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
Summary Risk Factors
Our business is subject to a number of risks,
including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition,
results of operations, cash flows, and prospects. These risks are discussed more fully below and include, but are not limited to, risks
related to:
Risks related to our business and industry
| ● | our efforts to be in compliance with the Implementation Rules
materially and adversely affecting our business, financial condition, results of operations and prospect in the future; |
| ● | our limited operating history, which makes it difficult to
predict our prospects and our business and financial performance; |
| ● | potential contractual disputes in relation to the sponsorship
in the schools that local governments may claim to have sponsor interests, which could cause us to lose control of the affected schools
if any such contractual dispute were to judicially determined against us; |
| ● | new legislation or proposed changes in the PRC regulatory
requirements regarding private education, which may cast doubt on the legality of our contractual arrangements and our revenue derived
from the running of schools pursuant to our contractual arrangements; |
| ● | our ability to execute our growth strategies, continue to
grow rapidly or manage our growth effectively, which may negatively affect our prospects and our business and financial performance; |
| ● | our ability to charge tuition and boarding fees at sufficient
levels to be profitable or increase our fee level, which may negatively affect our profitability; |
| ● | our ability to enroll and retain a sufficient number of students,
which may negatively affect our profitability; |
| ● | potential unfavorable changes in our cooperative relationships
with local governments or favorable government policy treatment, which could negatively affect our current business model and/or result
in disputes with the relevant local governments; |
| ● | our ability to obtain all required approvals, licenses and
make all required registrations for our education services and business operations, which could subject us to fines and penalties and
order to cease operation in the case of non-compliance; |
| ● | our ability to integrate businesses we acquired or plan to
acquire in the future, which may negatively affect our expansion; |
| ● | our ability to attract and retain a sufficient number of
qualified teachers and principals, which could negatively affect our business if we experience a shortage of high-quality teachers and
principals; |
| ● | our ability to maintain the market recognition of our brand
and our reputation; and |
| ● | accidents, injuries or other harm at our school premises
or otherwise arising from or in connection with our education services, which could subject us to tort liabilities. |
Risks related to our corporate structure
| ● | compliance of the contractual arrangements that establish
our corporate structure for operating our business, which could subject us to penalties if the PRC government finds that our corporate
structure and contractual arrangements does not comply with applicable PRC laws and regulations; |
| ● | uncertainties in the interpretation of newly issued rules,
regulatory actions and statements related to VIE and private schools, under which we may be unable to assert our contractual rights over
the assets of the affiliated entities; |
| ● | failure by the VIE or its shareholders to perform their obligations
under our contractual arrangements with them, which could force us to rely on legal remedies under PRC laws to enforce the contractual
arrangements, which may not be effective; |
| ● | uncertainties with respect to the interpretation and implementation
of the newly enacted Foreign Investment Law and its impact on the viability of our current corporate structure, which could require us
to take additional actions with respect to, or modify or unwind, our current contractual arrangements to the extent required by any unfavorable
interpretation or implementation; and |
| ● | actual or potential conflicts of interest of shareholders
of the VIE with us, which could cause such shareholders not to act in the best interests of our company. |
Risks related to doing business in China
| ● | changes in China’s economic, political or social conditions
or government policies, laws and regulations, which could adversely affect the education services market and harm our business; |
| ● | uncertainties with respect to the PRC legal system, which
may affect our decisions on the policies and actions to be taken to comply with PRC laws and regulations; |
| ● | any actions by the Chinese government may cause us to make
material changes to the operation of our PRC subsidiaries or the affiliated entities; |
| ● | significant uncertainties in the application and interpretation
of the Law on Promoting Private Education, the Implementation Rules and their detailed implementation rules and regulations; |
| ● | increased regulatory scrutiny focus on U.S.-listed companies
with operations in China, which could add uncertainties to our business operations, share price and reputation; and |
| ● | difficulty for overseas regulators to conduct investigations
or collect evidence within China, which could increase difficulties you face in protecting your interests. |
Risks related to the ADS
| ● | volatility of the trading price of the ADSs; and |
| ● | the sale or availability for sale of substantial amounts
of the ADSs. |
| ● | impact of our dual-class share structure on the ability of
holders of our Class A ordinary shares and ADSs to influence corporate matters, which, among other things, will limit your ability to
influence corporate matters and could discourage others from pursuing any favorable change of control transactions. |
Risks Related to Our Business and Industry
Our efforts to be in 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.
On May 14, 2021, the PRC State Council promulgated
the amended Implementation Rules for Private Education Laws (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, among others, merger, acquisition and contractual arrangements, and (3) private
schools 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.
The Implementation Rules have had significant
impacts on our business operations and our results of operations. As a result of the effectiveness of the Implementation Rules, we have
lost control over the Affected Entities as from September 1, 2021, which primarily include the middle schools providing compulsory education
and the sponsor entities within China that are affected by the Implementation Rules. Consequently, we classified the operation for the
Affected Entities as discontinued operations. We have determined that, in substance, we had ceased to recognize revenues for all activities
related to the Affected Entities and had discontinued all business activities with such entities by September 1, 2021 while continuing
to provide essential services to keep these schools in normal operations. Such discontinuation has had a material and adverse impact on
our business, financial condition and results of operations. Our ability to engage in the compulsory 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 have limited operating history, which makes
it difficult to predict our prospects and our business and financial performance.
We have a limited operating history of nine years,
with our first school established in 2012. Our limited operating history may not serve as an adequate basis for evaluating our prospect
and results of operations, including revenues, cash flows and operating margins. We have encountered, and may continue to encounter in
the future, risks, challenges and uncertainties associated with operating a private education business, such as addressing regulatory
compliance and uncertainty, engaging, training and retaining high-quality teachers, and expanding our school network. If we do not manage
these risks successfully, our operating and financial results may differ materially from our expectations and our business and financial
performance may suffer.
In addition, as some of our schools commenced
operations recently, they have not yet reached their full capacity. For newly established schools, we only admit students for the entry
classes, such as the tenth grade for high schools, but not higher grades, upon the establishment of a new school, which leads to a relatively
lower utilization rate for such schools. With our existing students progressing into the next grades in school and as we fill up new entry
classes, the utilization rates of our newly established schools will increase accordingly. We cannot assure you that we will be able to
successfully increase the utilization rate for the schools that are in the ramp-up stage, which may materially and adversely affect our
business growth and profitability.
If local governments claim to have sponsor
interests in certain of our schools, we could be subject to contractual disputes in relation to the sponsorship in those schools or the
entry into contractual arrangements over those schools.
We primarily collaborate with local governments
to establish and operate our schools. The cooperative arrangements for a total of seven schools provide that the local governments retain
ownership in the affected schools’ “ownership assets” without defining what constitutes such assets. It is possible
that “ownership assets” could be interpreted in a way to include sponsor interest, in which case, the local governments may
have a claim over the sponsor interest in the affected schools. We have obtained written statements from local governments for all of
the seven schools confirming our understanding that “ownership assets” refer to real estate and tangible assets that local
governments provided.
In addition, the school operation permits for
Yunnan Hengshui Experimental Secondary School—Xishan School and Yunnan Yuxi Hengshui Experimental High School provide that the
local governments and Long-Spring Education are co-sponsors of such schools. We have obtained written statements for Yunnan Hengshui
Experimental Secondary School—Xishan School and Yunnan Yuxi Hengshui Experimental High School from the local governments confirming
our understanding that the sponsor interests of such schools belong to Long-Spring Education. As of the date of this annual report, we
are in the process of amending these permits to designate Long-Spring Education as the sole sponsor.
Furthermore, according to the list released by
People's Government of Xishan District on March 30, 2022, Yunnan Hengshui Experimental Secondary School—Xishan School may be turned
into a public school from September 2022. As of the date of this annual report, we are in the process of communicating with the competent
authorities on such matter.
To the extent that any local government has a
claim over the sponsor interest in or control over any of our schools, we could be subject to contractual disputes. For example, the
government claimants could argue that they have de facto sponsor interest in the affected schools per our cooperative arrangements and
that the entry into the contractual arrangements in relation to the affected schools have infringed their interests. If the government
claimants successfully persuaded the court to rule in their favor, we could lose control over the affected schools and may be unable
to receive the full rights and economic benefits of any or all of those schools, in which case we would no longer be able to include
the operating results of those schools in our consolidated financial statements, which in turn would materially and adversely affect
business, results of operation and financial condition.
Uncertainties exist in relation to new legislation
or proposed changes in the PRC regulatory requirements regarding private education, which may materially and adversely affect our group
structure, our business, financial condition and results of operation
Pursuant to the Law on Promoting Private Education
of the PRC (the “Private Education Law”), last amended and becoming effective on December 29, 2018, sponsors of private
schools may choose to establish schools in China as either non-profit or for-profit schools. Sponsors are not permitted to establish for-profit
schools that provide compulsory education services, which cover grades one to nine. Sponsors of for-profit private schools are entitled
to retain the profits from their schools and the operating surplus may be allocated to the sponsors pursuant to the PRC Company Law and
other relevant laws and regulations. Sponsors of non-profit private schools are not entitled to any distribution of profits from their
schools and all revenues must be used for the operation of the schools. For further details, see “Item 4. Information on the Company—B.
Business Overview—Regulations—Regulations on Private Education in the PRC—The Law on Promoting Private Education.”
Our school sponsors have registered Hengshizhong Education Tutorial School, Xinping Long-Spring Advanced Secondary School, and Xishuangbanna
Long-Spring Experimental Secondary School as for-profit private schools and have registered Qujing Hengshui Experimental Secondary School,
Xinping Hengshui Experimental Middle School, Qiubei Long-Spring Experimental Secondary School, Wenshan Long-Spring Experimental Secondary
School, and Mengla Long-Spring Experimental Secondary School as non-profit private schools, while have not submitted classified registration
materials for the rest of our schools as for-profit or non-profit educational institutions. We cannot assure you that our current intention
to register some of our schools as non-profit educational institutions will not materially and adversely affect our business, financial
condition and results of operations. As a holding company, our ability to generate profits, pay dividends and other cash distributions
to our shareholders under the Private Education 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 wholly-owned PRC subsidiary, Yunnan WFOE, which in turn depends on the service fees paid to
Yunnan WFOE 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 Private Education Law, sponsors are not permitted to establish
for-profit schools if such schools provide compulsory education services, which cover grades one to nine. Nevertheless, during the reporting
period, compulsory education services accounted for a significant portion of our student base as well as revenue.
In addition, the Opinions on Further Strengthening
and Regulating the Administration of Education Fees (the “Opinions”), which were issued on August 17, 2020 by the MOE, the
National Development and Reform Commission, the Ministry of Finance, the State Administration of Market Regulation and the National Press
and Publication Administration, reiterate the provision from the decision that the sponsors of non-profit privately-run schools may not
obtain proceeds from the running of schools. The Opinions further provide that the sponsors of non-profit privately-run schools and non-profit
sino-foreign cooperative educators may not obtain proceeds from the running of schools such as tuition income, distributing school balances
(residual assets) or transferring proceeds from the running of schools through related-party transactions or affiliated parties or other
means. The Opinions have not specified (1) whether the contractual arrangements fall within the activities of transferring the proceeds
from the running of schools through profit privately-run schools and non-profit sino-foreign cooperative educators may not obtain proceeds
from the running of schools such as tuition income, distributing school balances (residual assets) or transferring proceeds from the running
of schools through related-party transactions or affiliated parties or other means, (2) the relevant legal consequences of engaging in
activities through contractual arrangements, or (3) the scope of proceeds from the running of schools by listing other possible income
sources such as meal and accommodation services.
We are entitled to the tuition and boarding fees
to be paid by our schools that are largely derived from the proceeds from the running of schools pursuant to our contractual arrangements.
See “Item 4. Information on the Company—C. Organizational Structure—Our Contractual Arrangements.” If any law
and regulation that may be promulgated in the future further defines the contractual arrangements, including ours, as related-party transactions
transferring proceeds from the running of schools, we may not obtain the part of the tuition and boarding fees under our contractual
arrangements that is funded by proceeds from the running of schools. As advised by our PRC legal counsel, Jingtian & Gongcheng, the
Opinions do not affect the legality of our contractual arrangements in accordance with applicable PRC laws and regulations, as the provisions
under the Opinions did not render the contractual arrangements invalid under the Civil Code of the PRC. As of the date of this annual
report, however, we have not sought declaration from the relevant government authorities as to the legality of our contractual agreements
under the Opinions, and we are not aware of any official administrative or judicial declaration on, or interpretation of, the Opinions,
especially as applied to contractual or other similar arrangements under which we operate. We are also not aware of when official administrative
or judicial declaration or interpretation on that matter will be released, if at all, and we cannot assure you that the Opinions will
not be interpreted, or further laws and regulations will not be promulgated, in a way that would affect or impair our ability to retain
the tuition and boarding fees under the contractual arrangements in the future. Our business, financial condition and results of operations
would be materially and adversely affected if we are unable to obtain any or all of the tuition and boarding fees to be paid by our schools
under the contractual arrangements.
We may not be able to execute our growth strategies,
continue to grow rapidly or manage our growth effectively.
We have experienced steady growth and expansion
since the establishment of our first secondary school in 2014. We plan to continue to expand our operations in different geographic locations
in China primarily by (1) entering into partnerships with local governments and independent third parties; (2) establishing new self-owned
schools; and (3) acquiring additional schools if there are suitable targets.
However, we may not be able to continue to grow
as we did in the past due to uncertainties involved in the process as follows:
| ● | 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 hire, retain and train qualified teachers,
and attract and retain management, administrative and marketing personnel for our existing
and new schools; |
| ● | we may be unable to optimize our student’s academic performance
as expected; |
| ● | we may be unable to adequately update our operational, administrative
and technological systems and strengthen our financial and management controls to support
our future expansion; |
| ● | we may be unable to keep strengthening our operational, administrative
and technological systems, our financial and management controls; |
| ● | the development and acquisitions of new schools may be delayed
or affected as a result of many factors, such as delays in obtaining government approvals
or licenses, and changes in applicable laws and regulations, some of which are beyond our
control; |
| ● | we may not be able to maintain and enhance our brand name and
reputation; |
| ● | we may be unable to successfully execute new growth strategies;
and |
| ● | we may be unable to successfully integrate entities we have
established or acquired into our operations. |
These risks may increase significantly as we
expand into new geographical areas. We may find it difficult to manage our financial resources, implement uniform education standard
and operational policies and maintain consistency across our network. There are no guarantees that we will be able to effectively manage
any future growth in an efficient, cost-effective and timely manner, or at all. Our growth in a relatively short period of time is not
necessarily indicative of results that we may achieve in the future. In addition, local governments and cooperative partners may
have interests which are not entirely in line with ours and may consider their own interests or the interests of other stakeholders of
schools in making cooperation decisions, and as a result, we may be unable to execute our expansion plan and growth strategies in a cost-effective
or timely manner, or at all. Any failure in our management and execution of our expansion plan may materially and adversely affect our
ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our business, financial condition
and results of operations.
These risks may increase significantly as we
expand into new geographical areas. We may find it difficult to manage our financial resources, implement uniform education standard
and operational policies and maintain consistency across our network. There are no guarantees that we will be able to effectively manage
any future growth in an efficient, cost-effective and timely manner, or at all. Our growth in a relatively short period of time is not
necessarily indicative of results that we may achieve in the future. In addition, local governments and cooperative partners may have
interests which are not entirely in line with ours and may consider their own interests or the interests of other stakeholders of schools
in making cooperation decisions, and as a result, we may be unable to execute our expansion plan and growth strategies in a cost-effective
or timely manner, or at all. Any failure in our management and execution of our expansion plan may materially and adversely affect our
ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our business, financial condition
and results of operations.
We may be unable to charge tuition and boarding
fees at sufficient levels to be profitable or increase our fee level.
Our revenues are primarily driven by our tuition
and boarding fees. For 2019, 2020 and 2021, tuition income accounted for 78.1%, 78.4% and 81.0% of our total revenues, respectively,
and our boarding fees accounted for 4.7%, 4.6% and 4.8% of our total revenues, respectively, for the same periods. Subject to applicable
regulatory requirements, we determine our tuition and boarding fee rates based on many factors, including market supply and demands for
our education, our cost of operations, the quality of education services we provide, the geographic area we operate in, and general economic
conditions of the PRC. Although we have been able to increase the tuition and boarding fees we charge our students at certain schools
in the past, we cannot guarantee that we will be able to maintain or increase our tuition in the future without adversely affecting the
demand for our education services. Our competitive advantage might be adversely affected if we fail to implement the optimal pricing
strategy to maintain our profitability, which could adversely affect our student enrollments and consequently our revenues and cash flow.
As part of our cooperation with local
governments, we admit a certain number of local students on behalf of the government as publicly-sponsored students. These students
pay us tuition typically at the level of public schools, which are usually lower than the normal tuition we charge, and under our
cooperative arrangements with local governments for certain of our schools, we may receive government subsidies to make up for the
tuition difference. As of December 31, 2019, 2020 and 2021, the number of publicly-sponsored students in our schools was 4,607,
6,755 and 7,993, respectively, accounting for 33.7%, 39.2% and 42.8% of our total students for our continuing operations as of the
same dates. We have limited discretion in increasing the tuition for publicly-sponsored students, and the government subsidies have
an upper limit which we may gradually use up over a number of years. We intend to re-negotiate with the local governments to obtain
additional government subsidies to cover the tuition difference for the publicly-sponsored students after we use up the upper limit
or our cooperative arrangements with local governments expire. If our re-negotiation efforts fail, or if we cannot collect the
outstanding amount of government subsidies on time, we would be unable to make up for the price difference for publicly-sponsored
students, which would materially and adversely affect our profitability.
The tuition and boarding fees we charge are subject
to regulatory restrictions. While we are not required to obtain pre-approval from relevant authorities before raising our tuition and
boarding fees in Yunnan province, China where most of our schools are located, we are generally required to file and record our price
increase with local governments, who in turn still maintain certain level of control and oversight of our operation. We might also be
inspected by relevant pricing authorities in the future, which could result in negative adjustments in our tuition and boarding fees
and material disruption of our operations.
Furthermore, the tuition we may 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 local economic conditions. Any significant deterioration in these factors could have a material adverse effect
on our ability to charge tuition at levels for us to remain profitable.
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 and brand recognition as
a leading school operator; |
| ● | expand our school network and geographic reach; |
| ● | effectively market our schools and programs to a broader base
of prospective students; |
| ● | manage our growth while maintaining consistency of our teaching
quality; |
| ● | maintain cooperative relationships with local governments;
and |
| ● | respond to increasing competition in the market. |
In addition, local and provincial government
authorities may impose restrictions on the number of students we can enroll. 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.
Our ability to maintain sufficient cash to
fund our operations depends on our financing activities.
Our ability to maintain sufficient cash to fund
our operations depends on our financing activities. In April 2019, August 2020 and November 2021, we entered into sale and leaseback
arrangements with certain financing leasing companies for net financing proceeds of RMB28.7 million, RMB93.5 million and RMB50.0 million
(US$7.8 million), respectively. Under the sale and leaseback arrangements, Yunnan WFOE, Long-Spring Education, Yunnan Long-Spring Logistics
Service Co., Ltd. and ten of our schools, or collectively the lessees, sold certain equipment, including computers, projectors and printers,
to the lessors. Concurrent with the sale of the leased equipment, the lessees lease back all of the leased equipment sold to the lessor
for a lease term of two or three years. We consider the substance of the transaction to be debt financing in nature and no gain or loss
is recognized upon the sale of these assets. If the lessees fail to make lease payments in full and timely or there be any material adverse
change in our business, the lessor has the right to immediately collect the total lease payments, request for penalty on late payment,
and/or retrieve the leased equipment. As a result, our ability to maintain sufficient cash to fund our operations could be diminished,
which may materially and adversely affect our business, financial condition and results of operations.
Any unfavorable changes in our cooperative
relationships with third parties or favorable government policy treatment may adversely affect our business.
Our asset-light business model, under which we
form mutually beneficial cooperative arrangements with third parties, including local governments and real estate developers, has allowed
us to grow rapidly and expand with light capital commitments and have more flexibility in our allocation of financial resources. Under
such arrangements, our partners contributed or leased to us land and/or school facilities, and our government partners also granted to
us favorable tax treatments or other forms of favorable government policies or support, while we contributed our expertise in operating
private schools, teachers, as well as operating expenses of the schools and capital expenditures to construct and renovate school facilities.
If our relationship with our partners deteriorates
or favorable government policies and support cease to be available, we may incur substantial amount of expenses in connection with our
infrastructure, promotion, and other matters relating to school establishment and operations, which may materially and adversely affect
our business, financial condition and results of operations. We may also be unable to form cooperative relationship with third parties
in the geographic areas we plan to enter and expand into, which would materially and adversely affect our ability to grow as quickly
as planned or maintain historical growth rates.
The cooperative arrangements for five schools
within our network have provided that the local government has the right to appoint a majority of a school’s board of supervisors,
which shall be the supreme decision-making body in school management. As of the date of this annual report, we obtained written statements
from local governments for four of such schools confirming that the school council or board of director should be the decision-making
body for such schools. To the extent any of these local governments changes their view toward our collaborative relationships and claims
to have control in these schools, we could be subject to contractual disputes with the local governments in relation to the management
of such schools.
In September 2018, we entered into certain cooperation
agreements with local governments in Inner Mongolia Autonomous Region, China, pursuant to which we provide school operation and management
services and receive service fees. See “Item 4. Information on the Company—B. Business Overview—Our Schools and Programs”
We are also required to meet certain academic performance targets pursuant to such agreements. If we fail to meet such performance targets,
we may be found in breach of the agreements and be unable to continue our cooperation with the relevant governments, which may materially
and adversely affect our relationship with the relevant governments, as well as our business, financial condition and results of operations.
We may also be unable to enter into similar cooperation agreements with third parties in the future, which may materially and adversely
affect our business, financial condition and results of operations
We may be unable to obtain all required approvals,
licenses and make all required registrations for our education services and business operations, and may be subject to fines and penalties
if the operations of our business do not comply with applicable PRC laws and regulation.
In order to conduct our business and operate our
schools in China, we are required to obtain and maintain various approvals, licenses and permits and fulfill registration and filing requirements.
For example, to establish and operate a school in the PRC, we are required to obtain a private school operation permit from the local
education bureau and register with the local civil affairs bureau to obtain a certificate of registration for a privately-run non-enterprise
unit for a non-profit school, or register with the local market supervision and administration department to obtain a business license
for a for-profit school. Such local regulatory authorities may also conduct annual inspection of our schools. We currently hold valid
private school operation permits for all of our operating schools except for Chengdu Long-Spring Tutorial School, Shaanxi Hengshi Tutorial
School and Chongqing Hengshi Tutorial School, which are still in the process of obtaining a private school operation permit and registering
with the local market supervision and administration department or the local civil affairs bureau, and Hengshizhong Education Tutorial
School for which the private school operation permit has been cancelled. For such schools which conduct business before we can obtain
a private school operation permit, we may be subject to order to cease our operation, refund the income we collected and a fine ranging
from one to five times of the income the sponsor collected. Ordos Hengshui Experimental High School is still in the process of applying
for the renewal of such permit. We cannot guarantee that all of our existing schools will be able to renew their permits, or that all
of our newly opened schools will be able to receive operation permits in a timely manner or at all, which may materially and adversely
affect our business and results of operations.
A total of 17 of our schools have not set up
their own on-site medical clinics, all of such schools are in the process of engaging third-party hospitals and/or medical clinics with
valid practice license to provide healthcare services on campus, and recruiting a sufficient number of medical care personnel. However,
we cannot assure you that we may be able to obtain all relevant practice licenses, retain third-party licensed medical care providers
or otherwise fully comply with the relevant laws and regulations relating to on-site medical clinics at all of our current locations
in a timely manner or at all, and we may be subject to orders to rectify within a specified period of time.
While we intend to obtain all requisite permits,
approvals and complete the necessary filings, renewals and registrations on a timely basis for our schools, there is no assurance that
we will be able to obtain all required permits given the significant amount of discretion the local PRC authorities may have in interpreting,
implementing and enforcing relevant rules and regulations, as well as other factors that are beyond our control and anticipation. If
we fail to receive required permits in a timely manner or obtain or renew any permits and certificates, we may be subject to fines, confiscation
of the gains derived from our non-compliant operations, the suspension of our non-compliant operations or disgorgement of our profits
to compensate for any economic loss suffered by our students or other relevant parties, which may materially and adversely affect our
business and results of operations.
We may not be able to successfully integrate
businesses we acquired or plan to acquire in the future, which may adversely affect our business growth.
We have expanded rapidly primarily through organic
growth. We have, in the past, acquired an underperforming high school and successfully turned it into a high-quality high school with
solid academic results. We may attempt to make similar acquisitions in the future. The integration of acquired schools is complicated
and time-consuming and requires significant resource commitment, standardized integration process, and adequate planning and implementation.
We may not successfully integrate the schools we acquire in a timely manner and may not effectively and efficiently manage our expansion,
which would have a material adverse effect on our financial condition and results of operations. In addition, as advised by our PRC legal
counsel, our plan to pursue further expansion through acquisitions could be affected by regulatory uncertainty in connection with the
Private Education Law and related implementation rules.
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 management services to the Affected Entities, such as consultation
for school operation, catering and accommodation, property management and maintenance, administrative management, student admission
and school branding. However, the future cooperation with the Affected Entities, if any, will be arm’s length transactions on mutually
acceptable terms, and 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 effect the cooperation
with the Affected Entities as we expect.
We may not be able to attract and retain a
sufficient number of qualified teachers and principals.
As an education service provider, our ability
to recruit and retain qualified teachers and principals is crucial to the quality of our education and services and our brand and reputation.
To ensure our successful operation and growth, we need to retain and continue to hire high-quality teachers specialized in specific subjects
that are able to teach the courses we offer or plan to offer to our students, as well as high-quality principals who are able to effectively
manage the operation of our schools. We must provide competitive compensation and benefits packages to attract and retain qualified candidates.
However, there is no guarantee that we would be able to keep recruiting teachers and principals meeting the high standards in the future,
or retain our current, high-quality teachers and principals, especially when we seek a more rapid expansion plan to meet the growing
demands for our services. Furthermore, under our business model, we may not be able to provide extensive training to our newly hired
teachers for them to familiarize with our teaching methods and to retain existing teachers who can provide such trainings. A shortage
of high-quality teachers and principals, a decrease in the quality of our teachers’ and principals’ performance, whether
actual or perceived, or a significant increase in the cost to engage or retain high-quality teachers and principals would have a material
adverse effect on our business, financial condition and results of operations.
We may not be able to maintain the market
recognition of our brand and our reputation.
Our success depends heavily on our reputation.
We might face potential difficulties in maintaining our reputation and brand recognition, which could adversely affect our student enrollments
and results of operations. Our ability to maintain our brand and reputation could be affected by many factors, some of which are beyond
our control, including: our ability to deliver satisfactory academic results, the teaching quality of our teachers, the academic quality
and achievements of our students, news report about our company, our schools or our partners, results of government inspections or compliance
with relevant regulations, unauthorized use or other infringement of our copyright and brand by third party, campus incidents, especially
safety incidents, and any kind of disruption of our education services.
We have developed our student base mainly through
word-of-mouth referrals. Our other promotion efforts include participating in education fairs organized by local governments and distributing
relevant promotional materials in connection with such fairs. However, we cannot guarantee that our promotional efforts will be enough
to maintain or enhance our reputation in the marketplace to remain competitive. Our promotional efforts may be insufficient to enhance
our brand recognition and reputation and we may incur excessive expenses for our promotions, which may adversely affect our business.
Accidents, injuries or other harm at our school
premises or otherwise arising from or in connection with our education services may adversely affect our reputation and subject us to
liabilities.
We may be subject to liabilities arising from
accidents or injuries or other harm to students or other people on our school premises, including those caused by or otherwise arising
in connection with our school facilities, employees or education services. We could also face claims alleging that we were negligent,
provided inadequate maintenance to our school facilities or supervision of our employees and therefore may be held liable for accidents
or injuries suffered by our students or other people at our schools. In addition, if any of our students or our employees or contractors
commits unlawful acts or displays seriously inappropriate behavior, we could face allegations that we failed to provide adequate security,
supervision or were otherwise responsible for his or her actions, even if such acts or behavior may occur off our school premises. As
an education services provider, we may be held liable for other accidents, injuries or other harm in relation to our education services
and students, such as commuting to our schools and extracurricular activities. We may also be subject to liabilities arising from out-of-school
activities or events which we organize or involve in. As a result, our schools may be perceived to be unsafe, which may discourage prospective
students from applying to or attending our schools.
Our schools have also outsourced the operation
of all of our meal catering services to third parties since September 2017. We cannot assure you that we will be able to maintain the
quality of food or monitor the meal preparation process to ensure its quality, that service providers adhere to food quality standards,
or that no incidents resulted from food quality will occur in the future. In the event of incidents arising from poor quality food that
result in any serious health violations or medical emergencies, such as mass food poisonings, our business and reputation could be materially
and adversely affected.
Furthermore, although we maintain certain liability
insurance, the insurance coverage may not be adequate to fully protect us from these kinds of claims and liabilities. In addition, we
may not be able to obtain liability insurance in the future at reasonable prices or at all. A liability claim against us or any of our
employees could adversely affect our reputation, student enrollment and retention, and teacher recruitment and retention. Such a claim,
even if unsuccessful, could create unfavorable publicity, incur substantial expenses for us and divert the time and resources of our
management, all of which may have a material and adverse effect on our business, prospects, financial condition and results of operations.
Failure to adequately and promptly respond
to changes in examination systems, admission standards, test materials, teaching methods and regulation changes in the PRC could render
our education services less attractive to students.
Our reputation, student enrollment, and results
of operations depend in part on our ability to prepare our students for various tests and examinations, such as Gaokao. Admission and
assessment processes undergo continuous changes, in terms of subject and skill focus, question type, examination format and the manner
in which the processes are administered. We are therefore required to continually update and enhance our curricula, course materials
and teaching methods. Any failure to respond to the changes in a timely and cost-effective manner will adversely impact our students’
academic performance and the marketability of our education services, which would have a material adverse effect on our business, financial
condition and results of operations.
Regulations and policies that decrease the weight
of scholastic competition achievements in the admissions process mandated by government authorities or adopted by schools or affect the
number of students participating in Gaokao or Zhongkao may have an impact on our student enrollments and teaching methods. For example,
the Ministry of Education of the PRC (the “MOE”), issued certain implementing opinions in January 2014 to clarify that local
educational administrative departments at all levels, public schools and private schools are not allowed to use examinations to select
their students for admission to middle schools from primary schools. As a result, we may need to adjust our teaching methods to accommodate
a student body of a potentially wide competency range. Failure to track and respond to these changes in a timely and cost-effective manner
would render our courses, services and products less attractive to students, which may materially and adversely affect our reputation
and ability to continue to attract students.
If we fail to help our students achieve their
academic goals, student and parent 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, and student and parent
satisfaction with our services may decline. In addition, we cannot guarantee that our students will be admitted to higher levels of 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.
We face intense competition in the PRC education
industry and we may fail to compete effectively.
The private education sector in China is rapidly
evolving, highly fragmented and competitive, and we expect competition in this sector to persist and intensify. We compete with public
schools and other private schools that offer similar programs in each geographic market where we operate our schools. In particular,
we face significant competition from public schools and other private schools in Yunnan province, China. Although our business model
and cooperative relationship with local governments helped us receive favorable regulatory treatments, we may fail to compete effectively
with public schools that may enjoy more substantial financial and policy support from the local governments. Additionally, our competitors
may adopt similar curriculums, school management approaches and marketing strategies, with different pricing and service packages that
may be more appealing than ours to students and parents in the relevant regions. Some of our competitors might be able to dedicate more
resources than we can to the development and improvement of their schools and respond more quickly than we can to the changes in student
demands, testing materials, admission standards, market needs and new technologies. As such, we may be required to lower our tuition
and boarding fees or increase our spending in order to maintain our competitiveness and retain or attract students and qualified teachers
or pursue new market opportunities. If we are unable to successfully compete for new students, attract and retain competent teachers
or other key personnel, maintain or increase our tuition level, enhance the quality of our education services or maintain our operations
in a cost-effective manner, our business and/or results of operations may be materially and adversely affected.
Our business may be disrupted if we lose the
services of our senior management and other key personnel.
Our continued success depends in part on the
expertise and dedication of our senior management team and other key personnel. We rely on our senior management and school administrators
for the efficient and effective operation of our schools and the execution of our business plans, which is vital for us to compete in
the education industry. We may experience changes in our senior management in the future for reasons beyond our control. We may not be
able to retain our directors, senior management, or other key management personnel, who might either join our competitors or start their
own businesses that directly compete with us. If we lose one or more of our directors, senior management, or other key management personnel,
we might not be able to hire qualified candidates to fill the gap in a timely manner and our business could be materially disrupted or
otherwise adversely affected.
Our school premises and facilities are subject
to extensive governmental approvals and compliance requirements.
The construction and usage of our school premises
requires various permits, certificates and approvals, including, for example, land use rights certificates, construction permits, public
health permits and certificates for passing fire control assessments. As of the date of this annual report, we leased six business premises
for our schools and were provided with 13 business premises by governments pursuant to our cooperative arrangements with them. For premises
we leased from or were provided for use by local governments or entities associated with local governments, the lessors or premise providers
failed to obtain the relevant land use rights certificates, construction planning approvals or construction permits, or failed to pass
the relevant environmental protection verification, fire control assessment or inspection for completion of construction, or failed to
provide us with the authorization to lease the premises. If the government authorities suspend the use of such premises or require measures
to be taken to rectify the defects or any of our lease agreements is invalidated due to the defects of such premises, or if any third
party successfully challenges our use of the affected premises, the operation of the affected schools could be interrupted and we may
need to relocate those schools, which would incur additional expenses and our business and results of operations may be materially and
adversely affected.
We have also encountered, and may in the future
encounter, problems in fulfilling the conditions precedent to the receipt of the permits, certificates and approvals for our self-built
premises. As of the date of this annual report, we built four business properties for our schools on the leased or provided premises.
For our self-built school premises which we have already put in use, the lessors or premise providers have not obtained the relevant
land use rights certificates, construction planning approval or construction permits, or passed environmental protection verification,
fire control assessment and inspection for completion of construction primarily because the lessors or premise providers failed to fulfill
the conditions precedent to completing such procedures, and we may be subject to fines and/or temporary suspension of the usage of the
affected school premises before the defects are rectified. If the lessors, premise providers or we ourselves are not able to rectify
the defects in a timely manner, or fail to obtain requisite permits, certificates or approvals for campuses and school premises we plan
to develop in the future, we may become subject to administrative fines and other penalties, which could disrupt our business and cause
us to incur additional expenses.
A significant portion of our schools are not
in compliance with fire safety regulations.
According to the PRC fire safety laws and regulations, construction
projects and decoration projects are generally required to obtain fire safety permits or complete fire safety filings except for certain
statutory exemptions. As of the date of this annual report, we leased six business premises for our schools, were provided with 13 business
premises by governments pursuant to our cooperative arrangements with them, and built four business properties for our schools on the
leased or provided premises. As of the date of this annual report, we have neither obtained the fire safety permits or written evidence
for passing the fire safety inspection nor made the requisite fire safety filings for any of our school premises, except for Yunnan Long-Spring
Foreign Language Secondary School, primarily because the lessors or premise providers failed to fulfill the condition precedent to completing
such procedures. We have, however, arranged inspections for nine of the premises by a third-party fire control assessment institution
and obtained an assessment report that eight of our school premises have met the technical requirements for the fire safety inspections.
We cannot assure you that the lessors, the premise providers or we ourselves would be able to obtain the fire safety permits, rectify
the defects or otherwise fully comply with the relevant fire safety laws and regulations at all of our current locations in a timely manner
or at all. Given the relevant lessors or premise providers have the legal obligation to obtain fire safety permits or complete fire safety
filings, we cannot assure you that such lessor or premise provider can meet the conditions precedents to obtaining such permits or completing
such filings, over which we have little control. We may be subject to orders to rectify within a specified period of time or to suspend
operations for such non-compliance. As a result, we may not be able to occupy certain of our current locations and may be ordered to relocate
our operations to other locations that comply with the relevant fire safety laws and regulations, and we cannot assure you that such alternative
locations will be available on commercially reasonable terms or at all, which could materially and adversely affect our business, results
of operations and financial conditions.
Failure to control rental costs, control the
quality, maintenance and management of the leased school premises, obtain leases at desired locations at reasonable prices or failure
to comply with the applicable PRC property laws and regulations regarding certain of our leased and owned premises could materially and
adversely affect our business.
As of the date of this annual report, we leased
six premises and have been provided with 13 premises by governments pursuant to our cooperative arrangements with a total gross floor
area of approximately 982,173 square meters for our school operations. These school premises, including the associated school buildings
and facilities, were developed and/or maintained by our landlords or the providers. Accordingly, we are not in a position to effectively
control the quality, maintenance and management of such premises, buildings and facilities. In the event that the quality of the school
premises, buildings and facilities deteriorates, or if any or all of our landlords or providers fail to properly maintain and renovate
such premises, buildings or facilities in a timely manner, or at all, the operation of our schools could be materially and adversely
affected. In addition, if any of our landlords terminates the existing lease agreements, refuses to continue to lease the premises to
our schools when such lease agreements expire, or increase rent to the level not acceptable to us, or the providers refuse to continue
to provide the premises for our use, we will be forced to relocate our schools to other locations, we may not be able to find suitable
premises for such relocation without incurring significant time and costs, or at all. If this occurs, our business, results of operations
and financial condition could be materially and adversely affected, and our students, teachers and staff may also be negatively affected
by such relocation.
We did not receive from the lessors of some of
our leased premises copies of the title certificates or obtain proof of authorization to lease or provide the premises for our use from
land providers for certain of our school premises. As of the date of this annual report, we are not aware of any actions, claims or investigations
threatened against us or our lessors or premise providers with respect to the defects in our land use interests. However, if any of our
leases or cooperative arrangements is terminated as a result of challenges by third parties or government authorities for lack of title
certificates or proof of authorization to lease, while we do not expect to be subject to any fines or penalties, we may be forced to
relocate the affected schools and incur additional expenses relating to such relocation, or we may not be able to find suitable premises
for relocation at all.
Under the applicable PRC laws and regulations,
the parties to a lease agreement are required to register and file the executed lease agreement with the relevant government authorities.
As of the date of this annual report, all the lease agreements for the leased properties that we occupy are not registered or filed.
As advised by our PRC counsel, while the failure to complete the lease registration will not affect the legal effectiveness of the lease
agreements according to PRC law, the relevant real estate administrative authorities may require the parties to the lease agreements
to complete lease registration within a prescribed period of time and the failure to do so may subject the parties to fines ranging from
RMB1,000 to RMB10,000 for each non-registered lease. While we have not been subject to any penalties or disciplinary action related to
the failure to register our lease agreements, we cannot assure you that we will not be subject to penalties or other disciplinary actions
for our past and future non-compliance. The failure to comply with the applicable PRC property laws and regulations regarding certain
of our leased premises may cause us to make relocations and be subject to fines and suspension of business, which may materially and
adversely affect our business, financial condition and results of operations.
We face uncertainties with respect to the development of regulatory
requirements on operating licenses and permits for our online education services in China.
As a supplement to conventional school programs,
we provide online education services on third-party platforms to our students on a complimentary basis. See “Item 4. Information
on the Company—B. Business Overview—Our Online Education Services.” As advised by our PRC legal counsel, Jingtian &
Gongcheng, the launch of the courses developed by us on third-party online platforms and the use of the education resources available
thereon by our students and teachers do not involve any activities in relation to the provision of basic or value-added telecommunication
services, and therefore we are not required to obtain additional approvals, licenses or permits for the online education services we currently
provide, except for those we already obtained.
However, we may be required to apply for and
obtain additional licenses or permits, or make additional registration and filings for our online education services, as the interpretation
and implementation of current PRC laws and regulations are still evolving, and new laws and regulations may also be promulgated. There
can be no assurance that once required, we will be able to obtain all the required approvals, licenses, permits and complete all necessary
filings and registrations on a timely basis for our online education services, given the significant amount of discretion the PRC authorities
may have in interpreting, implementing and enforcing relevant rules and regulations, as well as other factors beyond our control and
anticipation. If we fail to obtain required approvals, licenses and permits or complete necessary registrations and filings in a timely
manner, we may be subject to fines or suspension of our non-compliant operations, and we may be forced to cease the provision of online
education services in whole or in part, which could adversely affect our overall teaching results and appeal to students.
Our business is subject to seasonal fluctuations,
which may cause our operating results to fluctuate from quarter to quarter. This may result in volatility and adversely affect the price
of the ADSs.
We have experienced, and expect to continue to
experience, seasonal fluctuations in our results of operations, primarily due to seasonal changes in service days, student enrollments
and influence of the summer and winter breaks. We generally require students to pay tuition and boarding fees for each semester upfront
prior to the commencement of such semester, and recognize revenues for the tuition fees and boarding fees received proportionately over
relevant period of the applicable program. However, the timing of our recording of our costs and expenses do not necessarily correspond
with the timing of our recognition of revenues. Our interim results, growth rates and profitability may not be indicative of our annual
results or our future results, and our historical interim and annual results, growth rates and profitability may not be indicative of
our future performance for the corresponding periods. These fluctuations could result in volatility and adversely affect the price of
the ADSs.
Termination of our cooperative relationship
with Hebei Hengshui High School may adversely affect our business.
We have partnered with Hebei Hengshui High School,
a well-regarded benchmark of secondary schools in China, in developing a series of standardized measures and protocols for each stage
in a school’s development and for a wide variety of scenarios in school management and operation, which we require all of our schools
to consistently adhere to. We also have teachers with work experience at Hebei Hengshui High School to coach our teachers to ensure the
consistent implementation of effective teaching methods within our school network. If the cooperation is terminated by Hebei Hengshui
High School, or if any unforeseeable events cause us to terminate our cooperation with Hebei Hengshui High School, we may be required
to change the names of our schools and may be unable to recruit additional high-quality teachers laterally from Hebei Hengshui High School
and ensure our overall teaching quality and the operation of our education system could be materially and adversely affected.
Failure to adequately protect our intellectual
property could materially and adversely affect our business.
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, third parties may obtain and use our intellectual property without due authorization.
The practice of intellectual property rights enforcement action by the PRC regulatory authorities is in its early stage of development
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, there is no assurance that we will be able to enforce 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 brand name and reputation, our business, financial condition
and results of operations.
We may be subject to intellectual property
infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot assure you that our operations or any
aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual
property rights held by third parties. From time to time, we may be subject to legal proceedings and claims relating to the intellectual
property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property
rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual
property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions.
If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources
from our business and operations to defend against these claims, regardless of their merits.
Additionally, the application and interpretation
of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how
or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory
authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject
to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees
or be forced to develop alternatives of our own. As a result, our business, financial condition, results of operations and prospects
may be materially and adversely affected.
We may be involved in labor and employment
related disputes and legal claims from time to time arising out of our operations.
We may, from time to time, be involved in labor
and employment related disputes with and subject to such claims by school personnel and other employees. We cannot assure you that any
of the labor and employment related legal actions will be resolved in our favor. We may be subject to uncertainties as to the outcome
of such legal proceedings and our business operations may be disrupted. Such legal or other proceedings involving us may, among other
impacts, incur significant costs for us, divert our management and other resources, disrupt our business operations, draw negative publicity
against us or damage our reputation. As a result, our business, financial condition and results of operations may be materially and adversely
affected.
Our brand image, business and results of operations
may be adversely impacted by students and employees’ misconduct and improper activities, many of which are beyond our control.
We have limited control over the behavior of
our students, our teachers and other employees. To the extent any improper behavior is associated with our schools and education services,
our ability to protect our brand image and reputation may be limited. In addition, if any of our students or employees suffer or allege
to have suffered physical, financial or emotional harm following contact initiated in connection with our education services, we may
face civil lawsuits or other liabilities initiated by the affected student and employees, or governmental or regulatory actions against
us. In response to allegations of illegal or inappropriate activities in connection with our education services or any negative media
coverage about us, PRC governmental authorities may intervene and hold us liable for non-compliance with PRC laws and regulations concerning
the dissemination of information on the internet and subject us to administrative penalties or other sanctions, such as requiring us
to restrict or discontinue some of the education services provided by us. As a result, our business may suffer and our brand image, student
base, results of operations and financial condition may be materially and adversely affected.
We are exposed to the risk of other types of
employee fraud or other misconduct. Other types of employee misconduct include intentionally failing to comply with government regulations,
engaging in unauthorized activities and misrepresentation to our students, which could harm our reputation. It is not always possible
to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown
or unmanaged risks or losses, which could harm our business, financial condition and results of operations.
We recorded share-based compensation, and
we may grant share-based awards in the future, which may result in increased share-based compensation expense.
We recorded share-based compensation of RMB177.8
million in 2018 for our directors, officers and employees and certain external consultants for their services performed. We may grant
share-based awards pursuant to our 2021 Share Incentive Plan and other share incentive plans to be adopted in the future, which we believe
will help us attract and retain key personnel and employees. As a result, our expenses associated with share-based compensation may increase,
which may have an adverse effect on our results of operations and financial condition.
Unauthorized disclosure of personal data that
we collect and retain due to a system failure or otherwise could expose us to liabilities and adversely affect our reputation and business
We maintain records that include personal data,
such as academic and medical records, address and family information. If the security measures we use to protect personal data are ineffective
due to a system failure or other reasons, we could be liable for claims of invasion of privacy, impersonation, unauthorized purchases
or other claims. In addition, we could be held liable for the misuse of personal data, fraudulent or otherwise, by our employees, independent
consultants or third-party contractors.
We could incur significant expenses in connection
with rectifying any security breaches, settling any resulting claims and providing additional 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.
Any health pandemics, including the recent
outbreak of COVID-19, and other natural disasters and calamities, could have a material adverse effect on our business operations.
We are vulnerable to health pandemics, including
COVID-19, Ebola virus diseases, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome (SARS) and other epidemics. For example,
the recent outbreak of COVID-19 has and is continuing to spread rapidly throughout China and other parts of the world. On March 11, 2020,
the World Health Organization declared COVID-19 a global pandemic. Many businesses and social activities in China and other countries
and regions were severely disrupted, including school operations. Such disruption and the potential slowdown of China’s economy
could have a material adverse effect on our business, results of operations and financial condition. Moreover, if the outbreak persists
or escalates, we may be subject to further negative impact on our business operations. Our business operation could also be disrupted
if any of our students, teachers and other staff members has contracted or is suspected of having contracted COVID-19 or any contagious
disease or condition, since it could require them to be quarantined or our school facilities to be closed down and disinfected.
As a result of the government-mandated quarantine measures following
the COVID-19 outbreak, the spring semester of 2020 at all the secondary schools in China, including ours, was postponed, and we have resorted
to various alternative teaching methods, including live streaming, to resume basic teaching activities. See “Item 4. Information
on the Company—B. Business Overview—Our Online Education Services.” On March 31, 2020, the MOE also announced that Gaokao
would be postponed by one month until July 2020 due to the COVID-19 outbreak. We have re-opened our high schools for graduating classes
and our tutorial school programs since late March 2020 and re-opened our other classes in late April 2020. To reduce the risk of infection
and contain the virus spread, we have implemented a series of control measures, including body temperature monitoring of our students
and staff and periodical sanitization of school facilities. We have also expanded our school schedule with longer school hours and extended
the spring semester to catch up with our teaching plans. The delayed school openings and the alternative teaching activities could adversely
affect our student enrollment, our teaching results and our students’ academic performance. In addition, we also experienced a lower
than expected student enrollment in the fall semester of 2020 due to the delayed campus construction by local governments and other third
parties that we collaborate with during the COVID-19 outbreak. In 2021, we experienced higher operating costs due to increased spending
in COVID-19 related prevention and testing equipment. We paid additional subsidies for our staff working during irregular shifts to accommodate
local preventive and partial lock-down measures. In addition, compared with 2020, we were required to pay higher corporate social insurance
premiums. In February 2020, Ministry of Human Resources and Social Security, Ministry of Finance, and State Administration of Taxation
jointly announced Notice on the Exemption of the Payment of Social Insurance Premiums for Companies in China, a notice aiming to reduce
corporate social insurance burden during COVID-19 outbreak. The exemption period ended in December 2020, and therefore our cost of revenues
in 2021 slightly increased compared to 2020. All of the foregoing impacts of COVID-19 outbreak could materially and adversely affect our
business, results of operations and financial condition.
Our tutorial schools experienced greater impact
during the COVID-19 outbreak, compared with our high schools. Upon request, we made tuition refund of approximately RMB2.0 million to
students from Hengshizhong Education Tutorial School for the compelled conversion from on-site classes to online courses under the impact
of COVID-19 outbreak in January and February 2020. In 2021, we did not experience school closure due to the COVID-19 outbreak. However,
we experienced refund of approximately RMB2.0 million (US$0.3 million) for our extra-curricular services including liberal education courses
primarily including, among others, Chinese calligraphy, painting and swimming, under the impact of the COVID-19 outbreak. Furthermore,
the COVID-19 outbreak related traveling and gathering restrictions in China in 2021 and first quarter of 2022 had an adverse impact on
our student admission campaigns. Our student admission officers had to rely on higher portion of video calls and online marketing measures,
whereas the quality of student admission might be negatively affected. We cannot assure you that we will not make similar tuition refund
in the future, and our revenue may be curtailed, which could materially and adversely affect our business, results of operations and financial
condition. Along with the postponement of Gaokao in 2020, our tutorial schools experienced approximately a one-month delay of student
admission. In addition, Hengshizhong Education Tutorial School also experienced a decrease of student enrollment from 650 for the class
of 2019 to 456 for the class of 2020, which could reduce the tuition fees we may collect from such tutorial school and could undermine
the perception of our brand recognition and reputation. All of the foregoing impacts of COVID-19 outbreak could materially and adversely
affect our business, results of operations and financial condition. See “Item 5. Operating and Financial Review and Prospects—A.
Operating Results— Major Factors Affecting Our Results of Operations—COVID-19 outbreak.” We will pay close attention
to the development of the outbreak of COVID-19 and continuously evaluate its impact on our business, results of operations and financial
condition, which we believe will depend on the duration of the pandemic and the government’s responsive measures.
In addition, other natural disasters and calamities,
such as fire, floods, typhoons, earthquakes, power loss, telecommunications failures, wars, riots, terrorist attacks or similar events,
could cause severe disruption of our operations or those of our industry customers, which could materially and adversely affect our business,
results of operations and financial condition.
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. 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 of development, and as
a result insurance companies in China offer limited business-related insurance products. We do not have any business interruption insurance,
or key-man life insurance. Any business interruption, 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.
If we fail to maintain an effective system
of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.
As a public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), and the rules and regulations
of the applicable listing and corporate governance standards of the New York Stock Exchange (the “NYSE”). We expect that the
requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some
activities more difficult, time-consuming and costly and place significant strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with
our fiscal year ended December 31, 2021, we must perform system and process evaluation and testing of our internal control over financial
reporting to allow management to report on the effectiveness of our internal control over financial reporting in our Form 20-F filing
for that year, as required by Section 404 of the Sarbanes-Oxley Act. In addition, once we cease to be an “emerging growth company”
as the term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness
of our internal control over financial reporting.
In the course of auditing our consolidated financial
statements that are included elsewhere in this annual report, we and our independent registered public accounting firm identified one
material weakness in our internal control over financial reporting, in accordance with the standards established by the PCAOB.
The material weakness that has been identified
relates to our lack of sufficient number of financial reporting personnel with appropriate knowledge, experience and training of U.S.
GAAP and SEC financial reporting requirements to properly address complex U.S. GAAP accounting issues and prepare and review financial
statements and related disclosures in accordance with U.S. GAAP and reporting requirements set forth by the SEC. To remedy our identified
material weakness, we have adopted and plan to continue to adopt certain measures to improve our internal control over financial reporting,
including (1) hiring more qualified accounting personnel with extensive experience and knowledge in handling U.S. GAAP and SEC financial
reporting requirements; (2) providing regular and appropriate trainings for our accounting staff, especially trainings related to U.S.
GAAP and SEC reporting requirements; and (3) setting up performance measurement and reward plan for our accounting staff aligning with
our objective of internal control over financial reporting and our ethical value. However, the implementation of these measures may not
fully address these weakness and deficiencies in our internal control over financial reporting, and we cannot conclude that they have
been fully remedied. Our failure to correct these weakness and deficiencies or our failure to discover and address any other weakness
and deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial
reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting
could significantly hinder our ability to prevent fraud.
We cannot assure you that there will not be additional
material weaknesses or any significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain
internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of
operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent
registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial
reporting once that firm begins its Section 404 reviews, investors may lose confidence in the accuracy and completeness of our financial
reports, the market price of the ADSs could decline, and we could be subject to sanctions or investigations by the NYSE, the SEC or other
regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or
maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
See “Item 15. Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting”
and Item 15. Controls and Procedures—Internal Control Over Financial Reporting.”
We are a “controlled company”
under the Corporate Governance Rules of the NYSE, and we, as a result, can rely on exemptions from certain corporate governance requirements
that could adversely affect our public shareholders.
Mr. Shaowei Zhang, our founder, chairman and
chief executive officer, together with his spouse, Ms. Yu Wu, are able to exercise over 50% of the total voting power of our company.
Therefore, we are, and expect to continue to be a “controlled company” under the Corporate Governance Rules of the NYSE.
Under these rules a company of which more than 50% of the voting power 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 Corporate Governance Rules of the NYSE, and the requirement that our compensation committee
and nominating and corporate governance committee consist entirely of independent directors. We currently rely on the exemptions with
respect to (1) the requirement that a majority of the board of directors consist of independent directors, and (2) the requirement that
the compensation committee and the nominating and corporate governance committee consist entirely of independent directors. As a result,
you will not have the same protections afforded to shareholders of companies that are subject to all of NYSE corporate governance requirements.
Risks Related to Our Corporate Structure
If the PRC government finds that our corporate
structure and contractual arrangements does not comply with applicable PRC laws and regulations, we could be subject to severe penalties
and our business may be materially and adversely affected.
We are a Cayman Islands company and thus, we are
classified as a foreign enterprise under the PRC laws. Foreign investment in the education industry in the PRC is extensively regulated
and subject to numerous restrictions. Under the Special Administrative Measures for Foreign Investment Access (Negative List) (2021)(the
“2021 Special Administrative Measures”), foreign investors are prohibited from investing in primary and middle schools in
the PRC for students in grades one through nine. High school is also restricted industries for foreign investors, and foreign investors
are only allowed to invest in such industries in cooperative ways with domestic investors, provided that domestic investors play a dominant
role in such cooperation. Furthermore, under the Implementation Opinions of the MOE on Encouraging and Guiding the Entry of Private Capital
in the Field of Education and Promoting the Healthy Development of Private Education, which was issued by the MOE on June 18, 2012, the
foreign portion of the total investment in a Sino-foreign joint venture high school should be below 50%. According to relevant regulations,
the foreign investors invested in high schools must be foreign education institutions, with relevant educational qualification and high
quality of education. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on
Foreign Investment in Education in the PRC” for details. Accordingly, our wholly-owned subsidiary, Yunnan WFOE, in China is currently
ineligible to apply for the required education licenses and permits in China for the operation of primary and middle schools. In order
to establish the structure for operating our business in China, we entered into a series of arrangements in which our wholly-owned subsidiary,
Yunnan WFOE, receives full economic benefits from our schools. For a description of these contractual arrangements, see “Item 4.
Information on the Company—C. Organizational Structure—Our Contractual Arrangements.” We expect to continue to rely
on our contractual arrangements to operate our education business.
On July 24, 2021, the General Office of State
Council and the General Office of Central Committee of the Communist Party of China jointly promulgated the Opinions on Further Alleviating
the Burden of Homework and After-School Tutoring for Students in Compulsory Education (the “Alleviating Burden Opinion”),
which provides, among others, that (1) Academic AST Institutions are prohibited from raising funds by listing on stock markets or conducting
any capitalization activities; and (2) foreign capital is prohibited from controlling or participating in any Academic AST Institutions
through mergers and acquisitions, entrusted operation, joining franchise or variable interest entities. The Alleviating Burden Opinion
provides that any violation of the foregoing shall be rectified. The Alleviating Burden Opinion further states that the administration
and supervision over academic subjects tutoring institutions for students on grade ten to twelve shall be implemented by reference to
the relevant provisions of the Alleviating Burden Opinion. It remains uncertain as to how and to what extent the administration over
academic subjects tutoring institutions for students on grade ten to twelve will be implemented by reference of the Alleviating Burden
Opinion.
If our corporate structure and contractual arrangements
are found to be in violation of any PRC laws or regulations, or if we are found to be required but failed to obtain any of the permits
or approvals for our private education business, the relevant PRC regulatory authorities, including the MOE, which regulates the education
industry in China, the MOFCOM, which regulates the foreign investment in China, and the Ministry of Civil Affairs, which regulates the
registration of schools in China, would have broad discretion in imposing fines or punishments upon us for such violations, including:
| ● | revoking the business and operating licenses of us and/or our
affiliated entities; |
| ● | discontinuing or restricting any related-party transactions
between us and/or our affiliated entities; |
| ● | imposing fines and penalties, or imposing additional requirements
for our operations which we or our affiliated entities may not be able to comply with; |
| ● | revoking the preferential tax treatment available to us; |
| ● | requiring us to restructure the ownership and control structure
or our current schools; |
| ● | requiring us to restructure our operations in such a way as
to compel us to establish new entities, re-apply for the necessary licenses or relocate our
businesses, staff and assets; or |
| ● | restricting or prohibiting our use of the proceeds from overseas
offerings to finance our business and operations in China, particularly the expansion of
our business through strategic acquisitions. |
As of the date of this annual report, similar
ownership structure and contractual arrangements were 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 Long-Spring Education and its schools and subsidiaries that most significantly impact their economic performance,
and/or failure to receive the economic benefits from Long-Spring Education and its schools and subsidiaries, we may not be able to consolidate
Long-Spring Education and its schools and 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 Long-Spring
Education or its schools or 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, among others, merger, acquisition and contractual arrangements, and (3) private schools providing compulsory education shall
not conduct any transaction with any related party. Where any other private school conducts any transaction with any related party, it
shall follow the principles of openness, fairness and impartiality, fix the reasonable tuition and fees and regulate the decision-making,
and shall not damage 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.
These regulations may challenge the enforcement
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 Yunnan WFOE
and the affiliated entities to the extent concerning private schools offering compulsory education have been rendered not legally enforceable
since September 1, 2021. Furthermore, our contractual arrangements may not be enforceable in the PRC if the PRC government authorities
take a view that such contracts contravene 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 the affiliated entities and its 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. 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, there remains uncertainty
as to when and how the Implementation Rules will become specifically applied to our business.
Uncertainties exist with respect to the interpretation
and implementation of the newly enacted Foreign Investment Law and how it may impact the viability of our current corporate structure,
corporate governance, business, financial condition, results of operations and prospects.
On March 15, 2019, the National People’s
Congress of the PRC (the “NPC”) promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced
the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign
Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law. The Foreign Investment Law embodies an expected
PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative
efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties
still exist in relation to its interpretation and implementation, and failure to take timely and appropriate measures to cope with the
regulatory-compliance challenges could result in material and adverse effect on us. For instance, though the Foreign Investment Law does
not explicitly classify contractual arrangements as a form of foreign investment, it contains a catch-all provision under the definition
of “foreign investment”, which includes investments made by foreign investors in China through means stipulated in laws or
administrative regulations or other methods prescribed by the State Council of the PRC (the “State Council”). Therefore, it
still leaves leeway for future laws, administrative regulations or provisions promulgated by the Stale Council to provide for contractual
arrangements as a form of foreign investment, at which time it will be uncertain whether our contractual arrangements will be deemed to
be in violation of the market access requirements for foreign investment in the PRC and if yes, how our contractual arrangements should
be dealt with. In addition, if future laws, administrative regulations or provisions prescribed by the State Council mandate 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. In the worst-case scenario, we may be required to unwind our existing contractual
arrangements and/or dispose of the relevant business operations, which could have a material and adverse effect on our current corporate
structure, corporate governance, business, financial condition and results of operations.
We rely on contractual arrangements with Long-Spring
Education and its shareholders for our business operations in China, which may not be as effective as direct ownership in providing control.
We have relied and expect to continue to rely
on contractual arrangements with Long-Spring Education and its shareholders to operate our business in China. For a description of these
contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Our Contractual Arrangements.”
These contractual arrangements may not be as effective as direct equity ownership in providing us with control over our affiliate entities.
Any failure by our affiliated entities, to perform their obligations under the contractual arrangements would have a material adverse
effect on the financial position and performance of our company.
If we had direct ownership of Long-Spring Education,
we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Long-Spring Education, which
in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under
the current contractual arrangements, we rely on the performance by our affiliated entities and their shareholders or sponsors of their
obligations under the contracts to exercise control over our affiliated entities. The shareholders or sponsors of our affiliated entities
may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout
the period in which we intend to operate certain portion of our business through the contractual arrangements with Long-Spring Education.
If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations
of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system.
See “—Any failure by our affiliated entities and their shareholders or sponsors to perform their obligations under our contractual
arrangements with them would have a material and adverse effect on our business.” 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. Therefore, our contractual arrangements with Long-Spring Education and its shareholders
may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
If the imposition of government actions causes
us to lose our right to direct the activities of our affiliated entities or our right to receive substantially all the economic benefits
and residual returns from our affiliated entities 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 our affiliated entities.
Furthermore, we are a holding company incorporated
in the Cayman Islands. As a holding company with no material operations of our own, we conduct a substantial majority of our operations
through our subsidiaries established in China, the VIE, and its subsidiaries in China. We control and receive the economic benefits of
the VIE and its subsidiaries’ business operations through certain contractual arrangements. Our ADSs listed on the NYSE represents
shares of our offshore holding company instead of shares of the VIE or its subsidiaries in China. We may not be able to continue to satisfy
the applicable requirements and rules with respect to such structure. If we are unable to satisfy the NYSE criteria for maintaining our
listing, our securities could be subject to delisting.
If the PRC government determines that the
contractual arrangements constituting part of the 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 VIE, and our 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 all of its operations and operates its business in China
through its PRC subsidiaries and the affiliated entities 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 VIE 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 the 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 VIE, and our ADSs or ordinary shares
may decline in value or become worthless.
On May 14, 2021, the PRC State Council promulgated
the amended 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 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 parties. 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 September 1, 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 affiliated entities; (2) receive substantially all of the economic
benefits of the affiliated entities in consideration for the services provided by us; and (3) have an exclusive option to purchase all
of the equity interests in the affiliated entities when and to the extent permitted under PRC law. Therefore, we are able to consolidate
the financial results of the affiliated entities 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 enforcement of these contractual arrangements are uncertain
and the relevant government authorities may have broad discretion in interpreting these laws and regulations.
Any failure by our affiliated entities and
their shareholders or sponsors to perform their obligations under our contractual arrangements with them would have a material and adverse
effect on our business.
Our affiliated entities and their shareholders
or sponsors may fail to take certain actions required for our business or to follow our instructions despite their contractual obligations
to do so. In addition, there might be a risk that the shareholders of the performing parties to the contractual arrangements may raise
objections to the arrangements. 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. For example,
if the shareholders of Long-Spring Education were to refuse to transfer their equity interests in Long-Spring Education to us or our
designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith
toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
All the agreements under our contractual arrangements
are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be
interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in
the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system
could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance
as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under
PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary.
In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing
parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration
awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. Moreover,
our contractual arrangements provided that arbitrators may award remedies over the shares and/or assets of our affiliated entities in
China, injunctive relief and/or winding up of our affiliated entities, and that courts of competent jurisdictions are empowered to grant
interim remedies in support of the arbitration pending the formation of an arbitral tribunal. However, under PRC law, arbitrators have
no power to grant injunctive relief and may not directly issue a provisional or final liquidation order to protect assets or equity interest
involved in case of disputes. In addition, interim remedies or enforcement orders granted by foreign courts in the United States and
the Cayman Islands may not be recognized or enforceable in China. In the event we are unable to enforce our contractual arrangements,
or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to
exert effective control over our affiliate entities, and our ability to conduct our business may be negatively affected. See “—Risks
Related to Doing Business in China—Uncertainties with respect to the PRC legal system could have a material adverse effect on us.”
The shareholders of Long-Spring Education
may have actual or potential conflicts of interest with us and not act in the best interests of our company.
The shareholders of Long-Spring Education may
have actual or potential conflicts of interest with us. These shareholders may breach, or cause Long-Spring Education to breach, or refuse
to renew, the existing contractual arrangements we have with them and Long-Spring Education, which would have a material and adverse
effect on our ability to effectively control Long-Spring Education and receive economic benefits from it. For example, the shareholders
may be able to cause our agreements with Long-Spring Education to be performed in a manner adverse to us by, among other things, failing
to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest
arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If
we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings,
which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Contractual arrangements between our affiliated
entities and us may be subject to scrutiny by the PRC tax authorities and a finding that we or our affiliated entities 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 between us and
our affiliated entities are not conducted on an arm’s-length basis and adjust the income of our affiliated entities through the
transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in, for PRC tax purposes, increased tax
liabilities of our affiliated entities. 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 our affiliated entities 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 our knowledge, the PRC tax authorities have not 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 our affiliated entities materially increase or if they are found to be subject to additional tax obligations,
late payment fees or other penalties.
If any of our affiliated entities becomes
the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy 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 our affiliated entities and the shareholders of Long-Spring Education. As part of these arrangements,
substantially all of our education-related assets that are important to the operation of our business are held by our affiliated entities.
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 our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its
equity owner or 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 revenues and the market price of the ADSs.
We may rely on dividends paid by our PRC subsidiaries
to fund cash and financing requirements. Any limitation on the ability of our PRC subsidiaries to pay dividends to us could have a material
adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.
We are a holding company, and we may rely on
dividends to be paid by our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends
and other cash distributions to the holders of the ADSs and our ordinary shares and service any debt we may incur. If our PRC subsidiaries
incur debt on their own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other
distributions to us.
Pursuant to the Law on Promoting 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 and 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. Under
PRC laws and regulations, wholly foreign-owned enterprises in the PRC, such as Yunnan WFOE, may pay dividends only out of their accumulated
profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required
to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund
certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At the discretion of
the wholly foreign-owned enterprise, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare
and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. 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 Promoting Private Education and Implementation Rules to be promulgated, and
how such rules will impact our operation. Furthermore, if our subsidiaries or the affiliated entities in China incur debt on their own
behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any
limitation on the ability of our wholly-owned PRC subsidiaries to pay dividends or make other distributions to us could materially and
adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise
fund and conduct our business.
PRC regulation of loans and direct investment
by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC
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, 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. 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 our affiliated entities, 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 Yunnan WFOE, is limited. In addition,
on March 30, 2015, SAFE promulgated the Circular of the SAFE on Reforming the Administrative Measures of Settlement of Foreign Exchange
Capital of Foreign-invested Enterprises (the “SAFE Circular 19”), a notice regulating the conversion by a foreign-invested
company of its capital contribution in foreign currency into Renminbi. 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. In addition, 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. Violations of the SAFE Circular 19 will result in severe penalties including hefty fines. As a result, the SAFE Circular 19
may significantly limit our ability to transfer the net proceeds from our initial public offering and future overseas offering to our
operations in China through our PRC subsidiaries, which may adversely affect our ability to expand our business. On February 13, 2015,
the SAFE promulgated the Circular on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies
(the “SAFE Circular 13”), which was effective on June 1, 2015. Pursuant to the SAFE Circular 13, the registration of existing
equity is required in lieu of annual foreign exchange inspection of direct investment. The SAFE Circular 13 also grants the authority
to banks 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 overseas offering 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 from our initial
public offering and future overseas offerings and foreign currency 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.
Our revenues are all sourced 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
continues to exercise 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 certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the
future release regulations or policies regarding our industry that could adversely affect our business, financial condition and results
of operations. Changes in any of these policies, laws and regulations could adversely affect the economy in China or the market for education
services, especially for Gaokao and Zhongkao, which could harm our business. 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. 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.
While the PRC economy has experienced significant
growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. In addition, the
rate of growth has been slowing since 2012, and the impact of COVID-19 on the Chinese and global economies in 2020 is likely to be severe.
In particular, the National Bureau of Statistics of China reported a 6.8% drop and a 3.2% growth in GDP for the first and second quarters
of 2020, respectively, compared with the respective periods of 2019. Any adverse changes in economic conditions in China, in the policies
of the PRC government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of
China. Any significant slowdown in China’s economic growth may cause our potential students to delay or cancel their plans to enroll
in our schools, which in turn could reduce our revenues. The PRC government has implemented various measures to stimulate economic growth
and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may have a negative effect on
us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments
or changes in tax regulations. In addition, in the past, the PRC government has implemented certain measures, including interest rate
adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely
affect our business and results of operations. In addition, the increased global focus on social, ethical and environmental issues may
lead to China’s adoption of more stringent standards in these areas, which may adversely impact the operations of China-based companies
including us.
Furthermore, our company, the VIE and its subsidiaries,
and our investors may face uncertainty about future actions by the government of China that could significantly affect the affiliated
entities and its subsidiaries’ financial performance and operations, including the enforceability of the contractual arrangements.
As of the date of this report, neither our company nor the VIE has received or has been denied permission from Chinese authorities to
list on U.S. exchanges. However, there is no guarantee that our company or VIE 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 interest relating
to foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to evolve
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 which could limit the available legal protections.
In addition, the PRC administrative and judicial
authorities have significant discretion in interpreting, implementing or enforcing statutory rules and contractual terms, and it may
be more difficult to predict the outcome of administrative and judicial proceedings and the level of legal protection we may enjoy 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 rights, property (including intellectual
property) or tort rights. In addition, the regulatory uncertainties may be exploited through unmerited legal actions or threats in an
attempt 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.
Any actions by the Chinese government, including any decision
to intervene or influence the operations of our PRC subsidiaries or the affiliated entities or to exert control over any offering of securities
conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to the operations of our PRC
subsidiaries or the VIE, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause
the value of such securities to significantly decline or be worthless.
The Chinese 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 affiliated entities 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.
The central or local governments of China may
impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on
our part to ensure our PRC subsidiaries and the affiliated entities’ compliance with such regulations or interpretations. As such,
our PRC subsidiaries and the affiliated entities may be subject to various government actions and regulatory interference in the provinces
in which they operate. They could be subject to regulation by various political and regulatory entities, including various local and
municipal agencies and government sub-divisions. They may incur increased costs necessary to comply with existing and newly adopted laws
and regulations or penalties for any failure to comply.
Furthermore, it is uncertain when and whether
we will be required to obtain permission from the PRC government to list on U.S. exchanges in the future, and even when such permission
is obtained, whether it will be later denied or rescinded. Although we believe that our company, our PRC subsidiaries, and the VIE, are
currently not required to obtain permission from any Chinese authorities, and none of them has received any notice of denial of permission
to list on the U.S. exchange, our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations
relating to our business or industry, particularly in the event permission to list on U.S. exchanges may be later required, or withheld
or rescinded once given.
Accordingly, government actions in the future,
including any decision to intervene or influence the operations of our PRC subsidiaries or the affiliated entities at any time, or to
exert control over an offering of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make
material changes to the operations of our PRC subsidiaries or the VIE, may limit or completely hinder our ability to offer or continue
to offer securities to investors, and/or may cause the value of such securities to significantly decline or be worthless.
Based on the recent development of PRC law, there is significant
uncertainty about the application and interpretation of the Law on Promoting Private Education, the Implementation Rules and their detailed
implementation rules and regulations. We may be subject to significant limitations on our ability to engage in the private education business,
acquire private schools, or receive payments from the VIE and may otherwise be materially and adversely affected by changes in PRC laws
and regulations.
Pursuant to the Law on Promoting 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.
As a holding company, our ability to generate
profits, pay dividends and other cash distributions to our shareholders under the Law on Promoting Private Education, the Implementation
Rules and other relevant laws and regulations are affected by many factors, including whether our schools are characterized as for-profit
or non-profit schools, the profitability of our schools, and our ability to receive dividends and other distributions from our PRC subsidiary,
Yunnan WFOE, which in turn depends on the service fees paid to Yunnan WFOE from the affiliated entities. Yunnan WFOE has respectively
entered into exclusive management services and business cooperation agreements with the affiliated entities and each of the shareholders
of Long-Spring Education, pursuant to which Yunnan WFOE has the exclusive right to provide comprehensive technical and business support
services to the affiliated entities. As advised by our PRC counsel, as of the date of this annual report, except for the Affected Entities,
our right to receive the service fees from our schools and other affiliated entities did not, to our knowledge, contravene any PRC laws
and 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 and effect beginning 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 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, among others, merger, acquisition and contractual arrangements; and (3)
private schools providing compulsory education shall not conduct any transaction with any related party. Where any other private school
conducts any transaction with any related party, it shall follow 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, 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.
Therefore, a private school providing compulsory
education is prohibited from conducting transactions with its related parties. As a result, the clause or provision of the exclusive
management services and business cooperation agreements, in relation to related party transactions between a private school providing
compulsory education and Yunnan WFOE, have been rendered not legally enforceable since September 1, 2021. Since September 1, 2021, we
have ceased our transactions with the Affected Entities, to the extent practicable. However, to keep these private schools providing
compulsory education open, we continued to provide essential services without recognizing any revenues relating to such activities to
schools providing compulsory education in our discontinued operation, which are key to the normal daily operation of these schools. As
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 authority, and we are currently unable to assess, with any
certainty, the risks of penalty associated with our continued provision of such essential services. 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.
In particular, the enforcement 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—If the PRC government finds that
our corporate structure and contractual arrangements does not comply with applicable PRC laws and regulations, we could be subject to
severe penalties and our business may be materially and adversely affected.”
Recent joint statement by the SEC and the PCAOB, proposed rule
changes submitted by Nasdaq, and the HFCAA all call for additional and more stringent criteria to be applied to emerging market companies
upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments
could add uncertainties to our continued listing or future offerings of our securities in the U.S.
On April 21, 2020, the SEC Chairman Jay Clayton
and the PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated
with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized
the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in
emerging markets.
On May 20, 2020, the U.S. Senate passed the HFCAA
requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified
reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s
auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 2, 2020,
the U.S. House of Representatives approved the HFCAA. On December 18, 2020, the HFCAA was signed into law.
On March 24, 2021, the SEC adopted interim final
rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA.
On June 22, 2021, the U.S. Senate passed a bill,
the Accelerating Holding Foreign Companies Accountable Act, which, if signed into law,
would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years
to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision.
On September 22, 2021, the PCAOB adopted a final
rule implementing the HFCAA, which provides a framework for the PCAOB to determine, as contemplated under the HFCAA, whether the PCAOB
is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position
taken by one or more authorities in that jurisdiction. On December 2, 2021, the SEC adopted amendments to finalize the implementation
of disclosure and documentation measures, which require us to identify, in our annual report on Form 20-F, (1) the auditors that provided
opinions to the financial statements presented in the annual report, (2) the location where the auditors’ report was issued, and
(3) the PCAOB ID number of the audit firm or branch that performed the audit work. If the SEC determines that we have three consecutive
non-inspection years, the SEC will issue stop order to prohibit the trading of our ADSs on any U.S. stock exchange or over-the-counter
market.
On December 16, 2021, the PCAOB issued PCAOB
Rule 6100 Board Determinations Under the Holding Foreign Companies Accountable Act. The PCAOB notified the SEC that it was unable to
inspect or investigate completely registered public accounting firms headquartered in mainland China and in Hong Kong, because of the
positions taken by authorities in mainland China and Hong Kong.
According to Article 177 of the PRC Securities
Law (last amended in March 2020), no overseas securities regulator is allowed to directly conduct investigation or evidence collection
activities in China. 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 overseas regulators. Therefore, the
audit working papers of our financial statements may not be fully inspected by the PCAOB without the approval of the PRC authorities.
Our current auditor, Audit Alliance LLP, the independent
registered public accounting firm that issues the audit report included elsewhere in this annual report and is headquartered in Singapore,
is a firm registered with the PCAOB, and, as of the date of this annual report, was not included in the list of PCAOB Identified Firms
in the PCAOB Determination Report issued in December 2021. Our ability to retain an auditor subject to PCAOB inspection and investigation,
including but not limited to inspection of the audit working papers related to us, may depend on the relevant positions of U.S. and Chinese
regulators. With respect to audits of companies with operations in China, such as our company, there are uncertainties about the ability
of auditors of such companies to fully cooperate with a request by the PCAOB for audit working papers in China without the approval of
Chinese authorities.
The increased regulatory scrutiny focus on U.S.-listed
companies with operations in China could add uncertainties to our business operations, share price and reputation. The market prices
of our ordinary shares and/or other securities could be adversely affected as a result of possible negative impacts of the HFCA and other
similar rules and regulations. Furthermore, while we understand that there has been dialogue among the China Securities Regulatory Commission,
the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, and the audit reports of Audit Alliance
LLP incorporated by reference into this report are prepared by Singapore auditors who are subject to inspection and investigation by
the PCAOB, there can be no assurance that our auditor or we will be able to comply with requirements imposed by U.S. regulators in the
future and, as such, future investors may be deprived of such inspections, which could result in limitations or restrictions to our access
in the U.S. capital markets. Furthermore, trading in our securities may be prohibited under the HFCAA or the Accelerating Holding Foreign
Companies Accountable Act if the SEC subsequently determines our audit work is performed by auditors that the PCAOB is unable to inspect
or investigate completely, and as a result, U.S. national securities exchanges, such as the Nasdaq or the over-the-counter market, may
determine to delist our securities.
We have not been identified by the SEC as a commission-identified
issuer under the HFCAA as of the date of this annual report. However, the above recent developments may have added uncertainties to our
listing and we cannot assure you whether the NYSE or regulatory authorities would apply additional and more stringent criteria to us since
we are an emerging growth company and substantial all of our operations are conducting in China. Furthermore, the HFCAA, which requires
that the PCAOB be permitted to inspect the issuer’s public accounting firm within three years, may result in the delisting of our
company in the future if the PCAOB is unable to inspect our accounting firm at such future time. If, in the future, we have been identified
by the SEC for three consecutive years, or, two consecutive years if the Accelerating Holding Foreign Companies Accountable Act is signed into law, as a commission-identified issuer whose registered public accounting firm is
determined by the PCAOB that it is unable to inspect or investigate completely because of a position taken by one or more authorities
in China, the SEC may prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading
market in the United States.
If the settlement reached between the SEC
and the “big four” PRC-based accounting firms concerning the manner in which the SEC may seek access to audit working papers
from audits in China of US-listed companies is not or cannot be performed in a manner acceptable to authorities in China and the United
States, we may be unable to timely file future financial statements in compliance with the requirements of the Exchange Act in the future.
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. A first instance 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, although that proposed penalty did not take effect
pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the Chinese
accounting firms reached a settlement with the SEC whereby the proceedings were stayed. Under 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
matching those under Section 106 of the Sarbanes-Oxley Act of 2002, and would be required to abide by a detailed set of procedures with
respect to such requests, which in substance would require them to facilitate 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 deemed dismissed with prejudice at the end of four years starting from the
settlement date, which was on February 6, 2019. Despite the final ending of the proceedings, the presumption is 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, in cases where the
CSRC does not authorize production of requested documents to the SEC, the SEC will further challenge the four PRC-based accounting firms’
compliance with U.S. law. If additional challenges are imposed on the Chinese affiliates of the “big four” accounting firms,
we may be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.
In the event that the SEC restarts 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, including possible 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 our ADSs may be adversely affected.
In the past we had engaged certain Chinese affiliates
of the “big four” accounting firms as our independent registered public accounting firm. While we did not do so for the fiscal
year ended December 31, 2021, we cannot assure you that we will not engage or otherwise rely on their audits in the future. If the accounting
firm we engage 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, our financial statements could be determined not to
be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ordinary
shares from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of
our ADSs in the United States.
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 August 17, 2021, the 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’ livelihoods and
public interest in the event of damage, function loss or data leakage. In addition, relevant administration departments of each critical
industry and sector, or 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 December 28, 2021, the Cyberspace Administration of China jointly
with other 12 government authorities, issued the Measures for Cybersecurity Review (2021), which became effective on February 15, 2022,
and repealed the Cybersecurity Review Measures (2020) simultaneously. The Measures for Cybersecurity Review (2021) provide that critical
information infrastructure operators purchasing network products and services and data processors carrying out data processing activities,
which affect or may affect national security, shall apply for cybersecurity review to the cyberspace administrations in accordance with
the provisions thereunder. As of the date of this annual report, no detailed rules or implementation have been issued by any Protection
Departments and we have not been informed that we are identified as a critical information infrastructure operator by any governmental
authorities. We will closely monitor the rule-making process and will assess and determine whether we are required to apply for the cybersecurity
review.
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 at protecting the personal information rights and interests, regulating the processing of
personal information, ensuring the orderly and free flow of personal information in accordance with the law, and promoting 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 specified 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, upon leakage or illegal usage, may easily infringe the personal dignity
or harm safety of livelihood and property. Personal information handlers shall bear responsibility 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.
The opinions recently issued by the General Office of the Central
Committee of the Communist Party of China and the General Office of the State Council may subject us to additional compliance requirement
in the future.
Recently, the General Office of the Central Committee
of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down
on Illegal Securities Activities According to Law” (the “Opinions”), which were made available to the public on July
6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on
overseas listings by China-based companies. These Opinions proposed to take effective measures, such as promoting the construction of
relevant regulatory systems, to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity
and data privacy protection. The aforementioned policies and any related implementation rules to be enacted may subject us to additional
compliance requirement in the future. As the Opinions were recently issued, official guidance to act upon, and interpretation of the
Opinions, remain unclear in several respects at this time. Therefore, we cannot assure you that we will remain fully compliant with all
new regulatory requirements of the Opinions or any future implementation rules on a timely basis, or at all.
It may be difficult for overseas regulators to conduct investigations
or collect evidence within China.
Shareholder claims or regulatory investigations
that are common in jurisdictions outside China are difficult to pursue as a matter of law or practicality in China. For example, in China,
there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated
outside China. Although the 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, such cooperation with the securities regulatory
authorities in the United States or other jurisdictions may not be efficient in the absence of a mutual and practical cooperation mechanism.
Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities
regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC, and without
the consent by the Chinese securities regulatory authorities and the other competent governmental agencies, no entity or individual may
provide documents or materials related to securities business to any foreign party. While detailed interpretation of or implementation
rules under Article 177 has yet to be promulgated, the inability of an overseas securities regulator to directly conduct investigation
or evidence collection activities within China and the potential obstacles for information provision may further increase difficulties
you face in protecting your interests. See “—Risks Related to our ADSs—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 and conduct our operations in China” for risks associated with investing in us as a Cayman Islands company.
The discontinuation of any preferential tax treatment currently
available to us, in particular the tax exempt status of our schools, could materially and adversely affect our results of operations.
Prior to the Private Education Law taking effect
on December 29, 2018, private schools for which the school sponsors do not require returns are eligible to enjoy the same preferential
tax treatment as public schools according to the Implementation Rules of the Law on Promoting Private Education. Pursuant to the Private
Education Law, a non-profit private school may enjoy the same preferential tax treatments as public schools in accordance with the relevant
PRC laws and regulations. Our school sponsors have registered Hengshizhong Education Tutorial School, Xinping Long-Spring Advanced Secondary
School and Xishuangbanna Long-Spring Experimental Secondary School as for-profit private education institutions and have registered Qujing
Hengshui Experimental Secondary School, Xinping Hengshui Experimental Middle School, Qiubei Long-Spring Experimental Secondary School,
Wenshan Long-Spring Experimental Secondary School, and Mengla Long-Spring Experimental Secondary School as non-profit private schools.
We have not made decisions to register some of our schools as for-profit or non-profit schools as we are currently in the transition period
during which no registration election is required. There is a possibility that the PRC government may promulgate relevant tax regulations
that will eliminate such preferential tax treatment, or the local tax bureaus may change their policy, in each such case, we will be subject
to PRC enterprise income tax going forward. The discontinuation of any preferential tax treatment currently available to us or the determination
of any of the relevant tax authorities that any of the preferential tax treatment we have enjoyed or currently enjoy is not in compliance
with the PRC laws would cause our effective tax rate to increase, which would increase our tax expenses and reduce our net profit.
We may be subject to potential tax penalty and surcharge for
the enterprise income tax payable in PRC.
As of the date of this annual report, our nine
schools have not paid enterprise income tax for revenues generated from formal education services and three of these nine schools and
another one school have not paid enterprise income tax for revenues generated from informal education services, among which we have obtained
confirmation letters from or conducted interview with the PRC tax authorities for six of these schools to confirm that such schools are
not required to pay enterprise income tax. As of the date of this annual report, we have not obtained confirmation letters from the PRC
tax authorities for the remaining four schools, and we may be subject to additional tax liabilities if deemed payable by the relevant
PRC tax authorities. If any of our schools is deemed to have failed to pay enterprise income tax within the prescribed time limit, we
may be subject to tax penalty and related surcharges and our business, financial condition and results of operations could be materially
and adversely affected.
If we are classified as a PRC resident enterprise for PRC income
tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or the ADS holders.
Under the PRC Enterprise Income Tax Law and its
implementation rules, an enterprise established under the laws of jurisdictions outside of the PRC with its “de facto management
body” within the PRC is considered a “resident enterprise” and will be subject to PRC enterprise income tax on its global
income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises
full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise.
In 2009, the State Administration of Taxation (the “SAT”) issued a circular, known as SAT Circular 82, which provides certain
specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated
offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise
groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general
position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore
enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group
will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to
PRC enterprise income tax on its global income only if all of the following conditions are met: (1) the senior management and core management
departments in charge of daily operations are located mainly within the PRC; (2) decisions relating to the enterprise’s financial
and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (3) the enterprise’s primary
assets, accounting books, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (4) at least
50% of voting board members or senior executives habitually reside in the PRC.
We believe none of our entities outside of China
is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the
PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If
the PRC tax authorities determine that First High-School Education Group Co., Ltd. is a PRC resident enterprise for enterprise income
tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises,
including the holders of the ADSs. In addition, non-resident enterprise shareholders (including the ADS holders) may be subject to PRC
tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares at a rate of 10%, if such income is
treated as sourced from within the PRC. Furthermore, if PRC tax authorities determine that we are a PRC resident enterprise for enterprise
income tax purposes, dividends paid to our non-PRC individual shareholders (including the ADS holders) and any gain realized on the transfer
of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld
at source by us), if such gains are deemed to be from PRC sources. These rates may be reduced by an applicable tax treaty, but it is
unclear whether non-PRC shareholders of First High-School Education Group Co., Ltd. would be able to claim the benefits of any tax treaties
between their country of tax residence and the PRC in the event that First High-School Education Group Co., Ltd. is treated as a PRC
resident enterprise. Any such tax may reduce the returns on your investment in the ADSs.
We face uncertainties with respect to indirect transfer of equity
interests in PRC resident enterprises by their non-PRC holding companies.
In February 2015, the SAT issued the Bulletin
on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises or Bulletin 7. Pursuant to Bulletin
7, an “indirect transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC holding company
of a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of the underlying
PRC assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment
of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and
the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a
rate of 10% for the transfer of equity interests in a PRC resident enterprise.
On October 17, 2017, the SAT issued the Announcement
of the SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or Bulletin 37, which came into effect
on December 1, 2017 and further amended on June 15, 2018. The Bulletin 37 further clarifies the practice and procedure of the withholding
of nonresident enterprise income tax.
There is uncertainty as to the application of
Bulletin 37 or previous rules under Bulletin 7. We face uncertainties on our offshore restructuring transactions or sale of the shares
of our offshore subsidiaries, where non-resident enterprises, as the transferors, were involved. Under Bulletin 37 and Bulletin 7, our
company may be subject to filing obligations or taxes if our company is the transferor in such transactions, and may be subject to withholding
obligations if our company is the transferee in such transactions. 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.
The custodians or authorized users of our controlling non-tangible
assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.
Under the PRC law, legal documents for corporate
transactions, including agreements and contracts are executed using the chop or seal of the signing entity or with the signature of a
legal representative whose designation is registered and filed with relevant PRC market regulation administrative authorities.
In order to secure the use of our chops and seals,
we have established internal control procedures and rules for using these chops and seals. In any event that the chops and seals are
intended to be used, the responsible personnel will submit the application through our office automation system and the application will
be verified and approved by authorized employees in accordance with our internal control procedures and rules. In addition, 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 our affiliated entities or their subsidiaries. If any employee obtains, misuses or misappropriates
our chops and seals or other controlling non-tangible 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.
Restrictions on currency exchange may limit our ability to receive
and use our revenues effectively.
The PRC government imposes controls on the convertibility
of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all
of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments
from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments
of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions,
can be made in foreign currencies without prior approval of the SAFE, by complying with certain procedural requirements. Specifically,
under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries
in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities
is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment
of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of
our PRC subsidiaries and affiliated entities to pay off their respective debt in a currency other than Renminbi owed to entities outside
China, or to make other capital expenditure payments outside China in a currency other than Renminbi.
In light of the flood of capital outflows of
China in 2016 due to the weakening Renminbi, the PRC government has imposed more restrictive foreign exchange policies and stepped up
scrutiny of major outbound capital movement including overseas direct investment. More restrictions and substantial vetting process are
put in place by SAFE to regulate cross-border transactions falling under the capital account. If any of our shareholders regulated by
such policies fails to satisfy the applicable overseas direct investment filing or approval requirement timely or at all, it may be subject
to penalties from the relevant PRC authorities. The PRC government may at its discretion further restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies
to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders
of the ADSs.
Our subsidiaries and affiliated entities in China are subject
to restrictions on making dividends and other payments to us.
We are a holding company and rely principally
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 Long-Spring Education, in turn depends on the service fees paid by the affiliated entities. 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 Promoting 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 and 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 specific Implementation Rules being promulgated by the State Council and
other relevant regulations promulgated by other local and regional governments, at the end of each fiscal year, each of our schools
that are private schools in China is required to allocate a certain amount to its development fund for the construction or maintenance
of the school properties or purchase or upgrade of school facilities. In particular, our schools that require reasonable returns must
allocate no less than 25.0% of their annual net income, and our schools that do not require reasonable returns must allocate no less
than 25.0% of their annual increase in the net assets of the school for such purposes. 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 Promoting Private Education and Implementation Rules to be promulgated, and how such rules will
impact our operation. Furthermore, if our subsidiaries or the affiliated entities in China incur debt on their own behalf in the future,
the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. 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 exchange rates could have a material adverse
effect on our results of operations and the value of your investment.
The value of the Renminbi against the U.S. dollar
and other currencies is affected by changes in China’s political and economic conditions and China’s foreign exchange policies,
among other things. In 2005, the PRC government changed its decades-old policy of pegging the value of the Renminbi to the U.S. dollar,
and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this
appreciation halted and the exchange rate between Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, Renminbi
has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of IMF completed
the regular five-year review of the basket of currencies that make up the Special Drawing Right (the “SDR”), and decided that
with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth
currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has
depreciated significantly against the backdrop of a surging U.S. dollar and persistent capital outflows from China. This depreciation
halted in 2017, and the RMB appreciated approximately 7% against the U.S. dollar during this one-year period. In 2018, a new round of
RMB depreciation emerged under the influence of a strong U.S. dollar and the trade friction between China and the United States. With
the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the
PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that Renminbi will not
appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or
PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.
Significant revaluation of the Renminbi may have
a material adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from our overseas
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 would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making
payments for dividends on our ordinary shares or the ADSs or for other business purposes, appreciation of the U.S. dollar against the
Renminbi would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options are available in
China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any material hedging transactions in an
effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future,
the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all.
In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi
into foreign currency.
The M&A Rules and certain other PRC regulations establish
complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue
growth through acquisitions in China.
The Provisions on the Merger and Acquisition of
Domestic Enterprises by Foreign Investors (the “M&A Rules”) adopted by six PRC regulatory agencies in 2006 and amended
in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that
could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances
that the MOFCOM, be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic
enterprise. Moreover, the Anti-Monopoly Law requires that the MOFCOM shall be notified in advance of any concentration of undertaking
if certain thresholds are triggered. In addition, the security review rules issued by the MOFCOM that became effective in September 2011
specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers
and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security”
concerns are subject to strict review by the MOFCOM, and the rules prohibit any activities attempting to bypass a security review, including
by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring
complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such
transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts
may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our
market share.
PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit
our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase its registered capital
or distribute profits to us, or may otherwise adversely affect us.
The SAFE promulgated the Circular on Relevant
Issues Relating to Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted by Domestic
Residents through Overseas Special Purpose Vehicles (the “SAFE Circular 37”), in July 2014 that requires PRC residents or
entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established
for the purpose of overseas investment or financing with such PRC residents or entities’ legally owned assets or equity interests
in domestic enterprises or offshore assets or interests. On February 13, 2015, SAFE issued SAFE Circular 13, which took effect on June
1, 2015, pursuant to which, the power to accept SAFE registration was delegated from local SAFE to local qualified banks where the assets
or interest in the domestic entity was located. In addition, such PRC residents or entities must update their SAFE registrations when
the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such
PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or
mergers or divisions.
SAFE Circular 37 is issued to replace the Circular
on Relevant Issues Relating to Foreign Exchange Administration of Financing and Roundtrip Investments by Domestic Residents via Overseas
Special Purpose Vehicles, or SAFE Circular 75.
If our shareholders who are PRC residents or
entities do not complete their registration with the local SAFE branches, our PRC subsidiaries may be prohibited from distributing their
profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute
additional capital to our PRC subsidiaries. Moreover, failure to comply with the SAFE registration described above could result in liability
under PRC laws for evasion of applicable foreign exchange restrictions.
We have used our best efforts to notify PRC residents
or entities who directly or indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents
to complete the foreign exchange registrations. However, we may not be informed of the identities of all the PRC residents or entities
holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements.
As of the date of this annual report, all PRC residents known to us that currently hold direct or indirect ownership interests in our
company completed the registration with SAFE as required by the SAFE Circular 37, except for Mr. Shaowei Zhang, who is in the process
of updating his SAFE registration for his equity position in the offshore special purpose vehicles, including Long-Spring Education Management
Limited, Long-Spring Education Technology Limited, and Long-Spring Education Consulting Limited. However, we may not at all times be
fully aware or informed of the identities of all our shareholders or beneficial owners that are required to make or update such registration,
and we cannot compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all
other shareholders or beneficial owners of ours who are PRC residents or entities have complied with, and will in the future make, obtain
or update any applicable registrations or approvals required by SAFE regulations. Failure by such shareholders or beneficial owners to
comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us
to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to
make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
Failure to comply with PRC regulations regarding
the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to
fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who
participate in share incentive plans in overseas non-publicly-listed companies due to their position as director, senior management or
employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for the foreign exchange
registration with respect to offshore special purpose companies. Our directors, executive officers and other employees who are PRC residents
and who have been granted share-based awards may have to follow SAFE Circular 37 to apply for the foreign exchange registration before
our company becomes an overseas listed company. In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange
Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or SAFE Circular
7. Under SAFE Circular 7 and other relevant rules and regulations, PRC residents who participate in stock incentive plan in an overseas
publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants
of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly
listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures
with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution
to handle matters in connection with their exercise of share-based awards, the purchase and sale of corresponding shares or interests
and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if
there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution, or any other material
changes.
We did not grant any share options to our employees
or consultants under our 2021 Share Incentive Plan as of the date of this annual report but may do so in the future. When we do, from
time to time, 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 SAFE Circular 7, nor can we ensure 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 SAFE
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 2021 Share Incentive Plan or any future share incentive
plans to our employees or consultants who are PRC citizens.
The enforcement of the PRC Labor Contract
Law and other labor-related regulations in the PRC may adversely affect our business, financial condition and results of operations.
The Standing Committee of the National People’s
Congress (the “SCNPC”) enacted the Labor Contract Law in 2007, and amended it on December 28, 2012. The Labor Contract Law
introduced specific provisions related to fixed-term employment contracts, part-time employment, probationary periods, consultation with
labor unions and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining
to enhance previous PRC labor laws. Under the Labor Contract Law, an employer is obligated to sign an unlimited-term labor contract with
any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term
labor contract that has already been entered into twice consecutively, the resulting contract, with certain exceptions, must have an unlimited
term, subject to certain exceptions. With certain exceptions, an employer must pay severance to an employee where a labor contract is
terminated or expires. In addition, the PRC governmental authorities have continued to introduce various new labor-related regulations
since the effectiveness of the Labor Contract Law.
Under the PRC Social Insurance Law and the Administrative
Measures on Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance,
unemployment insurance, maternity insurance, and housing funds and employers are required, together with their employees or separately,
to pay the social insurance premiums and housing funds for their employees. However, certain of our affiliated entities did not make
adequate social insurance and housing fund for certain employees. As the interpretation and implementation of labor-related laws and
regulations are still evolving, we cannot assure you that our employment practices do not and will not violate labor-related laws and
regulations in China, which may subject us to labor disputes or government investigations. We cannot assure you that we have complied
or will be able to comply with all labor-related law and regulations regarding including those relating to obligations to make social
insurance payments and contribute to the housing funds. If we are deemed to have violated relevant labor laws and regulations, we could
be required to provide additional compensation to our employees and our business, financial condition and results of operations will
be adversely affected.
Under the PRC Tort Law, employers shall bear
tortious liability for any injury or damage caused to other people by their employees in the course of their employment. Entities that
engage dispatched laborers shall bear tortious liability for any injury or damage caused to other people by such dispatched laborers
in the course of their work and during the dispatch period, and the dispatching party shall bear corresponding supplementary liabilities
if it is at fault. If the workers on our platform are deemed as our employees or dispatch employees by courts or arbitral tribunals,
we shall bear the responsibilities accordingly.
These laws designed to enhance labor protection
tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our
employment practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties
or incur significant liabilities in connection with labor disputes or investigations.
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 affects the cost of an employer’s decision to reduce its workforce. Further, it requires
certain terminations be based on the mandatory retirement age. In the event we decide to significantly change or decrease our workforce,
the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business
or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.
Risks Related to our ADSs
The trading price of the ADSs is likely to
be volatile, which could result in substantial losses to investors.
The trading prices of the ADSs are likely to
be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors,
like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other companies
based in China that have listed their securities in the United States in recent years. The securities of some of these companies have
experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in their
trading prices. The trading performances of other Chinese companies’ securities after their offerings, may affect the attitudes
of investors toward Chinese companies listed in the United States, 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 attitudes of
investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. In
addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating
performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and
the second half of 2011, which may have a material adverse effect on the market price of the ADSs.
In addition to the above factors, the price and
trading volume of the ADSs may be highly volatile due to multiple factors, including the following:
| ● | regulatory developments affecting us, our users, or our industry; |
| ● | condition of the education industry; |
| ● | announcements of studies and reports relating to the quality
of our services or those of our competitors; |
| ● | changes in the economic performance or market valuations of
other education companies; |
| ● | actual or anticipated fluctuations in our quarterly results
of operations and changes or revisions of our expected results; |
| ● | changes in financial estimates by securities research analysts; |
| ● | announcements by us or our competitors of new services, acquisitions,
strategic relationships, joint ventures or capital commitments; |
| ● | additions to or departures of our senior management; |
| ● | detrimental negative publicity about us, our management or
our industry; |
| ● | fluctuations of exchange rates between the RMB and the U.S.
dollar; |
| ● | release or expiry of lock-up or other transfer restrictions
on our outstanding ordinary shares or ADSs; and |
| ● | sales or perceived potential sales of additional ordinary shares
or ADSs. |
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. In addition, holders of our Class A ordinary
shares may experience loss of voting power and dilution due to future issuances and conversions of our Class B ordinary shares.
Our authorized and issued ordinary shares are
divided into Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders
of Class B ordinary shares are entitled to 20 votes per share, while holders of Class A ordinary shares are entitled to one vote per
share based on our dual-class share structure. Each Class B ordinary share is convertible into one Class A ordinary share at any time
by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any
direct or indirect sale, transfer, assignment or disposition of such number of Class B ordinary shares by the holder thereof to any person
other than a designated holder (as defined in our memorandum and articles of association) or any person that is not an affiliate of such
holder, or upon a change of beneficial ownership of any Class B ordinary shares as a result of which any person who is not a designated
holder or any person who is not an affiliate of the holders of such ordinary shares becomes a beneficial owner of such ordinary shares,
such Class B ordinary shares are automatically and immediately converted into the same number of Class A ordinary shares.
As of the date of this annual report, Mr. Shaowei
Zhang (our founder, chairman and chief executive officer), Ms. Yu Wu (his spouse), and Longwater Topco B.V. beneficially own all of our
issued Class B ordinary shares. These Class B ordinary shares constitute approximately 37.15% of our total issued and outstanding share
capital and 92.20% of the aggregate voting power of our total issued and outstanding share capital due to the disparate voting powers
associated with our dual-class share structure. 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, holders of Class B ordinary shares will have considerable
influence over matters such as decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election
of directors and other significant corporate actions. Any future issuances of Class B ordinary shares may be dilutive to the voting power
of holders of Class A ordinary shares. Any conversions of Class B ordinary shares into Class A ordinary shares may dilute the percentage
ownership of the existing holders of Class A ordinary shares within their class of ordinary shares. Such conversions may increase the
aggregate voting power of the existing holders of Class A ordinary shares. In the event that we have multiple holders of Class B ordinary
shares in the future and certain of them convert their Class B ordinary shares into Class A ordinary shares, the remaining holders who
retain their Class B ordinary shares may experience increases in their relative voting power. Holders of Class B ordinary shares may take
actions that are not in the best interest of us 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 our 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.
Our dual-class share structure may adversely
affect the trading market for and the trading price of the ADSs.
Certain shareholder advisory firms have announced
changes to their eligibility criteria for inclusion of shares of public companies on certain stock market indices, including the S&P
500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting
power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of
multiple class structures. As a result, our dual-class share structure may prevent the inclusion of the ADSs representing Class A ordinary
shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices
or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading
market for the ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital
structure could also adversely affect the value of the ADSs.
If securities or industry analysts do not
publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price
for the ADSs and trading volume could decline.
The trading market for the ADSs will be influenced
by research or reports that industry or securities analysts publish about our business. If research analysts do not establish and maintain
adequate research coverage or if one or more analysts who cover us downgrade the ADSs or publish inaccurate of unfavorable research about
our business, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly
publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the market price or trading
volume for the ADSs to decline.
The sale or availability for sale of substantial
amounts of the ADSs could adversely affect their market price.
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 and could materially
impair our ability to raise capital through equity offerings in the future. The ADSs sold in our initial public offering were freely tradable
without restriction or further registration under the Securities Act of 1933, as amended (the “Securities Act”), and shares
held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule
701 under the Securities Act and the applicable lock-up agreements. As of the date of this annual report, there are 113,303,070 ADSs (equivalent
to 37,767,690 Class A ordinary shares) outstanding. We cannot predict what effect, if any, market sales of securities held by our significant
shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs.
Techniques employed by short sellers may drive
down the market price of the ADSs.
Short selling is the practice of selling securities
that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later
date to return to the lender. The short seller hopes to profit from a decline 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 that have substantially all
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. As a result, many of these companies
are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits
and/or SEC enforcement actions.
It is not clear what effect such negative publicity
could have on us. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or
untrue, we could have to expend a significant amount of resources 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 against the relevant
short seller by principles of freedom of speech, applicable 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 materially and adversely affect our business, and any investment in the ADSs could be
greatly reduced or even rendered worthless.
Because we cannot guarantee to pay dividends
in the foreseeable future, you must rely on price appreciation of the ADSs for return on your investment.
Considering that we have achieved net income
in 2021, we intend to distribute a certain portion of our net income for the fiscal year ended December 31, 2021 as a cash dividend
among the holders of our ordinary shares in 2022, conditional upon the passing of the relevant resolutions of our board of directors,
provided that under no circumstances may the dividend be paid if it would result in our company being unable to pay our debts as they
fall due in the ordinary course of business. However, we still intend to retain most, if not all, of our available funds and any future
earnings to fund the development and growth of our business. Therefore, you should not rely on an investment in the ADSs as a source
for any future dividend income.
Our board of directors has complete discretion
as to whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company may only pay
dividends out of profits or share premium account, and provided always that in no circumstances may a dividend be paid if this would
result in our company being unable to pay its debts as they fall due in the ordinary course of business. In addition, our shareholders
may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. 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 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. There
is no guarantee that the ADSs would 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 or even lose your entire investment in the ADSs.
Our memorandum and articles of association
contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and the ADSs.
Our memorandum and articles of association contain
provisions which could limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions.
These provisions could have the effect of depriving our shareholders of an 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. Our
board of directors has the authority, without further action by our shareholders, 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 ordinary shares, in the form of ADS or otherwise. Preferred shares
could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more
difficult. 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 ordinary shares and ADSs may be materially and adversely affected.
Forum selection provisions in our memorandum
and articles of association could limit the ability of holders of our Class A ordinary shares, ADSs or other securities to obtain a favorable
judicial forum for disputes with us, our directors and officers, and potentially others.
Our memorandum and articles of association provide
that the federal district courts of the United States are the exclusive forum within the United States for the resolution of any complaint
asserting a cause of action arising under the Securities Act and the Exchange Act. However, the enforceability of similar federal court
choice of forum provisions has been challenged in legal proceedings in the United States, and it is possible that a court could find
this type of provision to be inapplicable, unenforceable, or inconsistent with other documents that are relevant to the filing of such
lawsuits. If a court were to find the stipulated choice of forum provision contained in our memorandum and articles of association to
be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other forums or
jurisdictions. If upheld, the forum selection clause in our memorandum and articles of association may increase the costs for you or
limit your ability to bring a claim against us, our directors and officers, and potentially others in his or her preferred judicial forum,
and this limitation may discourage such lawsuits. In addition, the Securities Act provides that both federal and state courts have jurisdiction
over suits brought to enforce any duty or liability under the Securities Act or the rules and regulations thereunder. Accepting or consent
to this forum selection provision does not constitute a waiver by you of compliance with federal securities laws and the rules and regulations
thereunder. You may not waive compliance with federal securities laws and the rules and regulations thereunder. The exclusive forum provision
in our memorandum and articles of association will not operate so as to deprive the courts of the Cayman Islands from having jurisdiction
over matters relating to our internal affairs.
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 and conduct our operations in China.
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 Companies Act (As
Revised) of the Cayman Islands, as amended, 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, the decisions of whose courts are of persuasive
authority, but are not binding, on 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 precedent 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.
Shareholders of Cayman Islands exempted companies
like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles of associations,
any special resolutions passed by such companies, and the register of mortgages and charges of such companies) or to obtain copies of
lists of shareholders of these companies. Our directors have discretion under our 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.
As a Cayman Islands company listed on the NYSE,
we are subject to the NYSE corporate governance listing standards. However, NYSE rules permit 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 the NYSE corporate governance listing standards.
Pursuant to Sections 303A.01, 303A.04, 303A.05,
303A.07 and 302.00 of the NYSE Listed Company Manual, a company listed on the NYSE must have a majority of independent directors, a nominating
and corporate governance committee composed entirely of independent directors and a compensation committee composed entirely of independent
directors. We currently follow our home country practice in lieu of these requirements. We may also continue to rely on these and other
exemptions available to foreign private issuers in the future.
In addition, we conduct our business operations
in China, and all of our directors and senior management are based in China. The SEC, U.S. Department of Justice 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 China, as shareholder claims that are common in the United States, including class action securities law and
fraud claims, generally are difficult or impossible to pursue as a matter of law or practicality in many emerging markets, including
China.
As a result of all 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 controlling shareholders than they would as public shareholders of a company incorporated in the United States. See Exhibit 2.4 to
this annual report.
Certain judgments obtained against us by our
shareholders may not be enforceable.
We are a Cayman Islands exempted company and
all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition,
most of our current directors and officers are nationals and residents of countries other than the United States. All or a substantial
portion of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you
to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been
infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws
of the Cayman Islands and of China may render you unable to enforce a judgment against us, our assets, our directors and officers or
their assets.
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 direct how your Class A ordinary shares which
are represented by your ADSs are voted.
Holders of ADSs do not have the same rights as
our registered shareholders. 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. You will only be able to exercise the voting rights
which are carried by the Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary
in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions
to the depositary. If we request the depositary to ask for your instructions, then upon receipt of your voting instructions, the depositary
will try, as far as is practicable, to vote the underlying Class A ordinary shares which are represented by your ADSs in accordance with
your instructions. If we do not request the depositary to ask for your instructions, the depositary may still vote in accordance with
instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to
the underlying Class A ordinary shares represented by your ADSs unless you withdraw the shares and became the registered holder of such
shares prior to the record date for the general meeting. Under our second amended and restated memorandum and articles of association,
the minimum notice period required for convening a general meeting will be seven days. When a general meeting is convened, you may not
receive sufficient advance notice to withdraw the Class A ordinary shares underlying your ADSs and become the registered holder of such
shares to allow you to attend the general meeting and vote directly with respect to any specific matter or resolution to be considered
and voted upon at the general meeting. In addition, under our amended and restated memorandum and articles of association, for the purposes
of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of
members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record
date may prevent you from withdrawing the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares
prior to the record date, so that you would not be able to attend the general meeting or to vote directly. 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 the underlying Class A ordinary
shares represented by your ADSs. 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 may give us a discretionary
proxy to vote our Class A ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely
affect your interests and the ability of our shareholders as a group to influence the management of our company.
Under the deposit agreement for the ADSs, if you
do not give voting instructions to the depositary to direct how the Class A ordinary shares underlying your ADSs are voted, upon our
request, the depositary will give us (or our nominee) a discretionary proxy to vote the Class A ordinary shares underlying your ADSs
at shareholders’ meetings if:
| ● | we timely provided the depositary with notice of meeting and
related voting materials and requested it to solicit your instructions; |
| ● | we request the depositary to give a proxy; |
| ● | we have informed the depositary that there is no substantial
opposition as to a matter to be voted on at the meeting; and |
| ● | the matter subject to voting would not have a material adverse
impact on shareholders. |
The effect of this discretionary proxy is that
if you do not give voting instructions to the depositary to direct how the Class A ordinary shares underlying your ADSs are voted, you
cannot prevent the Class A ordinary shares underlying your ADSs from being voted, under 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 cash dividends if the
depositary decides it is impractical to make them available to you.
The depositary has agreed to pay to you the cash
dividends or other distributions it or the custodian receives on our Class A 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 may, at its discretion, decide that it is inequitable or impractical to make a distribution
available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property
through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary
may decide not to distribute such property to you.
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 as a result.
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 in connection with the
performance of its duties. The depositary may close its books from time to time for a number of reasons, including events in emergencies,
and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of the ADSs generally when
our 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.
ADS holders may not be entitled to a jury
trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in
any such action.
The deposit agreement governing the ADSs representing
our Class A ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any
claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including
any claim under the U.S. federal securities laws.
If we or the depositary opposed a jury trial
demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that
case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury
trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States
Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under
the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has
non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute
jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right
to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult
legal counsel regarding the jury waiver provision before entering into the deposit agreement.
If you or any other holders or beneficial owners
of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including
claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to
such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought
against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court,
which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have
had, including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver provision
is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition,
stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the
depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated
thereunder.
As a company incorporated in the Cayman Islands,
we are permitted to adopt certain home country practices for corporate governance matters that differ significantly from the NYSE corporate
governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with
the corporate governance listing standards.
The ADSs have been approved for listing on the
NYSE. The NYSE corporate governance listing standards permit 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 the NYSE corporate governance listing standards.
For instance, we are not required to: (1) have
a majority of the board be independent; (2) have a compensation committee or a nominations or corporate governance committee consisting
entirely of independent directors; or (3) have regularly scheduled executive sessions with only independent directors each year. We intend
to rely on some of these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements
of the NYSE.
We are a foreign private issuer within the
meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
Because we 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 are 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 NYSE. Press releases relating to financial results and material events
will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less
extensive and less timely than that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded
the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
We are an emerging growth company within the
meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging growth company,”
as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that
are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to
comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards
until such date that a private company is otherwise required to comply with such new or revised accounting standards.
We incur significant costs as a result of
being a public company, particularly after we cease to qualify as an “emerging growth company.”
We incur significant legal, accounting and other
expenses as a result of being a public company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC
and the NYSE, impose various requirements on the corporate governance practices of public companies. We expect these rules and regulations
to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. As a company
with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant
to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise
applicable generally to public companies. After we are no longer an “emerging growth company”, we expect to incur significant
expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002 and the other rules and regulations of the SEC.
As a public company, we need to increase the
number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect
that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance,
and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more
difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and
monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the
amount of additional costs we may incur or the timing of such costs.
We may be a passive foreign investment company,
which could result in adverse U.S. federal income tax consequences to U.S. investors owning the ADSs or our ordinary shares.
A non-U.S. corporation, such as our company,
will be considered a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross income
is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a
taxable year) is attributable to assets that produce or are held for the production of passive income. Although the law in this regard
is not entirely clear, we treat our affiliated entities as being owned by us for U.S. federal income tax purposes because we control
their management decisions and are entitled to substantially all of the economic benefits associated with them. As a result, we consolidate
their results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner
of our affiliated entities for U.S. federal income tax purposes, we would likely be treated as a PFIC for the current taxable year and
any subsequent taxable year.
Assuming that we are the owner of our affiliated
entities for U.S. federal income tax purposes, and based upon our current and projected income and assets, including the proceeds from
our initial public offering, and projections as to the value of our assets, we do not expect to be a PFIC for the taxable year ending
December 31, 2021 or the foreseeable future. However, no assurance can be given in this regard because the determination of whether we
will be or become a PFIC is a factual determination made annually that will depend, in part, upon the composition of our income and assets.
Fluctuations in the market price of the ADSs may cause us to be classified as a PFIC for the current or future taxable years because
the value of our assets for purposes of the asset test, including the value of our goodwill and unbooked intangibles, may be determined
by reference to the market price of the ADSs from time to time (which may be volatile). If our market capitalization subsequently declines,
we may be or become classified as a PFIC for the current taxable year or future taxable years. Furthermore, the composition of our income
and assets may also be affected by how, and how quickly, we use our liquid assets, including the cash raised in our initial public offering.
Under circumstances where our revenues from activities that produce passive income significantly increases relative to our revenues from
activities that produce non-passive income, or where we determine not to deploy significant amounts of cash for active purposes, our
risk of becoming classified as a PFIC may substantially increase.
If we were treated as a PFIC for any taxable
year during which a U.S. investor held an ADS or an ordinary share, certain adverse U.S. federal income tax consequences could apply
to the U.S. Holder. See “Item. 10 Additional Information—E. Taxation—United States Federal Income Taxation—Passive
foreign investment company rules.”
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
In September 2011, we established Long-Spring
Education Holding Group Limited, or Long-Spring Education, in the PRC, through which we operated our schools.
In September 2016, we established Long-Spring
Education Group (the former parent of our company), or the former parent, in the Cayman Islands. In the same month, we established First
High-School Group Hong Kong Limited, or First High-School HK, under the former parent in Hong Kong. In October 2016, First High-School
HK incorporated Yunnan Century Long-Spring Technology Co., Ltd., or Yunnan WFOE, in the PRC.
In November 2016, First High-School HK became
the offshore holding company of our group in Hong Kong through Yunnan WFOE by entering into a series of contractual arrangements with
Long-Spring Education and its shareholders. Such contractual arrangements were terminated and re-entered into in December 2018 to add
additional entities as parties to the contractual arrangements. See “—C. Organizational Structure—Our Contractual Arrangements”
for details.
In September 2018, we established First High-School
Education Group Co., Ltd., or First High-School Education, under the former parent as our proposed listing entity in the Cayman Islands.
In the same month, we established First High-School Education Group (BVI) Limited, or First High-School BVI, under the former parent
in the British Virgin Islands.
In August 2019, we transferred the ownership of
First High-School BVI to First High-School Education and then transferred the ownership of First High-School HK to First High-School
BVI in September 2019.
In January 2021, we completed our corporate restructuring
by issuing ordinary shares or redeemable ordinary shares to the respective shareholders of the former parent to generally mirror the
shareholding structure in the former parent, and immediately after the share issuance, the former parent surrendered our shares and ceased
to be our parent company.
On March 11, 2021, our ADSs commenced trading
on the NYSE under the symbol “FHS.” We raised approximately US$42.4 million in net proceeds from our initial public offering
after deducting underwriting discounts and commissions and offering expenses paid by us.
In May 2021, we acquired 51% equity interests
in Beijing Tomorrow Future Plus Education Technology Co., Ltd., a technology-driven education company that provides premium full-time
live AI online teaching services.
In July 2021, our wholly-owned subsidiary, First
High-School HK, has entered into a strategic partnership agreement with Sichuan Fuhang Capital Equity Investment Fund Management Co.,
Ltd., to collaborate in establishing an education fund with a focus on online-merge-offline learning.
In November 2021, we established Beijing Long-Spring
Ordinary-Vocational Education Integration Development and Research Institute to actively carry out research on the integration of ordinary
and vocational education, and to promote the high-quality development of the related occupations.
Our principal executive offices are located at
No. 1-1, Tiyuan Road, Xishan District, Kunming, Yunnan Province 650228, People’s Republic of China. Our telephone number is +86-10-6255-5966.
Our registered office in the Cayman Islands is located at P.O. Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands.
Our website is www.longspringedu.com. The information
contained on our website is not a part of, and will not be incorporated by reference into, this annual report. The SEC also maintains
a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make
electronic filings with the SEC using its EDGAR system.
B. Business Overview
We are an education service provider primarily
focusing on high schools in Western China. We aspire to become a leader and innovator of private high school education in China, dedicated
to a comprehensive education management integrating education information consulting, education research project development, education
talent management, education technology management, education service management, and general vocational integration development services.
First High-School Education, our ultimate Cayman Islands holding company, does not have any substantive operations other than indirectly
controlling the affiliated entities through certain contractual arrangements.
We trace our history back to August 2012 when
we established our first school to provide after-school tutoring services. We have since developed a network of 20 schools for our continuing
operations, offering 14 high school programs and six tutorial school programs for Gaokao repeaters, as of December 31, 2021. We have also
collaborated with local governments and other third parties in China and expect to launch new schools offering high school programs and
vocational programs in the second half of 2022. In addition, we have also established Chinese-English bilingual programs for students
interested in pursuing higher education overseas. As of December 31, 2021, we had 18,686 high school students (including Gaokao repeaters)
across our school network, and 2,561 public school students at public schools to which we provide management services, for our continuing
operations. We are dedicated to recruiting teachers who hold sufficient academic credentials, are devoted and active professionals in
their field, and are committed to improving their students’ academic performance. As of December 31, 2021, we had a total of 1,617
teachers in our schools for our continuing operations, all of whom had a bachelor’s degree. As of the same date, we had a total
of 48 principals and deputy principals across our school network for our continuing operations, who are responsible for the strategic
development and operation of our schools. We are committed to investing in our teachers and principals and offer them opportunities to
grow with us. We have designed systematic training courses and established a comprehensive internal training system to assist our teachers
and principals in their professional development, including regular training sessions to discuss educational theories, methodologies and
techniques.
We have a highly scalable, asset-light business
model premised on collaboration with third parties, including local governments and real estate developers. Our partners typically contribute
the land and school facilities. Our government partners also provide other forms of support, such as subsidies and preferential tax treatment.
In return, we provide educational resources, teachers and staff, and school management expertise. Our services raise local education standards
for the under-developed areas and often invigorate the local economy by attracting more talents to live and work in the area. We currently
operate 14 schools pursuant to cooperative arrangements with local governments. Operating private secondary schools under the current
regulatory regime requires stringent approvals from the relevant governments in China. As such, we believe that, with our proven track
record, our ability to maintain cooperative relationship with local governments to obtain not only the approval but also the support to
operate our schools has created strong entry barriers and underpins our long-term growth. We have also cooperated with the local government
to provide management services for two public schools in Yunnan province for annual management service fees. In addition to collaborating
with local governments, we currently operate six schools by either leasing lands from or collaborating with third parties. We expect to
launch new schools in the second half of 2022. Our synergistic relationship with third parties allows us to launch new schools with relatively
lower upfront capital expenditures.
We have also developed a standardized and centralized
school management system. We have devised a series of standardized measures and protocols for each stage in a school’s development
and for a wide variety of scenarios in school management and operation, which we require all of our schools to consistently adhere to.
Our standardized and centralized management model allows us to secure control over key resources, including teaching methods, education
contents and school management experience, making our business success highly replicable and scalable.
We have experienced steady growth in our business.
For our continuing operations, our revenues were RMB264.1 million, RMB351.9 million and RMB400.2 million (US$62.8 million) in 2019, 2020
and 2021, respectively. Our net income was RMB31.7 million, RMB80.9 million and RMB52.7 million (US$8.3 million) in 2019, 2020 and 2021,
respectively. Our adjusted net income was RMB43.6 million, RMB80.9 million and RMB 52.7 million (US$8.3 million) in 2019, 2020 and 2021,
respectively.
Our Schools and Programs
We operate a network of 20 schools located in
Yunnan province, Guizhou province, Inner Mongolia Autonomous Region, Chongqing municipality, Sichuan province and Shaanxi province, offering
14 high school programs and six tutorial school programs for Gaokao repeaters as of December 31, 2021. We also provided management services
to two public schools as of the same date. We have also collaborated with local governments and other third parties in China and expect
to launch new schools offering high school programs in the second half of 2022.
The following map sets forth the geographical
locations of our schools and the public schools to which we provided management services as of December 31, 2021.
The following table sets forth the student enrollment,
capacity and utilization rate of our schools, as categorized by the type of schools.
| |
Student enrollment | | |
School capacity | | |
School
utilization rate(1) | |
| |
As of December 31, | | |
As of December 31, | | |
As of December 31, | |
| |
2019 | | |
2020 | | |
2021 | | |
2019 | | |
2020 | | |
2021 | | |
2019 | | |
2020 | | |
2021 | |
High schools | |
| 12,188 | | |
| 15,689 | | |
| 17,190 | | |
| 18,394 | | |
| 33,955 | | |
| 32,895 | | |
| 66.3 | % | |
| 46.2 | % | |
| 52.3 | % |
Tutorial schools | |
| 1,472 | | |
| 1,541 | | |
| 1,496 | | |
| 2,072 | | |
| 2,472 | | |
| 2,701 | | |
| 71.0 | % | |
| 62.3 | % | |
| 55.4 | % |
Total | |
| 13,660 | | |
| 17,230 | | |
| 18,686 | | |
| 20,466 | | |
| 36,427 | | |
| 35,596 | | |
| 66.7 | % | |
| 47.3 | % | |
| 52.5 | % |
(1) | School utilization rate is
calculated by dividing student enrollment with school capacity . |
The following table sets forth certain key information
about our schools.
|
|
|
|
|
|
|
|
Student enrollment |
|
|
School
capacity |
|
|
|
Commencement |
|
|
|
Education |
|
As of December 31, |
|
|
As of December 31, |
|
High Schools |
|
date of operation |
|
Location |
|
programs |
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2021 |
|
Kunming Xishan Long-Spring Experimental Secondary School |
|
September 2014 |
|
Kunming,
Yunnan |
|
High School |
|
|
1,058 |
|
|
|
1,231 |
|
|
|
1,218 |
|
|
|
1,315 |
|
Kunming Chenggong Long-Spring Experimental Secondary School(1) |
|
September 2015 |
|
Kunming,
Yunnan |
|
High School |
|
|
1,505 |
|
|
|
1,428 |
|
|
|
1,230 |
|
|
|
1,500 |
|
Yiliang Long-Spring Experimental Secondary School |
|
September 2016 |
|
Kunming,
Yunnan |
|
High School |
|
|
869 |
|
|
|
975 |
|
|
|
1,038 |
|
|
|
1,580 |
|
Yunnan Hengshui Experimental Secondary School—Xishan School |
|
September 2016 |
|
Kunming,
Yunnan |
|
High School |
|
|
1,381 |
|
|
|
1,431 |
|
|
|
1,363 |
|
|
|
1,450 |
|
Qujing Hengshui Experimental Secondary School |
|
September 2017 |
|
Qujing,
Yunnan |
|
High School |
|
|
2,857 |
|
|
|
2,883 |
|
|
|
2,161 |
|
|
|
3,800 |
|
Yunnan Yuxi Hengshui Experimental High School |
|
September 2017 |
|
Yuxi,
Yunnan |
|
High School |
|
|
2,393 |
|
|
|
2,921 |
|
|
|
3,210 |
|
|
|
3,480 |
|
Ordos Hengshui Experimental High School |
|
September 2017 |
|
Ordos, Inner
Mongolia |
|
High School |
|
|
1,221 |
|
|
|
1,585 |
|
|
|
1,577 |
|
|
|
3,000 |
|
Yunnan Long-Spring Foreign Language Secondary School |
|
September 2017 |
|
Kunming,
Yunnan |
|
High School |
|
|
403 |
|
|
|
521 |
|
|
|
497 |
|
|
|
860 |
|
Xinping Long-Spring Advanced Secondary School |
|
September 2019 |
|
Yuxi,
Yunnan |
|
High School |
|
|
501 |
|
|
|
974 |
|
|
|
1,314 |
|
|
|
1,780 |
|
Xishuangbanna Long-Spring Experimental Secondary School |
|
September 2020 |
|
Jinghong,
Yunnan |
|
High School |
|
|
— |
|
|
|
397 |
|
|
|
640 |
|
|
|
850 |
|
Qiubei Long-Spring Experimental Secondary School |
|
September 2020 |
|
Qiubei,
Yunnan |
|
High School |
|
|
— |
|
|
|
150 |
|
|
|
547 |
|
|
|
2,400 |
|
Wenshan Long-Spring Experimental Secondary School |
|
September 2020 |
|
Wenshan,
Yunnan |
|
High School |
|
|
— |
|
|
|
191 |
|
|
|
580 |
|
|
|
2,880 |
|
Zhenxiong Long-Spring Advanced Secondary School |
|
September 2020 |
|
Zhenxiong,
Yunnan |
|
High School |
|
|
— |
|
|
|
354 |
|
|
|
648 |
|
|
|
5,000 |
|
Mengla Long-Spring Experimental Secondary School |
|
September 2020 |
|
Mengla,
Yunnan |
|
High School |
|
|
— |
|
|
|
648 |
|
|
|
1,167 |
|
|
|
3,000 |
|
Tutorial Schools |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yunnan Zhongchuang Education Tutorial School(1) |
|
August 2012 |
|
Kunming,
Yunnan |
|
Tutorial
School |
|
|
678 |
|
|
|
997 |
|
|
|
875 |
|
|
|
800 |
|
Hengshizhong Education Tutorial School |
|
July 2019 |
|
Kunming,
Yunnan |
|
Tutorial
School |
|
|
650 |
|
|
|
456 |
|
|
|
299 |
|
|
|
900 |
|
Guizhou Zunyi Tutorial School(2) |
|
September 2020 |
|
Guiyang,
Guizhou |
|
Tutorial
School |
|
|
— |
|
|
|
88 |
|
|
|
74 |
|
|
|
300 |
|
Chongqing Hengshi Tutorial School |
|
September 2021 |
|
Hi-tech District,
Chongqing |
|
Tutorial
School |
|
|
— |
|
|
|
— |
|
|
|
101 |
|
|
|
101 |
|
Chengdu Long-Spring Tutorial School |
|
September 2021 |
|
Chengdu,
Sichuan |
|
Tutorial
School |
|
|
— |
|
|
|
— |
|
|
|
36 |
|
|
|
400 |
|
Shaanxi Hengshi Tutorial School |
|
September 2021 |
|
Yangling,
Shaanxi |
|
Tutorial
School |
|
|
— |
|
|
|
— |
|
|
|
111 |
|
|
|
200 |
|
| (1) | We established Yunnan Zhongchuang Education Tutorial School in August
2012 to initially provide after-school tutoring services and disposed of the after-school
tutoring services in September 2018 to focus strategically on private high school education.
In 2019, certain students from Yunnan Zhongchuang Education Tutorial School were relocated
to Hengshizhong Education Tutorial School. |
| (2) | We combined Guizhou Mingde Tutorial School, which commenced operation
in September 2020, with our newly established Guizhou Zunyi Tutorial School in August 2021
for our convenience of school operation in Guizhou. |
As part of our cooperation with local governments
of communities, we admit a certain number of local students on behalf of the government as publicly-sponsored students. As of December
31, 2019, 2020 and 2021, the number of publicly-sponsored students in our schools for our continuing operations was 4,607, 6,755 and
7,993, respectively, accounting for 33.7%, 39.2% and 42.8% of our total students for our continuing operations as of the same dates.
We allow publicly-sponsored students to pay lower tuition, typically at the level of public schools, and receive price difference or
other forms of support from local governments for such publicly-sponsored students.
Beginning from September 2020, we have also cooperated
with the local government of Xishuangbanna, Yunnan province, to provide management services for Xishuangbanna International Resort District
Middle School, a local public school. Starting from August 2021, we have also cooperated with the local government to provide management
services for Yuanjiang County District High School, a public school in Yunnan province, in exchange for annual management service fees
from the local government of approximately RMB3.0 million.
Our high schools
We operate 14 high schools in Yunnan province
and Inner Mongolia Autonomous Region with a total of 17,190 students and 1,455 teachers as of December 31, 2021.
All of our high schools are boarding schools,
and we have implemented strict daily study schedules on our students, aimed to improve their intellectual and well-rounded development.
Curriculum design
Our high schools deliver core curriculum designed
primarily pursuant to the standards set by national, provincial and local education authorities. Mandatory courses at our high schools
include Chinese, mathematics, English, physics, chemistry, biology, history, geography, politics, music, sports, arts, student psychology
and information technology. In addition to government-mandated core curriculum, we also deliver supplemental courses to enrich the interests
and dimensions of our students. We offer over 20 elective courses and extracurricular activities at our high schools, including model
airplane crafting, soilless cultivation, martial arts, African drums, start-up simulation, electric engineering mini-lab, Chinese literature,
robotic engineering, law, music and drawing, as well as various sports courses and foreign languages courses. We use course materials
written and compiled by our centralized curriculum development team for our elective courses, and exercise close supervision and offer
generous support to students attending our extracurricular activities.
Academic assessment and achievement
The final grades for students in our high schools
for each course represent a combination of written and oral exam results, class participation, and grades for quizzes, reports and homework
assignments. We conduct formal written and oral exams on a monthly basis, in addition to our mid-term and final exams. We sometimes participate
in city-wide and regional mid-term and final exams where students from all schools in the community use the same set of exam questions.
Trained with our standardized teaching methodologies
and centrally designed curricula and course materials, our students consistently achieve outstanding academic results. Many graduates
were admitted into first-tier universities in China and the world, including Tsinghua University, Peking University, Zhejiang University,
Shanghai Jiao Tong University, Fudan University, University of College London, University of Edinburgh and University of Melbourne. We
achieved these results although the class of 2017 was our first graduating class, and the average Zhongkao scores of the classes of 2017,
2018 and 2019 were mediocre among the local communities we serve.
Bilingual programs
We have established Chinese-English bilingual
programs at Yunnan Long-Spring Foreign Language Secondary School for students interested in pursuing higher education overseas. We have
implemented a dual-track parallel education system which allows our students to access both Australian and Chinese curricula and to choose
between domestic and overseas higher education. For our Australian program, our three-year curriculum consists of six modules, including
South Australian international high school curriculum module, Chinese high school curriculum module, academic English curriculum module,
overseas school application preparation module, extracurricular activities module, and school-based elective curriculum module. For our
South Australian international high school curriculum module, we entered into various cooperative arrangements with the SACE Board of
South Australia, an independent statutory authority of the South Australian government, to provide curricula that meet the requirements
of South Australian Certificate of Education, or SACE, an internationally recognized qualification that paves the way for our graduates
to gain admissions into overseas universities with greater ease. Our cooperation with the SACE Board of South Australia enables us to
offer education service and deliver curricula to our students in the same way and at the same quality as high schools in South Australia.
In addition, Yunnan Long-Spring Foreign Language
Secondary School has been authorized to offer the UK Advanced Levels courses (the “A-Level courses”), the Global Assessment
Certificate program (the “GAC program”), and the Advanced Placement courses (the “AP courses”), for students interested
in pursuing higher education in the United Kingdom and the United States. Yunnan Long-Spring Foreign Language Secondary School is also
an authorized ACT test center available for students to take the standardized test for college admissions in the United States.
Our tutorial schools
We operate six tutorial schools in Yunnan province,
Guizhou province, Chongqing municipality, Sichuan province and Shaanxi province, dedicated to provide full-time education to train Gaokao
repeaters who wish to improve their performance in their second Gaokao attempt. As of December 31, 2021, our tutorial schools had 1,496
students and 162 teachers. We generally require enrolled students to live in student dormitories during their course of study.
Curriculum design
Our tutorial schools deliver core curriculum
designed primarily pursuant to the standards set by national, provincial and local education authorities. Students enrolled in our tutorial
schools typically have a singular educational goal, which is to achieve improved academic performances on their second Gaokao attempts.
Therefore, our curriculum places a heavier emphasis on Gaokao subjects. Apart from Chinese, mathematics and English, which are mandatory
exam subjects for all students, we also offer courses on political science, history and geography to students pursuing the social sciences
track, and physics, chemistry and biology to those pursuing the natural sciences track.
Academic assessment and achievement
Our tutorial schools organize formal monthly
exams and final exams at the end of each semester. The monthly exams and final exams simulate the real Gaokao by using the same exam
papers, exam time, and adopting the same grading standards. Compared to high schools in our network, tutorial schools focus more on adopting
monthly and final exams as means to assess student performances, instead of using homework assignments, quizzes or other forms of informal
assessments.
In addition, we also participate in regional
and city-wide standard exams which simulate the exam structure and competitiveness of Gaokao. These cross-school assessments offer our
students a better understanding of their competitiveness among students both within and outside our school network against whom our students
must ultimately compete in the real Gaokao. We were able to help over 80% of our students raise 50 points or more (out of a full Gaokao
score of 750 in Yunnan province), in their second Gaokao attempt in 2021 through one-year tutoring with us, as compared to their initial
Gaokao scores in 2020.
Discontinued Operations
Due to the effectiveness of the Implementation
Rules, we have concluded that we have lost control over the Affected Entities as from September 1, 2021, which primarily include the middle
schools providing compulsory education and the sponsor entities within China that are affected by the Implementation Rules. Consequently,
we classified the operation for the Affected Entities as discontinued operations. We have determined that, in substance, we had ceased
to recognize revenues for all activities related to the Affected Entities and had discontinued all business activities with such entities
by September 1, 2021while continuing to provide essential services to keep these schools in normal operations.
As of December 31, 2021, the Affected Entities
included eight middle schools in Yunnan province and Shaanxi province with a total of 9,552 students and 656 teachers. The following
table sets forth the student enrollment, capacity and utilization rate of the schools of our discontinued operations.
|
|
Student enrollment |
|
|
School capacity |
|
|
School utilization rate(1 |
|
|
|
As of December 31, |
|
|
As of December 31, |
|
|
As of December 31, |
|
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
Middle schools |
|
|
7,576 |
|
|
|
8,637 |
|
|
|
9,552 |
|
|
|
8,694 |
|
|
|
10,319 |
|
|
|
11,750 |
|
|
|
87.1 |
% |
|
|
83.7 |
% |
|
|
81.3 |
% |
(1) | School utilization rate is
calculated by dividing student enrollment with school capacity. |
The following table sets forth certain key information
about each of the schools of our discontinued operations.
|
|
|
|
|
|
|
|
Student enrollment |
|
|
School capacity |
|
|
|
Commencement |
|
|
|
Education |
|
As of December 31, |
|
|
As of December 31, |
|
Schools |
|
date of operation |
|
Location |
|
programs |
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2021 |
|
Kunming Xishan Long-Spring Experimental Secondary School |
|
September 2014 |
|
Kunming,
Yunnan |
|
Middle School |
|
|
1,005 |
|
|
|
1,067 |
|
|
|
1,064 |
|
|
|
1,080 |
|
Kunming Chenggong Long-Spring Experimental Secondary School(1) |
|
September 2015 |
|
Kunming,
Yunnan |
|
Middle School |
|
|
1,461 |
|
|
|
1,437 |
|
|
|
1,786 |
|
|
|
2,030 |
|
Yiliang Long-Spring Experimental Secondary School |
|
September 2016 |
|
Kunming,
Yunnan |
|
Middle School |
|
|
1,493 |
|
|
|
1,551 |
|
|
|
1,436 |
|
|
|
1,500 |
|
Yunnan Hengshui Experimental Secondary School—Xishan School |
|
September 2016 |
|
Kunming,
Yunnan |
|
Middle School |
|
|
1,486 |
|
|
|
1,727 |
|
|
|
1,748 |
|
|
|
1,800 |
|
Qujing Hengshui Experimental Secondary School |
|
September 2017 |
|
Qujing,
Yunnan |
|
Middle School |
|
|
1,304 |
|
|
|
1,571 |
|
|
|
1,466 |
|
|
|
2,440 |
|
Yunnan Long-Spring Foreign Language Secondary School |
|
September 2017 |
|
Kunming,
Yunnan |
|
Middle School |
|
|
505 |
|
|
|
622 |
|
|
|
750 |
|
|
|
700 |
|
Xinping Hengshui Experimental Middle School |
|
September 2019 |
|
Yuxi,
Yunnan |
|
Middle School |
|
|
322 |
|
|
|
662 |
|
|
|
980 |
|
|
|
1,000 |
|
Shaanxi Hengshui Experimental Middle School |
|
September 2021 |
|
Xianyang,
Shaanxi |
|
Middle School |
|
|
— |
|
|
|
— |
|
|
|
322 |
|
|
|
1,200 |
|
Our Online Education Services
As a supplement to conventional school programs,
we provide online education services on third-party platforms to our students on a complimentary basis. Since 2018, we have collaborated
with third parties to build our online learning platform to implement online classes during school holidays, provide online tutorials
relating to college admission and online trainings for students participating in competitions. Our online learning platform also connects
parents with teachers and schools to enhance parent involvement.
During the COVID-19 outbreak in 2020 and 2021,
we expanded our online courses based on our online learning platform. For example, we provide online tri-teacher lectures to promote
online educational resources sharing and synchronous teaching for our students from different locations within our school network. In
our online tri-teacher lectures, we invite external education consultants and experts to provide interdisciplinary online lectures to
inspire students. In collaboration with these consultants and experts, our teachers prepare the course materials and live-stream the
courses to our students. In this process, our teachers also ensure the implementation of teaching plans, instruct students with their
after-class exercises to supervise the progress of their study plans and offer guidance to the moral development of our students. Our
teachers for graduating classes in our high schools recorded a series of courses to assist the self-study of our graduating high school
students during the winter break. We also provided our graduating high school students with guidance in college admission and college
major selection through our online tutorials. In addition, we collaborated with People’s Daily Online to produce a live broadcast
entitled “The Same Class” to share the knowledge of COVID-19 prevention and control and the arrangement of online teaching
during the extended winter break for all of our students, their parents and our employees.
Our online education services have become an important
enhancement to our schools and programs to diversify our teaching methods, encourage independent learning and enhance parent involvement.
We currently provide online education services and online tri-teacher lectures for nine of our schools, specifically Qiubei Long-Spring
Experimental Secondary School, Zhenxiong Long-Spring Advanced Secondary School, Xishuangbanna Long-Spring Experimental Secondary School,
Mengla Long-Spring Experimental Secondary School, Xinping Long-Spring Advanced Secondary School, Yunnan Yuxi Hengshui Experimental High
School, Qujing Hengshui Experimental Secondary School, Wenshan Long-Spring Experimental Secondary School and Yuanjiang County District
High School. We have eight schools offering all the courses and one school offering a majority of the courses. For our online tri-teacher
lectures provided at these schools, we cooperate with many external education consultants and experts who graduated from Peking University
or Tsinghua University with more than ten years of work experience on average and in-depth knowledge in the area of secondary education.
These external education consultants and experts provide online lectures and are responsible for 44 classes and a total of 2,154 students
at these schools as of December 31, 2021. Leveraging our online learning platform and the application of information technology, we have
optimized our staff costs incurred at the relevant schools. We also offer online education services for certain courses, such as physics,
at all of our other schools, and we expect to expand the online education services to all other courses offered at all of our schools
by September 2024.
Our experience in offering online education services
allows us to provide high-quality and effective education services and promote educational resources sharing. We may cooperate with other
online education service providers to deliver high-quality online courses to aspiring students in China, especially in Western China
and other regions with relatively inadequate high-quality public educational resources.
Cooperative Arrangements with Third Parties
We have a highly scalable, asset-light business
model premised on collaboration with third parties, including local governments and real estate developers. Our partners typically contribute
the land and school facilities. Our government partners also provide other forms of support, such as subsidies and preferential tax treatment.
In return, we provide educational resources, teachers and staff, and school management expertise Pursuant to our cooperative arrangements
with local governments, we admit a certain number of local students on behalf of the government as publicly-sponsored students. These
students pay us tuition typically at the level of public schools, lower than the normal tuition we charge, and we receive the tuition
difference or other forms of support from local governments. We believe the local governments are willing to cooperate with us because
of our ability to provide high-quality educational resources to the local community as well as our strong management expertise and solid
reputation. Our services raise local education standards for the under-developed areas and often invigorate the local economy by attracting
more talents to live and work in the area. In recognition of our contribution, we were awarded the title of excellent private school
in Yunnan province in 2015.
We have established stable cooperative relationships
with several local governments, which have an average term of approximately 16 years. Operating private secondary schools under the current
regulatory regime requires stringent approvals from the relevant governments. As such, we believe that, with our proven track record,
our ability to maintain cooperative relationship with local governments to obtain not only the approval but also the support to operate
our schools has created strong entry barriers and underpins our long-term growth.
In addition to collaborating with local governments,
we currently operate six schools by leasing lands from third parties. We expect to launch new schools in the second half of 2022, including
high schools and vocational schools. Our synergistic relationship with third parties allows us to launch new schools with relatively lower
upfront capital expenditures.
Our School Management System
Standardization
We have developed a series of standardized measures
and protocols for each stage in a school’s development and for a wide variety of scenarios in school management and operation, which
we require all of our schools to consistently adhere to. These measures and protocols generally set out key operating procedures on topics
such as curriculum design and delivery, student admission and administration, teacher training, parent communication, logistics, student
affairs, finance, human resources, internal control and quality control.
For example, we adopted a set of standardized
teaching protocol named the “Three-Three-One Teaching Method,” pursuant to which our teachers follow a seven-step streamlined
teaching protocol to offer education services related to student motivation (Guide and Think), course delivery (Discuss and Present),
and student feedback (Comment, Test, and Practice). Other teaching methods include the “Five-step Review Process,” which
helps our students review course materials efficiently. These standardized measures play a critical role in assisting our school management
teams in monitoring and supervising the various aspects of the schools’ daily operations. Our school management teams apply standardized
guidelines designed for each aspect of school operations, and are required to report the results generated from the application of these
standardized guidelines to the senior management team on a regular basis via teleconferences or in-person meetings.
Centralization
We have assembled our experienced teaching talents
in our centralized curriculum development team to prepare our curriculum offerings and course materials, which are adopted by every school
in our network. By centralizing curriculum development activities, we ensure the consistency of quality of our education service across
all schools within our school network.
Our centralized school management system also
encompasses our centralized oversight and implementation of strict quality control measures. Since 2017, we have established eight management
centers: (1) Center for International Educational Exchange, (2) Information Center, (3) Center for Academic Research, (4) Center for
Admission and Graduation, (5) Center for Teaching Materials, (6) Center for Student Development, (7) Center for Teacher Development and
(8) Center for Curriculum Reform and Development. Each center is headed by seasoned professionals with extensive experience in their
respective areas of expertise. These centers ensure that our schools are under effective and efficient management according to our standardized
operating measures and protocols.
Our standardized and centralized management model
also allows us to secure control over key resources, including teaching methods, education contents and school management experience,
making our business highly replicable. We believe that our standardized and centralized management system enables us to quickly ramp
up newly opened schools which often lack know-hows and talents to independently achieve the operational results and student academic
performances of established schools. Unified application of our standardized and centralized measures and protocols also preserves our
culture and teaching methods in the newly opened schools and is also conducive to efficiently achieve success in school operations and
student academic performances.
In April 2018, we established Long-Spring Educational
Science and Research Academy to manage all of our schools, develop and implement corporate strategies, design and optimize our education
service offerings, train teachers, and discharge other managerial functions. The Long-Spring Educational Science and Research Academy
also established several teaching research groups and course preparation groups to develop standardized course materials and teaching
methods in order to maintain consistent teaching quality of our education programs across all schools in our network.
Digitization
Our school management system also features the
concept of “digital campus” where we digitize various activities of campus administration and streamline every process of
school operations. We believe that our investment in educational technology distinguishes us from education service providers who only
observe traditional school management and teaching methods. We also believe that by pursuing and developing alternative school management
and teaching methods, we are better equipped to face the challenges in the marketplace, capitalize on new opportunities and deliver higher
quality education services.
Our Students
We primarily admit students from local communities
where our schools are located. The number of students we admit is largely limited by the quota set by national, provincial, and local
education authorities. For our high schools, the quotas are generally based on the governments’ evaluation of the capacity of each
of our schools.
We have implemented a selective admission process
for applicants to all of our schools. Our high schools participate in the unified admission procedure administered by local education
authorities and generally admit middle school graduates who applied for our schools through the unified admission procedure and who reach
or exceed our required Zhongkao exam scores. Our tutorial schools generally admit high school graduates who obtained our required scores
in their first Gaokao attempt but decided to try again in the following year instead of applying for colleges immediately.
Each of our high school is staffed with admission
managers who are deeply involved in our student admission processes, and are generally responsible for conducting market research and
attending various admission and marketing training programs, and preparing promotional materials. We also have an admission hotline dedicated
to answering any questions applicants may have about our schools and programs.
Our Teachers
We have an excellent and committed team of teachers.
Our teachers are knowledgeable in their respective subject areas and the development trends in China’s education environment, which
enable them to design curricula and exam preparation programs that help our students achieve satisfactory exam results. As of December
31, 2021, we had a total of 1,617 teachers in our schools for our continuing operations, all of whom had a bachelor’s degree. We
require all our teachers of our high schools and tutorial schools to obtain the qualifications required by PRC regulatory authorities.
We also have teachers with work experience at many nationally well-regarded secondary schools in China, to coach our teachers to ensure
the consistent implementation of effective teaching methods within our school network.
We have a professional and dedicated team of
principals, who are responsible for the strategic development and operation of our schools. In addition to lateral hiring of experienced
principals, many of our school principals have grown with us and have acted in several capacities within our school network, often starting
as teachers. As of December 31, 2021, we had a total of 48 principals and deputy principals across our school network for our continuing
operations, among whom nine principals had a master’s or higher degree. As of the same date, 12 of our high school principals were
recognized as Advanced Secondary School Teachers.
Teacher recruitment
As a part of our centralized management system,
we have established the Center for Human Recourses which is in charge of recruiting teachers and ensuring the overall teaching quality
of the newly recruited teachers. We recruit both college graduates and experienced teachers. Candidates without prior teaching experience
must hold a minimum of bachelor’s degree in the subject area they intend to teach, and score higher than the tier-1 university
cutoff score in Gaokao. Experienced teachers must hold a minimum of bachelor’s degree in the subject they intend to teach, and
bear the recommendations of reputable schools. Our Center for Human Resources evaluates their teaching skills and ethics through trial
lectures.
To recruit top college graduates, we organize on-campus
job fairs and post job openings online. We have also cooperated with reputable universities to ensure a steady supply of high-quality
teachers for our high schools. For example, we currently intend to recruit 256 teachers, with at least 40% holding a master’s degree
or above, from universities designated under the national Double First Class University Plan in China by 2022. We have also designated
top-tier universities, including among others, Peking University, Tsinghua University, Beijing Normal University, Southwest University
and Central China Normal University, as our target universities on which we focus our recruitment efforts. In addition, we have entered
into agreements with 11 universities in China, such as Xi'an Jiaotong University, Harbin Institute of Technology and Lanzhou University,
and provided exclusive internship and externship opportunities for their students and graduates.
Teacher compensation
We offer competitive compensation packages to
our teachers. In addition to base salary, our teachers in graduating classes in our high schools also are entitled to performance-based
bonuses determined by the academic results achieved by their students. The average annual salary of our teachers of our high schools
and tutorial schools in Yunnan province were RMB124,738 and RMB173,882 in 2021, respectively.
With the aid of our cooperative arrangements
with local governments, teachers in most of our high schools may also receive various forms of financial supports and perks from the
local governments in addition to compensation from us. See “—Cooperative Arrangements with Third Parties” for details.
We believe the competitive compensation packages and perks help us recruit and retain talented teachers who play a critical role in carrying
out our strategies, delivering our curricula, and helping our students succeed.
Teacher training
We attach great importance to training our teachers
and established the Long-Spring Educational Science and Research Academy to facilitate teacher trainings across our school network. In
addition to solidifying their teaching skills and widening their knowledge pool, our trainings also focus on developing our teachers’
professional responsibilities and ethics. Each newly-hired teacher is required to participate in a month-long training session which
focuses on ethics, student and classroom management, and teaching skills and methodologies. Specifically, we implement a three-phase
approach for the training of our newly-hired teachers:
| ● | Phase I: we hold seminars on pedagogy and educational psychology,
conduct teaching skill evaluation, and introduce our teaching methodologies and protocols.
During this phase, we generally organize trainings at our headquarters. |
| ● | Phase II: we offer shadowing opportunities where newly-hired
teachers observe experienced teachers’ course delivery. |
| ● | Phase III: we assign a mentor for each newly-hired teacher
to improve their teaching skills. |
We also provide various training opportunities
to our teachers and principals, both at our headquarters and at the individual school level. For example, we have recently cooperated
with Tsinghua University to host training programs for our principals. We also plan to establish education research centers in Yunnan
province and Beijing to host training programs for teachers and promote research and development of educational methodologies. We require
our teachers to research and prepare for each class session. To ensure consistency across classrooms, our teachers must adhere to the
curriculum requirements developed by our centralized curriculum development team, and groups of teachers of the same subject attend joint
class-preparation sessions to ensure consistency in the content they deliver. In addition, we collaborate with well-known education and/or
research institutions to improve our teacher training capabilities.
Teacher evaluation and promotion
We have set up a performance-based teacher compensation
system where teachers’ compensation level is partially dependent on their performance. We consider various factors in evaluating
the performance for each teacher, including student average scores in the monthly exams, seniority, ethical behaviors and the managerial
functions they undertake.
In addition, we put in place a well-established
career path for our teachers, which we believe further incentivizes our teachers to improve their teaching skills and encourage loyalty.
Our decisions to promote teachers are based on each teacher’s individual performance and evaluation under the guidance issued by
local governments. Specifically, we consider our teachers’ educational backgrounds, seniority, research capabilities, and knowledge
in teaching methodologies.
Our Tuition
We typically charge our students tuition, boarding
fees, and other miscellaneous fees for meals, books, uniforms and other school supplies. Subject to applicable regulatory approvals,
we plan to adjust tuition in the future as our competitive positions change in the markets where we compete. The following table sets
forth the average tuition per student for our continuing operations by school type for the periods indicated.
| |
For the Year ended
December 31, | |
| |
2019 | | |
2020 | | |
2021 | |
| |
(in RMB) | |
Average tuition per student of our schools(1) | |
| | |
| | |
| |
High schools and tutorial schools for Gaokao repeaters | |
| 17,926 | | |
| 17,868 | | |
| 18,043 | |
| (1) | The
average tuition per student equals to the total tuition income of our schools during a certain
calendar year divided by the average student enrollment of such calendar year, which is arrived
at by averaging the number of students enrolled as of the end of the previous and the concerned
calendar years/periods. |
In determining the amount of tuition we charge,
we consider factors including the demand for our education programs, the cost of our operations, the geographical markets where our schools
are located, the tuition charged by our competitors, and our pricing strategy to gain market share. For details of our tuition, see “Item
5. Operating and Financial Review and Prospects—A. Operating Results—Key Components of Our Results of Operations—Revenues.”
We have established refund policies at each of
our schools for students who withdraw from our schools or transfer to a school outside our network. In general, prepaid tuition fees
and boarding fees can be refunded proportionately for the remaining year.
Marketing
We primarily market our schools to students and
parents located near the regions where our respective schools are located. To attract high-quality students and increase student enrollment,
we utilize a variety of marketing methods, including:
| ● | Referrals. As we have developed a reputation for offering
quality education, we rely strongly on word-of-mouth referrals by former students and their
parents who are satisfied with our education services. We believe that our extensive and
expanding alumni network will continue to offer a solid platform for referrals. |
| ● | Media advertising. To reach a larger base of audience
efficiently, we place advertisements about our schools through various media platforms, including
newspapers, radio and online and mobile platforms. |
| ● | Promotional events. From time to time, we introduce
our programs to potential feeder schools, distribute information booklets and invite prospective
students and their parents to visit our campuses, which allows us to reach potential students
directly and enable the active engagement with them. |
Competition
The education service market in China is rapidly
evolving and highly competitive. We compete primarily with public and private schools outside our network, especially those operating
in the same communities as our schools. We believe we are well-positioned to succeed in this market primarily due to our extensive operational
experiences, scalable asset-light business model, and our standardized and centralized school management system. Our competitive compensation
packages, supplemented by various forms of subsidies from local governments, enable us to recruit and retain talented teachers. Our students’
past success in Gaokao demonstrates the outstanding quality of our education services, and helps us build a strong and favorable reputation
among prospective students, which improved our ability to admit top students in the local communities.
Properties and Facilities
All of our properties are located in China. We
currently occupy a total combined gross floor area of approximately 782,296 square meters of facilities for 13 properties provided by
local governments or entities through our cooperative arrangements with them. The terms of such properties range from nine to 21 years.
By utilizing the properties developed by local governments, we avoid significant capital expenditures in connection with land procurement
and facilities construction. See “—Cooperative Arrangements with Third Parties.” For relevant risks, see “Item
3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Any unfavorable changes in our cooperative
relationships with third parties or favorable government policy treatment may adversely affect our business.”
We also lease properties with a total combined
gross floor area of approximately 199,877 square meters in Yunnan province, Shaanxi province, Sichuan province, Chongqing municipal and
Guizhou province from third parties to operate our schools. Our leases have terms of five years to 38 years.
We believe that the facilities which we currently
lease and occupy are adequate to meet our needs for the foreseeable future, and we believe that we will be able to obtain adequate facilities,
principally through leasing of additional properties, to accommodate our future expansion plans. For relevant risks, see “Item
3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Failure to control rental costs, control
the quality, maintenance and management of the leased school premises, obtain leases at desired locations at reasonable prices or failure
to comply with the applicable PRC property laws and regulations regarding certain of our leased and owned premises could materially and
adversely affect our business.”
Employees
We had 1,916 full-time employees for our continuing
operations as of December 31, 2021. All of our full-time employees are located in China. The following table sets forth the number of
our full-time employees for our continuing operations, categorized by function, as of December 31, 2021.
| |
| |
Teachers | |
| 1,617 | |
Administrative staff | |
| 266 | |
Supporting staff | |
| 33 | |
Total | |
| 1,916 | |
Our administrative staff primarily comprise our
management and administrative personnel and principals. Our supporting staff primarily comprise personnel providing support and services
in connection with our students’ campus life.
As required by PRC laws and regulations, we participate
in various employee social security plans for our employees that are administered by local governments, including housing, pension, medical
insurance and unemployment insurance. We believe we maintain a good working relationship with our employees.
Intellectual Property
Our schools hold copyrights to various course
materials that have been developed internally and provide a basis for improving the quality of our education service. Our strategic plan
calls for continued and extensive investment in maintaining and expanding these assets. We owned 39 trademarks in China as of December
31, 2021. We have registered 20 domain names, including www.longspringedu.com, as of the same date. To protect our intellectual properties,
we rely on a combination of trademark, copyright and trade secret laws. From time to time, we are required to obtain licenses with respect
to course materials owned by third parties for our education service, in particular for our Chinese-English bilingual programs which
require foreign-language educational materials.
Insurance
We maintain various insurance policies, such
as school liability insurance, student life insurance, auto insurance and key-man life insurance to safeguard against risks and unexpected
events. We do not maintain business interruption insurance. See “Item 3. Key Information—D. Risk Factors—Risks Related
to Our Business and Industry—We have limited insurance coverage with respect to our business and operations.” We consider
our insurance coverage to be in line with the industry practice as well as the customary practice in China.
Legal Proceedings
From time to time, we may become a party to various
legal or administrative proceedings arising in the ordinary course of our business, including actions with respect to intellectual property
infringement, violation of third-party licenses or other rights, breach of contract and labor and employment claims. We are currently
not a party to, and we are not aware of any threat of, any legal or administrative proceedings that, in the opinion of our management,
are likely to have any material and adverse effect on our business, financial condition, cash-flow or results of operations.
Regulations
Regulations on Foreign Investment in Education
in the PRC
Regulations on Foreign Investment
Pursuant to the PRC Law on Wholly Foreign-invested
Enterprises, which was promulgated by the SCNPC on April 12, 1986, last amended on September 3, 2016 and became effective on October
1, 2016, where the incorporation of wholly foreign-invested enterprises does not involve the implementation of special administrative
measures for foreign investment access, the incorporation, separation, merger, or any other major change and the operation period of
such enterprises are subject to record-filing administration.
The Implementation Rules on Wholly Foreign-invested
Enterprises of the PRC (the “Implementation Rules on Wholly Foreign-invested Enterprises”) was promulgated by the Ministry
of Foreign Trade and Economic Cooperation of the PRC (currently known as the MOFCOM) on December 12, 1990, amended by the State Council
on February 19, 2014, and became effective on March 1, 2014. According to the Implementation Rules on Wholly Foreign-invested Enterprises,
industries in which foreign investment is prohibited or restricted shall be regulated in accordance with the Provisions on Guiding the
Orientation of Foreign Investment and the Foreign Investment Industries Guidance Catalog.
According to the Foreign Investment Law of the PRC
(the “Foreign Investment Law”), adopted by the NPC on March 15, 2019 and came into effect on January 1, 2020, China shall
implement a management system of pre-establishment national treatment and a negative list for foreign investment. Under the pre-establishment
national treatment, the treatment given to foreign investors and their investments during investment access stage will not be lower than
that given to their domestic counterparts. The negative list refers to special administrative measures for foreign investment access in
specific industries as stipulated. China shall give national treatment to foreign investment beyond the negative list. The organization
form, institutional framework and standard of conduct of foreign-invested enterprises shall be subject to the provisions of the Company
Law and the Partnership Enterprise Law of the PRC, and other laws. Foreign investors shall not invest in any industry prohibited by the
negative list for foreign investment access. For any industry restricted by the negative list foreign investors shall conform to the investment
conditions as required in the negative list.
The Implementing Regulation for the Foreign Investment
Law of the PRC, adopted at the 74th executive meeting of the State Council on December 12, 2019 which came into effect on January 1,
2020, provides implementing measures and detailed rules to ensure the effective implementation of the Foreign Investment Law of the PRC.
The PRC Law on Sino-Foreign Equity Joint Ventures,
the PRC Law on Wholly Foreign-invested Enterprises and the PRC Law on Sino-Foreign Cooperative Joint Ventures were repealed simultaneously
as the Foreign Investment Law came into effect, and foreign-invested enterprises which were incorporated in accordance with such laws
before the implementation of the Foreign Investment Law may retain their original organization forms and other aspects for five years
upon the implementation hereof.
Subject to the Measures for Reporting of Foreign
Investment Information (the “Foreign Investment Information Measures”), which was jointly issued by the MOFCOM and the State
Administration for Market Regulation (the “SAMR”) on 30 December 2019 and came into effect on January 1, 2020. Beginning
on January 1, 2020, when foreign investors carry out investment activities directly or indirectly in China, foreign investors or foreign
invested enterprises shall submit investment information through the Enterprise Registration System and the National Enterprise Credit
Information Publicity System operated by the SAMR. Specifically, foreign investors or foreign-invested enterprises shall report their
establishments, modifications and cancellations and file their annual reports in accordance with the Foreign Investment Information Measures.
When a foreign-invested enterprise has completed filing of such reports, the relevant information will be passed by the competent market
regulation department to the competent commercial department, so the reports do not need to be submitted separately.
Special Administrative Measures for Foreign
Investment Access (Negative List) (2021)
Under the 2021 Special Administrative Measures, which
was promulgated by the NDRC and the MOFCOM on December 27, 2021 and became effective on January 1, 2022, the Special Administrative Measures
for Foreign Investment Access (Negative List) (2020) shall be repealed simultaneously as its implementation.
Pursuant to the 2020 Special Administrative Measures,
high school education is a restricted industry for foreign investors, and foreign investors are only allowed to invest in high school
education in cooperation with a domestic party and the domestic party shall play a dominant role in the cooperation, which means the
principal or other chief executive officers of the school shall be PRC citizens and the representatives of the domestic party shall account
for no less than half of the total members of the board of directors, the executive council or the joint administration committee of
the Sino-foreign cooperative educational institution. In addition, pursuant to the 2021 Special Administrative Measures, foreign investors
are not allowed to invest in compulsory education.
Regulations on Sino-Foreign Cooperation in
Operating Schools
Sino-foreign cooperation in operating schools or training
programs is specifically governed by the Regulation on Sino-Foreign Cooperative Education of the PRC (the “Sino-Foreign Regulation”),
which was promulgated by the State Council on March 1, 2003 and last amended on March 2, 2019, and the Implementation Rules for the Regulation
on Sino-Foreign Cooperative Education (the “Implementation Rules”), which was promulgated by the MOE on June 2, 2004 and became
effective on July 1, 2004.
The Sino-Foreign Regulation and its Implementation
Rules apply to the activities of educational institutions established in the PRC cooperatively by foreign educational institutions and
PRC educational institutions, the students of which are to be admitted primarily among PRC citizens. The Sino-Foreign Regulation and its
Implementation Rules encourage substantive cooperation between foreign educational institutions with relevant qualifications and experience
in providing high-quality education and PRC educational institutions, to jointly operate various types of schools in the PRC, with such
cooperation in the industries of higher education and occupational education being encouraged. The foreign educational institution must
have relevant qualifications and experience at the same level and in the same category of education. Sino-foreign cooperation schools
are not permitted, however, in compulsory education, namely primary schools and middle schools, and military, police, political and other
kinds of education that are of a special nature in the PRC. Any Sino-foreign cooperation school and cooperation programs shall be approved
by relevant education authorities and obtain the Permit for Sino-foreign Cooperation in Operating School. A Sino-foreign cooperation school
established without the above approval or permit may be banned by relevant authorities, be ordered to refund the fees collected from its
students and be subject to a fine of no more than RMB100,000, while a Sino-foreign cooperation program established without such approval
or permit may also be banned and be ordered to refund the fees collected from its students.
On June 18, 2012, the MOE issued the Implementation
Opinions of the MOE on Encouraging and Guiding the Entry of Private Capital in the Field 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 sino-foreign cooperative educational institution shall be less than 50%.
Regulations on Private Education in the PRC
Education Law of the PRC
On March 18, 1995, the NPC enacted the Education Law
of the PRC (the “Education Law”), which became effective on September 1, 1995. The Education Law sets forth provisions relating
to the fundamental education systems of the PRC, including a school education system comprising pre-school 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 should formulate plans for the development of education, and
establishes and operates schools and other educational institutions. Furthermore, it provides that, in principle, enterprises, social
organizations and individuals are encouraged to establish and operate schools and other types of educational institutions in accordance
with PRC laws and regulations. On December 27, 2015, the SCNPC published the Decision on Amendment of the Education Law, which became
effective on June 1, 2016. The amended Educational Law narrowed the provision prohibiting the establishment or operation of schools or
other educational institutions for profit to include only schools or other educational institutions founded with governmental funds or
donated assets.
In addition, the Education Law stipulates the
basic requirements to be fulfilled for the establishment of schools or any other educational institution. It also provides that the establishment,
modification or termination of schools or any other educational institution shall, in accordance with the relevant PRC laws and regulations,
go through the process of examination, verification, approval, registration or filing.
Law on Promoting Private Education
The Private Education Law was last amended and
became effective on December 29, 2018. Pursuant to the Private Education Law, private schools that provide diploma- and degree-oriented
education, preschool education, Self-Taught Higher Education Examination education and other cultural education shall be subject to examination
and approval by education authorities at or above the county level within the limits of their powers. Sponsors of private schools may
choose to establish non-profit or for-profit private schools at their own discretion. However, they may not establish for-profit private
schools providing compulsory education.
Implementation Rules of the Law on Promoting
Private Education
According to the Implementation Rules which became
effective on April 1, 2004 and was amended on May 14, 2021 with an effective date of 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 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, among others, merger,
acquisition and contractual arrangements; 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.
Several Opinions on Encouraging Private Entities
and Individuals to Operate Schools and Promoting the Healthy Development of Private Education
According to the Several Opinions on Encouraging
Private Entities and Individuals to Operate Schools and Promoting the Healthy Development of Private Education, which was issued by the
State Council on December 29, 2016, innovative institutional mechanisms shall be implemented in the field of private education, which
include but are not limited to: (i) classified registration and management shall be applicable to private schools, and the sponsors of
private schools may, at their own discretion, choose to establish non-profit or for-profit private schools; (ii) government support policies
shall be applicable to private schools. The people’s government at all levels are responsible for formulating and improving support
policies for non-profit private schools including but not limited to government subsidies, government procurement services, fund incentives,
donation incentives and land allocation. Meanwhile, the people’s government at all levels may support the development of for-profit
private schools by ways including but not limited to government procurement services and preferential tax treatments in accordance with
economic and social development and public services requirements; and (iii) broaden the financing channels for private schools, encourage
and attract private funds to enter into the field of private education. Financial institutions are encouraged to provide loans to private
schools with the pledge of the schools’ future operating income or intellectual property rights, while individuals or entities
are encouraged to make donations to non-profit private schools.
As of the date of this annual report, certain
local governments, such as Yunnan province, Inner Mongolia Autonomous Region, Shaanxi province, Sichuan province, Guizhou province and
Chongqing municipal, have promulgated their local regulations relating to legal person registration and administration for private schools
and certain local governments, and have issued general guidance to encourage the development of private schools. Among these local regulations
and guidance, some local governments, such as Yunnan province, Inner Mongolia Autonomous Region, Shaanxi province, Sichuan province,
Guizhou province and Chongqing municipal, require the existing private schools to register either as for-profit or non-profit schools
within a specific time period.
Implementation Rules on Classified Registration
of Private Schools
According to the Implementation Rules on Classified
Registration of Private Schools, which was issued jointly by the MOE, the Ministry of Human Resources and Social Security, the Ministry
of Civil Affairs, the State Commission Office of Public Sectors Reform and the SAIC on December 31, 2016 and became effective on the
same day, the establishment of private schools is subject to approval. Private Schools approved to be established shall apply for registration
certificate or business license in accordance with the classified registration regulations after they obtain the license for school operations
by competent government authorities.
Implementation Rules on the Supervision and
Administration of For-profit Private Schools
According to the Implementation Rules on the
Supervision and Administration of For-profit Private Schools, which was issued jointly by the MOE, the Ministry of Human Resources and
Social Security and the SAIC on December 31, 2016 and became effective on the same day, social organizations and individuals are permitted
to operate for-profit private colleges and universities and other universities, high schools and kindergartens while are prohibited from
operating for-profit private schools providing compulsory education.
According to the Implementation Rules on the
Supervision and Administration of For-profit Private Schools, social organizations and individuals operating for-profit private schools
shall have the financial resources appropriate to the level, type and scale of the school, and their net assets or monetary funds shall
be able to satisfy the costs of the school construction and development. Furthermore, social organizations operating for-profit private
schools shall be a legal person who is in good credit standing, and shall not be listed as an enterprise operating abnormally, in material
non-compliance with the laws, or being dishonest. Individuals operating for-profit private schools shall be PRC citizens who reside in
China, be in good credit standing without any criminal record and enjoy political rights and complete civil capacity.
Notice on the Registration and Administration
of the Name of For-profit Private Schools
According to the Notice of the SAIC and the MOE
on the Registration and Administration of the Name of For-profit Private Schools, which was issued on August 31, 2017 and became effective
on September 1, 2017, for-profit private schools shall be registered as limited liability companies or joint-stock limited companies
according to the Company Law of the PRC and the Law on Promoting Private Education, and its name shall comply with the relevant laws
and regulations on company registration and education.
Interim Measures on the Management of the
Collection of Private Education Fees
The Interim Measures on the Management of the
Collection of Private Education Fees, or Private Education Fees Collection Measures, was promulgated by the NDRC, the MOE and the Ministry
of Labor and Social Security (currently known as the Ministry of Human Resources and Social Security) on March 2, 2005. According to
the Private Education Fees Collection Measures and the Implementation Rules of the Law on Promoting Private Education, the types and
amounts of fees charged by private schools providing diploma- or degree-oriented education shall be examined by education authorities
or labor and social welfare authorities and approved by governmental pricing authorities; and, other private schools shall file its pricing
information with the governmental pricing authorities and publicly disclose such information. If a school raises its tuition levels without
obtaining proper approval or making the requisite filing with the relevant government pricing authorities, such school would be required
to return the additional tuition fees obtained through such raise and be held liable for compensation of any losses caused to the students
in accordance with relevant PRC laws.
The Several Opinions of the Central Committee
of the Communist Party of China and the State Council on Promoting the Price Mechanism Reform, which was issued on October 12, 2015,
allows for-profit private schools to determine their prices on their own, while the tuition-collecting policies of non-profit private
schools shall be determined by the provincial governments in a market-oriented manner and based on the local situations.
On July 12, 2016, Yunnan Development and Reform
Commission, Department of Education of Yunnan Province as well as Yunnan Provincial Department of Human Resources and Social Security
issued the Notice on the Implementation of Independent Pricing on Private Schools in Yunnan Province. According to this Notice, tuition
and boarding fees of the private schools in Yunnan province may be independently determined by the private schools according to the school-operating
cost, market demand and other factors, and be made available to the public.
On January 2, 2018, People’s Government
of Inner Mongolia Autonomous Region issued the Opinions on Encouraging Social Forces to Establish Education and Promoting the Healthy
Development of Private Education. Pursuant to this Opinions, fees of private schools are regulated by the market. Specific fee standards
are determined by the schools independently and implemented according to laws after being publicized to the public. Relevant authorities
shall strengthen the supervision during and after the event on the charging practices of private schools.
On July 16, 2018, People’s Government of
Guizhou province issued the Opinions on the Implementation of Supporting and Regulating Education by Social Forces and Promoting the
Healthy Development of Private Education. According to this Opinions, subject to the principles of fairness, openness, legitimacy and
good faith, the private schools providing academic education are entitled to determine the education fee rates on their own.
On January 14, 2018, People’s Government
of Shaanxi province issued the Opinions on the Implementation of Encouraging Social Forces to Establish Education and Promoting the Healthy
Development of Private Education. Pursuant to this Opinions, fees charged by non-profit private primary and secondary schools shall be
determined by local government in a market-oriented manner and based on the local situations, while for-profit private schools are allowed
to determine their prices on their own according to the market demand.
On August 17, 2020, MOE, NDRC, the Ministry of Finance,
and the State Administration for Industry and Commerce or the SAMR, and the General Administration of Press and Publication jointly released
the Opinions on Further Strengthening and Regulating the Administration of Education Fees (the “Opinions”), effective as of
the same date. The Opinions mainly stipulate the specific methods for non-profit private school’s fees shall be formulated by the
provincial people’s government; the fees of for-profit private schools shall be regulated by the market and determined by the school
themselves. For private schools established before November 7, 2016, the charging policies shall be managed as non-profit private schools
before the relevant procedures for classification registration are completed. In particular, it is strictly forbidden for the sponsors
of non-profit private schools and non-profit private Sino-foreign cooperative school sponsors to obtain proceeds from school-running such
as tuition income, distributing school balances (residual assets) or transferring proceeds from school running through related-party transactions
or affiliated parties or other means.
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 last amended 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 Fundamental Education (Trial) on June 8, 2001, which became effective on the same day, pursuant to which
schools providing fundamental 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 local education authorities have the power to determine the
curriculum standard for other courses, and schools may develop curriculums that are suitable for their specific needs.
Regulations on After-School tutoring
On July 24, 2021, the General Office of State Council
and the General Office of Central Committee of the Communist Party of China jointly promulgated the Alleviating Burden Opinion, which
provides that, among other things, (1) local government authorities shall no longer approve new after-school tutoring institutions providing
tutoring services on academic subjects for students in compulsory education, and the existing after-school tutoring institutions providing
tutoring services on academic subjects shall be registered as non-profit; (2) Academic AST Institutions are prohibited from raising
funds by listing on stock markets or conducting any capitalization activities and listed companies are prohibited from investing in Academic
AST Institutions through capital markets fund raising activities, or acquiring assets of Academic AST Institutions by paying cash or
issuing securities; and (3) foreign capital is prohibited from controlling or participating in any Academic AST Institutions through
mergers and acquisitions, entrusted operation, joining franchise or variable interest entities.
Any violation of the foregoing shall be rectified.
Moreover, the Alleviating Burden Opinion specifies a series of operating requirements that after-school tutoring institutions must meet,
including, among other things, administration and supervision over academic subjects tutoring institutions for students on grade ten
to twelve shall be implemented by reference to the relevant provisions of the Alleviating Burden Opinion.
Regulations on Intellectual Property in the PRC
Copyright
Pursuant to the Copyright Law of the PRC (the “Copyright
Law”), which was last amended on November 11, 2020 and became effective from June 1, 2021, copyrights include personal rights such
as the right of publication and attribution as well as property rights such as the right of production and distribution. Reproducing,
distributing, performing, projecting, broadcasting or compiling a work or communicating the same to the public via an information network
without permission from the owner of the copyright therein shall constitute copyright infringement unless otherwise provided in the Copyright
Law. The infringer shall, according to the circumstances of the case, undertake to cease the infringement, take remedial actions, offer
an apology, pay damages, etc.
Trademark
Pursuant to the Trademark Law of the PRC (the “Trademark
Law”), which was amended on August 30, 2013 and became effective on May 1, 2014, and last amended on April 23, 2019 and became effective
on November 1, 2019, the right to exclusive use of a registered trademark shall be limited to trademarks which have been approved for
registration and to goods for which the use of trademark has been approved. The validity period of a registered trademark shall be ten
years, counted from the date of approval of the registration. According to the Trademark Law, using a trademark that is identical with
or similar to a registered trademark in connection with the same or similar goods without the authorization of the owner of the registered
trademark constitutes an infringement. The infringer shall, in accordance with the relevant laws, undertake to cease the infringement,
take remedial actions, pay damages, etc.
Domain Name
In accordance with the Measures on the Administration
of Internet Domain Names, which was promulgated by Ministry of Industry and Information Technology of the PRC (the “MIIT”),
on August 24, 2017 and came into effect on November 1, 2017, the Implementation Rules of China Internet Network Information Center on
Domain Name Registration, which was promulgated by China Internet Network Information Center on May 28, 2012 and came into effect on May
29, 2012, domain name registrations are conducted through domain name service agencies established under relevant regulations, and the
applicant becomes a domain name holder upon successful registration. Pursuant to the Measures of the China Internet Network Information
Center on Domain Name Dispute Resolution, which was promulgated by China Internet Network Information Center on September 1, 2014 and
came into effect on the same date, domain name disputes shall be submitted to an organization authorized by China Internet Network Information
Center for resolution.
Regulations on Foreign Exchange in the PRC
Pursuant to the Foreign Exchange Administration Regulations
of the PRC, as amended on August 5, 2008, RMB is freely convertible for current account items, including dividend distributions, interest
payments, trade-and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans,
repatriation of investments and investments in securities outside China, unless prior approval of the SAFE, is obtained and prior registration
with SAFE is made. On May 10, 2013, SAFE promulgated the Circular of SAFE on Printing and Distributing the Administrative Provisions on
Foreign Exchange in Domestic Direct Investment by Foreign Investors and Relevant Supporting Documents (the “SAFE Circular 21”),
which was amended on October 10, 2018. It provides for and simplifies the operational steps and regulations on foreign exchange matters
related to direct investment by foreign investors, including foreign exchange registration, account opening and use, receipt and payment
of funds, and settlement and sales of foreign exchange.
Pursuant to the Circular of the SAFE on Further Improving
and Adjusting Foreign Exchange Administration Policies for Direct Investment (the “SAFE Circular 59”), which was promulgated
on November 19, 2012 and became effective on December 17, 2012, and was further amended on May 4, 2015 and October 10, 2018, approval
is not required for the opening of an account entry in foreign exchange accounts under direct investment. The SAFE Circular 59 also simplifies
the capital verification and confirmation formalities for foreign-invested entities, the foreign capital and foreign exchange registration
formalities required for the foreign investors to acquire equities from PRC parties, and further improves the administration on exchange
settlement of foreign exchange capital of foreign-invested entities.
Pursuant to the SAFE Circular 37, promulgated and
becoming effective on July 4, 2014, (1) a PRC resident shall register with the local SAFE branch before he or she contributes assets or
equity interests in an overseas special purpose vehicle (the “SPV”), that is directly established or controlled by the PRC
resident for the purpose of conducting investment or financing; and (2) following the initial registration, the PRC resident is required
to register with the local SAFE branch for any major change, in respect of the SPV, including, among other things, a change in the SPV’s
PRC resident shareholder(s), name of the SPV, term of operation, or any increase or reduction of the SPV’s registered capital, share
transfer or swap, and merger or division. Pursuant to the SAFE Circular 37, failure to comply with these registration procedures may result
in penalties.
Pursuant to the SAFE Circular on Further Simplifying
and Improving the Direct Investment-related Foreign Exchange Administration Policies (the “SAFE Circular 13”), which was promulgated
on February 13, 2015 and became effective on June 1, 2015, the foreign exchange registration under domestic direct investment and under
overseas direct investment is directly reviewed and conducted by banks in accordance with the SAFE Circular 13, and the SAFE and its branches
shall perform indirect regulation over the direct investment-related foreign exchange registration through banks.
Regulations on Loans to and Direct Investment
in the PRC Entities by Offshore Holding Companies
According to the Implementation Rules on the
Provisional Regulations on Statistics and Supervision of Foreign Debts promulgated by the SAFE on September 24, 1997 and the Interim
Provisions on the Management of Foreign Debts promulgated by the SAFE, the State Development Planning Commission (currently known as
the NDRC) and the MOF and becoming effective from March 1, 2003, loans by foreign companies to their subsidiaries in China, which accordingly
are foreign-invested enterprises, are considered foreign debts, and such loans must be registered with the local branches of the SAFE.
Under its provisions, the total amount of accumulated medium-term and long-term foreign debts and the balance of short-term debts borrowed
by a foreign-invested enterprise is limited to the difference between its total investment and the registered capital.
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) such foreign investor acquires equity interests or subscribes for new equity interests
in a domestic enterprise through an increase of registered capital in the domestic enterprise and thereby converting it into a foreign-invested
enterprise, or (2) such 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 such assets to establish a foreign-invested enterprise.
According to Article 11 of the M&A Rules, where a domestic enterprise or individual, through foreign enterprise established or controlled
by it/him/her, acquires a domestic enterprise which is related to or connected with it/him/her, approval from the MOFCOM is required.
According to the Interim Administrative Measures
for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises, the merger and acquisition of domestic enterprises
by foreign investors shall, if not involving special administrative measures for foreign investment access and affiliated mergers and
acquisitions, be subject to the record filing measures.
Pursuant to the Manual of Guidance on Administration
for Foreign Investment Access, which was issued and became effective on December 18, 2008 by the Department of Foreign Investment Administration
of the MOFCOM, notwithstanding the fact that (1) the domestic shareholder is connected with the foreign investor or not, or (2) the foreign
investor is existing or new investor, the M&A Rules shall not apply to the transfer of equity interests in an incorporated foreign-invested
enterprise from the domestic shareholders to the foreign investors.
C. Organizational Structure
We are a holding company that does not have any
substantive operations. We conduct our operations primarily through our subsidiaries and affiliated entities in China. For more information,
see “—Our Contractual Arrangements.”
The following diagram illustrates our simplified
corporate structure, including our principal subsidiaries, the VIE and other principal affiliated entities, as of the date of this annual
report.
| (1) | Mr. Shaowei Zhang and Ms. Yu Wu hold 86.76% and 9.64% equity interests
in Long-Spring Education, respectively. The remaining 3.6% equity interests of Long-Spring Education are held by five limited partnerships
established to hold interests for certain of our employees. |
|
(2) |
The 11 schools comprise Kunming Xishan Long-Spring Experimental Secondary
School, Kunming Chenggong Long-Spring Experimental Secondary School, Yiliang Long-Spring Experimental Secondary School, Qujing
Hengshui Experimental Secondary School, Yunnan Yuxi Hengshui Experimental High School, Yunnan Hengshui Experimental Secondary
School—Xishan School, Yunnan Zhongchuang Education Tutorial School, Yunnan Long-Spring Foreign Language Secondary School,
Zhenxiong Long-Spring Advanced Secondary School, Qiubei Long-Spring Experimental Secondary School, and Mengla Long-Spring
Experimental Secondary School. |
|
(3) |
We have registered Xinping Long-Spring Advanced Secondary School as Xinping Long-Spring Advanced Secondary School Co., Ltd., Hengshizhong Education Tutorial School as Kunming Guandu Hengshizhong Education Training School Co., Ltd., and Xishuangbanna Long-Spring Experimental Secondary School as Xishuangbanna Long-Spring Experimental Secondary School Co., Ltd., all of which were registered as for-profit private schools. |
|
(4) |
We are in the process of registering Chengdu Long-Spring Tutorial School, Shaanxi Hengshi Tutorial School, Chongqing Hengshi Tutorial School with the local market supervision and administration department or the local civil affairs bureau and obtaining private school operation permits for some of such schools. |
|
(5) |
The sponsor of Guizhou Zunyi Tutorial School is Mr. Shaodong Zhang, a third-party individual, while it is actually operated by Zunyi Hengshi Education Technology Co., Ltd. |
Under the PRC laws, for-profit private
schools are registered as companies and the entities and individuals who establish them are registered as shareholders of such schools
and non-profit private schools are registered as private non-enterprise units and the entities and individuals who establish them 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 and regulatory matters, but differ
with regard to the right of a sponsor to receive proceeds 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, the VIE and schools/subsidiaries held by the VIE from our continuing operations.
Subsidiaries |
|
Place
of Incorporation |
First High-School BVI |
|
BVI |
First High-School HK |
|
Hong Kong |
Yunnan Century Long-Spring Technology Co., Ltd. |
|
PRC |
Yunnan Long-Spring Logistics Service Co., Ltd. |
|
PRC |
VIE |
|
Place
of Incorporation |
Long-Spring Education Holding Group Limited |
|
PRC |
Subsidiaries/schools held by the VIE |
|
Place of Incorporation |
Beijing Hengyue Education Technology Co., Ltd. |
|
PRC |
Beijing Hualing International Human Resources Co., Ltd |
|
PRC |
Ordos Hengyue Education Technology Co., Ltd. |
|
PRC |
Ordos Hengshui Experimental High School |
|
PRC |
Yunnan Zhongchuang Education Tutorial School |
|
PRC |
Kunming Xishan Long-Spring Experimental Secondary School |
|
PRC |
Kunming Chenggong Long-Spring Experimental Secondary School |
|
PRC |
Yunnan Hengshui Experimental Secondary School—Xishan School |
|
PRC |
Yiliang Long-Spring Experimental Secondary School |
|
PRC |
Yunnan Long-Spring Foreign Language Secondary School Dianchi Resort District School |
|
PRC |
Qujing Hengshui Experimental Secondary School |
|
PRC |
Yunnan Yuxi Hengshui Experimental High School |
|
PRC |
Kunming Guandu Hengshizhong Education Training School Co., Ltd. |
|
PRC |
Xinping Long-Spring Advanced Secondary School Co., Ltd. |
|
PRC |
Shanxi Long-Spring Enterprise Management Co., Ltd. |
|
PRC |
Datong Hengshi Gaokao Tutorial School |
|
PRC |
Xishuangbanna Long-Spring Experimental Secondary School Co., Ltd. |
|
PRC |
Guizhou Long-Spring Century Technology Co., Ltd. |
|
PRC |
Guizhou Hengshizhong Technology Co., Ltd. |
|
PRC |
Yunnan Lihua Education Technology Co., Ltd. |
|
PRC |
Zhenxiong Bainian Long-Spring Technology Co., Ltd. |
|
PRC |
Zhenxiong Long-Spring Advanced Secondary School |
|
PRC |
Qiubei Long-Spring Experimental Secondary School |
|
PRC |
Wenshan Long-Spring Experimental Secondary School |
|
PRC |
Mengla Long-Spring Experimental Secondary School |
|
PRC |
Kunming Chenggong Times Giant Tutorial School Co., Ltd. |
|
PRC |
Beijing Yigao Education Technology Co., Ltd. |
|
PRC |
Zhengzhou Hengshi Hengzhong Education Technology Co., Ltd. |
|
PRC |
Shenyang Century Long-Spring Technology Co., Ltd. |
|
PRC |
Xiamen Hengshi Education Technology Co., Ltd. |
|
PRC |
Shenzhen Hengshi Education Technology Co., Ltd. |
|
PRC |
Chongqing Hengshi Education Technology Co., Ltd. |
|
PRC |
Sichuan Century Long-Spring Technology Co., Ltd. |
|
PRC |
Mengzi Bainian Long-Spring Education Technology Co., Ltd. |
|
PRC |
Panzhihua Bainian Long-Spring Education Technology Co., Ltd. |
|
PRC |
Yunnan Hengshun Property Service Co., Ltd. |
|
PRC |
Zunyi Hengshi Education Technology Co., Ltd. |
|
PRC |
Yunnan Long-Spring Education Holding Group Hengshui Experimental Middle School Management Co., Ltd |
|
PRC |
Shaanxi Century Changshui Education Technology Co., Ltd. |
|
PRC |
Shaanxi Hengshi Hengzhong Education Technology Co., Ltd. |
|
PRC |
Beijing Long-Spring Weilaijia Education Technology Co., Ltd. |
|
PRC |
Kunming Long-Spring Weilaijia Education Technology Co., Ltd. |
|
PRC |
Our Contractual Arrangements
Current PRC laws and regulations restrict foreign
ownership in the private education industry in China. We are a company registered in the Cayman Islands. Yunnan WFOE is our PRC subsidiary
and a foreign-invested enterprise under PRC laws. To comply with PRC laws and regulations, we primarily operate in China through our
affiliated entities, based on a series of contractual arrangements by and among Yunnan WFOE, our affiliated entities, and the shareholders
of Long-Spring Education.
Our contractual arrangements with our affiliated
entities and the shareholders of Long-Spring Education permit us to (1) exercise effective control over the affiliated entities, (2)
receive substantially all of the economic benefits of our affiliated entities, and (3) have an exclusive call option to purchase all
or part of the equity interests in our affiliated entities when and to the extent permitted by PRC law.
We do not have any equity interest in our affiliated
entities. However, as a result of these contractual arrangements, we control our affiliated entities through our PRC subsidiary, Yunnan
WFOE. As a result of our direct ownership in Yunnan WFOE and the contractual arrangements with our affiliated entities, we are the primary
beneficiary of our affiliated entities, and we have also consolidated their financial results in accordance with U.S. GAAP. 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 “—Risks Related to Doing Business in China.”
The following is a summary of the material provisions
of these contractual arrangements with our affiliated entities and the shareholders of Long-Spring Education executed in December 2018.
Exclusive Call Option Agreement.
Pursuant to the exclusive call option agreement, the shareholders of Long-Spring Education unconditionally and irrevocably granted Yunnan
WFOE or its designated entity the right to purchase at any time all or part of their equity interests in the affiliated entities at the
lowest price applicable under PRC laws and regulations. Without Yunnan WFOE’s prior written consent, the shareholders of Long-Spring
Education also refrain from (1) selling, assigning, transferring, or otherwise disposing of the equity or sponsorship interest, (2) increasing
or reducing the capital investment, (3) dividing the affiliated entities into or merging it with other entities, (4) disposing of any
of the assets of the affiliated entities, (5) terminating or contradicting any material contract entered into by the affiliated entities,
(6) procuring the affiliated entities to enter into transactions that may have material impact on their assets, liabilities, operations,
equity structure, or other legal rights, (7) procuring the affiliated entities to declare or distribute profits and/or returns, (8) amending
the article of association of the affiliated entities, and (9) allowing the affiliated entities to undertake any material obligation
beyond normal business activities.
School Sponsor’s and Directors’
Rights Entrustment Agreement. Pursuant to the school sponsor’s and directors’ rights entrustment agreement, the school
sponsors irrevocably authorized and entrusted Yunnan WFOE or its designated personnel to exercise all their rights as the school sponsor
of each school, including but not limited to the right to appoint and/or elect directors, council members, and supervisors of the school,
right to review the resolutions of the board of directors and the financial statement of the school, right to transfer school sponsor’s
interest, and right to decide whether the school would be for-profit or non-profit. Each director appointed by the sponsor of each school
unconditionally and irrevocably authorized and entrusted Yunnan WFOE to exercise all the rights as a director of the school, including
but not limited to the right to attend meetings of the board of directors and vote, right to sign board resolutions and other legal documents
and other rights of directors under the school’s articles of association and the applicable PRC laws.
Shareholders’ Rights Entrustment
Agreement. Pursuant to the shareholders’ rights entrustment agreement, each shareholder of Long-Spring Education irrevocably
authorized and entrusted Yunnan WFOE to exercise all the respective rights as shareholders of the affiliated entities, including but
not limited to the right to attend shareholder’s meeting and vote, right to sign shareholders’ resolutions and other legal
documents, right to instruct the directors and other rights of shareholders under the school’s articles of association and the
applicable PRC laws.
Power of Attorney. Pursuant to
the school sponsors’ power of attorney, each school sponsor authorized and appointed Yunnan WFOE as its agent to exercise on its
behalf a school sponsor’s rights. Pursuant to the directors’ power of attorney, each director of Long-Spring Education authorized
and appointed Yunnan WFOE as his/her agent to exercise on his/her behalf a director’s rights. Pursuant to the shareholders’
power of attorney, each shareholder of Long-Spring Education authorized and appointed Yunnan WFOE as his/her/its agent to exercise on
his/her/its behalf a shareholder’s rights.
Exclusive Technical Service and Management
Consultancy Agreement and Business Cooperation Agreement. Pursuant to the exclusive technical service and management consultancy
agreement and business cooperation agreement, Yunnan WFOE provides exclusive technical services to the affiliated entities, including
software, website, and on-site technical support and training. It also provides exclusive management consultancy services such as staff
training, student admission support, internal management advisory, and market research and public relations. Each of the affiliated entities
pays Yunnan WFOE a service fee equal to the total amount of surplus of its operation. Yunnan WFOE also reserves the exclusive proprietary
rights to any technology or intellectual property developed in the course of the provision of services under the agreements. Without the
prior written consent of Yunnan WFOE, the affiliated entities cannot accept services provided by or establish similar cooperation relationship
with any third-party. The agreements will remain effective unless Yunnan WFOE and/or the designated entity fully exercised its purchase
rights pursuant to the exclusive call option agreement or unilaterally terminated by Yunnan WFOE with a 30-day advance notice. Unless
otherwise required by applicable PRC laws, the affiliated entities do not have any right to terminate the agreements.
Equity Pledge Agreement. Pursuant
to the equity pledge agreement, the shareholders of Long-Spring Education unconditionally and irrevocably pledged and granted first priority
security interests over all of his/her/its equity interest in the affiliated entities, as well as all related rights, to Yunnan WFOE
as security for performance of all the contractual arrangements. Without Yunnan WFOE’s prior written consent, the shareholders
of Long-Spring Education must not transfer the equity interest or create further pledge or encumbrance over the pledged equity interest.
They also waived any pre-emptive rights upon enforcement, and Yunnan WFOE can enforce upon default by transferring all or part of the
equity interest, selling the pledged equity interest, or disposing of the pledged equity interest in any other way to the extent permitted
by PRC laws and regulations.
Spousal Undertaking. Pursuant to
the spousal undertaking executed by the spouses of the shareholders of Long-Spring Education, the signing spouses consented to the contractual
arrangements with respect to the equity interest in Long-Spring Education, including its pledge, transfer, and disposal in any other
forms. The spouses will not participate in the operation, management, liquidation, or any other matters in relation to the affiliated
entities. They authorized the shareholders of Long-Spring Education to exercise their shareholding rights on behalf of them to ensure
the interest of Yunnan WFOE. This undertaking will not terminate until Yunnan WFOE and the spouses terminate it in writing.
Loan Agreement. Pursuant to the
loan agreement, Yunnan WFOE agreed to provide interest-free loans to Long-Spring Education. Each loan will be for an infinite term until
termination at the sole discretion of Yunnan WFOE. This agreement will terminate when all equity interests of the Long-Spring Education
are transferred to Yunnan WFOE.
In the opinion of our PRC legal counsel:
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except for the Affected Entities, the ownership structures of Yunnan WFOE and our affiliated entities in China, as of the date of this annual report, are not in violation of applicable PRC laws and regulations currently in effect; and |
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the contractual arrangements among Yunnan WFOE, our affiliated entities, and the shareholders of Long-Spring Education, governed by PRC law are legal, valid and binding, and will not result in any violation of applicable PRC laws and regulations currently in effect, except that the clause or provision of the Exclusive Technical Service and Management Consultancy Agreement and Business Cooperation Agreement, in relation to related party transactions between a private school providing compulsory education and Yunnan WFOE, have been rendered not legally enforceable since September 1, 2021. |
However, our PRC legal counsel has also advised
us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations
and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is
uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what
they would provide. If we or our contractual arrangements are found to be in violation of any existing or future PRC laws or regulations,
or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion
to take action in dealing with such violations or failures. 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 “—Risks
Related to Doing Business in China.”
D. Property, Plant and Equipment
Our principal executive offices are in Yunnan,
China. All of our properties are located in China. We currently occupy a total combined gross floor area of approximately 782,296 square
meters of facilities for 13 properties provided by local governments or entities through our cooperative arrangements with them. The
terms of such properties range from nine to 21 years. By utilizing the properties developed by local governments, we avoid significant
capital expenditures in connection with land procurement and facilities construction. We also lease properties with a total combined
gross floor area of approximately 199,877 square meters in Yunnan province, Shaanxi province, Sichuan province, Chongqing municipal and
Guizhou province from third parties to operate our schools. Our leases have terms of five to 38 years. We believe that the facilities
which we currently lease and occupy are adequate to meet our needs for the foreseeable future, and we believe that we will be able to
obtain adequate facilities, principally through leasing of additional properties, to accommodate our future expansion plans.