F-1/A 1 d98528df1a.htm AMENDMENT NO.3 TO FORM F-1 Amendment No.3 to Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on September 30, 2020.

Registration No. 333-248691

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Lixiang Education Holding Co., Ltd.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Not Applicable

(Translation of Registrant’s Name into English)

 

 

 

Cayman Islands   8200   Not Applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

No. 818 Hua Yuan Street

Liandu District, Lishui City, Zhejiang Province, 323000

People’ s Republic of China

+86 0578 2267142

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Stephanie Tang, Esq.   Dan Ouyang, Esq.

Hogan Lovells

11th Floor, One Pacific Place

88 Queensway

Hong Kong

+852 2219 0888

 

Wilson Sonsini Goodrich & Rosati

Professional Corporation

Unit 2901, 29F, Tower C, Beijing Yintai Centre

No. 2 Jianguomenwai Avenue

Chaoyang District, Beijing 100022

The People’s Republic of China

+86 10 6529 8300

 

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each of

Securities To Be Registered

  Amount of
Securities to be
Registered(1)
 

Proposed

Maximum

Offering Price
Per Share(1)

 

Proposed

Maximum

Aggregate

Offering  Price(1)(2)

 

Amount of

Registration Fee(4)

Ordinary Shares, par value US$0.0001 per share(2)(3)

  19,167,000   US$2.20   US$42,167,400   US$5,474

 

 

(1)

Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933.

(2)

Includes ordinary shares that are issuable upon the exercise of the underwriters’ option to purchase additional ADSs. Also includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These ordinary shares are not being registered for the purpose of sales outside the United States.

(3)

American depositary shares issuable upon deposit of ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-249010). Each American depositary share represents 5 ordinary shares.

(4)

Previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED SEPTEMBER 30, 2020

3,333,400 American Depositary Shares

Lixiang Education Holding Co., Ltd.

 

 

Representing 16,667,000 Ordinary Shares

 

 

This is the initial public offering of American depositary shares, or ADSs, of Lixiang Education Holding Co., Ltd. We are offering 3,333,400 ADSs. Each ADS represents 5 ordinary shares, par value US$0.0001 per share. We anticipate that the initial public offering price per ADS will be between US$9.00 and US$11.00.

Prior to this offering, there has been no public market for our ADSs or our ordinary shares. We have been approved for listing the ADSs on the Nasdaq Global Market under the symbol “LXEH.”

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

 

 

Investing in our ADSs involves risks. See “Risk Factors” beginning on page 14.

 

 

PRICE US$                PER ADS

 

     Per ADS      Total  

Initial public offering price

   US$                    US$                

Underwriting discounts and commissions(1)

   US$                    US$                

Proceeds, before expenses, to us

   US$                    US$                

 

(1)

See “Underwriting” for additional disclosure regarding underwriting compensation payable by us.

 

 

We have granted the underwriters an option to purchase up to an additional 500,000 ADSs to cover over-allotments.

 

 

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

The underwriters expect to deliver the ADSs against payment in U.S. dollars to purchasers on or about             , 2020.

AMTD

Loop Capital Markets

Prospectus dated             , 2020


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1  

THE OFFERING

     9  

RISK FACTORS

     14  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

     58  

USE OF PROCEEDS

     59  

DIVIDEND POLICY

     60  

CAPITALIZATION

     61  

DILUTION

     62  

ENFORCEABILITY OF CIVIL LIABILITIES

     64  

CORPORATE HISTORY AND STRUCTURE

     66  

SELECTED CONSOLIDATED FINANCIAL DATA

     72  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     75  

INDUSTRY

     94  

BUSINESS

     108  

REGULATION

     124  

MANAGEMENT

     140  

PRINCIPAL SHAREHOLDERS

     147  

RELATED PARTY TRANSACTIONS

     149  

DESCRIPTION OF SHARE CAPITAL

     151  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     161  

SHARES ELIGIBLE FOR FUTURE SALE

     172  

TAXATION

     174  

UNDERWRITING

     182  

EXPENSES RELATED TO THIS OFFERING

     194  

LEGAL MATTERS

     195  

EXPERTS

     196  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     197  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

You should rely only on the information contained in this prospectus or in any related free writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free writing prospectus. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

Neither we nor any of the underwriters have taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus or any filed free writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform them about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside the United States.

Until             , 2020 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

- i -


Table of Contents

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus, especially our consolidated financial statements and the related notes and sections titled ‘‘Risk Factors,” “Business,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Investors should note that Lixiang Education Holding Co., Ltd., our ultimate Cayman Islands holding company, does not directly own any substantive business operations in the PRC and our businesses in the PRC described in this prospectus are operated through our VIEs. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan, an independent research firm, to provide information regarding our industry and our market position in China. We refer to this report as the Frost & Sullivan report.

Our Education Philosophy

Our education philosophy is to guide the healthy development of our students and to establish a solid foundation for their lifelong advancement and happiness. We aim to provide high quality, distinctive and international education services.

Our Mission

Our mission is to nurture modern citizens with a sense of national pride and international vision. We believe that a quality education should be all-encompassing, covering health, moral character, academic results and overall competency.

Our Vision

We believe that education is of long-term significance. After nearly 20 years of development, we have formed our unique philosophy. We believe in learning with joy and inspiring our students’ creativity, imagination and innate talents. We aim to empower more and more graduates with the merits, knowledge and skills that are critical to the present and future developments of society.

Our Business

We are a prominent private primary and secondary education service provider in Lishui City, Zhejiang Province. According to the Frost & Sullivan report, we were one of the top ten private primary and secondary education institutes in Zhejiang Province in terms of the students enrolled on a monthly average basis for the 2019/2020 school year. We ranked second among the top private primary and secondary education institutes and second among the top private primary and middle school (excluding high school) education institutes in Lishui City both in terms of the students enrolled on a monthly average basis for the 2019/2020 school year.

Our private education services primarily include primary and middle school education. We are able to attract students of different age groups to our School. In 2003, we launched our Liandu Foreign Language School in Lishui City. Soon after our establishment, our School had been named a private school of exemplary quality in Lishui City by Lishui Education Bureau in 2005. As of June 30, 2020, we had two campuses offering primary and middle school private education in operation:

 

   

Baiyun Campus offering standard PRC curriculum programs at the primary school and middle school level; and

 

   

Yijing Campus—Featured Division offering featured PRC curriculum programs at the primary school level.



 

- 1 -


Table of Contents

We also offer high school education services at our High School Division through our collaboration with Qingtian High School, a public high school in Qingtian County, Lishui City, pursuant to a contractual arrangement for a period from June 2017 to June 2020. Under such arrangement, we are mainly responsible for student admission and progression and Qingtian High School is mainly responsible for the curriculum and teaching. The students of our High School Division use the facilities and attend the classes taught by Qingtian High School. After completion of three years of schooling, our students will receive their diplomas from us. Our high school curriculum programs are designed for students from overseas Chinese families returning to China who are commonly known as the overseas Chinese returnees.

We are well-known for our quality education services. We received the Quality Award which is the most authoritative award in recognition of education quality in various categories, such as winning school, education quality management team, education quality managing principals, best performing individual teacher and various single subjects, from the Liandu District Education Bureau during recent school years. For example, we won the Quality Award in primary school management efficiency of Lishui City and the Quality Award in middle school management progress of Lishui City in 2015. We won the first prize in Quality Award in primary school management efficiency of Lishui City and Quality Award for primary and middle school of Liandu District in 2017. In 2019, we also won the Middle School Quality Progress Award of Lishui City, the Middle and Primary School Teaching Quality Award of Liandu District of 2018, the Primary and Middle School Management Award of Liandu District and the first prize in Teaching Quality Award (middle school) of Liandu District.

We are committed to offering a comprehensive education with unique features. We are designated as the Foreign Language Experimental School of the National Basic Foreign Language Teaching Research Center. Our School is also the base of arts, sports, Chinese calligraphy and small-class education. We not only offer high quality standard PRC curriculum programs which equip our students with basic knowledge and skills, but also place an emphasis on featured curriculum programs which aim to inspire our students with unique teaching and learning methods, philosophies and environment.

Our School is highly recognized among the large overseas Chinese returnee community in Zhejiang Province. We are the Chinese education base recognized by the Overseas Chinese Affairs Office of the Zhejiang People’s Government and the Department of Education of Zhejiang Province. In December 2019, we were approved as an overseas Chinese international culture exchange base of Zhejiang Province.

Our students have achieved impressive results in unified examinations and have received numerous academic and athletic awards at the provincial, city and district levels throughout our history, which we believe demonstrates the quality of our education.

As of September 1, 2019, we had 4,558 students enrolled at our School in total. The table below sets forth the number of student enrollments and the number of teachers of our School as of the dates indicated.

 

     As of September 1,  
     2017      2018      2019  

Student enrollments

     4,268        4,478        4,558  

Number of teachers

     305        320        322  

Our net revenue increased by 6.7% from RMB142.5 million in 2018 to RMB152.1 million (US$21.9 million) in 2019. Our net revenue increased by 3.1% from RMB84.1 million for the six months ended June 30, 2019 to RMB86.7 million (US$12.3 million) for the six months ended June 30, 2020. Our net income increased by 72.3% from RMB27.4 million in 2018 to RMB47.2 million (US$6.8 million) in 2019. Our net income decreased by 24.9% from RMB36.2 million for the six months ended June 30, 2019 to RMB27.2 million (US$3.8 million) for the six months ended June 30, 2020.



 

- 2 -


Table of Contents

Our Strengths

We believe the following factors are our key competitive strengths that have contributed to our success and differentiate us from our competitors:

 

   

a prominent player in Zhejiang Province’s fast-growing private primary and secondary education industry;

 

   

reputable brand with strong market demand;

 

   

high quality education fostering all-rounded development of students;

 

   

premium pricing and steady enrollment growth creating high business visibility; and

 

   

visionary, experienced and passionate management.

Our Strategies

We intend to pursue the following business strategies:

 

   

increase the utilization rate of our campuses;

 

   

continue to provide competitive private education services and further promote our brand;

 

   

enhance our profitability by optimizing our pricing ability;

 

   

pursue strategic alliances with reputable schools;

 

   

develop private formal vocational education service offering; and

 

   

actively seek acquisition opportunities.

Our Challenges

We face risks and uncertainties in realizing our business objectives and executing our strategies, including:

 

   

substantial uncertainties exist with respect to the interpretation and application of the Decision of the Standing Committee of the National People’s Congress on Amending the Private Education Promotion Law of the PRC, or the Decision, and the amended Law for Promoting Private Education of the PRC, or the Promotion Law;

 

   

substantial uncertainties exist with respect to the Implementing Regulations for the Law of the PRC on the Promotion of Privately-run Schools (Revised Draft) (Draft for Comments), or the MOJ Draft for Comments, and relevant regulations issued recently, and if the MOJ Draft for Comments is promulgated in the form as published, it may impact the legality of our existing structure, our contractual arrangements and our expansion;

 

   

we may be unable to maintain or raise the tuition, meal and accommodation service fees we charge as planned;

 

   

our business depends on the market recognition of our brand and reputation that we may not be able to maintain;

 

   

we may fail to continue to recruit and retain students in our School;

 

   

our students’ academic performance may fall and satisfaction with our educational services may otherwise decline;

 

   

we may fail to continue to attract and retain qualified and committed teachers and other school personnel; and

 

   

we face intense competition in the education industry and we may fail to compete effectively;



 

- 3 -


Table of Contents

See “Risk Factors” and “Special Note Regarding Forward-Looking Statements And Industry Data” for detailed discussions of these and other risks and uncertainties associated with our business and investing in our ADSs.

Corporate History and Structure

In August 2001, Ms. Fen Ye, our chairlady and director, established Lishui Mengxiang, the sponsor of our School which was later founded in September 2003.

In August 2018, Lianwai Education Group Limited was incorporated under the laws of the Cayman Islands as our offshore holding company. In September 2018, Lianwai Investment Co., Ltd. was incorporated as Lianwai Education Group Limited’s wholly-owned subsidiary in the British Virgin Islands and Hong Kong Mengxiang Education Development Group Limited was incorporated as Lianwai Investment Co., Ltd.’s wholly-owned subsidiary in Hong Kong. In October 2018, Hong Kong Mengxiang Education Development Group Limited incorporated Liandu WFOE as its wholly-owned subsidiary in the PRC.

Due to PRC legal restrictions on foreign ownership in education services and the ability of schools providing compulsory education to make distributions to their sponsors, we carry out our business through Liandu WFOE. In 2018, Liandu WFOE entered into a series of contractual arrangements, as amended and restated, with Lishui Mengxiang, shareholders of Lishui Mengxiang, our School and the directors of our School. We do not have any equity interest in our VIEs. However, because of these contractual arrangements, we have control over our VIEs through Liandu WFOE. We have consolidated the results of our VIEs in our consolidated financial statements included elsewhere in this prospectus in accordance with U.S. GAAP. For more details and risks related to our VIE structure, please see “Corporate History and Structure—Corporate Structure,” “Corporate History and Structure—Contractual Arrangements” and “Risk Factors—Risks Relating to Our Corporate Structure.”

On May 26, 2020, Lianwai Education Group Limited changed its name to Lixiang Education Holding Co., Ltd. In August 2020, we established Zhejiang Lishui Xianke Agricultural Products Distribution Co., Ltd., a wholly-owned subsidiary of Liandu WFOE.



 

- 4 -


Table of Contents

The following diagram illustrates our corporate structure upon the closing of this offering, assuming no exercise of the underwriters’ option to purchase additional ADSs, including our VIEs:

 

 

LOGO

 

 

Notes:

 

(1)

Through Mengxiang Holdings Limited, a British Virgin Islands company which is wholly-owned and controlled by Ms. Fen Ye.

 

(2)

Through Lianwai Holdings Co., Ltd., a British Virgin Islands company which is wholly-owned and controlled by Ms. Hong Ye.



 

- 5 -


Table of Contents
(3)

Through Mengxiang Investment Co., Ltd., a British Virgin Islands company which is wholly-owned and controlled by Ms. Fang Ye.

 

(4)

According to PRC laws and regulations, entities and individuals who establish private schools are commonly referred to as “sponsors” instead of “owners” or “shareholders.” The economic substance of “sponsorship” with respect of private schools is substantially similar to that of ownership with regard to legal, regulatory and tax matters. However, the differences between sponsorship and equity ownership can be found in the specific provisions of the laws and regulations applicable to sponsors and owners, such as provisions regarding the right to receive returns on investment and the right to the distribution of residual properties upon termination and liquidation. See “Regulation—The Law for Promoting Private Education and the Implementation Rules for the Law for Promoting Private Education.”

Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. 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 have elected to take advantage of such exemptions.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Implications of Being a Controlled Company

Upon the completion of this offering, our Controlling Shareholder will beneficially own 67.5% of our total issued and outstanding ordinary shares, representing 67.5% of the total voting power, assuming that the underwriters do not exercise their over-allotment option, or 65.1% of our total issued and outstanding ordinary shares, representing 65.1% of the total voting power, assuming that the over-allotment option is exercised in full. As a result, we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because our Controlling Shareholder will hold more than 50% of the voting power for the election of directors. As a “controlled company,” we are permitted to elect not to comply with certain corporate governance requirements. Currently, we plan to rely on exemptions with respect to the requirement that a majority of the board of directors consist of independent directors, the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors, and the requirement that we have a compensation committee that is composed entirely of independent directors.

Implications of Being a Foreign Private Issuer

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 of the securities rules and regulations in the United States that are applicable to



 

- 6 -


Table of Contents

U.S. domestic issuers. Moreover, the information we are required to file with or furnish to the United States Securities and Exchange Commission, or the SEC, will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq corporate governance listing standards. We have relied on and intend to continue 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 Nasdaq Global Market.

Corporate Information

Our principal executive offices are located at No. 818 Hua Yuan Street, Lianbo District, Lishui City, Zhejiang Province, the PRC. Our telephone number at this address is +86 0578 2267142. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168, United States.

Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is www.lixiangeh.com. The information contained on our website is not a part of this prospectus.

Conventions That Apply To This Prospectus

Except where the context otherwise requires and for purposes of this prospectus only:

 

   

“ADRs” refers to the American depositary receipts that evidence our ADSs;

 

   

“ADSs” refers to our American depositary shares, each of which represents 5 ordinary shares;

 

   

“CAGR” refers to compound annual growth rate;

 

   

“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this prospectus only, Taiwan region, Hong Kong, and Macau;

 

   

“Liandu WFOE” refers to Zhejiang Mengxiang Consultancy Services Co., Ltd., a wholly foreign-owned enterprise incorporated under the laws of the PRC;

 

   

“Lishui Mengxiang” refers to Lishui Mengxiang Education Development Company Limited, a company incorporated under the laws of the PRC and the sponsor of our School;

 

   

“Mengxiang Holdings” or “Controlling Shareholder” refers to Mengxiang Holdings Limited, a British Virgin Islands company;

 

   

“RMB” or “Renminbi” refers to the legal currency of China and “$,” “dollars,” “US$” or “U.S. dollars” refers to the legal currency of the United States;

 

   

“SEC” refers to the United States Securities and Exchange Commission;

 

   

“shares” or “ordinary shares” refers to our ordinary shares;

 

   

“School” refers to Liandu Foreign Language School, comprising of Baiyun Campus, Yijing Campus—Featured Division and High School Division;

 

   

“school year” refers to the periods from September of each calendar year to July of the following calendar year which consists of two semesters. The first semester usually commences in September of



 

- 7 -


Table of Contents
 

each year and ends in January of the following year, while the second semester usually commences in March and ends in July of the following year;

 

   

“variable interest entities” or “VIEs” refer to Lishui Mengxiang and our School, the PRC entities of which we have power to control the management, and financial and operating policies and have the right to recognize and receive substantially all the economic benefits and in which we have an exclusive option to purchase all or part of the equity interests and all or a portion of the assets at the minimum price possible to the extent permitted by PRC law; and

 

   

“we,” “us,” “our company,” the “Company,” and “our” refer to Lixiang Education Holding Co., Ltd. (formerly known as Lianwai Education Group Limited), a Cayman Islands company and its subsidiaries and, in the context of describing our operations and consolidated financial information, its consolidated VIEs.

Our reporting currency is Renminbi because our business is conducted in the PRC and all of our revenue is denominated in Renminbi. This prospectus contains translations of Renminbi into U.S. dollars solely for the convenience of the reader. Unless otherwise stated, all translations of RMB into U.S. dollars in this prospectus were made at the rate of RMB7.0651 to US$1.00, the noon buying rate on June 30, 2020 and in the context of the financial data as of and for the year ended December 31, 2019, at the rate of RMB6.9618 to US$1.00, the noon buying rate on December 31, 2019, as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that the RMB or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all. On September 25, 2020, the noon buying rate for RMB was RMB6.8220 to US$1.00.



 

- 8 -


Table of Contents

THE OFFERING

The following assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.

 

Offering price

We expect that the initial public offering price will be between US$9.00 and US$11.00 per ADS.

 

ADSs offered by us

3,333,400 ADSs (or 3,833,400 ADSs if the underwriters exercise their option to purchase additional ADS in full).

 

ADSs outstanding immediately after this offering

3,333,400 ADSs (or 3,833,400 ADSs if the underwriters exercise their option to purchase additional ADS in full).

 

Ordinary shares outstanding immediately after this offering

66,667,000 shares (or 69,167,000 shares if the underwriters exercise their option to purchase additional ADS in full, comprised of 2,500,000 shares).

 

The ADSs

Each ADS represents 5 ordinary shares. The ADSs generally are uncertificated.

 

  The depositary will hold the ordinary shares underlying your ADSs and you will have rights as provided in the deposit agreement among us, the depositary and all holders and beneficial owners of ADSs issued thereunder.

 

  If we declare dividends on ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

  You may surrender your ADSs to the depositary in exchange for our ordinary shares. The depositary will charge you fees for such exchange. We and the depositary may amend or terminate the deposit agreement without your consent. Any amendment that imposes or increases fees or charges or which materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Option to purchase additional ADSs

We have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to 500,000 additional ADSs.


 

- 9 -


Table of Contents

Use of Proceeds

We estimate that we will receive net proceeds of approximately US$29.0 million from this offering (or US$33.6 million if the underwriters exercise their option to purchase additional ADSs in full), after deducting the underwriting discounts, commissions, and estimated offering expenses payable by us and assuming an initial public offering price of US$10.00 per ADS, being the midpoint of the estimated range of the initial public offering price shown on the front cover of this prospectus.

 

  We plan to use the net proceeds we receive from this offering to invest in business expansion including student and teacher recruitments, campus construction and maintenance and upgrade of facilities, strategic acquisition and general corporate purpose. See “Use of Proceeds” for additional information.

 

Lock-up

We, our directors, executive officers, existing shareholders and holders of share-based awards have agreed with the underwriters, subject to certain exceptions, not to sell, transfer, or otherwise dispose of any ADSs, ordinary shares, or similar securities for a period of 180 days after the date of this prospectus. See “Underwriting” for more information.

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of the risks you should carefully consider before investing in the ADSs.

 

Listing

We have been approved for listing the ADSs on the Nasdaq Global Market, or Nasdaq under the symbol “LXEH.” Our ADSs and ordinary shares will not be listed on any other stock exchanges or traded on any automated quotation system.

 

Payment and Settlement

The ADSs are expected to be delivered against payment on             , 2020. They will be registered in the name of a nominee of The Depository Trust Company, or DTC.

 

Depositary

Citibank, N.A.


 

- 10 -


Table of Contents

Summary Consolidated Financial Data

The following selected consolidated statements of operations data for the years ended December 31, 2018 and 2019, the selected consolidated balance sheet data as of December 31, 2018 and 2019 and the selected consolidated statements of cash flows data for the years ended 2018 and 2019 have been derived from the audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statements of operations data for the six months ended June 30, 2019 and 2020, the selected consolidated balance sheet data as of June 30, 2020 and the selected consolidated statements of cash flows data for the six months ended June 30, 2019 and 2020 have been derived from the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements. All adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented, have been included in the unaudited condensed consolidated financial statements. Our historical results are not necessarily indicative of results expected for future periods. You should read this Summary Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The following table presents our selected consolidated statements of comprehensive income for the years ended December 31, 2018 and 2019 and the six months ended June 30, 2019 and 2020.

 

    Year Ended December 31,     Six months ended June 30,  
    2018     2019     2019     2020  
    RMB     RMB     US$     RMB     RMB     US$  
   

(in thousands, except for share and per share data)

 
          (Unaudited)              

Selected Consolidated Statement of Comprehensive Income Data:

           

Net revenue(1)

    142,524       152,121       21,851       84,129       86,741       12,277  

Cost of revenues

    (89,610     (98,133     (14,096     (44,351     (53,792     (7,614
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    52,914       53,988       7,755       39,777       32,949       4,664  

Operating expenses

           

General and administrative expenses

    (27,621     (9,276     (1,332     (4,023     (7,361     (1,042
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    25,293       44,712       6,422       35,754       25,588       3,622  

Interest income

    86       53       8       26       26       4  

Interest expense

    (5,087     (3,426     (492     (2,068     (1,327     (188

Change in fair value of short-term investments

    61       5       1       —         (2     (0

Gain on disposal of Lianwai Kindergarten

    243       —         —         —         —         —    

Other income, net

    6,817       5,893       847       2,480       2,892       409  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    27,412       47,237       6,785       36,192       27,177       3,847  

Income tax expenses

    —         —         —         —         —         —    

Income from operations, net of tax

    27,412       47,237       6,785       36,192       27,177       3,847  

Net income

    27,412       47,237       6,785       36,192       27,177       3,847  

Net income attributable to the Company’s ordinary shareholders

    27,412       47,237       6,785       36,192       27,177       3,847  

Comprehensive income

    27,412       47,237       6,785       36,192       27,177       3,847  

Net earnings per share attributable to the Company’s ordinary shareholders

           

- Basic and diluted

    0.55       0.94       0.14       0.72       0.54       0.08  

Weighted average number of ordinary shares used in per share calculation

           

- Basic and diluted

    50,000,000       50,000,000       50,000,000       50,000,000       50,000,000       50,000,000  

 

Note:

 

(1)

Net revenue includes revenue from tuition, meal and accommodation services, other revenue and revenue from related parties.



 

- 11 -


Table of Contents

The following table presents our selected consolidated balance sheet data as of December 31, 2018 and 2019 and June 30, 2020.

 

     As of December 31,      As of June 30,
2020
 
     2018      2019  
     RMB      RMB      US$      RMB      US$  
     (in thousands)  

Selected Consolidated Balance Sheet Data:

              

Current assets:

              

Cash and cash equivalents

     2,648        24,723        3,551        28,904        4,091  

Short-term investments

     5,061        20,005        2,874        10,004        1,416  

Accounts receivable, net

     938        1,251        180                

Amounts due from related parties

     14,011        12,754        1,832                

Inventories

     543        1,169        168        1,162        164  

Prepayments and other current assets

     689        436        63        959        136  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     23,891        60,340        8,667        41,029        5,807  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-current assets:

              

Property and equipment, net

     202,683        204,194        29,331        204,871        28,998  

Land use rights

     39,607        38,667        5,554        38,197        5,406  

Intangible assets

     22        17        2        14        2  

Other non-current assets

            61        9        5,309        751  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current assets

     242,312        242,938        34,896        248,391        35,157  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     266,202        303,278        43,563        289,419        40,965  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities:

              

Short-term borrowings

     69,000        83,600        12,008        41,809        5,918  

Accounts payable

     12,336        9,262        1,330        6,443        912  

Deferred revenue, current

     16,886        17,729        2,547        21,392        3,028  

Salaries and welfare payable

     15,533        13,318        1,913        12,819        1,814  

Amounts due to related parties

     20,050        719        103        323        46  

Taxes payable

     577        27        4        82        12  

Accrued liabilities and other current liabilities

     5,859        5,763        828        7,496        1,061  

Total current liabilities

     140,241        130,419        18,734        90,363        12,790  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities

     2,052        1,712        246        733        104  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     142,293        132,131        18,979        91,096        12,894  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total shareholders’ equity(1)

     123,909        171,146        24,584        198,324        28,071  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and shareholders’ equity

     266,202        303,278        43,563        289,419        40,965  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note:

 

(1)

As of December 31, 2018 and 2019 and June 30, 2020, we had 500,000,000, 500,000,000 and 500,000,000 shares with a par value of US$0.0001 each authorized, of which 50,000,000, 50,000,000 and 50,000,000 shares were issued and outstanding, respectively.



 

- 12 -


Table of Contents

The following table presents our selected consolidated statements of cash flow data for the years ended December 31, 2018 and 2019 and the six months ended June 30, 2019 and 2020.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2018     2019     2019     2020  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  
          (unaudited)              

Selected Consolidated Cash Flows Data:

           

Net cash from operating activities

    52,324       58,775       8,443       27,296       30,297       4,288  

Net cash (used in)/generated from investing activities

    (2,637     (34,739     (4,990     3,444       18,355       2,598  

Net cash (used in)/generated from financing activities

    (82,048     (1,962     (282     2,269       (44,472     (6,295

Net (decrease)/increase in cash and cash equivalents

    (32,360     22,075       3,171       33,010       4,181       592  

Cash and cash equivalents at beginning of the year/period

    35,009       2,648       380       2,648       24,723       3,499  

Cash and cash equivalents at end of the year/period

    2,648       24,723       3,551       35,658       28,904       4,091  


 

- 13 -


Table of Contents

RISK FACTORS

An investment in our ADSs involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition, and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS AND INDUSTRY

Substantial uncertainties exist with respect to the interpretation and application of the Decision of the Standing Committee of the National People’s Congress on Amending the Private Education Promotion Law of the PRC, or the Decision, and the amended Law for Promoting Private Education of the PRC, or the Promotion Law.

The private education industry in the PRC is subject to various laws and regulations including among others the Promotion Law promulgated in December 2002, which are subject to changes to accommodate the development of the education industry, in particular, the private education industry from time to time. On November 7, 2016, the Decision amended the Promotion Law. On December 29, 2018, the Promotion Law was further amended. Under the Decision and the current Promotion Law, private schools may be established as non-profit or for-profit entities. The sponsor of a non-profit private school shall not receive proceeds from the running of the school and the cash surplus of the school shall be retained for the running of the school, while the sponsor of a for-profit private school may gain proceeds from the running of the school, and the cash surplus of the school may be distributed in accordance with applicable PRC laws. See “Regulation—Regulations on Private Education in the PRC.” Our School provides compulsory education and we expect that when the relevant implementation policies are in effect, our School sponsor will register it as a non-profit private school. We will conduct the registration for private schools in accordance with the applicable PRC laws and the implementing rules to be issued by the competent local government authorities.

There are substantial uncertainties regarding the interpretation and application of the Decision and the Promoting Law, as amended, which affect or may affect our industry as a whole or our School. Such uncertainties include, among others:

 

   

Uncertainties with respect to liquidation

According to the Decision, upon liquidation of for-profit private schools, school sponsors can obtain the schools’ remaining assets after the settlement of the schools’ indebtedness. The Decision also states that, a private school established before the promulgation of this Decision registered as non-profit, shall give appropriate compensation out of the remains to the sponsors after its property is liquidated, at its termination, based on their applications and by taking into full account of the circumstances. After that, the remaining assets shall be used for the operation of other non-profit private schools. The Decision is silent on how or by whom the aforesaid rest of the remaining assets of a liquidated non-profit private school shall be dominated or disposed of. Accordingly, we may not be able to transfer all or part of the remaining assets and residual interests of our School to Liandu WFOE upon their liquidation. As a result, our business, our financial position and the market price of our shares may be materially and adversely affected.

 

   

Uncertainties with respect to school fees

According to the Decision, the fees charged by private schools shall be determined in accordance with costs and market demand. The level of fees charged by for-profit private schools is determined by the schools at their discretion, while the level of fees charged by non-profit private schools shall be

 

- 14 -


Table of Contents

regulated by the relevant local government authorities. The tuition and boarding fees we charge at our School are currently regulated by the relevant local government authorities, and the regulations or rules implementing the Decision may continue to impose limits on the fees we charge at our School or prevent us from raising the tuition and boarding fees to our desired levels or at all. There is uncertainty as to whether there will be any material adverse impact on the fees charged by non-profit private schools generally or our School. We may not be able to maintain our current tuition and board fees, and may not be able to raise any of such fees at our desired rates, times and places or at all in the future. As a result, our business, our financial position and the market price of our shares may be materially and adversely affected.

 

   

Uncertainties with respect to supporting measures

According to the Decision, additional supportive measures will be provided for private schools. Non-profit private schools will enjoy more supportive measures than for-profit private schools, such as government subsidies, fund awards and incentive donations. Non-profit private schools will enjoy the same preferential tax policies as public schools, while for-profit private schools will not be expected to enjoy the same preferential tax policies as public schools and non-profit private schools. The Decision does not specify whether and how existing schools that choose to become for-profit private schools will be required to pay additional taxes during the transition process. As the relevant PRC tax laws have not been amended to distinguish between non-profit and for-profit private schools, there is currently uncertainty as to whether the tax treatments will change after the Decision becomes effective. According to the Decision, non-profit private schools will enjoy the same treatment as public schools with respect to the supply of land, which will be supplied by the government through allocation or other means, and for-profit private schools are not expected to enjoy the same treatment as public schools and non-profit private schools. There is uncertainty as to whether and how our School will be able to benefit from any of such additional supporting measures as contemplated or at all. We cannot assure you that the tax and other treatments contemplated under the Decision will not change or that they apply or continue to apply to our School after the Decision becomes effective.

As a result of the uncertainties in connection with the Decision, there can be no assurance that the Decision and subsequent interpretation in connection therewith will not materially and adversely affect our business, financial condition, results of operations and the market price of our shares. Moreover, any speculation in the market with respect to such interpretation, application and implementation, whether or not they will be materialized as speculated or at all, may negatively affect the market price of our shares.

While we intend to comply with all new and existing laws and regulations, we cannot assure you that we will always be deemed to be in compliance with the new laws and regulations, interpretation of which may remain uncertain and relevant PRC government authorities may take a different view or change their policy in the future, or that we will be able to efficiently change our business practice in line with the new regulatory environment. Any such failure could materially and adversely affect our business, financial condition and results of operations.

Substantial uncertainties exist with respect to the Implementing Regulations for the Law of the PRC on the Promotion of Privately-run Schools (Revised Draft) (Draft for Comments), or the MOJ Draft for Comments, and relevant regulations issued recently, and if the MOJ Draft for Comments is promulgated in the form as published, it may impact the legality of our existing structure, our contractual arrangements and our expansion.

On August 10, 2018, the Ministry of Justice of the PRC, or the MOJ, released the MOJ Draft for Comments for public review, which made certain significant changes to some provisions of the Implementation Rules for the Law for Promoting Private Education of the PRC, or the Implementation Rules. The MOJ has not provided

 

- 15 -


Table of Contents

the timeframe for the Implementation Rules. As of the date of this prospectus, the new implementing regulation on the Law for Promoting Private Education had not been promulgated and entered into force.

The MOJ Draft for Comments stipulates provisions of the operation and management of private schools, such as our School. The provisions and the related risks of the MOJ Draft for Comments mainly include:

 

   

foreign investment enterprises established in China and social organizations for which the foreign party is the actual controller shall not establish, participate in establishment of, or actually control private schools providing compulsory education. However, given that our actual controller, Ms. Fen Ye, is a natural person of Chinese nationality, we do not fall under the circumstance specified as the social organization for which the foreign party is the actual controller;

 

   

social organizations which adopt centralized school management models are not allowed to control non-profit private schools through ways such as mergers and acquisitions, franchising or contractual arrangements. We currently operate only one school in which case will not be generally recognized as adopting “centralized school management models”, and there are no express restrictions on acquiring control of for-profit private schools, or, establishing a new non-profit private school by us or jointly with any other third-party subject to other applicable PRC Laws; and

 

   

private schools which have transactions with related parties shall follow the principles of openness, fairness, and justice and shall not damage national interests, school interests, and teacher and student rights. Any material, long-term or recurring agreement entered into between a non-profit private school and its related parties shall be reviewed and audited by the education administrative authorities as well as the human resources and social security authorities in terms of the necessity and legality of such agreement and its compliance with the applicable laws and regulations. Accordingly, our contractual arrangements may be regarded as related-party transactions of our School and we may incur compliance costs for establishing disclosure mechanisms and undergoing review and audit by the relevant government authorities. Government authorities may also consider that one or more agreements underlying our contractual arrangements do not comply with applicable PRC laws and regulations and our contractual arrangements may be required to be amended or to accommodate other more stringent regulatory requirements.

As advised by our PRC legal counsel, the agreements under our contractual arrangements are valid, legal and binding under the existing applicable PRC Laws and regulations, and pursuant to the Legislation Law of the PRC, laws, administrative regulations and rules shall not be retroactive unless otherwise regulated specially. However, there can be no assurance that relevant PRC governmental agencies would reach the same conclusion as our PRC legal counsel. Based on the above, we are of the view that if the implementing regulation of the Private Education Promotion Law of the PRC is legislated in the same form as the MOJ for Comments, other than the risks listed above, our existing corporate structure and contractual arrangements will remain valid and adoptable.

Given the evolving regulatory environment, there is uncertainty as to the effective time and the provisions of the Implementation Rules and how they will be implemented and interpreted. Further, if the new implementing regulations on the Law for Promoting Private Education are officially promulgated in the near future, the local competent authorities will, in general, issue local implementation rules with which we are also required to comply. To the extent that we are unable to fully comply with any of these requirements, our business, financial condition and results of operations may be materially and adversely affected.

The Opinions on Further Strengthening and Regulating the Administration of Education Fees, or the Opinions, which were recently issued on August 17, 2020 by the relevant authorities, reiterate the provision from the Decision that the sponsors of non-profit privately-run schools shall not gain proceeds from the running of schools. The Opinions further underline that the sponsors of non-profit privately-run schools and non-profit privately-run sino-foreign cooperative educators shall be prohibited from obtaining 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 (a) whether the contractual arrangements fall within the activities of transferring the proceeds from the

 

- 16 -


Table of Contents

running of schools through transactions with related-parties and affiliated parties, (b) the relevant legal consequences of engaging in activities through contractual arrangements, or (c) 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 service fees to be paid by our School that are largely derived from the proceeds from the running of schools pursuant to our contractual arrangements. See “Corporate History and Structure—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 could be prohibited from obtaining the part of the service fees under our contractual arrangements that is funded by proceeds from the running of schools. While tuition income is a quintessential example of proceeds from the running of schools, it is not entirely clear whether meal and accommodation fees also fall into this category barring further legislative or regulatory clarification. In 2018 and 2019 and the six months ended June 30, 2020, we derived 93.4%, 94.6% and 98.2% of our total revenue, respectively, from tuition, meal and accommodation fees combined, and 68.0%, 72.2% and 83.9% of our total revenue, respectively, from tuition alone. 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 service 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 services fees to be paid by our School under the contractual arrangements.

We may be unable to maintain or raise the tuition, meal and accommodation service fees we charge as planned.

We derive the majority of our revenue from tuition, meal and accommodation service fees. We determine the rates of the tuition or other fees for our School primarily based on limits, guidelines and requirements set by the authorities and commercial considerations such as the demand for our educational programs, our cost of revenues, the tuition charged by our competitors, our pricing strategy, the economic conditions of Lishui City, Zhejiang Province and the general economic conditions in China.

Any increase in the tuition and accommodation service fees we charge at our School is subject to regulatory approval. Moreover, the Decision sets out certain specific requirements with respect to the level of fees charged by non-profit private schools. Therefore, we may face the risks that we can only maintain our current tuition and accommodation service fees, and may not be able to raise any of such fees for our School at our desired rates, times and places or at all in the future.

Even if our intended rates of tuition and other fees are approved by the authority, we may fail to attract sufficient prospective students to apply for our School at those levels. As a result, our business, financial condition and results of operations may be materially and adversely affected.

Our business depends on the market recognition of our brand and reputation that we may not be able to maintain.

The success of our business has depended and will continue to depend on our brand and reputation. Our brand and reputation may be affected by a number of factors, including student and parent satisfaction rates, teaching quality, our students’ academic performances and test scores, campus accidents, scandals involving our School, negative publicity and failure to pass governmental inspections. Some of these factors are beyond our control. In addition, as we continue to grow in size, expand our programs and extend our geographic reach, it may become difficult to maintain quality and consistency in the services we offer, which may lead to diminishing confidence in our brand name and negatively affect our reputation. If our brand or reputation is damaged or negatively affected, students’ and parents’ interest in our School may decrease and our business, financial condition and results of operations could be materially and adversely affected.

We have developed our student base primarily through word-of-mouth referrals. However, we cannot assure you that our marketing efforts will be successful or sufficient in further promoting our brand and reputation to help us maintain or increase student enrollment. Moreover, there can be no assurance that our brand and reputation will hold sufficient market recognition in the geographic areas where we plan to acquire or establish

 

- 17 -


Table of Contents

schools. If we are unable to further enhance the market recognition of our brand and reputation, or if we are required to incur excessive marketing expenses to promote our brand and reputation, our business, financial condition and results of operations may be materially and adversely affected.

We may fail to continue to recruit and retain students in our School.

The success of our business depends on the number of students enrolled in our School and in any school we may acquire or establish in the future. Our ability to attract and retain students depends on several factors, including our ability to:

 

   

enhance existing programs to respond to market changes and the demands of students and parents;

 

   

develop new programs or schools that appeal to students;

 

   

maintain and improve our reputation for providing high quality private education;

 

   

maintain and improve the academic and non-academic performance of our students;

 

   

recruit and retain qualified teachers;

 

   

manage our growth while maintaining the consistency of our teaching quality;

 

   

expand our student capacity;

 

   

effectively market our School and programs to prospective students; and

 

   

respond to the increasing competition in the market.

Our Yijing Campus—Featured Division was established in 2017 and recorded a utilization rate of 24.8% and 34.1% as of September 1, 2018 and 2019, respectively. If we are unable to attract and retain students in our School to fully utilize our campuses, we may record lower operation efficiency and we may be unable to benefit from our initial investments in Yijing Campus—Featured Division. As a result, our business, financial condition and results of operations may be materially and adversely affected.

Our students’ academic performance may fall and satisfaction with our educational services may otherwise decline.

Our students’ academic performance may be affected by various factors, including teaching method and materials, personal efforts, learning environment, pressure and family influence, some of which may be beyond our control. If their academic performance fall or do not improve as expected, our students may be unable to achieve the test scores necessary for their desired progressions and satisfaction with our educational services may decline. Satisfaction with our educational services may also decline due to negative publicity on our School, directors or management, lack of qualified teachers, unsatisfactory learning environment or other factors, which may result in, among others, a decrease in word-of-mouth referrals and reputation, students’ withdrawal from our School and decreased application for our School. If our student retention rate decreases substantially or if we otherwise fail to continue to attract and admit students due to decreased students’ or parents’ satisfaction with our educational services, our business, financial condition and results of operations may be materially and adversely affected.

We may fail to continue to attract and retain qualified and committed teachers and other school personnel.

We rely substantially on our teachers for the provision of educational services to our students. Our teachers are critical to maintaining the quality of our programs and upholding our brand and reputation. We must continue to attract qualified teachers who are committed to teaching. We face competition from public schools, other private education providers and other institutions for high quality candidates and may have to incur additional costs for our recruitment efforts. We may not be able to recruit enough teachers to keep pace with the growth of our student enrollment while maintaining consistent teaching quality and the overall quality of our education programs. In addition, criteria such as dedication, capability and loyalty are difficult to ascertain during the recruitment process and we may fail to identify and select the desired candidates.

Furthermore, we may be unable to retain high quality teachers or have to incur significant expenditures for our retention efforts. As of September 1, 2019, approximately 58.7% of our teachers had been with us for over

 

- 18 -


Table of Contents

five years and 33.5% of the same had been with us for more than ten years. However, there has been turnover of teachers at our School. We had 26 and 20 teachers who discontinued working with us, most of whom left for other job opportunities such as teaching roles with public schools and other private schools in 2018 and 2019 school years, respectively. Teachers may be dissatisfied with their workload, compensation, benefits, career path or working environment, which may disrupt our school operations and teaching activities, adversely affect our reputation and damage our ability to attract and retain teachers and students. Similarly, other school personnel such as administrators, counselors and financial staff also play an important role in the efficient and smooth running of our School. There is no guarantee that we can recruit and retain quality personnel to perform these functions in the future without incurring significant costs or at all. If we are unable to attract and retain qualified and committed teachers and other school personnel at reasonable costs or at all, or if there is a significant decrease in teaching quality or educational experiences in our School due to lack of qualified teachers or other school personnel, or if our teachers or other school personnel take disruptive actions to express their dissatisfaction with our School or us, our business, financial condition and results of operations may be materially and adversely affected.

We face intense competition in the education industry and we may fail to compete effectively.

The education sector in China is rapidly evolving, highly fragmented and competitive and we expect competition in this sector to persist and intensify. In the geographic market in which we operate our School, we compete with public schools and other private schools that offer primary school and secondary school education. We compete with these schools across a range of factors, including program and curriculum offerings, tuition level, school location and premises, qualified teachers and other key personnel.

Our competitors that are private schools may offer similar or superior educational programs, with different pricing and service packages that are more appealing than those offered at our School. Some of our competitors that are private schools may have more resources than us and may be able to devote greater resources than we can to the development and promotion of their schools and respond more quickly than we can to changes in student demands, testing materials, admissions standards, market needs or new technology. Our competitors that are public schools may have access to resources that may not be available to private schools and may be able to offer quality educational programs at lower prices than our School. According to the Frost & Sullivan report, tuition charged by public schools is generally lower than tuition charged by private schools, especially premium private schools. In addition, the PRC public education system continues to improve in terms of resources, admission policies and teaching quality and approaches. If public schools relax their admission limitations, offer more diversified curriculum, upgrade their campus facilities or reforms the exam-oriented education approach, they may become more attractive to students, which may lead to increased competition in the education industry.

As a result, we may be required to reduce tuition or increase spending in order to retain or attract students or pursue new market opportunities. If we are unable to successfully retain and attract students, maintain or increase our tuition level, recruit and retain qualified teachers or other key personnel, enhance the quality of our educational services or control competition costs, our business, financial condition and results of operations may be materially and adversely affected.

We may not be able to obtain all necessary approvals, licenses and permits and to make all necessary registrations and filings for our educational and other services in China.

We are required to obtain and maintain various approvals, licenses and permits and fulfill registration and filing requirements in order to operate our School and provide educational and other services to our students. For instance, we are required to obtain and/or renew a private school operation permit, obtain and/or renew a registration certificate for private non-enterprise entities, pass annual inspections conducted by the relevant government authorities and obtain approval from the relevant government authorities as to the scale and scope of our student recruitment activities. Currently, we have obtained and maintained all such approvals, licenses and permits required for our operation.

 

- 19 -


Table of Contents

While we intend to obtain all requisite approvals, licenses and permits, and complete the necessary filings, renewals and registrations on a timely basis for our School, there is no assurance that our efforts will result in full compliance as there may be factors beyond our control, intention and anticipation, and the local PRC authorities may have significant discretion in interpreting, implementing and enforcing the relevant rules and regulations. If we fail to obtain or renew the required approvals, licenses or permits in a timely manner or at all, we may be subject to fines, confiscation of the gains derived from our School, suspension of some or all of our School operations, be required to compensate the economic losses suffered by our students or other relevant parties, or be subject to other penalties or administrative actions, which may materially and adversely affect our business, financial condition and results of operations.

We may face risks in relation to our collaboration with Qingtian High School.

We offer high school education services in collaboration with Qingtian High School, a reputable public high school in Qingtian County, Lishui City, pursuant to a contractual arrangement for a period of from June 2017 to June 2020. Under such arrangement, we are mainly responsible for student admission and progression and Qingtian High School is mainly responsible for the curriculum and teaching. We currently do not intend to extend our cooperation with Qingtian High School upon the expiry of the current contractual arrangement as we plan to focus on current primary and middle school private education and explore other opportunities with respect to high school and secondary vocational education services, such as self-operation and acquisition opportunities. Although our existing students of our High School Division will continue to study with us until graduation, we will not recruit new students subsequent to June 2020, which may affect our operation and financial performance.

We are subject to general conditions and the education industry of Lishui City and/or Zhejiang Province as all of our operations are currently located in a single city.

Our School and its operations are currently located in Lishui City, Zhejiang Province. According to the Frost & Sullivan report, the population of Lishui City and Zhejiang Province in 2019 was 2.7 million and 58.5 million, respectively. While we hope to expand into other cities in the future, we expect that we will continue to generate the majority of our revenue from our School in Lishui City for the foreseeable future.

Consequently, we are highly susceptible to factors adversely affecting the PRC private education industry, or us, in Lishui City and/or Zhejiang Province. If Lishui City or Zhejiang Province experiences an event that materially and adversely affects its education industry or us, such as an economic downturn, a natural disaster or an outbreak of a contagious disease, or if any governmental authorities governing Lishui City or Zhejiang Province adopt regulations that place additional restrictions or burdens on us or on the education industry in general, our business, financial condition and results of operations may be materially and adversely affected.

In addition, because we currently operate only one school, any material negative development with respect to any of these schools could have a material adverse effect on our business, financial condition and results of operations as a whole.

Misconduct of students and employees and improper activities and any negative publicity concerning our School, our Company, our Controlling Shareholder, our directors or our employees may adversely affect us.

Misconduct of students and employees and improper activities may adversely affect our brand image, business and results of operations. In addition, any negative publicity concerning our School, our Company, our Controlling Shareholder, our directors, our employees or any of them, even if untrue, may damage our brand image and reputation, deter prospective students and teachers and take up excessive time of our management and other resources. As a result, our business, financial condition and results of operations may be materially and adversely affected.

 

- 20 -


Table of Contents

Our business depends on our ability to promptly and adequately respond to changes in admission requirements for higher-level education, testing materials and technologies.

Our middle and primary school students are subject to PRC high school and middle school entrance exams, as applicable. The admission scores for the various high schools or middle schools in China usually change from year to year and so do the admission requirements for overseas universities. Testing materials may also change in terms of focus areas, format and the manner in which such tests are administered. In addition, some admission tests may be conducted in a computer-based format, which requires certain level of computer proficiency by test takers. These changes require us to continually update and enhance the courses we offer and to continually train our students to take standardized tests so as to maximize their performance on these tests. If we fail to adequately prepare our students for admission tests in our everyday classroom teaching and any test preparation courses we offer, our students’ admissions rates to PRC high schools and middle schools, as applicable, may decrease and our programs and services may become less attractive to students. Furthermore, if we fail to timely develop and introduce new education services and programs in our School based on the changing education standards in China and abroad, our ability to attract and retain students may decrease. As a result, our reputation, business, financial condition and results of operations may be materially and adversely affected.

We may not be able to successfully implement our business strategies.

Our business strategies include organic growth, strategic alliance with reputable education institutes, acquiring and establishing schools. We may not succeed in implementing our business strategies due to a number of factors, including the following:

 

   

we may lose government support in Lishui City or in cities to which we plan to expand our operation;

 

   

we may not be able to admit all qualified students who would like to enroll in our School due to the capacity constraints of our school facilities;

 

   

we may fail to identify cities with sufficient growth potential in which to acquire or establish schools;

 

   

we may have limited access to capital resources or may have to rely on the shareholders’ guarantee in obtaining bank facilities;

 

   

we may fail to acquire or lease suitable land sites in the cities to which we plan to expand our operations;

 

   

we may fail to effectively market our School or brand in new markets or promote ourselves in existing markets;

 

   

we may not be able to replicate our successful growth model in new markets;

 

   

we may not be able to effectively integrate any future acquisitions into our operations;

 

   

we may fail to obtain the requisite licenses and permits from the authorities necessary to acquire or establish schools at our desired locations;

 

   

we may not be able to continue to enhance our course materials or adapt our course materials to changing student needs and teaching methods;

 

   

we may fail to follow the expected timetable with respect to the development of our School; and

 

   

we may fail to achieve the benefits we expect from our expansion.

If we fail to successfully execute our growth strategies, we may not be able to maintain our growth rate and our business, financial condition and results of operations may be materially and adversely affected.

We may expand our school network through acquisition but the scope of our acquisition may be limited by the MOJ Draft for Comments, and we may not be able to successfully integrate businesses that we acquire.

We may expand our school network through acquisition of additional for-profit private schools. We have limited experience in acquiring schools, and if the MOJ Draft for Comments is adopted in its current form, it may

 

- 21 -


Table of Contents

limit the scope of our acquisition plan as the number of target schools available for our acquisition may be reduced. As a result, we expect the competition for acquisition of target schools to intensify. We may not be able to successfully acquire the target schools we have identified as a result.

We further believe we face challenges in integrating business operations and management philosophies of acquired schools. The benefits of our future acquisitions depend in significant part on our ability to effectively and timely integrate management, operations, technology and personnel. The integration of acquired schools is a complex, time-consuming and expensive process that, without proper planning and implementation, could significantly disrupt our business and operations and reputation. The main challenges involved in integrating acquired entities include the following:

 

   

ability to find suitable targets;

 

   

retaining qualified teaching staff of any acquired school;

 

   

consolidating educational services and implementing our educational philosophy and curriculum;

 

   

integrating information technology platforms and administrative infrastructure;

 

   

ensuring and demonstrating to our students and their parents that the new acquisitions will not result in any adverse changes to our established brand image, reputation, service quality or standards; and

 

   

minimizing the diversion of our management’s attention from on-going business concerns.

Negotiating these acquisitions can be time-consuming, difficult and expensive, and may divert our management’s attention and result in debt or dilution to our shareholders. These acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our existing business. In addition, we may not successfully integrate our operations and the operations of the schools we acquire in a timely manner, or at all, and we may not realize the anticipated benefits or synergies of the acquisitions to the extent, or in the timeframe, we anticipated. As a result, our business, financial condition and results of operations may be materially and adversely affected.

While we have incurred initial capital outlay to establish new campuses, we may not be able to obtain a reasonable return during the startup or as expected, which may adversely affect our business, financial condition and results of operation.

Establishment of a new school and/or campus requires significant capital expenditures, including the construction or upgrade of campus and school facilities and other related expenses. We commenced schooling of grades 1 through 4 at the then Yijing Campus in 2003. The primary school education services at the then Yijing Campus were subsequently transitioned to our Baiyun Campus in July 2016 following which we renovated the then Yijing Campus and established our Yijing Campus—Featured Division. The operation of our Yijing Campus—Featured Division commenced in 2017. While the operation of our School is managed as a whole, in connection with establishing our Yijing Campus—Featured Division, we incurred capital expenditure of RMB25.1 million which mainly included renovation fees and purchases of office equipment and other facilities. The number of students enrolled in our Yijing Campus—Featured Division increased from 134 as of September 1, 2018 to 184 as of September 1, 2019, which represented a utilization rate of 24.8% and 34.1% as of September 1, 2018 and 2019, respectively. If we establish other campuses in the future, it may take time for us to fully utilize the new campuses and to obtain a reasonable return since their commencement of operations. If we are not able to increase our student enrollment at our new campuses during the startup or as expected, which may adversely affect our business, financial condition and results of operation.

We recorded net current liabilities as of December 31, 2018 and 2019 and June 30, 2020.

As of December 31, 2018 and 2019 and June 30, 2020, we had net current liabilities of RMB116.4 million, RMB70.1 million and RMB49.3 million, respectively. We cannot assure you that we will not experience periods

 

- 22 -


Table of Contents

of net current liabilities in the future. We may continue to record net current liabilities in future periods as we continue to expand. A net current liabilities position could expose us to liquidity risks, constrain our operational flexibility and adversely affect our ability to obtain financing and expand our business. There can be no assurance that we will always be able to generate sufficient cash flow from our operations or obtain necessary funding to meet our future financial needs, including repaying our loans upon maturity and finance our capital commitments. If we fail to meet our financial obligations, our business, liquidity, financial position and prospects could be materially and adversely affected.

We face risks related to health epidemics, natural disasters or terrorist attacks in China.

We offer accommodation service to our students of Baiyun Campus and Yijing Campus—Featured Division. We also provide on-campus or nearby off-site accommodation to our teachers and staff. The boarding and accommodation arrangements make our students, teachers and staff vulnerable to outbreaks of health epidemics such as the COVID-19 virus, H1N1 flu virus, avian influenza and severe acute respiratory syndrome, or SARS, and Influenza A virus, such as H5N1 subtype and H5N2 subtype flu viruses, natural disasters, such as earthquakes, floods, landslides, as well as terrorist attacks, other acts of violence or war or social instability, especially when such health epidemics, natural disasters or terrorist attacks take place in our School or in or near the regions where our School are located. As a result, our business, financial condition and results of operations may be materially and adversely affected.

An outbreak of COVID-19 was first reported in Wuhan, Hubei Province, the PRC in late 2019 and continues to spread within the PRC and globally. The new strain of coronavirus is considered highly contagious and may pose a serious public health threat. On January 30, 2020, the World Health Organization reportedly declared this COVID-19 outbreak a health emergency of international concern. In March 2020, the World Health Organization declared the COVID-19 a pandemic. Since the COVID-19 outbreak, the PRC government has imposed various strict measures with the aim to contain the virus including, but not limited to, travel restrictions, mandatory quarantine requirements, and postponed resumption of business operations. Our campuses had been closed down from February 2020 and we provided online education services to our students with the support from a third-party online resource provider. After a closedown of approximately three months as required by local education regulatory authority, our Baiyun Campus, Yijing Campus—Featured Division and High School Division resumed normal operation in April 2020. No students withdrew from our school due to the COVID-19 outbreak. As the students’ enrollment is conducted and our tuition and other fees are charged on a semester basis, it is anticipated that the COVID-19 outbreak will not have a material long-term impact on our financial and operation. However, the extent to which the COVID-19 outbreak impacts our financial condition and results of operations for the full year of 2020 cannot be reasonably estimated at this time and will depend on future developments, including new information which may emerge concerning the severity of the COVID-19 outbreak and the actions to contain the COVID-19 outbreak or treat its impact, and the impact on the economic growth and business of our customers for the foreseeable future, among others. In the event that we establish our own online platform or the legal requirements applicable to us change resulting from the changes in the regulatory environment in this area, we may be required to obtain all applicable permits, licenses, certificates and approvals. Any future outbreak of public health epidemics may restrict economic activities in affected regions, resulting in reduced business volume, disrupt our business operations and adversely affect our results of operations.

We may be affected by changes in our target customer group’s preferences towards primary school and middle school education.

We have designed our standard and featured PRC curriculum programs, engaged teachers and staff and constructed our school facilities primarily to serve the demands for high-quality primary and middle school education and, to the extent applicable, high school education of our target customer group, which is primarily the rapidly growing middle class in Zhejiang Province. As of September 1, 2019, 4,374 students enrolled in our standard PRC curriculum programs taught by our Baiyun Campus and High School Division, representing a majority of our total students as of the same date. We believe the demands for private education by our target

 

- 23 -


Table of Contents

customer group will continue to grow and expect the revenue from our standard PRC curriculum programs to continue to be the primary source of our revenue. However, our target customer group’s preferences for educational services may change. They may become less interested in standard PRC curriculum programs and be more attracted to international programs, international schools or other educational programs. As of June 30, 2020, we did not operate international schools. If our target customer group’s interest in PRC curriculum programs decreases, student enrollment in our School’ PRC curriculum programs may substantially decrease and we may need to lower our tuition to attract more students. As a result, our business, financial condition and results of operations may be materially and adversely affected.

We are subject to extensive governmental approvals and compliance requirements for the construction and development of our School and in relation to the land and buildings that we own.

For campuses and school facilities constructed and developed for our School, we must obtain various permits, certificates and other approvals from the relevant authorities at various stages of property development, including the land use right certificates, planning permits, construction permits, certificates for passing environmental assessments, certificates for passing fire control assessments, certificates for passing construction completion inspections and building ownership certificates.

In the event that if we lose the rights to any of our land or buildings, our uses of such land or buildings may be limited, or we may be forced to relocate and incur additional costs, which may result in disruptions to our school operations and materially and adversely affect our business, financial condition and results of operations. In addition, we may in the future encounter problems in obtaining the relevant permits, certificates and approvals for the construction and development of our School, which may negatively affect our growth strategies. As a result, our business, financial condition and results of operations may be materially and adversely affected.

Capacity constraints of our school facilities could cause us to lose students to our competitors.

The educational facilities of our School are limited in space and size which is also subject to regulatory approval from the competent departments in charge of urban and rural planning. We may not be able to admit all qualified students who would like to enroll in our School due to the capacity constraints of our current school facilities. Our Baiyun Campus’s capacity was 1,640 and 2,880 for its middle school and primary school as of September 1, 2018 and 2019, respectively. Our Baiyun Campus recorded a utilization rate of over 90% as of September 1, 2018 and 2019, respectively. Yijing Campus—Featured Division’s capacity is 540 as of September 1, 2018 and 2019. Our Yijing Campus—Featured Division was established in 2017 and recorded a utilization rate of 24.8% and 34.1% as of September 1, 2018 and 2019, respectively. We may not be able to expand our capacity at our current campuses unless we relocate to other facilities in the local area with more space. If we fail to expand our capacity as quickly as the demand for our services grows, or if we otherwise fail to grow by acquiring or establishing schools and campuses, we could lose potential students to our competitors, and our business, financial condition and results of operations may be materially and adversely affected.

Our historical financial and operating results may not be indicative of our future performance and our financial and operating results may be difficult to forecast.

Our financial and operating results may not meet the expectations of public market analysts or investors, which could cause the price of our shares to decline. Our revenue, expenses and operating results may vary from year to year in response to a variety of factors beyond our control, including:

 

   

our ability to increase student enrollment in our School and raise tuitions fees;

 

   

general economic conditions and regulations or government actions pertaining to the provision of private educational services in China;

 

   

shifts in consumer attitude toward private primary and secondary education in China;

 

- 24 -


Table of Contents
   

our ability to control cost of revenues, in particular salary and welfare relating to teachers and other costs; and

 

   

non-recurring charges incurred in connection with acquisitions or other extraordinary transactions or unexpected circumstances.

Due to these factors, we believe that year-to-year comparisons of our operating results may not be indicative of our future performance and you should not rely on them to predict the future performance of our shares.

Accidents or injuries suffered by our students, employees or other people at our School may adversely affect our reputation and subject us to liability.

There are inherent risks of accidents or injuries in schools. We could be held liable in the event of personal injuries, disease, fires or other accidents suffered by students, employees or other people that occur at our School. Although we designate certain staff members in each of our campuses to be in charge of student health and security, in the event of personal injuries, disease, food poisoning, fires or other accidents suffered by our students, employees or other people on our campuses, we may face claims for damages and our School may be perceived unsafe by prospective parents and students.

Claims against us arising from injuries incurred or claimed to have incurred on our campuses may adversely affect our reputation, subject us to significant amounts of damages, divert management attention and other resources or increase our insurance costs. As a result, our business, financial condition and results of operations may be materially and adversely affected.

We may be involved in legal and other disputes and claims from time to time arising out of our operations.

We may, in the future, be involved in disputes with and subject to claims by parents and students, teachers and other school personnel, our suppliers, construction companies, third-party sub-contractors and other parties involved in our business. Legal or other proceedings involving us may, among others, incur significant costs, divert management’s attention and other resources, negatively affect our business operations, cause 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.

We may lose the services of our executive directors, officers and other key personnel.

Our future success depends heavily upon the continuing services of our executive directors and officers and in particular, Mr. Biao Wei and Ms. Fen Ye, who have been our leaders since our inception. If one or more of our executive directors, officers or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for experienced executive directors or management personnel in the private education sector is intense, the pool of qualified candidates is very limited and we may not be able to retain the services of our executive directors or officers or key personnel, or attract and retain high-quality executive directors or officers or key personnel in the future. In addition, if any member of our executive directors or officers or any other key personnel joins a competitor or forms a competing company, we may lose teachers, students and staff members. As a result, our business, financial condition and results of operations may be materially and adversely affected.

Each of our executive officers has entered into an employment contract and certain executive officers and/or key employees have entered into confidentiality agreements with us. The employment contracts and confidentiality agreements are governed by PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions such as the United States and uncertainties in the PRC legal system could limit our ability to enforce these agreements. For

 

- 25 -


Table of Contents

example, prior court decisions may be cited for reference but not necessary and have limited precedential value in the PRC and the PRC arbitration tribunals and courts have significant discretion in interpreting, implementing or enforcing relevant PRC laws. It is thus difficult to predict the outcome of any arbitration awards or court proceedings or gage the level of legal protection that such awards or proceedings may provide. Accordingly, if any disputes arise between any of our senior executives or key personnel and us, it may be difficult to enforce these agreements against these individuals. As a result, our business, financial condition and results of operations may be materially and adversely affected.

If we fail to implement and maintain an effective system of internal controls to remediate our material weakness over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control and procedures over financial reporting. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audit of our consolidated financial statements for the years ended December 31, 2018 and 2019, we and our independent registered public accounting firm identified a material weakness as of December 31, 2019.

As defined in the standards established by the U.S. Public Company Accounting Oversight Board, or PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified is our lack of sufficient financial reporting and accounting personnel with appropriate understanding of accounting principles generally accepted in U.S. GAAP, to design and implement formal period-end financial reporting policies and procedures, to address complex U.S. GAAP technical accounting issues and to prepare and review our consolidated financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC. We are in the process of implementing a number of measures to address the material weakness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting.” However, we cannot assure you that these measures may fully address the material weaknesses and deficiencies in our internal control over financial reporting or that we may conclude that they have been fully remediated.

Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional deficiencies may have been identified.

Upon completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of this Act will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2021. In addition, once we cease to be an “emerging growth company,” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems

 

- 26 -


Table of Contents

for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

Failure to develop appropriate internal control and management structures in line with our rapid growth could result in a material adverse effect on our business, prospects, financial condition and results of operations.

Our business and operations have been expanding rapidly. Significant management resources must be expanded to develop and implement appropriate and effective internal control, risk monitoring and management systems which are in line with our growth. These systems are critical to ensure our compliance with the relevant laws and regulations on an on-going basis, effective business operations and our future development. Historically, our business operations were subject to certain legal risks due to insufficient internal control measures. For example, in 2018 and 2019, we collected small amounts of miscellaneous fees due from students which were usually between RMB100 and RMB200 per student through our teachers after prior notices had been made to the parents. These miscellaneous fees were mainly fees incurred from medical care and purchase of learning materials. The teachers then immediately transferred all amounts collected to our School’s account. Since June 2020, we have ceased such payment collection arrangement through teachers and no warnings or penalties were imposed upon us by the relevant authorities. However, if we fail to effectively implement our internal control measures and if we fail to allocate appropriate management resources, we may not be able to identify compliance issues, administrative oversight, unfavorable business trends or other risks that could materially and adversely affect our business, prospects, financial condition and results of operations.

You are deprived of the benefit of inspection since the audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board.

Our auditor, PricewaterhouseCoopers Zhong Tian LLP, the independent registered public accounting firm that issues the audit report included in this prospectus, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. However, you are deprived of the benefits of such inspection because our auditors are located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities.

In May 2013, the PCAOB entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC, and the PRC Ministry of Finance, which established a cooperative framework among the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to discuss with the CSRC, and the PRC Ministry of Finance to allow joint inspections in the PRC of audit Chinese companies that trade on U.S. exchanges and audit firms that are

 

- 27 -


Table of Contents

registered with the PCAOB. On December 7, 2018, to emphasize the continued challenges faced by the U.S. regulators in their oversight of financial statement audits of China-based issuers listed in the United States the SEC and the PCAOB released a joint public statement relating to this topic. On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior executives in the SEC jointly released a public statement reiterating the significant risks involved in investing in emerging markets especially the risks of investing in China as it has grown to be the largest emerging market economy and the world’s second largest economy. The statement highlighted past SEC and PCAOB warnings on matters including the difficulty associated with inspecting accounting firms and audit work papers in China and higher risks of fraud in emerging markets and the difficulty of bringing and enforcing SEC, Department of Justice and other U.S. regulatory actions, including in instances of fraud, in emerging markets generally. Nonetheless, we are uncertain on whether SEC and the PCAOB will take any further actions to address these issues.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could diminish the confidence the investors and potential investors may have in our audit procedures and reported financial information and the quality of our financial statements.

In June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges Act, or the EQUITABLE Act prescribes increased disclosure requirements for these issuers and, starting from 2025, the delisting from U.S. national securities exchanges of issuers included on the SEC’s list for three consecutive years. On May 20, 2020, the U.S. Senate passed S.945, the Holding Foreign Companies Accountable Act, or the HFCA Act, which includes requirements similar to those in the EQUITABLE Act for the SEC to identify issuers whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate because of restrictions imposed by non-U.S. authorities. If passed by the U.S. House of Representatives and signed by the U.S. President, the HFCA Act would also require public companies on this SEC list to certify that they are not owned or controlled by a foreign government and make certain additional disclosures in their SEC filings. In addition, for issuers that remain on the SEC list for three consecutive years, the SEC would be required to prohibit the securities of these companies from being traded on a U.S. national securities exchange or in U.S. over-the-counter markets. On July 21, 2020, the U.S. House of Representatives approved its version of the National Defense Authorization Act for Fiscal Year 2021, which contains provisions comparable to the HFCA Act. If either of these bills is enacted into law, it would amend the Sarbanes-Oxley Act of 2002 to direct the SEC to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over-the-counter” if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for three consecutive years after the law becomes effective. Enactment of these proposed legislations or other efforts to increase U.S. regulatory access to audit information could cause investors uncertainty for affected issuers, including us, adversely affect the market price of our ADSs and result in prohibitions on the trading of our ADSs on U.S. national securities exchanges if we are unable to meet the PCAOB is unable to inspect our auditors for three consecutive years. It is unclear if these proposed legislations will be enacted.

On June 4, 2020, the U.S. President issued a memorandum directing the President’s Working Group on Financial Markets, or the PWG, which is chaired by the Secretary of the Treasury and includes the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the SEC and the Chairman of the Commodity Futures Trading Commission, to convene to discuss the risks faced by U.S. investors in Chinese companies and companies with significant operations in China that are listed on U.S. stock exchanges related to the Chinese government’s position on the inability of the PCAOB to conduct inspections of auditors in China. The memorandum also directs the PWG to submit to the President a report within 60 days with recommendations for actions (i) the U.S. executive branch may take to protect investors in U.S. financial markets from the failure of the Chinese government to allow PCAOB-registered audit firms to comply with U.S. securities laws and

 

- 28 -


Table of Contents

investor protections; (ii) the SEC or PCAOB should take, including inspection or enforcement actions, with respect to PCAOB-registered audit firms that fail to provide requested audit working papers or otherwise fail to comply with U.S. securities laws; and (iii) the SEC or any other U.S. federal agency or department should take as a means to protect U.S. investors in Chinese companies, or companies from other countries that do not comply with U.S. securities laws and investor protections, including initiating a notice of proposed rulemaking that would set new listing rules or governance safeguards. On August 6, 2020, the PWG released a report recommending that the SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate, or NCJs, the PWG recommends enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. The report permits the new listing standards to provide for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the necessary rulemakings and/or standard-setting are effective. After we are listed on the Nasdaq Global Market, if we fail to meet the new listing standards before the deadline specified thereunder due to factors beyond our control, we could face possible de-listing from the Nasdaq Global Market, deregistration from the SEC and/or other risks, which may materially and adversely affect, or effectively terminate, our ADS trading in the United States. It remains uncertain on what other recommendations the PWG may ultimately make. However, as with the proposed legislation described above, such recommendations could cause investors uncertainty for affected issuers, including us, adversely affect the market price of our ADSs and result in prohibitions on the trading of our ADSs on U.S. national securities, among other things.

Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In December 2012, the SEC instituted administrative proceedings against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain PRC-based companies that are publicly traded in the United States.

On January 22, 2014, the administrative law judge, or the ALJ, presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failing to produce audit papers and other documents to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months.

On February 6, 2015, the four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. laws in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be adversely affected. A determination that we have not timely filed financial statements in compliance with the SEC requirements could ultimately lead to the delisting of our ADSs from the Nasdaq or the termination of the registration of our ADSs under the

 

- 29 -


Table of Contents

Securities Exchange Act of 1934, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Our business, financial performance and results of operations could be adversely affected by deterioration of the relation between China and the United States.

The relation between China and the United States is constantly changing. There was a “trade war” between the two countries in 2019 and tensions exist in other areas such as political, social and health issues, particularly recent disagreements in relation to the COVID-19 pandemic. In light of the recent tensions between China and the United States, there is a risk that our business, the offering and our listing status may be adversely affected by trade restrictions, sanctions and other policies that may be implemented. As we operate in China, any deterioration in political or trade relations might cause a public perception in the United States or elsewhere that might cause our education services to become less attractive. The United States lawmakers have introduced several bills intended to protect American investments in Chinese companies. On June 4, 2020, the U.S. President Donald Trump issued the PWG, criticizing China’ failure to uphold international commitment to transparency and calling for recommendations to protect U.S. investors from China’s failure to allow audits of U.S.-listed Chinese companies. The PWG may impact U.S.-listed Chinese companies if strict compliance with audit requirements and U.S. law or new listing rules or governance standards were imposed. Furthermore, there have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have material and adverse impact on the stock performance of China-based issuers listed in the United States. Changes in political conditions and changes in the state of China-U.S. relations are difficult to predict and could adversely affect our business, operating results and financial condition. We cannot predict what effect any changes in China-U.S. relations may have on our ability to access capital or effectively operate our business in China. Moreover, any political or trade controversies between the United States and China, whether or not directly related to our business, could cause investors to be unwilling to hold or buy our ADSs and consequently cause the trading price of our ADSs to decline.

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and results of operations.

The Standing Committee of the National People’s Congress enacted the Labor Contract Law in 2008, 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, except where an employee under a fixed-term labor contract, an employer is obligated to sign an permanent labor contract with any employee who has worked for the employer for more than 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. 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. As of June 30, 2020, we had made social insurance contribution for the PRC-based employees based on the relevant PRC laws and regulations and practical measures. We have obtained confirmation letters issued by the competent social security department for the entities which are required to make social insurance contributions in the PRC, confirming that there is no shortfall of their social insurance payments during the past three years. If we fail to, or are deemed to have failed to, make adequate social insurance and housing fund contributions in the future, we

 

- 30 -


Table of Contents

may be required to make supplemental contributions and/or subject to overdue fees and/or fines and our business, financial condition and results of operations may be adversely affected. See “Regulation—PRC Laws and Regulations Relating to Labor Protection.”

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.

The increases in labor costs in the PRC may adversely affect our business and results of operations and we may face labor and employment related disputes and regulatory penalties.

China’s economy has experienced increases in labor costs in recent years and the overall economy and the average wages in China are expected to continue to grow. The average wage level for our employees has also increased in recent years. We expect that our employee costs, including salaries and welfare, will continue to increase. Unless we are able to pass on these increased labor costs to our students and their parents by increasing tuition, meal and accommodation service fees, our profitability and results of operations may be materially and adversely affected.

In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits to designated government agencies for the benefit of our employees. Compared with its predecessors, the current Labor Contract Law of the PRC imposes stricter requirements on employers in terms of signing labor contracts, minimum wages, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts, further increasing our labor-related costs such as limiting our ability to terminate employment of some of our employees or otherwise change our employment or labor practices in a cost-effective manner. In addition, as the interpretation and implementation of labor-related laws and regulations are still developing, we cannot assure you that our employment practices have been or will at all times be deemed in compliance with the labor-related laws and regulations in China. If we are subject to severe penalties in connection with labor disputes or government investigations, our business, financial condition and results of operations will be adversely affected.

Seasonal and other fluctuations in our results of operations could adversely affect the trading price of the ADSs.

Our net revenue and results of operations normally fluctuate from quarter to quarter as a result of seasonal variations in our business. Our students and their parents typically pay the tuition and other fees prior to the commencement of a semester, and we recognize revenues from the delivery of education services on a straight-line basis over the semester. The fluctuations may result in volatility or have an adverse effect on the market price of the ADSs. In addition, comparisons of our operating results between different periods within a single financial year, or between the same periods in different financial years, may not be meaningful and should not be relied upon as good indicators of our performance.

We have limited insurance coverage.

We maintain various insurance policies to safeguard against certain risks and unexpected events, such as school liability insurance, student personal accident insurance and property insurance for vehicles. However, our insurance may not be sufficient in terms of amounts and scope. If we were held liable for amounts and claims exceeding the scope or amounts covered by our insurance policies, or suffered losses from incidents for which we do not currently maintain any insurance, we may be required to pay significant damages or suffer significant loss without being able to recover all or part of the amounts from insurance companies, and our business, results of operations and financial condition may be materially and adversely affected. In addition, we do not have any business disruption insurances to cover losses caused by natural disasters or catastrophic events, which may

 

- 31 -


Table of Contents

significantly disrupt our business operations and incur substantial costs on us, and may materially and adversely affect our business, financial condition and results of operations.

We may not be able to adequately protect our intellectual property rights.

As of June 30, 2020, we had 17 and two registered trademarks in the PRC and Hong Kong, respectively. As of June 30, 2020, we also had 23 trademarks pending registration in the PRC. We believe our trademarks and other intellectual properties are competitive advantages and are important to our success to date and our future prospects. We have been investing resources to develop our own intellectual properties and we take prudent steps to protect our intellectual properties and know-how. However, the steps we have taken to protect our intellectual property rights may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others and halt any copycat attempts.

In addition, the legal regime governing intellectual property in China is still evolving and the level of protection of intellectual property rights and know-how in China may differ from those in other more developed jurisdictions. Accordingly, protection of intellectual property rights in China might not be as effective as in the United States or other western countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce or defend our intellectual property rights or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and the diversion of resources and management’s attention.

We may be subject to intellectual property infringement claims and our brand and reputation may be negatively affected.

From time to time, we could face allegations of trademark, copyright, patent and other intellectual property rights infringement of third parties. Such allegations of intellectual property right infringements could come from our competitors and third parties which operate in other industries. In the event that we are sued by the intellectual property owners or licensees, or we receive a cease and desist letter or a court order regarding alleged infringements, we may have to discontinue to our use of brand name and may be subject to claims or other financial losses. In the event that any lawsuit is filed against us and such claims were to prevail, it could have an adverse effect on our business, financial conditions and results of operations. In addition, we will have to invest in additional resources in establishing new brand names, which may take time and cause us significant costs and efforts, which in turn affects our ability to develop and grow.

Capacity constraints or system disruptions to our computers or network, any cybersecurity incidents, or any unauthorized disclosure or manipulation of sensitive information relating to our students and teachers may expose us to litigation and damages or may adversely affect the reputation of our School.

We possess sensitive and private information about our students and teachers, such as names, addresses, contact numbers, ID numbers and exam scores of our students. We store these sensitive data primarily in computers located in our school offices. In addition, during the lockdown of campuses due to the COVID-19 outbreak in the first quarter of 2020, we provided online education services to our students with the support from a third-party online resource provider. If any sensitive and private data about our students and teachers was lost, damaged or leaked due to capacity constraints or system disruptions to our computers or network, was obtained, disclosed or manipulated by unauthorized third parties through cybersecurity breaches to the computers or network of our School or our providers, or was negligently misappropriated or disclosed by our staff, we may be sued and held liable for damages, which may incur significant costs, negatively affect our reputation and divert management attention and other resources. As a result, our business, financial condition and results of operations may be materially and adversely affected.

 

- 32 -


Table of Contents

RISKS RELATING TO OUR CORPORATE STRUCTURE

We may be subject to severe penalties if the PRC government finds that the agreements that establish the structure for operating our business in China do not comply with applicable PRC laws and regulations.

Foreign investment in the education industry in China is extensively regulated and subject to various restrictions. Specifically, foreign investors are prohibited from investing in compulsory education, namely primary to middle school in the PRC. In addition, foreign investment in education institutions in the PRC must be in the form of cooperation between Chinese educational institutes and foreign educational institutes and the foreign portion of the total investment in a Sino-foreign education institute must be below 50%. Liandu WFOE is currently ineligible to apply for the required education licenses and permits in China for the operation of primary and middle school education. Although foreign investment in high schools is not prohibited, our subsidiary Liandu WFOE in China is still ineligible to independently or jointly invest and operate high schools. To comply with PRC laws and regulations, we have entered into a series of arrangements pursuant to which our wholly owned subsidiary Liandu WFOE receives the economic benefits from our VIEs. For a description of these contractual arrangements, see “Corporate History and Structure—Contractual Arrangements”. If the contractual arrangements that establish the structure for operating our business in China are found to violate any PRC laws or regulations in the future or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the Ministry of Education of People’s Republic of China, or the MOE, which regulates the education industry, would have broad discretion in dealing with such violations, including:

 

   

revoking the business and operating licenses of our PRC subsidiaries or VIEs;

 

   

discontinuing or restricting the operations of any related-party transactions among Liandu WFOE or VIEs;

 

   

imposing fines or other requirements with which we or Liandu WFOE or VIEs may not be able to comply;

 

   

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;

 

   

imposing additional conditions or requirements with which we may not be able to comply; or

 

   

restricting the use of proceeds from our additional public offering or financing to finance our business and operations in China.

The imposition of any of these penalties may result in a material and adverse effect on our ability to conduct our business in China and a loss of our economic benefits in the assets and operations of our VIEs. In addition, if the imposition of any of these penalties causes us to lose the rights to direct the activities of the VIEs or our right to receive economic benefits from them, we would no longer be able to consolidate their financial results in our consolidated financial statements.

Uncertainties exist with respect to the interpretation and implementation of the newly enacted Foreign Investment Law of the People’s Republic of China and how it may affect the viability of our current corporate structure, corporate governance, business, financial condition and results of operations.

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law of PRC or the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the Law of the PRC on Chinese-Foreign Equity Joint Ventures, the Law of the PRC on Chinese-Foreign Contractual Joint Ventures, 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. For instance, the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment.

 

- 33 -


Table of Contents

Conducting operations through contractual arrangements has been adopted by many PRC-based companies, and has been adopted by our Company to establish control of our VIEs. Since the Foreign Investment Law 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 arrangement as a form of foreign investment, it still leaves a leeway for future laws and if future laws, administrative regulations or provisions stipulates contractual arrangements as a way of foreign investment, then whether our contractual arrangements will be recognized as foreign investment, whether our contractual arrangements will be deemed to be in violation of the foreign investment access requirements and how our contractual arrangements will be handled are uncertain. In the extreme case-scenario, we may be required to unwind the contractual arrangements and/or dispose relevant business operations, which could have a material and adverse effect on our business, financial condition and result of operations.

Our contractual arrangements may not be as effective in providing control over our VIEs as equity ownership.

We have relied and expect to continue to rely on our contractual arrangements to operate private education businesses in China. These contractual arrangements may not be as effective in providing us with control over our VIEs as equity ownership. If we had equity ownership of our VIEs, we would be able to exercise our rights as a direct or indirect shareholder to effect changes in the board of directors of our VIEs, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, as these contractual arrangements stand now, if our VIEs or their shareholders fail to perform their respective obligations under these contractual arrangements, we cannot exercise shareholders’ rights to direct corporate actions as direct ownership would otherwise entail. If the parties under such contractual arrangements refuse to carry out our directions in relation to everyday business operations, we will be unable to maintain effective control over the operations of our School in China. If we were to lose effective control over our VIEs, certain negative consequences would result, including our being unable to consolidate the financial results of our VIEs with our financial results. Given that we derived all of our revenue from our VIEs for 2018 and 2019 and the six months ended June 30, 2020 and substantially all of our assets are held by our VIEs (including our permits and licenses, real estate leases, buildings and other educational facilities related to our School), our financial position would be materially and adversely affected if we were to lose effective control over our VIEs or if our contractual arrangements are invalidated or nullified. In addition, losing effective control over our VIEs may negatively affect our operational efficiency and brand image. Further, losing effective control over our VIEs may impair our access to their cash flow from operations, which may reduce our liquidity.

The owners of our VIEs may have conflicts of interest with us, which may materially and adversely affect our business, financial condition and results of operations.

Our control over our VIEs is based upon the contractual arrangements with our VIEs. The beneficial owners of our VIEs and the Registered Shareholders are also our Controlling Shareholder. Any of them may potentially have conflicts of interest with us and breach any of their contracts or undertakings with us if it would further any of their own interests or if any of them otherwise acts in bad faith. We cannot assure you that when conflicts of interest arise between our Company and the beneficial owners of our VIEs, any of them will act completely in our interest or that the conflicts of interest will be resolved in our favor. In the event that such conflict of interest cannot be resolved in our favor, we may have to rely on legal proceedings which may disrupt our business operations and subject us to uncertainties as to the outcome of such legal proceedings. As a result, our business, financial condition and results of operations may be materially and adversely affected.

 

- 34 -


Table of Contents

We may have to incur additional costs and expend substantial resources to enforce our contractual arrangements, temporarily or permanently lose control over our primary operations or lose access to our primary sources of revenue, if our VIEs or their respective ultimate shareholders fail to perform their obligations under our contractual arrangements.

Under the current contractual arrangements, if any of our VIEs or their ultimate shareholders fails to perform its or her respective obligations under these contractual arrangements, we may incur substantial costs and resources to enforce such arrangements and relying on legal remedies under PRC laws, including seeking specific performance or injunctive relief and claiming damages.

Since our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. Under PRC laws, rulings by arbitration tribunals are final and the parties to a dispute cannot appeal the arbitration award in any court based on the substance of the case. The prevailing party may enforce the arbitration award by instituting arbitration award recognition proceedings with the competent PRC court. In addition, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our VIEs for an extended period of time or we may be permanently unable to exert control over our VIEs.

In addition to the enforcement costs outlined above, during the course of disputes regarding such enforcement action, we may temporarily lose effective control over our School in China, which may lead to loss of revenue or potentially lead to our having to incur additional costs and expend substantial resources to operate our business in the absence of effective enforcement of these contractual arrangements. If this were to occur, our business, financial condition and results of operations may be materially and adversely affected and the value of our Shareholders’ investments in our Company may therefore decrease.

Certain terms of our contractual arrangements may not be enforceable under PRC laws.

Our contractual arrangements provide for the resolution of disputes through arbitration in accordance with the arbitration rules of the China International Economic and Trade Arbitration Commission in Beijing. Our contractual arrangements contain provisions to the effect that the arbitral body may award remedies over the shares and/or assets of our VIEs, injunctive relief and/or winding up of our VIEs. In addition, our contractual arrangements contain provisions to the effect that courts in the Cayman Islands are empowered to grant interim remedies in support of the arbitration pending the formation of an arbitral tribunal. Under PRC laws, an arbitral body granting any injunctive relief or provisional or final liquidation order to preserve the assets of or any equity interest in Chinese legal entities in case of disputes must submit the application to the court in China. Therefore, such remedies may not be available to us, notwithstanding the relevant contractual provisions contained in our contractual arrangements. PRC laws allow an arbitral body to award the transfer of assets of or an equity interest in China in favor of an aggrieved party. In the event of non-compliance with such award, enforcement measures may be sought from the court. However, the court may or may not support the award of an arbitral body when deciding whether to take enforcement measures. Under PRC laws, courts of judicial authorities in the PRC generally would not grant injunctive relief or the winding-up order against an entity as interim remedies to preserve the assets or shares in favor of any aggrieved party. As a result, in the event that our VIEs or any of the Registered Shareholders breaches any of the contractual arrangements, we may not be able to obtain sufficient remedies in a timely manner, and our ability to exert effective control over our VIEs and conduct our education business could be materially and adversely affected.

Our exercise of the option to acquire school sponsor’s interests in our School may be subject to certain limitations and we may incur substantial costs and spend significant resources to enforce the option under the contractual arrangements.

We may incur substantial costs on our part to exercise the option to acquire the school sponsor’s interests in our School. As advised by our PRC legal counsel, our School provides nine-year compulsory education services

 

- 35 -


Table of Contents

(i.e., primary school and middle school education services), in which case the foreign investors are prohibited to hold equity interests in Lishui Mengxiang, our School sponsor, in accordance with the current PRC laws and regulations. Pursuant to the Exclusive Call Option Agreement, if and when the PRC laws and regulations permit foreign investors to directly hold part or all of the equity interests of our VIEs and to engage in the restricted and prohibited business, Liandu WFOE or its designated purchaser may, at its discretion, purchase all or part of the direct and/or indirect equity interests (including the interests in our School) held by Lishui Mengxiang’s shareholders at the minimum price permitted by PRC laws and regulations, and the percentage of equity interests to be purchased by Liandu WFOE or its designated purchaser shall be no less than the maximum limit permitted by the PRC laws and regulations in relation to the equity held by foreign investors. Such equity transfer price is not expressly provided for in the current PRC laws and regulations and it is uncertain whether it may be further regulated by future PRC laws and regulations. As a result, the estimated costs associated with the purchase of the equity interests in our VIEs cannot be ascertained as of the date of this prospectus. Pursuant to the Exclusive Call Option Agreement, Lishui Mengxiang’s shareholders have irrevocably undertaken that if the purchase price is determined at an amount exceeding RMB0, the difference shall be compensated fully by Lishui Mengxiang’s shareholders to Liandu WFOE or its designated entity. In the event that Liandu WFOE or its designated party acquires the equity interests of Lishui Mengxiang or our School and the relevant PRC authorities determine that the purchase price for acquiring such interests in our School is below market value, the respective equity holder(s), Lishui Mengxiang’s shareholders or Lishui Mengxiang, may be required to pay taxes with reference to the market value such that the amount of tax may be substantial. However, pursuant to the Exclusive Call Option Agreement, all taxes and fees associated with the equity transfer shall be paid by Lishui Mengxiang’s shareholders and/or the direct equity holders of our VIEs upon the transfer. We will determine the purchase target after due consideration of the said tax duties and fees before exercising the call option. In the event that Lishui Mengxiang is deemed as the direct interest holder, it may be subject to such tax. Furthermore, the PRC tax authorities may impose late payment penalties on Lishui Mengxiang for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if Lishui Mengxiang’s tax liabilities increase or if it is required to pay late payment fees and other penalties.

Our contractual arrangements may be subject to scrutiny by the PRC tax authorities, which may impose late payment fees and other penalties on us.

Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the Business Cooperation Agreement and Exclusive Technical Service and Business Consulting Agreement entered into, among others, our VIEs and Liandu WFOE does not represent an arm’s-length price and adjust any of those entities’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could increase our tax liabilities. In addition, PRC tax authorities may form the view that our subsidiaries or VIEs have improperly minimized their tax obligations and we may not be able to rectify any such incident within the limited timeline required by PRC tax authorities. As a result, PRC tax authorities may impose late payment fees and other penalties on us for under-paid taxes, which may materially and adversely affect our business, financial condition and results of operations.

We rely on dividends and other payments from Liandu WFOE to pay dividends and other cash distributions to our shareholders.

Our Company is a holding company and our ability to pay dividends and other cash distributions to our Shareholders, service any debt we may incur and meet our other cash requirements depends significantly on our ability to receive dividends and other distributions from Liandu WFOE. The amount of dividends paid to us by Liandu WFOE depends solely on the service fees paid to Liandu WFOE from our VIEs. However, there are restrictions under PRC laws for the payment of dividends to us by Liandu WFOE. For example, relevant PRC laws and regulations permit payments of dividends by Liandu WFOE only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, Liandu WFOE is required to set aside at least 10% of its after-tax profits based on the PRC accounting standards

 

- 36 -


Table of Contents

each year to fund a statutory reserve, until the accumulated amount of such reserve has exceeded 50% of its registered capital. Consequently, Liandu WFOE is restricted in its ability to transfer a portion of its net assets to us or any of our other subsidiaries in the form of dividends, loans or advances. The foregoing restrictions on the ability of Liandu WFOE to pay dividends to us and the limitations on the ability of VIEs to pay service fees to Liandu WFOE could materially and adversely limit our ability to borrow money outside of China or pay dividends to holders of our shares.

Our School may be subject to limitations on their ability to operate private education or make payments to related parties.

Before the promulgation of the Decision in 2016, the principal regulations governing private education in China are the Promotion Law and the Regulations on the Implementation of the Non-State Education Promotion Law of the PRC. Under these regulations, a private school may elect to be a school that does not require reasonable returns or a school that requires reasonable returns. A private school that does not require reasonable returns cannot distribute dividends to its school sponsors. A private school whose school sponsor requires reasonable returns must consider factors such as items and criteria for the school’s fees, the ratio of the funds used for education-related activities to the total fees collected, the school’s operational level and educational quality when determining the percentage of the school’s net income that would be distributed as reasonable returns. However, the Promoting Law in force at the time did not provide a formula or guidelines for determining what constitutes a ““reasonable return”. PRC laws and regulations require a private school the school sponsor of which requires reasonable returns to make an annual appropriation of 25% of its after-tax income to its development fund prior to payments of reasonable returns, while in the case of a private school that does not require reasonable returns, this amount is at least 25% of the annual increase in the net assets of the school, if any. Such appropriations are required to be used for the construction or maintenance of the school or for the procurement or upgrading of educational equipment. Furthermore, none of the current PRC laws and regulations set forth any requirements or restrictions on a private school’s ability to operate its education business that differ based on whether such school’s sponsor requires reasonable returns.

On September 1, 2017, the Decision became effective. According to the Decision, private schools can be established as non-profit or for-profit entities, with the exception of schools providing compulsory education, which can only be established as non-profit entities. According to the Decision, it will no longer make a distinction between schools the school sponsors of which require reasonable returns and schools the school sponsors of which do not require reasonable returns. The sponsor of a non-profit private-run school shall not gain proceeds from school running, and the cash surplus of the school shall be used for school running. There are uncertainties involved in interpreting and implementing the Decision with respect to various aspects of the operations of a private school. Therefore, we cannot assure that the detailed rules and regulations to be promulgated by local governmental authorities would not impose restrictions on our ability to operate private schools or to make payments to Liandu WFOE under the Contractual Arrangements, which may have a material adverse impact on our business operations and prospects.

We may lose the ability to use and enjoy certain important assets, which could reduce the size of our operations, impair our ability to generate revenue and materially affect the market price of our shares, if any of our VIEs becomes the subject of a bankruptcy or liquidation proceeding.

We currently conduct our operations in China through the contractual arrangements. As part of these arrangements, our VIEs hold a majority of the assets that are important to the operation of our business, including operating permits and licenses, real estate leases, buildings and other educational facilities related to our School. Under the contractual arrangements, Ms. Fen Ye, Ms. Fang Ye and Ms. Hong Ye may not unilaterally, without our consent, decide to voluntarily liquidate our VIEs.

If any of these entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and

 

- 37 -


Table of Contents

adversely affect our business, financial condition, results of operations and price of our shares. If any of our VIEs undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business.

Moreover, the Decision sets out certain specific requirements and restrictions with respect to the disposition of assets by private non-profit private schools upon liquidation.

RISKS RELATING TO DOING BUSINESS IN CHINA

Adverse changes in the PRC economic, political and social conditions as well as laws and government policies, may materially and adversely affect our business, financial condition, results of operations and growth prospects.

The economic, political and social conditions in the PRC differ from those in more developed countries in many respects, including structure, government involvement, level of development, growth rate, control of foreign exchange, capital reinvestment, allocation of resources, rate of inflation and trade balance position. Before the adoption of its reform and opening up policies in 1978, the PRC was primarily a planned economy. In recent years, the PRC government has been reforming the PRC economic system and government structure. For example, the PRC government has implemented economic reform and measures emphasizing the utilization of market forces in the development of the PRC economy in the past four decades. These reforms have resulted in significant economic growth and social prospects. Economic reform measures, however, may be adjusted, modified or applied inconsistently from industry to industry or across different regions of the country.

We cannot predict whether the resulting changes will have any adverse effect on our current or future business, financial condition or results of operations. Despite these economic reforms and measures, the PRC government continues to play a significant role in regulating industrial development, allocation of natural and other resources, production, pricing and management of currency, and there can be no assurance that the PRC government will continue to pursue a policy of economic reform or that the direction of reform will continue to be market friendly.

Our ability to successfully expand our business operations in the PRC depends on a number of factors, including macro-economic and other market conditions, and credit availability from lending institutions. Stricter credit or lending policies in the PRC may affect our customers’ consumer credit or consumer banking business, and may also affect our ability to obtain external financing, which may reduce our ability to implement our expansion strategies. We cannot assure you that the PRC government will not implement any additional measures to tighten credit or lending standards, or that, if any such measure is implemented, it will not adversely affect our future results of operations or profitability.

Demand for our services and our business, financial condition and results of operations may be materially and adversely affected by the following factors:

 

   

political instability or changes in social conditions of the PRC;

 

   

changes in laws, regulations, and administrative directives or the interpretation thereof;

 

   

measures which may be introduced to control inflation or deflation; and

 

   

changes in the rate or method of taxation.

These factors are affected by a number of variables which are beyond our control.

The inherent uncertainties in the PRC legal system could materially and adversely affect 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,

 

- 38 -


Table of Contents

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 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.

In particular, PRC laws and regulations regarding the private fundamental education industry have been rapidly evolving in recent years. The relevant PRC government authorities may promulgate new laws and regulations or materialize draft laws and regulations or consultation papers regulating the private fundamental education industry in the future which may impose limitations and restrictions on our business operation. Moreover, developments in the private fundamental education industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies that may impose limitations and restrictions on the private fundamental education market players, including us, which could materially and adversely affect our business and operations. See also “—Risks Related to Our Business and Industry—Substantial uncertainties exist with respect to the interpretation and application of the Decision of the Standing Committee of the National People’s Congress on Amending the Private Education Promotion Law of the PRC, or the Decision, and the amended Law for Promoting Private Education of the PRC, or the Promotion Law,” and “—Risks Relating to Our Business and Industry—Substantial uncertainties exist with respect to the Implementing Regulations for the Law of the PRC on the Promotion of Privately-run Schools (Revised Draft) (Draft for Comments), or the MOJ Draft for Comments, and relevant regulations issued recently, and if the MOJ Draft for Comments is promulgated in the form as published, it may impact the legality of our existing structure, our contractual arrangements and our expansion.”

You may face difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in this prospectus based on foreign laws.

We are an exempted company incorporated under the laws of the Cayman Islands. We conduct our business in China, and our assets are located in China. In addition, most of our senior executive officers are PRC nationals and they have lived in China for a significant portion of time. As a result, it may be difficult or impossible for you to bring an action against us or against our management named in this prospectus 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 as it may be difficult for our shareholders to effect service of process upon us or those persons inside China. Furthermore, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible. Even if you are successful in bringing an action of this kind, the laws of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see also “Enforceability of Civil Liabilities.”

Furthermore, as a matter of law or practicality, it is generally difficult to pursue shareholder claims including securities law class actions and fraud claims in China, which are contrarily common in the United States. For example, you may experience significant legal and practical obstacles to obtaining necessary

 

- 39 -


Table of Contents

information for shareholder investigations or litigations outside China or with respect to foreign entities. Although the local 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, so far no such cooperation has been established with the United States securities regulatory authorities. In addition, Article 177 of the PRC Securities Law which became effective in March 2020 promulgated that no overseas securities regulator is allowed to conduct investigation or evidence collection activities directly in the PRC. Therefore, without approval from the competent PRC securities regulators and relevant authorities, no organization or individual may provide documents and materials relating to the securities activities to overseas entities. While detailed interpretation of or implementation rules under Article 177 has yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase the difficulties you face in protecting your interests.

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries or VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

In utilizing the proceeds of this offering in the manner described in “Use of Proceeds” of this prospectus as an offshore holding company, we may (i) transfer the net proceeds into Liandu WFOE to pay in their initially subscribed registered capital, and (ii) provide loans to Liandu WFOE and our VIEs. We may also establish and/or acquire new foreign-invested enterprises in China, pay in their registered capital and provide loans to them.

We plan to utilize part of the proceeds from the offering by way of paying in the initially subscribed registered capital of Liandu WFOE. The amount of funds in the form of capital contribution into Liandu WFOE and other PRC subsidiaries we establish in the future is subject to the amount of their initially subscribed registered capital. Currently, the initially subscribed registered capital of Liandu WFOE is US$1 million which will be fully paid before the deadline prescribed in its articles of association. If the initially subscribed registered capital is not sufficient to allow our intended capital injection, under the current PRC laws and regulation, we may increase the registered capital and complete the relevant procedures which include (i) altering our registration with local SAIC, and (ii) filing the alteration report to local counterparts of the Ministry of Commerce of the PRC, or the MOFCOM. In addition, capital contribution to our School must be approved by the Ministry of Civil Affairs of the PRC or the MCA or their respective local counterparts. We plan to increase the registered capital of Liandu WFOE to approximately US$12 million after closing of the offering.

We also plan to provide loans to Liandu WFOE and Lishui Mengxiang. According to the current PRC laws and regulations, the maximum amount of the loans provided to a PRC enterprise is up to 2.5 times (or the prevailing statutory multiples) of the borrower’s net assets set out in its latest audited financial statement. As a result, the loans we may provide to Liandu WFOE and Lishui Mengxiang are in an amount of up to 2.5 times (or the prevailing statutory multiples) of their respective net assets set out in their latest audited financial statements. Liandu WFOE and Lishui Mengxiang are required to file the information of their cross-border financing arrangements with local SAFE after the loan agreements are signed and before three working days prior to the fund withdrawal. In addition, for loans carrying a term of more than one year, Liandu WFOE and Lishui Mengxiang may be required to complete the relevant filing and registration formalities to the NDRC. Currently, the Company’s business operation is conducted through Liandu WFOE’s contractual arrangements with the VIEs and Liandu WFOE does not engage in its own business. As such, Liandu WFOE’s current net assets are in close approximation to its paid-up registered capital. Pursuant to the relevant PRC laws and regulations, the estimated amount of loans we will provide to Liandu WFOE will be approximately US$30 million which is 2.5 times of its enlarged registered capital after closing of the offering, assuming that Liandu WFOE’s net assets set out in its latest audited financial statements equals to its paid-up registered capital at the time when the loans are made.

Moreover, we intend to establish new foreign-invested enterprises in order to facilitate our business expansion and make additional investments in the manners described above. However, we cannot assure you that our intended investments to these entities will always succeed as we planned, or at all.

 

- 40 -


Table of Contents

On March 30, 2015, the SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or Circular 19. Circular 19 stipulates that the use of capital by foreign-invested enterprises shall follow the principles of authenticity and self-use within the business scope of enterprises. According to the Notice of the State Administration of Foreign Exchange on Further Promoting the Facilitation of Cross-border Trade and Investment, or Circular 28, promulgated on October 25, 2019 by SAFE, restrictions on the domestic equity investment by non-investment foreign-funded enterprises with their capital funds have been canceled. Non-investment foreign-funded enterprises are allowed to make domestic equity investment with their capital funds in accordance with the law on the premise that the existing Negative List for foreign investment access are not violated and the projects invested thereby in China are true and compliant. However, SAFE and competent banks may have different interpretations of SAFE Circular 28, resulting in uncertainties in practice.

The aforementioned existing restrictions and future restrictions may significantly limit our ability to transfer the net proceeds from the offering or any other offering of additional equity securities to Liandu WFOE or our VIEs or invest in or acquire any other companies in the PRC.

Restrictions on currency exchange under PRC laws may limit our ability to convert cash derived from our operating activities into foreign currencies and may materially and adversely affect the value of your investment.

The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive our revenue in Renminbi. Under our current corporate structure, our income is primarily derived from dividend payments from Liandu WFOE. Shortages in the availability of foreign currency may restrict the ability of Liandu WFOE to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations, if any. Under existing PRC foreign exchange regulations, conversion of Renminbi is permitted, without prior approval from the SAFE, for current account transactions, including profit distributions, interest payments and expenditures from trade-related transactions, as long as certain procedural requirements are complied with. However, any existing and future restrictions on currency exchange in China may limit our ability to convert cash derived from our operating activities into foreign currencies to fund expenditures denominated in foreign currencies. If the foreign exchange restrictions in China prevent us from obtaining U.S. dollars or other foreign currencies as required, we may not be able to pay dividends in U.S. dollars or other foreign currencies to our Shareholders.

If we are classified as a PRC resident enterprise for PRC income tax purpose, holders of our shares may be subject to a PRC withholding tax upon the dividends payable by us and upon gain from the sale of our shares.

Under the PRC Enterprise Income Tax Law and its implementing regulations, an enterprise established outside China with its ‘‘de facto management body’’ within China is considered a ‘‘resident enterprise’’ in China and will be subject to the PRC enterprise income tax at the rate of 25% on its worldwide income. The tax authority will normally review factors such as the routine operation of the organizational body that effectively manages the enterprise’s production and business operations, locations of personnel holding decision-making power, location of finance and accounting functions and properties of the enterprise. The Enterprise Income Tax Law’s implementation regulations define the term ‘‘de facto management bodies’’ as ‘‘establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.’’ The State Administration of Taxation issued the Notice of the State Administration of Taxation on Issues about the Determination of Chinese-Controlled Enterprises Registered Abroad as Resident Enterprises on the Basis of Their Body of Actual Management, or the SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific criteria for determining whether the ‘‘de facto management body’’ of a Chinese-controlled offshore incorporated enterprise is located inside China, stating that only a company meeting all the criteria would be deemed having its de factor management body inside China.

 

- 41 -


Table of Contents

One of the criteria is that a company’s major assets, accounting books and minutes and files of its board and shareholders’ meetings are located or kept in the PRC. In addition, the SAT issued a bulletin on July 27, 2011, effective September 1, 2011, providing more guidance on the implementation of SAT Circular 82. This bulletin clarifies matters including residence status determination, post determination administration and competent tax authorities. Although both SAT Circular 82 and the bulletin only apply to offshore enterprises controlled by PRC enterprises and there are currently no further detailed rules or precedents applicable to us governing the procedures and specific criteria for determining ‘‘de facto management body’’ for companies like ours, the determination criteria set forth in SAT Circular 82 and the bulletin may reflect the SAT’s general position on how the ‘‘de facto management body’’ test should be applied in determining the tax residency status of offshore enterprises and how the administration measures should be implemented with respect to such enterprises, regardless of whether they are controlled by PRC enterprises or PRC individuals.

As all of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. We do not believe that our Company, or any of our offshore subsidiaries, should be qualified as a ‘‘resident enterprise’’ as each of our offshore holding entities is a company incorporated outside the PRC and we are not an offshore enterprise controlled by PRC domestic enterprises. As holding companies, each of these entities’ corporate documents, minutes and files of the board and shareholders’ meetings are located and kept outside of the PRC. Therefore, we believe that none of our offshore holding entities should be treated as a ‘‘resident enterprise’’ with its ‘‘de facto management bodies’’ located within China as defined by the relevant regulations for PRC EIT purposes. However, as the tax resident status of an enterprise is subject to determination by the PRC tax authorities, there are uncertainties and risks associated with this issue.

Under the Enterprise Income Tax Law and the Regulation on the Implementation of the Enterprise Income Tax Law, the non-resident enterprise as the shareholder of the PRC resident enterprise will be subject to a 10% (or 20% for an individual shareholder pursuant to the Individual Income Tax Law) withholding tax upon dividends received from the PRC resident enterprise and on gain recognized with respect to the sale of shares of the resident enterprise. Accordingly, if we are treated as a PRC resident enterprise, our shareholders that are non-resident enterprises, including the holders of the ADSs, may be subject to a 10% withholding tax upon dividends received from us and on gain recognized with respect to the sale of our shares, unless such withholding tax is reduced by an applicable income tax treaty between China and the jurisdiction of the shareholder. Any such tax may reduce the returns on your investment in our shares.

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer of PRC taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee, or other person who is obligated to pay for the transfer, of taxable assets. On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding at Source of Income Tax of Non-resident Enterprise, or SAT Bulletin 37, which came into effect on December 1, 2017. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax. Where a non-resident enterprise transfers its taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes which is not related to

 

- 42 -


Table of Contents

a PRC establishment or place of business of a non-resident enterprise, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

We face uncertainties as to the reporting and other implications of certain future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

Fluctuations in exchange rates may result in foreign currency exchange losses and may have a material adverse effect on 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. 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 affect the exchange rate between Renminbi and the U.S. dollar in the future.

Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from this 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 preferential tax and other treatments contemplated by us may change or may become unavailable.

The Decision states that additional supportive measures will be provided for private schools. We cannot assure you that the preferential tax and other treatments contemplated by us will not change or that they will apply or continue to apply to our School after the Decision becomes effective. The uncertainty in securing such preferential tax treatments could affect our results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Taxation—PRC.”

 

- 43 -


Table of Contents

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 the Management of Offshore Investment and Financing and Round Trip Investment By Domestic Residents through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch prior to making capital contribution in a special purpose vehicle 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 Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies, or Circular 13, which 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 such 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. Chinese residents may undertake subsequent operations (including repatriation of profits and dividends) upon completion of such registration change formalities.

Ms. Fen Ye, Ms. Hong Ye and Ms. Fang Ye who are known to us as being PRC residents have completed the foreign exchange registrations as required by SAFE Circular 37 and Circular 13. However, we cannot assure you that all existing and future shareholders or beneficial owners of ours who are PRC residents or entities will be able to update and/or obtain 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 Liandu WFOE, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit Liandu WFOE’s ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

If there are any failures in complying with PRC regulations with respect to the registration requirements for employee stock incentive plans, the PRC plan participants or we may be subject to fines and other legal or administrative sanctions.

After our Company becomes an overseas listed company upon completion of this offering, we and our directors, senior management and other employees who are PRC residents that have been granted options will be subject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, or SAFE Circular 7, issued by SAFE in February 2012, according to which, employees, directors, supervisors and other management members participating in any stock incentive plan of an overseas publicly listed company who are PRC residents are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. See “Regulations—PRC Laws and Regulations Relating to Foreign Investment in Education—Regulations on Stock Incentive Plans.”

We will try our best efforts to comply with these requirements upon completion of this offering. However, we cannot assure you that they can successfully register with SAFE in full compliance with the rules. If the participants or we fail to complete the SAFE registrations, the participants or we may be subject to fines and legal sanctions. It will adversely affect our ability to pay under the share incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into our wholly-foreign owned enterprises in China and limit our wholly-foreign owned enterprises’ ability to distribute dividends to us. Uncertainties also exist in our ability to adopt additional share incentive plans for our directors and employees under PRC law because of the regulatory restrictions.

 

- 44 -


Table of Contents

The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC law.

On August 8, 2006, six PRC regulatory agencies, namely, the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the State Administration for Foreign Exchange, and the China Securities Regulatory Commission, or CSRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006 and amended on June 22, 2009. The M&A Rule which, requires, among other things, offshore special purpose vehicles, or SPVs, formed for the listing purpose through acquiring PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.

As advised by our PRC legal counsel, based on its understanding of the current PRC laws and regulations, we will not be required to obtain the approval from CSRC for the offering and listing. However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering, and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules.

We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC legal counsel, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may take certain actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. Such actions include, among others, limitation on our ability to pay dividends outside of China, the repatriation of the proceeds from this offering into China being delayed or restricted. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

RISKS RELATING TO OUR ADSS AND THIS OFFERING

There has been no public market for our shares or our ADSs prior to this offering and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this offering, there has been no public market for our ADSs or our ordinary shares underlying the ADSs. Although our ADSs have been approved for listing on the Nasdaq Global Market, we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price of our ADSs may decline and the liquidity of our ADSs may decrease significantly.

The initial public offering price for our ADSs will be determined by negotiation between us and the underwriters based on several factors, and we cannot assure you that the price at which the ADSs are traded after this offering will not decline below the initial public offering price. As a result, investors in our ADSs may experience a significant decrease in the value of their ADSs due to insufficient or a lack of market liquidity of our ADSs.

The trading price of our ADSs may be volatile, which could result in substantial losses to you.

The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen due to broad market and industry factors, such as performance and fluctuation in the market prices or underperformance or deteriorating financial results of other listed companies based in China. The securities of some of these companies have experienced significant volatility since their initial public

 

- 45 -


Table of Contents

offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other Chinese companies’ securities may affect the attitudes of investors towards China-based and U.S.-listed companies, which consequently may affect the trading performance of our 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 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. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material and adverse effect on the trading price of our ADSs.

In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following:

 

   

regulatory developments affecting us or our industry;

 

   

variations in our revenue, profit, and cash flow;

 

   

changes in the economic performance or market valuations of other education service providers;

 

   

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;

 

   

detrimental negative publicity about us, our services, our officers, directors, Controlling Shareholder, or our industry;

 

   

announcements by us or our competitors of new service offerings, acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments;

 

   

additions to or departures of our senior management;

 

   

potential litigation or regulatory proceedings involving us, our officers, directors, or Controlling Shareholder;

 

   

negative publicity on our direct and indirect shareholders;

 

   

release or expiry of lock-up or other transfer restrictions on our outstanding shares or our ADSs; and

 

   

sales or perceived potential sales of additional ordinary shares or ADSs.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

If securities or industry analysts do not publish or publish inaccurate or unfavorable research about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research

 

- 46 -


Table of Contents

coverage or if one or more of the analysts who covers us downgrades our ADSs or publishes inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to 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 our ADSs to decline.

The sale or availability for sale of substantial amounts of our ADSs in the public market could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or 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. There will be 3,333,400 ADSs (equivalent to 16,667,000 ordinary shares) outstanding immediately after this offering or 3,833,400 ADSs (equivalent to 19,167,000 ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering, we, our officers, directors, and existing shareholders have agreed not to sell any of our ordinary shares or our ADSs or are otherwise subject to similar lockup restrictions for 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

Because the amount, timing, and whether or not we distribute dividends at all is entirely at the discretion of our board of directors, you must rely on price appreciation of our ADSs for return on your investment.

Although we currently intend to distribute dividends in the future, the amount, timing, and whether or not we actually distribute dividends at all is entirely at the discretion of our board of directors. Our board of directors has complete discretion as to whether to distribute dividends. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under the 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. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. We cannot assure you that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

Because our initial public offering price is substantially higher than our pro forma net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$6.18 per ADS (assuming that the underwriters do not exercise their over-allotment option), representing the difference between (i) our pro forma net tangible book value per ADS of US$3.82 as of

 

- 47 -


Table of Contents

June 30, 2020, after giving effect to this offering, and (ii) the assumed initial public offering price per share of US$10.00 per ADS (the midpoint of the estimated initial public offering price range set forth on the front cover page of this prospectus). In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options. Substantially all of the ordinary shares issuable upon the exercise of currently outstanding share options will be issued at a purchase price on a per ADS basis that is less than the initial public offering price per ADS in this offering. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.

The voting rights of holders of our ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct how the ordinary shares represented by your ADSs are voted.

Holders of our ADSs do not have the same rights as our registered shareholders. As a holder of ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights that are carried by the underlying ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. If we instruct the depositary to ask for your instructions, then upon timely receipt of your voting instructions, the depositary will try, as far as practicable, to vote the underlying ordinary shares represented by your ADSs in accordance with your instructions. If we do not instruct 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 ordinary shares represented by your ADSs unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. Under our post-offering memorandum and articles of association, the minimum notice period required to be given by our company to our registered shareholders for convening a general meeting is 10 calendar days.

When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the ordinary shares underlying your ADSs and become the registered holder of such shares to allow you to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our post-offering memorandum and articles of association that will become effective immediately prior to completion of this offering, 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 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 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 have agreed to give the depositary at least thirty (30) days’ prior notice of shareholder meetings. Nevertheless, 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 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 direct how the ordinary shares underlying your ADSs are voted and you may have no legal remedy if the ordinary shares underlying your ADSs are not voted as you requested.

The depositary shall deem you to have instructed the depositary to give us a discretionary proxy to vote the ordinary shares underlying your ADSs if you do not give timely voting instructions to the depositary to direct how the ordinary shares underlying your ADSs are voted, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not give timely voting instructions to the depositary to direct how the ordinary shares underlying your ADSs are voted, the depositary shall deem you to have instructed

 

- 48 -


Table of Contents

the depositary to give us a discretionary proxy to vote the ordinary shares underlying your ADSs at shareholders’ meetings unless:

 

   

we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

   

we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

   

a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

   

the voting at the meeting is to be made on a show of hands.

The effect of this discretionary proxy is that if you do not give timely voting instructions to the depositary to direct how the ordinary shares underlying your ADSs are voted, you cannot prevent the ordinary shares underlying your ADSs from being voted, except 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.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirement is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from the registration requirement under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.

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

 

- 49 -


Table of Contents

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 severely impact our business operations, and any investment in the ADSs could be greatly reduced or even rendered worthless.

You may not receive cash dividends if the depositary decides it is impractical to make them available to you.

The depositary will pay cash distributions on the ADSs only to the extent that we decide to distribute dividends on our ordinary shares or other deposited securities. To the extent that there is a distribution, the depositary has agreed to pay you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary 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.

We and the depository are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement, and we may terminate the deposit agreement, without the prior consent of the ADS holders.

We and the depository are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement, without the prior consent of the ADS holders. We and the depositary may agree to amend the deposit agreement in any way we decide is necessary or advantageous to us. Amendments may reflect, among other things, operational changes in the ADS program, legal developments affecting ADSs or changes in the terms of our business relationship with the depositary. In the event that the terms of an amendment are disadvantageous to ADS holders, ADS holders will only receive days’ advance notice of the amendment, and no prior consent of the ADS holders is required under the deposit agreement. Furthermore, we may decide to terminate the ADS facility at any time for any reason. For example, terminations may occur when we decide to list our shares on a non-U.S. securities exchange and determine not to continue to sponsor an ADS facility or when we become the subject of a takeover or a going-private transaction. If the ADS facility will terminate, ADS holders will receive at least thirty (30) days’ prior notice, but no prior consent is required from them. Under the circumstances that we decide to make an amendment to the deposit agreement that is disadvantageous to ADS holders or terminate the deposit agreement, the ADS holders may choose to sell their ADSs or surrender their ADSs and become direct holders of the underlying shares, but will have no right to any compensation whatsoever.

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 ordinary shares provides that, to the fullest extent permitted by applicable law, holders and beneficial owners of ADSs irrevocably waive the right to a jury trial of any claim that they may have against us or the depositary arising from or relating to our ordinary shares, our ADSs or the deposit agreement, including any claim under the U.S. federal securities laws. The waiver continues to apply to claims that arise during the period when a holder holds the ADSs, even if the ADS holder subsequently withdraws the underlying ordinary shares. However, you will not be deemed, by agreeing to the terms of the deposit agreement, to have waived our or the depositary’s compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder. In fact, you cannot waive our or the depositary’s compliance with U.S. federal securities laws and the rules and regulations promulgated thereunder.

 

- 50 -


Table of Contents

If we or the depositary opposed a demand for jury trial relying on above-mentioned jury trial waiver, it is up to the court to determine whether such waiver was enforceable considering the facts and circumstances of that case in accordance with the applicable state and federal law.

If this jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court or by the United States Supreme Court. Nonetheless, we believe that a jury trial waiver provision is generally enforceable 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. In determining whether to enforce a jury trial waiver provision, New York courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or one which is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim, none of which we believe are applicable in the case of the deposit agreement or the ADSs. If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary relating to the matters arising under the deposit agreement or our ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not have the right to a jury trial regarding such claims, which may limit and discourage lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary according to 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 have different outcomes compared to that of a jury trial, including results that could be less favorable to the plaintiff(s) in any such action.

Moreover, as the jury trial waiver relates to claims arising out of or relating to the ADSs or the deposit agreement, we believe that, as a matter of construction of the clause, the waiver would likely continue to apply to ADS holders who withdraw the ordinary shares from the ADS facility with respect to claims arising before the cancelation of the ADSs and the withdrawal of the ordinary shares, and the waiver would most likely not apply to ADS holders who subsequently withdraw the ordinary shares represented by ADSs from the ADS facility with respect to claims arising after the withdrawal. However, to our knowledge, there has been no case law on the applicability of the jury trial waiver to ADS holders who withdraw the ordinary shares represented by the ADSs from the ADS facility.

ADS holders have limited choice of forum, which could limit your ability to obtain a favorable judicial forum for complaints against us, the depositary or our or the depositary’s respective directors, officers or employees.

The deposit agreement governing our ADSs provides that, (i) the deposit agreement and the ADSs will be interpreted in accordance with the laws of the State of New York, and (ii) as an owner of ADSs, you irrevocably agree that any legal action arising out of the deposit agreement and the ADSs involving us or the depositary may only be instituted in a state or federal court in the city of New York. Any person or entity purchasing or otherwise acquiring any our ADSs, whether by transfer, sale, operation of law or otherwise, shall be deemed to have notice of and have irrevocably agreed and consented to these provisions. This choice of forum provision may increase your cost and limit your ability to bring a claim in a judicial forum that you find favorable for disputes with us, the depositary or our and the depositary’s respective directors, officers or employees, which may discourage such lawsuits against us, the depositary and our and the depositary’s respective directors, officers or employees. However, it is possible that a court could find such choice of forum provisions to be inapplicable or unenforceable. The enforceability of similar choice of forum provisions has been challenged in legal proceedings. It is possible that a court could find this type of provisions to be inapplicable or unenforceable.

To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the

 

- 51 -


Table of Contents

Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, actions by our ADS holders to enforce any duty or liability created by the Exchange Act, the Securities Act or the respective rules and regulations thereunder must also be brought in federal court. Our ADS holders will not be deemed to have waived our compliance with the federal securities laws and the regulations promulgated thereunder.

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 it 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 in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of the ADSs generally when 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.

You may experience difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited as we are incorporated under the Cayman Islands law.

As an exempted company incorporated under the laws of the Cayman Islands, our corporate affairs are governed by our memorandum and articles of association, together with the Companies Law of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under the Cayman Islands law are largely governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived partly from the comparatively limited judicial precedent in the Cayman Islands and also the common law of England and Wales, whose precedents are only of persuasive but not binding authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under the 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 compared to that of 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. Moreover, a company incorporated in the Cayman Islands may not have standing to initiate a shareholder derivative action in a federal court of the United States. In addition, controlling shareholders owe a fiduciary duty to the companies they control and the minority shareholders under Delaware laws, while our Controlling Shareholder do not owe any such fiduciary duties to our company or to our minority shareholders under the Cayman Island laws. As a result, our Controlling Shareholder may exercise their powers, including the voting rights in respect of their shares, as shareholders in a manner as they think fit.

Shareholders of Cayman Islands companies like us have no general rights under the Cayman Islands law to inspect corporate records, other than the memorandum and articles of association and any special resolutions passed by such companies, and the registers of mortgages and charges of such companies. Our directors have discretion under our post-offering memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Certain corporate governance practices in our home country, the Cayman Islands are significantly different from the requirements for companies incorporated in other jurisdictions such as the United States. Currently, we

 

- 52 -


Table of Contents

will rely on home country practice with respect to our corporate governance after we complete this offering subject to the applicable Nasdaq listing standards and the U.S. securities law, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to the domestic issuers in the United States.

In light of the above, public shareholders may experience more difficulties in protecting their interests in the face of actions taken by our management, members of our board of directors, or our Controlling Shareholder than they would as public shareholders of a company incorporated in the United States. For a discussion of the significant differences between the provisions applicable to companies incorporated in the Cayman Islands and their shareholders, and the Companies and the relevant provision in laws of the United States, see also “Description of Share Capital—Differences in Corporate Law.”

Our post-offering memorandum and articles of association to be effective in connection with this offering provide that the courts of the Cayman Islands will be the sole and exclusive forum for a claim arising under the internal affairs doctrine, and that the U.S. federal district courts will be the exclusive forum within the United States of America for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended, which could limit investors’ ability to obtain a favorable judicial forum for disputes with us.

We have adopted a forum selection provision under our post-offering memorandum and articles of association that provides that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum within the United States of America for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. This forum selection clause does not apply to claims under the Securities Exchange Act of 1934, which are subject to the exclusive jurisdiction of U.S. federal district courts, and it does not require investors to waive the requirements of the U.S. federal securities laws.

In addition, the forum selection provision in our post-offering memorandum and articles of association provides that the courts of the Cayman Islands shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to the Company or its members, (iii) any action asserting a claim arising pursuant to any provision of the Companies Law of the Cayman Islands (2020 Revision) or the memorandum and articles of association including but not limited to any purchase or acquisition of Shares, security or guarantee provided in consideration thereof, or (iv) any action asserting a claim against the Company which if brought in the United States of America would be a claim arising under the internal affairs doctrine (as such concept is recognized under the laws of the United States of America from time to time).

This forum selection provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Our forum selection provision seeks to reduce litigation costs and increase outcome predictability. While forum selection provisions in corporate charters and by-laws are becoming more commonplace for public companies in the United States and have been upheld by courts in certain states, it is possible that in connection with any action a court could find the forum selection provision contained in our memorandum and articles of association to be inapplicable or unenforceable in such action. If a court were to find our forum selection by-law inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions and we may not obtain the benefits of limiting jurisdiction to the courts selected. If a court were to find the forum selection provision to be inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, the Company may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition and results of operations.

We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.

We expect our net proceeds immediately after the completion of this offering to be US$29.0 million, based upon an assumed initial public offering price of US$10.00 per ADS, which is the midpoint of the estimated initial

 

- 53 -


Table of Contents

public offering price range set forth on the front cover page of this prospectus. We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that will improve our results of operations or increase the ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.

Our post-offering memorandum and articles of association contain anti-takeover provisions that could discourage a third party from acquiring us, which could limit our shareholders’ opportunity to sell their ordinary shares, including ordinary shares represented by the ADSs, at a premium.

Our post-offering memorandum and articles of association contain provisions to 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. For example, 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 ADSs 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 our ADSs may fall and the voting and other rights of the holders of our ordinary shares and our ADSs may be materially and adversely affected.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

   

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

   

the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

   

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

   

the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the Nasdaq Global Market. 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 compared to 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.

 

- 54 -


Table of Contents

We are a “controlled company” within the meaning of the Nasdaq Stock Market Rules and as a result, we are entitled to, and do, rely on the exemption from certain corporate governance requirement that provide protection to shareholders of other companies.

Under the Nasdaq Stock Market Rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and is permitted to phase in its compliance with the corporate governance requirements. Upon the completion of this offering, assuming that the underwriters do not exercise their option to purchase additional ADSs, Ms. Fen Ye, our chairlady and director and Mr. Wei, our director and the spouse of Ms. Fen Ye, will together beneficially own 45,000,000 ordinary shares issued, representing more than 50% of our aggregate voting power and will have the power to appoint a majority of the board of directors. As a result, we will be a “controlled company” under the Nasdaq Stock Market Rules and entitled to elect not to comply with certain corporate governance requirements of the Nasdaq Global Market, including the requirement that a majority of our directors to be independent upon closing of the offering. A majority of the members of our board of directors will not be independent directors upon closing of the offering as we choose to rely on the “controlled companies” exemption and do not intend to meet that requirement voluntarily.

Ms. Fen Ye and Mr. Wei will have the power to control the Company in all material aspects, in consideration of the following:

 

   

our post-offering memorandum and articles of association authorizes the board of directors to issue additional ordinary shares from time to time as the board of directors shall determine, to the extent of available authorized but unissued shares. Our post-offering memorandum and articles also authorizes the board of directors, subject to certain conditions, to establish from time to time one or more series of preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series. The board of directors may issue preferred shares without action by our shareholders to the extent authorized but unissued;

 

   

our post-offering memorandum and articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable; and

 

   

the board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs, including among others (i) declaring dividends and distributions; (ii) exercising our borrowing powers and our mortgaging the property; and (iii) approving the transfer of shares in the Company, including the registration of such shares in our register of members.

See “Management—Duties of Directors” and “Description of Share Capital.”

Accordingly, during the period we remain a controlled company relying on the exemption and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements.

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq Global Market listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq Global Market listing standards.

As a Cayman Islands company to be listed on the Nasdaq Global Market, we are subject to the Nasdaq Global Market listing standards. However, the Nasdaq Global Market 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 Nasdaq Global Market listing

 

- 55 -


Table of Contents

standards. We have relied on and intend to continue to rely on some of these exemptions. For instance, upon listing, we will not:

 

   

have a majority of the board be independent (although all of the members of the audit committee must be independent under the Exchange Act within one year of this offering);

 

   

have a compensation committee or a nominating and corporate governance committee consisting entirely of independent directors; or

 

   

have regularly scheduled executive sessions with only independent directors each year.

As a result, you may not be provided with the benefits of certain corporate governance requirements of the Nasdaq Global Market.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in the ADSs or ordinary shares to significant adverse United States federal income tax consequences.

We will be classified as a passive foreign investment company, or PFIC, for any taxable year if either (i) 75% or more of our gross income for such year consists of certain types of “passive” income, or (ii) 50% or more of the value of our assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passive income, or the asset test. Although the law in this regard is not entirely clear, we treat our consolidated VIEs 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 consolidated VIEs for U.S. federal income tax purposes, we may be treated as a PFIC for the current taxable year and any subsequent taxable year.

Assuming that we are the owner of our consolidated VIEs for U.S. federal income tax purposes, and based upon our current and expected income and assets, including goodwill, the expected proceeds from this offering as well as projections as to the market price of our ADSs immediately following the completion of this offering, we do not presently expect to be classified as a PFIC for the current taxable year and/or the foreseeable future.

While we do not expect to be a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition and classification of our income. Because there are uncertainties in the application of the relevant rules, it is possible that the IRS may challenge our classification of certain income and assets as non-passive which may result in our being or becoming a PFIC in the current or subsequent years. In addition, the composition of our income and assets will also be affected by how, and how quickly, we use our liquid assets and the cash rose in this offering. If we determine not to deploy significant amounts of cash for active purposes, our risk of being a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—United States Federal Income Taxation”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of our ADSs or ordinary shares and on the receipt of distributions on our ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules, and such holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds our ADSs or our ordinary shares, we will generally continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or our ordinary shares. For more information, see “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Rules.”

 

- 56 -


Table of Contents

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 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 for so long as a registrant qualifies as an emerging growth company it 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. Pursuant to the JOBS Act, we have elected to take advantage of the benefits of this extended transition period for complying with new or revised accounting standards as required when they are adopted for public companies. As a result, our operating results and financial statements may not be comparable to the operating results and financial statements of other companies who have adopted the new or revised accounting standards.

We will incur increased costs because of being a public company, particularly after we cease to qualify as an emerging growth company.

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002 and the rules subsequently implemented by the SEC and the Nasdaq Global Market detailed requirements concerning corporate governance practices of public companies. As a company with less than US$1.07 billion in net revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2012 relating to internal controls over financial reporting.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. Our management will be required to devote substantial time and attention to our public company reporting obligations and other compliance matters. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

- 57 -


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

AND INDUSTRY DATA

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of current or historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

 

   

our goals and strategies;

 

   

our future business development, financial condition and results of operations;

 

   

the trends in, expected growth, market size and student enrollment in the private fundamental education industry in China;

 

   

expected changes in our revenue, costs or expenditures;

 

   

competition in our industry;

 

   

our proposed use of proceeds;

 

   

government policies and regulations relating to our industry;

 

   

general economic and business conditions in China; and

 

   

the COVID-19 developments in China and globally.

You should read this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains certain data and information that we obtained from industry publications and reports generated by third-party providers of market intelligence. We have not independently verified the accuracy or completeness of the data and information contained in these publications and reports. Statistical data in these publications also include projections based on a number of assumptions. The private fundamental education industry in China may not grow at the rate projected by market data, or at all. Failure of these markets to grow at the projected rate may have a material and adverse effect on our business and the market price of the ADSs. If any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions.

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

- 58 -


Table of Contents

USE OF PROCEEDS

We estimate that the aggregate net proceeds to us from this offering of approximately US$29.0 million, after deducting underwriting discounts and estimated expenses payable by us in connection with this offering, and assuming an initial offering price of US$10.00 per ADS, being the midpoint of the estimated range of the initial public offering price shown on the cover page of this prospectus. Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and estimated expenses payable by us in connection with this offering, a US$1.00 increase (decrease) in the assumed initial public offering price of US$10.00 per ADS would increase (decrease) the net proceeds of this offering by approximately US$3.1 million.

The primary purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our shares, and retain talented employees by providing them with equity incentives and enable access to the public equity markets for us and our shareholders. We plan to use the net proceeds of this offering for the following purposes:

 

   

business expansion including student and teacher recruitments, campus construction and maintenance and upgrade of facilities;

 

   

strategic acquisition (there are currently no specific acquisition targets identified and we have not initiated any strategic acquisition project as of the date of this prospectus) or investment. We intend to consider acquisition of companies and/or institutions which are reputable, established and sizable private education service providers engaging in grades 1 through 9 compulsory education with national presence, recognized high schools, vocational higher education schools and online learning institutions which will complement our current operations; and

 

   

for general corporate purposes.

Accordingly, our management will have discretion in the application of net proceeds to us from this offering, and investors will be relying on the judgment of our management regarding the use of these net proceeds.

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funds to our PRC subsidiaries only through loans or capital contributions. We may extend inter-company loans to our PRC subsidiaries or make additional capital contributions to our PRC subsidiaries to fund its capital expenditures or working capital subject to satisfaction of applicable government registration and approval requirements. We cannot assure you that we will be able to obtain such government registrations or approvals on a timely basis, if at all, which may delay or prevent us from providing the proceeds of this offering to our PRC subsidiaries. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries or VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

The forward-looking statements made in this prospectus relate only to events or information as of the date on which these statements are made in this prospectus. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

- 59 -


Table of Contents

DIVIDEND POLICY

We have never declared or paid cash dividends on our ordinary shares, but it is possible that we may declare dividends in the future to the extent permitted under the Cayman Islands law. We have historically retained earnings to finance operations and the expansion of our business. Any future determination to pay cash dividends will be at the discretion of the board of directors and will be dependent upon our financial condition, operating results, capital requirements and such other factors as the board of directors deems relevant.

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our PRC subsidiaries for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Risk Factors—Risks Relating to Our Corporate Structure—We rely on dividends and other payments from Liandu WFOE to pay dividends and other cash distributions to our shareholders.”

Our board of directors has complete discretion on whether to distribute dividends, subject to applicable laws. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under the Cayman Islands law, namely that our company may pay a dividend either out of profit or share premium account, and provided always that in no circumstances may a dividend be paid if the dividend payment would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency, and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions, and other factors that the board of directors may deem relevant.

If we pay any dividends on our ordinary shares, we will pay those dividends that are payable in respect of the ordinary shares underlying our ADSs to the depositary, as the registered holder of such ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to the ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

- 60 -


Table of Contents

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2020:

 

   

on an actual basis; and

 

   

on an as-adjusted basis to reflect the issuance and sale of 16,667,000 ordinary shares representing 3,333,400 ADSs by us in this offering at an assumed initial public offering price of US$10.00 per ADS, being the midpoint of the estimated initial public offering price range as shown on the front cover of this prospectus, resulting in net proceeds of approximately US$29.0 million (RMB204.2 million) after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise the over-allotment option to purchase additional ADSs in full.

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2020  
     Actual     Adjusted(1)  
     RMB     US$     RMB      US$  
     (in thousands, except share and per share data)  

Shareholders’ equity:

         

Share capital (US$0.0001 par value; 500,000,000 shares authorized, 50,000,000 shares issued and outstanding on an actual basis and 66,667,000 shares issued and outstanding on an as-adjusted basis)

     35       5       47        7  

Subscriptions receivable from shareholders

     (35     (5             

Additional paid-in capital

     11,200       1,585       215,411        30,489  

Statutory reserve

     50,808       7,191       50,808        7,191  

Retained earnings

     136,316       19,294       136,316        19,294  
  

 

 

   

 

 

   

 

 

    

 

 

 

Total equity

     198,324       28,071       402,582        56,981  
  

 

 

   

 

 

   

 

 

    

 

 

 

Total capitalization(2)

     198,324       28,071       402,582        56,981  
  

 

 

   

 

 

   

 

 

    

 

 

 

 

Notes:

 

(1)

The as adjusted information discussed above is illustrative only. Our total capitalization following the completion of this offering is subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.

(2)

A US$1.00 change in the assumed initial public offering price of US$10.00 per ADS, the midpoint of the estimated range of the initial public offering price shown on the cover page of this prospectus, would, in the case of an increase, increase and, in the case of a decrease, decrease total capitalization by US$3.1 million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

- 61 -


Table of Contents

DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value as of June 30, 2020 was US$22.0 million, or US$0.44 per ordinary share and US$2.20 per ADS as of the same date. Net tangible book value represents the amount of our total combined tangible assets, less the amount of our total combined liabilities. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering from the assumed initial public offering price of US$2.00 per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus adjusted to reflect the ADS-to-ordinary share ratio, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in such net tangible book value after June 30, 2020, other than to give effect to our issuance and sale of ADSs in this offering at an assumed initial public offering price of US$10.00 per ADS, the midpoint of the estimated public offering price range, and after deduction of underwriting discounts and commissions and estimated offering expenses payable by us (assuming the over-allotment option is not exercised by the underwriters), our as adjusted net tangible book value as of June 30, 2020 would have been US$50.9 million, or US$0.76 per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, and US$3.82 per ADS. This represents an immediate increase in net tangible book value of US$0.32 per ordinary share, or US$1.62 per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$1.24 per ordinary share, or US$6.18 per ADS, to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per Ordinary Share      Per ADS  

Assumed initial public offering price

   US$ 2.00      US$ 10.00  

Net tangible book value as of June 30, 2020

   US$ 0.44      US$ 2.20  
  

 

 

    

 

 

 

As adjusted net tangible book value after giving effect to this offering, as of June 30, 2020

   US$ 0.76      US$ 3.82  

Amount of dilution in net tangible book value to new investors in the offering

   US$ 1.24      US$ 6.18  

A US$1.00 increase or decrease in the assumed initial public offering price per ADS would increase or decrease our as adjusted net tangible book value after giving effect to the offering by US$3.1 million, increase or decrease the as adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by US$0.05 per ordinary share and US$0.23 per ADS and decrease or increase the dilution in as adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by US$0.05 per ordinary share and US$0.23 per ADS, assuming no exercise of the underwriters’ option to purchase additional ADSs and no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

 

- 62 -


Table of Contents

The following table summarizes, on an adjusted basis as of June 30, 2020, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADS or ordinary shares) purchased from us, the total consideration paid, and the average price per ordinary share and per ADS paid before deducting estimated underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters to purchase additional ADSs.

 

     Ordinary Shares
Purchased
    Total
Consideration
    Average Price
Per Ordinary
Share

(US$)
     Average Price
Per ADS
(US$)
 
     Number      Percent     Amount
(US$)
     Percent  

Existing shareholders

     50,000,000        75     5,000        0.01     0.0001        0.0005  

New investors

     16,667,000        25     33,334,000        99.99     2.00        10.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     66,667,000        100     33,339,000        100     
  

 

 

    

 

 

   

 

 

    

 

 

      

The discussion and tables above exclude 5,000,000 ordinary shares reserved for future issuance under our 2020 Equity Incentive Plan, which may be granted as share options, restricted shares, restricted share units, or local awards.

 

- 63 -


Table of Contents

ENFORCEABILITY OF CIVIL LIABILITIES

Cayman Islands

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands exempted company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection for investors. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our assets and operations are located in China. All of our directors and officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. Therefore, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce judgments obtained in U.S. courts against us or them, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors.

We have appointed Cogency Global Inc. as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Maples and Calder (Hong Kong) LLP, or Maples, our counsel as to the laws of the Cayman Islands has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (1) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state in the United States, or (2) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the federal securities laws of the United States or the securities laws of any state in the United States.

Maples has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty; (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, there is uncertainty with regard to Cayman Islands law on whether judgments of courts of the United States predicated upon the civil liability provisions of the securities laws of the United States or any State will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company, such as our company. Because such a determination in relation to judgments obtained from U.S. courts under civil liability provisions of U.S. securities laws has not yet been made by a court of the Cayman Islands, it is uncertain whether such judgments would be enforceable in the Cayman Islands. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

PRC

DeHeng Law Offices, as our legal counsel in respect of PRC law, has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may

 

- 64 -


Table of Contents

recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not ratify and enforce a foreign judgment or ruling against us or our directors and officers if they deemed that the basic principle of the laws of the PRC or the sovereignty, security or public interest of the State is violated. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or the Cayman Islands.

 

- 65 -


Table of Contents

CORPORATE HISTORY AND STRUCTURE

Corporate History

We are an exempted company incorporated in the Cayman Islands with limited liability. We conduct our business through our PRC subsidiaries and VIEs. Currently, we operate our School that offers private primary and secondary education in Lishui City, Zhejiang Province.

Our history can be traced back to 2001 when Ms. Fen Ye, our chairlady and our executive director, established Lishui Mengxiang, the sponsor of our School. Since its establishment, Lishui Mengxiang has experienced a series of share transfer to change its nature from a wholly-foreign-owned enterprise to a PRC domestic enterprise and founded our School in September 2003 as the sponsor. In January 2003, Ms. Fen Ye transferred 90% of shares in Lishui Mengxiang to Mr. Biao Wei, Ms. Fen Ye’s spouse and our chief executive officer and executive director, holding on trust for and on behalf of Ms. Fen Ye. The remaining 10% of Lishui Mengxiang’s shares were transferred to Ms. Fang Ye and Ms. Hong Ye who are both Ms. Fen Ye’s sisters as to 5% each.

Beginning in August 2018, we undertook a series of restructuring steps to consolidate our business in the PRC and to form our offshore holding structure in preparation for our financing and listing outside the PRC. In particular:

 

   

Transfer of equity interest. On August 24, 2018, Mr. Biao Wei transferred all of his 90% equity interest in Lishui Mengxiang, to his spouse Ms. Fen Ye, such that immediately after such transfer of interest, Lishui Mengxiang was held by Ms. Fen Ye, Ms. Hong Ye and Ms. Fang Ye as to 90%, 5% and 5%, respectively.

 

   

Incorporation of the listing entity and other offshore entities. In September 2018, the Company was incorporated in the Cayman Islands, Lianwai Investment Co., Ltd., a wholly-owned subsidiary of the Company was incorporated in BVI and Hong Kong Mengxiang Education Development Group Limited was incorporated in Hong Kong as a wholly-owned subsidiary of Lianwai Investment Co., Ltd.

 

   

Establishment of the wholly-owned foreign entity. On October 10, 2018, Liandu WFOE was established in the PRC, which was wholly owned by Hong Kong Mengxiang Education Development Group Limited.

 

   

Disposal of Liandu Foreign Language School Kindergarten. In November 2018, we disposed of Liandu Foreign Language School Kindergarten to Ms. Fen Ye, Ms. Fang Ye and Ms. Hong Ye for a total cash consideration of RMB10,136,000 as we intend to focus on private primary and secondary education services.

In August 2020, we established Zhejiang Lishui Xianke Agricultural Products Distribution Co., Ltd., a wholly-owned subsidiary of Liandu WFOE.

 

- 66 -


Table of Contents

Corporate Structure

The diagram below illustrates our corporate structure upon the closing of this offering, assuming no exercise of the underwriters’ option to purchase additional ADSs:

 

 

LOGO

 

Notes:

 

(1)

Through Mengxiang Holdings, a British Virgin Islands company which is wholly-owned and controlled by Ms. Fen Ye.

 

(2)

Through Lianwai Holdings Co., Ltd., a British Virgin Islands company which is wholly-owned and controlled by Ms. Hong Ye.

 

(3)

Through Mengxiang Investment Co., Ltd., a British Virgin Islands company which is wholly-owned and controlled by Ms. Fang Ye.

 

- 67 -


Table of Contents
(4)

According to PRC laws and regulations, entities and individuals who establish private schools are commonly referred to as “sponsors” instead of “owners” or “shareholders.” The economic substance of “sponsorship” with respect to private schools is substantially similar to that of ownership with regard to legal, regulatory and tax matters. However, the differences between sponsorship and equity ownership can be found in the specific provisions of the laws and regulations applicable to sponsors and owners, such as provisions regarding the right to receive returns on investment and the right to the distribution of residual properties upon termination and liquidation. See “Regulation—The Law for Promoting Private Education and the Implementation Rules for the Law for Promoting Private Education”

Contractual Arrangements

Foreign ownership in the educational industry is subject to significant regulations in China, including strict licensing requirements. Specifically, foreign ownership is prohibited in compulsory education at the primary and middle school levels, and is restricted at the high school level. As we are a company incorporated in the Cayman Islands, our whole-owned subsidiary in the PRC, Liandu WFOE, is viewed as a foreign-owned enterprise thus is ineligible to apply for and hold licenses to operate, or otherwise own equity interests in, our primary and middle school campuses and to independently or jointly invest and operate our high school campus pursuant to the relevant laws and regulations.

In response to these restrictions, we have entered into a series of contractual arrangements through Liandu WFOE with our VIEs, shareholders of Lishui Mengxiang and the directors of our School, which enables us to (i) exercise the power over our Lishui Mengxiang and our School, (ii) have the exposure or rights to variable returns from our involvement with our VIEs, and (iii) exercise the ability to affect those returns through use of its power over our VIEs.

We do not have any equity interest in our VIEs. However, because of these contractual arrangements, we control our VIEs through our PRC subsidiary, Liandu WFOE. We have consolidated the results of our VIEs in our consolidated financial statements included elsewhere in this prospectus in accordance with U.S. GAAP. For a more detailed discussion of the basis of presentation of our consolidated financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.” The contractual arrangements were executed and became effective on October 13, 2018 and amended on November 29, 2018. For a detailed description of the risks associated with our corporate structure, see “Risk Factors—Risks Relating to Our Corporate Structure” and “Risk Factors—Risks Relating to Doing Business in China.”

Below is a summary of the material provisions of these contractual arrangements with Liandu WFOE and the shareholders of Lishui Mengxiang. For more complete information you should read these agreements in their entirety. Directions on how to obtain copies of these agreements are provided in this prospectus under “Where You Can Find Additional Information.”

Exclusive Call Option Agreement. Under the Exclusive Call Option Agreement dated October 13, 2018 and amended November 29, 2018, Ms. Fen Ye, Ms. Fang Ye and Ms. Hong Ye, or the shareholders of Lishui Mengxiang have irrevocably granted Liandu WFOE or its designated purchaser the exclusive right to purchase all or part of the direct and/or indirect equity interests of Lishui Mengxiang, or the Equity Call Option. The purchase price payable by Liandu WFOE or its designated purchaser in respect of the transfer of Lishui Mengxiang’s direct and/or indirect equity interest or equity interests shall be at the lowest price permitted under the PRC laws and regulations. Liandu WFOE or its designated purchaser shall have the right to purchase such proportion of Lishui Mengxiang’s interest in our School and/or other equity interest of Lishui Mengxiang as it decides at any time. As advised by our PRC legal counsel, our School provides nine-year compulsory education services (i.e., primary school and middle school education services), in which case the foreign investors are prohibited to hold equity interests of Lishui Mengxiang, our School sponsor, in accordance with the current PRC laws and regulations. If and when the PRC laws and regulations allow Liandu WFOE or us to directly hold all or

 

- 68 -


Table of Contents

part of the school sponsor interest in our School and/or all or part of other equity interests of Lishui Mengxiang and operate competent education business in the PRC, Liandu WFOE shall issue the notice of exercise of such equity call option as soon as practicable, and the percentage of interests to be purchased upon exercise of such Equity Call Option shall be no less than the maximum percentage allowed to be held by Liandu WFOE or its designated purchaser under the PRC laws and regulations. As advised by our PRC legal counsel, such equity transfer price is not expressly provided for in the current PRC laws and regulations and it is uncertain whether it may be further regulated by future PRC laws and regulations. Pursuant to the Exclusive Call Option Agreement, all taxes and fees associated with the equity transfer shall be paid by Lishui Mengxiang’s shareholders and/or the direct equity holders of our VIEs upon the transfer. In the absence of written consent from Liandu WFOE, except as otherwise described in the Exclusive Call Option Agreement, Lishui Mengxiang and its shareholders shall not sell, transfer, assign or otherwise dispose of or create any encumbrance on any of Lishui Mengxiang’s assets, businesses or equity interests or procure separation or merge with any other entities. Furthermore, without written consent from Liandu WFOE, Lishui Mengxiang may not terminate any material contracts or enter into any other contracts which may contradict such material contracts, incur any indebtedness or provide any loan or guarantee to a third party, except as disclosed to Liandu WFOE, or alter the nature or scope of its business. The Exclusive Call Option Agreement will remain in force during the operation term of VIEs and any periods that are renewable pursuant to the PRC laws, and will terminate automatically when Liandu WFOE and/or its designated entities fully exercised their options to purchase all the equities of VIEs in accordance with this agreement. In addition, unless otherwise stipulated by laws, this agreement may not be terminated by Lishui Mengxiang or its shareholders unilaterally, but may only be terminated by Liandu WFOE after notice in advance.

Proxy Agreement for School’s Sponsors and Directors. Pursuant to the Proxy Agreement for School’s Sponsors and Directors dated October 13, 2018 and amended November 29, 2018, Lishui Mengxiang has irrevocably authorized and entrusted Liandu WFOE to exercise all its rights as school sponsor of our School to the extent permitted by the PRC laws. These rights include, but are not limited to: (a) the right to appoint and/or elect directors of the school; (b) the right to appoint and/or elect supervisors of the school; (c) the right to access the information about the operation and financial situation of the school; (d) the right to review the resolutions and records of the board of directors and financial statements and reports of the school; (e) the right to acquire residue assets upon liquidation of the school in accordance with the laws and its articles of association; (f) the right to transfer school sponsor’s interest in accordance with the laws; (g) the right to choose for the school to be a for-profit school or non-profit school pursuant to applicable PRC laws and regulations and the articles of association of each school as amended from time to time; and (h) other school sponsor’s rights pursuant to applicable PRC laws and regulations and the articles of association of each school as amended from time to time.

The appointed directors of our School from Lishui Mengxiang has irrevocably authorized and entrusted Liandu WFOE to exercise all its rights as school sponsor of our School to the extent permitted by the PRC laws. These rights include, but are not limited to: (a) the right to attend the board meeting of our School acting as WFOE’ nominee; (b) the right to vote on behalf of the sponsors for all matters requiring discussion and resolution of the board meeting; (c) the right to sign the board minutes, resolutions or other legal documents; (d) the right to indicate the legal representative, and the executives of finance, business and administration to act in accordance with WFOE’s intention; (e) the right to handle legal procedures containing registration, examination and approval and license of schools at the competent departments of governments; (f) other school director’s rights pursuant to applicable PRC laws and regulations and the articles of association of our School as amended from time to time.

In addition, each of Lishui Mengxiang and the directors of our School have irrevocably agreed that (i) Liandu WFOE may delegate its rights under the Proxy Agreement for School’s Sponsors and Directors to the directors of Liandu WFOE or its designated person, without prior notice to or approval by Lishui Mengxiang and the directors of our School; and (ii) any person as successor of civil rights of Liandu WFOE or liquidator by reason of subdivision, merger, liquidation of Liandu WFOE or other circumstances shall have authority to replace Liandu WFOE to exercise all rights under the Proxy Agreement for School’s Sponsors and Directors.

 

- 69 -


Table of Contents

Proxy Agreement for Shareholders. Pursuant to the Proxy Agreement for Shareholders dated October 13, 2018 and amended November 29, 2018, each shareholder of Lishui Mengxiang has irrevocably authorized and entrusted Liandu WFOE to exercise all its rights as the shareholder to the extent permitted by the PRC laws. These rights include, but are not limited to: (a) the right to attend the shareholders’ meeting of our School acting as WFOE’ nominee; (b) the right to vote on behalf of the sponsors for all matters requiring discussion and resolution of the shareholders’ meeting; (c) the right to sign the shareholders’ minutes, resolutions or other legal documents; (d) the right to indicate the directors, the legal representative, etc. to act in accordance with WFOE’s intention; (e) the right to handle legal procedures containing registration, examination and approval and license of schools at the competent departments of governments; (f) the right to decide to transfer or otherwise dispose of the equity of our School; (g)any other shareholder rights as pursuant to the applicable PRC laws, regulations and our School’s articles of association as amended from time to time.

Business Cooperation Agreement. Pursuant to the Business Cooperation Agreement dated October 13, 2018 and amended November 29, 2018, Liandu WFOE shall provide technical services, management support and consulting services necessary for the private education business, and in return, our VIEs shall make payments accordingly. In particular, such services include but not limited to developing curriculum, conducting market research and offering management and marketing advice, providing technology services, providing public relations services, providing support for teacher hiring and training and providing other services that our VIEs may need from time to time. Without the prior consent of Liandu WFOE, none of our VIEs may accept such services provided by any third party. As part of the business cooperative agreement, VIEs and the shareholders of Lishui Mengxiang agree that they will not take any actions except as otherwise described in the Business Cooperative Agreement, such as incurring indebtedness, disposing of material assets, materially changing the scope or nature of the business of our VIEs, disposing of their equity interests in our VIEs, or paying dividends or other similar payments to the sponsors or the shareholders VIEs in the absence of written consent from Liandu WFOE. The aforementioned agreements will terminate automatically when Liandu WFOE and/or its designated entities fully exercised their options to purchase all the equities held by Nominee Shareholders in accordance with the Exclusive Call Option Agreement. In addition, unless otherwise stipulated by laws, this agreement may not be terminated by VIEs or the shareholders, but may only be terminated by Liandu WFOE after notice in advance.

Exclusive Technical Service and Business Consulting Agreement. Pursuant to the Exclusive Technical Service and Business Consulting Agreement dated October 13, 2018 and amended on November 29, 2018 and March 29, 2019 respectively, Liandu WFOE agreed to provide exclusive technical services to our School and our School sponsor, Lishui Mengxiang. Furthermore, Liandu WFOE agreed to provide exclusive business consultancy services to our School and our School sponsor. In consideration of the technical and business consultancy services provided by Liandu WFOE, our School and our School sponsor agreed to pay Liandu WFOE a service fee withdrawn from their respective amount of surplus from operations after deducting all costs, expenses, taxes, losses (if required by the law) and the legally development fund of the respective school (if required by the law) and other costs and funds that shall be retained at our School in accordance with applicable PRC laws. Liandu WFOE has the right (but not the obligation) to adjust the amount of such service fee by reference to the actual services provided and the actual business operations and needs of our School and our School sponsor, provided that any adjusted amount shall not exceed the amount mentioned above. Our School and our School sponsor do not have any right to make any such adjustment. Unless otherwise prescribed under the PRC laws and regulations, Liandu WFOE shall have exclusive proprietary rights to any technology and intellectual property developed and materials prepared in the course of the provision of research and development, technical support and services by Liandu WFOE to our School and our School sponsor, and any intellectual property in the products developed, including any other rights derived thereunder, in the course of performance of obligations under the Exclusive Technical Service and Business Consulting Agreement and/or any other agreements entered into between Liandu WFOE and our VIEs.

Equity Pledge Agreement. Pursuant to the Equity Pledge Agreement dated October 13, 2018 and amended November 29, 2018, the shareholders unconditionally and irrevocably pledged all of their equity interests in

 

- 70 -


Table of Contents

Lishui Mengxiang to Liandu WFOE to guarantee performance of the obligations of our VIEs under the Exclusive Call Option Agreement, Business Cooperation Agreement, Exclusive Technical Service and Business Consulting Agreement, Proxy Agreement for Shareholders, Proxy Agreement for School’s Sponsors and Directors and Loan Agreement, each as described above the shareholders of Lishui Mengxiang agreed that without prior written consent of the PRC WFOE, they shall not transfer or dispose of the pledged equity interests, or create or allow any encumbrance on the pledged equity interests. Unless otherwise stipulated by laws, this agreement may not be terminated by Lishui Mengxiang or the shareholders of Lishui Mengxiang unilaterally, but may only be terminated by the Liandu WFOE after notice in advance. The equity pledge agreement remains in full force and effect until all of the obligations under the contractual arrangements have been duly performed or the guaranteed debts are duly paid. The pledge of equity interests in Lishui Mengxiang has been duly registered with the local branch of SAIC and is effective upon such registration.

In the opinion of Deheng Law Offices, our PRC legal counsel:

 

   

the ownership structures of Liandu WFOE and our VIEs both currently and immediately after giving effect to this offering, do not and will not violate any applicable PRC law, regulation, or rule currently in effect; and

 

   

the contractual arrangements among Liandu WFOE, our VIEs, Ms. Fen Ye, Ms. Hong Ye and Ms. Fang Ye, our School and our School’s directors governed by PRC laws are valid, binding and enforceable in accordance with their terms and applicable PRC laws, rules, and regulations currently in effect.

However, we have been further advised by our PRC legal counsel, Deheng Law Offices, 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 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 VIE is 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. See “Risk Factors—Risks Relating to Our Corporate Structure.”

 

- 71 -


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of operations data for the years ended December 31, 2018 and 2019, the selected consolidated balance sheet data as of December 31, 2018 and 2019 and the selected consolidated statements of cash flows data for the years ended 2018 and 2019 have been derived from the audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statements of operations data for the six months ended June 30, 2019 and 2020, the selected consolidated balance sheet data as of June 30, 2020 and the selected consolidated statements of cash flows data for the six months ended June 30, 2019 and 2020 have been derived from the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements. All adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented, have been included in the unaudited condensed consolidated financial statements. Our historical results are not necessarily indicative of results expected for future periods. You should read the following selected financial information in conjunction with the consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The following table presents our selected consolidated statements of comprehensive income for the years ended December 31, 2018 and 2019 and for the six months ended June 30, 2019 and 2020.

 

    Year Ended December 31,     Six months ended June 30,  
    2018     2019     2019     2020  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands, except for share and per share data)  
          (Unaudited)              

Selected Consolidated Statement of Comprehensive Income Data:

           

Net revenue(1)

    142,524       152,121       21,851       84,129       86,741       12,277  

Cost of revenues

    (89,610     (98,133     (14,096     (44,351     (53,792     (7,614
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    52,914       53,988       7,755       39,777       32,949       4,664  

Operating expenses

           

General and administrative expenses

    (27,621     (9,276     (1,332     (4,023     (7,361     (1,042
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    25,293       44,712       6,422       35,754       25,588       3,622  

Interest income

    86       53       8       26       26       4  

Interest expense

    (5,087     (3,426     (492     (2,068     (1,327     (188

Change in fair value of short-term investments

    61       5       1       —         (2     (0

Gain on disposal of Lianwai Kindergarten

    243       —         —         —         —         —    

Other income, net

    6,817       5,893       847       2,480       2,892       409  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    27,412       47,237       6,785       36,192       27,177       3,847  

Income tax expenses

    —         —         —         —         —         —    

Income from operations, net of tax

    27,412       47,237       6,785       36,192       27,177       3,847  

Net income

    27,412       47,237       6,785       36,192       27,177       3,847  

Net income attributable to the Company’s ordinary shareholders

    27,412       47,237       6,785       36,192       27,177       3,847  

Comprehensive income

    27,412       47,237       6,785       36,192       27,177       3,847  

Net earnings per ordinary share attributable to the Company’s ordinary shareholders

           

- Basic and diluted

    0.55       0.94       0.14       0.72       0.54       0.08  

Weighted average number of ordinary shares used in per share calculation

           

- Basic and diluted

    50,000,000       50,000,000       50,000,000       50,000,000       50,000,000       50,000,000  

 

Note:

 

(1)

Net revenue includes revenue from tuition, meal and accommodation services, other revenue and revenue from related parties.

 

- 72 -


Table of Contents

The following table presents our selected consolidated balance sheet data as of December 31, 2018 and 2019 and June 30, 2020.

 

     As of December 31,      As of June 30,
2020
 
     2018      2019  
     RMB      RMB      US$      RMB      US$  
     (in thousands)  

Selected Consolidated Balance Sheet Data:

              

Current assets:

              

Cash and cash equivalents

     2,648        24,723        3,551        28,904        4,091  

Short-term investments

     5,061        20,005        2,874        10,004        1,416  

Accounts receivable, net

     938        1,251        180                

Amounts due from related parties

     14,011        12,754        1,832                

Inventories

     543        1,169        168        1,162        164  

Prepayments and other current assets

     689        436        63        959        136  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     23,891        60,340        8,667        41,029        5,807  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-current assets:

              

Property and equipment, net

     202,683        204,194        29,331        204,871        28,998  

Land use rights

     39,607        38,667        5,554        38,197        5,406  

Intangible assets

     22        17        2        14        2  

Other non-current assets

            61        9        5,309        751  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current assets

     242,312        242,938        34,896        248,391        35,157  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     266,202        303,278        43,563        289,419        40,965  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities:

              

Short-term borrowings

     69,000        83,600        12,008        41,809        5,918  

Accounts payable

     12,336        9,262        1,330        6,443        912  

Deferred revenue, current

     16,886        17,729        2,547        21,392        3,028  

Salaries and welfare payable

     15,533        13,318        1,913        12,819        1,814  

Amounts due to related parties

     20,050        719        103        323        46  

Taxes payable

     577        27        4        82        12  

Accrued liabilities and other current liabilities

     5,859        5,763        828        7,496        1,061  

Total current liabilities

     140,241        130,419        18,734        90,363        12,790  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities

     2,052        1,712        246        733        104  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     142,293        132,131        18,979        91,096        12,894  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total shareholders’ equity(1)

     123,909        171,146        24,584        198,324        28,071  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and shareholders’ equity

     266,202        303,278        43,563        289,419        40,965  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note:

 

(1)

As of December 31, 2018 and 2019 and June 30, 2020, we had 500,000,000, 500,000,000 and 500,000,000 shares with a par value of US$0.0001 each authorized, of which 50,000,000, 50,000,000 and 50,000,000 shares were issued and outstanding, respectively.

 

- 73 -


Table of Contents

The following table presents our selected consolidated statements of cash flow data for the years ended December 31, 2018 and 2019 and the six months ended June 30, 2019 and 2020.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2018     2019     2019     2020  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  
          (unaudited)              

Selected Consolidated Cash Flows Data:

           

Net cash from operating activities

    52,324       58,775       8,443       27,296       30,297       4,288  

Net cash (used in)/generated from investing activities

    (2,637     (34,739     (4,990     3,444       18,355       2,598  

Net cash (used in)/generated from financing activities

    (82,048     (1,962     (282     2,269       (44,472     (6,295

Net (decrease)/increase in cash and cash equivalents

    (32,360     22,075       3,171       33,010       4,181       592  

Cash and cash equivalents at beginning of the year/period

    35,009       2,648       380       2,648       24,723       3,499  

Cash and cash equivalents at end of the year/period

    2,648       24,723       3,551       35,658       28,904       4,091  

 

- 74 -


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this prospectus. The discussion in this prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in “Risk Factors,” as well as those discussed elsewhere. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements And Industry Data.”

Overview

We are a prominent private primary and secondary education service provider in Lishui City, Zhejiang Province. According to the Frost & Sullivan report, we were one of the top ten private primary and secondary education institutes in Zhejiang Province in terms of the students enrolled on a monthly average basis for the 2019/2020 school year. We ranked second among the top private primary and secondary education institutes and second among the top private primary and middle school (excluding high school) education institutes in Lishui City both in terms of the students enrolled on a monthly average basis for the 2019/2020 school year.

Our private education services primarily include primary and middle school education. We are able to attract students of different age groups to our School. In 2003, we launched our Liandu Foreign Language School in Lishui City. Soon after our establishment, our School had been named a private school of exemplary quality in Lishui City by Lishui Education Bureau in 2005. As of June 30, 2020, we had two campuses offering primary and middle school private education in operation. We also offer high school education services at our High School Division in collaboration with Qingtian High School. Our high school curriculum programs are designed for students from overseas Chinese families returning to China who are commonly known as the overseas Chinese returnees.

Our net revenue increased by 6.7% from RMB142.5 million in 2018 to RMB152.1 million (US$21.9 million) in 2019. Our net revenue increased by 3.1% from RMB84.1 million for the six months ended June 30, 2019 to RMB86.7 million (US$12.3 million) for the six months ended June 30, 2020. Our net income increased by 72.3% from RMB27.4 million in 2018 to RMB47.2 million (US$6.8 million) in 2019. Our net income decreased by 24.9% from RMB36.2 million for the six months ended June 30, 2019 to RMB27.2 million (US$3.8 million) for the six months ended June 30, 2020.

Major Factors Affecting Our Results of Operations

We believe that our results of operations are affected by the following factors:

Demand for Private Education in Zhejiang Province and the Rest of China

We currently operate our School in Zhejiang Province, China. Our operations are driven by the growth of demand for private education in Zhejiang Province and the rest of China. As one of provinces with the highest per capita disposable income, Zhejiang Province has been a pioneer region for private primary and secondary education in China. The demand for private primary and secondary schools is robust in Zhejiang Province. According to the Frost & Sullivan report, the total revenue of Zhejiang Province’s private primary and secondary education industry increased at a CAGR of approximately 15.5%, from RMB9.2 billion in 2014 to RMB18.9 billion in 2019 and is expected to increase to RMB34.9 billion in 2024, representing a CAGR of approximately 13.1% from 2019 to 2024. Penetration of private schools in China increased over the past five

 

- 75 -


Table of Contents

years, which has indicated that an increasing number of students have chosen to go to private schools instead of public ones and this trend is likely to continue in the future. The development of private primary and secondary education markets are driven by a number of factors, including increasing urbanization and associated increased demand for private education, diversified course offerings, improved quality of private education and continuous government support. We believe that these factors will continue to have an impact on the demand for the private primary and secondary education market in Zhejiang Province and the rest of China, which my in turn affect our results of operations.

Level of our student enrollment

Our net revenue and profitability are dependent on the level of student enrollment at our School. According to the Frost & Sullivan report, we were one of the top ten private primary and secondary education institutes in Zhejiang Province in terms of the students enrolled on a monthly average basis for the 2019/2020 school year. The total number of students enrolled in our School increased from 4,478 as of September 1, 2018 to 4,558 as of September 1, 2019.

Attracting students and subsequent student admission largely depends on our reputation which is mainly driven by the quality of education we provide. Our private education services primarily include primary and middle school education. Through our years of operations, we have accumulated experience in developing and customizing our educational programs to continue to attract top students and teachers to our School. We believe that highly qualified and dedicated teachers are critical to ensure our quality education and the quality of our teachers will continue to play an important role in the success of our School. Accordingly, we provide various training opportunities to our teachers, such as overseas school visits, education expert seminars and continuous studies. Our teachers’ assessments are performance-based, and we provide incentives based on the quality of teaching. We believe that our emphasis on high quality teachers will translate into high quality education for our students in and outside the classroom.

Our student enrollment level is also affected by the capacity of our School. As our Baiyun Campus has been in operation for more than ten years, it has maintained high utilization rates. Our Baiyun Campus recorded a utilization rate of over 90% as of September 1, 2018 and 2019, respectively. Our Yijing Campus—Featured Division was established in 2017 and recorded a utilization rate of 24.8% and 34.1% as of September 1, 2018 and 2019, respectively. Subject to the capacity of our School, we expect that our number of students will increase steadily by school year as we continue to recruit more students than graduates/withdrawals from our School.

Our tuition, meal and accommodation services fees

Our net revenue generally consists of tuition, meal and accommodation fees. The tuition and accommodation service fees we charge are subject to approval by the competent government pricing authorities. The pricing standards on tuition and accommodation fees for diploma education applied to privately-run schools shall be determined by the competent authorities with reference to the operating costs of the schools. The base price for each privately-run school shall be approved by the competent governmental departments for both price and education, namely Lishui Development and Reform Commission and Lishui Education Bureau. Each school may determine specific charging rates within applicable floating range on its own, and implement such rates after reporting to those governmental departments and making announcements to the public. For primary and middle school students, our School’s approved base prices are (i) RMB8,700 per semester for tuition at our Baiyun Campus and RMB20,000 per semester for Yijing Campus—Featured Division, and (ii) RMB850 per semester for accommodation fees at our Baiyun Campus and RMB2,000 per semester for Yijing Campus—Featured Division. The floating range applicable to our School is no more than 50% of the base prices due to high school-running costs or significant input as confirmed by the competent education department. As advised by our PRC legal counsel, our tuition and accommodation fees are within the applicable floating range based on the approved base prices. In the event that we consider it necessary to increase the base prices based on the costs, we will initiate communications with the competent price authority which will issue a written notice instructing us the required

 

- 76 -


Table of Contents

application materials to be submitted. The new charging rates will be determined and issued after on-site examination and review of the materials by the competent price authority. The processing time of this procedure is approximately one to two months. The tuition rates we charge are typically based on the demand for our educational programs, the cost of our operations, the tuition rates charged by our competitors, our pricing strategy to gain market share and general economic conditions in China and the areas in which our campuses are located. We believe high-quality educational resources and school infrastructure will allow us to raise our tuition rates to the extent permitted by the government. We believe that we remain competitive leveraging on our reputation and our ability to attract and retain students even if we raise our tuition rates.

The tuition rate of our Baiyun Campus and Yijing Campus at the high end of the average level in Zhejiang Province. The tuition rate for each semester charged by our Baiyun Campus was RMB10,600 and RMB11,000 per student during the 2017/2018 and 2018/2019 school years, respectively. The tuition rate for each semester charged by our Baiyun Campus increased to RMB13,000 per student for the 2019/2020 school year. The tuition rate for each semester charged by our Yijing Campus—Featured Division has been, since September 1, 2018, maintained at RMB20,000 per student, which was higher than that charged by our Baiyun Campus. According to the Frost & Sullivan report, the average annual tuition fee of Zhejiang Province private primary and middle school was RMB10,900 and RMB18,300 in 2019, respectively. Leveraging our market leadership, strong branding and effectiveness of our education services, we believe that we are able to command premium prices. As of September 1, 2019, approximately 24% our students of Yijing Campus—Featured Division are students from affluent families who are overseas Chinese returning to China and are willing to invest in the higher-quality education that we provide.

Our ability to control operating costs and expenses

Our cost of revenue primarily consists of salaries and welfare for our teachers, utilities and costs for food, books and school uniforms. Our general and administrative expenses primarily consist of salaries and welfare for our administrative staff and office expenses. Our profitability depends, in part, on our ability to control our operating costs and expenses. We highly value our teachers and invest in our teachers heavily, through extensive training opportunities and competitive compensation levels. The number of teachers employed by our School slightly increased from 320 as of September 1, 2018 to 322 as of September 1, 2019. Salaries and welfare for our teachers (excluding teachers from Liandu Foreign Language School Kindergarten) increased by 11.5% from RMB63.6 million in 2018 to RMB70.9 million in 2019 and by 30.1% from RMB32.6 million for the six months ended June 30, 2019 to RMB42.4 million for the six months ended June 30, 2020. Our strategy is to maintain and attract more high-quality teachers, by continuing to increase teachers’ salaries and other benefits from time to time to maintain our competitiveness in the market. As we continue to increase our student base and expand our operations, our utilities, costs for food, books and school uniforms and general and administrative expenses may increase accordingly. Our ability to effectively control operating costs and expenses will continue to affect our results of operations.

Seasonality

Our financial performance is subject to seasonality as each of our school years includes a winter holiday between December and January and a summer holiday between July and August. Our net income and results of operations normally fluctuate from quarter to quarter as a result of seasonal variations in our education operations. Our students and their parents typically pay the tuition and other fees prior to the commencement of a semester, and we recognize revenue generated from tuition and other fees on a straight-line basis over the semester. We typically incur higher upfront operating expenses in the third fiscal quarter at the start of each school year. As a result of the combination of the forgoing, we have historically recorded significantly lower net income in the first and third fiscal quarters, primarily due to our School being closed due to the winter and summer holidays, when no revenue from our school operations is recognized.

 

- 77 -


Table of Contents

Critical Accounting Policies

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.

The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

Consolidation of variable interest entity (VIE)

We account for entities qualifying as VIEs in accordance with Financial Accounting Standards Boards, or FASB, Accounting Standards Codification Topic 810, Consolidation, or ASC 810. In order to comply with PRC regulatory requirements restricting foreign ownership of education services in China, we have been conducting our education services through VIEs. Our VIEs mainly conduct primary and secondary school education services.

We have entered into a series of contractual arrangements, including loan agreement, exclusive call option agreement, proxy agreements and power of attorney for shareholders, proxy agreements and power of attorney for school’s sponsors and directors, equity pledge agreements, spousal undertakings, business cooperation agreement and exclusive technical services and business consulting agreements, with our VIEs and their respective shareholders. As a result of our direct ownership in Liandu WFOE and the contractual arrangements relating to our VIEs and their respective shareholders, we are regarded as the primary beneficiary of our VIEs in accordance with ASC 810, and we treat them as our consolidated affiliate Chinese entities under U.S. GAAP. We have consolidated the financial results of our VIEs in our consolidated financial statements in accordance with U.S. GAAP.

Any changes in PRC laws and regulations that affect our ability to control our VIEs might preclude us from consolidating the entities in the future. We will continually evaluate whether we are the primary beneficiary of our VIEs as facts and circumstances change.

Revenue recognition

We adopted ASC 606, “Revenue from Contracts with Customers” for all periods presented. Consistent with the criteria of Topic 606, we follow five steps for its revenue recognition: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

We mainly offer primary and middle school education service to students from grade 1 to grade 9. During the stay in school, the students are offered meal service (including breakfast, lunch, dinner and snacks) and

 

- 78 -


Table of Contents

accommodation service. Both the meal fee and boarding fee are collected in advance prior to the beginning of each semester. We would provide school uniforms to the students with payment made also prior to the beginning of each semester. We ask students to purchase certain designated additional learning materials, such as after-class reading books related to the courses provided. Students may choose to either purchase from bookstores by themselves or order from the School. The payments for learning materials are collected at the end of each semester.

We also offered kindergarten care services in the track period before its disposal of Lianwai Foreign Language School Kindergarten in November 2018.

Tuition, meal and accommodation service income

Tuition, meal and accommodation service income are generally received in advance prior to the beginning of each semester of a school year, and are initially recorded as deferred revenue. Tuition, meal and accommodation service income are recognized over time during the service period over each semester. The portion of tuition, meal and accommodation service payments received from students but not earned is recorded deferred revenue. Amounts which will be earned within one year is reflected as a current liability, and those which will be earned beyond one year is reflected as a non-current liability.

We recognize service income on gross basis, as we are responsible for fulfilling the promise to provide the education, meal and boarding services to students.

Financing component included in tuition

Some contracts contain a financing component because payment by the customer occurs significantly before performance. We take the practical expedient and will not adjust the impact of a financing component for deferred revenue which will be earned within one year. We do not adjust the impact of a financing component for deferred revenue which will be earned beyond one year as the portion of financing component is immaterial.

Sale of uniforms and learning materials

We sell uniform and learning materials to students. Revenue from uniform and learning materials are recognized at a point in time when control of the uniforms and learning materials have been transferred and accepted by the students.

We recognize revenue from sale of uniform and learning materials on gross basis, as we control the goods before it is transferred to the students. We are responsible for design of uniforms and take inventory risk of uniforms and learning materials.

Rental income

Rental income is recognized on a straight-line basis over the term of the lease.

We entered into lease agreements as lessor with both third parties and related parties.

The third parties rented our school non-education space for grocery stores, selling stationeries or snacks etc. to students which were operated directly by the lessee. The total rental revenue for third parties rental was RMB 2,857,143 and RMB 952,381 for year ended December 31, 2018 and 2019.

We leased certain non-education space to our related party, Lishui Yuanmeng Training Company Limited from December 1, 2016 to November 30, 2021. The total rental revenue for Lishui Yuanmeng Training Company Limited were RMB1,619,048 and RMB1,619,048 for the years ended December 31, 2018 and 2019, respectively.

 

- 79 -


Table of Contents

In addition, we continued leasing our space to Lianwai Foreign Language School Kindergarten for their operation of kindergarten care service after the disposal on November 28, 2018. The total rental revenue for Lianwai Foreign Language School Kindergarten were RMB69,143 for the period from November 28, 2018 to December 31, 2018 and RMB754,285 for the year ended December 31, 2019.

Segment reporting

Operating segments are defined as components of an enterprise engaging in businesses activities for which separate financial information is available that is regularly evaluated by our chief operating decision makers in deciding how to allocate resources and assess performance. Before the disposal of Lianwai Foreign Language School Kindergarten on November 28, 2018, we had two reportable segments, the kindergarten care service provided by Lianwai Foreign Language School Kindergarten and the primary and middle school education business from grade 1 to grade 9 provided by the School. Accordingly, the financial statements for the year ended December 31, 2018 include segment information which reflects the current composition of the reportable segments in accordance with ASC Topic 280, Segment Reporting.

For the year ended December 31, 2019, we had one reportable segment for the primary and middle school education business from grade 1 to grade 9, provided by the School. Our chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results including revenue, gross profit and operating profit at a consolidated level only. We do not distinguish between markets for the purpose of making decisions about resources allocation and performance assessment. We do not have any other geography besides the PRC that has above 10% of revenues or long-lived assets. Hence, we have only one operating segment and one reportable segment.

Income taxes

Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions.

Deferred income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purpose. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

The guidance on accounting for uncertainties in income taxes prescribes a more likely than not threshold for financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating our uncertain tax positions and determining its provision for income taxes. We did not recognize any significant interest and penalties associated with uncertain tax positions for the years ended December 31, 2018 and 2019. As of December 31, 2018 and 2019, we did not have any significant unrecognized uncertain tax positions.

Impairment of long-lived assets

For other long-lived assets including property and equipment and other non-current assets, we evaluate for impairment whenever events or changes (triggering events) indicate that the carrying amount of an asset may no

 

- 80 -


Table of Contents

longer be recoverable. We assess the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to receive from use of the assets and their eventual disposition. Such assets are considered to be impaired if the sum of the expected undiscounted cash flows is less than the carrying amount of the assets. The impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Key Components of Results of Operations

Net Revenue

We derive our net revenue from tuition, meal and accommodation fees, revenue from related parties and other revenue. Revenue from related parties refers to the rental income generated from premises we own and lease to Lishui Yuanmeng Training Company Limited as a training venue and to Liandu Foreign Language School Kindergarten as its kindergarten facilities. Other revenue includes revenue generated from sales of school uniforms, consulting fees and rental income generated from independent third parties and related parties. We disposed of Liandu Foreign Language School Kindergarten in November 2018. Our net revenue was RMB142.5 million, RMB152.1 million (US$21.9 million) and RMB86.7 million (US$12.3 million) in 2018, 2019 and the six months ended June 30, 2020, respectively. 86.8%, 89.1% and 92.2% of net revenue was generated from our Baiyun Campus in 2018, 2019 and the six months ended June 30, 2020.

We generally charge our students tuition, meal and accommodation fees prior to the beginning of each semester. We offer a partial refund if a student withdraws during a semester. Approximately 0.26% and 0.33% of our students for the 2017/2018 and 2018/2019 school years withdrew from our School primarily due to family reasons such as relocation to another city in China or overseas. We offer discounted tuition rates to children of our teachers and staff. Our meals are offered to boarding students on a basis of three meals a day and to non-boarding students on a basis of two meals a day. We currently charge our primary and middle school students who live on campus at Baiyun Campus RMB2,500 per semester for meals and our primary school students who live on campus at Yijing Campus—Featured Division RMB4,500 per semester for meals. For non-boarding students, the fees charged for meals are RMB2,000 per semester at Baiyun Campus and RMB3,700 per semester at Yijing Campus—Featured Division, which are lower as there are only two meals provided to them each day. Most of our students are boarding students. As of September 1, 2019, approximately 89.6% and 78.3% of our students at Baiyun Campus and Yijing Campus—Featured Division lived on-campus, respectively. We commenced to admit students at our High School Division since the 2018/2019 school year. We had 7 and 13 students admitted to our High School Division as of September 1, 2018 and 2019, respectively.

The following table sets forth the number of students enrolled at our campuses (excluding Liandu Foreign Language School Kindergarten) as of the dates indicated.

 

     September 1,  
     2018     2019  
     Number      %     Number      %  

Baiyun Campus

          

Boarding

     3,981        88.9     3,907        85.7

Non-boarding

     356        7.9     454        10.0

Yijing Campus—Featured Division

          

Boarding

     106        2.4     144        3.2

Non-boarding

     28        0.6     40        0.9

High School Division

          

Boarding

     7        0.2     13        0.3

Non-boarding

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     4,478        100.0     4,558        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

- 81 -


Table of Contents

Our revenue increased from 2018 to 2019 and from the six months ended June 30, 2019 to the six months ended June 30, 2020, primarily due to increases in the level of tuition, meal and accommodation fees and the increased number of our student enrollments. The tuition rate for each semester charged by our Baiyun Campus was RMB10,600 and RMB11,000 per student during the 2017/2018 and 2018/2019 school years, respectively. The tuition rate for each semester charged by our Baiyun Campus increased to RMB13,000 per student for the 2019/2020 school. The tuition rate for each semester charged by our Yijing Campus—Featured Division has remained unchanged at RMB20,000 per student since September 1, 2018.

The following table sets forth the tuition, meal and accommodation fees by campus (excluding Liandu Foreign Language School Kindergarten) for the periods indicated.

 

     Year Ended December 31,     Six months ended June 30,  
     2018     2019     2019     2020  
     RMB      % of
net revenue
    RMB      % of
net revenue
    RMB      % of
net revenue
    RMB      % of
net revenue
 
     (in thousands, except for percentage)  
           (unaudited)               

Baiyun Campus

                    

Tuition

     92,855        65.2     103,548        68.1     58,190        69.2     68,275        78.7

Meal

     22,964        16.1     23,347        15.3     14,718        17.5     8,088        9.3

Accommodation

     7,800        5.5     8,665        5.7     4,743        5.6     3,586        4.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     123,619        86.8     135,560        89.1     77,651        92.3     79,949        92.1

Yijing Campus—Featured Division

                    

Tuition

     4,020        2.8     6,118        4.0     3,210        3.8     4,406        5.1

Meal

     889        0.6     1,347        0.9     705        0.8     529        0.6

Accommodation

     341        0.2     520        0.3     270        0.3     221        0.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     5,250        3.6     7,985        5.2     4,185        4.9     5,156        6.0

High School Division

                    

Tuition

     28        0.0     92        0.1     42        0.1     72        0.1

Meal

     —          —         —          —         —          —         —          —    

Accommodation

     —          —         —          —         —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     128,897        93.4     143,635        94.6     81,878        97.3     85,177        98.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Revenue generated from the operation of Liandu Foreign Language School Kindergarten was RMB4.2 million in 2018 (up to November 28, 2018).

Cost of revenue

Our cost of revenue primarily consists of salaries, welfare costs, cost for food, books and uniform, depreciation and amortization, utilities, tax surcharges and maintenance and repairs. Salaries and welfare for our teachers are the primary components of our cost of revenue. Our cost of revenue was RMB89.6 million, RMB98.1 million (US$14.1 million) and RMB53.8 million (US$7.6 million) in 2018, 2019 and the six months end June 30, 2020, accounting for 62.9%, 64.5% and 62.0% of our net revenue for the same periods, respectively.

 

- 82 -


Table of Contents

The following tables set forth the components of our cost of revenue (excluding Liandu Foreign Language School Kindergarten) for the periods indicated.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2018     2019     2019     2020  
    RMB     % of total
cost of

revenue
    RMB     % of total
cost of
revenue
    RMB     % of total
cost of
revenue
    RMB     % of total
cost of
revenue
 
    (in thousands, except for percentage)  
          (unaudited)              

Salaries and welfare costs

    63,604       73.6     70,853       72.2     32,569       73.5     42,372       78.8

Cost for food

    7,206       8.3     10,265       10.5     4,228       9.5     4,780       8.9

Cost for books

    1,500       1.7     2,092       2.1     970       2.2     332       0.6

Cost for uniform

    1,648       1.9     1,639       1.7     235       0.5     176       0.3

Depreciation and amortization

    7,967       9.2     8,417       8.6     4,129       9.3     4,695       8.7

Utilities

    2,357       2.7     2,482       2.5     1,245       2.8     609       1.1

Tax surcharges

    566       0.7     394       0.4     167       0.4     81       0.2

Maintenance and repair

    490       0.6     485       0.5     280       0.6     374       0.7

Others

    1,119       1.3     1,504       1.5     528       1.2     374       0.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    86,457       100.0     98,133       100.0     44,351       100.0     53,792       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue of Liandu Foreign Language School Kindergarten was RMB3.2 million in 2018 (up to November 28, 2018).

Gross profit

Our gross profit was RMB52.9 million, RMB54.0 million (US$7.8 million) and RMB32.9 million (US$4.7 million) in 2018, 2019 and the six months ended June 30, 2020, respectively. Our gross profit margin was 37.1%, 35.5% and 38.0% in 2018, 2019 and the six months ended June 30, 2020, respectively. The slight decrease in gross profit margin from 37.1% 2018 to 35.5% 2019 and from 47.3% for the six months ended June 30, 2019 to 38.0% for the six months ended June 30, 2020 was primarily due to the increased level of compensation for teachers.

General and administrative expenses

Our general and administrative expenses primarily consist of salaries and welfare for our non-teaching staff, office expenses, professional service fees, business entertainment fees, traveling and courier service expenses and others. Our general and administrative expenses were RMB27.6 million, RMB9.3 million (US$1.3 million) and RMB7.4 million (US$1.0 million) in 2018, 2019 and the six months ended June 30, 2020, respectively, accounting for 19.4%, 6.1% and 8.5% of our net revenue for the same periods, respectively.

Interest expense, net

Our interest income is generated from our interest-bearing bank deposits. Our interest expense arises from our bank borrowings. Our interest expense, net was RMB5.0 million, RMB3.4 million (US$0.5 million) and RMB1.3 million (US$0.2 million) in 2018, 2019 and the six months ended June 30, 2020, accounting for 3.5%, 2.2% and 1.5% of our net revenue for the same periods, respectively.

Gain on disposal of Liandu Foreign Language School Kindergarten

In November 2018, we disposed of Liandu Foreign Language School Kindergarten to Ms. Fen Ye, Ms. Fang Ye and Ms. Hong Ye for a total cash consideration of RMB10,360,000 as we intend to focus on private primary

 

- 83 -


Table of Contents

and secondary education services. The transfer was completed in November 2018. See “Corporate History and Structure.” We recognized a gain on disposal of RMB0.2 million in 2018.

Other income, net

Our other income consists of government grants and other miscellaneous income/(cost). Government grants represented subsidies from various government authorities in China in relation to our school operation. Other miscellaneous income/(cost) consists of investment income, non-operating income and expenses, bank charges and others. Our other income, net was RMB6.8 million, RMB5.9 million (US$0.8 million) and RMB2.9 million (US$0.4 million) in 2018, 2019 and the six months ended June 30, 2020, accounting for 4.8%, 3.9% and 3.3% of our net revenue for the same periods, respectively.

Results of Operations

The following table sets forth a summary of our consolidated results of operations by amount and as a percentage of total revenue for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations in any period are not necessarily indicative of the results that may be expected for any future period.

 

    Year Ended December 31,     Six Months ended June 30,  
    2018     2019     2019     2020  
    RMB     % of net
revenue
    RMB     US$     % of net
revenue
    RMB     % of net
revenue
    RMB     US$     % of net
revenue
 
    (in thousands, except for percentage, share and per share data)  
          (unaudited)  

Revenue from tuition, meal and accommodation services

    133,067       93.4     143,635       20,632       94.4     81,878       97.3     85,177       12,056       98.2

Other revenue

    7,768       5.5     6,112       878       4.0     1,065       1.3     730       103       0.8

Revenue from related parties

    1,688       1.2     2,373       341       1.6     1,187       1.4     834       118       1.0

Total net revenue

    142,524       100.0     152,121       21,851       100.0     84,129       100.0     86,741       12,277       100.0

Cost of revenue

    89,610       (62.9 )%      98,133       (14,096     (64.5 )%      (44,351     (52.7 )%      (53,792     (7,614     (62.0 )% 

Gross profit

    52,914       37.1     53,988       7,755       35.5     39,777       47.3     32,949       4,664       38.0

Operating expenses

                   

General and administrative expenses

    (27,621     (19.4 )%      (9,276     (1,332     (6.1 )%      (4,023     (4.8 )%      (7,361     (1,042     (8.5 )% 

Total operating expenses

    (27,621     (19.4 )%      (9,276     (1,332     (6.1 )%      (4,023     (4.8 )%      (7,361     (1,042     (8.5 )% 

Income from operations

    25,293       17.7     44,712       6,422       29.4     35,754       42.5     25,588       3,622       29.5

Interest expense

    (5,087     (3.6 )%      (3,426     (492     (2.3 )%      (2,068     (2.5 )%      (1,327     (188     (1.5 )% 

Interest income

    86       0.1     53       8       0.0     26       0.0     26       4       0.0

Change in fair value of short-term investments

    61       0.0     5       1       0.0     —         —         (2     (0     (0.0 )% 

Gain on disposal of Lianwai Kindergarten

    243       0.0     —         —         —         —         —         —         —         —    

Other income, net

    6,817       4.8     5,893       847       3.9     2,480       2.9     2,892       409       3.3

Income before income tax expense

    27,412       19.2     47,237       6,785       31.1     36,192       43.0     27,177       3,847       31.3

Income tax expense

    —         —         —         —         —         —         —         —         —         —    

Income from operations, net of tax

    27,412       19.2     47,237       6,785       31.1     36,192       43.0     27,177       3,847       31.3

Net income

    27,412       19.2     47,237       6,785       31.1     36,192       43.0     27,177       3,847       31.3

Net income attributable to the Company’s ordinary shareholders

    27,412       19.2     47,237       6,785       31.1     36,192       43.0     27,177       3,847       31.3

Net income

    27,412       19.2     47,237       6,785       31.1     36,192       43.0     27,177       3,847       31.3

Other comprehensive income, net of tax

    —         —         —         —         —         —         —         —         —         —    

Comprehensive income

    27,412       19.2     47,237       6,785       31.1     36,192       43.0     27,177       3,847       31.3

Net earnings per share attributable to the Company’s ordinary shareholders

                   

—Basic and diluted

    0.55       —         0.94       0.14       —         0.72       —         0.54       0.08       —    

Weighted average number of ordinary shares used in per share calculation

                   

—Basic and diluted

    50,000,000       —         50,000,000       50,000,000       —         50,000,000       —         50,000,000       50,000,000       —    

 

- 84 -


Table of Contents

Six months ended June 30, 2019 compared to six months ended June 30, 2020

Net revenue. Our net revenue increased by 3.1% from RMB84.1 million for the six months ended June 30, 2019 to RMB86.7 million (US$12.3 million) for the six months ended June 30, 2020, primarily due to an increase in tuition.

 

   

Baiyun Campus. Our net revenue generated from Baiyun Campus increased by 3.0% from RMB77.7 million for the six months ended June 30, 2019 to RMB79.9 million (US$11.3 million) for the six months ended June 30, 2020, primarily due to an increase in the number of students enrolled and an increase in the tuition rate charged. The number of students enrolled at our Baiyun Campus increased by 45 from the beginning of the second semester of the 2018/2019 school year to the beginning of the second semester of the 2019/2020 school year. The tuition rate of each semester charged by our Baiyun Campus was RMB10,600 per student during the 2017/2018 and 2018/2019 school years. The tuition rate for each semester charged by our Baiyun Campus increased to RMB13,000 per student for the 2019/2020 school year.

 

   

Yijing CampusFeatured Division. Our net revenue generated from Yijing Campus – Featured Division increased by 23.2% from RMB4.2 million for the six months ended June 30, 2019 to RMB5.2 million (US$0.7 million) for the six months ended June 30, 2020, primarily due to an increase in the number of students enrolled and a stable tuition rate during the same period. The number of students enrolled at our Yijing Campus – Featured Division increased by 55 from the beginning of the second semester of the 2018/2019 school year to the beginning of the second semester of the 2019/2020 school year.

Cost of revenue. Our cost of revenue increased by 21.3% from RMB44.4 million for the six months ended June 30, 2019 to RMB53.8 million (US$7.6 million) for the six months ended June 30, 2020, primarily due to an increase in salaries and welfare for teachers. Salaries and welfare costs increased from RMB32.6 million for the six months ended June 30, 2019 to RMB42.4 million (US$6.0 million) for the six months ended June 30, 2020. While the number of teachers remained stable, the level of compensation for our teachers increased from the six months ended June 30, 2019 to the six months ended June 30, 2020.

Gross profit. As a result of the foregoing, our gross profit decreased by 17.2% from RMB39.8 million for the six months ended June 30, 2019 to RMB32.9 million (US$4.7 million) for the six months ended June 30, 2020. Our gross margin decreased from 47.3% for the six months ended June 30, 2019 to 38.0% for the six months ended June 30, 2020, primarily due to an increased salary and welfare for our teachers despite our improved operating efficiency. Salary and welfare for our teachers increased by 30.1% from RMB32.6 million for the six months ended June 30, 2019 to RMB42.4 million for the six months ended June 30, 2020. Our teacher-student ratio remained stable at 1:15 at our Baiyun Campus as of September 1, 2018 and 2019 while our teacher-student ratio was 1:6 and 1:5 at our Yijing Campus—Featured Division as of September 1, 2018 and 2019, respectively. Our strategy is to maintain and attract more high-quality teachers, by continuing to increase teachers’ salaries and other benefits from time to time to maintain our competitiveness in the market.

General and administrative expenses. Our general and administrative expenses increase by 83.0% from RMB4.0 million for the six months ended June 30, 2019 to RMB7.4 million (US$1.0 million) for the six months ended June 30, 2020, primarily due to the professional service fees charged to our general and administrative expenses that were incurred for those professional services (including, among others, audit services) not being directly related to our proposed offering of our ordinary shares in the United States.

Income from operations. As a result of the foregoing, our income from operations decreased by 28.4% from RMB35.8 million for the six months ended June 30, 2019 to RMB25.6 million (US$3.6 million) for the six months ended June 30, 2020.

Interest expense, net. Our interest expense, net decreased by 35.8% from RMB2.1 million for the six months ended June 30, 2019 to RMB1.3 million (US$0.2 million) for the six months ended June 30, 2020 primarily due to our repayment of bank borrowings.

 

- 85 -


Table of Contents

Other income, net. Our other income, net increased by 16.6% from RMB2.5 million for the six months ended June 30, 2019 to RMB2.9 million (US$0.4 million) for the six months ended June 30, 2020 primarily due to an increase in government grants to us.

Income from operations, net of tax. As a result of the foregoing, our income from operations, net of tax decreased by 24.9% from RMB36.2 million for the six months ended June 30, 2019 to RMB27.2 million (US$3.8 million) for the six months ended June 30, 2020.

Net income. Our net income decreased by 24.9% from RMB36.2 million for the six months ended June 30, 2019 to RMB27.2 million (US$3.8 million) for the six months ended June 30, 2020, as a result of the foregoing.

Year ended December 31, 2018 compared to year ended December 31, 2019

Net revenue. Our net revenue increased by 6.7% from RMB142.5 million in 2018 to RMB152.1 million (US$21.9 million) in 2019, primarily due to an increase in tuition. Our operation at Liandu Foreign Language School Kindergarten was disposed of in November 2018.

 

   

Baiyun Campus. Our net revenue generated from Baiyun Campus increased by 8.8% from RMB128.0 million in 2018 to RMB139.3 million (US$20.0 million) in 2019, primarily due to an increase in the number of students enrolled and an increase in the tuition rate charged. The number of students enrolled at our Baiyun Campus increased from 4,337 as of September 1, 2018 to 4,361 as of September 1, 2019. The tuition rate for each semester charged by our Baiyun Campus was RMB10,600 and RMB11,000 per student during the 2017/2018 and 2018/2019 school years, respectively. The tuition rate for each semester charged by our Baiyun Campus increased to RMB13,000 per student for the 2019/2020 school year.

 

   

Yijing CampusFeatured Division. Our net revenue generated from Yijing Campus – Featured Division increased by 48.2% from RMB5.6 million in 2018 to RMB8.3 million (US$1.2 million) in 2019, primarily due to an increase in the number of students enrolled and a stable tuition rate during the same period. The number of students enrolled at our Yijing Campus—Featured Division increased from 134 as of September 1, 2018 to 184 as of September 1, 2019.

Cost of revenue. Our cost of revenue increased by 9.5% from RMB89.6 million in 2018 to RMB98.1 million (US$14.1 million) in 2019, primarily due to an increase in compensation level for teachers, as our number of teachers (excluding teachers of Liandu Foreign Language School Kindergarten) increased only from 320 as of September 1, 2018 to 322 as of September 1, 2019. The increase in cost of revenue from 2018 to 2019 was also due to an increase in cost for food which resulted from an increase in market prices of meat and other ingredients necessary for our provision of meals.

Gross profit. As a result of the foregoing, our gross profit increased by 2.1% from RMB52.9 million in 2018 to RMB54.0 million (US$7.8 million) in 2019. Our gross margin decreased from 37.1% in 2018 to 35.5% in 2019, primarily due to an increased salary and welfare for our teachers despite our improved operating efficiency. Salary and welfare for our teachers (excluding teachers of Liandu Foreign Language School Kindergarten) increased by 11.5% from RMB63.6 million in 2018 to RMB70.9 million in 2019. Our teacher-student ratio remained stable at 1:15 at our Baiyun Campus as of September 1, 2018 and 2019 while our teacher-student ratio was 1:6 and 1:5 at our Yijing Campus—Featured Division as of September 1, 2018 and 2019, respectively. Our strategy is to maintain and attract more high-quality teachers, by continuing to increase teachers’ salaries and other benefits from time to time to maintain our competitiveness in the market.

General and administrative expenses. Our general and administrative expenses decreased by 66.3% from RMB27.6 million in 2018 to RMB9.3 million (US$1.3 million) in 2019, primarily due to the professional service fees incurred in relation to a proposed Hong Kong initial public offering and listing in 2018 which has since been halted due to unfavorable market conditions.

 

- 86 -


Table of Contents

Income from operations. As a result of the foregoing, our income from operations increased by 76.7% from RMB25.3 million in 2018 to RMB44.7 million (US$6.4 million) in 2019.

Interest expense, net. Our interest expense, net decreased by 32.0% from RMB5.0 million in 2018 to RMB3.4 million (US$0.5 million) in 2019 primarily due to our repayment of bank borrowings.

Gain on disposal of Liandu Foreign Language Kindergarten. We disposed of Liandu Foreign Language School Kindergarten in November 2018 and recognized a gain of RMB0.2 million.

Other income, net. Our other income, net decreased by 13.2% from RMB6.8 million in 2018 to RMB5.9 million (US$0.8 million) in 2019 primarily due to a decrease in government grants to us.

Income from operations, net of tax. As a result of the foregoing, our income from operations, net of tax increased by 72.3% from RMB27.4 million in 2018 to RMB47.2 million (US$6.8 million) in 2019.

Net income. Our net income increased by 72.3% from RMB27.4 million in 2018 to RMB47.2 million (US$6.8 million) in 2019, as a result of the foregoing.

Liquidity and Capital Resources

Historically, we funded our operations primarily through cash generated from our operating activities, bank borrowings and financing from related parties and shareholders. As of December 31, 2018 and 2019 and June 30, 2020, we had RMB2.6 million, RMB24.7 million (US$3.6 million) and RMB28.9 million (US$4.1 million), respectively, in cash and cash equivalents. All of our cash and cash equivalents as of June 30, 2020 were held in China. Our cash and cash equivalents primarily consist of cash in banks or other financial institutions which are unrestricted as to withdrawal or use. As of December 31, 2018 and 2019 and June 30, 2020, we had short-term bank borrowings of RMB69.0 million, RMB83.6 million (US$12.0 million) and RMB41.8 million (US$5.9 million), respectively. All of our bank borrowings were short term borrowings and were secured by (i) the pledge of the buildings we own and the land use right we have, and (ii) personal guarantees from related parties. As of June 30, 2020, we had net current liabilities of RMB49.3 million. Our ability to continue to operate on a going-concern basis is dependent on our management’s ability to successfully execute our business plans, which includes increasing revenue while controlling operating expenses, as well as generating operating cash flows and continuing to obtain external sources of financing when necessary. We intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities, bank borrowings and from the net proceeds we will receive from this offering.

Although we consolidate the results of our VIEs, we only have access to the assets or earnings of our VIEs through our contractual arrangements with our VIEs and their shareholders. See “Corporate History and Structure.”

We have not encountered any difficulties in meeting our cash obligations to date. When considering our liquidity position and our future capital resources and needs, we take into account price controls set by local governments that may affect the tuition and other fees we are able to charge to students in our School, annual enrollment numbers approved for our School, the economic benefits we have received from Liandu WFOE and our VIEs under our Business Cooperation Agreement and Exclusive Technical Service and Business Consulting Agreement. Based on cash flow projections for operating activities and available loan facilities, we believe that we have sufficient funds for sustainable operations and will be able to meet our payment obligations from operations and debt related commitments for the next twelve months from the date of the prospectus.

 

- 87 -


Table of Contents

Cash Flows

The following table presents our selected consolidated statements of cash flows for the years ended December 31, 2018 and 2019 and the six months ended June 30, 2019 and 2020.

 

    Year Ended December 31,     Six Months Ended June 30,  
    2018     2019     2019     2020  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  
          (unaudited)              

Selected Consolidated Cash Flows:

           

Net cash from operating activities

    52,324       58,775       8,443       27,296       30,297       4,288  

Net cash (used in)/generated from investing activities

    (2,637     (34,739     (4,990     3,444       18,355       2,598  

Net cash (used in)/generated from financing activities

    (82,048     (1,962     (282     2,269       (44,472     (6,295

Net (decrease)/increase in cash and cash equivalents

    (32,360     22,075       3,171       33,010       4,181       592  

Cash and cash equivalents at beginning of the year/period

    35,009       2,648       380       2,648       24,723       3,499  

Cash and cash equivalents at end of the year/period

    2,648       24,723       3,551       35,658       28,904       4,091  

Operating activities

We generate cash from operating activities primarily from tuition, meal and accommodation fees, all of which are typically paid in advance before the respective services are rendered. Tuition, meal and accommodation fees are initially recorded as deferred revenue. We recognize such amounts received as revenue proportionately over the relevant period in which the students attend the applicable programs of each semester.

For the six months ended June 30, 2020, we had net cash from operating activities of RMB30.3 million (US$4.3 million). For the six months ended June 30, 2020, the difference between net income and net cash from operating activities of RMB3.1 million (US$0.4 million) primarily resulted from non-cash items such as depreciation of property and equipment of RMB4.4 million (US$0.6 million). Changes in the working capital accounts mainly included a decrease in accounts payable of RMB3.5 million (US$0.5 million) which resulted from payments for the purchases of school uniform or miscellaneous services, partly offset by a decrease in accounts receivables of RMB1.3 million (US$0.2 million) in relation to settlements of account receivables for the learning materials purchased by students.

In 2019, we had net cash from operating activities of RMB58.8 million (US$8.4 million). In 2019, the difference between net income and net cash from operating activities of RMB11.5 million (US$1.7 million) primarily resulted from non-cash items such as depreciation of property and equipment of RMB7.9 million (US$1.1 million). Changes in the working capital accounts mainly included a decrease in salaries and welfare payable of RMB2.2 million (US$0.3 million) which resulted from bonus payments made to our teachers in connection with our increased level of compensation for teachers and a decrease in amounts due to related parties of RMB2.8 million (US$0.4 million), partly offset by an increase in accounts payable of RMB0.6 million (US$0.1 million) which resulted from purchase of school uniform or miscellaneous services.

In 2018, we had net cash from operating activities of RMB52.3 million. In 2018, the difference between net income and net cash from operating activities of RMB24.9 million primarily resulted from non-cash items such as depreciation of property and equipment of RMB7.5 million. Changes in the working capital accounts mainly included an increase in salaries and welfare payable of RMB6.6 million which resulted from our increased payment of salaries and welfare to teachers, an increase in accounts payable of RMB2.5 million which resulted from purchases of school uniform or miscellaneous services and a decrease in accounts receivable of RMB2.1 million which resulted from learning materials purchased by students.

Investing activities

For the six months ended June 30, 2020, we had net cash generated from investing activities of RMB18.4 million (US$2.6 million), primarily attributable to (i) proceeds from maturity of short-term investments of

 

- 88 -


Table of Contents

RMB40.0 million (US$5.7 million), and (ii) repayment of loans by related parties of RMB34.3 million (US$4.8 million), partly offset by (i) purchase of short-term investments of RMB30.0 million (US$4.2 million), (ii) loans lent to related parties of RMB21.5 million (US$3.0 million), and (iii) purchase of property and equipment of RMB4.4 million (US$0.6 million) for the purposes of campus maintenance. Short-term investments include investments in wealth management products issued by certain banks with maturities between three months and one year.

In 2019, we had net cash used in investing activities of RMB34.7 million (US$5.0 million), primarily attributable to (i) loans lent to related parties of RMB34.4 million (US$4.9 million), (ii) purchase of short-term investments of RMB30.0 million (US$4.3 million), (iii) purchase of property and equipment of RMB13.2 million (US$1.9 million) for the purposes of campus maintenance, offset by proceeds from maturity of short-term investments of RMB15.1 million (US$2.2 million) and (iv) repayment of loans by related parties of RMB22.6 million (US$3.2 million). Short-term investments include investments in wealth management products issued by certain banks with maturities between three months and one year.

In 2018, we had net cash used in investing activities of RMB2.6 million, primarily attributable to (i) loans lent to related parties of RMB38.1 million, (ii) purchase of property and equipment of RMB15.6 million for the purposes of campus maintenance, and (iii) purchase of short-term investments of RMB5.0 million, partly offset by (i) repayments of loans by related parties of RMB39.1 million, and (ii) proceeds from maturity of short-term investments of RMB12.3 million.

Financing activities

For the six months ended June 30, 2020, we had net cash used in financing activities of RMB44.5 million (US$6.3 million), attributable to (i) repayment of short-term borrowings with banks of RMB56.8 million (US$8.0 million) and proceeds from short-term borrowings with banks of RMB15.0 million (US$2.1 million), respectively, and (ii) cash paid for initial public offering related costs of RMB2.7 million (US$0.4 million).

In 2019, we had net cash used in financing activities of RMB2.0 million (US$0.3 million), attributable to (i) proceeds from and repayments of short-term borrowings with banks of RMB119.8 million (US$17.2 million) and RMB105.2 million (US$15.1 million), respectively, and (ii) repayments to of loan payable due to Lianwai Foreign Language School Kindergarten of RMB16.6 million (US$2.4 million).

In 2018, we had net cash used in financing activities of RMB82.0 million, attributable to (i) proceeds from and repayments of short-term borrowings with banks of RMB85.0 million and RMB119.7 million, respectively, and (ii) repayments of short-term borrowings to related parties of RMB47.4 million.

Capital Expenditure

We incurred capital expenditure of RMB15.6 million, RMB13.2 million (US$1.9 million) and RMB4.4 million (US$0.6 million) in 2018, 2019 and the six month ended June 30, 2020, respectively, primarily in connection with the maintenance and renovation of school facilities and purchase of educational equipment. We intend to fund our future capital expenditure through our existing cash balance, bank borrowings, proceeds from this offering and other financing alternatives. We will continue to incur capital expenditure to support the growth of our business.

Contractual Obligations

We had capital commitments related to renovation of the school buildings of RMB0.9 million as of December 31, 2019. We did not have any operating leases as lessee, purchase commitment, capital commitments or any other commitments, long-term obligations or guarantees as of June 30, 2020.

 

- 89 -


Table of Contents

Off-Balance Sheet Commitments and Obligations

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Holding Company Structure

We are a holding company with no material operations of our own. We conduct our operations primarily through the wholly foreign-owned subsidiary and consolidated VIEs in China. As a result, our ability to pay dividends depends upon dividends paid by our wholly foreign-owned subsidiary in China. Our wholly foreign-owned subsidiary in China has not historically paid any dividends to our offshore entities until they generate accumulated profits and meet the requirements for statutory reserve funds. If our wholly foreign-owned subsidiary in China or any newly formed subsidiaries incur any debt in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiary in China is permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries, our consolidated VIEs in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, our wholly foreign-owned subsidiary in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our consolidated VIEs may allocate a portion of their after-tax profits based on PRC accounting standards to a discretionary surplus fund at their discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE.

Furthermore, according to the Implementing Regulations for the Law of the PRC on the Promotion of Privately-run Schools currently in force, at the end of each fiscal year, our School is required to allocate a portion of its funds to our development fund for the construction or maintenance of the school properties or purchase and upgrade of teaching equipment. Our School shall also withhold at least 25.0% of our annual increase of the net assets for the same purposes.

Taxation

Cayman Islands

We are incorporated in the Cayman Islands and conduct our primary business operations through the wholly foreign-owned subsidiary and consolidated VIEs in China. Under the current laws of the Cayman Islands, we are not subject to income, corporation or capital gains taxes. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

Hong Kong

Our Hong Kong subsidiary, Hong Kong Mengxiang Education Development Group Limited, is located in Hong Kong and is subject to an income tax rate of 16.5% for its estimated assessable profit for the years ended December 31, 2018 and 2019 and the six months ended June 30, 2020. Dividend income received from subsidiaries in China is not subject to Hong Kong profit tax. We made no provision for Hong Kong profits tax in our consolidated financial statements as our Hong Kong subsidiary had no assessable profit in 2018 and 2019 and the six months ended June 30, 2020.

 

- 90 -


Table of Contents

British Virgin Islands

Under the current laws of the British Virgin Islands, our British Virgin Islands subsidiary, Lianwai Investment Co., Ltd., is not subject to income or capital gains taxes. In addition, dividend payments are not subject to withholding tax in the British Virgin Islands.

PRC

Our School has been granted corporate income tax exemption for the tuition, meal and accommodation fees from relevant local tax authorities. Pursuant to the Enterprise Income Tax Law of the People’s Republic of China amended on December 29, 2018 (the “EIT Law”), a uniform 25% enterprise income tax rate is generally applicable to both foreign-invested enterprises and domestic enterprises except where a special preferential rate applies, and the income of qualified non-profit organization’s shall be tax-exempt. In addition, according to the Law for Promoting Private Education of the PRC, privately-run schools may enjoy preferential taxation policies and non-profit private-run schools may enjoy the same preferential taxation policies as government-run schools. See “Regulation—Regulations on Taxation in the PRC.”

Quantitative and Qualitative Disclosure about Financial Risks

Foreign currency risk

Our revenues, expenses and assets and liabilities are primarily denominated in Renminbi. Renminbi is not freely convertible into foreign currencies for capital account transactions. 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 by China’s foreign exchange policies, among other things. In July 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 subsided and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On March 17, 2014, the PRC government announced a policy to further expand the maximum daily floating range of Renminbi trading prices against the U.S. dollar in the inter-bank spot foreign exchange market to 2.0%. On August 10, 2015, the PRC government announced that it had changed the calculation method for Renminbi’s daily central parity exchange rate against the U.S. dollar, which resulted in an approximately 2.0% depreciation of Renminbi on that day. We expect Renminbi to fluctuate more significantly in value against the U.S. dollar or other foreign currencies in the future, depending on the market supply and demand with reference to a basket of major foreign currencies. It is difficult to predict how market forces or PRC or U.S. government policy may affect the exchange rate between the Renminbi and the U.S. dollar in the future.

To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. To the extent that we need to convert U.S. dollars we received from this offering into Renminbi for our operations or capital expenditures, 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 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.

We estimate that we will receive net proceeds of approximately US$29.0 million from this offering if the underwriters do not exercise their over-allotment option, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, based on the initial offering price of US$10.00 per ADS. Assuming that we convert the full amount of the net proceeds from this offering into Renminbi, a 10% appreciation of the U.S. dollar against Renminbi, from a rate of RMB7.0651 to US$1.00 to a rate of RMB7.7716 to US$1.00, will result in an increase of RMB20.8 million in our net proceeds from this offering. Conversely, a 10% depreciation of the U.S. dollar against the Renminbi, from a rate of RMB7.0651 to US$1.00 to a rate of RMB6.3586 to US$1.00, will result in a decrease of RMB20.8 million in our net proceeds from this offering.

 

- 91 -


Table of Contents

Credit and concentration risk

Financial instruments, including cash and cash equivalents, short-term investments, prepayments and accounts receivable, potentially subject us to credit risks. As of June 30, 2020, our cash and cash equivalents and short-term investments were held by reputable financial institutions with high-credit ratings and quality. As a result, we do not have significant credit risk associated with the cash and cash equivalents and short-term investments. We do not have significant concentrations of credit risk associated with prepayments. We have not experienced any significant recoverability issue with respect to our accounts receivable and periodically evaluate the creditworthiness of the existing customers in determining an allowance for doubtful accounts primarily based on the age of receivables as well as other factors.

Internal Control over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control and procedures over financial reporting. In the course of auditing our consolidated financial statements for the years ended December 31, 2018 and 2019, we and our independent registered public accounting firm identified one material weakness as of December 31, 2019. As defined in the standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness identified relates to the lack of sufficient financial reporting and accounting personnel with appropriate understanding of accounting principles generally accepted in the United States of America, or U.S. GAAP, to design and implement formal period-end financial reporting policies and procedures, to address complex U.S. GAAP technical accounting issues and to prepare and review our consolidated financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness in our internal control over financial reporting. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.

To remedy our identified material weaknesses as of December 31, 2019, we plan to adopt certain measures to improve our internal control over financial reporting, including (1) hiring more qualified resources equipped with relevant U.S. GAAP and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework, (2) implementing regular and continuous U.S. GAAP accounting and financial reporting training programs for accounting and financial reporting personnel, (3) establishing effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with U.S. GAAP and SEC reporting requirements, and (4) enhancing an internal audit function as well as engaging an external consulting firm to help assess its compliance readiness under rule 13a-15 of the Exchange Act and improve overall internal control. However, we cannot assure you that we will remediate our material weaknesses in a timely manner. See “Risk Factors—Risks Relating to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls to remediate our material weakness over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.”

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an emerging growth company pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s internal control over financial reporting.

 

- 92 -


Table of Contents

Emerging Growth Company Status

We are an “emerging growth company” as defined in the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We elected to take advantage of the extended transition period. However, this election will not apply should we cease to be an emerging growth company.

Recent Accounting Pronouncements

For detailed discussion on recent accounting pronouncements, see Note 2 to our Consolidated Financial Statements.

 

- 93 -


Table of Contents

INDUSTRY

OVERVIEW OF ZHEJIANG PROVINCE’S MACRO ECONOMY AND POPULATION

Per capita disposable income in Zhejiang Province

Zhejiang Province has been among the top provinces in China with the highest per capita disposable income. The per capita disposable income in Zhejiang Province has reached RMB49,899 in 2019, 62.4% higher than the national average of RMB30,733 in the same period. Over the next five years, it is expected that the increasing trend would continue and the per capital annual disposable income in Zhejiang Province would increase at a CAGR of 7.0% from 2019 to 2024.

 

LOGO

Per capita annual expenditure of households on education in Zhejiang Province

Per capita annual expenditure of overall households (both urban and rural) on education in Zhejiang Province has increased from around RMB1,242 in 2014 to RMB1,894 in 2019, representing a CAGR of 8.8%. This upward trend is associated with the increasing annual disposable income of overall households in Zhejiang Province, which would drive the per capita annual expenditure of overall households on education in Zhejiang Province to further increase at a CAGR of 8.1% from 2019 to 2024.

 

LOGO

Source: the Frost & Sullivan report

 

- 94 -


Table of Contents

Population of Zhejiang Province

Population of Zhejiang Province has grown steadily from 55.1 million in 2014 to 58.5 million in 2019, representing a CAGR of 1.2%. With Zhejiang Province’s robust economic growth and increasing urbanization rate (representing the ratio of the urban population to the total population within a specific region) which enables its residents to enjoy improved living standards, the population of Zhejiang Province is forecasted to increase to 61.5 million in 2024, representing a CAGR of 1.0% from 2019 to 2024. Zhejiang Province’s urbanization rate increased to from 64.9% in 2014 to 70.0% in 2019. The urbanization rate is expected to further increase to 74.4% in 2024.

 

LOGO

Population of Overseas Chinese Returnees and their Relatives Residing in Zhejiang Province

In recent years, the trend is becoming more evident that the overseas Chinese are returning to their hometown in China for retirement or better career prospects. As a result, the population of overseas Chinese returnees and their relatives residing in Zhejiang Province has increased from 1.2 million in 2014 to 1.5 million in 2019, representing a CAGR of 4.5%. It is expected this number would continue to grow steadily at a CAGR of 4.0% from 2019 to 2024.

 

LOGO

Source: the Frost & Sullivan report

Note: Overseas Chinese returnees refer to people of Chinese ethnicities who had gained permanent residence outside the PRC and have returned to reside permanently in the PRC. Overseas Chinese returnees and their

 

- 95 -


Table of Contents

Relatives Residing in Zhejiang Province refer to overseas Chinese returnees (including Chinese returnees from Hong Kong and Macau) and their immediate families who are residing in Zhejiang Province permanently.

OVERVIEW OF LISHUI CITY’S MACRO ECONOMY

Overview of Macro Economy in Lishui City

As of the end of 2019, Lishui City has a population of 2.7 million, representing a year-over-year rate of 0.2%. Lishui City has an urbanization rate of 31.4%, representing a year-over-year rate of 3.0%. Lishui City’s economy has recorded a strong growth. The nominal GDP in Lishui City increased from RMB105.1 billion in 2014 to RMB147.7 billion in 2019, representing a CAGR of 7.0% from 2014 to 2019. At the per capital level, per capita nominal GDP in Lishui City grew from RMB39,600 in 2014 to RMB54,500 in 2019, representing a CAGR of 6.6%.

In line with the sound growth of the economy in Lishui City, per capita disposal income increased from RMB22,400 in 2014 to RMB35,500 in 2019, representing a CAGR of 9.6% from 2014 to 2019. Driven by the higher purchasing power, parents are able to spend more on children’s education, under this background, parents are inclined to choose private education which provides more personalized education for the students but is more expensive.

LOGO

 

- 96 -


Table of Contents

Per Capita Annual Expenditure of Households on Education in Lishui City

Per capita annual expenditure of overall households on education in Lishui City has increased from RMB815 in 2014 to RMB1,246 in 2019, representing a CAGR of 8.9% from 2014 to 2019, which indicates the rising willingness of residents in Lishui City to pay for quality education.

 

LOGO

CHINA EDUCATION INDUSTRY OVERVIEW

Overview of China’s education system

China’s education system is generally categorized into formal and non-formal education. Students engaged in formal education are entitled to receive certificates officially recognized by the Chinese government upon successful completion. Primary school, middle school and high school constitute the primary and secondary education, which covers children from six to 18 years old. Within primary and secondary education, primary school and middle school constitutes the nine-year compulsory educational phase. The non-formal education system only provides students with certificates for completion of the training and learning courses, which may not be officially recognized by the PRC government.

The following diagram illustrates the composition of China’s education system.

 

LOGO

Source: the Frost & Sullivan report

 

- 97 -


Table of Contents

Total Revenue of Formal Education Industry in China

The PRC education industry had strong growth over the past five years, which was mainly driven by rising government public expenditure and private consumption. According to the Ministry of Education of the PRC, the total revenue of education industry in China increased from RMB3,280.6 billion in 2014 to RMB5,017.5 billion in 2019, representing a CAGR of 8.9%. China’s total revenue of education industry is expected to increase from RMB5,017.5 billion in 2019 to RMB7,705.8 billion in 2024, representing a CAGR of 9.0%.

 

LOGO

Source: the Frost & Sullivan report

OVERVIEW OF CHINA’S PRIVATE PRIMARY AND SECONDARY EDUCATION MARKET

Introduction of China’s private primary and secondary education market

In the early 1980s, fundamental education was first allowed to be operated by private entities in China. The main purpose of the Chinese government’s allowing the entry of private capitals was to address public funds shortage to run educational institutes. In the 1990s, private fundamental education entered a rapid growth stage.

In 2002, as the Non-state Education Promotion Law of the PRC was enacted, the legal status of private educational institutes was acknowledged. Since then, private primary schools, middle schools and high schools have played an important role in the Chinese education system. With consumers’ rising preference towards private schools, more and more parents in China tend to send their children to private schools, driving the increasing enrollments in private schools and also the uprising income of education industry from tuition fees and growing private investment into the industry. From 2014 to 2019 the total number of students enrolled in private primary and secondary schools in China increased from 14.0 million to 19.9 million, and the total revenue of private primary and secondary education market increased from RMB95.5 billion to RMB201.0 billion, due to the growth of age group of 7 to 12 years old and policy support from the government. Specifically, student enrolled in primary schools, middle schools and high schools grew from 6.7 million to 9.5 million, from 4.9 million to 6.9 million and from 2.4 million to 3.6 million, respectively. The increasing trend is expected to continue in the future with the total number of student enrollments in primary and secondary schools reaching 30.1 million in 2024, representing a CAGR of 8.6%.

 

- 98 -


Table of Contents

LOGO

Penetration of private primary and secondary education in China

Penetration of private schools in China increased over the past five years, which has indicated that an increasing number of students have chosen to go to private schools instead of public ones and this trend is likely to continue in the future.

 

LOGO

Source: the Frost & Sullivan report

Total revenue of private primary and secondary education

From 2014 to 2019, total revenue of private primary and secondary schools increased from RMB95.5 billion to RMB238.4 billion, representing a CAGR of 20.1%. Total revenue of private primary and secondary schools is expected to increase to RMB642.4 billion in 2024, representing a CAGR of 21.9%.

 

- 99 -


Table of Contents

LOGO

Note: Total revenue of private primary and secondary schools has been calculated by aggregating total PRC government public expenditures allocated to primary and secondary schools in the PRC private education industry by the central government and local governments, funding provided to private primary and secondary schools by investors, revenues generated from donations to and fundraising by primary and secondary schools, revenues generated by private primary and secondary schools from teaching, research and other activities (such as tuition and school-run businesses), and other educational funding or school revenues.

Source: Ministry of Education of the PRC; the Frost & Sullivan report

OVERVIEW OF PRIVATE PRIMARY AND SECONDARY EDUCATION MARKET IN ZHEJIANG PROVINCE

Overview of private primary and secondary education market in Zhejiang Province

With one of the highest per capita disposable income, Zhejiang Province has been a pioneer region for private primary and secondary education in China. The tuition fee of private schools is generally much higher than the public ones, therefore the demand for private primary and secondary schools is usually more vibrant in wealthy regions, such as Zhejiang Province.

Student enrollment in private primary and secondary education

The total number of students enrolled in private primary and secondary education in Zhejiang Province increased from 0.9 million in 2014 and to 1.0 million in 2019, representing a CAGR of 2.6%. The number is expected to keep growing in the next few years, reaching 1.1 million in 2024, representing a CAGR of 3.0% from 2019 to 2024.

 

- 100 -


Table of Contents

LOGO

Source: the Frost & Sullivan report

Revenue of private primary and secondary education market in Zhejiang Province

As the private primary and secondary education market in Zhejiang Province is at a relatively mature stage, the total revenue of Zhejiang Province private primary and secondary education has shown a slower growth than the overall growth in China. The total revenue of Zhejiang Province private primary and secondary education industry increased from RMB9.2 billion in 2014 to RMB18.9 billion in 2019, representing a CAGR of 15.5%. The total revenue of Zhejiang Province private primary and secondary education is expected to increase to RMB34.9 billion in 2024, representing a CAGR of approximately 13.1% from 2019 to 2024.

 

LOGO

Source: the Frost & Sullivan report

Average annual tuition fee in Zhejiang Province

The average annual tuition fee of Zhejiang private primary, middle and high school reached RMB10,900, RMB18,300 and RMB19,700 in 2019, which grew at a CAGR of 22.8%, 21.5% and 4.9% from 2014 to 2019, respectively. Driven by the increasing popularity of private primary and secondary education and the diversifying

 

- 101 -


Table of Contents

curriculum content and teaching facility, it is expected that the annual tuition fee in Zhejiang primary, middle and high school would increase further at a CAGR of 14.0%, 12.0% and 8.4% from 2019 to 2024, respectively.

 

LOGO

Average annual salaries and benefits of the teachers in Zhejiang Province

Due to the increasing demand of teachers, that the average salaries and benefits of teachers of Zhejiang private primary and secondary education increased from RMB92,600 in 2014 to RMB123,500 in 2019 representing a CAGR of 5.9% from 2014 to 2019. Driving by the increasing demand of teachers in private primary and secondary education in Zhejiang Province, the annual salaries and benefits of teachers is expected to reach RMB166,200 by 2024, representing a CAGR of 6.1% from 2019 to 2024E.

 

LOGO

Market drivers of private primary and secondary education market in Zhejiang Province

 

   

increasing urbanization. Increasing urbanization increases the disposal incomes of rural citizens in Zhejiang Province which will, in turn, increases demand for education. According to the Frost & Sullivan report, the per capita disposable income in Zhejiang Province increased from RMB32,658 in 2014 to RMB49,899 in 2019, representing a CAGR of 8.8% for the same period. Nevertheless, the development of public education resources is likely to continue at a relatively stable pace and will be highly concentrated in tier-1 cities. Private primary and secondary education in Zhejiang Province is expected to develop given the

 

- 102 -


Table of Contents
 

gap between the rapidly increasing demand for primary and secondary education and the relatively limited public primary and secondary education resources. The penetration rate of private and secondary education, i.e., the ratio of the number of students enrolled in private primary and secondary schools to the total number of students enrolled in private and public primary and secondary schools, increased from 14.7% in 2014 to 16.0% in 2019 in Zhejiang Province and is expected to increase further in the future.

 

   

increasingly diversified course offering and improved quality of private education. With policy support and private education groups’ ever-increasing capabilities in resource integration, the education quality of private primary and secondary education continuously improves. Meanwhile, private primary and secondary education expands from test-oriented courses that are public primary and secondary schools’ primary focus to integrated courses which are both quality-oriented and test-oriented. Such development is expected to attract more people to enroll in primary and secondary education in Zhejiang Province.

 

   

government support. In response to Chinese government’s plan to encourage and promote the development of private education, Zhejiang Province Government issued several policies, including “Opinions of the People’s Government of Zhejiang Province on Encouraging and Promoting Development of Private Education,” “1+7 Supporting Policies on Promoting Development of Private Education” and so on. Government support includes but not limited to encouraging PPP financing model, government subsidy, improving teachers’ welfare in the private education institutions, increasing land availabilities to private education institutions and so on.

Development trends of private primary and secondary education market in Zhejiang Province

 

   

increasing number of private primary and secondary education institutions. Primary and secondary education in Zhejiang Province mainly used to rely on the public schools, while private primary and secondary education providers used to have limited access to resources and were inexperienced. There used to be insufficient awareness and approval from the public regarding private higher education. Nevertheless, supported by private education providers’ enhanced capability to introduce and utilize capital resources, as well as their continuously improved education quality and recognition, the transition from public education to private education is likely to be a key development trend. This trend is also supported by the initiatives of PRC and Zhejiang Province government on providing education resources.

 

   

industry consolidation. Private primary and secondary education market in Zhejiang Province is expected to experience an increasing consolidation with more and more ownership transfer and merger and acquisition cases, with the continuous development of industry-leading players. This is primarily because growth through merger and acquisition is a major strategy for business growth in this industry. With stringent requirements under relevant laws regarding the establishment of private primary and secondary education institutions, significant amount of capital and resources required and certainly long period for preparation and establishment, growth through merger and acquisition is widely adopted by industry players given its high efficiency and effectiveness.

 

   

emphasis on global vision. Global communication and cooperation has been a key trend for private education in general. Driven by the globalization, private primary and secondary education providers and students will put more emphasis on global vision. International education system has been integrated in traditional high school and there is an emerging trend of expanding the integration to primary and secondary schools. Under this background, educational institutes expect to enhance their competitiveness by establishing a teaching system that is consistent with international standards and supported by international educational resources and international professional teachers. Students expect to broaden their horizon and have a global vision by leveraging the resources these institutions provide.

Entry barriers of private primary and secondary education market in Zhejiang Province

 

   

government approval. In China, the establishment of private educational institutes must firstly be approved by the relevant governmental authorities. Central and local governments have issued regulations to detail the

 

- 103 -


Table of Contents
 

requirements of facilities and teaching staff on the establishment of private educational institutions. Companies with established track records or past experience on establishing private educational institutes may have an advantage in obtaining the permission.

 

   

brand awareness and student source. Brand awareness is especially essential for private schools, as it is among the top criteria for students and parents to choose schools. Students and their parents would like to choose a recognized school with good reputation that is established over time. Accordingly, it is relatively hard for new entrants to have sufficient number of students.

 

   

sufficient initial capital and continuous investment. At the beginning of the establishment of schools, a large amount of initial capital is needed for campus construction, facilities and equipment. Moreover, establishment of schools is long-term investments. Market players must have sufficient capital to support additional investments on a continuous basis. Thus, the capital requirement is a high barrier for new entrants.

 

   

qualified teachers. Qualified teachers are commonly regarded as the most critical educational resources, directly reflecting the education quality of schools. Thus, all the schools place specific emphasis on the recruiting teachers. High quality teachers are usually employed by public schools and well-established private educational institutes. It is difficult for new entrants to gain access to resources of high quality teachers.

 

   

land resource and relevant facilities. To meet various requirements of teaching and extracurricular activities, schools always require plenty of land resources to construct campuses and relevant facilities. The land use rights are usually granted by the local governments or leased from third parties. With the tight supply of available land resources and the increased rental cost, it is becoming more difficult to gain additional land resources.

Overview of Primary and Secondary Education Market in Lishui City

Per the increasing number of student-age population lays a solid foundation for the growing student enrollments in primary and secondary education in Lishui City. Student admission of primary education, middle-school education, and high-school education attained a CAGR of 2.7%, 3.2% and 1.3% from 2016 to 2018, respectively. However, the number of schools in the primary and secondary education markets in Lishui City witnessed a decrease from 2016 to 2018.

 

LOGO

 

- 104 -


Table of Contents

People and the local government have paid great attention to education in Lishui City and the city witnessed increasing investment activities on education in the past few years. The planned education projects increased from 108 in 2017 to 130 in 2019 and corresponding project investment increased from RMB6.2 billion in 2017 to RMB8.1 billion in 2019. In addition, the total revenue of the education industry has grown from RMB8.4 billion in 2017 to RMB10.8 billion in 2019, representing a CAGR of 13.3% from 2017 to 2019.

 

LOGO

COMPETITIVE LANDSCAPE

Competitive landscape of primary and secondary education market in Zhejiang Province

Total enrollment in private primary and secondary education in Zhejiang Province is approximately 975,700 persons for the 2019/2020 school year. The market is fragmented as the top ten players in aggregated had merely 10.3% of total students enrolled in private primary and secondary education for the 2019/2020 school year in Zhejiang Province. The competition in Zhejiang Province private primary and secondary education market is fierce with a few large-scale education groups having more than 10,000 students enrolled and operating five to seven separate schools located in more than one city in Zhejiang Province.

The Company, with approximately 4,600 students enrolled on a monthly average basis, ranked tenth among the top private primary and secondary education institutes in Zhejiang Province in terms of the student enrollment for the 2019/2020 school year, accounting for 0.5% of the market share.

 

- 105 -


Table of Contents

LOGO

Source: the Frost & Sullivan report

Competitive landscape of primary and secondary education market in Lishui City

The private primary and secondary education market in Lishui City is highly concentrated with the top four players garnering 49.0% of total students enrolled in Lishui City for the 2019/2020 school year. We ranked second among the top private primary and secondary education institutes in Lishui City with approximately 4,600 students enrolled on a monthly average basis, accounting for 15.2% of the market share in Lishui City for the 2019/2020 school year.

 

LOGO

Source: the Frost & Sullivan report

The private primary and middle school education market in Lishui City is highly concentrated with the top four players enrolling merely 51.4% of total students enrolled for the 2019/2020 school year. We ranked second among the top private primary and middle school education institutes in Lishui City with approximately 4,500

 

- 106 -


Table of Contents

students enrolled on a monthly average basis, accounted for 18.4% of the market share for the 2019/2020 school year.

 

LOGO

Source: the Frost & Sullivan report

OVERVIEW OF CHINA’S PRIVATE FORMAL VOCATIONAL EDUCATION MARKET

Private vocational education constitutes an important part of China’s education system. Vocational education includes secondary and higher vocational education. Secondary vocational schools include technical school, vocational high school and specialized secondary school. Higher vocational school education is undertaken by universities and junior colleges.

Vocational education used to be provided only by schools of lower academic levels such as technician school, vocational high school and specialized secondary school, therefore was not first choice of students and their parents. With the changes in national policies, higher vocational education is now provided by junior colleges offering three-year vocational programs, which offer a more advanced level of education and thus more welcome by students and their parents. In addition, graduates of higher vocational educational programs who possess both professional and technical skills are more desired by potential employers. Such developments are expected to attract more students to consider private higher vocational education and drive the growth of the market.

In recent years, an increasing number of private vocational schools began to cooperate with local and regional enterprises. Under the school-enterprise model, vocational schools provide practical trainings with the input of the enterprises, from which students will obtain guaranteed internships and job opportunities. This also benefits the enterprises with a stable source of talents. This model has enhanced the employment prospect for students upon graduation, and therefore has attracted more students to undertake private vocational education in recent years. With supportive government policies and growing demand of vocational education graduates from employers, it is expected that China’s private vocational education market would continue to expand.

 

- 107 -


Table of Contents

BUSINESS

OUR EDUCATION PHILOSOPHY

Our education philosophy is to guide the healthy development of our students and to establish a solid foundation for their lifelong advancement and happiness. We aim to provide high quality, distinctive and international education services.

OUR MISSION

Our mission is to nurture modern citizens with a sense of national pride and international vision. We believe that a quality education should be all-encompassing, covering health, moral character, academic results and overall competency.

OUR VISION

We believe that education is of long-term significance. After nearly 20 years of development, we have formed our unique philosophy. We believe in learning with joy and inspiring our students’ creativity, imagination and innate talents. We aim to empower more and more graduates with the merits, knowledge and skills that are critical to the present and future developments of society.

OVERVIEW

We are a prominent private primary and secondary education service provider in Lishui City, Zhejiang Province. According to the Frost & Sullivan report, we were one of the top ten private primary and secondary education institutes in Zhejiang Province in terms of the students enrolled on a monthly average basis for the 2019/2020 school year. We ranked second among the top private primary and secondary education institutes and second among the top private primary and middle school (excluding high school) education institutes in Lishui City both in terms of the students enrolled on a monthly average basis for the 2019/2020 school year.

Our private education services primarily include primary and middle school education. We are able to attract students of different age groups to our School. In 2003, we launched our Liandu Foreign Language School in Lishui City. Soon after our establishment, our School was named a private school of exemplary quality in Lishui City by Lishui Education Bureau in 2005. As of June 30, 2020, we had two campuses offering primary and middle school private education in operation:

 

   

Baiyun Campus offering standard PRC curriculum programs at the primary school and middle school level; and

 

   

Yijing Campus—Featured Division offering featured PRC curriculum programs at the primary school level.

We also offer high school education services at our High School Division through our collaboration with Qingtian High School, a public high school in Qingtian County, Lishui City, pursuant to a contractual arrangement for a period up to June 2020. Under such arrangement, we are mainly responsible for student admission and progression and Qingtian High School is mainly responsible for the curriculum and teaching. The students of our High School Division use the facilities and attend the classes taught by Qingtian High School. After completion of three years of schooling, our students will receive their diplomas from us. Our high school curriculum programs are designed for students from overseas Chinese families returning to China who are commonly known as the overseas Chinese returnees.

We are well-known for our quality education services. We received the Quality Award which is the most authoritative award in recognition of education quality in various categories, such as winning school, education

 

- 108 -


Table of Contents

quality management team, education quality managing principals, best performing individual teacher and various single subjects, from the Liandu District Education Bureau during recent school years. For example, we won the Quality Award in primary school management efficiency of Lishui City and the Quality Award in middle school management progress of Lishui City in 2015. We won the first prize in Quality Award in primary school management efficiency of Lishui City and Quality Award for primary and middle school of Liandu District in 2017. In 2019, we also won the Middle School Quality Progress Award of Lishui City, the Middle and Primary School Teaching Quality Award of Liandu District of 2018, the Primary and Middle School Management Award of Liandu District and the first prize in Teaching Quality Award (middle school) of Liandu District.

We are committed to offering a comprehensive education with unique features. We are designated as the Foreign Language Experimental School of the National Basic Foreign Language Teaching Research Center. Our School is also the base of arts, sports, Chinese calligraphy and small-class education. We not only offer high quality standard PRC curriculum programs which equip our students with basic knowledge and skills, but also place an emphasis on featured curriculum programs which aim to inspire our students with unique teaching and learning methods, philosophies and environment.

Our School is highly recognized among the large overseas Chinese returnee community in Zhejiang Province. We are the Chinese education base recognized by the Overseas Chinese Affairs Office of the Zhejiang People’s Government and the Department of Education of Zhejiang Province. In December 2019, we were approved as an overseas Chinese international culture exchange base of Zhejiang Province.

Our students have achieved impressive results in unified examinations and have received numerous academic and athletic awards at the provincial, city and district levels throughout our history, which we believe demonstrates the quality of our education.

As of September 1, 2019, we had 4,558 students enrolled at our School in total. The table below sets forth the number of student enrollments and the number of teachers of our School as of the dates indicated.

 

     As of September 1,  
     2017      2018      2019  

Student enrollments

     4,268        4,478        4,558  

Number of teachers

     305        320        322  

Our net revenue increased by 6.7% from RMB142.5 million in 2018 to RMB152.1 million (US$21.9 million) in 2019. Our net revenue increased by 3.1% from RMB84.1 million for the six months ended June 30, 2019 to RMB86.7 million (US$12.3 million) for the six months ended June 30, 2020. Our net income increased by 72.3% from RMB27.4 million in 2018 to RMB47.2 million (US$6.8 million) in 2019. Our net income decreased by 24.9% from RMB36.2 million for the six months ended June 30, 2019 to RMB27.2 million (US$3.8 million) for the six months ended June 30, 2020.

Our Strengths

We believe the following strengths have contributed to our continued success:

A prominent player in Zhejiang Province’s fast-growing private primary and secondary education industry

According to the Frost & Sullivan report, we are a prominent private primary and secondary education service provider in Lishui City, Zhejiang Province. In addition, we were one of the top ten private primary and secondary education institutes in Zhejiang Province in terms of the students enrolled on a monthly average basis for the 2019/2020 school year, according to the Frost & Sullivan report.

The private primary and secondary education industry in China experienced rapid growth. According to the Frost & Sullivan report, student enrollments in the China’s private education industry increased from

 

- 109 -


Table of Contents

14.0 million to 19.9 million from 2014 to 2019, and is expected to further increase to 30.1 million by 2024, representing a CAGR of 8.6%. Zhejiang Province is a highly populated and wealthy region in China and the growth of Zhejiang Province’s private education industry has benefited tremendously from its macroeconomic environment. As one of the provinces with the highest per capita disposable income, Zhejiang Province has been a pioneer region for private primary and secondary education in China. The demand for private primary and secondary schools is vibrant in Zhejiang Province. The total revenue of Zhejiang Province’s private primary and secondary education industry increased at a CAGR of approximately 15.5%, from RMB9.2 billion in 2014 to RMB18.9 billion in 2019 and is expected to increase to RMB34.9 billion in 2024, representing a CAGR of approximately 13.1% from 2019 to 2024.

We actively capture the opportunities in the fast-growing primary and secondary education industry and offer premium primary and secondary private education services targeted on local and overseas Chinese returnee students. In 2003, we launched our Liandu Foreign Language School in Lishui City with an initial number of students of 930. Since then, we have rapidly developed a large student base through the expansion of our School in Lishui City and have established our reputation and market presence. As of September 1, 2019, we had 4,558 students. Leveraging on our significant experience in providing private education for 17 years, we are well-positioned to capture the opportunities in response to the growing demand for private education in Zhejiang Province and the rest of China.

Reputable brand with strong market demand

We believe that we have achieved a strong reputation in China’s private education industry. We are well-known as offering Chinese education to overseas Chinese returnee students, according to the Frost & Sullivan report and we were approved as an overseas Chinese international culture exchange base of Zhejiang Province in December 2019. We were recognized as the Technology and Physical Education Advanced School of Zhejiang Province of 2017 by Liandu District Education Bureau and the Talent-caring Advanced Company of Lishui City by the Talent-caring Unit of Lishui City in 2017. We were also recognized as the Advanced Group of Education and Research of Lishui City in 2019. Our Chinese teaching crew were recognized as the Advanced Teaching and Research Team of Zhejiang Province by the Department of Education of Zhejiang Province in 2019. We were also recognized as the Information Promotion Advanced Group by Liandu District Education Bureau in 2019. Our School is well-received in the market, according to the Frost & Sullivan report. We usually receive a larger number of admission applications than our total capacity during each school year. For example, during the 2019/2020 school year, the admission rate for our grade seven, i.e., the first year of middle school, was only approximately 9% despite our effort to accommodate the applications to the most extent possible. We believe that our recognized brand name and extensive experience in providing private education with a high standard, together with the trust that we have gained from the community, enable us to further enhance our brand awareness, strengthen our market position and expand our market presence.

In addition to our strong ability to recruit new students in response to the strong market demand, we offer the opportunity of direct promotion from primary school to middle school to those students who prefer linked, coherent and consistent private education of high quality. With our strong capabilities and reputation, we have been able to retain a large number of our existing students upon their promotion to the next grade. Only less than 1% of our students discontinued their studies with us mainly due to family reasons during the past three school years. For the 2019/2020 school year, over 60% of our primary school graduates continued their middle school studies with us. Our private fundamental education covering primary and middle school levels allows us to attract younger students who will become the stable and high-quality student base on a continuing basis for our School.

High quality education fostering all-rounded development of students

During our 17 years of operation, we have established a strong reputation for quality education, which has attracted top students and teachers to our School that are integral to our success. We believe that our School is

 

- 110 -


Table of Contents

well-recognized in Lishui City and is often viewed by students and their parents as a pathway to prominent higher education. For example, over 70% of our middle school graduates were admitted to local premium high schools in 2018 and 2019.

We received the Quality Award which is the most authoritative award in recognition of education quality in various categories, such as winning school, education quality management team, education quality managing principals, best performing individual teacher and various single subjects, from the Liandu District Education Bureau during recent school years. For example, we won the Quality Award in primary school management efficiency of Lishui City and the Quality Award in middle school management progress of Lishui City in 2015. We won the first prize in Quality Award in primary school management efficiency of Lishui City and Quality Award for primary and middle school of Liandu District in 2017. In 2019, we also won the Middle School Quality Progress Award of Lishui City, the Middle and Primary School Teaching Quality Award of Liandu District of 2018, the Primary and Middle School Management Award of Liandu District and the first prize in Teaching Quality Award (middle school) of Liandu District.

We are committed to providing personally attentive learning environment across all levels of our education for our students. Our education programs not only focus on academics, but also balanced, all-rounded and personal developments of our students to their fullest potential. Our primary and middle school curriculum programs received the Excellent Curriculum Program Award of 2016 from Liandu District Education Bureau. We offer high quality standard PRC curriculum programs which aim to develop the comprehensive competency of our students. Our Yijing Campus—Featured Division offers special featured PRC curriculum programs that aim to inspire our students with small-class teaching, theme-based learning, self-discovery and the International Baccalaureate (IB) principles such as nurturing curiosity, encouraging critical and creative thinking, developing a strong sense of fairness and justice and balancing intellectual, physical and emotional aspects. We strongly encourage our students’ exposure to diverse courses, such as foreign language, art, sports, ethics and comprehensive practical courses. We also encourage participations to various school activities and events, such as Carnival of Science and Technology, Military Festival, Sports Festival and Reading Festival, which provide our students with the opportunities of learning with joy.

Our students are known for their outstanding performances. Our students have achieved impressive results in unified examinations. In recognition of our education quality which is partly reflected in our students’ academic results, we received the Quality Award from the Liandu District Education Bureau for 2017/2018 and 2018/2019 school years. Our primary and middle school students also have various achievements in sports, arts and academic performance. For example, we won the first prize in primary school general fitness match and track and field match of Liandu District of 2006, the first prize in primary and middle school track and field match (primary school) of Liandu District in 2016, the first prize in primary and middle school table tennis match (middle school boys) of Liandu District in 2018 and the first prize in the fifth primary school invitational basketball tournament (boys) of Zhejiang Province in November 2019. We were recognized as the Extracurricular Reading Advanced School of Zhejiang Province of 2018 by Zhejiang Province Education Press Head Office, an institution directly under the Department of Education of Zhejiang Province.

We believe that highly qualified and dedicated teachers are critical to ensure our quality education. As of September 1, 2019, we had 322 teachers, among whom 32 had received Advanced Teacher qualifications issued by the relevant Chinese education authorities including 12 teachers who received the recognition of city-level academic leaders. Two of our teachers were recognized as Zhejiang Education and Research Outstanding Individuals by Zhejiang Province Education Science Planning Leader Group and Zhejiang Research Institute of Education Science. We also have nine teachers who were recognized as Excellent Teachers by Lishui People’s Education Fund, Lishui Education Bureau and Liandu District Education Bureau. We also employed four foreign teachers to provide an immersive English-learning environment to our students. We are committed to enabling our teachers’ development. We provide various training opportunities to our teachers, such as overseas school visit, education expert seminar and continuous studies. Our teachers’ assessment is performance-based and we provide incentives to quality teaching. Our Chinese teaching crew were recognized as the Advanced Teaching and Research Team of Zhejiang Province by the Department of Education of Zhejiang Province in 2019.

 

- 111 -


Table of Contents

Premium pricing and steady enrollment growth creating high business visibility

Leveraging our market leadership and effectiveness of our education services, we believe that we are able to command premium prices. According to the Frost & Sullivan report, the average annual tuition fee of Zhejiang Province private primary and middle school was RMB10,900 and RMB18,300 in 2019, respectively. The tuition rate for each semester charged by our Baiyun Campus was RMB10,600 and RMB11,000 per student during the 2017/2018 and 2018/2019 school years, respectively. The tuition rate for each semester charged by our Baiyun Campus increased to RMB13,000 per student for the 2019/2020 school year. The tuition rate for each semester charged by our Yijing Campus—Featured Division remained unchanged at RMB20,000 per student. As of September 1, 2019, approximately 24% our students of Yijing Campus—Featured Division are students from affluent families who are overseas Chinese returning to China and are willing to invest in the higher-quality education that we provide.

We have experienced steady growth in our student enrollments and revenue in recent years. The number of students enrolled in our School increased from 4,268 as of September 1, 2017 to 4,558 as of September 1, 2019. We believe that we will be able to continue to grow our business with our premium pricing and steady growth in our number of students.

Visionary, experienced, and passionate management

Our visionary, experienced and passionate management team has been crucial in driving the success of our business. Ms. Fen Ye, our founder, Chairlady and executive director, and Mr. Biao Wei, our executive director and chief executive officer, each of whom has nearly 20 years of experience in education management, have devoted their entrepreneurial career to serving the education industry in China. Ms. Fen Ye received the Lishui Education Person of the Year Award in 2014 from the Lishui City government and recently started to serve as the Vice Chairman of the seventh Committee of the Lishui City Overseas Chinese Returnee Federation. Mr. Wei was named Top Ten Outstanding Young People in Lishui City by the Lishui city government. Mr. Weijian Xu, our chief financial officer, has over 10 years of experience in accounting and financial management and previously worked at listed companies in China.

Mr. Guoliang Chen, the principal of our School, has over 20 years of experience as educators. Mr. Chen is the vice president of the Provincial Private Education Association. He is also the legal representative and secretary general of the Lishui City Private Education Association. Mr. Chen is one of the leading teachers of Lishui City and has made outstanding achievements in both teaching and research. We believe that our management team’s extensive education and management experience has provided, and will continue to provide us with valuable industry insight and expertise and enables us to manage operations efficiently and promote our growth and reputation.

Our Strategies

We intend to further grow our business by pursuing the following strategies:

Increase the utilization rate of our campuses

We intend to increase the utilization rate of our campuses by our continuous efforts in recruiting and retaining students. Our Yijing Campus—Featured Division was established in 2017 and had not reached its planned utilization rates of each grade during recent school years. With the continuous expansion in admission of new students and progression of existing students, the utilization rate of our Yijing Campus—Featured Division will increase. We will also strengthen our student recruitment capability and maintain the utilization rate of our other campuses at a higher level. Our School is highly recognized among the overseas Chinese returnee students and their parents. According to the Frost & Sullivan report, the population of overseas Chinese returnees

 

- 112 -


Table of Contents

(including Chinese returnees from Hong Kong and Macau) and their relatives residing in Zhejiang Province has increased from 1.2 million in 2014 to 1.5 million in 2019, representing a CAGR of 4.5%. It is expected this number would continue to grow steadily at a CAGR of 4.0% from 2019 to 2024. We plan to continue to attract the overseas Chinese returnee students and Chinese students of foreign nationalities. We believe that our operational efficiency will improve as we increase the utilization rate of our campuses.

Continue to provide competitive private education services and further promote our brand

We will continue to enhance our ability in providing premium private education. We plan to further diversify our conventional education offerings to improve our students’ learning experience and meet their unique needs. We will continue to explore and experiment the innovative teaching methods which will best suit our students and plan to introduce the trendy education philosophy which is well-received in the international community.

Due to the COVID-19 outbreak in China during the first quarter of 2020, we initiated an attempt to introduce online interactive platforms supported by our supplier as an alternative to the traditional class-room teaching and learning. We also seek cooperative opportunities with leading online learning service providers which we believe will complement our regular curricula and enable online interaction and collaboration among our students, which nurtures individual and collaborative learning beyond the classroom. Specifically, we initiated an effort to explore cooperative opportunities with a leading online education service provider based in Hangzhou for an online and offline development model. As of the date of this prospectus, the potential cooperation is at a preliminary stage and no agreement has been entered into.

We will continue to maintain our quality education, reputation and brand name. As the quality of teachers is critical to our quality education, we intend to continue to maintain and expand a team of experienced and qualified principals and teachers. As part of our incentive initiatives, we intend to provide better career advancement opportunities and internal and external continuous trainings to our teachers. We have collaborated with Lishui University to establish a program that offers continuous resources of on-demand continuing trainings to our teachers, improving their academic capability, teaching skills and overall quality. We also regularly engage external consultants specializing in education to evaluate the in-class performance of our teachers as well as the curriculum taught at our School. We believe our external consultants are able to provide our teachers with meaningful feedback that enable them to improve their teaching quality.

Enhance our profitability by optimizing our pricing strategy

Given our leading position in our existing markets, our established reputation, premium education quality as well as the strong demand for our education services, we believe that we will be able to optimize our pricing while maintaining a stable student base. Driven by the increasing popularity of private primary and secondary education and the diversifying curriculum content and teaching facility, it is expected that the annual tuition fee in Zhejiang Province primary, middle and high school would increase further at a CAGR of 12.9%, 11.5% and 5.8% from 2018 to 2024, respectively. We intend to adjust our tuition level, subject to government approval, from time to time based on demand from students and parents, our operational costs, the local living standards and competition.

Pursue strategic alliances with reputable schools

Going forward, we intend to continue to enhance our capability and proactively seek opportunities within and outside Zhejiang Province to complement our organic growth. With the growing demand for private education in the market, we had collaboration with Qingtian High School, and will continue to pursue strategic alliance with various schools and institutions, such as reputable high schools, vocational higher education schools and online learning institutions.

 

- 113 -


Table of Contents

Develop private formal vocational education service offering

Considering the growing demand for formal vocational education which offers students both professional and technical skills and better career prospects in China, we intend to develop our formal vocational education service offerings. We will seek collaboration with foreign leading institutes which are able to provide curriculum and technological supports to our formal vocational education. We will also consider the school-enterprise model, under which our students will benefit from practical training opportunities offered by the enterprises.

Actively seek acquisition opportunities

We intend to increase our market share by capturing potential acquisition opportunities. While we have not i