
118 |
|
|
|
117 |
|
|
|
468 |
|
Foshan Shunde Beijiao
Country Garden Guilanshan Kindergarten |
|
Foshan, Guangdong |
|
|
November 2018 |
|
|
|
147 |
|
|
|
147 |
|
|
|
270 |
|
Dongguan Dongcheng Bright
Scholar Kindergarten |
|
Dongguan, Guangdong |
|
|
March 2020 |
|
|
|
68 |
|
|
|
99 |
|
|
|
270 |
|
Guangzhou Zengcheng Fettes
College Kindergarten Co., Ltd. |
|
Guangzhou, Guangdong |
|
|
June 2020 |
|
|
|
32 |
|
|
|
32 |
|
|
|
400 |
|
Chengdu Pidu Bright Scholar
Kindergarten |
|
Chengdu, Sichuan |
|
|
September 2020 |
|
|
|
50 |
|
|
|
76 |
|
|
|
450 |
|
Huizhou
Huiyang Lelebao Shenhui City Kindergarten |
|
Huizhou, Guangdong |
|
|
September 2020 |
|
|
|
147 |
|
|
|
252 |
|
|
|
270 |
|
Total |
|
|
|
|
|
|
|
|
939 |
|
|
|
1,171 |
|
|
|
2,764 |
|
Discontinued Operations
Discontinued Domestic Kindergartens
Due to the effectiveness
of the Implementation Rules, we have concluded that we have lost control of 68 domestic kindergartens since August 31, 2021 and that
such VIE contractual arrangements with them has become invalid since then and, we have thus classified them as discontinued
operations. As of September 1, 2022, these discontinued domestic kindergartens had a total capacity of 26,680 students.
Discontinued Bilingual and International
Schools
Due to the effectiveness
of the Implementation Rules, we have concluded that we have lost control of the international schools and bilingual schools previously
in our school network as well as the sponsor entities of such schools since August 31, 2021 and that such VIE contractual arrangements
with them has become invalid since then and, we have thus classified them as discontinued operations. As of September 1, 2022, these Discontinued Bilingual and International
Schools had a total capacity of 44,582 students.
During the 2022 school year,
the total average number of teachers and instructors employed at these schools of our discontinued operations was 3,479.
Centralized Management
We have provided services
of a centralized management system for our domestic school network, through which we manage and oversee certain aspects of our kindergartens
across our network, including school administration, supply procurement and sharing and development of teaching resources, to support
and facilitate management of our schools as well as to ensure consistency in the quality of our education. For our overseas operations,
we have established a center of excellence to centralize certain functions of management, including finance, IT, human resources, procurement,
marketing and admissions.
Sharing and development of teaching resources
In order to maintain and
improve our teaching quality, some of our schools share their teaching resources with each other and jointly hold teacher development
workshops. We also operate a centralized teaching staff recruitment program through which we hire and deploy teachers and educational
staff within our school network based on each school’s needs and teacher preferences. We intend to continue to leverage the availability
of our teaching resources at different schools within our network to ensure consistency in teaching quality.
Education material and equipment procurement
We make procurement decisions
regarding teaching materials and equipment and other education supplies for our schools in the same geographical areas to improve our
operating efficiency, maximize economies of scale and enhance our overall bargaining power with suppliers. Such procurement choices include
those for catering, textbooks, school uniforms, classroom furniture, computers, kitchen equipment, tableware and office appliances.
School administration
To improve our service efficiency,
we have centralized our finance, marketing, human resources, legal and information technology functions. We have adopted a series of
policies and procedures relating to general corporate governance matters, which are aimed at strengthening the management and government
of our company and our schools. For example, in the 2018 fiscal year, we implemented an ERP system where we centralize the collection
and analysis of budgeting, procurement and financial information and data, which enhanced the efficiency of our data management processes,
adding value to the overall operation of our business.
Our Expansions and Investments
In January 2016, we
acquired élan, an English proficiency training business. In March 2018, we acquired an additional 49% equity interest in
Can-achieve to supplement our test preparation and college counseling business to improve our students’ university admission
results. As of the date of this annual report, we hold a total of 70% equity interest in Can-achieve. In June 2018, we acquired a
75% equity interest in FGE, which is primarily engaged in providing overseas study consulting services. In December 2018, we
acquired a 75% equity interest in Chengdu Yinzhe, which is primarily engaged in offering online career and education mentoring
services to overseas Chinese students under the brand of “DreambigCareer.” In December 2018, we acquired BCS in the
United Kingdom, which offers day and boarding education from ages two to 18. In March 2019, we purchased a 70% equity interest in
Hangzhou Impression, a Zhejiang-based art training institution. In June 2019, we acquired a 25% equity interest in Start Camp, which
provides one-stop solution in camp layout and program design for education department of local governments, education groups and
real estate developers in China. In July 2019, we acquired CATS, which operates five overseas schools and three language training
institutions across the United Kingdom and the United States as of the date of this annual report. In September 2019, we acquired
St. Michael’s School and BIC located in the United Kingdom. In July 2020, we acquired a 51% equity interest in Shanghai Huodai
Business Information Consulting Co., Ltd. (“Linstitute”), which offers high-quality and outcomes-focused online training
services including Academic Olympiad and other world-wide recognized international courses. In September 2020, we entered into an
agreement to acquire a 60% equity interest in Leti Camp, which specializes in providing summer and winter camp activities for
teenagers and owns a comprehensive product offering in Hands-on Inquiry Based Learning (HIBL) and camp business. We plan to continue
to make strategic investments into and acquisitions of overseas schools and complementary businesses to better serve our students
and drive our future growth.
In September 2018, we also
entered into a partnership agreement with third-parties to establish an investment fund under which we agreed to invest a total of RMB999.8
million in promoting the establishment and operations of K-12 education centers, bilingual schools and international schools. However,
due to uncertainties in government regulations, we have decided not to pursue the plan any further and have withdrawn all of our investment
in the fund.
Our Students
Student admission
Our students enrolled in our kindergartens are primarily Chinese nationals
from relatively affluent families. Our overseas schools recruit students from around the world, with a student body comprising around
76 different nationalities for the 2022 school year. The majority of the students in our overseas schools are from 14 to 18 years old.
Student and parent support services
We generally have small class
sizes across our domestic school network in order to provide each student with close and frequent teacher interactions and individual
attention and support. Our teachers assist students through academic difficulties with personalized remedial measures, including additional
practice materials and instructive sessions.
We also maintain regular
communication with the parents of our students and provide them with complementary seminars and training on education programs, university
applications and parenting.
Our Teachers
Teacher qualifications
We have assembled a team of
teachers with extensive experience in education. Our schools are staffed with different levels of teachers and educational staff. Certain
senior teachers have managerial responsibilities in addition to their responsibilities as instructors. Educational staff include teaching
assistants, librarians and medical staff. We seek to employ teachers that have a passion for teaching, mastery of their subject areas,
strong communication skills and proficiency in employing innovative and effective teaching methods. In the 2022 fiscal year, we had an
average of 750 teachers and instructors globally.
Teacher recruitment
Our teachers are critical
to maintaining the quality of our programs and services and in promoting our brand and reputation. We place particular importance on
recruiting teachers who are appropriately qualified and experienced. For our overseas schools, we also expect teachers to have a wealth
of international experience across the world of academia. We implement a centralized recruitment program that seeks to hire teachers
and educational staff and deploy them across our domestic school network based on each kindergarten’s needs and teacher preferences.
We screen candidates for strong academic credentials, dedication and knowledge in the relevant teaching subjects, and commitment to serving
students’ needs. We require our teachers for schools in China to possess the appropriate qualifications required by PRC regulatory
authorities, including the foreign expert certificate in the case of foreign teachers. We believe that teacher candidates are attracted
to our schools because of our reputation, commitment to quality education, financial strength and competitive compensation package. To
enhance our retention rate, we also allow our teachers to laterally transfer within our school network.
Teacher training
We are committed to providing
ongoing professional development for our teachers and principals, in the form of online, on-campus or one-on-one training and support
sessions. From time to time, we organize seminars on professional training in cooperation with prestigious institutions. We also invite
veteran teachers to participate in school administration by offering them management training with the possibility of promotion to principal
positions. The opportunity for ongoing professional training and career advancement is not always available at private schools in China
and is a key differentiator in our ability to attract, develop and retain talented teachers.
Teachers in our overseas
schools are continuously assessed under Continues Development, a program that measure the effectiveness and quality of their teaching
and provide them with the right learning environment that enables them to adapt teaching methods and use innovative tools to delivery
academic excellence.
Our Tuition
We charge our students tuition,
boarding and other applicable fees generally prior to the beginning of each semester. Tuition and fees being paid in arrears is subject
to special approval. We also accept monthly payment of fees at certain kindergartens we operate. We offer a partial refund if a student
withdraws in the predetermined period. We may also offer tuition discounts to certain of Country Garden’s homeowners, our employees
and employees of Country Garden. Tuition refund or discounts did not materially and adversely affect our business, results of operations
or financial position. We have limited discretion in determining the types and amounts of fees we charge under the current PRC regulatory
regime. For example, in accordance with the relevant local regulations, if we increase the tuition at our schools in Guangdong province
in a certain school year, such increase will generally not affect the existing students until they complete their current section of education
at the same schools. In determining the amount of tuition we charge, we consider factors including the demand for our education programs,
the cost of our operations, the geographic markets where our schools are located, the tuition charged by our competitors, our pricing
strategy to gain market share and general economic conditions in China. Our tuition and fees charged for internationally accredited programs
are typically higher than that for government-mandated curricula, which reflects the additional educational and operational resources
associated with administering the former. For the 2022 school year, we charged average tuition and fees of RMB27,070 for domestic kindergartens
and RMB227,363 for overseas schools.
Research and Curriculum Development
We believe we have devoted
significant resources to our research and curriculum development efforts which are reflected in the course materials and effective teaching
methods. We work with school teachers to develop, update and improve school curricula and course materials based upon students’
needs and the latest official government curricula or course outlines issued by the relevant international programs. As students’
academic ability levels vary, our curricula are designed with the flexibility to address a particular student’s strengths and weaknesses.
Our teaching and research department works with school teachers to prepare or update such course curricula, and revises the curricula
based on feedback from the classroom. To ensure our education quality can be upheld across schools, we have dedicated a professional
team to designing curricula for the programs implemented in our schools and to keep our teaching materials updated with reference to
the latest educational trends. Our overseas schools are continuously developing curriculum and academic extension activities to prepare
students for admission to top universities. For example, preparation for students applying to Oxbridge has included preparation for admissions
tests, workshops with a drama specialist to prepare students for interview, and mock interviews with academics from the University of
Cambridge. Additionally, our overseas schools develop curricula in specific subject areas, which focus on the skills needed for interested
students’ success at university.
In August 2019, we entered
into an agreement with National Center for School Curriculum and Textbook Development (“NCCT”) and National Institute for
Curriculum and Textbook Research (“NICTR”), to jointly establish a research base for fundamental education curriculum reform.
Through this agreement, NCCT and NICTR will assist us in the development of a forward-looking and systematic five-year curriculum plan
and annual curriculum reform guidance. In addition, they will also assist in the optimization of our current curriculum to advocate our
core values in education.
Marketing
We historically marketed our
schools in China primarily to students from families that purchased residential units developed by Country Garden. We distributed marketing
brochures and offer site tours of our school to prospective home buyers visiting the sales centers for residential properties developed
by Country Garden. Our relationship with Country Garden is synergistic because our schools enable Country Garden to meet the requisite
local governmental requirements or market needs for schools in its residential communities and we may offer preferential student placements
and tuition discounts as an incentive to prospective home buyers. We believe that the availability of and convenient access to quality
education is a significant factor that drives home buying decisions.
As we have gradually forged
a reputation for quality education through a proven track record of success over the years, we began to attract students from families
other than Country Garden’s homeowners. We have also implemented a variety of marketing methods to enhance the brand recognition
of our schools. By doing so, we intend to continue creating and implementing a standard corporate identity across all our schools. We
take measures to increase word-of-mouth referrals which have been instrumental to attracting new students and building our brand. We
have also strengthened our marketing strategy to drive student recruitment, and built up our marketing teams at both headquarters and
regional levels to assist student’s recruitment, while allocating more marketing and promotional budgets for schools in the ramp-up
stage.
|
● |
Referrals. Word-of-mouth referrals by former and current students and
their families have been a significant source of our student enrollment. We actively work with our alumni and current students to encourage
them to recommend our programs to prospective students. |
|
● |
Promotional events. From time to time, we organize promotional and
recruiting events to provide real-time, on-site opportunities for our prospective students to learn more about our services and programs,
as well as to meet our teachers and staff. For example, we joined SPBCN to hold an online English spelling contest with more than 3,300
registered contestants. |
|
● |
Media advertising. From time to time, we may publish articles on popular
local newspapers to promote our brand awareness and advocate for our education philosophy. We have also placed advertisements on
searching engines and internet portals in China. |
Our overseas schools depend
on advertisements on related websites such as university targeted websites, generic campaigns on platforms such as Facebook and Instagram,
and educational agencies to market themselves and recruit students. We have also assembled a team of specialists to offer support, training
and guidance to the educational agencies and assist them in student recruitment.
Competition
The education service market
in China is rapidly evolving, highly fragmented and competitive. We compete with a number of private kindergarten operators. We may also
compete with local private kindergartens and quality education service providers in each region we have a presence. Similarly, our overseas
schools compete against large operators such as Nord Anglia and Alpha Plus in the United Kingdom, as well as standalone private schools
in each region. We believe we are well-positioned to replicate our success and compete effectively based on the following factors:
|
● |
scalable business model; |
|
● |
reputation and brand recognition; |
|
● |
ability to recruit and retain students; |
|
● |
ability to recruit and retain principals and teaching staff; |
|
● |
relationship with local education authorities, international program
accreditors and overseas colleges and universities; and |
|
● |
relationship with other key stakeholders, such as real estate developers. |
Properties and Facilities
We currently occupy a total
combined gross floor area of approximately 22,140 square meters of facilities developed by Country Garden, all of which is leased. By
utilizing the properties developed by Country Garden we avoid significant capital expenditures in connection with land procurement and
facilities construction. We may also provide preferential student placements and tuition discounts to homeowners of the Country Garden
properties. In recognition of our synergistic relationship, Country Garden adopted an internal policy that designates us as a preferred
school operator partner, under which we are entitled to the right of first refusal on school development projects in connection with
its new residential properties.
As of the date of this annual
report, we also own 60 properties and lease 35 facilities in the United Kingdom and the United States for school campuses and office
use.
Intellectual Property
We have obtained a license
to use certain trademarks, including “Country Garden” from Country Garden free of charge for a term expiring in 2028 and
2030. We have applied for or registered trademarks relating to our logos and names, including “Bright Scholar” and “Bo
Shi Le” in China. As of the date of this annual report, we have registered 100 trademarks including “élan,”
with the PRC Trademark Office and major domain names used for our operation with the China Internet Network Information Center, including
www.brightscholar.com, brightscholar.net, www.bgyedu.cn, 博实乐.cn and 博实乐.com. As of the date
of this annual report, we have registered a total of 71 trademarks and 71 domain names with relevant authorities in jurisdictions where
we operate internationally. From time to time, we are required to obtain licenses with respect to course materials owned by third parties
for our education services, in particular for our international program which requires foreign-language education materials. We own copyrights
to the course content we developed in-house.
Our trademarks and other
intellectual property rights distinguish our services and products from those of our competitors and contribute to our ability to compete
in our target markets. To protect our intellectual properties, we rely on a combination of trademark, copyright and trade secret laws.
We have confidentiality clauses in our employment agreements with our employees to protect our intellectual property rights, and also
monitor any infringement or misappropriation of our intellectual property rights.
Insurance
We maintain various insurance
policies to safeguard against risks and unexpected events. We maintain insurance to cover students and teachers’ medical expenses
for injuries they might sustain at our schools. We also maintain insurance to cover our liability should any injuries occur at our schools.
In addition, we maintain property insurance for our vehicles. We do not maintain business interruption insurance, product liability insurance
or key-man life insurance. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We have
limited insurance coverage with respect to our business and operations.” We consider our insurance coverage to be in line with that
of other private K-12 education providers of a similar scale in China.
Legal Proceedings
From time to time, we are
subject to legal proceedings, investigations and claims during the ordinary course of our business. We are not currently a party to any
legal proceeding or investigation which, in the opinion of our management, is likely to have a material adverse effect on our business,
financial condition or results of operations.
Regulations
We operate our business in
China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative body,
the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies
under its authority, including the MOE, the Ministry of Industry and Information Technology, the State Administration for Market Regulation,
the Ministry of Civil Affairs and their respective local offices. The section summarizes the principal PRC regulations related to our
business.
PRC Laws and Regulations Relating to Foreign
Investment in Education
Special Administrative Measures for Access
of Foreign Investment (Negative List) (2021 Version)
Pursuant to the Foreign Investment
Industries Guidance Catalog (Amended in 2015), or the Foreign Investment Catalog, which was amended and promulgated by National Development
and Reform Commission, or the NDRC, and the MOFCOM on March 10, 2015 and became effective on April 10, 2015, kindergarten education,
high school education and higher education are restricted industries for foreign investors, and foreign investments are only allowed
to invest in kindergarten education, high school education and higher education in cooperative ways and the domestic party shall play
a dominant role in the cooperation. In addition, according to the Foreign Investment Catalog, foreign investors are prohibited from investing
in compulsory education, i.e., primary school to middle school.
Sino-foreign cooperation
in operating schools is specifically governed by the Regulation on Operating Sino-foreign Schools of the PRC, which was promulgated by
the State Council on March 1, 2003 and became effective on September 1, 2003 and amended on July 18, 2013, the Law for Promoting Private
Education of the PRC, and the Implementing Rules for the Regulations on Operating Sino-foreign Schools or the Implementing Rules, which
were issued by the MOE on June 2, 2004 and became effective on July 1, 2004.
On June 18, 2012, the MOE
issued the Implementation Opinions of the MOE on Encouraging and Guiding the Entry of Private Capital in the Fields of Education and
Promoting the Healthy Development of Private Education to encourage private investment and foreign investment in the field of education.
According to these opinions, the proportion of foreign capital in a PRC-foreign education institute shall be less than 50%.
The Foreign Investment Industries
Guidance Catalog (2017 Revision), or the 2017 Catalog, which was promulgated on June 28, 2017 and took effect on July 28, 2017 replacing
the abovementioned Foreign Investment Industries Guidance Catalog (2015 Revision), contains the same types of industry categories.
The Special Administrative Measures for Access of Foreign Investment
(Foreign Investment Access Negative List) set forth in the 2017 Catalog was replaced by the Special Administrative Measures for Access
of Foreign Investment (Negative List) (2018 Version), or the 2018 Negative List, promulgated on June 28, 2018 with effect on July 28,
2018, which imposes the same restriction and prohibition on foreign investors in the education sector besides one additional ban on religious
education institutes. On June 30, 2019, the MOFCOM and the NDRC jointly released the Catalog of Industries Encouraging Foreign Investment
(2019 Version), or the 2019 Encouraged Catalog, which became effective on July 30, 2019 and replaced the previous list of the industries
in which foreign investment is encouraged to invest under the 2017 Catalog, and the Special Administrative Measures for Access of Foreign
Investment (Negative List) (2019 Version), or the 2019 Negative List, which became effective on July 30, 2019 and replaced the 2018 Negative
List. On June 23, 2020, the MOFCOM and the NDRC jointly released the Special Administrative Measures for Access of Foreign Investment
(Negative List) (2020 Version), or the 2020 Negative List, which superseded the 2019 Negative List on July 23, 2020. On December 27, 2021,
the NDRC and the MOFCOM jointly released the Special Administrative Measures for Access of Foreign Investment (Negative List) (2021 Version),
or the 2021 Negative List which came into effect on January 1, 2022 and replaced the 2020 Negative List. The 2021 Negative List remains
unchanged with respect to the education industry, while it further provides that any domestic enterprise, which is engaged in the field
of business that foreign investment is prohibited from investing as set forth in the 2021 Negative List, shall be examined and approved
by the relevant state authorities before issuing shares and listing and trading abroad. Besides, any foreign investor shall not participate
in the management of such domestic enterprise, and its shareholding ratio shall follow the relevant provisions regulating foreign investors’
investment in domestic securities.
As of the date of this annual
report, our domestic kindergartens fall within restricted industries for foreign investors.
Regulations on 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. The Education Law sets forth provisions relating to the fundamental education systems of the PRC, including a school education
system comprising kindergarten education, primary education, secondary education and higher education, a system of nine-year compulsory
education, a national education examination system, and a system of education certificates. The Education Law stipulates that the government
formulates plans for the development of education, establishes and operates schools and other education institution. Furthermore, it
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, no organization or individual may establish or
operate a school or any other education institution for profit-making purposes. The Education Law was amended on December 27, 2015, and
further amended on April 29, 2021. The amended Education Law repudiates a specific paragraph of the old law, which prohibits any organization
or individual from establishing or operating a school or any other education institution for profit-making purposes. Nevertheless, schools
and other education institutions sponsored wholly or partially by government financial funds and donated assets remain prohibited from
being established as for-profit organizations.
The Law for Promoting Private Education and
the Implementation Rules
The Law for Promoting Private Education of the PRC became effective
on September 1, 2003 and was amended on June 29, 2013 and on December 29, 2018, and the Implementation Rules became effective on April
1, 2004 and was amended on April 7, 2021 and the amended version became effective on September 1, 2021. Under these regulations, “private
schools” are defined as schools established by social organizations or individuals using non-government funds. Private schools providing
academic qualifications education, kindergarten education, education for self-study examination and other education shall be subject to
approval by the education authorities at or above the county level, while private schools engaging in occupational qualification training
and occupational skill training shall be subject to approvals from the authorities in charge of labor and social welfare at or above the
county level. A duly approved private school will be granted a Permit for Operating a Private School, and shall be registered with the
Ministry of Civil Affairs of the PRC, or the MCA, or its local counterparts as a privately run non-enterprise institution. Each of our
schools has obtained the Permit for Operating a Private School and has been registered with the relevant local counterpart of the MCA.
Under the above regulations,
the operations of a private school are highly regulated. For example, the types and amounts of fees charged by a private school providing
academic qualifications education shall be approved by relevant government authorities and publicly disclosed, and a private school that
provides non-academic qualifications education shall file its pricing information with the relevant government authorities and publicly
discloses such information.
According to PRC laws and
regulations, entities and individuals who establish private schools are commonly referred to as “sponsors” rather than “owners”
or “shareholders.” The economic substance of “sponsorship” with respect to private schools is substantially similar
to that of shareholder’s ownership with respect to companies in terms of legal, regulatory and tax matters. For example, the name
of the sponsor shall be entered into the private schools’ articles of association and Permit for Operating a Private School, similar
to that of shareholders where their names shall be entered into the company’s articles of associations and corporate records filed
with relevant authority. From the perspective of control, the sponsor of a private school also has the right to exercise ultimate control
over the school by means such as adopting the private school’s constitutional documents, electing the school’s decision-making
bodies, including the school’s board of directors and principals. The sponsor can also profit from the private schools by receiving
“reasonable returns,” as explained in detail below, or disposing its sponsorship interests in the schools for economic gains.
However, the rights of sponsors vis-à-vis private schools also differ from the rights of shareholders vis-à-vis companies.
For example, under the PRC laws, a company’s ultimate decision-making body is its shareholders meeting, while for private schools,
it is the board of directors, though the members of which are substantially appointed by the sponsor. The sponsorship interest also differs
from the ownership interests with regard to the right to the distribution of residual properties upon liquidation of a private school,
mainly because private education is treated as a public welfare undertaking under the current regulations. While private education is
treated as a public welfare undertaking under the current regulations, sponsors of a private school may choose to require “reasonable
returns” from the annual net balance of the school after deduction of costs for school operations, donations received, government
subsidies (if any), the reserved development fund and other expenses as required by the regulations. Private schools, whether for-profit or non-profit, may enjoy national
preferential tax treatments, while non-profit private schools shall be entitled to the same preferential tax treatment as public schools. To date, however, no regulations have been promulgated by such authorities
in this regard.
The Decision of the Standing
Committee of the National People’s Congress on Amending the Law for Promoting Private Education of the PRC, or the Amendment, was
promulgated by Order No. 55 of the President of the PRC on November 7, 2016 and came into force on September 1, 2017.
Under the Amendment, the
term “reasonable return” is no longer used and sponsors of private school may choose to establish non-profit or for-profit
private schools at their own discretion, while before 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. In other
words, the schools engaged in compulsory education should retain their non-profit status after the Amendment comes into force.
The Amendment further establishes
a new classification system for private schools to be classified by whether they are established and operated for profit-making purposes.
According to the Amendment,
the key features of the aforesaid new classification system for private schools include the following:
|
● |
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; |
|
● |
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; |
|
● |
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; |
|
● |
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; |
|
● |
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; |
|
● |
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 29, 2016,
the State Council issued the Several Opinions of the State Council on Encouraging the Operation of Education by Social Forces and
Promoting the Healthy Development of Private Education, or the State Council Opinions, which requires to ease the access to the
operation of private schools and encourages social forces to enter into the education industry. The State Council Opinions also
provides that each level of the people’s governments shall increase their support to the private schools in terms of financial
investment, financial support, autonomy policies, preferential tax treatments, land policies, fee policies, autonomy operation,
protecting the rights of teachers and students etc. Further, the State Council Opinions require each level of the people’s
governments to improve its local policies on government support to for-profit and non-profit private schools by ways of preferential
tax treatments etc. In addition, under the State Council Opinions, private schools shall strengthen its construction of the Chinese
Communist Party, or the CCP, and further the theoretical system of Socialism with Chinese Characteristics by introducing such system
into textbooks and teaching programs. The construction of the CCP’s organizations by the private schools as well as the
CCP’s leadership to private schools shall constitute an important part of such school’s annual inspection.
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. As of the date of this annual report, the majority of provincial governments
in the PRC have promulgated their local rules which detail but for the most part repeat the provisions contained in the abovementioned
state rules.
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 September 1, 2017, SAIC
and MOE jointly issued the Notice of Relevant Work on the Registration and Management of the Name of For-Profit Private Schools, which
specifies the requirements on the names of for-profit private schools.
On December 29, 2018, the
Decision of the Standing Committee of the National People’s Congress on Amending the Seven Laws of the Labor Law of the People’s
Republic of China was promulgated by Order No.24 of the President of the PRC and took effect on the same date, which made two minor adjustments
to Article 26 and Article 64 of the Law for Promoting Private Education of the PRC. These minor adjustments do not materially affect
our business and operations.
On May 14, 2021, the State Council announced the amended version
of the Implementation Rules of the Law for Promoting Private Education, the other details of the operation requirement of non-profit schools
and for-profit schools will further of the PRC, or the Implementation Rules, which became effective on September 1, 2021. Pursuant to
the Amended Regulations, (1) foreign-invested enterprises established in China and social organizations whose actual controllers are foreign
parties shall not sponsor, participate in or actually control private schools that provide compulsory education, (2) social organizations
or individuals shall not control any private school that provides compulsory education or any non-profit private school that provides
pre-school education by means of merger, acquisition, contractual arrangements, etc., and (3) private schools providing compulsory education
shall not conduct any transaction with any related party. Where a private school other than private schools providing compulsory education
conducts transactions with any related party, it shall follow the principles of openness, fairness and equality, determine the reasonable
fees and regulate the decision-making, and shall not do detriment to the state interests, the interests of the school or the rights and
interests of the teachers and students, otherwise, there is a risk of being ordered to make corrections within a time limit, and the illegal
gains, if any, shall be confiscated after the fees collected are returned; if the circumstances are serious, the sponsor, actual controller
and member of the decision-making body or supervisory body shall not become the sponsor, actual controller or member of the decision-making
body or supervisory body of other private school within one to five years; if the circumstances are especially serious with adverse social
impact, the sponsor, actual controller and member of the decision-making body or supervisory body shall not become the sponsor, actual
controller and members of the decision-making body or supervisory body of other private school permanently; if a violation of public security
administration is constituted, the public security organ shall impose a public security administration punishment according to law; if
a crime is constituted, criminal responsibility shall be investigated in accordance with the law.
For a detailed discussion on
how the Amendment and the above regulations will affect our schools, see “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Business—Our compliance with the Implementation Rules has materially and adversely affected and may continue to materially
and adversely affect our business, financial condition, results of operations and prospect in the future, and we have been subject to
significant limitations on our ability to engage in the private for-profit education business and may otherwise be materially and adversely
affected by changes in PRC laws and regulations.”
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:
|
● |
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 our 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. |
As of the date of this annual
report, certain local governments, such as Jiangsu province and Hebei province, have promulgated their local regulations relating to
legal person registration and administration for private schools and certain local governments, such as Guangdong province, Jiangsu province,
Hubei province, Hebei province, Gansu province, and Anhui province, have promulgated general guidance to encourage the development of
private schools. Among these local regulations and guidance, some local governments, such as Hubei province, Hebei province, and Anhui
province, require the existing private schools to register either as for-profit or non-profit schools within a specific time period.
Regulations on compulsory education
According to the Law for
Compulsory Education of the PRC, which was promulgated by the NPC on April 12, 1986 and was amended by the tenth Standing Committee of
the NPC on June 29, 2006 and by the twelfth Standing Committee of the NPC on April 24, 2015, and by the thirteenth Standing Committee
of the NPC on December 29, 2018, a nine-year system of compulsory education, including six years of primary school and three years of
middle school, was adopted.
Further, the MOE issued the
Reform Guideline on the Curriculum System of Compulsory Education (Trial) on June 8, 2001, which became effective on the same date, pursuant
to which schools providing compulsory education shall follow a “state-local-school” three-tier curriculum system. In other
words, schools must follow the state curriculum standard for state courses, while the local education authorities have the power to determine
the curriculum standard for other courses, and schools may also develop curriculum that are suitable for their specific needs provided
that the state curriculum shall be completely maintained.
On June 23, 2019, the Central
Committee of the Communist Party of China and the State Council promulgated the Opinions on Deepening the Reform of Educational Teaching
and Thoroughly Enhancing the Quality of Compulsory Education, which lays out more stringent requirements for textbooks that are permitted
to be used in compulsory education.
On December 16, 2019, the
MOE issued the Administrative Measures on Primary and Secondary School Textbooks, which details the regulations on the authoring, vetting,
publication and schools’ selection of primary and secondary school textbooks.
On May 6, 2020, the General
Office of the MOE issued the Notice on Negative List of Excessive and Advanced Training in Six Subjects of Compulsory Education (Trial).
According to the Notice, extracurricular training institutions are prohibited from providing for students in primary schools and middle
schools excessive and advanced training relating to six subjects, namely, Chinese, Math, English, Physics, Chemistry and Biology. For
example, the difficulties of education contents provided by extracurricular training institutions shall not exceed the difficulties of
contents in textbooks used in corresponding compulsory education classes, and the extracurricular education targeting students in primary
schools shall not include contents expected to be taught in middle schools, and the extracurricular education targeting students in middle
schools shall not include contents expected to be taught in high schools.
Regulations on the operation of high schools
The MOE has promulgated several
regulations on the operation of high schools, which mainly concern the choice of textbooks, the curriculum system and the graduation
exam system.
According to the Circular
of the Central Office of the MOE on the Selection of the Trial Textbooks for the Curriculum of High Schools promulgated on April 26,
2005 and the Interim Measures for the Management of the Selection of the Primary and Middle School Textbooks promulgated and came into
effect on September 30, 2014, the textbooks used by the primary and middle schools can only be selected from the catalog issued by the
MOE; and the provincial education authority is in charge of textbook selection within its relevant administrative jurisdiction and has
the power to approve the curriculum system applied in the primary and middle schools within the province.
Further, the MOE issued the
Notice on Developing Trial Curriculum System in High Schools, the Guidance on Strengthening Instruction on Developing Trial Curriculum
System in High Schools, the Notice on Propelling 2006 Trial Curriculum System in High Schools and the Notice on Propelling 2007 Trial
Curriculum System in High Schools from 2003 through 2007, pursuant to which the MOE developed a new curriculum system in high schools
nationwide, and the implementation of such curriculum system is carried on mainly by the provincial education authorities while the MOE
mainly provides guidance to its local counterparts. Under the guidelines of the MOE and subject to approval by the respective provincial
education authorities, the high schools may adopt their own unique curriculum system.
Regulations on After-School Tutoring
The State Council issued
an Opinion on Supervising After-School Tutoring Institutions (“Circular 80”) on August 22, 2018, which provides various guidance
on regulating after-school tutoring institutions that target primary and secondary school students. Circular 80 requires that after-school
tutoring institutions obtain school operating permits and other legally required licenses and permits, and instructs relevant governmental
authorities to strengthen their supervisions and regulations on after-school tutoring institutions. Circular 80 also standardizes the
approval and registration processes of after-school tutoring institutions.
Measures for Punishment for Violation of Professional
Ethics of Primary and Secondary School Teachers
The Measures for Punishment
for Violation of Professional Ethics of Primary and Secondary School Teachers as promulgated by MOE on January 11, 2014 and amended on
November 8, 2018 prohibits teachers of primary and secondary schools from providing paid tutoring in schools or in out-of-school learning
centers. Some provinces and cities where our schools are located have adopted more stringent regulations which prohibit public school
teachers from teaching, on a part-time basis, at private schools or learning centers. For a detailed description of the risk associated
with these matters, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We may be unable
to recruit, train and retain a sufficient number of qualified and experienced teachers and principals.”
Opinions on Regulating the Development and
Deepening of the Reform of Pre-school Education
On November 7, 2018, the Central
Committee of the Communist Party of China and the State Council promulgated the Opinions on Regulating the Development and Deepening of
the Reform of the Pre-School Education, which provides, among others, that (1) private kindergartens forming part or all of the assets
of a listing vehicle are prohibited from listing on stock markets; (2) non-governmental capital is prohibited from controlling state-owned
or collectively-owned kindergartens and non-profit kindergartens by ways of mergers and acquisitions, entrusted management, franchising,
variable interest entities arrangements, or other forms of control agreements; (3) for-profit kindergartens which participate in acquisitions,
franchising or chain operation shall file with education departments of the county level or above and make available to the public agreements
entered into with relevant interested enterprises; (4) listed companies are prohibited from investing in for-profit kindergartens through
financing through stock markets, and should not purchase assets of for-profit kindergartens by cash, issuance of shares or other similar
means; and (5) provincial legislative bodies should promulgate implementing measures by June 2019 with regard to the election of private
kindergartens to be registered as non-profit or for-profit schools and specify time-frame requirements for such registration. For a detailed
description of the associated risks, see “Item 3. Key Information—Risks Factors—Risks Related to Our Business—Our
ability to maintain the operation of our kindergartens and to expand our kindergarten network may be limited due to our listing status
as well as the PRC laws and regulations, which may in turn affect our results of operations.” On September 7, 2020, the MOE published
the Draft Preschool Education Law for public comments. The Draft Preschool Education Law is expected to tighten restrictions over kindergartens
in pursuing profits and specify legal liabilities for the violation of such restrictions.
PRC Laws and Regulations Relating to Trademark
and Domain Name
Trademark
Pursuant to the Trademark
Law of the PRC, or the Trademark Law, which was revised on April 23, 2019 and with effect from November 1, 2019, registered trademarks
refer to trademarks that have been approved and registered by the Trademark Office of the National Intellectual Property Administration,
which include commodity trademarks, service trademarks, collective marks and certification marks. The trademark registrant shall enjoy
an exclusive right to use the trademark, which shall be protected by law.
Domain name
Pursuant to the Measures
for the Administration of Internet Domain Names of China, which was promulgated by the Ministry of Industry and Information Technology
of the PRC on August 24, 2017 and with effect from November 1, 2017, “domain name” shall refer to the character mark of hierarchical
structure, which identifies and locates a computer on the internet and corresponds to the Internet protocol (IP) address of that computer
and the principle of “first come, first serve” is followed for the domain name registration service. Domain name applicants
shall provide true, accurate and complete identification of the domain name holder as requested by the domain name registration service
provider.
PRC Laws and Regulations Relating to Foreign
Exchange
The principal regulation
governing foreign currency exchange in China is the Foreign Exchange Administration Rules of the PRC. These were promulgated by the State
Council of the PRC on January 29, 1996 and with effect from April 1, 1996 and were amended on January 14, 1997 and August 5, 2008. Under
these rules, Renminbi is generally freely convertible for payments of current account items, such as trade and service-related foreign
exchange transactions and dividend payments, but not freely convertible for capital account items, such as direct investment, loan or
investment in securities outside China, unless the prior approval of the SAFE or its local counterparts is obtained.
Under the Foreign Exchange
Administration Rules, foreign-invested enterprises in the PRC may, without the approval of SAFE, make a payment from their foreign exchange
accounts at designated foreign exchange banks for paying dividends with certain evidencing documents (such as board resolutions, tax
certificates), or for trade and services-related foreign exchange transactions by providing commercial documents evidencing such transactions.
They are also allowed to retain foreign currency (subject to a cap approval by SAFE) to satisfy foreign exchange liabilities. In addition,
foreign exchange transactions involving overseas direct investment or investment and trading in securities, derivative products abroad
are subject to registration with SAFE or its local counterparts and approval form or filling with the relevant PRC government authorities
(if necessary).
According to the Circular
on the Management of Offshore Investment and Financing and Round Trip Investment By Domestic Residents through Special Purpose Vehicles,
or Circular 37, which was promulgated on July 14, 2014 and with effect from the same day, before a domestic resident contributes its
legally owned onshore or offshore assets and equity into a Special Purpose Vehicle, or SPV, the domestic resident shall be required to
register with the local branch of SAFE for foreign exchange registration of overseas investments before contributing the domestic and
overseas lawful assets or interests to a SPV, and to update such registration in the event of any change of basic information of the
registered SPV or major change in the SPV’s capital, including increases and decreases of capital, share transfers, share swaps,
mergers or divisions. The SPV is defined as an “offshore enterprise directly established or indirectly controlled by the domestic
resident (including domestic institution and individual resident) with their legally owned assets and equity of the domestic enterprise,
or legally owned offshore assets or equity, for the purpose of investment and financing”; “Round Trip Investments”
refer to “the direct investment activities carried out by a domestic resident directly or indirectly via an SPV, that is, establishing
a foreign-invested enterprise or project within the PRC through a new entity, merger or acquisition and other ways, while obtaining ownership,
control, operation and management and other rights and interests”. In addition, according to the procedural guidelines as attached
to the Circular 37, the principle of review has been changed to “the domestic individual resident is only required to register
the SPV directly established or controlled (first level)”.
Pursuant to Circular of the
State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration
Policies, or Circular 13, which was promulgated on February 13, 2015 and implemented June 1, 2015, the initial foreign exchange registration
for establishing or taking control of a SPV by domestic residents can be conducted with a qualified bank, instead of the local foreign
exchange bureau, and the Circular 13 also simplifies some procedures relating to foreign exchange for direct investments.
On March 30, 2015, the SAFE
promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested
Enterprises, or Circular 19, which came into effect from June 1, 2015. According to Circular 19, the foreign exchange capital of foreign-invested
enterprises shall be subject to the Discretional Foreign Exchange Settlement. The Discretional Foreign Exchange Settlement refers to
the foreign exchange capital in the capital account of a foreign-invested enterprise for which the rights and interests of monetary contribution
has been confirmed by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be
settled at the banks based on the actual operational needs of the foreign-invested enterprise. The proportion of Discretional Foreign
Exchange Settlement of the foreign exchange capital of a foreign-invested enterprise is temporarily determined to be 100%. The Renminbi
converted from the foreign exchange capital will be kept in a designated account and if a foreign-invested enterprise needs to make further
payment from such account, it still needs to provide supporting documents and go through the review process with the banks.
SAFE issued the Circular
on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, on June 9,
2016, which became effective simultaneously. Pursuant to Circular 16, enterprises registered in the PRC may also convert their foreign
debts from foreign currency to Renminbi on a self-discretionary basis. Circular 16 provides an integrated standard for conversion of
foreign exchange under capital account items (including but not limited to foreign currency capital and foreign debts) on self-discretionary
basis which applies to all enterprises registered in the PRC. Circular 16 reiterates the principle that Renminbi converted from foreign
currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited
by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its non-affiliated entities.
On January 26, 2017, SAFE
promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Authenticity and Compliance Verification,
or Circular 3, which took effect on the same date. Circular 3 sets out various measures to tighten authenticity and compliance verification
of cross-border transactions and cross-border capital flow, which include without limitation requiring banks to verify board resolutions,
tax filing form, and audited financial statements before wiring foreign invested enterprises’ foreign exchange distribution above
US$50,000, and strengthening genuineness and compliance verification of foreign direct investments.
On October 23, 2019, SAFE
issued the Circular of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment,
or the Circular 28, which took effect on the same date. Circular 28 allows non-investment foreign-invested enterprises to use their capital
funds to make equity investments in China, with genuine investment projects and in compliance with effective foreign investment restrictions
(negative list) and other applicable laws. However, as the Circular 28 was newly issued, there are still substantial uncertainties as
to its interpretation and implementations in practice.
As of the date of this annual
report, all PRC residents known to us that currently have direct or indirect interests in our company have completed the necessary registrations,
as required by Circular 37. For a detailed description of the risk associated with the non-completion of such process, see “Item
3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—A failure by the beneficial owners of our
shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits,
restrict our overseas and cross-border investment activities and subject us to liability under PRC law.”
Regulations on loans to and direct investment
in the PRC entities by offshore holding companies
According to the Implementation
Rules for the Provisional Regulations on Statistics and Supervision of Foreign Debt promulgated by SAFE on September 24, 1997 and the
Interim Provisions on the Management of Foreign Debts promulgated by SAFE, the NDRC and the MOF and effective from March 1, 2003, loans
by foreign companies to their subsidiaries in China, which accordingly are foreign-invested enterprises, are considered foreign debt,
and such loans must be registered with the local branches of the SAFE. Under the provisions, the total amount of accumulated medium-term
and long-term foreign debt and the balance of short-term debt borrowed by a foreign-invested enterprise is limited to the difference
between the total investment and the registered capital of the foreign-invested enterprise.
According to the Provisional
Regulations for the Proportion of Registered Capital to Total Amount of Investment of Joint Ventures Using Chinese and Foreign Investment
issued by SAIC on February 17, 1987 and Decision on Amending the Provisions on the Merger or Acquisition of Domestic Enterprises by Foreign
Investors issued by MOFCOM on August 8, 2006, if the registered capital of a foreign-invested enterprise is less than US$2.1 million,
its total investment amount may not exceed 1.4 times the registered capital; if the registered capital of a foreign-invested enterprise
is more than US$2.1 million but less than US$5 million, its total investment amount may not exceed two times the registered capital;
if the registered capital of a foreign-invested enterprise is more than US$5 million but less than US$12 million, its total investment
amount may not exceed 2.5 times the registered capital; and if the registered capital of a foreign-invested enterprise is more than US$12
million, its total investment amount may not exceed three times the registered capital.
According to the Measures
for the Administration of Foreign Debt Registration issued by SAFE on April 28, 2013, the statutory limit on the amount of loans from
an overseas shareholder to a foreign-invested enterprise is the difference between the total investment amount and the registered capital
of the foreign-invested enterprise.
On January 12, 2017, the
People’s Bank of China promulgated Notice of the People’s Bank of China on Issues Concerning Macro Prudential Management
of Full Scale Cross-border Financing, or PBOC Circular 9. According to PBOC Circular 9, the People’s Bank of China establishes
a cross-border financing regulation system and the legal entities and financial institutions established in PRC excluding government
financing vehicles and real estate enterprise, may carry out cross-border financing of foreign currency in accordance with relevant regulations.
PBOC Circular 9 provides that, among other things, the outstanding amount of the foreign currency for the entities in cross-border financing,
shall be limited to the upper limit of the risk-weighted balance of such entity.
The enterprise shall, after
signing the cross-border financing contract, but not later than three business days before the withdrawal of the borrowing funds, file
with the local branches of SAFE for the cross-border financing through SAFE’s capital project information system. PBOC Circular
9 also provides that during the one-year period starting from January 11, 2017, foreign-invested enterprises may choose one method to
carry out cross-border financing in foreign currency either according to PBOC Circular 9 or according to the Interim Provisions on the
Management of Foreign Debts. After the end of such one-year period, the method of foreign-invested enterprises to carry out cross-border
financing in foreign currency will be determined by the People’s Bank of China and SAFE.
On September 14, 2015, the
National Development and Reform Commission promulgated Notice on Promoting the Administrative Reform of the Filing and Registration System
for Enterprises’ Issuance of Foreign Debts, or NDRC Circular 2044. According to NDRC Circular 2044, an enterprise that plans to
issue foreign debts shall apply to the National Development and Reform Commission in advance for filing, registration, and report issuance
information to the National Development and Reform Commission within 10 business days after the completion of such issuance. The National
Development and Reform Commission shall determine whether to accept the application within five business days from the date of receipt
of the application, and issue the Certificate on the Filing and Registration of Foreign Debts Issued by Enterprises within seven business
days from the date of accepting the application.
Zhuhai Bright Scholar, a
foreign-invested enterprise indirectly held by us, currently has a total investment amount of RMB14.0 million (approximately US$2.0 million)
and an initially subscribed registered capital RMB10.0 million (approximately US$1.5 million). We may provide shareholder loans of up
to the U.S. dollar equivalent of RMB4.0 million (approximately US$0.6 million) to Zhuhai Bright Scholar, which is the difference between
its total investment amount and registered capital. According to the Measures for the Reporting of Foreign Investment Information issued
by MOFCOM and SAIC on December 30, 2019, which supersedes the Interim Measures for the Administration of the Establishment and Alteration
of Archival Filing of Foreign Invested Enterprises, the increase of total investment amount and registered capital of a foreign-invested
enterprise must be reported to commerce departments through the enterprise registration system and the National Enterprise Credit Information
Publicity System, and market regulatory departments shall forward such investment information reported by foreign investors or foreign-invested
enterprises to commerce departments in a timely manner.
According to applicable PRC
regulations on foreign-invested enterprises, capital contributions from a foreign holding company to its PRC subsidiaries, which are
considered foreign-invested enterprises, may only be made when approval by or registration with the MOFCOM or its local counterpart is
obtained.
Provisions on the Merger and Acquisition of
Domestic Enterprises by Foreign Investors (Revised in 2009)
Under the M&A Rules, a
foreign investor is required to obtain necessary approvals when (1) a foreign investor acquires equity in a domestic non-foreign invested
enterprise thereby converting it into a foreign-invested enterprise, or subscribes for new equity in a domestic enterprise via an increase
of registered capital thereby converting it into a foreign-invested enterprise; or (2) a foreign investor establishes a foreign-invested
enterprise which purchases and operates the assets of a domestic enterprise, or which purchases the assets of a domestic enterprise and
injects those assets to establish a foreign-invested enterprise. According to Article 11 of the M&A Rules, where a domestic company
or enterprise, or a domestic natural person, through an overseas company established or controlled by it/him/her, acquires a domestic
company which is related to or connected with it/him/her, approval from the MOFCOM is required.
For a detailed description
of the risk associated with the M&A Rules, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business
in China—Certain PRC regulations, including the M&A Rules and national security regulations, may require a complicated review
and approval process which could make it more difficult for us to pursue growth through acquisitions in China.”
C. Organizational Structure
The following diagram illustrates
our corporate structure, including our principal subsidiaries and affiliated entities, as of the date of this annual report.
(1) |
Ultimately owned by Ms. Meirong Yang and Ms. Huiyan Yang, our ex-chairlady.
See “Item 6. Directors, Senior Management and Employees—E. Share Ownership.” Ms. Meirong Yang and Ms. Huiyan Yang have
also entered into an acting-in-concert arrangement, pursuant to which they consult with each other before voting and deciding on material
matters in relation to the management of our company. Under such arrangement, if no consensus could be reached through consultation, the
decision made by Ms. Meirong Yang prevails. Furthermore, Ms. Huiyan Yang and Ms. Meirong Yang are joint settlors and members of the two-person
investment committee of Yeung Family Trust V, which controls Excellence Education Investment Limited and Ultimate Wise Group Limited. |
(2) |
Wholly owned by Ms. Huiyan Yang. See “Item 6. Directors, Senior
Management and Employees—E. Share Ownership” for information. |
(3) |
For the
beneficial ownership of Ms. Meirong Yang and Ms. Huiyan Yang, see “Item 6. Directors, Senior Management and
Employees—E. Share Ownership.” |
(4) |
The remaining 30% equity interest is owned by CAN-ACHIEVE
GLOBAL EDUCATION PARTNERS LIMITED, an unaffiliated third party. |
(5) |
Under PRC law, entities and individuals who establish private schools
are referred to as “sponsors” rather than “owners” or “shareholders.” The rights of sponsors vis-à-vis
schools are similar to the rights of shareholders vis-à-vis companies with regard to legal, regulatory and tax matters, but differ
with regard to the right of a sponsor to receive returns on investment and the right to the distribution of residual properties upon termination
and liquidation. For more information regarding school sponsorship and the difference between sponsorship and ownership under relevant
laws and regulations, see “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on
Private Education in the PRC.” |
The following table sets
forth the details of our significant subsidiaries, VIEs and schools/subsidiaries held by the VIEs from our continuing operations.
Subsidiaries |
|
Place of Incorporation |
|
|
|
Bright Scholar (Enlightenment) Investment Holdings Limited |
|
Cayman |
Impetus Investment Limited |
|
Cayman |
New Bridge Management Co., Ltd |
|
Cayman |
Bright Scholar (Canada) Holdings Limited |
|
Canada |
Can-Achieve Academy Limited |
|
Canada |
Can-Achieve International Education Limited (Vancouver) |
|
Canada |
CEG Holdings Canada Inc. |
|
Canada |
FGE Holdings Limited |
|
BVI |
Bright Can-Achieve Limited |
|
Hong Kong |
Can-Achieve International Education Limited |
|
Hong Kong |
CEG Hong Kong JV Limited |
|
Hong Kong |
Foundation Global Education Limited |
|
Hong Kong |
Foundation Education China Limited |
|
Hong Kong |
Foundation Academy Limited |
|
Hong Kong |
Foundation Education Services Limited |
|
Hong Kong |
Time Education China Holdings Limited |
|
Hong Kong |
Xin Rui Management Co., Ltd. |
|
Hong Kong |
Bright Scholar (UK) Holdings Limited |
|
United Kingdom |
Bright Scholar (BCS) Limited |
|
United Kingdom |
Bright Scholar (BCS) Property Limited |
|
United Kingdom |
Bright Scholar (BCS) Management Limited |
|
United Kingdom |
Bright Scholar (BIC) Management Limited |
|
United Kingdom |
Bright Scholar (SM) Management Limited |
|
United Kingdom |
CATS Colleges Holdings Limited |
|
United Kingdom |
The Worthgate School Canterbury |
|
United Kingdom |
Guildhouse School London |
|
United Kingdom |
CATS Retail Limited |
|
United Kingdom |
Cambridge School of Visual and Performing Arts Limited |
|
United Kingdom |
Cambridge Arts and Science Limited |
|
United Kingdom |
Cambridge School of Art and Design Limited |
|
United Kingdom |
CEG Properties Limited |
|
United Kingdom |
CEG Colleges Limited |
|
United Kingdom |
CGS Administrative Services Limited |
|
United Kingdom |
Stafford House Companies Limited |
|
United Kingdom |
Stafford House School of English Limited |
|
United Kingdom |
Stafford House Study Holidays Limited |
|
United Kingdom |
Study Holidays Limited |
|
United Kingdom |
Cambridge Education Group Holdings Inc. |
|
United States |
CATS Academy Boston Inc. |
|
United States |
Boston Academy of English Inc. |
|
United States |
Intrax English Academies LLC |
|
United States |
Can-achieve Global Education, Inc |
|
United States |
Cambridge Education Technology (Shanghai) Co., Limited (China) |
|
The PRC |
Foundation Information Consulting (Shenzhen) Co., Ltd. |
|
The PRC |
Guangdong Bright Scholar Education Technology Co., Ltd. |
|
The PRC |
Shenzhen Qianhai Xingkeyucai Trading Co., Ltd. |
|
The PRC |
Zhuhai Hengqin Bright Scholar Management Consulting Co., Ltd. |
|
The PRC |
Guangdong Zhixing Weilai Logistics Management Co., Ltd. |
|
The PRC |
Beijing Jingshiboda Education Technology Co., Ltd. |
|
The PRC |
Zhuhai Hengqin Dingjia Education Consulting Limited |
|
The PRC |
Zhuhai Hengqin Kaidi Education Consulting Co., Ltd. |
|
The PRC |
Time Elan Education Technology Co., Ltd. |
|
The PRC |
Zhuhai Xin Xu Education Management Co., Ltd. |
|
The PRC |
Guangzhou Elan Education Consulting Co., Ltd. |
|
The PRC |
Beijing Bright Scholar Education Consulting Limited Co., Ltd. |
|
The PRC |
Beijing Bolai Reading Culture Co., Ltd. |
|
The PRC |
Shenzhen Elan Education Training Co., Ltd. |
|
The PRC |
Foshan Shunde Elan Education Training Co., Ltd. |
|
The PRC |
Hangzhou Impression Arts Training Co., Ltd. |
|
The PRC |
Can-achieve (Beijing) Education Consulting Co., Ltd. |
|
The PRC |
Guangzhou Can-achieve Global Consulting Co., Ltd. |
|
The PRC |
Zhengzhou Dahua Education Consulting Co., Ltd. |
|
The PRC |
Bright Scholar Wanjia (Beijing) Education Consulting Co., Ltd. |
|
The PRC |
Beijing Can-achieve Lingying Information Consulting Co., Ltd. |
|
The PRC |
Bright Scholar Education Consulting (Huizhou) Co., Ltd. |
|
The PRC |
Beijing Yinxiang Bright Scholar Education Consulting Co., Ltd. |
|
The PRC |
Shanghai Yinle Arts Training Co., Ltd. |
|
The PRC |
VIEs |
|
Place of Incorporation |
|
|
|
Foshan Meiliang Education Technology Co., Ltd. |
|
The PRC |
Foshan Shangtai Education Technology Co., Ltd. |
|
The PRC |
Foshan Renliang Education Technology Co., Ltd. |
|
The PRC |
Foshan Yongliang Education Technology Co., Ltd. |
|
The PRC |
Foshan Zhiliang Education Technology Co., Ltd. |
|
The PRC |
Beijing Boteng Consulting Co., Ltd. |
|
The PRC |
Schools/subsidiaries
held by VIEs |
|
Place
of Incorporation |
|
|
|
Dreambig Career Limited |
|
Hong Kong |
Chengdu Boxuele Education Management Consulting Co., Ltd. |
|
The PRC |
Wuhan Mierdun Education Technology Limited |
|
The PRC |
Chengdu Yinzhe Education and Technology Co., Ltd. |
|
The PRC |
Chengdu Laizhe Education and Technology Co., Ltd. |
|
The PRC |
Chengdu Zhiyimeng Software Technology Co., Ltd. |
|
The PRC |
Guangzhou Elan Education and Training Co., Ltd. |
|
The PRC |
Shanghai Elan Education and Training Co., Ltd. |
|
The PRC |
Shanghai Bolai Training Center Co., Ltd. |
|
The PRC |
Foshan Shunde Shengbo Culture and Arts Training Co., Ltd. |
|
The PRC |
Guangdong Xingjian Education Co., Ltd. |
|
The PRC |
Huidong Silver Beach Education Consulting Co., Ltd. |
|
The PRC |
Dongguan Qishi Country Garden Kindergarten Co., Ltd. |
|
The PRC |
Dongguan Qingxi Country Garden Kindergarten Co., Ltd. |
|
The PRC |
Foshan Shunde Beijiao Country Garden Guilanshan Kindergarten Co., Ltd. |
|
The PRC |
Guangzhou Huihua Education Consulting Co., Ltd. |
|
The PRC |
Beijing Huanxue International Travel Limited |
|
The PRC |
Guangdong Lebeimeng Education Consulting Co., Ltd. |
|
The PRC |
Guangzhou Xingzhu Information Technology Co., Ltd. |
|
The PRC |
Baoding Baigou New City Shenghua Country Garden Kindergarten Co., Ltd. |
|
The PRC |
Taishan Lebeimeng Education Consulting Co., Ltd. |
|
The PRC |
Beijing Huanxue Tianxia International Travel Limited |
|
The PRC |
Dongguan Dongcheng Bright Scholar Kindergarten Co., Ltd |
|
The PRC |
Chengdu Pidu Bright Scholar Kindergarten Co., Ltd. |
|
The PRC |
Huizhou Huiyang Lelebao Shenhui City Kindergarten Co., Ltd. |
|
The PRC |
Guangzhou Zengcheng Fettes College Kindergarten Co., Ltd. |
|
The PRC |
Shanghai Huodai Commercial Information Consulting Co., Ltd. |
|
The PRC |
Shanghai Youxun Education Technology Co., Ltd. |
|
The PRC |
Shanghai Hanlin Education Technology Co., Ltd. |
|
The PRC |
Foshan Shunde Beijiao Town Country Garden Ivy League Education
Training Centre Co., Ltd. |
|
The PRC |
Guangdong Bright Scholar Ivy League Education Science Research Institute
Co., Ltd. |
|
The PRC |
Jiangxi Leti Culture and Tourism Development Co., Ltd. |
|
The PRC |
Aijia Education Training (Shanghai) Co., Ltd. |
|
The PRC |
Shanghai Xinghanhai Education Technology Co., Ltd. |
|
The PRC |
Shanghai Yuhanlin Education Technology Co., Ltd. |
|
The PRC |
Zhejiang Leti Travel Agency Co., Ltd. |
|
The PRC |
Jiangxi Yuanye Travel Agency Co., Ltd. |
|
The PRC |
Fuzhou Leti Camping Operation Management Co., Ltd. |
|
The PRC |
Jiangxi Leyan Education Management Co., Ltd. |
|
The PRC |
Tongxiang Wuzhen Leti Camping Operation Management Co., Ltd. |
|
The PRC |
Jiangxi Jingrui International Travel Agency Co., Ltd. |
|
The PRC |
The following table sets forth
the details of the significant subsidiaries, the VIE, i.e., BGY Education Investment, and schools/subsidiaries held by the VIE
from our discontinued operations, collectively referred to as the Affected Entities throughout this annual report.
VIE |
|
Place of Incorporation |
|
|
|
BGY Education Investment Management Co., Ltd. |
|
The PRC |
Schools/subsidiaries
held by the VIE |
|
Place of Incorporation |
|
|
|
Hubei Sannew Education Development Limited |
|
The PRC |
Wuhan Sannew American Middle School |
|
The PRC |
Heze Qiqiaoban Education Technology Limited |
|
The PRC |
Heze Economic Development Zone Qiqiaoban Huaqiao City Kindergarten |
|
The PRC |
Heze Economic Development Zone Electric Kindergarten |
|
The PRC |
Heze Qiqiaoban Juancheng Kindergarten |
|
The PRC |
Heze Mudan District Yihai Kindergarten |
|
The PRC |
Qiqiaoban Oscar Kindergarten |
|
The PRC |
Juye Phoenix Qiqiaoban Dongfang Xintiandi Kindergarten |
|
The PRC |
Caoxian Qiqiaoban Kindergarten |
|
The PRC |
Juancheng Shuncheng International Kindergarten |
|
The PRC |
Jining Yanzhou Lelebao Kindergarten |
|
The PRC |
Shangdong Boshiyou Education Consulting Limited |
|
The PRC |
Jining Boshiwei Education Consulting Limited |
|
The PRC |
Xiju Country Garden Kindergarten |
|
The PRC |
Huiyang Country Garden Kindergarten |
|
The PRC |
Country Garden Silver Beach Kindergarten |
|
The PRC |
Huaxi Country Garden International Kindergarten |
|
The PRC |
Ningxiang Country Garden School |
|
The PRC |
Maoming Country Garden Kindergarten |
|
The PRC |
Huaxi Country Garden International School |
|
The PRC |
Huadu Holiday Peninsula Kindergarten |
|
The PRC |
Dalang Country Garden Kindergarten |
|
The PRC |
Haoting Country Garden Kindergarten |
|
The PRC |
Huanan Country Garden School |
|
The PRC |
Huanan Country Garden Bilingual Kindergarten |
|
The PRC |
Wuhan Country Garden School |
|
The PRC |
Wuhan Country Garden Kindergarten |
|
The PRC |
Country Garden Venice Bilingual School |
|
The PRC |
Nansha Country Garden Bilingual Kindergarten |
|
The PRC |
Licheng Country Garden Bilingual Kindergarten |
|
The PRC |
Phoenix City Bilingual School |
|
The PRC |
Phoenix City Country Garden Kindergarten |
|
The PRC |
Phoenix City Bilingual Kindergarten |
|
The PRC |
Lanzhou Country Garden School |
|
The PRC |
Country Garden Experimental School |
|
The PRC |
Gaoming Country Garden Kindergarten |
|
The PRC |
Ningxiang Country Garden Foreign Language Training School |
|
The PRC |
Ningxiang Country Garden Kindergarten |
|
The PRC |
Country Garden Silver Beach School |
|
The PRC |
Enping Country Garden Kindergarten |
|
The PRC |
Shaoguan Zhenjiang Country Garden Foreign Language Kindergarten |
|
The PRC |
Qingyuan Country Garden Bilingual Kindergarten |
|
The PRC |
Danyang Country Garden Kindergarten |
|
The PRC |
Laian Country Garden Foreign Language School |
|
The PRC |
Laian Country Garden Kindergarten |
|
The PRC |
Chuzhou Country Garden Kindergarten |
|
The PRC |
Country Garden Huacheng Kindergarten |
|
The PRC |
Country Garden Huacheng School |
|
The PRC |
Kaiping Country Garden Jade Bay Kindergarten |
|
The PRC |
Chuzhou Country Garden Foreign Language School |
|
The PRC |
Kaiping Country Garden School |
|
The PRC |
Shaoguan Country Garden Foreign Language School |
|
The PRC |
Xiangtan Yisuhe Country Garden Kindergarten |
|
The PRC |
Guangyuan Lizhou Kasijia Kindergarten |
|
The PRC |
Dongguan Humen Bright Scholar Country Garden Kindergarten |
|
The PRC |
Foshan Shunde Ronggui Street Country Garden Kindergarten |
|
The PRC |
Guangdong Lelebao Education Technology Co., Ltd. |
|
The PRC |
Baoding Baigou New City Bright Scholar Shenghua Education Consulting
Co., Ltd. |
|
The PRC |
Shawan Country Garden Kindergarten |
|
The PRC |
Heshan Country Garden Kindergarten |
|
The PRC |
Heshan Country Garden School |
|
The PRC |
Huanan Country Garden Cuiyun Mountain Kindergarten |
|
The PRC |
Country Garden Venice Kindergarten |
|
The PRC |
Zengcheng Country Garden Kindergarten |
|
The PRC |
Zengcheng Country Garden School |
|
The PRC |
Fengxin Country Garden Kindergarten |
|
The PRC |
Phoenix City Fengyan Kindergarten |
|
The PRC |
Shenghua Country Garden Bilingual School |
|
The PRC |
Wuhan Qiaosheng Education Investment Co., Ltd. |
|
The PRC |
Wuhan Qingshan District Bilingual Kindergarten |
|
The PRC |
Wuhan Donghu Tech Development Zone Xinqiao Kindergarten |
|
The PRC |
Wuhan Donghu Tech Development Zone Xinqiao-Jinxiu Longcheng Kindergarten |
|
The PRC |
Wuhan Dongxihu District Dongqiao Kindergarten |
|
The PRC |
Wuhan Hongshan District Xinqiao Aijia Kindergarten |
|
The PRC |
Haiyang Country Garden Kindergarten |
|
The PRC |
Tianjin Beichen Lelebao Kindergarten |
|
The PRC |
Guangzhou Fettes School |
|
The PRC |
Guigang Gangbei Country Garden Lelebao Kindergarten |
|
The PRC |
Zhaoqing Lelebao Xingfuli Kindergarten |
|
The PRC |
Lanzhou Lelebao Hyde Country Kindergarten |
|
The PRC |
Lanzhou Lelebao Yorkshire Kindergarten |
|
The PRC |
Lanzhou Lelebao Edinburgh Kindergarten |
|
The PRC |
Jinan Zhangqiu Phoenix City Lelebao Kindergarten |
|
The PRC |
Jining Jizhou Yinxiang Lelebao Kindergarten |
|
The PRC |
Jining Feicuiwan Lelebao Kindergarten |
|
The PRC |
Heze Mudan District Culture City Kindergarten |
|
The PRC |
Weifang Boshixin Education Consulting Co., Ltd. |
|
The PRC |
Jinan Boshixing Education Consulting Co., Ltd. |
|
The PRC |
Guangdong Country Garden School |
|
The PRC |
Taishan Country Garden School |
|
The PRC |
Jurong Country Garden School |
|
The PRC |
Wuyi Country Garden Bilingual School |
|
The PRC |
Anqiu Lelebao Kindergarten |
|
The PRC |
Jurong Lelebao Yunxiyuan Kindergarten |
|
The PRC |
Tianjin Wuqing Ziquantingyuan Lelebao Kindergarten |
|
The PRC |
Yiwu Bright Scholar Education Consulting Management
Co. Ltd. |
|
The PRC |
Henan Lelebao Education Consulting Management
Co. Ltd. |
|
The PRC |
Jinxiang Lelebao Kindergarten |
|
The PRC |
Xianning Bright Scholar Country Garden Bilingual
School |
|
The PRC |
Shouguang Feicuihuafu Lelebao Kindergarten |
|
The PRC |
Our Contractual Arrangements
Foreign ownership in education
services is subject to significant regulations in China. The PRC government regulates the provision of education services through strict
licensing requirements. In particular, PRC laws and regulations currently prohibit foreign ownership of companies and institutions providing
compulsory education services at primary and middle school levels, and restrict foreign investment in education services at the kindergarten
and high school level. We are a company incorporated in the Cayman Islands. Our PRC subsidiary, Zhuhai Bright Scholar, is a wholly foreign-owned
enterprise and currently ineligible to apply for and hold licenses to operate, or otherwise own equity interests in our schools. Due
to these restrictions, we, through our PRC subsidiary, Zhuhai Bright Scholar, have entered into a series of contractual arrangements
with (1) the VIEs, and (2) the shareholders of the VIEs, i.e., Ms. Meirong Yang and Mr. Wenjie Yang.
On May 14, 2021, the State
Council promulgated the Implementation Rules, which became effective on September 1, 2021 and further stipulate the operation and management
of private schools and the capital operation of private education. Pursuant to the Implementation Rules, (1) foreign-invested enterprises
established in China and social organizations whose actual controllers are foreign parties shall not sponsor, participate in or actually
control private schools that provide compulsory education, (2) social organizations or individuals shall not control any private school
that provides compulsory education or any non-profit private school that provides pre-school education by means of merger, acquisition,
contractual arrangements, etc., and (3) private schools providing compulsory education shall not conduct any transaction with any related
party. As a result of the foregoing, in August 2021, shareholder of BGY Education Investment established a few new entities, including,
Foshan Meiliang Education Technology Co., Ltd., Foshan Shangtai Education Technology Co., Ltd., Foshan Renliang Education Technology
Co., Ltd., Foshan Yongliang Education Technology Co., Ltd., Foshan Zhiliang Education Technology Co., Ltd. and Beijing Boteng Consulting
Co., Ltd. On August 13, 2021, Foshan Meiliang Education Technology Co., Ltd., Foshan Shangtai Education Technology Co., Ltd., Foshan
Renliang Education Technology Co., Ltd., Foshan Yongliang Education Technology Co., Ltd., Foshan Zhiliang Education Technology Co., Ltd.
and Beijing Boteng Consulting Co., Ltd. entered a series of supplementary agreements, which enabled them to join the 2017 contractual
arrangements and share the same rights and obligations, if applicable, of BGY Education Investment.
The following is a summary
of the material provisions of these contractual arrangements with the VIEs, respectively, and their respective shareholders. We may not
amend or terminate these agreements unless authorized by a majority vote of our board of directors.
Call Option Agreements.
Pursuant to the call option agreements between Zhuhai Bright Scholar, Ms. Meirong Yang and Mr. Wenjie Yang, and the VIEs, Ms. Meirong
Yang and Mr. Wenjie Yang unconditionally and irrevocably granted Zhuhai Bright Scholar or its designee an exclusive option to purchase,
to the extent permitted under PRC laws and regulations, all or part of the equity interest in the VIEs at nil consideration or the lowest
consideration permitted by PRC laws and regulations under the circumstances where Zhuhai Bright Scholar or its designee is permitted
under PRC laws and regulations to own all or part of the equity interests of the VIEs or where we otherwise deem it necessary or appropriate
to exercise the option. Zhuhai Bright Scholar has the sole discretion to decide when to exercise the option, and whether to exercise
the option in part or in full. Without Zhuhai Bright Scholar’s written consent, Ms. Meirong Yang and Mr. Wenjie Yang may not sell,
transfer, pledge or otherwise dispose of or create any encumbrance on any of the VIEs’ assets or equity interests. Without obtaining
Zhuhai Bright Scholar’s written consent, Ms. Meirong Yang and Mr. Wenjie Yang may not enter into any material contracts, incur
any indebtedness, or alter the business scope of the VIEs. The key factor for us to decide whether to exercise the option is whether
the current regulatory restrictions on foreign investment in the education services business will be removed in the future, the likelihood
of which we are not in a position to know or comment on.
Power of Attorney.
In January 2017 and August 2021, respectively, Ms. Meirong Yang and Mr. Wenjie Yang each executed irrevocable powers of attorney,
appointing Zhuhai Bright Scholar, or any person designated by Zhuhai Bright Scholar, as his/her attorney-in-fact to (1) call and attend
shareholders meeting of the VIEs and execute relevant shareholders resolutions, (2) exercise on his/her behalf all his/her rights as
a shareholder of the VIEs, including those rights under PRC laws and regulations and the articles of association of the VIEs, such as
voting, appointing, replacing or removing directors, (3) submit all documents as required by government authorities on behalf of the
VIEs, (4) assign Ms. Meirong Yang’s and Mr. Wenjie Yang’s shareholding rights to Zhuhai Bright Scholar, including the rights
to receive dividends, dispose of equity interest and enjoy the rights and interests during and after liquidation, (5) review the resolutions,
books and accounts of the VIEs, and (6) exercise any other rights and benefits associated with shareholding that Ms. Meirong Yang or
Mr. Wenjie Yang receive from the VIEs.
Exclusive Management
Services and Business Cooperation Agreement. Pursuant to the exclusive management services and business cooperation agreement
among Zhuhai Bright Scholar, the VIEs, Ms. Meirong Yang and Mr. Wenjie Yang, as the shareholders of the VIEs, entered into in January
2017, Zhuhai Bright Scholar has the exclusive right to provide comprehensive technical and business support services to the VIEs. Such
services include conducting market research, offering strategic business advice and providing information technology services, advice
on mergers and acquisitions, human resources management services, intellectual property licensing services, support for teaching activities
and other services that the parties may mutually agree. Without the prior consent of Zhuhai Bright Scholar, none of the VIEs may accept
such services from any third party. Zhuhai Bright Scholar owns the exclusive intellectual property rights created as a result of the
performance of this agreement. The VIEs agree to pay Zhuhai Bright Scholar service fees in an amount solely decided by Zhuhai Bright
Scholar, but not to exceed the paying school’s total revenues deducted by costs, taxes, mandatory reserve fund and other expenses.
At the sole discretion of Zhuhai Bright Scholar, the calculation of the service fees should be determined based on the complexity of
the services provided, the time and resources committed by Zhuhai Bright Scholar, the commercial value of the services, the market reference
price and the operating condition of the paying school. As part of the exclusive management services and business cooperation agreement,
Ms. Meirong Yang, Mr. Wenjie Yang and the VIEs agree that they will not take any action, such as incurring indebtedness, disposing of
material assets, materially changing the scope or nature of the business of the VIEs, or disposing of their equity interests in the VIEs,
without the written consent of Zhuhai Bright Scholar. The exclusive management services and business cooperation agreement may not be
terminated by Ms. Meirong Yang, Mr. Wenjie Yang or any of the VIEs without the written consent of Zhuhai Bright Scholar.
Unless terminated, the agreement
shall remain in full force and effect during the term of operations of Zhuhai Bright Scholar and the VIEs.
Equity Pledge Agreements.
Pursuant to the equity pledge agreement among Zhuhai Bright Scholar, Ms. Meirong Yang, Mr. Wenjie Yang and the VIEs, Ms. Meirong
Yang and Mr. Wenjie Yang unconditionally and irrevocably pledged all of their respective equity interests in the VIEs to Zhuhai Bright
Scholar to guarantee performance of the obligations of the VIEs under the call option agreements, power of attorneys and exclusive management
services and business cooperation agreements, each as described above. Ms. Meirong Yang and Mr. Wenjie Yang each agreed that without prior
written consent of Zhuhai Bright Scholar, they shall not transfer or dispose of the pledged equity interests or create or allow any encumbrance
on the pledged equity interests. Unless terminated, the equity pledge agreements remain in full force and effect until all of the obligations
of Ms. Meirong Yang, Mr. Wenjie Yang and the VIEs under the agreements described above have been duly performed and related payments are
duly paid. The pledge of equity interests in the VIEs has been effective upon the registration with the local branch of SAIC.
D. Property, plants and equipment
See “—B. Business
Overview—Properties and Facilities.”
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of
our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements
and their related notes included in this annual report. This report contains forward-looking statements. You should carefully consider
the information provided under the caption “Item 3. Key Information—D. Risk Factors” in this annual report. We caution
you that our businesses and financial performance are subject to substantial risks and uncertainties.
A. Operating Results
Overview
We are a global premier education
service company, which primarily provides quality international education services to global students and equip them with the critical
academic foundation and skillsets necessary to succeed in the pursuit of higher education. As part of our global expansion plan, we have
been exploring mergers and acquisition opportunities abroad to expand our global school network, targeting quality K-12 private education
providers and reputable schools in the targeted overseas countries and jurisdictions. As of the date of this annual report, we have eight
domestic kindergartens within China and eight overseas school located in the United Kingdom and the United States.
On May 14, 2021, the PRC
State Council announced the Implementation Rules, which became effective on September 1, 2021. Pursuant to the Implementation Rules,
(1) foreign-invested enterprises established in China and social organizations whose actual controllers are foreign parties shall not
sponsor, participate in or actually control private schools that provide compulsory education, (2) social organizations or individuals
shall not control any private school that provides compulsory education or any non-profit private school that provides pre-school education
by means of merger, acquisition, contractual arrangements, etc., and (3) private schools providing compulsory education shall not conduct
any transaction with any related party.
The Implementation Rules
have had significant impacts on our business and our results of operations. After consultation with its PRC legal counsel and external
advisors, we have reached the conclusion that, as a result of the effectiveness of the Implementation Rules, we have lost control over
the Affected Entities, which primarily include our private schools providing compulsory education, not-for-profit kindergartens and other
enterprises within China that are affected by the Implementation Rules. We have determined that, in substance, we had ceased to recognize
revenues for all activities related to the Affected Entities with compulsory education and discontinued all business activities with
such entities, by August 31, 2021 while continuing to provide essential services to keep these schools open.
Our continued business includes
domestic for-profit kindergartens and K-12 operation services, overseas schools and complementary education services. We have built our
global presence primarily through acquiring established overseas schools and language training institutions in countries such as the
United Kingdom and the United States. Leveraging our experience and insights into learning needs at different stages, our kindergartens
seek to lay the necessary foundation for our students’ future studies. We also offer a range of complementary education services,
primarily including camp programs, after-school programs, through our network of learning centers in China, as well as international
education consulting services.
For our continuing
operations, our revenue was RMB1,476.3 million, RMB1,401.8 million and RMB1,714.0 million (US$248.8 million) for the 2020, 2021 and
2022 fiscal years, respectively; our net loss was RMB307.3 million, RMB535.1 million and RMB703.5 million (US$102.1 million) for the
same periods, respectively. We use adjusted net loss, which excludes share-based compensation expense, amortization of intangible
assets, tax effect of amortization of intangible assets, impairment loss on operating lease right-of-use assets, impairment loss on
goodwill, impairment loss on intangible assets, impairment loss on property and equipment, and income/(loss) from discontinued
operations, net of tax, in evaluating our ongoing results of operations. Our adjusted net loss was RMB283.6 million, RMB420.2
million and RMB141.7 million (US$20.6 million) for the 2020, 2021 and 2022 fiscal years, respectively. See “—Non-GAAP
measures” for details.
Major Factors Affecting Our Results of Operations
We believe that our results
of operations are affected by general factors affecting the private K-12 education industry in China and overseas and company-specific
factors, including the following:
Demand for quality private kindergartens
in China and quality private K-12 education overseas
We have benefited from the
increasing demand for private education in China. Such demand is primarily driven by the increasing number of Chinese students who seek
quality education and aspire to study abroad, which is in turn driven by an increasing number of affluent families in China, the rising
recognition of the quality of higher education overseas, the emphasis placed by Chinese parents on the importance of enrollment in globally-recognized
universities to improve their children’s career prospects, and various economic and political factors. Demand for private K-12
education in each respective overseas market is affected by, among many other factors, the general economic conditions and political
trend, local policies and regulations on private education, and the quality of local public education. Material changes to these factors
will affect our operation results.
Our student enrollment and mix
Our revenue primarily consists
of tuition and fees from students enrolled at our schools. The level of students enrolled at our schools directly affects our revenue
and profitability. The following table sets forth the average number of students enrolled at our schools for our continuing operations
in the school years indicated.
| |
2020 school year | | |
2021 school year | | |
2022 school year | |
| |
Number | | |
% of total | | |
Number | | |
% of total | | |
Number | | |
% of total | |
Domestic Kindergartens | |
| 541 | | |
| 14.4 | | |
| 939 | | |
| 28.6 | | |
| 1,171 | | |
| 33.0 | |
Overseas Schools(1) | |
| 3,212 | | |
| 85.6 | | |
| 2,343 | | |
| 71.4 | | |
| 2,377 | | |
| 67.0 | |
Total | |
| 3,753 | | |
| 100.0 | | |
| 3,282 | | |
| 100.0 | | |
| 3,548 | | |
| 100.0 | |
(1) |
For the purpose of calculating average number of students enrolled
at our schools, we do not take into account students at our language training institutions. |
Our total student enrollment
for our continuing operations for the 2020, 2021 and 2022 fiscal years was 3,753, 3,282 and 3,548 respectively. Student enrollment is
generally dependent on, among other things, the reputation of our schools, which is primarily driven by our education quality and our
students’ academic results, the ramp-up stage of our schools, the expansion of our school network.
Student enrollment is also
affected by the number and capacity of our schools. The following table sets forth the number and capacity of schools for our continuing
operations as of the dates indicated.
| |
As of September 1, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
Number of schools | | |
Student capacity | | |
Number of schools | | |
Student capacity | | |
Number of schools | | |
Student capacity | |
Domestic Kindergartens | |
| 5 | | |
| 1,644 | | |
| 8 | | |
| 2,764 | | |
| 8 | | |
| 2,764 | |
Overseas Schools | |
| 8 | | |
| 4,422 | | |
| 8 | | |
| 4,422 | | |
| 8 | | |
| 4,260 | |
Total | |
| 13 | | |
| 6,066 | | |
| 16 | | |
| 7,186 | | |
| 16 | | |
| 7,024 | |
The total number of schools
within our school network for our continuing operations for the 2020, 2021 and 2022 fiscal year was 13, 16 and 16, respectively.
As utilization rates are
generally higher for schools that have been in operation for a longer period of time, the unutilized capacity at our recently opened
schools, which are still at the ramp-up stage, allows us to readily increase student enrollment without incurring significant
additional investment. The utilization rate is defined as the average of monthly student enrollment at a school for a period divided
by the school capacity as of the start of such period. The average utilization rate for our domestic kindergartens as of August 31,
2022 was 42.4%.
Our tuition and fees
Our results of operations
are affected by the level of the tuition and fees we charge our students. We charge tuition and fees based on the type of school that
the student is enrolled at, the location of the school and, in certain cases, the student’s grade level. We generally seek to gradually
increase our tuition and fee level without compromising our student enrollment. The tuition and fees we charge are subject to approval
by the competent government pricing authorities. The government pricing authorities, at both the provincial and local levels, have broad
powers to regulate the private education industry in China including the tuition, room and boarding fees and other fees charged by schools.
The following table sets forth the average tuition and fees of our schools for our continuing operations in the school years indicated.
| |
2020 school year | | |
2021 school year | | |
2022 school year | |
| |
RMB | | |
RMB | | |
RMB | | |
US$ | |
Domestic Kindergartens | |
| 17,095 | | |
| 25,703 | | |
| 27,070 | | |
| 3,929 | |
Overseas Schools(1) | |
| 207,643 | | |
| 203,337 | | |
| 227,363 | | |
| 33,004 | |
(1) |
For the purpose of calculating average tuition and fees of our schools,
we do not take into account students at our language training institutions. |
For the 2020, 2021 and 2022
school years, our average tuition and fees across all of our domestic kindergartens for our continuing operations were RMB17,095. RMB25,703
and RMB27,070, respectively. Our tuition and fees charged for overseas schools take into consideration of market rates and consumption
levels of the relevant countries and areas where our schools are located. For the 2020, 2021 and 2022 school years, our average tuition
and fees per student for overseas schools were RMB207,643, RMB203,337 and RMB227,363, respectively. The fluctuation was largely attributable
to the impact of the COVID-19 pandemic.
We have more discretion in
determining the tuition levels for our complementary education services. We generally raise the tuition for our complementary education
services based on factors including the demand for our services, the costs of offering our services, and the tuition and fees charged
by our competitors.
Our ability to control our costs and expenses
and improve our operating efficiency
Staff costs and administrative
expenses have a direct impact on our profitability. The number of our staff, particularly our teachers, generally increases as our student
base expands, while other expenses, particularly those in relation to administrative functions, are relatively fixed. Our ability to drive
the productivity of our staff and enhance our operating efficiency affects our profitability. The ratio of the number of our students
to the number of our teachers in our schools affects our margins, with higher student-to-teacher ratios generally representing higher
operating efficiency and higher margins. Our student-to-teacher ratio for our overseas schools and domestic kindergartens in the 2022
school years was 6.7 and 6.5, respectively. We had a negative operating margin of 8.4%, 27.8% and 35.4% in the 2020, 2021 and 2022 fiscal
years, respectively.
Our newly established schools’
ability to grow rapidly during the ramp-up period following their establishment is expected to result in their growing brand value and
increasing student enrollment, which will improve the capacity utilization of their campuses and further result in greater operating leverage
and increasing profitability at these schools.
Strategic acquisitions and investments
In recent years, we have expanded
rapidly through acquisitions and strategic investments in China and overseas. For details, see “Item 4. Information on the Company—B.
Business Overview—Our Expansions and Investments.” We plan to continue to make strategic investments into and acquisitions
of schools and complementary businesses to better serve our students, expand our global school network and drive our future growth. Our
overall financial condition and profitability could be affected by the different levels of profitability of our acquisition targets.
Seasonality
Our business in China is
subject to seasonal fluctuations as our costs and expenses vary significantly and do not necessarily correspond with our recognition
of revenues. Our students enrolled in our domestic kindergartens and overseas schools and their parents typically pay the tuition and
fees prior to the commencement of a semester, and we recognize revenues from the delivery of education services on a straight-line basis
over the semester. For our domestic kindergartens and overseas schools, we typically incur higher upfront operating expenses in the first
fiscal quarter at the start of each school year. We also typically recognize more revenue in the second half of fiscal years due to higher
revenues from complementary education services during the summer and, to a lesser extent, students who transfer into our schools for
the second semester. As a result of the combination of the forgoing, we have historically incurred net loss or significantly lower net
income in the second and fourth fiscal quarters, primarily due to our schools being closed due to the winter and summer holidays, when
no revenue from our school operations is recognized.
Our overseas operations are
subject to seasonal fluctuations similar to our domestic operations, with minimal school term revenue recognized typically in July and
August.
Key Components of Results of Operations
Revenue
The following tables compare
revenue generated from our overseas schools, complementary education services, and domestic kindergartens and K-12 operation services
and as a percentage of total revenues for our continuing operations for the periods indicated.
| |
Year Ended August 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
% | | |
RMB | | |
% | | |
RMB | | |
US$ | | |
% | |
| |
(in thousands except for percentage) | | |
| |
Overseas schools | |
| 835,927 | | |
| 56.6 | | |
| 502,607 | | |
| 35.9 | | |
| 652,773 | | |
| 94,756 | | |
| 38.1 | |
Complementary education services | |
| 540,387 | | |
| 36.6 | | |
| 625,640 | | |
| 44.6 | | |
| 636,615 | | |
| 92,410 | | |
| 37.1 | |
Domestic kindergartens and K-12 operation services | |
| 100,033 | | |
| 6.8 | | |
| 273,533 | | |
| 19.5 | | |
| 424,577 | | |
| 61,631 | | |
| 24.8 | |
Total | |
| 1,476,347 | | |
| 100.0 | | |
| 1,401,780 | | |
| 100.0 | | |
| 1,713,965 | | |
| 248,797 | | |
| 100.0 | |
We generally charge our students
tuition and other fees prior to the beginning of each semester. We also accept monthly payment for fees at certain kindergartens. We
offer a partial refund if a student withdraws during a semester and tuition discounts to certain of Country Garden’s homeowners,
our employees and Country Garden’s employees.
Cost of revenue
Our cost of revenue primarily
consists of staff costs, comprising primarily salaries and other benefits for teachers and educational staff, and other costs, comprising
primarily expenses relating to room and board services, educational activities and utilities and maintenance of school facilities.
The following tables set
forth the components of our cost of revenue by amount and as a percentage of total business segment revenue for the periods indicated.
| |
Year Ended August 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
% | | |
RMB | | |
% | | |
RMB | | |
US$ | | |
% | |
| |
(in thousands except for percentages) | |
Overseas schools | |
| 588,840 | | |
| 70.4 | | |
| 513,871 | | |
| 102.2 | | |
| 574,744 | | |
| 83,429 | | |
| 88.0 | |
Complementary education services | |
| 338,363 | | |
| 62.6 | | |
| 382,548 | | |
| 61.1 | | |
| 373,753 | | |
| 54,254 | | |
| 58.7 | |
Domestic Kindergartens and K-12 Operation Services | |
| 132,334 | | |
| 132.3 | | |
| 283,844 | | |
| 103.8 | | |
| 288,809 | | |
| 41,923 | | |
| 68.0 | |
Total | |
| 1,059,537 | | |
| 71.8 | | |
| 1,180,263 | | |
| 84.2 | | |
| 1,237,306 | | |
| 179,606 | | |
| 72.2 | |
Selling, general and administrative expenses
Our selling, general and
administrative expenses primarily consisted of salaries and other benefits for our administrative, management and marketing personnel,
maintenance costs of our office facilities and teaching equipment, and share-based compensation expenses. Our selling, general and administrative
expenses were RMB562.6 million, RMB535.9 million and RMB539.9 million (US$78.4 million) in the 2020, 2021 and 2022 fiscal years, respectively,
accounting 38.1%, 38.2% and 31.5% of our revenue for the same periods, respectively.
Results of Operations
Reportable Segment
During the year ended August 31, 2021, we operated under three reportable
segments, which included Overseas Schools, Complementary Education Services, and Domestic Kindergartens and K-12 Operation Services. Since
then and up to the date of this annual report, the composition of our reportable segments has remained unchanged.
The following tables set
forth a summary of our consolidated results of operations by amount and as a percentage of total revenues for our continuing operations
for the periods indicated. This information should be read together with our consolidated financial statements and related notes included
elsewhere in this annual report. The results of operations in any period are not necessarily indicative of the results that may be expected
for any future period.
| |
Year Ended August 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
% | | |
RMB | | |
% | | |
RMB | | |
US$ | | |
% | |
| |
(in thousands, except for percentages, share and per share data) | |
Continuing operations | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Revenue | |
| 1,476,347 | | |
| 100.0 | | |
| 1,401,780 | | |
| 100.0 | | |
| 1,713,965 | | |
| 248,797 | | |
| 100.0 | |
Cost of revenue | |
| (1,059,537 | ) | |
| (71.8 | ) | |
| (1,180,263 | ) | |
| (84.2 | ) | |
| (1,237,306 | ) | |
| (179,606 | ) | |
| (72.2 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 416,810 | | |
| 28.2 | | |
| 221,517 | | |
| 15.8 | | |
| 476,659 | | |
| 69,191 | | |
| 27.8 | |
Selling, general and administrative expenses | |
| (562,600 | ) | |
| (38.1 | ) | |
| (535,878 | ) | |
| (38.2 | ) | |
| (539,893 | ) | |
| (78,370 | ) | |
| (31.5 | ) |
Other operating income | |
| 34,761 | | |
| 2.4 | | |
| 24,969 | | |
| 1.8 | | |
| 5,339 | | |
| 775 | | |
| 0.3 | |
Impairment loss on operating lease right-of-use assets | |
| (12,772 | ) | |
| (0.9 | ) | |
| (15,575 | ) | |
| (1.1 | ) | |
| (8,861 | ) | |
| (1,286 | ) | |
| (0.5 | ) |
Impairment loss on goodwill | |
| - | | |
| - | | |
| (84,730 | ) | |
| (6.0 | ) | |
| (419,805 | ) | |
| (60,938 | ) | |
| (24.5 | ) |
Impairment loss on intangible assets | |
| - | | |
| - | | |
| - | | |
| - | | |
| (113,385 | ) | |
| (16,459 | ) | |
| (6.6 | ) |
Impairment loss on property and equipment | |
| - | | |
| - | | |
| - | | |
| - | | |
| (6,586 | ) | |
| (956 | ) | |
| (0.4 | ) |
Operating loss | |
| (123,801 | ) | |
| (8.4 | ) | |
| (389,697 | ) | |
| (27.8 | ) | |
| (606,532 | ) | |
| (88,043 | ) | |
| (35.4 | ) |
Interest expenses, net | |
| (162,912 | ) | |
| (11.0 | ) | |
| (169,693 | ) | |
| (12.1 | ) | |
| (127,840 | ) | |
| (18,557 | ) | |
| (7.5 | ) |
Investment income | |
| 54,166 | | |
| 3.7 | | |
| 129,575 | | |
| 9.2 | | |
| 135,309 | | |
| 19,641 | | |
| 7.9 | |
Other expenses | |
| (10,364 | ) | |
| (0.7 | ) | |
| (10,137 | ) | |
| (0.7 | ) | |
| (5,808 | ) | |
| (843 | ) | |
| (0.3 | ) |
Loss before income taxes and share of equity in loss of unconsolidated affiliates | |
| (242,911 | ) | |
| (16.5 | ) | |
| (439,952 | ) | |
| (31.4 | ) | |
| (604,871 | ) | |
| (87,802 | ) | |
| (35.3 | ) |
Income tax expenses | |
| (63,815 | ) | |
| (4.3 | ) | |
| (94,176 | ) | |
| (6.7 | ) | |
| (58,919 | ) | |
| (8,553 | ) | |
| (3.4 | ) |
Share of equity in loss of unconsolidated affiliates | |
| (595 | ) | |
| (0.0 | ) | |
| (1,018 | ) | |
| (0.1 | ) | |
| (39,747 | ) | |
| (5,770 | ) | |
| (2.3 | ) |
Net loss from continuing operations | |
| (307,321 | ) | |
| (20.8 | ) | |
| (535,146 | ) | |
| (38.2 | ) | |
| (703,537 | ) | |
| (102,125 | ) | |
| (41.0 | ) |
Income from discontinued operations, net of tax | |
| 471,495 | | |
| 31.9 | | |
| 369,343 | | |
| 26.3 | | |
| - | | |
| - | | |
| - | |
Net income/(loss) | |
| 164,174 | | |
| 11.1 | | |
| (165,803 | ) | |
| (11.8 | ) | |
| (703,537 | ) | |
| (102,125 | ) | |
| (41.0 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Less: Net income/(loss) attributable to the non-controlling interests | |
| 3,169 | | |
| 0.2 | | |
| (112,998 | ) | |
| (8.1 | ) | |
| 5,803 | | |
| 842 | | |
| 0.3 | |
Net income/(loss) attributable to Bright Scholar Holdings ordinary shareholders | |
| 161,005 | | |
| 10.9 | | |
| (52,805 | ) | |
| (3.8 | ) | |
| (709,340 | ) | |
| (102,967 | ) | |
| (41.4 | ) |
Amounts attributable to Bright Scholar Holdings shareholders | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss from continuing operations | |
| (316,878 | ) | |
| (21.5 | ) | |
| (540,768 | ) | |
| (38.6 | ) | |
| (709,340 | ) | |
| (102,967 | ) | |
| (41.4 | ) |
Income from discontinued operations, net of tax | |
| 477,883 | | |
| 32.4 | | |
| 487,963 | | |
| 34.8 | | |
| - | | |
| - | | |
| - | |
Net income/(loss) attributable to Bright Scholar Holdings shareholders | |
| 161,005 | | |
| 10.9 | | |
| (52,805 | ) | |
| (3.8 | ) | |
| (709,340 | ) | |
| (102,967 | ) | |
| (41.4 | ) |
Net (loss)/earnings per share attributable to ordinary shareholders - basic and diluted: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss from continuing operations attributable to ordinary shareholders | |
| (2.64 | ) | |
| | | |
| (4.54 | ) | |
| | | |
| (5.98 | ) | |
| (0.87 | ) | |
| | |
Net income from discontinued operations attributable to ordinary shareholders | |
| 3.98 | | |
| | | |
| 4.09 | | |
| | | |
| - | | |
| - | | |
| | |
Net income/(loss) attributable to Bright Scholar Education Holdings Limited shareholders | |
| 1.34 | | |
| | | |
| (0.45 | ) | |
| | | |
| (5.98 | ) | |
| (0.87 | ) | |
| | |
Weighted average shares used in calculating net earnings per ordinary share, basic and diluted | |
| 120,158,001 | | |
| | | |
| 119,220,331 | | |
| | | |
| 118,697,495 | | |
| 118,697,495 | | |
| | |
Non-GAAP measures
In evaluating our
business, we consider and use certain non-GAAP measures, including primarily adjusted EBITDA, adjusted net income/(loss), adjusted
gross profit/(loss) and adjusted operating income/(loss) as supplemental measures to review and assess our operating performance.
The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the
financial information prepared and presented in accordance with U.S. GAAP. We define adjusted gross profit/(loss) from continuing
operations as gross profit/(loss) from continuing operations excluding amortization of intangible assets. We define adjusted EBITDA
as net income/(loss) excluding interest income/(expense), net, income tax expense/benefit, depreciation and amortization,
share-based compensation expense, impairment loss on operating lease right-of-use assets, impairment loss on goodwill, impairment
loss on intangible assets, impairment loss on property and equipment, and income/(loss) from
discontinued operations, net of tax. We define adjusted net income/(loss) as net income/(loss) excluding share-based compensation
expense, amortization of intangible assets, tax effect of amortization of intangible assets, impairment loss on operating lease
right-of-use assets, impairment loss on goodwill, impairment loss on intangible assets, impairment loss on property and equipment,
and income/(loss) from discontinued operations, net of tax. We define adjusted operating income/(loss) from continuing operations as
net operating income/(loss) from continuing operations excluding share-based compensation expense, amortization of intangible
assets, impairment loss on operating lease right-of-use assets, impairment loss on goodwill, impairment loss on intangible assets,
and impairment loss on property and equipment.
We incur amortization expense
of intangible assets related to various acquisitions that have been made in recent years. These intangible assets are valued at the time
of acquisition and are then amortized over a period of several years after the acquisition. We believe that exclusion of these expenses
allows greater comparability of operating results that are consistent over time for the Company’s newly acquired and long-held business
as the related intangibles does not have significant connection to the growth of the business. Therefore, we provide exclusion of amortization
of intangible assets to define adjusted gross profit from continuing operations, adjusted operating income/(loss) from continuing operations,
adjusted net income/(loss). In addition, due to the impact of the Implementation Rules, the Affected Entities deconsolidated is classified
as discontinued operations, which is a non-recurring item. The exclusion facilitates comparisons of our operating performance on a period-to-period
basis. Therefore, we provide exclusion of income/(loss) from discontinued operations, net of tax, to define adjusted net income/(loss),
adjusted EBITDA.
We present the non-GAAP financial
measures because they are used by our management to evaluate our operating performance and formulate business plans. Such non-GAAP measures
include adjusted EBITDA, adjusted net income/(loss), adjusted gross profit/(loss) from continuing operations, adjusted operating income/(loss)
from continuing operations. Non-GAAP financial measures enable our management to assess our operating results without considering the
impact of non-cash charges, including depreciation and amortization and share-based compensation expense, and without considering the
impact of non-operating items such as interest income/(expense), net; income tax expense/benefit; share-based compensation expense; amortization
of intangible assets, tax effect of amortization of intangible assets, and without considering the impact of non-recurring item, i.e.
income/(loss) from discontinued operations. We also believe that the use of these non-GAAP measures facilitates investors’
assessment of our operating performance.
The non-GAAP financial measures
are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. The non-GAAP financial measures have limitations
as analytical tools. One of the key limitations of using these non-GAAP financial measures is that they do not reflect all items of income
and expense that affect our operations. Interest income/(expense), net; income tax expense/benefit; depreciation and amortization; share-based
compensation expense; and tax effect of amortization of intangible assets, have been and may continue to be incurred in our business
and are not reflected in the presentation of these non-GAAP measures, including adjusted EBITDA or adjusted net income/(loss). Further,
these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore their
comparability may be limited.
We reconcile the non-GAAP
financial measures to the nearest U.S. GAAP performance measures, which should be considered when evaluating our performance. We encourage
you to review our financial information in its entirety and not rely on a single financial measure.
The following tables continuing operations,
adjusted operating income/(loss) from continuing operations for the periods indicated to their respective most directly comparable financial
measures calculated and presented in accordance with U.S. GAAP.
| |
Year Ended August 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
RMB | | |
RMB | | |
US$ | |
| |
(in thousands, except for share amounts and per share data) | |
Reconciliation of gross profit to adjusted gross profit | |
| | |
| | |
| | |
| |
Gross profit from continuing operations | |
| 416,810 | | |
| 221,517 | | |
| 476,659 | | |
| 69,191 | |
Add: Amortization of intangible assets | |
| 26,754 | | |
| 16,141 | | |
| 17,814 | | |
| 2,586 | |
Adjusted gross profit from continuing operations | |
| 443,564 | | |
| 237,658 | | |
| 494,473 | | |
| 71,777 | |
| |
| | | |
| | | |
| | | |
| | |
Reconciliation of operating loss to adjusted operating loss | |
| | | |
| | | |
| | | |
| | |
Operating loss from continuing operations | |
| (123,801 | ) | |
| (389,697 | ) | |
| (606,532 | ) | |
| (88,043 | ) |
Add: Share-based compensation expense | |
| (10,631 | ) | |
| 1,865 | | |
| (816 | ) | |
| (118 | ) |
Add: Amortization of intangible assets | |
| 26,754 | | |
| 16,141 | | |
| 17,814 | | |
| 2,586 | |
Add: Impairment loss on operating lease right-of-use assets | |
| 12,772 | | |
| 15,575 | | |
| 8,861 | | |
| 1,286 | |
Add: Impairment loss on goodwill | |
| - | | |
| 84,730 | | |
| 419,805 | | |
| 60,938 | |
Add: Impairment loss on intangible assets | |
| - | | |
| - | | |
| 113,385 | | |
| 16,459 | |
Add: Impairment loss on property and equipment | |
| - | | |
| - | | |
| 6,586 | | |
| 956 | |
Adjusted operating loss from continuing operations | |
| (94,906 | ) | |
| (271,386 | ) | |
| (40,897 | ) | |
| (5,936 | ) |
| |
| | | |
| | | |
| | | |
| | |
Reconciliation of net income/(loss) to adjusted net loss | |
| | | |
| | | |
| | | |
| | |
Net income/(loss) | |
| 164,174 | | |
| (165,803 | ) | |
| (703,537 | ) | |
| (102,125 | ) |
Add: Share-based compensation expense | |
| (10,631 | ) | |
| 1,865 | | |
| (816 | ) | |
| (118 | ) |
Add: Amortization of intangible assets | |
| 26,754 | | |
| 16,141 | | |
| 17,814 | | |
| 2,586 | |
Add: Tax effect of amortization of intangible assets | |
| (5,148 | ) | |
| (3,343 | ) | |
| (3,764 | ) | |
| (546 | ) |
Add: Impairment loss on operating lease right-of-use assets | |
| 12,772 | | |
| 15,575 | | |
| 8,861 | | |
| 1,286 | |
Add: Impairment loss on goodwill | |
| - | | |
| 84,730 | | |
| 419,805 | | |
| 60,938 | |
Add: Impairment loss on intangible assets | |
| - | | |
| - | | |
| 113,385 | | |
| 16,459 | |
Add: Impairment loss on property and equipment | |
| - | | |
| - | | |
| 6,586 | | |
| 956 | |
Less: Income from discontinued operations, net of tax | |
| 471,495 | | |
| 369,343 | | |
| - | | |
| - | |
Adjusted net loss | |
| (283,574 | ) | |
| (420,178 | ) | |
| (141,666 | ) | |
| (20,564 | ) |
| |
| | | |
| | | |
| | | |
| | |
Reconciliation of net income/(loss) to adjusted EBITDA | |
| | | |
| | | |
| | | |
| | |
Net income/(loss) | |
| 164,174 | | |
| (165,803 | ) | |
| (703,537 | ) | |
| (102,125 | ) |
Add: Interest expense, net | |
| 162,912 | | |
| 169,693 | | |
| 127,840 | | |
| 18,557 | |
Add: Income tax expense | |
| 63,815 | | |
| 94,176 | | |
| 58,919 | | |
| 8,553 | |
Add: Depreciation and amortization | |
| 118,160 | | |
| 138,847 | | |
| 115,934 | | |
| 16,829 | |
Add: Share-based compensation expense | |
| (10,631 | ) | |
| 1,865 | | |
| (816 | ) | |
| (118 | ) |
Add: Impairment loss on operating lease right-of-use assets | |
| 12,772 | | |
| 15,575 | | |
| 8,861 | | |
| 1,286 | |
Add: Impairment loss on goodwill | |
| - | | |
| 84,730 | | |
| 419,805 | | |
| 60,938 | |
Add: Impairment loss on intangible assets | |
| - | | |
| - | | |
| 113,385 | | |
| 16,459 | |
Add: Impairment loss on property and equipment | |
| - | | |
| - | | |
| 6,586 | | |
| 956 | |
Less: Income from discontinued operations, net of tax | |
| 471,495 | | |
| 369,343 | | |
| - | | |
| - | |
Adjusted EBITDA | |
| 39,707 | | |
| (30,260 | ) | |
| 146,977 | | |
| 21,335 | |
Segment information
In response to the Implementation
Rules, we reorganized our business unites and operated in three segments. The following tables set forth the revenue, cost of revenue
and gross profit of our three segments of business by amount and as a percentage of total segment revenue for our continuing operations
for the periods indicated, with the change in segment reporting reflected retrospectively.
| |
Year
Ended August 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
% | | |
RMB | | |
% | | |
RMB | | |
US$ | | |
% | |
| |
(in thousands, except
for percentages) | |
Revenue | |
| 1,476,347 | | |
| 100.0 | | |
| 1,401,780 | | |
| 100.0 | | |
| 1,713,965 | | |
| 248,797 | | |
| 100 | |
Overseas schools | |
| 835,927 | | |
| 56.6 | | |
| 502,607 | | |
| 35.9 | | |
| 652,773 | | |
| 94,756 | | |
| 38.1 | |
Complementary
education services | |
| 540,387 | | |
| 36.6 | | |
| 625,640 | | |
| 44.6 | | |
| 636,615 | | |
| 92,410 | | |
| 37.1 | |
Domestic
kindergartens and K-12 operation services | |
| 100,033 | | |
| 6.8 | | |
| 273,533 | | |
| 19.5 | | |
| 424,577 | | |
| 61,631 | | |
| 24.8 | |
Cost of revenue | |
| (1,059,537 | ) | |
| (71.8 | ) | |
| (1,180,263 | ) | |
| (84.2 | ) | |
| (1,237,306 | ) | |
| (179,606 | ) | |
| (72.2 | ) |
Overseas schools | |
| (588,840 | ) | |
| (70.4 | ) | |
| (513,871 | ) | |
| (102.2 | ) | |
| (574,744 | ) | |
| (83,429 | ) | |
| (88.0 | ) |
Complementary
education services | |
| (338,363 | ) | |
| (62.6 | ) | |
| (382,548 | ) | |
| (61.1 | ) | |
| (373,753 | ) | |
| (54,254 | ) | |
| (58.7 | ) |
Domestic
kindergartens and K-12 operation services | |
| (132,334 | ) | |
| (132.3 | ) | |
| (283,844 | ) | |
| (103.8 | ) | |
| (288,809 | ) | |
| (41,923 | ) | |
| (68.0 | ) |
Gross profit/(loss) | |
| 416,810 | | |
| 28.2 | | |
| 221,517 | | |
| 15.8 | | |
| 476,659 | | |
| 69,191 | | |
| 27.8 | |
Overseas schools | |
| 247,087 | | |
| 29.6 | | |
| (11,264 | ) | |
| (2.2 | ) | |
| 78,029 | | |
| 11,327 | | |
| 12.0 | |
Complementary
education services | |
| 202,024 | | |
| 37.4 | | |
| 243,092 | | |
| 38.9 | | |
| 262,862 | | |
| 38,156 | | |
| 41.3 | |
Domestic
kindergartens and K-12 operation services | |
| (32,301 | ) | |
| (32.3 | ) | |
| (10,311 | ) | |
| (3.8 | ) | |
| 135,768 | | |
| 19,708 | | |
| 32.0 | |
Year ended August 31, 2021 compared to year ended August 31,
2022
Revenue. Our revenue
from continuing operations increased by 22.3% from RMB1,401.8 million in the 2021 fiscal year to RMB1,714.0 million (US$248.8 million)
in the 2022 fiscal year.
|
● |
Overseas schools. Our revenue from overseas schools increased
by 29.9% from RMB502.6 million in the 2021 fiscal year to RMB652.8 million (US$94.8 million) in the 2022 fiscal year, primarily due
to the recovery of overseas schools’ operation from pandemic. |
|
● |
Complementary education services. Our revenue from complementary
education services increased by 1.8% from RMB625.6 million in the 2021 fiscal year to RMB636.6 million (US$92.4 million) in the 2022
fiscal year, primarily due to the recovery of overseas study counselling and career counselling business. |
|
● |
Domestic kindergartens and K-12 operation services. Our revenue
from domestic kindergartens and K-12 operation services increased by 55.2% from RMB273.5 million in the 2021 fiscal year to RMB424.6 million (US$61.6 million) in the 2022 fiscal year, primarily due to the increase in revenue generated from catering services
and expansion of procurement services. |
Cost
of revenue. Our cost of revenue increased by 4.8% from RMB1,180.3 million in the 2021 fiscal year to RMB1,237.3 million (US$179.6
million) in the 2022 fiscal year, primarily due to increased teaching activities in our overseas schools, which have recovered
from the pandemic to certain extent.
|
● |
Overseas schools. Our costs of revenue incurred by our overseas schools increased by 11.8% from RMB513.9 million in the 2021 fiscal year to RMB574.7 million (US$83.4 million) in the 2022 fiscal year, as our overseas schools have recovered from the pandemic to certain extent. |
|
● |
Complementary education services. Our cost of revenue incurred by complementary education services was relatively stable, which decreased by 2.3% from RMB382.5 million in the 2021 fiscal year to RMB373.8 million (US$54.3 million) in the 2022 fiscal year, primarily due to our effective cost control measures. |
|
● |
Domestic kindergartens and K-12 operation services. Our cost of revenue incurred by domestic kindergartens and K-12 operation services was relatively stable, which increased by 1.7% from RMB283.8 million in the 2021 fiscal year to RMB288.8 million (US$41.9 million) in the 2022 fiscal year, primarily due to our effective cost control measures. |
Gross profit. As a
result of the foregoing, our gross profit increased by 115.2% from RMB221.5 million in the 2021 fiscal year to RMB476.7 million
(US$69.2 million) in the 2022 fiscal year. Our gross margin increased from 15.8% in the 2021 fiscal year to 27.8% in the 2022 fiscal
year, primarily due to the continuous recovery of our overseas business, our overseas study counselling and career counselling businesses.
Selling,
general and administrative expenses. Our selling, general and administrative expenses increased by 0.7% from RMB535.9 million in the
2021 fiscal year to RMB539.9 million (US$78.4 million) in the 2022 fiscal year. Our selling, general and administrative expenses as a
percentage of our revenue decreased from 38.3% in the 2021 fiscal year to 31.4% in the 2022 fiscal year. The increase in selling, general
and administrative expenses was primarily due to increased management and administrative activities in our overseas schools, which
to certain extent have recovered from the pandemic.
Impairment loss on operating
lease right-of-use assets. We recorded an impairment loss on operating lease right-of-use assets of RMB8.9 million (US$1.3 million) in the 2022 fiscal year as
compared to RMB15.6 million in the 2021 fiscal year.
Impairment loss on
goodwill. We recorded an impairment loss on goodwill of RMB419.8 million (US$60.9 million) in the 2022 fiscal year as compared
to RMB84.7 million in the 2021 fiscal year. The impairment is recorded in overseas schools reportable segment and complementary education services reportable
segment in the 2022 and 2021 fiscal year, respectively.
Impairment loss on intangible
assets. We recorded an impairment loss on intangible assets of RMB113.4 million (US$16.5 million) in the 2022 fiscal year as compared
to RMB nil in the 2021 fiscal year. The impairment is recorded in overseas schools reportable segment in the 2022 fiscal year.
Operating loss. As
a result of the foregoing, we experienced an operating loss of RMB389.7 million in the 2021 fiscal year and RMB606.5 million (US$88.0 million)
in the 2022 fiscal year.
Interest expense, net.
We recorded a net interest expense of RMB127.8 million (US$18.6 million) in the 2022 fiscal year as compared to RMB169.7 million in the
2021 fiscal year. The decrease was mainly due to the fluctuation of foreign currency
exchange rates and the redemption of senior notes.
Income tax expense.
Our income tax expense was RMB58.9 million (US$8.6 million) in the 2022 fiscal year. Our effective tax rate decreased from 52.4% in the
2021 fiscal year to -5.6% in the 2022 fiscal year, primarily due to the non-deductible expense of impairment loss on goodwill and impairment loss on intangible assets.
Loss for the year.
As a result of the foregoing, we experienced a net loss from continuing operations of RMB535.1 million for the 2021 fiscal year and a
net loss of RMB703.5 million (US$102.1 million) for the 2022 fiscal year.
Adjusted net
loss. We recorded an adjusted net loss of RMB141.7 million (US$20.6 million) for the 2022 fiscal year, compared to an adjusted
net loss of RMB420.2 million for the 2021 fiscal year. See “—Non-GAAP measures.”
Year ended August 31, 2020 compared to year ended August 31,
2021
Revenue. Our revenue
from continuing operations decreased by 5.1% from RMB1,476.3 million in the 2020 fiscal year to RMB1,401.8 million in the 2021 fiscal
year.
|
● |
Overseas schools. Our revenue from overseas schools decreased
by 39.9% from RMB835.9 million in the 2020 fiscal year to RMB502.6 million in the 2021 fiscal year, primarily due to impact of the
global COVID-19 pandemic on our overseas schools, which caused temporary shutdowns of campuses and resulted in our decreased revenue
from boarding and accommodation services. |
|
● |
Complementary education services. Our revenue from complementary
education services increased by 15.8% from RMB540.4 million in the 2020 fiscal year to RMB625.6 million in the 2021 fiscal year,
primarily due to a moderate recovery of our camp and domestic tour business and after school all-round education services as compared
to the previous fiscal year. |
|
● |
Domestic kindergartens and K-12 operation services. Our revenue
from domestic kindergartens and K-12 operation services increased by 173.4% from RMB100.0 million in the 2020 fiscal year to RMB273.5
million in the 2021 fiscal year, primarily due to increase in revenue from catering services. |
Cost of revenue. Our
cost of revenue increased by 11.4% from RMB1,059.5 million in the 2020 fiscal year to RMB1,180.3 million in the 2021 fiscal year, primarily
due to the growing size of our catering services.
|
● |
Overseas schools. Our costs of revenue incurred by our overseas
schools decreased by 12.7% from RMB588.8 million in the 2020 fiscal year to RMB513.9 million in the 2021 fiscal year, primarily due
to our effective cost control measures. |
|
● |
Complementary education services. Our cost of revenue incurred
by complementary education services increased by 13.1% from RMB338.4 million in the 2020 fiscal year to RMB382.5 million in the 2021
fiscal year, which was largely in line with the growth of our complementary education services in this fiscal year. |
|
● |
Domestic kindergartens and K-12 operation services. Our cost
of revenue incurred by domestic kindergartens and K-12 operation services increased by 114.5% from RMB132.3 million in the 2020 fiscal
year to RMB283.8 million in the 2021 fiscal year, primarily due to an increase in the provision of catering services. |
Gross profit. As a
result of the foregoing, our gross profit decreased by 46.9% from RMB416.8 million in the 2020 fiscal year to RMB221.5 million in the
2021 fiscal year. Our gross margin decreased from 28.2% in the 2020 fiscal year to 15.8% in the 2021 fiscal year, primarily due to a
decrease in the gross margin of our overseas school business caused by the still ongoing COVID-19 pandemic.
Selling, general and administrative
expenses. Our selling, general and administrative expenses decreased by 4.7% from RMB562.6 million in the 2020 fiscal year to RMB535.9
million in the 2021 fiscal year. Our selling, general and administrative expenses as a percentage of our revenue increased slightly from
38.1% in the 2020 fiscal year to 38.2% in the 2021 fiscal year. The decrease in selling, general and administrative expenses was primarily
due to decreased managerial and administrative activities in our overseas schools caused by the COVID-19 pandemic.
Impairment loss on operating
lease right-of-use assets. We recorded an impairment loss on operating lease right-of-use assets of RMB15.6 million in the 2021 fiscal
year as compared to RMB12.8 million in the 2020 fiscal year. The increase was primarily due to the increased adverse impact from the
COVID-19 pandemic overseas.
Impairment loss on goodwill.
We recorded an impairment loss on goodwill of RMB84.7 million in the 2021 fiscal year as compared to nil in the 2020 fiscal year.
The impairment loss on goodwill in 2021 fiscal year was related to our career counseling business that was adversely affected by the
COVID-19 pandemic and after-school program business that was adversely affected by the recently promulgated regulations on after-school
tutoring in China.
Operating loss. As
a result of the foregoing, we experienced an operating loss of RMB123.8 million in the 2020 fiscal year and RMB389.7 million in the 2021
fiscal year.
Interest expense, net.
We recorded a net interest expense of RMB169.7 million in the 2021 fiscal year as compared to RMB162.9 million in the 2020 fiscal year.
Income tax expense.
Our income tax expense was RMB94.2 million in the 2021 fiscal year. Our effective tax rate increased from 22.8% in the 2020 fiscal year
to 52.4% in the 2021 fiscal year, primarily due to the increase of undeductible expenses and impairment loss on goodwill.
Loss for the year.
As a result of the foregoing, we experienced a net loss from continuing operations of RMB307.3 million for the 2020 fiscal year and a
net loss of RMB535.1 million for the 2021 fiscal year.
Adjusted net loss.
We recorded an adjusted net loss of RMB420.2 million for the 2021 fiscal year, compared to an adjusted net loss of RMB283.6 million for
the 2020 fiscal year. See “—Non-GAAP measures.”
B. Liquidity and Capital Resources
Historically, we have financed our operations primarily through cash
generated from our operating activities and proceeds from our financing activities. As of August 31, 2020, 2021 and 2022, we had RMB2,011.9
million, RMB1,515.2 million and RMB857.8 million (US$124.5 million), respectively, in cash and cash equivalents and restricted cash for
our continuing operations. Approximately 53.2% of our cash and cash equivalents and restricted cash as of August 31, 2022 for our continuing
operations were held in China. Our cash primarily consists of cash on hand and interest-bearing financial instruments which are unrestricted
as to withdrawal or use. We intend to finance our future working capital requirements and capital expenditures primarily from cash generated
from operating activities, and to a lesser extent, from debt and equity financing activities.
Although we combine the results
of the VIEs and their respective subsidiaries, we do not have direct access to the cash and cash equivalents or future earnings of the
VIEs or their respective subsidiaries. However, a portion of the cash balances of the VIEs and their respective subsidiaries will be paid
to us pursuant to our contractual arrangements with the VIEs and their respective subsidiaries. For restrictions and limitations on liquidity
and capital resources as a result of our corporate structure, see “—Holding Company Structure.”
We have not encountered any
difficulties in meeting our cash obligations to date. When considering our liquidity position and our future capital resources and needs,
we take into account price controls set by local governments that may affect the tuition and fees we are able to charge to students in
our schools, annual enrollment numbers approved for our schools, the economic benefits we have received from our subsidiaries and affiliated
entities attributable to the provision of services to these entities and the economic benefits we may receive from our subsidiaries and
affiliated entities directly through payments under our exclusive management services and business cooperation agreement. We believe
that our current cash and cash equivalents and anticipated cash flow from operations, will be sufficient to meet our anticipated cash
needs for longer than the next twelve months.
The following table sets
forth a condensed summary of our cash flows for both continuing operations and discontinued operations for the periods indicated.
| |
Year Ended August 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
RMB | | |
RMB | | |
US$ | |
| |
(in thousands) | |
Net cash generated from operating activities | |
| 491,227 | | |
| 698,808 | | |
| 47,173 | | |
| 6,848 | |
Net cash generated from/(used in) investing
activities | |
| 72,567 | | |
| (3,079,036 | ) | |
| (836,769 | ) | |
| (121,465 | ) |
Net cash generated from/(used in) financing
activities | |
| 675,703 | | |
| (446,534 | ) | |
| 101,383 | | |
| 14,717 | |
Net increase/(decrease) in cash and cash equivalents, and restricted cash | |
| 1,239,497 | | |
| (2,826,762 | ) | |
| (688,213 | ) | |
| (99,900 | ) |
Cash and cash equivalents, and restricted cash at beginning of the year | |
| 3,265,014 | | |
| 4,423,937 | | |
| 1,515,163 | | |
| 219,939 | |
Effect of exchange rate change | |
| (80,574 | ) | |
| (82,012 | ) | |
| 30,834 | | |
| 4,476 | |
Cash and cash equivalents, and restricted cash at end of the year | |
| 4,423,937 | | |
| 1,515,163 | | |
| 857,784 | | |
| 124,515 | |
Operating activities
We generate cash from operating
activities primarily from tuition and fees for our schools and fees for our complementary education services, all of which are typically
paid in advance before the respective services are rendered. Tuition and fees for schools and fees for our complementary education services
are initially recorded under contract liabilities. We recognize such amounts received as revenue proportionately over the relevant period
in which the students attend the applicable programs.
For the 2022 fiscal year,
we had net cash generated from operating activities of RMB47.2 million (US$6.8 million). This amount represents our net loss of RMB703.5
million (US$102.1 million), adjusted primarily for (1) noncash lease expenses of RMB132.4 million (US$19.2 million), (2) depreciation
of RMB98.1 million (US$14.2 million), (3) share of equity in loss of unconsolidated affiliates of RMB39.7 million (US$5.8 million), (4)
impairment loss on goodwill of RMB419.8 million (US$60.9 million), (5) impairment loss on intangible assets of RMB113.4 million (US$16.5
million) and (6) changes in working capital. Adjustment for changes in working capital primarily consisted of (1) an increase of RMB114.8
million (US$16.7 million) in contract liabilities, (2) an increase of RMB86.5 million (US$12.6 million) in the amounts due to related
parties, (3) an increase of RMB74.9 million (US$10.9 million) in accrued expenses and other current liabilities, partially offset by a
decrease of other assets and liabilities in RMB132.1 million (US$19.2 million) and a decrease of operating lease liabilities in RMB113.6
million (US$16.5 million).
For the 2021 fiscal year,
we had net cash generated from operating activities of RMB698.8 million. This amount represents our net loss of RMB165.8 million, adjusted
primarily for (1) depreciation of RMB188.8 million, (2) noncash lease expenses of RMB257.2 million, (3) impairment loss on goodwill of
RMB84.7 million, (4) loss on deconsolidation of Affected Entities of RMB261.3 million, and (4) changes in working capital. Adjustment
for changes in working capital primarily consisted of (1) an increase of RMB220.3 million in accrued expenses and other current liabilities
and (2) an increase of RMB162.8 million in contract liabilities, partially offset by a decrease of lease liabilities in RMB213.8 million.
For the 2020 fiscal year,
we had net cash generated from operating activities of RMB491.2 million. This amount represents our net income of RMB164.2 million, adjusted
primarily for (1) depreciation of RMB153.9 million, (2) noncash lease expenses of RMB142.5 million, (3) impairment loss on goodwill of
RMB68.7 million, (4) amortization of intangible assets of RMB41.4 million, and (4) changes in working capital. Adjustment for changes
in working capital primarily consisted of (1) an increase of RMB109.5 million in lease liabilities and (2) an increase of RMB25.2 million
in contract liabilities.
Investing activities
For the 2022 fiscal year,
we had net cash used in investing activities of RMB836.8 million (US$121.5 million), primarily attributable to (1) purchase of short-term
investments of RMB2,337.0 million (US$339.2 million), (2) additions of property and equipment and intangible assets of RMB89.6 million
(US$13.0 million), partially offset by proceeds from redemption of short-term investments upon maturity of RMB1,536.5 million (US$223.0
million) and proceeds from loan receivable of RMB55.4 million (US$8.0 million).
For the 2021 fiscal year,
we had net cash used in investing activities of RMB3,079.0 million, primarily attributable to (1) purchase of short-term investments
of RMB3,892.7 million, (2) additions of property and equipment and intangible assets of RMB158.7 million and net cash outflow of RMB2,912.3
million from loss of control of Affected Entities, partially offset by proceeds from redemption of short-term investments upon maturity
of RMB3,905.7 million.
For the 2020 fiscal year,
we had net cash generated from investing activities of RMB72.6 million, primarily attributable to proceeds from redemption of short-term
investments upon maturity of RMB2,390.0 million, partially offset by (1) purchase of short-term investments of RMB2,156.6 million, (2)
additions of property and equipment and intangible assets of RMB 149.8 million.
Financing activities
For the 2022 fiscal year,
we had net cash used in financing activities of RMB101.4 million (US$14.7 million), representing (1) dividend payment to shareholders
of RMB27.5 million (US$4.0 million), (2) repurchase of ordinary shares of RMB9.2 million (US$1.3 million), (3) repurchase of senior notes
of RMB1,908.2 million (US$277.0 million) and (4) repayment of bank loans of RMB1,221.8 million (US$177.4 million), partially offset by
proceeds from bank loan of RMB629.0 million (US$91.3 million) and proceeds from promissory note of RMB877.5 million (US$127.4 million).
For the 2021 fiscal year,
we had net cash used in financing activities of RMB446.5 million, representing (1) dividend payment to shareholders of RMB92.6 million,
(2) repurchase of ordinary shares of RMB24.6 million, (3) repurchase of senior notes of RMB80.2 million and (4) repayment of bank loans
of RMB1,228.6 million, (4) payment for acquisition of Chengdu Yinzhe and Linstitute of RMB22.6 million and RMB12.2 million, partially
offset by proceeds from bank loan of RMB1,047.2 million.
For the 2020 fiscal year,
we had net cash generated from financing activities of RMB675.7 million, representing proceeds from bank loan of RMB1,016.2 million,
partially offset by (1) dividend payment to shareholders of RMB184.2 million, (2) repurchase of ordinary shares of RMB56.1 million and
(3) repayment of bank loans of RMB50.0 million.
For the translations of our
net proceeds from our initial public offering and follow-on offering as well as proceeds from issuance of senior notes, we used the foreign
exchange rates on the dates of closing of the initial public offering, follow-on offering and issuance of senior notes, respectively.
Capital Expenditures
We incurred capital expenditures of RMB149.8 million, RMB158.7 million
and RMB89.6 million (US$13.0 million) in the 2020, 2021 and 2022 fiscal years, respectively, primarily in connection with the construction,
maintenance and renovation of school facilities and purchase of educational equipment. We intend to fund our future capital expenditures
with our existing cash balance, proceeds from our offering and other financing alternatives. We will continue to incur capital expenditures
to support the growth of our business.
Holding Company Structure
We are a holding company
with no material operations of our own. We conduct our operations primarily through our subsidiaries and affiliated entities in China,
the United Kingdom, the United States and Canada. As a result, our ability to pay dividends depends upon dividends paid by these subsidiaries.
If our PRC subsidiaries or any newly formed subsidiaries incur any debt in the future, the instruments governing their debt may restrict
their ability to pay dividends to us. Our PRC subsidiaries are permitted to pay dividends to us only out of their retained earnings,
if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and affiliated
entities is required to set aside at least 10.0% of its after-tax profits each year, if any, to fund a statutory surplus reserve until
such reserve reaches 50.0% of its registered capital. In addition, each of our PRC subsidiaries may allocate a portion of its after-tax
profits based on PRC accounting standards to enterprise expansion fund and staff bonus and welfare fund at its discretion. Each of the
VIEs may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion.
Although the statutory surplus reserves can be used to increase the registered capital and eliminate future losses in excess of retained
earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. Furthermore,
at the end of each fiscal year, each of our schools that are private school in China is required to allocate a certain amount to its
development fund for the construction or maintenance of the school properties or purchase or upgrade of school facilities. In particular,
our for-profit schools must allocate no less than 10% of their annual net income, and our non-profit schools must allocate no less than 10% of their annual increase in the unrestricted net assets of the school for such purposes.
For the 2020, 2021 and 2022 fiscal years, our PRC subsidiaries and affiliated entities made apportions of RMB0.6 million, RMB1.9 million
and RMB12.3 million (US$1.8 million) to the statutory surplus reserve fund, and our schools made no apportions to the development
fund. Our PRC subsidiaries have not historically paid any dividends to our offshore entities until they generate accumulated profits
and meet the requirements for statutory reserve funds.
The following table sets
forth the respective revenue contributions for our continuing operations of (1) the VIEs and (2) our subsidiaries for the periods indicated
as a percentage of total revenues.
| |
As of August 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
% of total revenues | | |
RMB | | |
% of total revenues | | |
RMB | | |
US$ | | |
% of total revenues | |
| |
(in thousands, except percentages) | |
The VIEs | |
| 239,968 | | |
| 16.3 | % | |
| 311,373 | | |
| 22.2 | % | |
| 327,573 | | |
| 47,550 | | |
| 19.1 | % |
Our subsidiaries | |
| 1,236,379 | | |
| 83.7 | % | |
| 1,090,407 | | |
| 77.8 | % | |
| 1,386,392 | | |
| 201,247 | | |
| 80.9 | % |
Total revenues | |
| 1,476,347 | | |
| 100.0 | % | |
| 1,401,780 | | |
| 100.0 | % | |
| 1,713,965 | | |
| 248,797 | | |
| 100.0 | % |
The following table sets
forth the respective asset contributions of (1) BGY Education Investment and the six newly established companies, including Foshan Meiliang
Education Technology Co., Ltd., Foshan Zhiliang Education Technology Co., Ltd., Beijing Boteng Education Consulting Co., Ltd., Foshan
Shangtai Education Technology Co., Ltd., Foshan Renliang Education Technology Co., Ltd. and Foshan Yongliang Education Technology Co.,
Ltd., collectively referred to as the “New VIE Entities”, see Note 2 to our consolidated financial statements pursuant to Item 17 of Part III of this annual report for more details, and (2) our subsidiaries as of the date indicated as a percentage of total assets.
| |
As of August 31, | |
| |
2020* | | |
2021* | | |
2022 | |
| |
RMB | | |
% of total asset | | |
RMB | | |
% of total asset | | |
RMB | | |
US$ | | |
% of total asset | |
| |
(in thousands, except percentages) | |
The VIEs | |
| 4,151,628 | | |
| 30.8 | % | |
| 765,945 | | |
| 9.0 | % | |
| 626,055 | | |
| 90,877 | | |
| 12.6 | % |
Our subsidiaries | |
| 9,312,308 | | |
| 69.2 | % | |
| 7,786,245 | | |
| 91.0 | % | |
| 4,327,076 | | |
| 628,115 | | |
| 87.4 | % |
Total asset | |
| 13,463,936 | | |
| 100.0 | % | |
| 8,552,190 | | |
| 100.0 | % | |
| 4,953,131 | | |
| 718,992 | | |
| 100.0 | % |
* |
Include restated items. See “Explanatory Note” on the cover page for more information. |
Financial Information Related to the VIEs
The following balances of
VIEs as of August 31, 2021 and 2022, were included in our consolidated balance sheet after the elimination of intercompany balances,
respectively.
| |
As of August 31, | |
| |
2021 | | |
2022 | |
| |
RMB | | |
RMB | | |
US$ | |
| |
(in thousands) | |
ASSETS | |
| | |
| | |
| |
Current assets | |
| | |
| | |
| |
Cash and cash equivalents | |
| 142,609 | | |
| 142,642 | | |
| 20,706 | |
Restricted cash, net | |
| 2,943 | | |
| 10,410 | | |
| 1,511 | |
Accounts receivable, net | |
| 2,857 | | |
| 2,416 | | |
| 351 | |
Amounts due from related parties, net | |
| 11 | | |
| 10,375 | | |
| 1,506 | |
Other receivables, deposits and other assets, net | |
| 20,011 | | |
| 16,884 | | |
| 2,451 | |
Inventories | |
| 4,761 | | |
| 5,748 | | |
| 834 | |
Amounts due from Affected Entities, net | |
| 133,092 | | |
| - | | |
| - | |
Total current assets | |
| 306,284 | | |
| 188,475 | | |
| 27,359 | |
Restricted cash - non current | |
| 1,450 | | |
| 1,650 | | |
| 240 | |
Property and equipment, net | |
| 25,034 | | |
| 46,747 | | |
| 6,786 | |
Prepayments for construction contract | |
| - | | |
| 4,025 | | |
| 584 | |
Intangible assets, net | |
| 46,253 | | |
| 44,137 | | |
| 6,407 | |
Goodwill, net | |
| 227,814 | | |
| 227,814 | | |
| 33,069 | |
Long-term investments | |
| 70,315 | | |
| 30,289 | | |
| 4,397 | |
Operating lease right-of-use assets non-current | |
| 87,752 | | |
| 76,607 | | |
| 11,120 | |
Other non-current assets, net | |
| 1,043 | | |
| 6,311 | | |
| 916 | |
Total non-current assets | |
| 459,661 | | |
| 437,580 | | |
| 63,519 | |
TOTAL ASSETS | |
| 765,945 | | |
| 626,055 | | |
| 90,878 | |
LIABILITIES | |
| | | |
| | | |
| | |
Current liabilities | |
| | | |
| | | |
| | |
Accounts payable | |
| 10,941 | | |
| 6,154 | | |
| 893 | |
Amounts due to related parties | |
| 5,641 | | |
| 294,164 | | |
| 42,701 | |
Accrued expenses and other current liabilities | |
| 13,876 | | |
| 27,790 | | |
| 4,034 | |
Income tax payable | |
| 19,091 | | |
| 19,983 | | |
| 2,901 | |
Contract liabilities | |
| 139,126 | | |
| 107,494 | | |
| 15,604 | |
Refund liabilities | |
| 10,398 | | |
| 9,458 | | |
| 1,373 | |
Operating lease liabilities | |
| 12,005 | | |
| 20,779 | | |
| 3,016 | |
Amounts due to Affected Entities | |
| 276,378 | | |
| - | | |
| - | |
Total current liabilities | |
| 487,456 | | |
| 485,822 | | |
| 70,522 | |
Deferred tax liabilities, net | |
| 9,561 | | |
| 9,551 | | |
| 1,386 | |
Operating lease liabilities - non current | |
| 83,475 | | |
| 72,464 | | |
| 10,519 | |
Non-current portion of contract liabilities | |
| 1,084 | | |
| 1,108 | | |
| 161 | |
Other non-current liabilities due to related parties | |
| 13,154 | | |
| 11,197 | | |
| 1,625 | |
Total non-current liabilities | |
| 107,274 | | |
| 94,320 | | |
| 13,691 | |
TOTAL LIABILITIES | |
| 594,730 | | |
| 580,142 | | |
| 84,213 | |
The following amounts of
VIEs for the years ended August 31, 2020, 2021 and 2022, were included in our consolidated statements of operations and consolidated
statements of cash flows after the elimination of intercompany balances.
| |
For the year ended August 31, | |
| |
2020 | | |
2021 | | |
2022 | |
| |
RMB | | |
RMB | | |
RMB | | |
US$ | |
| |
(in thousands) | |
Revenue from continuing operations of the VIEs | |
| 239,968 | | |
| 311,373 | | |
| 327,573 | | |
| 47,550 | |
Revenue from discontinued operations of Affected Entities | |
| 1,890,156 | | |
| 2,303,339 | | |
| - | | |
| - | |
Net income from continuing operations of the VIEs after elimination of intercompany transactions | |
| 59,321 | | |
| 30,335 | | |
| 45,770 | | |
| 6,644 | |
Net income from discontinued operations of Affected Entities | |
| 471,495 | | |
| 369,343 | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net cash provided by operating activities | |
| 1,534,031 | | |
| 555,679 | | |
| 36,096 | | |
| 5,240 | |
Net cash used in investing activities | |
| (47,946 | ) | |
| (2,893,644 | ) | |
| (54,677 | ) | |
| (7,937 | ) |
Net cash (used in)/provided by financing activities | |
| 48,543 | | |
| (42,844 | ) | |
| 26,281 | | |
| 3,815 | |
Net increase in cash and cash equivalents and restricted cash | |
| 1,534,628 | | |
| (2,380,809 | ) | |
| 7,700 | | |
| 1,118 | |
Cash and cash equivalents and restricted cash at beginning of year | |
| 993,183 | | |
| 2,527,811 | | |
| 147,002 | | |
| 21,339 | |
Cash and cash equivalents and restricted cash at end of year | |
| 2,527,811 | | |
| 147,002 | | |
| 154,702 | | |
| 22,457 | |
Cash Flows Through Our Organization
We are a holding company
with no business operations of our own. We conduct our operations primarily through our PRC subsidiaries and VIEs in China. As a result,
our ability to pay dividends and to service any debt we may incur and pay our operating expenses principally depends on dividends paid
by our PRC subsidiaries.
Under applicable PRC laws
and regulations, our PRC subsidiaries are permitted 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 subsidiaries are required to allocate at least 10%
of their accumulated profits each year, if any, to fund statutory reserves of up to 50% of the registered capital of the enterprise.
Statutory reserves are not distributable as cash dividends except in the event of liquidation.
If we intend to distribute
dividends, we will transfer the dividends to Time Education China Holdings Limited, or Time Education, our Hong Kong subsidiary, in accordance
with the laws and regulations of the PRC, and then Time Education will transfer the dividends to Impetus Investment Limited, our Cayman
Islands subsidiary, and further to Bright Scholar Holdings, the Cayman Islands holding company, and the dividends will be distributed
from the Bright Scholar Holdings to all shareholders respectively in proportion to the shares they hold, regardless of whether the shareholders
are U.S. investors or investors in other countries or regions. For the fiscal years of 2020, 2021 and 2022, no dividends were declared
and paid by our PRC subsidiaries.
For the 2020, 2021 and 2022
fiscal years, the subsidiaries of Bright Scholar Holdings provided interest-free loans of RMB66.5 million, nil and nil to Bright Scholar
Holdings, respectively. For the 2020, 2021 and 2022 fiscal years, the subsidiaries of Bright Scholar Holdings borrowed loans of RMB1,908.7
million, RMB49.6 million and nil from Bright Scholar Holdings, respectively. The subsidiaries of Bright Scholar Holdings repaid RMB542.3
million (US$78.7 million) to Bright Scholar Holdings in the 2022 fiscal year.
For the 2020 fiscal year,
the subsidiaries of Bright Scholar Holdings borrowed interest-free loans of RMB278.3 million from the VIEs. The VIEs repaid RMB447.6 million
to the subsidiaries of Bright Scholar Holdings in the 2021 fiscal year. For the 2020, 2021 and 2022 fiscal years, the subsidiaries of Bright
Scholar Holdings provided interest-free loans of RMB1,549.4 million, RMB107.5 million and 79.2 million (US$11.5 million) to the VIEs,
respectively. For the 2020, 2021
and 2022 fiscal years, no assets other than the above cash transactions were transferred between the subsidiaries of Bright Scholar Holdings
and the VIEs.
Off-Balance Sheet Arrangements
We have not entered into
any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered
into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in
our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated
entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research
and development services with us.
We do not currently have
any outstanding off-balance sheet arrangements or commitments. We have no plans to enter into transactions involving, or otherwise form
relationships with, unconsolidated entities or financial partnerships established for the purpose of facilitating off-balance sheet arrangements
or commitments.
Contractual Obligations
The following table sets
forth our contractual obligations as of August 31, 2022.
|
|
Payment Due by Period |
|
|
|
Total |
|
|
Less than
one year |
|
|
One to
three
years |
|
|
Three to
five years |
|
|
More than
five years |
|
|
|
RMB |
|
|
US$ |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease payment |
|
|
2,017,572 |
|
|
|
292,869 |
|
|
|
170,013 |
|
|
|
327,255 |
|
|
|
283,963 |
|
|
|
1,236,341 |
|
Short-term loans |
|
|
149,239 |
|
|
|
21,663 |
|
|
|
149,239 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Long-term loan |
|
|
633 |
|
|
|
92 |
|
|
|
- |
|
|
|
633 |
|
|
|
- |
|
|
|
- |
|
We lease certain school
and office premises under non-cancellable operating leases that expire at various dates. We incurred lease costs, including
operating lease costs, short-term lease costs and variable lease costs, of RMB255.2 million, RMB241.2 million and RMB198.4
million (US$28.8 million) in the 2020, 2021 and 2022 fiscal years, respectively.
We also have certain capital
commitments that primarily related to commitments for construction of schools and investment in an equity method investment. Total capital
commitments contracted but not yet reflected in the consolidated financial statement was RMB219.6 million (US$31.9 million)
as of August 31, 2022. All of these capital commitments will be fulfilled in the future according to the construction progress and the
investment payment schedule.
In July 2019, we issued senior
notes in the aggregate principal amount of US$300.0 million, with interests of 7.45% per annum and maturing on July 31, 2022. As of the
date of this annual report, we have redeemed all outstanding senior notes matured on July 31, 2022. Upon the completion of such redemption,
all senior notes have been cancelled and delisted from the official list of the Stock Exchange of Hong Kong Limited.
From time to time, we take
out loans with commercial banks to provide for our working capital for daily operation.
C. Research and Development, Patents and Licenses, etc.
See “Item 4. Information
on the Company—B. Business Overview—Research and Curriculum Development.”
D. Trend Information
Other than as disclosed elsewhere
in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the 2022 fiscal year that are
reasonably likely to have a material adverse effect on our revenue, income, profitability, liquidity or capital resources, or that caused
the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
E. Critical Accounting Policy and Estimates
We prepare our consolidated
financial statements in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management
to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting period. We continually evaluate these judgments and estimates
based on our own experience, knowledge and assessment of current business and other conditions.
Our expectations regarding
the future are based on available information and assumptions that we believe to be reasonable, which together form our basis for making
judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the
financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree
of judgment than others in their application.
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 combined and 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.
Impairment
of assessment of indefinite lived intangible assets and goodwill
We test indefinite
lived intangible assets and goodwill for impairment on an annual basis as of August 31, or more frequently if events or changes in circumstances
indicate that it might be impaired.
Our indefinite lived intangible
assets consist of the overseas schools’ brand name. As of August 31, 2022, the carrying value of indefinite lived intangible assets,
net of impairment, was RMB252.7 million. We test indefinite lived intangible assets for impairment by first assessing
qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If based on the qualitative assessment,
it is more likely than not that the fair value of the indefinite lived intangible asset is less than its carrying amount,
a quantitative impairment test is required. We test indefinite lived intangible assets for impairment using the relief-from-royalty method
of the income approach, which requires management to make significant estimates and assumptions, including, but not limited to, royalty
rate, discount rate, terminal growth rate and forecasts of future revenues. In our 2022 annual impairment assessment for indefinite lived
intangible assets impairment, the key assumptions used are a royalty rate of 3.5%, a discount rate of 15.5%, a terminal growth rate of
2.3% and forecast of future revenues. Based on the results of our impairment assessment performed as of August 31, 2022, it is determined
that the carrying amounts of indefinite lived intangible assets brand names associated with Overseas Schools reporting unit exceeded
their fair values and, therefore, an impairment loss was recorded. We have determined that based on the underperformance of the Overseas
Schools reporting unit, market conditions and other factors including the adverse impacts from COVID-19, it was more likely than not
that there were indications of impairment. For the year ended August 31, 2022, we recorded RMB113.4 million of impairment loss on indefinite
lived intangible assets.
In goodwill impairment
test, we have the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
test. In the qualitative assessment, we consider primary factors such as industry and market considerations, overall financial performance
of the reporting unit, and other specific information related to the operations. We will perform the quantitative impairment test if we
bypass the qualitative assessment, or based on the qualitative assessment, if it is more likely than not that the fair value of each reporting
unit is less than the carrying amount.
On September 1, 2019, we early
adopted ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating
Step two from the goodwill impairment test. Under the new guidance, if the fair value of a reporting unit exceeds its carrying amount,
goodwill is not impaired and no further testing is required. If the fair value of a reporting unit is less than the carrying value, an
impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the
loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
We estimate the fair
values of reporting units using discounted cash flow model of the income approach, which requires management to make significant estimates
and assumptions, including, but not limited to, discount rate, terminal growth rate and others used to project future cash flows, such
as forecasts of future revenues. These assumptions were affected by management’s business plans and expectations about future market
and economic conditions, including the impact of the COVID-19.
Based
on the results of our annual goodwill impairment assessment performed as of August 31, 2022 for all of reporting units, we determined
that the carrying amounts of our goodwill reporting units did not exceed their respective fair values and, therefore, no impairment existed,
except for the overseas schools reporting unit. We have
determined that based on the underperformance of the overseas schools reporting unit, market conditions and other factors including the
adverse impacts from COVID-19, it was more likely than not that there were indications of impairment. We utilized the discounted cash
flow model to estimate the fair value of the reporting units and concluded the carrying amount of overseas schools reporting unit exceeded
its fair value. Accordingly, we recorded RMB419.8 million as impairment loss on goodwill on the consolidated statement of operations for
the year ended August 31, 2022. As of August 31, 2022, the carrying value of goodwill allocated to the overseas schools reporting unit
after impairment was RMB704.7 million.
In our 2022 annual goodwill impairment assessment for the overseas
schools reporting unit, the key assumptions used are a discount rate of 15% (2021: 15%), a terminal growth rate of 2.3% (2021: 3%) and
forecasts of future revenues.
The Company continuously
monitors for events and circumstances that could negatively impact the key assumptions in determining fair value. While the Company believes
the judgments and assumptions used in the goodwill and indefinite-lived intangible impairment tests are reasonable,
different assumptions or changes in general industry, market and macro-economic conditions could change the estimated fair values and,
therefore, future impairment charges could be required, which could be material to the consolidated financial statements.
Assessment of realization of
deferred tax assets
The carrying amounts
of deferred tax assets are reduced by a valuation allowance if an assessment of their components indicates
that it is more likely than not that all or some portion of these assets will not be realized. Judgment is required in estimating
valuation allowances for deferred tax assets. The realization of a deferred tax asset ultimately depends
on the existence of sufficient taxable income in either the carryback or carryforward periods under the applicable tax law.
We regularly assess
the realizability of our deferred tax assets and related valuation allowances, or whenever events or changes in circumstances
indicate that an assessment is required. In determining the requirement for a valuation allowance, the historical and projected financial
results of the legal entity or consolidated group recording the net deferred tax asset are considered, along with any other
positive or negative evidence. Since future financial results may differ from previous estimates, periodic adjustments to our valuation
allowances may be necessary.
Lease
We determine if an
arrangement is a lease or contains a lease at lease inception. Operating leases are required to be recorded in the balance sheets as
operating lease right-of-use (“ROU”) assets and operating lease liabilities, initially measured at the present value of
the lease payments. We have elected the package of practical expedients, which allows us not to reassess (1) whether any expired or
existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of
the adoption date and (3) initial direct costs for any expired or existing leases as of the adoption date. We adopt the practical
expedient to account for each separate lease component and the non-lease components associated with that lease component as a single
lease component. Lastly, we also have elected to utilize the short-term lease recognition exemption and, for those leases that
qualified, we did not recognize operating lease ROU assets or operating lease liabilities.
We have leases that have variable
payments, including lease payments where lease payment increases are based on the percentage change in the Consumer Price Index (“CPI”).
For such leases, payment at the lease commencement date is used to measure the operating lease ROU assets and operating lease liabilities.
Lease payments that are based on a change in CPI are treated as variable lease payments and recognized in the period in which
the obligation for those payments was incurred.
As the rate implicit in the lease
is not readily determinable, we estimate our incremental borrowing rate based on the information available at the commencement date in
determining the present value of lease payments. The incremental borrowing rate is estimated in a portfolio approach to approximate the
interest rate on a collateralized basis with similar terms and payments in a similar economic environment. Lease terms may include options
to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expenses are recorded on a straight-line
basis over the lease term.
We evaluate the carrying
value of operating lease ROU assets, including the operating lease obligation of the asset group if there are indicators of
impairment and reviews the recoverability of the related asset group. If the carrying value of the asset group determined to not be
recoverable and is in excess of the estimated fair value, we record an impairment loss in the consolidated statement of operations.
Base on the impairment assessments of the operating lease ROU assets, we recorded impairment loss of RMB12.8 million, RMB15.6
million and RMB8.9 million (US$1.3 million) related to the operating lease ROU assets within the overseas schools’ reportable
segment for the years ended August 31, 2020, 2021 and 2022, respectively.
During the 2020, 2021 and 2022 fiscal years, we received COVID-19 related
rent concessions. Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, we
elected to treat COVID-19-related rental discount as variable rent and applied payable approach to COVID-19 related deferral of rent payment.
Rental discount, amounting to RMB2.7 million, RMB4.8 million and RMB4.5 million (US$0.7 million), were recognized as an offset to rent
expense within selling, general and administrative expenses and cost of revenue on our consolidated statement of operations, respectively.
Deferral payments, amounting to approximately RMB16.4 million, RMB0.5 million and nil, were recognized as concession payable within accrued
expenses and other current liabilities on our consolidated balance sheets as of August 31, 2020, 2021 and 2022, respectively.
Revenue recognition
Our revenue is derived principally from the provision of educational programs and services, complementary training course and program
fees, commission fees, and consulting service fees etc.
Income from educational programs and services
The educational programs
and services from continuing operations consist of tuition, boarding and meal service from kindergartens in the PRC and overseas schools
in the UK and the US. Each contract of educational programs
and services is accounted for as a single performance obligation which is satisfied proportionately over the service period. The program
and service fee is generally collected in advance prior to the beginning of each semester, or prior to the beginning of the education
programs, and is initially recorded as contract liabilities. Refunds are provided to students if they decide within the predetermined
period that they no longer want to take the course or enroll in the program. After the predetermined period as agreed in the contract,
if a student withdraws from the program, the program fee is no longer available for refund. We determine the transaction price to be
earned based on the tuition fee and the estimated refund liability. The refund liability is determined based on historical refund ratio
on a portfolio basis using the expected value method. Historically, we have not had material refunds in this respect.
Complementary training course and program fees
We offer various types of
after-school tutoring services and art training services, which primarily consist of after-school group class courses, personalized tutoring
courses and art training courses. The tutoring services and art training services are accounted for as a single performance obligation.
Tutoring services and art training service fees is recognized proportionately as the tutoring sessions and art training courses are delivered.
The course fees are generally collected in advance and are initially recorded as contract liability. Tuition refunds are provided to
students if they decide within the trial period that they no longer want to take the course. For certain courses, we also offer refunds
for any unutilized classes for students who withdraw from the course. We determine the transaction price to be earned based on the tutoring
services and art training service fees and the estimated refund liability. The refund liability is determined based on historical refund
ratio on a portfolio basis using the expected value method.
Commission income
We earn commission revenue
by providing referral services to overseas education universities and institutions. Students’ referral service is accounted for
as a single performance obligation. Commission income is recognized at the point in time when the referred students enrolled at the overseas
education universities or institutions’ program, with the tuition fees are paid and upon we are entitled to the commission income.
Consulting service fees
We offer study abroad consulting
and career consulting services to students/candidates who intend to study abroad and to successfully obtain target job offer respectively.
Study-abroad consulting services and career consulting services are accounted for as a single performance obligation respectively. We
charge each student/candidate an up-front prepaid fee based on the scope of consulting services requested by the student/candidate. Portion
of the prepaid services fee are refundable if the student/candidate does not successfully gain admission or obtain target job offer.
We determine the transaction price to be earned based on service fees and the estimated refund liability. The refund liability is determined
based on historical refund ratio on a portfolio basis using the expected value method. We have not experienced significant refunds in
the past or in the current year. We recognize revenue over the consulting service period.
Camp service income
We offer camp services for
students during school vacations. Camp service is accounted for as a single performance obligation. Camp service fees are generally collected
upfront and are initially recorded as contract liability. Portion of the prepaid service fees are refundable if the student requests
for refund prior to the camp starts. We determine the transaction price to be earned based on services and the estimated refund liability.
The refund liability is determined based on historical refund ratio on a portfolio basis using the expected value method. We have not
experienced significant refunds in current year. We recognize revenue over the camping period.
Operation service income
We offer operation
services which mainly consist of marketing and consulting, procurement support, human resources, finance and legal support, and
information technology support. Operation service is accounted for as a single performance obligation. We recognize the operation
service income over the service period.
Practical expedients and exemptions
We have applied the new revenue
standard requirements to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it
is expected that the effects on the financial statements of applying the revenue recognition guidance to the portfolio would not differ
materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio. Therefore, we
elect the portfolio approach in applying the new revenue guidance.
We have elected to record
the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise
would have recognized is one year or less.
Consolidation of Variable Interest Entity
Prior to the effectiveness of the Implementation
Rules, PRC laws and regulations prohibit foreign ownership of companies and institutions providing compulsory education services at primary
and middle school levels and restrict foreign investment in education services at the kindergarten and high school level. In addition,
the PRC government regulates the provision of education services through strict licensing requirements.
Accordingly, we, through our WFOE, Zhuhai Bright
Scholar, have entered into a series of contractual arrangements with BGY Education Investment, BGY Education Investment’s subsidiaries
and schools, and BGY Education Investment’s shareholders that enable the Company to (1) have power to direct the activities that
most significantly affects the economic performance of the VIE, and (2) receive the economic benefits of the VIE that could be significant
to the VIE.
In response to the Implementation Rules, a set
of supplementary agreements to the contractual arrangements were entered into among our WFOE, Zhuhai Bright Scholar, BGY Education Investment,
BGY Education Investment’s shareholders and six newly established companies in August 2021 to enable them, as well as their subsidiaries,
to entitle to the same power, rights and obligations of the contractual arrangements as BGY Education Investment. The six newly established
companies, including Foshan Meiliang Education Technology Co., Ltd., Foshan Zhiliang Education Technology Co., Ltd., Beijing Boteng Education
Consulting Co., Ltd., Foshan Shangtai Education Technology Co., Ltd., Foshan Renliang Education Technology Co., Ltd. and Foshan Yongliang
Education Technology Co., Ltd. (collectively referred to as the “New VIE Entities”), are owned by the same equity shareholders
as BGY Education Investment. On the same day, the New VIE Entities obtained the equity interest of the subsidiaries providing complementary
education services, operation services for domestic schools and for-profit kindergartens from BGY Education Investment, which were previously
held by BGY Education Investment.
Under the Implementation Rules, private schools
providing compulsory education are prohibited from being controlled through contractual arrangement and conducting transactions with their
related parties and hence, significantly affects the enforceability of the exclusive management services and business cooperation agreements
with the schools providing compulsory education, including the primary schools, middle schools and international schools. In addition,
we provided high school education services in conjunction with compulsory education under the same school entities. As such, they are
also affected by the Implementation Rules.
Furthermore, taking into account BGY Education
Investment acted as a special purpose vehicle established as a holding company to hold interest in the Affected Entities and was engaged
in investment in private schools providing compulsory education and not-for-profit kindergartens education as the school sponsor or the
holding company thereof, the contractual arrangements with BGY Education Investment were more likely than not violating the Implementation
Rules, and accordingly, we were subject to significant risks of uncertainties of the validity and enforceability of the contractual arrangements
between Zhuhai Bright Scholar, BGY Education Investment, its subsidiaries and private schools that provides compulsory education and non-for-profit
kindergartens.
As a result of the effectiveness of the Implementation
Rules, we would no longer be able to use our power under the contractual arrangements to direct the relevant activities that would most
significantly affect the economic performance of those schools and hence, has lost control on August 31, 2021 over the private schools
providing compulsory education, not-for-profit kindergartens and other enterprises within China, including BGY Education Investment. Accordingly,
the carrying amount related to the net assets of the Affected Entities were deconsolidated from the consolidated financial statements
of the Group as of August 31, 2021.
We believe we have the power to control New VIE
Entities. Under the following agreements, including voting rights proxy agreement & irrevocable power of attorney, exclusive call
option agreement, equity pledge agreement and the exclusive management services and business cooperation agreement, the shareholders of
New VIE Entities have irrevocably granted Zhuhai Bright Scholar the power to exercise all voting rights to which they are entitled. In
addition, Zhuhai Bright Scholar has the option to acquire all the equity interests in New VIE Entities to the extent permitted by the
then-effective PRC laws and regulations, for nominal consideration. Finally, Zhuhai Bright Scholar is entitled to receive service fees
for certain services to be provided to New VIE Entities. Therefore, we believe we have the power to direct the activities that most significantly
impact the economic performance of New VIE Entities under the exclusive call option agreement. We also believe that our ability to exercise
effective control, together with the exclusive management services and business cooperation agreement and the equity pledge agreement,
give us the rights to receive substantially all of the economic benefits from New VIE Entities in consideration for the services provided
by our subsidiaries in China. Accordingly, as the primary beneficiary of New VIE Entities and in accordance with U.S. GAAP, we consolidate
their financial results and assets and liabilities in our consolidated financial statements.
As advised by our PRC
legal counsel, other than the Affected Entities, our corporate structure in China complies with all existing PRC laws and
regulations with regard to the foreign ownership in all material aspects. However, our PRC legal counsel has also advised us that as there
are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, and we cannot assure you
that the PRC government would agree that our corporate structure or any of the above contractual arrangements comply with current or
future PRC laws or regulations. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and
the relevant government authorities may have broad discretion in interpreting these laws and regulations. For a detailed description
of the risks associated with our corporate structure, see “Item 3. Key Information—D. Risk Factors—Risks Related
to Our Corporate Structure” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in
China.”
Recent Accounting Pronouncements
For a summary of recent accounting
pronouncements, see Note 2 to our consolidated financial statements pursuant to Item 17 of Part III of this annual report.