Ambow Education Holding Ltd 6-K, filed Dec 30, 2020
Ambow Education Holding Ltd. (AMBO)
About this 6-K
Ambow Education Holding Ltd filed this 6-K on December 30, 2020.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
For the month of December 2020
Commission File Number: 001-34824
Ambow Education Holding Ltd.
Not Applicable
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
12th Floor, Tower 1, Financial Street Chang’An Center,
Shijingshan District, Beijing 100043
People’s Republic of China
Telephone: +86 (10) 6206-8000
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F x Form 40-F ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨
Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ¨ No x
If “Yes” marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-___
INFORMATION CONTAINED IN THIS FORM 6-K REPORT
On December 30, 2020, Ambow Education Holding Ltd. (the “Company”) issued unaudited condensed consolidated financial statements as of and for the Nine Months Ended September 30, 2019 and 2020, prepared in accordance with generally accepted accounting principles in the United States, together with the Company’s Management Discussion and Analysis of Financial Condition and Results of Operations for the same periods.
The information contained in Exhibits 99.1 and 99.2 to this Report on Form 6-K is hereby incorporated by reference into the Company's registration statement on Form F-3 (File No. 333-231273), and to be a part thereof from the date on which this report is filed, to the extent not superseded by documents or reports subsequently filed or furnished.
Exhibit No.
99.2 Management Discussion and Analysis of Financial Condition and Results of Operations
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Ambow Education Holding Ltd. | ||
| By: | /s/ Jin Huang | |
| Name: Dr. Jin Huang | ||
| Title: President and Chief Executive Officer | ||
| Date: December 30, 2020 | ||
Exhibit 99.1
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Ambow Education Announces Third Quarter 2020 Financial Results
BEIJING, December 17, 2020 -- Ambow Education Holding Ltd. (“Ambow” or the “Company”) (NYSE American: AMBO), a leading national provider of educational and career enhancement services in China, today announced its unaudited financial and operating results for the three-month and nine-month periods ended September 30, 2020.
“While our business continued to be impacted by COVID-19-related macro headwinds during the third quarter of 2020, I am pleased to report that after a solid start to the new fall semester, revenue from the K-12 schools segment increased 18.8% year-over-year. Encouragingly, deferred revenue related to tuition and course fees and our education service platform increased 12.4% to US$37.9 million from the same period last year and reached its highest level since 2015, reflecting the resilience of our business. Supported by ample cash resources and a healthy balance sheet, our core strength and fundamentals remain solid across our key segments,” noted Dr. Jin Huang, Ambow’s President and Chief Executive Officer. “We are excited that in September we won the bid for a Technical and Vocational Education and Training (TVET) Center project that is financially supported by the Asian Development Bank as a part of its inclusive growth project in Ziyang City of Sichuan Province. This achievement demonstrates our exceptional capabilities and leading position in the vocational and technical education sector.”
“We continued to execute our key strategies to pursue more balanced growth, while providing high quality educational services that better engage students against the challenging backdrop of the COVID-19 environment. Leveraging our 20-year proven track record in curriculum development, professional training, job placement and education technology innovation, we are making massive progress in building out our online-to-offline education SaaS platform, Huanyujun Education Hub. We have gradually started rolling out Amazon Web Services (AWS) and Cisco-authorized certification and training courses on the Huanyujun Education Hub, which is already supported by our cutting-edge educational solutions such as Ambow Panorama Digital Teaching System and Ambow Cloud Platform. We believe these best-in-class educational services and course offerings will broaden our appeal to a wider student base as they pursue professional certifications for their technology careers.”
“Going forward, we will maintain our strategic efforts to enrich our educational service offerings, optimize operating efficiencies, and increase student enrollments and engagement. We remain confident that our efforts will support the long-term sustainability of our overall business,” concluded Dr. Huang.
Third Quarter 2020 Financial Highlights
| · | Net revenues for the third quarter of 2020 decreased by 6.2% to US$16.6 million from US$17.7 million in the same period of 2019. The decrease was primarily from fewer services provided at the Company’s tutoring centers, training offices and college campuses. This was partially offset by the increase in the revenue from K-12 schools driven by higher enrollment and the revenue from NewSchool of Architecture and Design, LLC (“NewSchool”), acquired in the first quarter of 2020. |
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| · | Gross profit for the third quarter of 2020 decreased by 77.8% to US$1.0 million from US$4.5 million in the same period of 2019. Gross profit margin was 6.0%, compared with 25.4% for the third quarter of 2019. The decreases in gross profit and margin were mainly attributable to the decrease in net revenues from the College Preparation & Career Enhancement Programs (“CP&CE Programs”). |
| · | Operating expenses for the third quarter of 2020 decreased by 3.4% to US$14.0 million from US$14.5 million for the same period of 2019. The decrease was primarily attributable to stringent expense controls to improve operating efficiency, and partially offset by operating expenses related to NewSchool. |
| · | Net loss attributable to ordinary shareholders was US$12.5 million, or US$0.29 per basic and diluted share, compared with a net loss of US$10.2 million, or US$0.23 per basic and diluted share, for the third quarter of 2019. |
| · | As of September 30, 2020, Ambow maintained strong cash resources of US$44.0 million, comprised of cash and cash equivalents of US$12.7 million and short-term investments of US$31.3 million. |
| · | As of September 30, 2020, the Company’s deferred revenue balance was US$37.9 million, representing a 59.9% increase from US$23.7 million as of December 31, 2019, mainly attributable to the tuition and fees collected at K-12 schools for the fall semester of the 2020-2021 academic year, and deferred revenue collected from our colleges for the fall semester of 2020. |
First Nine Months 2020 Financial Highlights
| · | Net revenues for the first nine months of 2020 decreased by 8.0% to US$52.8 million from US$57.4 million in the same period of 2019. The decrease was primarily from fewer boarding and other ancillary services provided for K-12 schools as result of temporary COVID-19-related campus closures in the first half of 2020, and fewer services provided at the Company’s tutoring centers, training offices and college campuses. This was partially offset by the revenue from NewSchool which was acquired in the period. |
| · | Gross profit for the first nine months of 2020 decreased by 40.5% to US$11.6 million from US$19.5 million in the same period of 2019. Gross profit margin was 22.0%, compared with 34.0% for the first nine months of 2019. The decreases in gross profit and margin were mainly attributable to the decrease in net revenues from CP&CE Programs. |
| · | Operating expenses for the first nine months of 2020 decreased by 1.9% to US$30.4 million from US$31.0 million for the same period of 2019. The decrease was primarily attributable to lower expenditures due to the temporary suspension of operations at training offices and tutoring centers in the period as a part of the national pandemic containment efforts, as well as stringent expense controls to improve operating efficiency, and partially offset by NewSchool’s operating expenses. |
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| · | Net loss attributable to ordinary shareholders was US$10.9 million, or US$0.25 per basic and diluted share, compared with a net loss of US$12.3 million, or US$0.28 per basic and diluted share, for the first nine months of 2019. |
On October 5, 2020, the Company completed a registered direct offering of 1,507,538 American Depositary Shares (“ADSs”, representing 3,015,076 Class A Ordinary Shares), at a purchase price of $3.98 per ADS. The Company also issued to investors registered warrants to purchase up to an aggregate amount of 603,016 ADSs (representing 1,206,032 Class A Ordinary Shares). Net proceeds from this offering were approximately US$5.2 million.
The Company's financial and operating results for the third quarter and first nine months of 2020 can also be found on its Form 6-K filed with the U.S. Securities and Exchange Commission at www.sec.gov.
Exchange Rate Information
This announcement contains translations of certain RMB amounts into U.S. dollars at a specified rate solely for the convenience of the reader. Unless otherwise noted, all amounts translated from RMB to U.S. dollars for the third quarter and first nine months of 2020 are based on the effective exchange rate of 6.7896 as of September 30, 2020; all amounts translated from RMB to U.S. dollars for the third quarter and first nine months of 2019 are based on the effective exchange rate of 7.1477 as of September 30, 2019; all amounts translated from RMB to U.S. dollars as of December 31, 2019 are based on the effective exchange rate of 6.9618 as of December 31, 2019. The exchange rates were according to the middle rate as set forth in the H.10 statistical release of the U.S. Federal Reserve Board.
About Ambow Education Holding Ltd.
Ambow Education Holding Ltd. is a leading national provider of educational and career enhancement services in China, offering high-quality, individualized services and products. With its extensive network of regional service hubs complemented by a dynamic proprietary learning platform and distributors, Ambow provides its services and products to students in 15 out of the 34 provinces and autonomous regions within China.
Follow us on Twitter: @Ambow_Education
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Safe Harbor Statement
This announcement contains forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar statements. Among other things, the outlook and quotations from management in this announcement, as well as Ambow’s strategic and operational plans, contain forward-looking statements. Ambow may also make written or oral forward-looking statements in its reports filed or furnished to the U.S. Securities and Exchange Commission, in its annual reports to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements, including but not limited to the following: the Company’s goals and strategies, expansion plans, the expected growth of the content and application delivery services market, the Company’s expectations regarding keeping and strengthening its relationships with its customers, and the general economic and business conditions in the regions where the Company provides its solutions and services. Further information regarding these and other risks is included in the Company’s filings with the U.S. Securities and Exchange Commission. All information provided in this press release is as of the date of this press release, and Ambow undertakes no duty to update such information, except as required under applicable law.
For investor and media inquiries please contact:
Ambow Education Holding Ltd.
Tel: +86-10-6206-8000
The Piacente Group | Investor Relations
Tel: +1-212-481-2050 or +86-10-6508-0677
E-mail: ambow@tpg-ir.com
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INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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AMBOW EDUCATION HOLDING LTD. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (All amounts in thousands, except for share and per share data) | ||||||||||||||||
| Note | As of September 30, | As of December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||||
| US$ | RMB | RMB | ||||||||||||||
| Note 3(a) | ||||||||||||||||
| LIABILITIES | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Short-term borrowings (including consolidated VIE amount without recourse to the Company of RMB nil and RMB 10,000 as of December 31, 2019 and September 30, 2020, respectively) | 9 | 2,948 | 20,013 | - | ||||||||||||
| Deferred revenue (including consolidated VIE amount without recourse to the Company of RMB 157,663 and RMB 246,202 as of December 31, 2019 and September 30, 2020, respectively) | 3 | (b) | 37,906 | 257,368 | 165,111 | |||||||||||
| Accounts payable (including consolidated VIE amount without recourse to the Company of RMB 8,686 and RMB 10,163 as of December 31, 2019 and September 30, 2020, respectively) | 2,284 | 15,500 | 14,718 | |||||||||||||
| Accrued and other liabilities (including consolidated VIE amount without recourse to the Company of RMB 149,197 and RMB 133,002 as of December 31, 2019 and September 30, 2020, respectively) | 27,277 | 185,203 | 192,957 | |||||||||||||
| Income taxes payable, current (including consolidated VIE amount without recourse to the Company of RMB 180,472 and RMB 179,729 as of December 31, 2019 and September 30, 2020, respectively) | 27,060 | 183,729 | 180,715 | |||||||||||||
| Amounts due to related parties (including consolidated VIE amount without recourse to the Company of RMB 1,971 and RMB 4,876 as of December 31, 2019 and September 30, 2020, respectively) | 15 | 718 | 4,876 | 1,971 | ||||||||||||
| Operating lease liability, current (including consolidated VIE amount without recourse to the Company of RMB 29,341 and RMB 24,153 as of December 31, 2019 and September 30, 2020, respectively) | 12 | 7,459 | 50,642 | 53,512 | ||||||||||||
| Total current liabilities | 105,652 | 717,331 | 608,984 | |||||||||||||
| Non-current liabilities: | ||||||||||||||||
| Income taxes payable, non-current (including consolidated VIE amount without recourse to the Company of RMB 32,152 and RMB 34,589 as of December 31, 2019 and September 30, 2020, respectively) | 10 | 5,094 | 34,589 | 32,152 | ||||||||||||
| Operating lease liability, non-current (including consolidated VIE amount without recourse to the Company of RMB 88,293 and RMB 80,329 as of December 31, 2019 and September 30, 2020, respectively) | 12 | 34,723 | 235,756 | 216,067 | ||||||||||||
| Total non-current liabilities | 39,817 | 270,345 | 248,219 | |||||||||||||
| Total liabilities | 145,469 | 987,676 | 857,203 | |||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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AMBOW EDUCATION HOLDING LTD. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (All amounts in thousands, except for share and per share data) | ||||||||||||||||
| Note | As of September 30, | As of December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||||
| US$ | RMB | RMB | ||||||||||||||
| Note 3(a) | ||||||||||||||||
| EQUITY | ||||||||||||||||
| Preferred shares | ||||||||||||||||
| (US$ 0.003 par value;1,666,667 shares authorized, nil issued and outstanding as of December 31, 2019 and September 30, 2020) | - | - | - | |||||||||||||
| Class A Ordinary shares | ||||||||||||||||
| (US$0.003 par value; 66,666,667 and 66,666,667 shares authorized, 38,858,199 and 38,895,700 shares issued and outstanding as of December 31, 2019 and September 30, 2020, respectively) | 108 | 731 | 730 | |||||||||||||
| Class C Ordinary shares | ||||||||||||||||
| (US$0.003 par value; 8,333,333 and 8,333,333 shares authorized, 4,708,415 and 4,708,415 shares issued and outstanding as of December 31, 2019 and September 30, 2020, respectively) | 13 | 90 | 90 | |||||||||||||
| Additional paid-in capital | 516,868 | 3,509,330 | 3,508,745 | |||||||||||||
| Statutory reserve | 620 | 4,210 | 20,185 | |||||||||||||
| Accumulated deficit | (505,202 | ) | (3,430,122 | ) | (3,371,815 | ) | ||||||||||
| Accumulated other comprehensive income | 2,420 | 16,429 | 6,341 | |||||||||||||
| Total Ambow Education Holding Ltd.’s equity | 14,827 | 100,668 | 164,276 | |||||||||||||
| Non-controlling interests | (256 | ) | (1,737 | ) | (680 | ) | ||||||||||
| Total equity | 14,571 | 98,931 | 163,596 | |||||||||||||
| Total liabilities and equity | 160,040 | 1,086,607 | 1,020,799 | |||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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AMBOW EDUCATION HOLDING LTD.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands, except for share and per share data)
| For the nine months ended September 30, | ||||||||||||
| 2020 | 2020 | 2019 | ||||||||||
| US$ | RMB | RMB | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net cash provided by operating activities | 6,217 | 42,209 | 37,610 | |||||||||
| Cash flows from investing activities | ||||||||||||
| Purchase of available-for-sale investments | (41,092 | ) | (279,000 | ) | (181,000 | ) | ||||||
| Proceeds from available-for-sale investments | 22,534 | 153,000 | 118,000 | |||||||||
| Purchase of held-to-maturity investments | (11,046 | ) | (75,000 | ) | (356,000 | ) | ||||||
| Maturity and proceeds from held-to-maturity investments | 11,194 | 76,000 | 355,000 | |||||||||
| Purchase of property and equipment | (592 | ) | (4,018 | ) | (4,213 | ) | ||||||
| Prepayment for leasehold improvement | (354 | ) | (2,402 | ) | (3,409 | ) | ||||||
| Purchase of intangible assets | - | - | (156 | ) | ||||||||
| Cash acquired from purchase of subsidiary | 5,541 | 37,622 | - | |||||||||
| Purchase of other non-current assets | (507 | ) | (3,444 | ) | (51,752 | ) | ||||||
| Cash balances at disposed subsidiaries | (6 | ) | (39 | ) | (229 | ) | ||||||
| Payment as result of disposal of subsidiaries | - | - | (25,532 | ) | ||||||||
| Collection of loan receivables | - | - | 42,677 | |||||||||
| Loan to third party | (3,255 | ) | (22,100 | ) | - | |||||||
| Net cash used in investing activities | (17,583 | ) | (119,381 | ) | (106,614 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from short-term borrowings | 3,006 | 20,409 | - | |||||||||
| Repayments of borrowing from third party | - | - | (41,179 | ) | ||||||||
| Net cash provided by/(used in) financing activities | 3,006 | 20,409 | (41,179 | ) | ||||||||
| Effects of exchange rate changes on cash, cash equivalents and restricted cash | (168 | ) | (1,144 | ) | 577 | |||||||
| Net change in cash, cash equivalents and restricted cash | (8,528 | ) | (57,907 | ) | (109,606 | ) | ||||||
| Cash, cash equivalents and restricted cash at beginning of periods | 23,211 | 157,600 | 241,508 | |||||||||
| Cash, cash equivalents and restricted cash at end of periods | 14,683 | 99,693 | 131,902 | |||||||||
| Supplemental disclosure of cash flow information | ||||||||||||
| Income tax paid | (391 | ) | (2,656 | ) | (465 | ) | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||
| Derecognition of assets other than cash of disposed subsidiaries/deregistered subsidiaries | 144 | 980 | - | |||||||||
| Derecognition of liabilities of disposed subsidiaries/deregistered subsidiaries, net of recognized amount due to the disposed subsidiaries/deregistered subsidiaries | 1,708 | 11,595 | - | |||||||||
| Operating lease right-of-use assets obtained in exchange for new operating lease liabilities | 14,635 | 99,366 | 148,920 | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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AMBOW EDUCATION HOLDING LTD.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousands, except for share and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
| a. | Background |
The accompanying condensed consolidated financial statements include the financial statements of Ambow Education Holding Ltd. (the “Company”), its subsidiaries and variable interest entities (“VIEs”) for which the Company or its subsidiaries are the primary beneficiaries. The Company, its subsidiaries and VIEs are hereinafter collectively referred to as the “Group”.
On June 14, 2020, the shareholders of VIE, Beijing Normal University Ambow Education Technology Co., Ltd. (“Ambow Shida”), terminated their share pledge agreements, call options agreements, loan agreements, powers of attorney and exclusive consulting and service agreements with Beijing Ambow Chuangying Education and Technology Co., Ltd. (“Ambow Chuangying”); and entered into such contractual agreements with Beijing BoheLe Science and Technology Co. Ltd. (“Beijing BoheLe”) on June 15, 2020. On May 25, 2020, the individual shareholders of Beijing Le’An Operational Management Co., Ltd. (“Beijing Le’An”) entered into the share pledge agreements, call options agreements, loan agreements, powers of attorney and exclusive consulting and service agreements with Beijing BoheLe. Beijing Le’An became VIE of the Company since then. Through the renewal/establishment of such contractual agreements, the Company through its subsidiaries, continued to control the operation decisions of the VIEs. Therefore, the accounts and operations of the VIEs and their subsidiaries remain unchanged in the Group’s consolidated financial statements.
In the nine months ended September 30, 2020, the Company also established a series of new subsidiaries and branch companies, and completed disposal of three subsidiaries, deregistration procedures of three subsidiaries and two branch companies in China.
2. GOING CONCERN
Liquidity and Capital Resources
As of September 30, 2020, the Group’s consolidated current liabilities exceeded its consolidated current assets by RMB 217,124. The Group’s consolidated net assets were amounting to RMB 98,931 as of September 30, 2020.
The Group’s principal sources of liquidity have been cash provided by operating activities. The Group had net cash provided by operating activities of RMB 37,610 and RMB 42,209 for the nine months ended September 30, 2019 and 2020, respectively. The cash inflow in the nine months ended September 30, 2020 was mainly attributable to the tuition and fees collected at K-12 schools for the fall semester of the 2020-2021 academic year, and deferred revenue collected from our colleges for the fall semester of 2020. As of September 30, 2020, the Group had RMB 86,072 in unrestricted cash and cash equivalents. The Group’s cash and cash equivalents consist of cash on hand and liquid investments that are unrestricted as to withdrawal or use, have maturities of three months or less and are placed with banks and other financial institutions. As of September 30, 2020, the Group had RMB 60,014 in unrestricted cash and cash equivalents from VIEs.
The Group’s operating results for future periods are subject to numerous uncertainties and it is uncertain if the Group will be able to achieve a net income position for the foreseeable future. If management is not able to increase revenue and/or manage cost and operating expenses in line with revenue forecasts, the Company may not be able to achieve profitability.
From the beginning of 2020, in response to the global spread of a novel coronavirus pandemic, also known as COVID-19, businesses and schools in China have been suspended since the end of January 2020 as part of quarantine measures to contain the pandemic. Our K-12 schools, tutoring centers and training offices in China have been closed since then. With the excellent control of the pandemic in China, our K-12 schools have gradually returned to operation from May 2020, and all of our tutoring centers and training offices went into full business operation from August 2020. Yet the pandemic in U.S. is still critical. Bay State College and NewSchool in U.S. has moved all courses online, including certain classes in a hybrid model (online and on campus together), in response to social distancing needs and precautionary measures. The pandemic may adversely affect our liquidity resources, including but not limited to delayed collection of tuition and fees.
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Management plan and actions
The Group had approximately RMB 182,629 and RMB 30,000 short term investments, available for sale and short term investments, held to maturity as of September 30, 2020, which was held as short-term investments to be liquid on the expiration date before the end of 2021. Besides, according to historical experience and knowledge, the management believed that certain current liabilities could be delayed for cash payment through arrangements.
Historically, the Group has addressed liquidity requirements through a series of cost reduction initiatives, debt borrowings, equity financing and the sale of subsidiaries and other non-performing assets. In October 2020, the Group has completed a registered direct offering. The net proceeds from the offering was around US$ 5,250. Bay State College has obtained a bank loan in US$ 1,470 under the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on May 1, 2020. The Group has remaining line of credit in RMB 20,000 from Bank of Huaxia as of September 30, 2020. In 2020, the Group has taken a series of measures to respond to the negative impact from the pandemic, including offering online programs and services, cutting down compensation cost, reducing other costs and expenses for savings, and negotiating for relief or postpone of rentals for certain period of time etc. Meanwhile the Group kept expanding existing business, exploring innovation in service portfolio, investing in new technology to build up education service platforms, improving operation efficiency and profitability, and enhancing the internal control procedures. From 2021 and onwards, the Group will focus on the development of core cash-generating business and will implement more stringent cost and expense controls than previous years, including but not limited to optimization of employees, require strict pre-purchase application and approval, suspend certain business consuming more cash than earned, implement comprehensive budget control and operation assessment, implement enhanced vendor review and selection processes as well as enhance internal controls on payable management, create synergy of our resources, and put forward efforts to pursue historical receivables. There are no liquidity concerns noted in the next 12 months according to the Group’s cash flow projection.
Conclusion
The Group believes that available cash and cash equivalents, short term investments, available for sale and short term investments, held to maturity, cash provided by operating activities, together with cash available from the activities mentioned above, should enable the Group to meet presently anticipated cash needs for at least the next 12 months after the date that the financial statements are issued and the Group has prepared the consolidated financial statements on a going concern basis. However, the Group continues to have ongoing obligations and it expects that it will require additional capital in order to execute its longer-term business plan. If the Group encounters unforeseen circumstances that place constraints on its capital resources, management will be required to take various measures to conserve liquidity, which could include, but not necessarily be limited to, initiating additional public offerings, curtailing the Group’s business development activities, suspending the pursuit of its business plan, obtaining credit facilities, controlling overhead expenses and seeking to further dispose of non-core assets. Management cannot provide any assurance that the Group will raise additional capital if needed.
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3. SIGNIFICANT ACCOUNTING POLICIES
| a. | Basis of presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial reporting. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly state the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto, included in the Company’s 2019 Annual Report filed with the SEC on April 22, 2020. The interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year or any future periods.
All amounts in the accompanying unaudited condensed consolidated financial statements and notes are expressed in Renminbi (“RMB”). Amounts in United States dollars (“US$”) are presented solely for the convenience of readers and use an exchange rate of RMB 6.7896, representing the middle rate as set forth in the H.10 statistical release of the U.S. Federal Reserve Board as of September 30, 2020. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.
| b. | Revenue recognition |
The Group has adopted ASC 606 Revenue from Contracts with Customers using the modified retrospective transition method from January 1, 2018. The Group’s revenue is generated from delivering educational programs and services and intellectualized operational services.
Disaggregation of revenues
The following table illustrates the disaggregation of revenue by operating segments for the three months ended September 30, 2019 and 2020, nine months ended September 30, 2019 and 2020, respectively:
| (RMB in thousands) | K-12 Schools | CP&CE Programs | Consolidated | |||||||||
| RMB | RMB | RMB | ||||||||||
| Net Revenues in the three months ended September 30, 2019 | 52,256 | 74,300 | 126,556 | |||||||||
| Net Revenues in the three months ended September 30, 2020 | 58,966 | 53,742 | 112,708 | |||||||||
| Net Revenues in the nine months ended September 30, 2019 | 203,214 | 207,346 | 410,560 | |||||||||
| Net Revenues in the nine months ended September 30, 2020 | 185,766 | 172,684 | 358,450 | |||||||||
Contract Balances
The transferred control of promised services to customers result in the Group’s unconditional rights and conditional consideration receivable on passage of time. Accordingly, as of December 31, 2019 and September 30, 2020, the Group has no other contract assets except for Accounts Receivable, in RMB 17,939 and RMB 24,549, respectively. Please refer to Note 6 Accounts Receivable for detail.
Contract liabilities represent the Group has received consideration but has not satisfied the related performance obligations. The tuition and service fees received in advance are the Group’s contract liabilities and presented in deferred revenue in the consolidated balance sheets. The revenue recognized during the nine months ended September 30, 2020 that was previously included in the deferred revenue balances as of December 31, 2019 was RMB 165,111.
The following table provides the deferred revenue balances by segments as of December 31, 2019 and September 30, 2020.
| As of | ||||||||
| December 31, 2019 | September 30, 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | ||||||||
| K-12 Schools | 96,301 | 195,576 | ||||||
| CP&CE Programs | 68,810 | 61,792 | ||||||
| Total | 165,111 | 257,368 | ||||||
| c. | Allowance for doubtful accounts |
The Group adopted ASC 326 Financial Instruments – Credit Losses from January 1, 2020 and interim periods therein. Management used an expected credit loss model for the impairment of trading receivables as of period ends. Management believes the aging of accounts receivable is a reasonable parameter to estimate expected credit loss, determines expected credit losses for accounts receivables using an aging schedule as of period ends. The expected credit loss rates under each aging schedule were developed on basis of the average historical loss rates from previous years, and adjusted to reflect the effects of those differences in current conditions and forecasted changes. Management measured the expected credit losses of accounts receivable on a collective basis. When an accounts receivable does not share risk characteristics with other accounts receivables, management will evaluate such accounts receivable for expected credit loss on an individual basis. Doubtful accounts balances are written off and deducted from allowance, when receivable are deemed uncollectible, after all collection efforts have been exhausted and the potential for recovery is considered remote.
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4. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the unaudited condensed consolidated statements of cash flows.
| As of | ||||||||
| December 31, 2019 | September 30, 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | ||||||||
| Cash and cash equivalents | 157,600 | 86,072 | ||||||
| Restricted cash | - | 13,621 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the unaudited condensed consolidated statements of cash flows | 157,600 | 99,693 | ||||||
5. SHORT TERM INVESTMENTS
Short term investments consist of held-to-maturity investments and available-for-sale investments.
Held to maturity investments
Held-to-maturity investments consist of various fixed-income financial products purchased from Chinese commercial banks, which are classified as held-to-maturity investments as the Group has the positive intent and ability to hold the investments to maturity. The maturities of these financial products are ninety days, with annual interest rates ranging from 2.95% to 4.0% and matured and fully collected with principal and interest as of the date of this report. They are classified as short term investments on the consolidated balance sheets as its contractual maturity dates are less than one year. The repayments of principal of the financial products are not guaranteed by the Chinese commercial banks from which the fixed income financial products were purchased. Historically, the Company has received the principal and the interest in full upon maturity of these investments.
While these fixed-income financial products are not publicly traded, the Company estimated that their fair value approximate their amortized costs considering their short term maturities and high credit quality. No other-than-temporary impairment (“OTTI”) loss was recognized for the nine months ended September 30, 2019 and 2020.
Available-for-sale investments
Investments other than held-to-maturity are classified as available-for-sale investments, which consist of various adjustable-income financial products purchased from Chinese commercial banks. All the available for sale investments did not have maturity date. They are classified as short-term investments on the consolidated balance sheets as management intends to hold them for a period less than one year.
Available-for-sale securities are carried at their fair values and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income. The aging of all the available-for-sale investments were less than 12 months as of September 30, 2020. No OTTI loss was recognized for the nine months ended September 30, 2019 and 2020.
The amortized cost, gross unrealized gain in accumulated other comprehensive income, and estimated fair value of investments as of December 31, 2019 and September 30, 2020, are reflected in the tables below:
| As of December 31, 2019 | ||||||||||||
| Amortized Cost | Gross unrealized gain in accumulated other comprehensive income |
Estimated Fair value |
||||||||||
| RMB | RMB | RMB | ||||||||||
| Short-term investments: | ||||||||||||
| Held-to-maturity investments | ||||||||||||
| Fixed-rate financial products | 31,000 | - | 31,000 | |||||||||
| Available-for-sale investments | ||||||||||||
| Adjustable-rate financial products | 56,000 | 1,487 | 57,487 | |||||||||
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| As of September 30, 2020 | ||||||||||||
| Amortized Cost | Gross unrealized gain in accumulated other comprehensive income | Estimated Fair value | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Unaudited | Unaudited | Unaudited | ||||||||||
| Short-term investments: | ||||||||||||
| Held-to-maturity investments | ||||||||||||
| Fixed-rate financial products | 30,000 | - | 30,000 | |||||||||
| Available-for-sale investments | ||||||||||||
| Adjustable-rate financial products | 182,000 | 629 | 182,629 | |||||||||
Interest income recognized on held-to-maturity investments for the nine months ended September 30, 2019 and 2020 were as follows:
| Nine months ended September 30, | ||||||||
| 2019 | 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | Unaudited | |||||||
| Interest income recognized on held-to-maturity investments | 1,374 | 338 | ||||||
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable consisted of the following:
| As of | ||||||||
| December 31, 2019 | September 30, 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | ||||||||
| Accounts receivable | 20,932 | 30,832 | ||||||
| Less: Allowance for doubtful accounts | (2,993 | ) | (6,283 | ) | ||||
| Accounts receivable, net | 17,939 | 24,549 | ||||||
| As of September 30, 2020 | |||||||||||||||||||||||||
| 0-180 Days | 181-365 Days | 1-2 Years | 2-3 Years | Over 3 Years | Total | ||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||
| Unaudited | |||||||||||||||||||||||||
| PRC | |||||||||||||||||||||||||
| Colleges | 8,517 | 3,633 | 420 | 51 | 69 | 12,690 | |||||||||||||||||||
| Corporates | 5,478 | 219 | 416 | 169 | 722 | 7,004 | |||||||||||||||||||
| Subtotal | 13,995 | 3,852 | 836 | 220 | 791 | 19,694 | |||||||||||||||||||
| 0-30 Days | 30-60 Days | 60-90 Days | 90-120 Days | Over 120 Days | Total | ||||||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | RMB | ||||||||||||||||||||
| Unaudited | |||||||||||||||||||||||||
| U.S. | |||||||||||||||||||||||||
| Students | 5,405 | 160 | 667 | 451 | 4,455 | 11,138 | |||||||||||||||||||
| Subtotal | 5,405 | 160 | 667 | 451 | 4,455 | 11,138 | |||||||||||||||||||
| Total | 30,832 | ||||||||||||||||||||||||
Allowance for doubtful accounts:
| As of | ||||||||
| December 31, 2019 | September 30, 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | ||||||||
| Balance at beginning of year/period | (3,535 | ) | (2,993 | ) | ||||
| Addition | (3,220 | ) | (7,483 | ) | ||||
| Written off | 3,762 | 4,193 | ||||||
| Balance at end of year/period | (2,993 | ) | (6,283 | ) | ||||
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7. PREPAID AND OTHER CURRENT ASSETS, NET
Prepaid and other current assets consisted of the following:
| As of | ||||||||
| December 31, 2019 | September 30, 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | ||||||||
| Amount due from Xihua Group (Note i) | 49,800 | 49,800 | ||||||
| Receivable from Zhenjiang operating rights (Note ii) | 35,000 | 35,000 | ||||||
| Prepaid input value-added tax | 4,682 | 4,922 | ||||||
| Due from former owners | 2,848 | - | ||||||
| Staff advances | 6,591 | 4,446 | ||||||
| Rental and other deposits | 5,404 | 2,828 | ||||||
| Prepaid professional services fees | 5,278 | 2,566 | ||||||
| Prepayments to suppliers | 7,802 | 11,107 | ||||||
| Loan to third party (Note iii) | 9,000 | 32,165 | ||||||
| Subsidy Receivable (Note iv) | - | 4,767 | ||||||
| Others (Note v) | 11,230 | 9,816 | ||||||
| Total before allowance for doubtful accounts | 137,635 | 157,417 | ||||||
| Less: allowance for doubtful accounts | (4,339 | ) | (240 | ) | ||||
| Total | 133,296 | 157,177 | ||||||
Allowance for doubtful accounts:
| As of | ||||||||
| December 31, 2019 | September 30, 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | ||||||||
| Balance at beginning of year/period | (9,654 | ) | (4,339 | ) | ||||
| Addition (Note vi) | (2,765 | ) | (828 | ) | ||||
| Written off (Note vi) | 8,080 | 4,927 | ||||||
| Balance at end of year/period | (4,339 | ) | (240 | ) | ||||
(Note i) A payable balance amounted to RMB 49,800 was recorded by a subsidiary prior to its acquisition by the Group, and such payable was indemnified by Xihua Investment Group (“Xihua Group). No provision was made for the indemnity. The indemnity balance was still outstanding as of the date of issuance of the financial statements.
(Note ii) The balance represented the prepaid operating rights to the Zhenjiang Foreign Language School and Zhenjiang International School. The Group started negotiating the return of the operating right back to the original owner Zhenjiang Education Investment Center in the third quarter of 2011. As a result, the prepaid operating rights have been reclassified as receivable since then. As of December 31, 2019 and September 30, 2020, the payable balance to Zhenjiang Foreign Language School amounted to RMB 36,770 and RMB 36,770, respectively; therefore, no provision was made. As of the date of issuance of the financial statements, the negotiation was still in progress.
(Note iii) Ambow Shengying entered into a series of loan agreements with Beijing Dongyuanzhongheng Investment Management Co., Ltd. (“Dongyuan”) in 2019 and the nine months ended September 30, 2020. All loan agreements were without any requirements for collateral or pledge on the loans. Please see the table as below for details.
| Date | Amount (RMB) | Interest Rate | Interest Receivable as of September 30, 2020 | Due Date | ||||||||||
| December 2019 | 9,000 | 5.00 | % | 327 | September 30, 2021 | |||||||||
| January 2020 | 9,000 | 5.00 | % | 336 | September 30, 2021 | |||||||||
| January 2020 | 7,000 | 5.00 | % | 250 | September 30, 2021 | |||||||||
| January 2020 | 2,900 | 5.00 | % | 103 | September 30, 2021 | |||||||||
| March 2020 | 1,000 | 5.00 | % | 26 | September 30, 2021 | |||||||||
| July 2020 | 2,200 | 5.00 | % | 23 | September 30, 2021 | |||||||||
| Total | 31,100 | 1,065 | ||||||||||||
On April 8, 2020, the Group entered into a term sheet with Dongyuan to agree that the outstanding loan and interest due would be turned into part of consideration for the Group to acquire a no-less-than 51% equity interest of Hebi Ambow Ruiheng Education Technology Co., Ltd. depending on both parties further agreement. Also refer to Note 19-Subsequent Event for further information. No allowance upon such loan to third party was provided in the nine months ended September 30, 2020.
(Note iv) On March 6, 2020, Ambow NSAD Inc. acquired 100% of the outstanding membership interest of NewSchool. As part of the acquisition, a subsidy was provided by the seller for four years after the acquisition for the loss of certain online business of NewSchool after the change of ownership. Refer to Note 14-Acquisition for further background information.
(Note v) Others mainly included inventory, prepaid education supplies, prepaid outsourcing service fee, and other miscellaneous items with trivial amounts.
(Note vi) Addition of allowance during the year of 2019 and the nine months ended September 30, 2020 was mainly provided against third parties, former employees and former owners due to the remote recoverability. Certain provisions were written off after all collection efforts being exhausted and the potentials for recovery was remote.
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8. GOODWILL
The changes in the carrying amount of goodwill by reporting unit for the year ended December 31, 2019 and nine months ended September 30, 2020 were as follows:
| K-12 | CP&CE | |||||||||||
| Schools | Programs | Consolidated | ||||||||||
| RMB | RMB | RMB | ||||||||||
| Balance as of December 31, 2018 | 25,710 | 47,456 | 73,166 | |||||||||
| Goodwill recognized during the year | - | 20,911 | 20,911 | |||||||||
| Goodwill impairment (Note i) | - | (33,724 | ) | (33,724 | ) | |||||||
| Balance as of December 31, 2019 | 25,710 | 34,643 | 60,353 | |||||||||
| Goodwill recognized during the period | - | 960 | 960 | |||||||||
| Goodwill disposed during the period | - | (290 | ) | (290 | ) | |||||||
| Goodwill impairment (Note i) | - | (35,313 | ) | (35,313 | ) | |||||||
| Balance as of September 30, 2020 | 25,710 | - | 25,710 | |||||||||
(Note i) In the nine months ended September 30, 2020, the Group elected to start with the quantitative impairment test for goodwill. The management determined that the Income Approach, specifically the Discounted Cash Flow (“DCF”) method, is appropriate. For CP&CE Programs, some business units have kept downward trends in business performance and operating results, and the management decided to suspend some non-performing business units in order to solidify the operational base and enhance future growth prospects. As a result, lower projection of cash flows was used for these business units. For the rest of entities, the management would continue to maintain business, develop new programs and service portfolios and organize resources in a more effective way. For K-12 segment, the management decided to use a flat and conservative growth rate. Other key assumptions besides cash flow projections included discount rates in the range from 15% to 16% and terminal growth rate of 3%. As a result of the above factors, fair value of CP&CE Programs was less than its carrying amount, with an impairment loss of RMB 35,313 recognized for the nine months ended September 30, 2020. The goodwill impairment loss of RMB 33,724 was recognized in the nine months ended September 30, 2019.
9. SHORT-TERM BORROWINGS
The following table sets forth the loan agreements of short-term borrowings from banks:
| Date | Borrower | Lender | Amount (RMB) | Original Amount
(US$) | Annual Interest Rate | Repayment Due Date | ||||||||||||
| September 1, 2020 | Ambow Shida | Huaxia Bank | 10,000 | N/A | 4.35 | % | September 1, 2021 | |||||||||||
| May 1, 2020 | Bay State College | Small Business Administration (“SBA”) | 10,013 | 1,470 | 1.00 | % | Not Fixed | |||||||||||
In July 2020, the Group has mortgaged its office property in Beijing, China with the carry amount of RMB 65,078 to obtain a line of credit in RMB 30,000 from Bank of Huaxia with one-year term from July 1, 2020 to July 1, 2021. The mortgage period shall end once all borrowings has been paid off and mortgage cancellation registration has been completed. On September 1, 2020, the Group received a loan from Huaxia Bank in the amount of RMB 10,000 with maturity date on September 1, 2021 and bearing interest at 4.35% per annum for working capital purpose.
On May 1, 2020, Bay State College obtained a PPP loan under the CARES Act from the SBA through Bank of America in US$1,470. Bay State College is applying for the forgiveness of the PPP loan, and will be obligated to repay the outstanding balance of the loan including interest calculated non in excess of a fixed rate of 1% if SBA does not confirm the forgiveness of the loan, or partly confirms the forgiveness of the loan, or Bay State College fails to apply for loan forgiveness.
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10. TAXATION
| a. | Value added tax (“VAT”) |
The PRC government implemented a value-added tax reform pilot program, which replaced the business tax with VAT. Since May 2016, the change from business tax to VAT has been expanded to all other service sectors which used to be subject to business tax. The VAT rates applicable to the subsidiaries and consolidated variable interest entities of the Group ranged from 3% to 6% as compared to the 3%~5% business tax rate which was applicable prior to the reform.
As of December 31, 2019 and September 30, 2020, the payable balances for VAT were RMB 10,645 and RMB 3,269 respectively.
| b. | Business tax |
From May 2016, as the final part of the VAT reform, VAT replaced business tax in all industries, on a nationwide basis. The VAT rates applicable to the subsidiaries and consolidated variable interest entities of the Group ranged from 3% to 6% as compared to the 3%~5% business tax rate which was applicable prior to the reform.
As of December 31, 2019 and September 30, 2020, the payable balances for business tax were RMB 18,456 and RMB 17,504, respectively.
| c. | Income taxes |
Cayman Islands
Under the current laws of Cayman Islands, the Company and its subsidiaries incorporated in the Cayman Islands are not subject to tax on income or capital gains. In addition, upon payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.
British Virgin Islands
The Company’s subsidiaries incorporated in the BVI are not subject to taxation.
Hong Kong
Entities incorporated in Hong Kong are subject to Hong Kong profit tax at a rate of 16.5%.
Taiwan
Entity incorporated in Taiwan is subject to Taiwan profit tax at a rate of 17%.
PRC and US
Significant components of the provision for income taxes on earnings for the nine months ended September 30, 2019 and 2020 are as follows:
| Nine Months ended September 30, | ||||||||
| 2019 | 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | Unaudited | |||||||
| Current: | ||||||||
| PRC | 7,635 | 3,877 | ||||||
| U.S. | 5 | 810 | ||||||
| Deferred: | ||||||||
| PRC | 2,953 | 2,630 | ||||||
| U.S. | 439 | (4,918 | ) | |||||
| Provision for income tax expenses | 11,032 | 2,399 | ||||||
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Corporate entities
The PRC Enterprise Income Tax (“EIT”) is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective on January 1, 2008. EIT Law imposes a unified income tax rate of 25% for all resident enterprises in China, including both domestic and foreign invested enterprises.
Reconciliation between total income tax expense and the amount computed by applying the PRC statutory income tax rate to income before income taxes is as follows:
| Nine months ended September 30, | ||||||||
| 2019 | 2020 | |||||||
% Unaudited | % Unaudited | |||||||
| PRC statutory income tax rate | 25 | % | 25 | % | ||||
| Impact of different tax rates in other jurisdictions | (9 | )% | 0 | % | ||||
| Tax effect of preferential tax rate for small enterprises | 0 | % | 1 | % | ||||
| Tax effect of non-deductible expenses | (8 | )% | 3 | % | ||||
| Tax effect of non-taxable income | 7 | % | 3 | % | ||||
| Tax effect of tax-exempt entities | 20 | % | (17 | )% | ||||
| Tax effect of short term investment | (1 | )% | 0 | % | ||||
| Deferred tax effect of tax rate change | (8 | )% | (13 | )% | ||||
| Changes in valuation allowance | (42 | )% | (6 | )% | ||||
| Effective tax rate | (16 | )% | (4 | )% | ||||
| d. | Uncertain tax positions |
A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows:
| As of | ||||||||
| December 31, 2019 | September 30, 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | ||||||||
| Unrecognized tax benefits | 32,152 | 34,589 | ||||||
The amounts of unrecognized tax benefits listed above are based on the recognition and measurement criteria of ASC Topic 740, and the balance is presented as a non-current liability in the consolidated financial statements since December 31, 2019 due to the fact that the Group does not anticipate payments of cash within one year.
However, due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of uncertain tax positions may result in liabilities which could be materially different from these estimates. In such an event, the Group will record additional tax expense or tax benefit in the period in which such resolution occurs. As of December 31, 2019 and September 30, 2020, there are RMB 32,152 and RMB 34,589 unrecognized tax benefits that if recognized would affect the annual effective tax rate. The Group does not expect that the position of unrecognized tax benefits will significantly increase or decrease within 12 months of September 30, 2020.
In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to assess underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities remain subject to examination by the tax authorities based on the above.
11. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share for the periods indicated:
| Nine months ended September 30, | ||||||||
| 2019 | 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | Unaudited | |||||||
| Numerator: | ||||||||
| Numerator for basic and diluted loss per share | (87,789 | ) | (73,688 | ) | ||||
| Denominator: | ||||||||
| Denominator for basic and diluted loss per share weighted average ordinary shares outstanding | 43,496,848 | 43,583,448 | ||||||
| Basic and diluted loss per share | (2.02 | ) | (1.69 | ) | ||||
Basic net loss per share is computed using the weighted average number of the ordinary shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of ordinary shares and ordinary equivalent shares outstanding during the period. Due to loss for the nine months ended September 30, 2019 and 2020, approximately 69,368 and 201,020 restricted shares were excluded from the calculation of diluted net loss per share, because the effect would be anti-dilutive.
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12. LEASES
The Group has operating leases for classrooms, dormitories, offices and certain equipment; and finance lease for a teaching building used by Shenyang K-12 School. For the finance lease, all lease payments have been paid to the landlord from the commencement date of the lease.
The components of lease expense were as follows:
| Nine months ended September 30, | ||||||||
| 2019 | 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | Unaudited | |||||||
| Operating and short-term lease expense | 33,452 | 45,702 | ||||||
| Finance lease expense | 450 | 450 | ||||||
Supplemental cash flow information related to leases was as follows:
| Nine months ended September 30, | ||||||||
| 2019 | 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | Unaudited | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | 30,291 | 35,565 | ||||||
| Operating cash flows from finance lease | - | - | ||||||
Supplemental balance sheet information related to leases was as follows:
| As of | ||||||||
| December 31, 2019 | September 30, 2020 | |||||||
| Unaudited | ||||||||
| Weighted-average Remaining Lease Term | ||||||||
| Operating leases | 7.87 Years | 7.57 Years | ||||||
| Finance lease | 10.67 Years | 9.92 Years | ||||||
| Weighted-average Discount Rate | ||||||||
| Operating leases | 4.57 | % | 4.50 | % | ||||
The Group’s lease agreements do not have a discount rate that is readily determinable. The incremental borrowing rate is determined at lease commencement or lease modification and represents the rate of interest the Group would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment. The weighted-average discount rate was calculated using the discount rate for the lease that was used to calculate the lease liability balance for each lease and the remaining balance of the lease payments for each lease as of December 31, 2019 and September 30, 2020, respectively.
The weighted-average remaining lease terms were calculated using the remaining lease term and the lease liability balance for each lease as of December 31, 2019 and September 30, 2020.
As of September 30, 2020, maturities of lease liabilities were as follows:
| Amount | ||||
| RMB | ||||
| Unaudited | ||||
| 2020 (remaining) | 16,123 | |||
| 2021 | 44,760 | |||
| 2022 | 49,759 | |||
| 2023 | 45,719 | |||
| 2024 | 43,993 | |||
| Thereafter | 151,151 | |||
| Total lease payments | 351,505 | |||
| Less: interest | (65,107 | ) | ||
| Total | 286,398 | |||
| Less: current portion | (50,642 | ) | ||
| Non-current portion | 235,756 | |||
As of September 30, 2020, the Group had no material operating or finance leases that had not yet commenced.
Sublease
The Group subleases dormitories and offices to third parties under operating leases. Sublease income is recorded as a reduction of lease expense in the consolidated statements of operations.
For the nine months ended September 30, 2019 and 2020, gross sublease income of the Group was RMB 1,827 and RMB 1,195, respectively.
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13. SEGMENT INFORMATION
The Group offers a wide range of educational and career enhancement services and products focusing on improving educational opportunities for primary and advanced degree school students and employment opportunities for university graduates.
The Group’s chief operating decision maker (“CODM”) has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the Group. The management classified the reportable segments into two segments: 1) K-12 schools, 2) CP&CE Programs.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The CODM evaluates performance based on each reporting segment’s revenues, cost of revenues, gross profit, operating expenses, other income (expense), (loss) income before income tax and non-controlling interests and total assets as follows.
For the nine months ended September 30, 2019 (Unaudited)
| (RMB in thousands) | K-12 Schools | CP&CE Programs | Consolidated | |||||||||
| RMB | RMB | RMB | ||||||||||
| Net Revenues | 203,214 | 207,346 | 410,560 | |||||||||
| Cost of revenues | (128,887 | ) | (142,385 | ) | (271,272 | ) | ||||||
| GROSS PROFIT | 74,327 | 64,961 | 139,288 | |||||||||
| OPERATING EXPENSES | ||||||||||||
| Selling and marketing | (941 | ) | (34,290 | ) | (35,231 | ) | ||||||
| General and administrative | (28,700 | ) | (64,316 | ) | (93,016 | ) | ||||||
| Research and development | - | (239 | ) | (239 | ) | |||||||
| Impairment loss | - | (38,754 | ) | (38,754 | ) | |||||||
| Unallocated corporate expenses | - | - | (54,357 | ) | ||||||||
| Total operating expenses | (29,641 | ) | (137,599 | ) | (221,597 | ) | ||||||
| OPERATING INCOME (LOSS) | 44,686 | (72,638 | ) | (82,309 | ) | |||||||
| OTHER INCOME | ||||||||||||
| Interest income | 813 | 699 | 1,512 | |||||||||
| Foreign exchange gain, net | - | 47 | 47 | |||||||||
| Other income (loss), net | 92 | (14 | ) | 78 | ||||||||
| Gain on sale of investment available for sale | 264 | - | 264 | |||||||||
| Unallocated corporate other income | - | - | 3,382 | |||||||||
| Total other income | 1,169 | 732 | 5,283 | |||||||||
| INCOME (LOSS) BEFORE INCOME TAX AND NON-CONTROLLING INTERESTS | 45,855 | (71,906 | ) | (77,026 | ) | |||||||
For the nine months ended September 30, 2020 (Unaudited)
| (RMB in thousands) | K-12 Schools | CP&CE Programs | Consolidated | |||||||||
| RMB | RMB | RMB | ||||||||||
| Net Revenues | 185,766 | 172,684 | 358,450 | |||||||||
| Cost of revenues | (119,972 | ) | (160,051 | ) | (280,023 | ) | ||||||
| GROSS PROFIT | 65,794 | 12,633 | 78,427 | |||||||||
| OPERATING EXPENSES | ||||||||||||
| Selling and marketing | (847 | ) | (33,563 | ) | (34,410 | ) | ||||||
| General and administrative | (29,205 | ) | (59,174 | ) | (88,379 | ) | ||||||
| Research and development | (28 | ) | (990 | ) | (1,018 | ) | ||||||
| Impairment loss | - | (36,699 | ) | (36,699 | ) | |||||||
| Unallocated corporate expenses | - | - | (45,740 | ) | ||||||||
| Total operating expenses | (30,080 | ) | (130,426 | ) | (206,246 | ) | ||||||
| OPERATING INCOME (LOSS) | 35,714 | (117,793 | ) | (127,819 | ) | |||||||
| OTHER INCOME | ||||||||||||
| Interest income | 407 | 2,226 | 2,633 | |||||||||
| Foreign exchange gain, net | - | 33 | 33 | |||||||||
| Other (loss) income, net | (460 | ) | 3,920 | 3,460 | ||||||||
| Loss from deregistration of subsidiaries | - | (22 | ) | (22 | ) | |||||||
| Gain on disposal of subsidiaries | - | 752 | 752 | |||||||||
| Gain on the bargain purchase | - | 40,273 | 40,273 | |||||||||
| Gain on sale of investment available for sale | 2,018 | - | 2,018 | |||||||||
| Unallocated corporate other income | - | - | 6,343 | |||||||||
| Total other income | 1,965 | 47,182 | 55,490 | |||||||||
| INCOME (LOSS) BEFORE INCOME TAX AND NON-CONTROLLING INTERESTS | 37,679 | (70,611 | ) | (72,329 | ) | |||||||
| Segment assets | 478,967 | 430,436 | 909,403 | |||||||||
| Unallocated corporate assets | - | - | 177,204 | |||||||||
| TOTAL ASSETS AS OF SEPTEMBER 30, 2020 | 478,967 | 430,436 | 1,086,607 | |||||||||
F-18
Confidential Draft
The following table summarizes the net revenues for the nine months ended September 30, 2019 and 2020 by geographic areas.
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2019 | 2020 | 2019 | 2020 | |||||||||||||
| RMB | RMB | RMB | RMB | |||||||||||||
| Unaudited | Unaudited | Unaudited | Unaudited | |||||||||||||
| Net Revenues | ||||||||||||||||
| PRC | 102,874 | 91,914 | 347,041 | 273,953 | ||||||||||||
| U.S. | 23,682 | 20,794 | 63,519 | 84,497 | ||||||||||||
| Total | 126,556 | 112,708 | 410,560 | 358,450 | ||||||||||||
Net revenues are attributed to areas based on the location where the service is performed to the customers. Other than in PRC and the United States, the Group does not conduct business in any other individual country.
The following table summarizes long-lived assets for the years ended and as of December 31, 2019 and September 30, 2020 by geographic areas.
| As of | ||||||||
| December 31, 2019 | September 30, 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | ||||||||
| Long-Lived Assets | ||||||||
| PRC | 371,847 | 303,838 | ||||||
| U.S. | 168,146 | 194,521 | ||||||
| Total | 539,993 | 498,359 | ||||||
Long-lived assets represent property and equipment, land use rights, intangible assets, goodwill, operating and finance lease right-of-use assets for each geographic area.
F-19
Confidential Draft
14. ACQUISITION
Acquisition completed in the nine months ended September 30, 2020:
| (1) | NewSchool |
On March 6, 2020, Ambow NSAD Inc. acquired 100% of the outstanding membership interests of NewSchool, a higher education institution based in San Diego, California offering Bachelor and Master of Architecture programs in Architecture, Construction Management, Product Design, Graphic Design & Interactive Media, and Interior Architecture and Design.
Management of the Group is responsible for determining the fair value of consideration transferred, assets acquired, liabilities assumed and intangible assets identified as of the acquisition date and considered a number of factors including valuations from an independent appraiser.
The total purchase price of RMB (8,576) (US$ (1,237)) consisted of cash consideration of RMB 7,510 (US$ 1,083) and negative cash consideration from subsidy receivable of RMB (16,086) (US$ (2,320)). The cash consideration was payable to the seller on or before December 31, 2021. The subsidy is provided by the seller for four years after the acquisition for the loss of certain online business of NewSchool after the change of ownership. The fair value of subsidy receivable was discounted by future subsidy payments during the four-year period.
The purchase price is less than the fair value of the net assets acquired from NewSchool and as a result, the Group recorded a gain on bargain purchase in connection with this transaction.
The Group used the following valuation methodologies to value assets acquired, liabilities assumed and intangible assets identified:
| (a) | Property and equipment was valued using the cost approach; |
| (b) | Brand were valued using the relief from royalty method, which represents the benefits of owning the intangible asset rather than paying royalties for its use; |
| (c) | Student populations was valued using the multi-period excess earning method approach; |
| (d) | All other current assets and current liabilities carrying value approximated fair value at the time of acquisition. |
Acquisition-related costs incurred for the acquisitions have been expensed as incurred in general and administrative expense.
The purchase price was allocated based on the fair values of the acquired assets and liabilities as of the acquisition date as follows:
| RMB | Amortization Period (in years) | |||||||
| Cash and cash equivalents | 23,755 | |||||||
| Restricted cash | 13,867 | |||||||
| Accounts receivable | 7,181 | |||||||
| Prepaid and other current assets | 7,310 | |||||||
| Property and equipment | 1,468 | |||||||
| Intangible assets: | ||||||||
| Software | 1,879 | |||||||
| Tradename | 3,190 | Indefinite | ||||||
| Accreditation | 693 | 10 | ||||||
| Operating lease right-of-use asset | 83,680 | |||||||
| Other non-current assets | 11,919 | |||||||
| Total assets | 154,942 | |||||||
| Deferred revenue | (4,811 | ) | ||||||
| Accounts payable | (44 | ) | ||||||
| Accrued and other liabilities | (11,785 | ) | ||||||
| Income tax payable, current | (4,887 | ) | ||||||
| Deferred tax liabilities | (9,419 | ) | ||||||
| Operating lease liability | (83,723 | ) | ||||||
| Total liabilities | (114,669 | ) | ||||||
| Gain on bargain purchase | 40,273 | |||||||
For the purposes of presenting operating segments, NewSchool is classified within the CP&CE Programs.
The following unaudited pro forma information summarizes the results of operations of the Group for the nine months ended September 30, 2019, as if the acquisition of NewSchool had been completed on January 1, 2019. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on the date indicated and may not be indicative of future operating results. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable.
| Nine months ended September 30, | ||||||||
| 2019 | 2020 | |||||||
| RMB | RMB | |||||||
| Unaudited | Unaudited | |||||||
| Pro forma net revenues | 474,401 | 377,571 | ||||||
| Pro forma net loss | 88,201 | 70,890 | ||||||
F-20
Confidential Draft
15. RELATED PARTY TRANSACTIONS
| a. | Transactions |
The Group entered into the following transactions with related parties:
| Nine months ended September 30, | ||||||||
| Transactions | 2019 | 2020 | ||||||
| RMB | RMB | |||||||
| Unaudited | Unaudited | |||||||
| Balance netting off with Shandong Shichuang Software Engineering Co., Ltd., an entity controlled by Executive Principal of Ambow Research Center (Note i) | - | 572 | ||||||
| Loan to Beijing QC Technology Company Limited, an entity significantly influenced by a member of management team of the Company (Note ii) | - | 3,000 | ||||||
| Service (purchased from) Jinan QCY Intelligent Technology Co., Ltd., an entity significantly influenced by a member of management team of the Company | - | (2,551 | ) | |||||
| Service provided to /(purchased from) Beijing QC Technology Company Limited, an entity significantly influenced by a member of management team of the Company | 950 | (928 | ) | |||||
| Service (purchased from) URSUS Information Technology (Beijing) Company Limited, an entity significantly influenced by a member of management team of the Company | (873 | ) | - | |||||
Note (i) The Company reversed the net off of the amount due to Shandong Shichuang Software Engineering Co., Ltd. in RMB 572 upon receipt of such amount in the nine months ended September 30, 2020.
Note (ii) Loan to Beijing QC Technology Company Limited in the amount of RMB 3,000 was for operational purpose without interest and a due date at September 30, 2021.
| b. | The Group had the following balances with related parties: |
| Amounts due from related parties | Amounts due to related parties | |||||||||||||||
| As of | As of | |||||||||||||||
| Relationship | December 31, 2019 | September 30, 2020 | December 31, 2019 | September 30, 2020 | ||||||||||||
| RMB | RMB | RMB | RMB | |||||||||||||
| Unaudited | Unaudited | |||||||||||||||
| Entity controlled by Executive Principal of Ambow Research Center - Shandong Shichuang Software Engineering Co., Ltd. (Note a. i) | - | - | 1,845 | 2,417 | ||||||||||||
| Entity significantly influenced by a member of management team of the Company - Beijing QC Technology Company Limited (Note a. ii) | 2,028 | 5,029 | 126 | 1,328 | ||||||||||||
| Entity significantly influenced by a member of management team of the Company - URSUS Information Technology (Beijing) Company Limited | 202 | 201 | - | - | ||||||||||||
| Entity significantly influenced by a member of management team of the Company - Beijing HJRT Technology Co., Ltd. | 88 | 154 | - | - | ||||||||||||
| Entity significantly influenced by a member of management team of the Company - Jinan QCY Intelligent Technology Co., Ltd. | - | 775 | - | 1,002 | ||||||||||||
| Borrowing from a member of management team of the Company | - | - | - | 129 | ||||||||||||
| 2,318 | 6,159 | 1,971 | 4,876 | |||||||||||||
16. DISPOSAL OF SUBSIDIARIES
In the nine months ended September 30, 2020, the Company sold 100% of its equity interest in several subsidiaries with minimal business operations to third parties. The disposals were not a strategic shift of the business and would not have a major impact on Ambow’s business, therefore the disposals did not qualify as discontinued operations. The Company recognized gain from the disposal of those subsidiaries in a collective amount of RMB nil and RM 752 in the nine months ended September 30, 2019 and 2020, respectively.
17. GAIN FROM DEREGISTRATION OF SUBSIDIARIES
In the nine months ended September 30, 2019 and 2020, the Company closed several subsidiaries through the deregistration procedures of local governmental and corporate service institutions. Those subsidiaries had no business operations and were in accumulated deficit for years. As a result, the Company recognized gain from the deregistration of those subsidiaries in a collective amount of RMB 1,279 and RM 3,967 in the nine months ended September 30, 2019 and 2020, respectively.
F-21
Confidential Draft
18. FAIR VALUE MEASUREMENTS
The Group adopted ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements.
ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC Topic 820 specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:
Level 1-Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
Level 2-Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
Level 3-Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Group’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Management of the Group is responsible for determining the fair value of equity issued, assets acquired, liabilities assumed and intangibles identified as of the acquisition date and considered a number of factors including valuations from independent appraiser.
When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group measures fair value using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and currency rates. The following is a description of the valuation techniques that the Group uses to measure the fair value of assets and liabilities that are measured and reported at fair value on a recurring basis:
At December 31, 2019 and September 30, 2020 information about inputs into the fair value measurements of the assets and liabilities that the Group makes on a recurring basis were as follows:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Total Fair Value and Carrying Value on Balance Sheet | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| As of September 30, 2020 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Short term investments, available for sale | 182,629 | 182,629 | - | - | ||||||||||||
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Total Fair Value and Carrying Value on Balance Sheet | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| As of December 31, 2019 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Short term investments, available for sale | 57,487 | 57,487 | - | - | ||||||||||||
The following table presents the quantitative information about the Group’s Level 3 fair value measurements of intangible assets on a recurring basis in the nine months ended September 30, 2019 and 2020, which utilize significant unobservable internally-developed inputs:
| Fair value | Valuation techniques | Unobservable inputs | Range of discount rates | |||||||
| Intangible assets in the nine months ended September 30, 2019 | 158,870 | Relief-from-royalty method | Royalty rate Discount rate Terminal growth rate | 1%-5% 14.8%-16% 3% | ||||||
| Intangible assets in the nine months ended September 30, 2020 | 177,814 | Relief-from-royalty method | Royalty rate Discount rate Terminal growth rate | 1%-7% 14.8%-16% 3% | ||||||
F-22
Confidential Draft
19. SUBSEQUENT EVENTS
| 1) | Closing of A Registered Direct Offering |
On October 5, 2020, the Company completed the issuance of 1,507,538 ADSs (representing 3,015,076 Class A Ordinary Shares), at a purchase price of $3.98 per ADS, in a registered direct offering. The Company also issued to the investors registered warrants to purchase up to an aggregate amount of 603,016 ADSs (representing 1,206,032 Class A ordinary shares). The net proceeds from the offering, after deducting the placement agent fees and other offering expenses, was approximately US$ 5,250.
| 2) | Additional Loans to Dongyuan |
In October 2020, the Group entered into an additional loan agreement with Dongyuan. The principal was RMB 10,000 with an annual interest rate at 5% and the due date is April 12, 2021.
The Company has not identified any other events with a material financial impact on the Group’s consolidated financial statements.
F-23
Exhibit 99.2
Confidential Draft
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements for the periods specified in this earning release on Form 6-K. We undertake no obligation to update publicly any forward-looking statements in earning release on Form 6-K.
| A. | Operating Results |
Overview
Our business addresses three critical demands in China’s education market, the desire for students to be admitted into top secondary and post-secondary schools, the desire for graduates of those schools to obtain more attractive jobs and the need of schools and corporate clients in optimizing their teaching and operating environment. We offer high-quality, individualized services and products through our integrated online and offline delivery model powered by our proprietary technologies and robust infrastructure.
Intelligent technology is transforming the education industry so that students no longer have to be restricted by the traditional learning environment. Intelligent campuses and classes are becoming the trend leading to increased efficiency, cost savings, and improved experiences for students and staff. We will proactively introduce our intellectualized operational services to more universities and colleges to provide students access to educational resources regardless of the location or device, increasing the potential for learning and teaching through cooperation with peers and experts worldwide and optimizing facilities to create a sustainable campus.
Our net revenues decreased from RMB 410.6 million in the nine months ended September 30, 2019 to RMB 358.5 million in the nine months ended September 30, 2020. The decrease from the nine months ended September 30, 2019 to 2020 was mainly due to fewer boarding and other ancillary services provided at K-12 schools as a result of temporary COVID-19 related campus closures in the first half of 2020; and less services provided at the Company’s tutoring centers, training offices and college campuses. Our net revenues decreased from RMB 126.6 million in the three months ended September 30, 2019 to RMB 112.7 million in the three months ended September 30, 2020. The decrease from the three months ended September 30, 2019 to 2020 was mainly due to fewer services provided at the Company’s tutoring centers, training offices and college campuses.
Our net loss changed from RMB 88.1 million in the nine months ended September 30, 2019 to RMB 74.7 million (US$ 11.0 million) in the nine months ended September 30, 2020, and from RMB 72.8 million in the three months ended September 30, 2019 to RMB 84.9 million (US$ 12.5 million) in the three months ended September 30, 2020.
Net revenues from our K-12 Schools segment accounted for 49.5%, 51.8%, 41.3% and 52.3% of our total net revenues in the nine months ended September 30, 2019 and 2020, three months ended September 30, 2019 and 2020, respectively. Net revenues from our College Preparation & Career Enhancement Programs (“CP&CE Programs”) accounted for 50.5%, 48.2%, 58.7% and 47.7% of our total net revenues in the nine months ended September 30, 2019 and 2020, three months ended September 30, 2019 and 2020, respectively.
Due to certain restrictions and qualification requirements under PRC law that applies to foreign investment in China’s education industry, our education business is currently conducted through contractual arrangements among our wholly-owned subsidiaries in China and our consolidated variable interest entities, or VIEs, in China. Our VIEs and their respective subsidiaries hold the licenses and permits necessary to conduct our educational and career enhancement services business in China and directly operate our tutoring centers, K-12 schools and career enhancement centers, develop and distribute educational content, software and other technologies, and operate our online education business. We have entered into Technology Service Agreements or Exclusive Cooperation Agreements with our VIEs pursuant to which we may receive economic benefits in the future. We have, however, entered into additional agreements to sell products and provide services to our VIEs’ subsidiaries. The terms of these sales agreements to our VIEs’ subsidiaries are the same as sales to third parties described further in this section of the earning release.
Confidential Draft
Factors affecting our results of operations
General factors affecting our results of operations
We have benefited significantly from the following recent trends in the China educational and career enhancement services market:
| • | Rapid growth in disposable household income; |
| • | Intense competition in the education sector and the job market; |
| • | Rapid economic growth; |
| • | Increasing hiring needs of existing and new companies doing business in China; and |
| • | The increased availability and utilization of advanced learning technologies to supplement the traditional education delivery model. |
The overall economic growth and the increase in the GDP per capita in China have led to a significant increase in spending on education in China. In addition, education is a welcomed and supported industry in China, which means that education service providers often get preferential treatment in terms of infrastructure support and tax rates. We anticipate that the demand for private education and career enhancement training in China will continue to increase as the economy in China continues to grow and as disposable income of urban households continues to rise. However, any adverse changes in the economic conditions or regulatory environment in China may have a material adverse effect on the education and career enhancement industries in China, which in turn may harm our business and results of operations. We are subject to a legal regime consisting of regulations governing various aspects of our business such as regulations on education, software, internet, audio-video broadcasting, tax, information security, privacy, copyright and trademark protection and foreign exchange. These regulations are evolving and are subject to frequent changes which may materially adversely affect our business in all aspects such as the operation of our K-12 schools, tutoring centers, career enhancement centers and training offices through the VIE structure, the engagement of public school teachers and the organization of classes with large-size attendance in our tutoring centers, the establishment of new colleges and the offering of our online services. Although we do not possess the land use right certificates or building ownership certificates with respect to some of our owned real properties, and the lessors of some of our leased properties do not have effective ownership certificates, we believe the risk is remote that our ability to maintain and obtain or renew our licenses or permits for our business operations will be adversely affected by such issues.
Specific factors affecting our results of operations
While our business is influenced by factors affecting the education and career enhancement industries in China generally and by conditions in each of the geographic markets we serve within China, we believe our business is more directly affected by company-specific factors, including, among others:
| • | The number of student enrollments . The number of student enrollments is largely driven by the demand for the educational programs offered by K-12 Schools and CP&CE Programs, the amount of fees we charge, the effectiveness of our marketing and brand promotion efforts, the locations and capacity of our tutoring centers, K-12 schools, career enhancement centers and college, and training offices, our ability to maintain the consistency and quality of our teaching, and our ability to respond to competitive pressures, as well as seasonal factors. We plan to continue to add new offerings to better attract students of different needs and provide cross-selling opportunities. |
| • | The amount of fees we charge . We determine course fees for our tutoring and career enhancement services primarily based on demand for our courses, the targeted market for our courses, the geographic location and capacity of the center, costs of delivering our services, and the course fees charged by our competitors for the same or similar courses. |
Confidential Draft
Education services are an investment for the future, especially for children’s education, in China. Steady growth of the economy will likely result in the continuous growth of income and higher consumption levels for China’s citizens, who will have more capital for the education of their children, especially for after-school tutoring. However, we believe that the tuition fees of tutoring services and K-12 schools and college tuition fees are less impacted by the ups and downs of the overall economy as we believe that people in China generally cut back on other spending before they reduce their spending on their children’s education.
The maximum tuition fees that a school or a college can charge vary by location, but usually the regulations governing these price controls take into consideration China’s economic growth in determining whether to approve a tuition increase and in setting the size of the tuition increase. Usually the local governments review and adjust tuition fees every two to three years as necessary to reflect inflation or new educational services that are provided. Price controls by local governments will affect the amount by which we are able to increase our fees charged to students in our K-12 schools and college.
| • | Our costs and expenses . We incur costs and expenses at both the headquarter level and at our tutoring centers, K-12 schools, career enhancement centers and training offices. Our most significant costs are compensation and social welfare paid to/for our teachers and rent expense. A substantial majority of our operating expenses are selling and marketing and general and administrative expenses. |
According to the Law for Promoting Private Education revised on November 7, 2016, private schools may be operated as nonprofit schools or profit-making schools, but the nine-year compulsory education schools cannot be operated as profit-making schools. We are currently operating three K-12 schools as profit-making schools with reasonable return and they willtransition to operating as non-profit schools under this revised law. The detailed implementation methods for transitioning K-12 schools to non-profit schools have not yet been issued by local government authorities. We are communicating with local authorities regarding the impact on the operation and registration of the schools. Since we can still maintain control over the daily operation of the schools and have the right to appoint key management, we believe there will not be any significant impact on the operation of these schools before any official reply is issued by local authorities. Although turning into non-profit schools will prohibit the distribution of retained earnings as dividends from these schools, we can still control and allocate the financial resources of the schools in their daily operation. Therefore, as of the date of this report, we believe there will be no significant financial impact to us.
Effects of disposals and other strategic plans
In June 2019, we entered into a Membership Interest Purchase Agreement (“MIPA”) with Laureate Education, to acquire 100% of the outstanding membership interest in NewSchool. NewSchool is a for-profit institution of higher education based in San Diego, California, that offers undergraduate and graduate degrees and non-degree certificates in Architecture, Design and Construction Management. This acquisition was closed in March 2020. Please refer to Note 14 to the unaudited condensed consolidated financial statements for details.
In the nine months ended September 30, 2019 and 2020, we closed several subsidiaries through the deregistration procedures of local governmental and corporate service institutions, and disposed several subsidiaries. Those subsidiaries had no business operations and accumulated deficits for years. As a result, we recognized gain from the deregistration/disposal of those subsidiaries in a collective amount of RMB 1.3 million and RM 4.7 million in the nine months ended September 30, 2019 and 2020, respectively.
There were no other acquisitions/disposals during the nine months ended September 30, 2019 and 2020.
Confidential Draft
Key financial performance indicators
Our key financial performance indicators consist of our net revenues, cost of revenues, gross profit and operating expenses, which are discussed in further detail below. The following table sets forth our net revenues, cost of revenues and gross profit, both in absolute amount and as a percentage of net revenues, for the periods indicated.
| For the nine months ended September 30, | ||||||||||
| 2019 | 2020 | |||||||||
| RMB | % | RMB | US$ | % | ||||||
| Net revenues | 410,560 | 100 | 358,450 | 52,794 | 100 | |||||
| Cost of revenues | (271,272 | ) | (66.1 | ) | (280,023 | ) | (41,243 | ) | (78.1 | ) |
| Gross Profit | 139,288 | 33.9 | 78,427 | 11,551 | 21.9 | |||||
| For the three months ended September 30, | ||||||||||
| 2019 | 2020 | |||||||||
| RMB | % | RMB | US$ | % | ||||||
| Net revenues | 126,556 | 100 | 112,708 | 16,600 | 100 | |||||
| Cost of revenues | (94,043 | ) | (74.3 | ) | (106,241 | ) | （15,648 | ) | (94.3 | ) |
| Gross Profit | 32,513 | 25.7 | 6,467 | 952 | 5.7 | |||||
Net revenues
In the nine months ended September 30, 2019 and 2020, three months ended September 30, 2019 and 2020, we generated net revenues of RMB 410.6 million, RMB 358.5 million (US$ 52.8 million), RMB 126.6 million and RMB 112.7 million (US$ 16.6 million), respectively.
The decrease of revenue from the nine months ended September 30, 2019 to 2020 was mainly due to fewer boarding and other ancillary services provided for K-12 schools as a result of temporary COVID-19 related campus closures in the first half of 2020 and fewer services provided at the Company’s tutoring centers, training offices and college campuses. This was partially offset by revenue from NewSchool, which was acquired in March 2020.
The decrease from the three months ended September 30, 2019 to 2020 was mainly from fewer services provided at the Company’s tutoring centers, training offices and college campuses. This was partially offset by revenue from NewSchool.
We derived net revenues from our two reportable segments in terms of percentages of our overall net revenues as follows in the nine months ended September 30, 2019 and 2020 and three months ended September 30, 2019 and 2020:
| For the nine months ended September 30, | For the three months ended September 30, | ||||||||||
| 2019 | 2020 | 2019 | 2020 | ||||||||
| % | % | % | % | ||||||||
| K-12 Schools: | 49.5 | 51.8 | 41.3 | 52.3 | |||||||
| CP&CE Programs: | 50.5 | 48.2 | 58.7 | 47.7 | |||||||
K-12 Schools . We operated three K-12 schools as of September 30, 2020. We recognize revenues from tuition fees and associated accommodation fees collected for enrollment in our K-12 schools ratably over the corresponding semester or school year. Tuition fees and associated accommodation fees collected from students at our K-12 schools are recorded as deferred revenue until they are recognized as revenues over the semester or school year. Our K-12 schools either collect full year tuition fees once a year, or collect half year tuition fees twice per year. Collections mainly take place between August and October and in February or March. The most significant factors that directly affect our net revenues for our K-12 schools are the number of student enrollments and the tuition fees we charge. Tuition fees and associated accommodation fees range from RMB 3,000 to RMB 80,000 per year. We typically adjust tuition fees and associated accommodation fees based on the market conditions of the city where the particular school is located, subject to the relevant local governmental authority’s advance approval, if required. Our K-12 schools have classes that range from 30 students to 60 students per class.
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CP&CE Programs . Our CP&CE Programs include tutoring services and career enhancement services. Our tutoring service provided educational services in our 12 tutoring centers as of September 30, 2020. These services consist primarily of test preparation courses and tutoring. We recognize revenues from course fees collected for enrollment in the courses we offer at our tutoring centers proportionally as we deliver the instruction over the period of the course. Course fees collected are recorded as deferred revenues until they are recognized as revenues over the period when the course is taught, which typically ranges from one to nine months. The most significant factors that directly affect our net revenues in our tutoring services are the number of student enrollments in the courses and the amount of course fees. Although similar courses have comparable rates, course fees vary among our numerous courses. Tuition fees in our tutoring centers range from RMB 100 to RMB 16,000 per program. We determine course fees primarily based on demand for our courses, the targeted market for our courses, the geographic location of the tutoring center, the length of time of the course, cost of services and the course fees charged by our competitors for the same or similar programs. Our courses are delivered in class settings ranging from 4 students to 20 students per class. In addition, we also deliver these services in premium classes, including one-on-one tutoring.
Our career enhancement services are provided in our 26 career enhancement centers, which include 5 career centers, 18 training offices and 3 career enhancement college campuses. We recognize revenues over the period of the services, which typically ranges from several days to 12 months. Course fees are either collected in advance and recorded as deferred revenues or recorded as accounts receivable and collected within credit periods. The most significant factors that directly affect our revenues in our career enhancement segment are the number of enrollments in the courses and the amount of course fees. In addition to the specific factors mentioned above, enrollments at our career enhancement centers are affected by the local job markets’ specific demand for skills such as soft skills, information technology services and digital art. In addition, we believe many university graduates choose to obtain job-readiness training or acquire supplementary skills to differentiate themselves from their peers in order to get a better job. Tuition fees in our career enhancement centers range from RMB 400 to RMB 20,000 per program with course lengths ranging from several days to 12 months. We determine course fees primarily based on demand for our courses, the targeted market for our courses, the geographic location of the career enhancement center, costs of services delivered, and the course fees charged by our competitors for the same or similar programs. Our career enhancement courses are generally delivered in settings ranging from 15 students to 50 students per class. The corporate trainings are all tailor-made according to customer companies’ requirements, and normally are delivered to 10 to 30 persons per course.
Cost of revenues
Cost of revenues for our educational and career enhancement programs and services primarily consists of:
| • | Teaching fees and performance-linked bonuses paid to our teachers. Our teachers consist of both full-time teachers and part-time teachers. Full-time teachers deliver teaching instruction and may also be involved in management, administration and other functions at our schools, tutoring centers and career enhancement centers. Their compensation and benefits primarily consist of teaching fees based on hourly rates, performance-linked bonuses based on student evaluations, as well as base salary, annual bonus and standard employee benefits in connection with their services other than teaching. Compensation of our part-time teachers is comprised primarily of teaching fees based on hourly rates and performance-linked bonuses based on student evaluations and other factors; |
| • | Rental payments for the operation of our school and center properties; |
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| • | Depreciation and amortization of properties and equipment used in the provision of educational and career enhancement services and accommodation facilities; |
| • | Utilities used in our schools and center properties and accommodation facilities; and |
| • | Meals, boarding services, uniforms, transportation and other services for students. |
| • | K-12 Schools . Cost of revenues for our K-12 Schools segment primarily consists of teaching fees and performance-linked bonuses paid to our teachers, and rental payments for our schools, meals, boarding services, uniforms, transportation and other services for students, depreciation and amortization of property and equipment used in the provision of educational services and accommodation facilities and, to a lesser extent, costs of course materials. |
| • | CP&CE Programs . Cost of revenues for our CP&CE Programs segment primarily consists of teaching fees and performance-linked bonuses paid to our teachers, rental payments for our centers, and depreciation and amortization of property and equipment used in the provision of educational services. |
Gross profit
Gross profit as a percentage of our net revenues was 33.9%, 21.9%, 25.7% and 5.7% in the nine months ended September 30, 2019 and 2020, three months ended September 30, 2019 and 2020, respectively. The decreased gross profit margin for the nine months and three months ended September 30, 2020 compared with the same periods 2019 was mainly due to the decrease of net revenues from CP&CE Programs.
Operating expenses
Our operating expenses consist of selling and marketing expenses, general and administrative expenses and research and development expenses. The following table sets forth the components of our operating expenses, both in absolute amounts and as a percentage of revenues, for the periods indicated.
| For the nine months ended September 30, | |||||||||||||||
| 2019 | 2020 | ||||||||||||||
| RMB | % | RMB | US$ | % | |||||||||||
| Net revenues | 410,560 | 100 | 358,450 | 52,794 | 100 | ||||||||||
| Operating expenses: | |||||||||||||||
| Selling and marketing | (40,778 | ) | (9.9 | ) | (37,861 | ) | (5,576 | ) | (10.6 | ) | |||||
| General and administrative | (140,510 | ) | (34.2 | ) | (127,230 | ) | (18,739 | ) | (35.5 | ) | |||||
| Research and development | (1,555 | ) | (0.4 | ) | (4,456 | ) | (656 | ) | (1.2 | ) | |||||
| Impairment loss | (38,754 | ) | (9.4 | ) | (36,699 | ) | (5,405 | ) | (10.2 | ) | |||||
| Total operating expenses | (221,597 | ) | (53.9 | ) | (206,246 | ) | (30,376 | ) | (57.5 | ) | |||||
| For the three months ended September 30, | |||||||||||||||
| 2019 | 2020 | ||||||||||||||
| RMB | % | RMB | US$ | % | |||||||||||
| Net revenues | 126,556 | 100 | 112,708 | 16,600 | 100 | ||||||||||
| Operating expenses: | |||||||||||||||
| Selling and marketing | （15,607 | ) | (12.3 | ) | (13,655 | ) | (2,011 | ) | (12.1 | ) | |||||
| General and administrative | (48,116 | ) | (38.0 | ) | (42,987 | ) | (6,331 | ) | (38.1 | ) | |||||
| Research and development | (1,087 | ) | (0.9 | ) | (1,758 | ) | (259 | ) | (1.6 | ) | |||||
| Impairment loss | (38,754 | ) | (30.6 | ) | (36,699 | ) | (5,405 | ) | (32.6 | ) | |||||
| Total operating expenses | (103,564 | ) | (81.8 | ) | (95,099 | ) | (14,006 | ) | (84.4 | ) | |||||
Selling and marketing expenses . Our selling and marketing expenses primarily consist of expenses relating to advertising, seminars, marketing and promotional trips and other community activities for brand promotion purposes. The decrease in selling and marketing expenses was primarily due to stringent expense controls to improve operating efficiency, and partially offset by NewSchool’s expenses.
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General and administrative expenses . Our general and administrative expenses primarily consist of compensation and benefits of administrative staff, amortization of intangibles, costs of third-party professional services, rental and utilities payments relating to office and administrative functions, and depreciation and amortization of property and equipment used in our general and administrative activities as well as bad debt provision. Our general and administrative expenses decreased from RMB 140.5 million in the first nine months of 2019 to RMB 127.2 million in the same period of 2020, which was mainly due to the temporary suspension of operations at training offices and tutoring centers in the period as a part of the national pandemic containment efforts, as well as stringent expense controls to improve operating efficiency, and partially offset by NewSchool’s expenses.
Research and development expenses .. Our research and development expenses primarily consist of compensation, benefits and other headcount-related costs associated with the development of our online education technology platform and courseware and outsourced development costs. The increase was mainly due to more headcounts in the periods.
Impairment loss . Our impairment loss was related to the impairment of goodwill and intangible assets.
Share-based compensation expenses .. The following table sets forth the allocation of our share-based compensation expenses, both in absolute amount and as a percentage of total share-based compensation expenses, among our employees based on the nature of work which they were assigned to perform.
| For the nine months ended September 30, | ||||||||||||||||||||
| 2019 | 2020 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| Allocation of share-based expenses: | ||||||||||||||||||||
| General and administrative | (1,382 | ) | 100.0 | (719 | ) | (106 | ) | 100.0 | ||||||||||||
| Total share-based expenses | (1,382 | ) | 100.0 | (719 | ) | (106 | ) | 100.0 | ||||||||||||
| For the three months ended September 30, | ||||||||||||||||||||
| 2019 | 2020 | |||||||||||||||||||
| RMB | % | RMB | US$ | % | ||||||||||||||||
| Allocation of share-based expenses: | ||||||||||||||||||||
| General and administrative | (244 | ) | 100.0 | (239 | ) | (35 | ) | 100.0 | ||||||||||||
| Total share-based expenses | (244 | ) | 100.0 | (239 | ) | (35 | ) | 100.0 | ||||||||||||
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Our predecessor entity, Ambow Education Co., Ltd., adopted the 2010 Equity Incentive Plan in June 2010, which became effective upon completion of our 2010 IPO. On December 21, 2018, we adopted the Amended and Restated 2010 Plan, which became effective upon the approval from the Board of Directors and shareholders. From 2015 to the nine months ended September 30, 2020, we only granted restricted share to our employees. No options were granted. We have adopted the provisions of ASC 718 “Stock Compensation” for the restricted shares we granted. For restricted shares granted to our employees, we record share-based compensation expenses based on the fair value of the award as of the date of grant and amortize the expenses over the vesting periods of the restricted shares.
Taxation
We are a Cayman Islands company and we currently conduct our operations primarily through our subsidiaries in China and our VIEs and their respective subsidiaries. Under the current laws of the Cayman Islands, we and our Cayman Island subsidiaries are not subject to tax on our income or capital gains. In addition, our payment of dividends, if any, is not subject to withholding tax in the Cayman Islands.
Entities incorporated in Hong Kong which are subject to Hong Kong profit tax at a rate of 16.5%.
Entity incorporated in Taiwan is subject to Taiwan profit tax at a rate of 17%.
We operate a number of subsidiaries and through our VIEs, schools, tutoring centers and career enhancement centers in China. The following is a summary of the types and rates of taxation to which our China entities are subject to.
VAT
The PRC government implemented a value-added tax reform pilot program, which replaced the business tax with value-added tax. Since May 2016, the changes from business tax to VAT are expanded to all other service sectors which used to be subject to business tax. The value-added tax rates applicable to the subsidiaries and consolidated variable interest entities of the Group ranged from 3% to 6% as compared to the 3% to 5% business tax rate which was applicable prior to the reform.
As of December 31, 2019 and September 30, 2020, the payable balances for VAT were RMB 10.6 million and RMB 3.3 million, respectively.
Business tax
For those schools and college in China providing degree-oriented education services, they are exempted from paying business tax on revenue generated from both these services and any accommodation revenue associated with degree-oriented education. As well as for any revenue generated by schools and college for non-degree-oriented education services, business tax of between 3% and 5% of gross revenues is payable. From May 2016, as the final part of the VAT reform, VAT replaced business tax in all industries, on a nationwide basis. The VAT rates applicable to the subsidiaries and consolidated variable interest entities of the Group ranged from 3% to 6% as compared to the 3% to 5% business tax rate which was applicable prior to the reform.
As of December 31, 2019 and September 30, 2020, the payable balances for business tax were RMB 18.5 million and RMB 17.5 million, respectively.
Income tax
Current income taxes are provided for in accordance with the laws and regulations set out below. Deferred income taxes are recognized when temporary differences exist between the tax bases and their reported amounts in the consolidated financial statements.
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Corporate entities
The PRC Enterprise Income Tax (“EIT”) is calculated based on the taxable income determined under the applicable EIT Law and its implementation rules, which became effective on January 1, 2008. EIT Law imposes a unified income tax rate of 25% for all resident enterprises in China, including both domestic and foreign invested enterprises.
EIT Law also imposes a withholding income tax rate of 10% on dividends distributed by a foreign invested enterprise, or FIE to its immediate holding company outside of PRC. However, a lower withholding income tax rate of 5% would be applied after the immediate holding company was registered in Hong Kong or other jurisdiction that have a tax treaty or arrangement with PRC and the FIE’s immediate holding company, and satisfies the criteria of a beneficial owner set out in Circular Guoshuihan (2009) No. 601, a circular issued by the State Administration of Taxation on October 27, 2009 on how to understand and identify a beneficial owner in tax treatments. Such withholding income tax was exempted under the previous income tax laws and rules. A joint circular issued by the Ministry of Finance and State Administration of Taxation on February 22, 2008 clarified that the withholding income tax is only to be paid for earnings generated after January 1, 2008. According to the EIT Law and a circular promulgated by the PRC State Administration of Taxation on December 10, 2009, in addition to the withholding income tax on dividends distributed by an FIE, the immediate holding company of an FIE will also be subject to an income tax at the rate of 10% for capital gain realized from transferring the equity interests in such FIE to third parties, and shall file and pay such tax within seven days after the date of the transferring agreement. Furthermore, when the de facto controlling shareholder who controls an FIE through an intermediate controlling entity, “indirectly transfers” the equity interests in such FIE by selling the intermediate controlling entity, such de facto controlling shareholder shall also file with the PRC tax authorities in some cases and may be subject to the PRC corporate income tax for the capital gain realized in such sale.
We have determined that our FIEs in China will not declare any dividends on which withholding tax should be paid and therefore no withholding tax has been accrued on the retained earnings of its FIEs in China.
Private schools
Our private schools, being privately run non-enterprise institutions, acquired in 2008 and 2009 are registered as private schools that either do or do not require a reasonable return. Prior to January 1, 2008, these private schools were subject to income tax determined in accordance with the Law for Promoting Private Education and the 2004 Implementing Rules, as well as the Notice on Tax Policy for Educational Institutions and Notice on Several Preferential Tax Policy jointly issued by the PRC Ministry of Finance and the State Administration of Taxation, collectively referred to as the 2003 Education Law. Under these laws and regulations, private schools not requiring reasonable returns were treated in a similar manner to public schools and were generally not subject to income tax. While it is indicated in the 2004 Implementing Rules that the relevant authorities under the State Council may consider formulating separate preferential tax treatment policies applicable to private schools requiring reasonable returns, no such tax preferential policy has been promulgated yet. As a result, the tax treatment applied to our schools varies among different cities.
Under the EIT Law there are specific criteria that should be met to qualify as a not-for-profit entity that is exempt from corporate income tax, and the preferential corporate income tax policy for education institutions under the 2003 Education Law has been superseded. No detailed implementation guidance has been provided to local tax authorities on how to apply these changes to schools. Some of the schools we have acquired have been able to obtain preferential tax treatment from the local tax authorities or to agree with local tax authorities on a fixed amount of income tax payable for prior years. Where such preferential tax treatment or fixed amount payable has not been confirmed by the tax authorities, we have made a full provision for income taxes payable based on our understanding of the 2003 Education Law and the EIT Law. No provision has been made for interest or late payment fees for such provision.
The determination of our provision for income taxes, particularly for private schools, is subject to uncertainty. The strict application of the EIT Law indicates that certain of our private schools are subject to income tax of 25% after January 1, 2008. For those private schools where the tax authorities have not determined a deemed fixed amount or deemed fixed rate for the purposes of calculating income tax payable, we have assumed that income tax of 25% is payable. However, as of September 30, 2020, no detailed implementation guidance has been provided to local tax authorities on how to apply the EIT Law to private schools. It is possible that, upon the introduction of the detailed implementation guidance, we may find ourselves in a position whereby income tax is not payable for periods prior to the release of the detailed guidance.
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The amount of income tax payable by our PRC subsidiaries, VIEs and schools in the future will depend on various factors, including, among other things, the results of operations and taxable income of, and the statutory tax rate applicable to, such PRC subsidiaries, and our effective tax rate depends partially on the extent of each of our subsidiaries’ relative contribution to our consolidated taxable income. If further detailed guidance is issued by the State Administration of Taxation on how to apply the EIT Law to schools, this may also have an impact on the amount of income tax payable by our own schools.
Critical accounting policies and estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Basis of consolidation
The consolidated financial statements include the financial statements of the company, its Wholly Owned Foreign Enterprise (“WOFEs”) and its VIEs. We have adopted the guidance of accounting for VIEs, which requires VIEs to be consolidated by the primary beneficiary of the entity. The company and its WOFEs have entered into contractual arrangements with the VIEs and their shareholders, which enable the company to (1) have power to direct activities that most significantly affect the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the company is considered the primary beneficiary of the VIEs and has consolidated the VIEs’ financial results of operations, assets and liabilities in the company’s consolidated financial statements. All inter-company transactions and balances have been eliminated upon consolidation.
The entities apart from the consolidated VIEs mainly include Beijing Ambow Shengying Education and Technology Co., Ltd. (“Ambow Shengying”), Beijing Ambow Chuangying Education and Technology Co., Ltd. (“Ambow Chuangying”), Beijing BoheLe Science and Technology Co. Ltd. (“BoheLe”), Ambow Education Inc., Ambow BSC Inc., Bay State College, Ambow NSAD Inc., NewSchool, four holding companies registered in Cayman and six holding companies registered in Hong Kong. Assets and liabilities of these entities mainly include cash and current accounts balances of inter-group financing and transactions. Except for Bay State College and NewSchool (“U.S. colleges”), operations of these entities are mainly inter-group financing and business management.
The separated VIE and Non-VIE financial information as of December 31, 2019 was as follows (in RMB thousands):
| VIEs Consolidated | Non-VIEs Consolidated | Inter- company Elimination | Group Consolidated | |||||||||||||
| Cash and cash equivalent | 94,967 | 62,633 | - | 157,600 | ||||||||||||
| Inter-Group balances due from VIEs/Non VIEs | 1,881,047 | 2,697,862 | (4,578,909 | ) | - | |||||||||||
| Other current assets | 213,126 | 28,914 | - | 242,040 | ||||||||||||
| Non-current assets | 376,291 | 244,868 | - | 621,159 | ||||||||||||
| Total Assets | 2,565,431 | 3,034,277 | (4,578,909 | ) | 1,020,799 | |||||||||||
| Inter-Group balances due to VIEs/Non VIEs | 2,879,536 | 1,720,967 | (4,600,503 | ) | - | |||||||||||
| Other current liabilities | 527,330 | 81,654 | - | 608,984 | ||||||||||||
| Non-current liabilities | 120,445 | 127,774 | - | 248,219 | ||||||||||||
| Total Liabilities | 3,527,311 | 1,930,395 | (4,600,503 | ) | 857,203 | |||||||||||
| Equity | (961,880 | ) | 1,103,882 | 21,594 | 163,596 | |||||||||||
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The separated VIE and Non-VIE net revenues and net loss during the nine months ended September 30, 2019 was as follows (in RMB thousands):
| VIEs Consolidated | Non-VIEs Consolidated | Inter- company | Group Consolidated | |||||||||||||
| Net Revenues | 347,041 | 63,519 | - | 410,560 | ||||||||||||
| Net Loss | (44,678 | ) | (43,380 | ) | - | (88,058 | ) | |||||||||
The separated VIE and Non-VIE financial information during the first nine months ended September 30, 2020 was as follows (in RMB thousands):
| VIEs Consolidated | Non-VIEs Consolidated | Inter- company | Group Consolidated | |||||||||||||
| Cash and cash equivalent | 60,014 | 26,058 | - | 86,072 | ||||||||||||
| Inter-Group balances due from VIEs/Non VIEs | 1,878,104 | 2,631,995 | (4,510,099 | ) | - | |||||||||||
| Other current assets | 344,804 | 69,331 | - | 414,135 | ||||||||||||
| Non-current assets | 314,684 | 271,716 | - | 586,400 | ||||||||||||
| Total Assets | 2,597,606 | 2,999,100 | (4,510,099 | ) | 1,086,607 | |||||||||||
| Inter-Group balances due to VIEs/Non VIEs | 2,849,648 | 1,681,658 | (4,531,306 | ) | - | |||||||||||
| Other current liabilities | 608,125 | 109,206 | - | 717,331 | ||||||||||||
| Non-current liabilities | 114,918 | 155,427 | - | 270,345 | ||||||||||||
| Total Liabilities | 3,572,691 | 1,946,291 | (4,531,306 | ) | 987,676 | |||||||||||
| Equity | (975,085 | ) | 1,052,809 | 21,207 | 98,931 | |||||||||||
| Net Revenues | 273,956 | 84,494 | - | 358,450 | ||||||||||||
| Net Loss | (71,079 | ) | (3,649 | ) | - | (74,728 | ) | |||||||||
Revenue recognition
We have adopted ASC 606 Revenue from Contracts with Customers using the modified retrospective transition method from January 1, 2018. Our revenue is generated from delivering educational programs and services and intellectualized operational services.
The core principle of ASC 606 is that an entity recognizes revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that principal, the Group applies the following steps:
Step 1: Identify the contract(s) with a customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to the performance obligations in the contract;
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
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We have two reportable segments: 1) K-12 Schools, 2) CP&CE. K-12 schools provide K-12 full curriculums educational services to pre-school children, primary and secondary students in China. CP&CE Programs offer tutoring services to pre-school children, primary and secondary students, provide vocational education services to undergraduate students in partner colleges, provide boarding and accommodation services to partner colleges or corporate customers, provide short term outward bound and in-house training services to corporate clients, and provide intellectualized operational services to corporate clients, colleges and universities. Our U.S. colleges under CP&CE Programs offers career-focused post-secondary educational services to undergraduate students in U.S.
For individual customers including pre-school children, primary and secondary students and undergraduate students, usually there are no written formal contracts between us and the students according to business practice. Records with student’s name, grades, tuition and fee collected are signed or confirmed by students. Academic requirements and each party’s rights are communicated with students through enrollment brochures or daily teaching and academic activities. For colleges and corporate clients, there are written formal contracts with these customers which recorded service fee, service period, each party’s rights and obligations and payment terms.
For individual customers including pre-school children, primary and secondary students and undergraduate students, our performance obligations are to provide acknowledged academic education from kindergarten till grade twelve to school-aged students within academic years, extracurricular tutoring services and post-secondary education with Associates and Bachelor’s programs within agreed-upon periods respectively. For college and corporate customers, our performance obligations are to provide customized vocational educational services to college students within academic years; or to provide boarding and accommodation services to customers for agreed-upon periods; or to provide short term outward bound and in-house training services to corporate clients within agreed-upon periods; or to provide intellectualized operational services and warranty of agreed period of time.
For individual customers including pre-school children, primary and secondary students and undergraduate students, transaction price of each customer is the tuition and fee received normally up front. For college and corporate customers, transaction price of each customer is the service fee defined in the contract, net of value added tax, and would be received either up front or within payment terms depending on each contract. Circumstances like other variable consideration, significant financing component, noncash consideration, consideration payable to a customer did not exist.
For individual, college and corporate customers, we identify one performance obligation. The transaction prices are allocated to the one performance obligation. For intellectualized operational services to corporate customers, we identify two distinct performance obligations, which is to provide intellectualized operational services and warranty, since customers obtain different benefits from the two services separately and these two services are usually quoted to customers with stand-alone prices, which are determined by cost of services plus certain amount of profit. The transaction price from the contract is allocated according to stand-alone selling prices of each obligation.
For individual customers including pre-school children, primary and secondary students and undergraduate students, we satisfy performance obligations to students over time, and recognizes revenue according to tutoring hours or school days consumed in each month of a semester. For vocational education services, outbound and in-house training services, and boarding and accommodation services to college and corporate customers, we satisfy performance obligations to customers over time, and recognizes revenue according to the number of months within the academic year, or training days consumed in each month, or boarding service days within each month. For intellectualized operational service to corporate clients, we satisfy performance obligations to customers over time, use the cost-based input method to depict its performance in transferring control of services promised to the clients. Such input measure is determined by the proportional relation of the contract costs incurred to date relative to the estimated total contract costs at completion. For performance obligation of warranty, the change of control would be transferred to the customer over time. Accordingly, we recognize revenue using a straight line method within the whole warranty period.
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Intangible assets, net
Intangible assets represent brand, software, trade name, student population, corporative agreement, customer relationship, license, trademark, workforce and non-compete agreement. The software was initially recorded at historic acquisition costs or cost directly incurred to develop the software during the application development stage that can provide future benefits, and amortized on a straight-line basis over estimated useful lives.
Other finite lived intangible assets are initially recorded at fair value when acquired in a business combination, in which the finite intangible assets are amortized on a straight-line basis except student populations and customer relationships, which are amortized using an accelerated method to reflect the expected departure rate over the remaining useful life of the asset. We review identifiable amortizable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value. The intangible assets have original estimated useful lives as follows:
| Software | 2 years to 10 years | |
| Student populations | 1.8 years to 15 years | |
| Cooperative agreements | 1.3 years to 10 years | |
| License | 10 years | |
| Trademark | 3 years | |
| Workforce | 2 years | |
| Trade names | Indefinite | |
| Brand | Indefinite | |
| Accreditation | 10 years |
We have determined that trade names have the continued ability to generate cash flows indefinitely. There are no legal, regulatory, contractual, economic or other factors limiting the useful life of the respective trade names. Consequently, the carrying amounts of trade names are not amortized but are tested for impairment annually in the third quarter or more frequently if events or circumstances indicate that the assets may be impaired. Such impairment test consists of a comparison of the fair values of the trade names with their carrying amounts and an impairment loss is recognized if and when the carrying amounts of the trade names exceed their fair values.
We performed impairment testing of indefinite-lived intangible assets in accordance with ASC 350, which requires an entity to evaluate events and circumstances that may affect the significant inputs used to determine the fair value of the indefinite-lived intangible assets when performing qualitative assessment. When these events occur, the Group estimates the fair value of these trade names with the Relief from Royalty method (“RFR”), which is one of the income approaches. RFR method is generally applied for assets that frequently licensed in exchange for royalty payments. As the owner of the asset is relieved from paying such royalties to a third party for using the asset, economic benefit is reflected by notional royalty savings. An impairment loss is recognized for any excess in the carrying value over the fair value of trade names.
Goodwill
Goodwill represents the future economic benefits arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized. Goodwill acquired in a business combination is tested for impairment at least annually or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The Group performed impairment analysis on goodwill as of September 30 every year either beginning with a qualitative assessment, or starting with the quantitative assessment instead. The quantitative goodwill impairment test compares the fair values of each reporting unit to its carrying amount, including goodwill. A reporting unit constitutes a business for which discrete profit and loss financial information is available. The fair value of each reporting unit is established using a combination of expected present value of future cash flows. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
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Determining when to test for impairment, our reporting units, the fair value of a reporting unit and the fair value of assets and liabilities within a reporting unit, requires judgment and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparable. We base fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.
Significant changes in the economic characteristics of components or reorganization of an entity’s reporting structure can sometimes result in a re-assessment of the affected operating segment and its components to determine whether reporting units need to be redefined where the components are no longer economically similar.
Future changes in the judgments and estimates underlying the company’s analysis of goodwill for possible impairment, including expected future cash flows and discount rate, could result in a significantly different estimate of the fair value of the reporting units and could result in additional impairment of goodwill.
Impairment of long-lived assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we will recognize an impairment loss based on the fair value of the assets, using the expected future discounted cash flows.
Income taxes
Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, net of operating loss carry forwards and credits, by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not some portion or all of the deferred tax assets will not be realized. Income taxes are provided for in accordance with the laws of the relevant taxing authorities.
We do not record PRC withholding tax expense for foreign earnings which we plan to reinvest to expand our PRC operations. We considered business plans, planning opportunities and expected future outcomes in assessing the needs for future expansion and support of our operations. If our business plans change or our future outcomes differ from our expectations, PRC withholding tax expense and our effective tax rate could increase or decrease in that period.
We adopted the guidance on accounting for uncertainty in income taxes, which prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on the de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment is required in evaluating our uncertain tax positions and determining its provision for income taxes. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite its belief that its tax return positions are in accordance with applicable tax laws. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation, or the change of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate.
Confidential Draft
Lease
We adopted Accounting Standards Update (“ASU”) 2016-02 Leases (“ASC 842”) as of January 1, 2019, using the non-comparative transition option pursuant to ASU 2018-11. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among others things (i) allowed us to carry forward the historical lease classification; (ii) did not require us to reassess whether any expired or existing contracts are or contain leases; (iii) did not require us to reassess initial direct costs for any existing leases.
We identify lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. For all operating leases except for short-term leases, we recognize operating right-of-use assets and operating lease liabilities. Leases with an initial term of 12 months or less are short-term lease and not recognized as right-of-use assets and lease liabilities on the consolidated balance sheet. The Group recognizes lease expense for short-term leases on a straight-line basis over the lease term. For finance lease, we recognize finance lease right-of-use assets. The operating lease liabilities are recognized based on the present value of the lease payments not yet paid, discounted using our incremental borrowing rate over a similar term of the lease payments at lease commencement. Some of the Group’s lease agreements contain renewal options; however, the Group do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that the Group is reasonably certain of renewing the lease at inception or when a triggering event occurs. The right-of-use assets consist of the amount of the measurement of the lease liabilities and any prepaid lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating lease
When none of the criteria of finance lease are met, a lessee shall classify the lease as an operating lease.
Finance lease
We classify a lease as a finance lease when the lease meets any of the following criteria at lease commencement:
| a. | The lease transfers ownership of the underlying asset to the lessee by the end of the lease term; |
| b. | The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise; |
| c. | The lease term is for the major part of the remaining economic life of the underlying asset; |
| d. | The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with ASC 842 paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset; |
| e. | The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. |
Share-based compensation
We grant restricted shares to our employees and directors. Cost of employee services received is measured at the grant-date using the fair value of the equity instrument issued net of an estimated forfeiture rate, and therefore only recognizes compensation costs for those shares expected to vest over the service period of the award. Share-based compensation expense is recorded on a straight-line basis over the requisite service period, generally ranging from one year to four years.
Forfeitures are estimated at the time of grant and revised in the subsequent periods if actual forfeitures differ from those estimates.
Confidential Draft
Foreign currency translation and transactions
We use RMB as our reporting currency. The functional currency of our company and the subsidiaries incorporated in the Cayman Islands, United States, Hong Kong and the British Virgin Islands is US$, the functional currency of our VIE incorporated in Taiwan is TWD, while the functional currency of the other entities of our company is RMB. An entity’s functional currency is the currency of the primary economic environment in which it operates, normally that is the currency of the environment in which it primarily generates and expends cash. We considered various indicators, such as cash flows, sales price, market expenses, financing and inter-company transactions and arrangements in determining an entity’s functional currency.
In the consolidated financial statements, the financial information of our company and its subsidiaries, which use US$ and TWD as their functional currencies, has been translated into RMB. Assets and liabilities are translated from each subsidiary’s functional currency at the exchange rates on the balance sheet date, equity amounts are translated at historical exchange rates, and revenues, expenses, gains, and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income or loss in the statement of shareholders’ equity and comprehensive income.
Foreign currency transactions denominated in currencies other than functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are re-measured at the applicable rates of exchange in effect at that date. Foreign exchange gains and losses resulting from the settlement of such transactions and from re-measurement at year-end are recognized in foreign currency exchange gain/loss, net on the consolidated statement of operations.
Results of operations
The following table sets forth a summary of our consolidated statements of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. We believe that period-to-period comparisons of results of operations should not be relied upon as indicative of future performance.
Summary of Consolidated Statements of Operations
| For
the nine months ended September 30, | For
the three months ended September 30, | |||||||||||||||||||||||
| 2019 | 2020 | 2020 | 2019 | 2020 | 2020 | |||||||||||||||||||
| RMB | RMB | US$ | RMB | RMB | US$ | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Consolidated Statement of Operations Data: | ||||||||||||||||||||||||
| NET REVENUES: | ||||||||||||||||||||||||
| - Educational programs and services | 409,367 | 358,098 | 52,742 | 126,729 | 112,439 | 16,560 | ||||||||||||||||||
| - Intellectualized operational services | 1,193 | 352 | 52 | (173 | ) | 269 | 40 | |||||||||||||||||
| Total net revenues | 410,560 | 358,450 | 52,794 | 126,556 | 112,708 | 16,600 | ||||||||||||||||||
| COST OF REVENUES: | ||||||||||||||||||||||||
| - Educational programs and services (1) | (265,454 | ) | (277,683 | ) | (40,898 | ) | (92,934 | ) | (105,359 | ) | (15,518 | ) | ||||||||||||
| - Intellectualized operational services | (5,818 | ) | (2,340 | ) | (345 | ) | (1,109 | ) | (882 | ) | (130 | ) | ||||||||||||
| Total cost of revenues | (271,272 | ) | (280,023 | ) | (41,243 | ) | (94,043 | ) | (106,241 | ) | (15,648 | ) | ||||||||||||
| GROSS PROFIT | 139,288 | 78,427 | 11,551 | 32,513 | 6,467 | 952 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling and marketing (1) | (40,778 | ) | (37,861 | ) | (5,576 | ) | (15,607 | ) | (13,655 | ) | (2,011 | ) | ||||||||||||
| General and administrative (1) | (140,510 | ) | (127,230 | ) | (18,739 | ) | (48,116 | ) | (42,987 | ) | (6,331 | ) | ||||||||||||
| Research and development (1) | (1,555 | ) | (4,456 | ) | (656 | ) | (1,087 | ) | (1,758 | ) | (259 | ) | ||||||||||||
| Impairment loss | (38,754 | ) | (36,699 | ) | (5,405 | ) | (38,754 | ) | (36,699 | ) | (5,405 | ) | ||||||||||||
| Total operating expenses | (221,597 | ) | (206,246 | ) | (30,376 | ) | (103,564 | ) | (95,099 | ) | (14,006 | ) | ||||||||||||
| OPERATING LOSS | (82,309 | ) | (127,819 | ) | (18,825 | ) | (71,051 | ) | (88,632 | ) | (13,054 | ) | ||||||||||||
| OTHER INCOME | 5,283 | 55,490 | 8,174 | 1,878 | 4,542 | 668 | ||||||||||||||||||
| Loss before income tax and non-controlling interest | (77,026 | ) | (72,329 | ) | (10,651 | ) | (69,173 | ) | (84,090 | ) | (12,386 | ) | ||||||||||||
| Income tax expense | (11,032 | ) | (2,399 | ) | (353 | ) | (3,634 | ) | (776 | ) | (114 | ) | ||||||||||||
| NET LOSS | (88,058 | ) | (74,728 | ) | (11,004 | ) | (72,807 | ) | (84,866 | ) | (12,500 | ) | ||||||||||||
| Less: Net (loss)/income contributable to non-controlling interest | (269 | ) | (1,040 | ) | (153 | ) | 4 | (332 | ) | (49 | ) | |||||||||||||
| NET LOSS ATTRIBUTABLE TO AMBOW EDUCATION HOLDING LTD. | (87,789 | ) | (73,688 | ) | (10,851 | ) | (72,811 | ) | (84,534 | ) | (12,451 | ) | ||||||||||||
| NET LOSS ATTRIBUTABLE TO ORDINARY SHAREHOLDERS | (87,789 | ) | (73,688 | ) | (10,851 | ) | (72,811 | ) | (84,534 | ) | (12,451 | ) | ||||||||||||
| (1) | Includes depreciation and amortization of RMB 17.7 million and RMB 25.5 million (US$ 3.8 million) for the nine months ended September 30, 2019 and 2020, respectively; RMB 5.9 million and RMB 10.0 million (US$ 1.5 million) for the three months ended September 30, 2019 and 2020, respectively. |
Confidential Draft
Nine months ended September 30, 2020 compared with nine months ended September 30, 2019
Net revenues . Our net revenues decreased by 12.7% to RMB 358.5 million (US$ 52.8 million) in the first nine months ended September 30, 2020 from RMB 410.6 million in the same period of 2019. The decrease was mainly caused by fewer boarding and other ancillary services provided for K-12 schools as result of temporary COVID-19 related campus closures in the first half of 2020 and fewer services provided at the Company’s tutoring centers, training offices and college campuses. This was partially offset by the revenue from NewSchool, which was acquired in March 2020.
Cost of revenues . Our cost of revenues increased by 3.2% to RMB 280.0 million (US$ 41.2 million) in the first nine months of 2020 from RMB 271.3 million in the same period of 2019. The increase mainly came from cost of NewSchool which was acquired in the period, and netted off with less cost caused by the temporary suspension of operations at training offices and tutoring centers in the period as a part of the national pandemic containment efforts, as well as stringent expense controls to improve operating efficiency.
Gross profit . Gross profit as a percentage of our net revenues decreased to 21.9% in the first nine months of 2020 from 33.9% in the same period of 2019. The decrease was mainly due to the decrease in net revenues from CP&CE Programs.
Operating expenses . Our total operating expenses decreased by 6.9% to RMB 206.2 million (US$ 30.4 million) in the nine months ended September 30, 2020 from RMB 221.6 million in the same period of 2019. This decrease was mainly due to lower expenditures due to the temporary suspension of operations at training offices and tutoring centers in the period as a part of the national pandemic containment efforts, as well as stringent expense controls to improve operating efficiency, and partially offset by operating expenses related to NewSchool.
| · | Selling and marketing expenses . Our selling and marketing expenses decreased by 7.1% to RMB 37.9 million (US$ 5.6 million) in the first nine months of 2020 from RMB 40.8 million in the same period of 2019. The decreases was mainly due to stringent expense controls to improve operating efficiency. |
| · | General and administrative expenses . Our general and administrative expenses decreased by 9.5% to RMB 127.2 million (US$ 18.7 million) in the first nine months of 2020 from RMB 140.5 million in the same period of 2019. The decrease was mainly from lower expenditures due to the temporary suspension of operations at training offices and tutoring centers in the period as a part of the national pandemic containment efforts, as well as stringent expense controls to improve operating efficiency. |
| · | Research and development expenses . Our research and development expenses increased by 181.3% to RMB 4.5 million (US$ 0.7 million) in the first nine months of 2020 from RMB 1.6 million in the first same period of 2019. It was mainly caused by more spending on headcounts. |
Confidential Draft
Other income, net. We recorded net other income of RMB 55.5 million (US$ 8.2 million) in the first nine months of 2020, compared to net other income of RMB 5.3 million in the same period of 2019. The increase was mainly due to RMB 40.3 million gain on the bargain purchase from acquisition of NewSchool in the first nine months of 2020.
Income tax expense . Our income tax expense decreased to RMB 2.4 million (US$ 0.4 million) in the first nine months of 2020 from RMB 11.0 million in the same period of 2019.
Net loss . According to above mentioned factors, our net loss decreased to RMB 74.7 million (US$ 11.0 million) in the first nine months of 2020 from loss of RMB 88.1 million in the same period of 2019.
Three months ended September 30, 2020 compared with three months ended September 30, 2019
Net revenues . Our net revenues decreased by 11.0% to RMB 112.7 million (US$16.6 million) in the three months ended September 30, 2020 from RMB 126.6 million in the same period of 2019. The decrease was mainly caused by fewer services provided at the Company’s tutoring centers, training offices and college campuses. This was partially offset by the increase in the revenue from K-12 schools driven by higher enrollment and the revenue from NewSchool which was acquired in March 2020.
Cost of revenues . Our cost of revenues increased by 13.0% to RMB 106.2 million (US$15.6 million) in the three months ended September 30, 2020 from RMB 94.0 million in the same period of 2019. The increase was mainly from the cost from NewSchool.
Gross profit . Gross profit as a percentage of our net revenues decreased to 5.7% in the three months ended September 30, 2020 from 25.7% in the same period of 2019. The decrease was mainly from the decrease of net revenues from CP&CE Programs.
Operating expenses . Our total operating expenses decreased by 8.2% to RMB 95.1 million (US$14.0 million) in the three months ended September 30, 2020 from RMB 103.6 million in the same period of 2019. This decrease was mainly due to stringent expense controls to improve operating efficiency, and partially offset by operating expenses related to NewSchool.
| · | Selling and marketing expenses . Our selling and marketing expenses decreased by 12.2% to RMB 13.7 million (US$2.0 million) in the three months ended September 30, 2020 from RMB 15.6 million in the same period of 2019. The decreases were mainly due to stringent expense controls to improve operating efficiency. |
| · | General and administrative expenses . Our general and administrative expenses decreased by 10.6% to RMB 43.0 million (US$6.3 million) in the three months ended September 30, 2020 from RMB 48.1 million in the same period of 2019. The decrease was mainly due to stringent expense controls to improve operating efficiency. |
| · | Research and development expenses . Our research and development expenses increased by 63.6% to RMB 1.8 million (US$0.3 million) in the three months ended September 30, 2020 from RMB 1.1 million in the same period of 2019. It was mainly caused by more spending on headcounts. |
Confidential Draft
Other income, net. We recorded net other income of RMB 4.5 million (US$0.7 million) in the three months ended September 30, 2020, compared to net other income of RMB 1.9 million in the same period of 2019. The increase was mainly from interest income.
Income tax expense. Our income tax expense decreased to RMB 0.8 million (US$0.1 million) in the three months ended September 30, 2020 from RMB 3.6 million expense in the same period of 2019.
Net loss. According to above mentioned factors, our net loss increased to RMB 84.9 million (US$12.5 million) in the three months ended September 30, 2020 from RMB 72.8 million in the same period of 2019.
Discussion of segment operations
The Group offers a wide range of educational and career enhancement services and products focusing on improving educational opportunities for primary and advanced degree school students and employment opportunities for university graduates.
The Group’s chief operating decision maker (“CODM”) has been identified as the CEO who reviews the financial information of separate operating segments when making decisions about allocating resources and assessing performance of the Group. The management classified the reportable segments into two segments: 1) K-12 schools, 2) CP&CE Programs.
The following table lists our net revenues, cost of revenues, gross profit and gross margin by our reportable segments for the periods indicated:
| For the nine months ended September 30, | For the three months ended September 30, | |||||||||||||||||||||||
| 2019 | 2020 | 2020 | 2019 | 2020 | 2020 | |||||||||||||||||||
| RMB | RMB | US$ | RMB | RMB | US$ | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Consolidated Statement of Operations Data: | ||||||||||||||||||||||||
| Net revenues: | ||||||||||||||||||||||||
| K-12 Schools | 203,214 | 185,766 | 27,360 | 52,256 | 58,966 | 8,685 | ||||||||||||||||||
| CP&CE Programs | 207,346 | 172,684 | 25,434 | 74,300 | 53,742 | 7,915 | ||||||||||||||||||
| Total net revenues of reportable segments and the company | 410,560 | 358,450 | 52,794 | 126,556 | 112,708 | 16,600 | ||||||||||||||||||
| Cost of revenues: | ||||||||||||||||||||||||
| K-12 Schools | (128,887 | ) | (119,972 | ) | (17,670 | ) | (38,794 | ) | (45,430 | ) | (6,692 | ) | ||||||||||||
| CP&CE Programs | (142,385 | ) | (160,051 | ) | (23,573 | ) | (55,249 | ) | (60,811 | ) | (8,956 | ) | ||||||||||||
| Total costs of revenues of reportable segments and the company | (271,272 | ) | (280,023 | ) | (41,243 | ) | (94,043 | ) | (106,241 | ) | (15,648 | ) | ||||||||||||
| Gross profit (loss) | ||||||||||||||||||||||||
| K-12 Schools | 74,327 | 65,794 | 9,690 | 13,462 | 13,536 | 1,993 | ||||||||||||||||||
| CP&CE Programs | 64,961 | 12,633 | 1,861 | 19,051 | (7,069 | ) | (1,041 | ) | ||||||||||||||||
| Total gross profit of reportable segments and the company | 139,288 | 78,427 | 11,551 | 32,513 | 6,467 | 952 | ||||||||||||||||||
| Gross margin | ||||||||||||||||||||||||
| K-12 Schools | 36.6 | % | 35.4 | % | 35.4 | % | 25.8 | % | 22.9 | % | 22.9 | % | ||||||||||||
| CP&CE Programs | 31.3 | % | 7.3 | % | 7.3 | % | 25.6 | % | (13.2 | )% | (13.2 | )% | ||||||||||||
| Total gross margin of reportable segments and the company | 33.9 | % | 21.9 | % | 21.9 | % | 25.7 | % | 5.7 | % | 5.7 | % | ||||||||||||
Confidential Draft
Nine months ended September 30, 2020 compared with nine months ended September 30, 2019
K-12 Schools
Net revenues from our K-12 Schools segment decreased to RMB 185.8 million (US$ 27.4 million) in the first nine months of 2020 from RMB 203.2 million in the same period of 2019. The decrease was primarily fewer boarding and other ancillary services provided for K-12 schools as result of temporary COVID-19 related campus closures in the first half of 2020.
Cost of revenues from our K-12 Schools segment decreased to RMB 120.0 million (US$ 17.7 million) in the first nine months of 2020 from RMB 128.9 million in the same period of 2019. The decrease was primarily due to lower teaching and supporting cost as result of temporary COVID-19 related campus closures in the first half of 2020.
Gross profit as a percentage of our net revenues from our K-12 Schools segment was 35.4% in the first nine months of 2020 and 36.6% in the same period of 2019. The change in the gross profit margin was insignificant.
CP&CE Programs
Net revenues from our CP&CE Programs segment decreased to RMB 172.7 million (US$ 25.4 million) in the first nine months of 2020 from RMB 207.3 million in the same period of 2019. The decrease was mainly caused by fewer services provided at the Company’s tutoring centers, training offices and college campuses. This was partially offset by the revenue from NewSchool which was acquired in March 2020.
Cost of revenues in our CP&CE Programs segment increased to RMB 160.1 million (US$ 23.6 million) in the first nine months of 2020 from RMB 142.4 million in the same period of 2019, which was mainly from NewSchool, and netted off by certain decrease of cost due to the temporary suspension of operations at training offices and tutoring centers in the period as a part of the national pandemic containment efforts, as well as stringent expense controls to improve operating efficiency.
Gross profit as a percentage of our net revenues from our CP&CE Programs segment was 7.3% in the first nine months of 2020 and 31.3% in the same period of 2019. The decrease in gross margin was mainly due to the decrease of net revenue.
Three months ended September 30, 2020 compared with three months ended September 30, 2019
K-12 Schools
Net revenues from our K-12 Schools segment increased to RMB 59.0 million (US$ 8.7 million) in the three months ended September 30, 2020 from RMB 52.3 million in the same period of 2019. The increase was primarily driven by increased student enrollment in K-12 schools for the 2020-2021 academic year.
Cost of revenues from our K-12 Schools segment increased to RMB 45.4 million (US$ 6.7 million) in the three months ended September 30, 2020 from RMB 38.8 million in the same period 2019. The increase was primarily from higher compensation caused by the extended spring semester than the last year because of the pandemic.
Gross profit as a percentage of our net revenues from our K-12 Schools segment was 22.9% in the three months ended September 30, 2020 and 25.8% in the same period of 2019. The change in the gross profit margin was from the increase of cost of revenues.
CP&CE Programs
Net revenues from our CP&CE Programs segment decreased to RMB 53.7 million (US$ 7.9 million) in the three months ended September 30, 2020 from RMB 74.3 million in the same period of 2019. The decrease was mainly caused by fewer services provided at the Company’s tutoring centers, training offices and college campuses. This was partially offset by the revenue from NewSchool which was acquired in March 2020.
Confidential Draft
Cost of revenues in our CP&CE Programs segment increased to RMB 60.8 million (US$ 9.0 million) in the three months ended September 30, 2020 from RMB 55.2 million in the same period of 2019, which mainly caused by the cost of revenue from NewSchool.
Gross profit as a percentage of our net revenues from our CP&CE Programs segment was (13.2)% in the three months ended September 30, 2020 and 25.6% in the same period of 2019. The decrease in gross margin was mainly due to the decrease of net revenues.
| B. | Liquidity and Capital Resources |
As of September 30, 2020, our consolidated current liabilities exceeded our consolidated current assets by RMB 217.1 million. Our consolidated net assets were amounting to RMB 98.9 million as of September 30, 2020.
Our principal sources of liquidity have been cash provided by operating activities. We have net cash provided by operating activities in RMB 42.2 million and RMB 37.6 million for the nine months ended September 30, 2020 and 2019, respectively. The cash inflow in the nine months ended September 30, 2020 was mainly attributable to the tuition and fees collected at K-12 schools for the fall semester of the 2020-2021 academic year, and deferred revenue collected from our colleges for the fall semester of 2020. As of September 30, 2020, we had RMB 86.1 million in unrestricted cash and cash equivalents. Our cash and cash equivalents consist of cash on hand and liquid investments that are unrestricted as to withdrawal or use, have maturities of three months or less and are placed with banks and other financial institutions. As of September 30, 2020, we had RMB 60.0 million in unrestricted cash and cash equivalents from VIEs.
Our operating results for future periods are subject to numerous uncertainties and it is uncertain if we will be able to achieve a net income position for the foreseeable future. If management is not able to increase revenue and/or manage cost and operating expenses in line with revenue forecasts, we may not be able to achieve profitability.
From the beginning of 2020, in response to the global spread of a novel coronavirus pandemic, also known as COVID-19, businesses and schools in China have been suspended since the end of January 2020 as part of quarantine measures to contain the pandemic. Our K-12 schools, tutoring centers and training offices in China have been closed since then. With the excellent control of the pandemic in China, our K-12 schools have gradually returned to operation from May 2020, and all of our tutoring centers and training offices went into full business operation from August 2020. Yet the pandemic in U.S. is still critical. Bay State College and NewSchool in U.S. has moved all courses online, including certain classes in a hybrid model (online and on campus together), in response to social distancing needs and precautionary measures. The pandemic may adversely affect our liquidity resources, including but not limited to delayed collection of tuition and fees.
We had approximately RMB 182.6 million and RMB 30.0 million short term investments, available for sale and short term investments, held to maturity as of September 30, 2020, which was held as short-term investments to be liquid on the expiration date before the end of 2021. Besides, according to our historical experience and knowledge, the management believed that certain current liabilities could be delayed for cash payment through arrangements.
Historically, we have addressed liquidity requirements through a series of cost reduction initiatives, debt borrowings, equity financing and the sale of subsidiaries and other non-performing assets. In October 2020, we have completed a registered direct offering. The net proceeds from the offering is around US$ 5.3 million. Bay State College has obtained a bank loan in US$ 1.5 million under the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act on May 1, 2020. We have remaining line of credit in RMB 20.0 million from Bank of Huaxia as of September 30, 2020. In 2020, we have taken a series of measures to respond to the negative impact from the pandemic, including offering online programs and services, cutting down compensation cost, reducing other costs and expenses for savings, and negotiating for relief or postpone of rentals for certain period of time etc. Meanwhile we keep expanding existing business, exploring innovation in service portfolio, investing in new technology to build up education service platforms, improving operation efficiency and profitability, and enhancing our internal control procedures. From the rest of 2021 and onwards, we are focusing on the development of core cash-generating business and will implement more stringent cost and expense controls than previous years, including but not limited to cut down numbers of employees, require strict pre-purchase application and approval, suspend certain business consuming more cash than earned, implement comprehensive budget control and operation assessment, implement enhanced vendor review and selection processes as well as enhance internal controls on payable management, create synergy of our resources, and put forward efforts to pursue historical receivables. There are no liquidity concerns noted in the next 12 months according to our cash flow projection.
Confidential Draft
We believe that available cash and cash equivalents, short term investments, available for sale and short term investments, held to maturity, cash provided by operating activities, together with cash available from the activities mentioned above, should enable us to meet presently anticipated cash needs for at least the next 12 months after the date that the financial statements are issued and we have prepared the consolidated financial statements on a going concern basis. However, we continue to have ongoing obligations and we expect that we will require additional capital in order to execute its longer-term business plan. If we encounter unforeseen circumstances that place constraints on its capital resources, management will be required to take various measures to conserve liquidity, which could include, but not necessarily be limited to, initiating additional public offerings, curtailing our business development activities, suspending the pursuit of its business plan, obtaining credit facilities, controlling overhead expenses and seeking to further dispose of non-core assets. Management cannot provide any assurance that we will raise additional capital if needed.
Condensed summary of our cash flows
| For the nine months ended September 30, | ||||||||||||
| 2019 | 2020 | 2020 | ||||||||||
| RMB | RMB | US$ | ||||||||||
| (in thousands) | ||||||||||||
| Net cash provided by operating activities | 37,610 | 42,209 | 6,217 | |||||||||
| Net cash used in investing activities | (106,614 | ) | (119,381 | ) | (17,583 | ) | ||||||
| Net cash (used in)/provided by financing activities | (41,179 | ) | 20,409 | 3,006 | ||||||||
| Effects of exchange rate changes on cash, cash equivalents and restricted cash | 577 | (1,144 | ) | (168 | ) | |||||||
| Net change in cash, cash equivalents and restricted cash | (109,606 | ) | (57,907 | ) | (8,528 | ) | ||||||
| Cash, cash equivalents and restricted cash at beginning of periods | 241,508 | 157,600 | 23,211 | |||||||||
| Cash, cash equivalents and restricted cash at end of periods | 131,902 | 99,693 | 14,683 | |||||||||
Operating activities
Net cash provided by operating activities amounted to RMB 104.2 million (US$ 15.3 million) in the three months ended September 30, 2020, as compared to RMB 44.1 million in the same period of 2019. Net cash provided by operating activities of RMB 42.2 million (US$ 6.2 million) in the nine months ended September 30, 2020, as compared to RMB 37.6 million in the same period of 2019.
Investing activities
Net cash used in investing activities amounted to RMB 119.4 million (US$ 17.6 million) in the nine months ended September 30, 2020 as compared to RMB 106.6 million net cash outflow in the same period of 2019.
Net cash used in investing activities in the nine months ended September 30, 2020 was mainly attributable to purchase of available-for-sale investments of RMB 279.0 million (US$ 41.1 million), purchase of held-to-maturity investments of RMB 75.0 million (US$ 11.0 million), loan to third party of RMB 22.1 million (US$ 3.3 million), purchase of other non-current assets of RMB 3.4 million (US$ 0.5 million), purchase of property and equipment of RMB 4.0 million (US$ 0.6 million), and prepayment for leasehold improvement of RMB 2.4 million (US$ 0.4 million), partially offset by proceed from available-for-sale investments of RMB 153.0 million (US$ 22.5 million), proceed from held-to-maturity investments of RMB 76.0 million (US$ 11.2 million), and purchase of subsidiaries, net of cash acquired, of RMB 37.6 million (US$ 5.5 million).
Confidential Draft
Net cash used in investing activities in the nine months ended September 30, 2019 was mainly attributable to purchase of available-for-sale investments of RMB 181.0 million, purchase of held-to-maturity investments of RMB 356.0 million, purchase of other non-current assets of RMB 51.8 million, purchase of property and equipment of RMB 4.2 million, and prepayment for leasehold improvement of RMB 3.4 million, payment as result of disposal of subsidiaries of RMB 25.5 million, partially offset by proceed from available-for-sale investments of RMB 118.0 million, proceed from held-to-maturity investments of RMB 355.0 million, and collection of loan receivables of RMB 42.7 million.
Financing activities
Our financing activities consist primarily of borrowings. Net cash provided by financing activities amounted to RMB 20.4 million (US$ 3.0 million) in the nine months ended September 30, 2020, as compared to net cash used in financing activities of RMB 41.2 million in the same period of 2019.
Net cash provided by financing activities in the nine months ended September 30, 2020 was attributable to short-term borrowings amounted to RMB 20.4 million (US$ 3.0 million).
Net cash used in financing activities in the nine months ended September 30, 2019 was attributable to repayment of borrowing from third party amounted to RMB 41.2 million.
Short-term borrowings
During the first nine months of 2020, we and our affiliated entities entered into various loan agreements in the aggregate amount of RMB 20.0 million (US$ 2.9 million) with terms less than one year. As at September 30, 2020, we haven’t repaid the borrowing of RMB 20.0 million (US$ 2.9 million).
Short-term borrowings consisted of the following:
| As of December 31, | As of September 30, | |||||||||||
| Maturities | 2019 | 2020 | ||||||||||
| RMB | RMB | |||||||||||
| (In thousands) | ||||||||||||
| Short-term borrowings | September 2021 | - | 20,013 | |||||||||
The weighted average interest rate of the borrowings outstanding was nil and 1.6% per annum as of December 31, 2019 and September 30, 2020. The fair values of the borrowings approximate their carrying amounts. The weighted average borrowings for the year ended December 31, 2019 and the nine months ended September 30, 2020 was 10.6 million and RMB 6.7 million, respectively.
The borrowings incurred interest expenses were nil and RMB 0.1 million for the year ended December 31, 2019 and the nine months ended September 30, 2020.
We have mortgaged our officer properties at Beijing to obtain certain short-term borrowing in the nine months ended September 30, 2020. Refer to Note 9 Short-Term Borrowings for further information.
Capital expenditures
Our capital expenditures were RMB 7.8 million and RMB 6.4 million (US$ 0.9 million) in the nine months ended September 30, 2019 and 2020, respectively. These capital expenditures were incurred primarily for investments in property, facilities, equipment, leasehold improvement and technology.
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Holding company structure
We conduct our operations primarily through our wholly-owned subsidiary in China, Ambow Shengying, Ambow Chuangying, Bohele, Ambow Education Management (Hong Kong) Limited (“Ambow Education Management”) and their affiliated entities, which we collectively refer to as our VIEs and their respective subsidiaries.
As a result, our ability to pay dividends and to finance any debt we may incur depends primarily upon dividends paid by Ambow Shengying, Ambow Chuangying, BoheLe, Ambow Education Management and fees paid by Ambow Sihua, Ambow Shanghai, Ambow Shida, Beijing Le’An Operational Management Co., Ltd. (“Beijing Le’An”), Ambow Rongye, Ambow Zhixin and IValley and their subsidiaries to Ambow Shengying, Ambow Chuangying, Bohele and Ambow Education Management for sales of services and products. Fees paid by VIEs and subsidiaries are mainly for sales of services. The aggregate amount that VIEs and subsidiaries had paid to Ambow Shengying, Ambow Chuangying, Bohele and Ambow Education Management were insignificant for the reporting period, and the aggregate amount of fees payable from the VIE and subsidiaries to Ambow Shengying, Ambow Chuangying, Bohele and Ambow Education Management were insignificant for the reporting period.
If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries incorporated as companies may only distribute dividends after they have made allowances to fund certain statutory reserves. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation of the companies.
Ambow Sihua, Ambow Shanghai, Ambow Shida, Ambow Rongye and Ambow Zhixin own and/or operate private schools, tutoring and career enhancement centers in China. At the end of each fiscal year, every private school in China is required to allocate a certain amount to its development fund for the construction or maintenance of the school or procurement or upgrade of educational equipment. In the case of a private school that requires reasonable returns, this amount shall be no less than 25% of the annual net income of the school, while in the case of four of our private schools that do not require reasonable returns, this amount shall be equivalent to no less than 25% of the annual increase in the net assets of the school (as determined under the generally accepted accounting principles of the PRC), if any. Pursuant to an amendment to The Law for Promoting Private Education on November 7, 2016, which will go into effect on September 1, 2017, sponsors of for-profit private schools are entitled to retain the profits from their schools and the operating surplus may be allocated to the sponsors pursuant to the PRC company law and other relevant laws and regulations.
Inflation
Inflation in China has not materially impacted our results of operations in recent years. Although we were not materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation in China.
| C. | Research and Development, Patents and Licenses |
We have an in-house research and development team with 53 full-time software and educational professionals as of September 30, 2020 to develop and update our educational content based on the latest official local government curriculum of each of our specific subjects. We integrate the best content from our acquired schools, tutoring centers and career enhancement centers into our qualified content database and then introduce it to our nationwide student user base. In the three months ended September 30, 2019 and 2020, and nine months ended September 30, 2019 and 2020, we spent RMB 1.1 million, RMB 1.8 million (US$ 0.3 million), RMB 1.6 million and RMB 4.5 million (US$ 0.7 million), respectively, on research and development expenses.
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| D. | Trend Information |
For a discussion of significant recent trends in our financial condition and results of operations, please see “A Operating and Financial Review and Prospects—Operating Results” and “B Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
| E. | Off-balance sheet arrangements |
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
There were no new off-balance sheet arrangements as of December 31, 2019 and September 30, 2020.
| F. | Contractual Obligations |
The following table presents a summary of our contractual obligations and payments, by period, as of September 30, 2020.
| Payments Due by Period | ||||||||||||||||||||
| Total | Less than 1 Year | 2-3 Years | 4-5 Years | More than 5 Years | ||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Operating lease obligations | 351.5 | 47.3 | 94.4 | 85.5 | 124.3 | |||||||||||||||
| Short-term borrowings obligations | 20.0 | 20.0 | - | - | - | |||||||||||||||