UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
For the fiscal year ended
OR
For the transition period from___to____.
OR
Date of event requiring this shell company report
Commission file number:
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Telephone: +
Email:
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
| NYSE: |
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NYSE: |
* Effective on August 16, 2017, the ratio of ADSs to Class A common shares was changed from one ADS representing two Class A common shares to three ADSs representing one Class A common share.
** Not for trading, but only in connection with the listing on The New York Stock Exchange of American depositary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of February 29, 2024,
and
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐ Yes ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404 (b) of the Sarbanes - Oxley Act (15 U.S.C. 7262 (b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒ | ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board | ☐ Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
☐ Yes ☐ No
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
TABLE OF CONTENTS
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Material Modifications to the Rights of Security Holders and Use of Proceeds | 139 | |
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Purchases of Equity Securities by the Issuer and Affiliated Purchasers | 142 | |
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 142 | |
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INTRODUCTION
In this annual report, except where the context otherwise requires, unless otherwise indicated and for purposes of this annual report only:
| ● | “ADSs” refers to our American depositary shares, each three of which represent one Class A common share; |
| ● | “AI” refers to artificial intelligence; |
| ● | “China” or “PRC” refers to the People’s Republic of China, and only in the context of describing PRC laws, regulations and other legal or tax matters in this annual report, excludes Taiwan, Hong Kong and Macau; |
| ● | “Hong Kong” refers to the Hong Kong Special Administrative Region of the PRC; |
| ● | “K-12” refers to the year before the first grade through the last year of high school; |
| ● | “K-9 Academic AST Services” refers to after-school tutoring services on academic subjects offered to students from kindergarten through grade nine; |
| ● | “RMB” or “Renminbi” refers to the lawful currency of China; |
| ● | “shares” or “common shares” refers to our Class A and Class B common shares, par value $0.001 per share; |
| ● | “$,” “US$” or “U.S. dollars” refers to the lawful currency of the United States; |
| ● | “U.S. GAAP” refers to generally accepted accounting principles in the United States; |
| ● | “VIEs” refers to variable interest entities including, among others, Beijing Xueersi Network Technology Co., Ltd., or Xueersi Network, Beijing Xueersi Education Technology Co., Ltd., or Xueersi Education, and Xinxin Xiangrong Education Technology (Beijing) Co., Ltd. (previously known as Beijing Dididaojia Education Technology Co., Ltd.), or Xinxin Xiangrong, all of which are domestic companies incorporated in the PRC in which we do not have equity interests but whose financial results have been consolidated into our consolidated financial statements in accordance with U.S. GAAP. See “Item 4. Information on the Company—C. Organizational Structure” for an illustrative diagram of our corporate structure; |
| ● | “VIE Subsidiaries” refers to the VIEs’ direct and indirect subsidiaries and schools; |
| ● | “VIE Contractual Arrangements” refer to the series of contractual agreements, including exclusive business service agreements, call option agreements, equity pledge agreements, letters of undertaking, and power of attorney agreements entered into by and among our subsidiaries incorporated in the PRC, or PRC subsidiaries, the VIEs and their respective equity holders, and VIE Subsidiaries; and |
| ● | “we,” “us,” “our company” and “our” refer to TAL Education Group, which is not a PRC operating company but a Cayman Islands holding company, and its subsidiaries, and, in the context of describing our operations and consolidated financial information, the VIEs and VIE Subsidiaries. We primarily conduct our operations in China through (i) our PRC subsidiaries and (ii) the VIEs with which we have maintained contractual arrangements, and VIE Subsidiaries. This structure entails unique risks to investors. See “Item 3. Key Information—D. Risk Factors—Risks Related to our Corporate Structure” for more details. |
Our financial statements are expressed in U.S. dollars, which is our reporting currency. Certain of our financial data in this annual report on Form 20-F are translated into U.S. dollars solely for the reader’s convenience. Unless otherwise noted, all convenient translations from Renminbi to U.S. dollars in this annual report on Form 20-F were made at a rate of RMB7.1977 to $1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on February 29, 2024. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, at the rate stated above, or at all.
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FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that reflect our current expectations and views of future events. These forward looking statements are made under the “safe-harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by these forward-looking statements.
You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to” or other similar expressions. These forward-looking statements include statements relating to:
| ● | PRC laws, regulations and policies relating to the learning solutions industry; |
| ● | our anticipated growth strategies; |
| ● | competition in the markets where we offer learning products and services; |
| ● | our future business development, results of operations and financial condition; |
| ● | expected changes in our revenues and certain cost and expense items; |
| ● | our ability to increase learner enrollments and expand solution and product offerings; and |
| ● | risks associated with the expansion of our geographic reach and our offering of new learning products and services. |
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. You should read this annual report and the documents that we refer to in this annual report completely and with the understanding that our actual future results may be materially different from and/or worse than what we expect. We qualify all of our forward-looking statements with these cautionary statements. Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.
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PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
Our Holding Company Structure and VIE Contractual Arrangements
TAL Education Group is not a PRC operating company but a Cayman Islands holding company. We primarily conduct our operations in China through (i) our PRC subsidiaries, and (ii) the VIEs with which we have maintained contractual arrangements, and VIE Subsidiaries. The PRC laws and regulations impose foreign investment restrictions and license requirements on certain learning business and value-added telecommunication services. Therefore, we operate a substantial majority of such business in China through the VIEs and VIE Subsidiaries and rely on contractual arrangements among our PRC subsidiaries, the VIEs and their nominee equity holders, and VIE Subsidiaries, or VIE Contractual Arrangements, to control the business operations of the VIEs and VIE Subsidiaries. Accordingly, we are considered the primary beneficiary of these entities, whose financial results are consolidated in TAL Education Group’s consolidated financial statements under the U.S. GAAP for accounting purposes. Net revenues contributed by the VIEs and VIE Subsidiaries accounted for 95.5%, 84.9% and 82.6% of our net revenues in the fiscal years ended February 28, 2022, 2023 and February 29, 2024, respectively. As used in this annual report, “we,” “us,” “our company,” and “our” refers to TAL Education Group, a Cayman Islands company, its subsidiaries, and, in the context of describing our operations and consolidated financial information, the VIEs and VIE Subsidiaries. As of the date of this annual report, all of the VIEs and VIE Subsidiaries are domestic companies incorporated in the PRC in which we do not have any equity ownership but whose financial results have been consolidated into our consolidated financial statements based solely on the VIE Contractual Arrangements in accordance with U.S. GAAP. Investors of our ADSs are not purchasing the equity interest in the VIEs or VIE Subsidiaries in China, but instead are purchasing equity interest in a holding company incorporated in the Cayman Islands, and may never hold equity interests in the VIEs or VIE Subsidiaries.
The VIE Contractual Arrangements include:
(i) exclusive business service agreements, pursuant to which Beijing Century TAL Education Technology Co., Ltd., or TAL Beijing, or its designated affiliates have the exclusive right to provide the VIEs comprehensive intellectual property licensing and various technical and business support services and relevant VIEs agreed to pay service fees annually or regularly to TAL Beijing or its designated affiliates and adjust the service fee rates from time to time at TAL Beijing’s discretion, and TAL Beijing or its designated affiliates is entitled to charge the VIEs and VIE Subsidiaries service fees regularly that amount to substantially all of the net income of the VIEs and VIE Subsidiaries before the service fees;
(ii) call option agreements, pursuant to which the respective equity holders of the VIEs unconditionally and irrevocably granted TAL Beijing or its designated party an exclusive option to purchase from the equity holders part or all of the equity interests in the respective VIEs for the minimum amount of consideration permitted by the applicable PRC laws and regulations under the circumstances where TAL Beijing or its designated party is permitted under PRC laws and regulations to own all or part of the equity interests of the respective VIEs or where we otherwise deem it necessary or appropriate to exercise the option, and TAL Beijing has sole discretion to decide when to exercise the option, and whether to exercise the option in part or in full;
(iii) equity pledge agreements, as supplemented, pursuant to which the respective equity holders of the VIEs unconditionally and irrevocably pledged all of their equity interests in the respective VIEs to TAL Beijing to guarantee performance of the obligations of the respective VIEs and VIE Subsidiaries under the technology support and service agreements with TAL Beijing;
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(iv) letters of undertaking, pursuant to which all equity holders of the VIEs covenanted with and undertook to TAL Beijing that, if, as the respective equity holders of the VIEs, such equity holders receive any dividends, interests, other distributions or remnant assets upon liquidation from the respective VIEs, such equity holders shall, to the extent permitted by applicable laws, regulations and legal procedures, remit all such income after payment of any applicable tax and other expenses required by laws and regulations to TAL Beijing without any compensation therefore; and
(v) power of attorney agreements, pursuant to which each of the equity holders of the VIEs has executed an irrevocable power of attorney appointed TAL Beijing, or any person designated by TAL Beijing as their attorney-in-fact to vote on their behalf on matters of the respective VIEs requiring shareholder approval, and TAL Beijing has the ability to exercise effective control over each of the VIEs respectively through shareholder votes and, through such votes, to also control the composition of the board of directors.
In addition, the spouse of each individual equity holder (as applicable) of the VIEs has entered into a spousal consent letter to acknowledge that she is aware of, and consents to, the execution by her spouse of the call option agreement described above. Each such spouse further agrees that she will not take any actions or raise any claims to interfere with performance by her spouse of the obligations under the above mentioned agreements.
Terms contained in each set of the VIE Contractual Arrangements are substantially similar. As a result of the VIE Contractual Arrangements, we have effective control over and are considered the primary beneficiary of the VIEs for accounting purposes, and we have consolidated the financial results of the VIEs and VIE Subsidiaries in our consolidated financial statements.
The following diagram sets out details of our significant subsidiaries, VIEs and VIE Subsidiaries as of February 29, 2024.
| (1) | Mr. Bangxin Zhang is our chairman and chief executive officer who owned 27.5% of the common shares and 73.2% of the voting power of TAL Education Group as of April 30, 2024. |
| (2) | Mr. Yachao Liu is our director and chief operating officer who owned 4.2% of the common shares and 5.4% of the voting power of TAL Education Group as of April 30, 2024. |
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| (3) | Among these schools, certain schools’ majority ownership are directly or indirectly held by Xueersi Education, and the remaining minority ownership are directly or indirectly held by Xueersi Network. For the other schools, Xueersi Education held either 100% or majority ownership for which the remaining minority ownership were held by third parties. |
However, the VIE Contractual Arrangements may not be as effective as direct ownership in providing us with control over the VIEs. If we had direct ownership of the VIEs, we would be able to exercise our rights as an equity holder to effect changes in the board of directors of these entities, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the VIE Contractual Arrangements, we rely on the performance by the VIEs and their respective equity holders of their obligations under the contracts to exercise control over and receive economic benefits from the VIEs. In addition, we cannot assure you that when conflicts of interest arise, any or all of the individual equity holders will act in the best interests of our company or such conflicts will be resolved in our favor. In addition, these individual equity holders may breach, or cause the VIEs to breach, or refuse to renew, the existing VIE Contractual Arrangements. If we cannot resolve any conflict of interest or dispute between us and these individual equity holders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings. As such, we may incur substantial costs to enforce the terms of the VIE Contractual Arrangements. In addition, the VIE Contractual Arrangements have not been tested in a court of law as of the date of this annual report. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on the VIE Contractual Arrangements for our operations in China, which may not be as effective in providing operational control as direct ownership” and “—The legal owners of the VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition” for further details.
Our corporate structure is subject to unique risks associated with the VIE Contractual Arrangements. If the PRC government deems that the VIE Contractual Arrangements do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. The PRC regulatory authorities could disallow the VIE structure, which would likely result in a material adverse change in our operations, and our ADSs may decline significantly in value or become worthless. Our holding company, our PRC subsidiaries, the VIEs and VIE Subsidiaries, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the VIE Contractual Arrangements and, consequently, significantly affect the financial performance of the VIEs, VIE Subsidiaries and our company as a whole. For a detailed description of the risks associated with our corporate structure, please refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights of our Cayman Islands holding company with respect to the VIE Contractual Arrangements. It is uncertain whether any new PRC laws or regulations related to variable interest entity structures will be adopted or, if adopted, what they would provide. If we or any of the VIEs is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required licenses, permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government determines that the agreements that establish the structure for operating our business in China are not in compliance with applicable PRC laws and regulations, we could be subject to severe penalties.”
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We primarily conduct our operations in China through (i) our PRC subsidiaries and (ii) the VIEs with which we have maintained contractual arrangements, and VIE Subsidiaries. Our revenues are primarily generated from China. Though the PRC’s Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, the definition of “foreign investment” thereunder is relatively wide and contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council of the PRC government. Therefore, there is no assurance that foreign investments via contractual arrangements would not be interpreted as a type of indirect foreign investment activities in the future. If any of the VIEs were deemed as a foreign-invested enterprise under any such future laws, administrative regulations or provisions and any of our business would be included in any negative list or other form of restrictions on foreign investment, we may need to take further actions to comply with such future laws, administrative regulations or provisions. Such actions may have a material and adverse impact on our business, financial condition, result of operations and prospects. In addition, if the PRC regulatory authorities were to find our legal structure and the VIE Contractual Arrangements to be in violation of any PRC laws, administrative regulations or provisions, we are uncertain what impact of actions by above PRC regulatory authorities would have on us and our ability to consolidate the VIEs and VIE Subsidiaries in the consolidated financial statements. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and how it may impact our business, financial condition and results of operations.”
We face various risks and uncertainties related to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, anti-monopoly regulatory actions, regulations on the use of variable interest entities, and oversight on cybersecurity and data privacy. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks related to doing business in China, “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China.”
The PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s oversight and discretion over our business operations could result in a material adverse change in our operations and the value of our ADSs.”
Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could have a material adverse effect on us.”
The Holding Foreign Companies Accountable Act
Pursuant to the Holding Foreign Companies Accountable Act, or the HFCAA, if the Securities and Exchange Commission, or the SEC, determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspections by the Public Company Accounting Oversight Board, or the PCAOB, for two consecutive years, the SEC will prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On December 16, 2021, the PCAOB issued a report to notify the SEC, of its determination that the PCAOB was unable to inspect or investigate completely registered public accounting firms headquartered in the mainland of China and Hong Kong, including our auditor. In July 2022, the SEC conclusively listed us as a “covered issuer,” or SEC-Identified Issuer, under the HFCAA following the filing of our annual report on Form 20-F for the fiscal year ended February 28, 2022. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination and removed the mainland of China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate completely registered public accounting firms. For this reason, we were not identified as an SEC-Identified Issuer under the HFCAA after we filed our annual report on Form 20-F for the fiscal year ended February 28, 2023 and do not expect to be identified so after we file this annual report on Form 20-F.
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Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in the mainland of China and Hong Kong, among other jurisdictions. If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely accounting firms in the mainland of China and Hong Kong and we continue to use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements filed with the SEC, we would be identified as an SEC-Identified Issuer following the filing of the annual report on Form 20-F for the relevant fiscal year. There can be no assurance that we would not be identified as an SEC-Identified Issuer for any future fiscal year, and if we were so identified for two consecutive years, we would become subject to the prohibition on trading under the HFCAA. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PCAOB had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections of our auditor in the past has deprived our investors of the benefits of such inspections.” and “—Our ADSs may be prohibited from trading in the United States under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely auditors located in the mainland of China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.”
Permissions Required from the PRC Government Authorities for Our Operations
We primarily conduct our business through our subsidiaries and the VIEs and VIE Subsidiaries in China. Our operations in China are governed by the PRC laws and regulations. As of the date of this annual report, other than disclosed in “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We are required to obtain various operating licenses and permits and to make registrations and filings for our current business in China; failure to comply with these requirements may materially and adversely affect our business and results of operations”, “—Risks Related to Doing Business in China—If we fail to obtain and maintain licenses, permits or approvals or to complete registrations and filings required under the evolving regulatory regime for online learning in China, our business, financial condition and results of operations may be materially and adversely affected,” and “—Risks Related to Doing Business in China—Our introduction and use of AI may not be successful and may present business, compliance, and reputational challenges which could lead to operational or reputational damage, competitive harm, legal and regulatory risk, and additional costs, any of which could materially and adversely affect our business, financial condition, and results of operations,” based on the advice of our PRC counsel, we believe our PRC subsidiaries and the VIEs and VIE Subsidiaries have obtained the requisite licenses and permits from the PRC government authorities that are necessary for their material business operations in China, including, among others, the private school operating permit, license for internet information services, or ICP license, the License for the Production and Operation of Radio and Television Program, the Permit for Operating Publications Business and the security assement and algorithm filing related to generative AI services.
Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings, or approvals for our business operations.
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Furthermore, in connection with our issuance of securities to foreign investors in the past, under current PRC laws, regulations, and rules, as of the date of this annual report, we, our PRC subsidiaries, and the VIEs and VIE Subsidiaries (i) have not been required to obtain permissions from or complete filings with the China Securities Regulatory Commission, or the CSRC, (ii) have not been required to go through cybersecurity review by the Cyberspace Administration of China, or the CAC, and (iii) have not received or have not been denied such requisite permissions by the CSRC or the CAC. Our PRC counsel has consulted the relevant government authorities, which acknowledged that, under the currently effective PRC laws and regulations, a company already listed in a foreign stock exchange before promulgation of the latest Cybersecurity Review Measures is not required to go through a cybersecurity review by the CAC to conduct a securities offering or maintain its listing status on the foreign stock exchange on which its securities have been listed. Therefore, we believe that under the currently effective PRC laws and regulations, we are not required to go through a cybersecurity review by the CAC for conducting a securities offering or maintain our listing status on the New York Stock Exchange, or NYSE. In addition, on February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Overseas Listing Trial Measures, and five supporting guidelines, effective on March 31, 2023. Pursuant to the Overseas Listing Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedure and report relevant information to the CSRC. Pursuant to the press conference held by CSRC for the release of the Overseas Listing Trial Measures and the Notice on Administration for the Filing of Overseas Offering and Listing by Domestic Companies, domestic companies that have been listed on a foreign stock exchange prior to the effective date of the Overseas Listing Trial Measures are not required to complete filing with the CSRC to maintain their listing status on the foreign stock exchange, but are required to file with the CSRC within three working days after such domestic companies complete a securities offering on the foreign stock exchange on which their securities have been listed. Since the Overseas Listing Trial Measures were newly promulgated, there are substantial uncertainties as to its interpretation, application and enforcement. If the filing procedure with the CSRC under the Overseas Listing Trial Measures is required for any future offerings, listing or any other capital raising activities by us, it is uncertain whether we could complete the filing procedure in a timely manner, or at all. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval of or filing with the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC laws, and, if required, we cannot predict whether or for how long we will be able to obtain such approvals or complete such filings.”
The PRC government has recently indicated an intent to exert more oversight over offerings that are conducted overseas and/or foreign investment in China-based issuers like us and published a series of new rules and regulations in this regard. Since these laws, regulations and rules are newly issued, there are substantial uncertainties as to the interpretation, application and enforcement of such laws, regulations and rules. If we had inadvertently concluded that such approvals were not required, or if applicable laws, regulations or interpretations change in a way that requires us to obtain such approvals in the future, we may be unable to obtain such necessary approvals in a timely manner, or at all, and such approvals may be rescinded even if obtained. Any such circumstance could subject us to penalties, including fines, suspension of business and revocation of required licenses, significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s oversight and discretion over our business operations could result in a material adverse change in our operations and the value of our ADSs.”
Cash and Asset Flows Through Our Organization
TAL Education Group is a Cayman Islands holding company with no operations of its own. We primarily conduct our operations in China through our PRC subsidiaries and the VIEs and VIE Subsidiaries. As a result, although other means are available for us to obtain financing at the holding company level, TAL Education Group’s ability to pay dividends to the shareholders and to service any debt it may incur depends upon dividends paid by our PRC subsidiaries and license and service fees paid by the VIEs and VIE Subsidiaries. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to TAL Education Group. In addition, to the extent cash or assets in our business is in the mainland of China or Hong Kong or a mainland of China or Hong Kong entity, such cash or assets may not be available to fund operations or for other use outside of China due to interventions in, or the imposition of restrictions and limitations on, the ability of our holding company, our PRC subsidiaries, or the VIEs or VIE Subsidiaries by the PRC government to transfer cash or assets. Cash may be transferred within our organization in the following manners:
8
(i) Under PRC laws, TAL Education Group may directly provide funding to our PRC subsidiaries through capital contributions, loans and cross-border RMB fund pool established under applicable PRC laws and regulations, and to the VIEs and VIE Subsidiaries through loans and cross-border RMB fund pool established under applicable PRC laws and regulations, subject to satisfaction of applicable government registration and approval requirements. With respect to the cross-border RMB fund pool, TAL Education Group, Pengxin TAL Industrial Investment (Shanghai) Co., Ltd. (a wholly-owned subsidiary of TAL Education Group), five of our wholly-owned subsidiaries and one VIE as a Multinational Enterprise Group, started a Round-way Cross-border RMB Fund Pool Business and opened a special deposit account, where the Multinational Enterprise Group can optimize and balance cross-border RMB funds among its domestic and foreign members.
For the years ended February 28, 2022, 2023 and February 29, 2024, TAL Education Group, through its intermediate holding companies, provided capital contributions of $110.2 million, nil and nil to its subsidiaries in China, respectively. TAL Education Group provided $70.8 million, nil and nil, respectively, to other members in the Multinational Enterprise Group, for the years ended February 28, 2022, 2023 and February 29, 2024. For the years ended February 28, 2022, 2023 and February 29, 2024, there was no repayment from other members in the Multinational Enterprise Group to TAL Education Group.
(ii) Our subsidiaries, including our PRC subsidiaries, could declare dividends or other distributions to their shareholders and eventually to TAL Education Group. As of the date of this annual report, no dividends or distributions have been made to TAL Education Group by our PRC subsidiaries or other subsidiaries. Our PRC subsidiaries are permitted to pay dividends to their shareholders and eventually to TAL Education Group only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Such payment of dividends by entities registered in China is subject to limitations, which could result in limitations on the availability of cash to fund dividends or make distributions to shareholders of our securities. The amount of dividends paid by our PRC subsidiaries to us primarily depends on the service fees paid to our PRC subsidiaries from the VIEs and VIE Subsidiaries, and, to a lesser degree, our PRC subsidiaries’ retained earnings. For any amounts owed by the VIEs and VIE Subsidiaries to our PRC subsidiaries under the VIE Contractual Arrangements, unless otherwise required by the PRC tax authorities, we are able to have such amounts settled without limitations under the currently effective PRC laws and regulations, provided that the VIEs and VIE Subsidiaries have sufficient funds to do so and that the VIEs and VIE Subsidiaries, if they are in the form of non-enterprise institution, follow the principles of openness, fairness and impartiality, set prices reasonably and establish appropriate decision-making processes, and do not damage the interests of the state, the non-enterprise institution, teachers or students when conducting such transactions. In the fiscal years ended February 28, 2022, 2023 and February 29, 2024, our relevant PRC subsidiaries collectively charged $1,174.6 million, $96.2 million and $201.1 million in service fees, respectively, to the VIEs and VIE Subsidiaries. The VIEs and VIE Subsidiaries collectively paid $839.9 million, $316.1 million and $196.4 million in service fees to relevant PRC subsidiaries in the fiscal years ended February 28, 2022, 2023 and February 29, 2024, respectively. As of February 28, 2022, 2023 and February 29, 2024, the balance of the amount payable for the service fees was $752.2 million, $532.3 million and $537.0 million, respectively. The VIEs and VIE Subsidiaries collected net proceeds from relevant PRC subsidiaries of $1,536.3 million in the fiscal year ended February 28, 2022, provided net funds to relevant PRC subsidiaries of $108.5 million in the fiscal year ended February 28, 2023 and collected net proceeds from relevant PRC subsidiaries of $31.1 million in the fiscal year ended February 29, 2024.
For the details of the financial position, cash flows and results of operation of the VIEs and VIE Subsidiaries, please refer to the “Item 3. Key information—Financial Information Related to the VIEs and VIE Subsidiaries.”
Our PRC subsidiaries and the VIEs and VIE Subsidiaries are required to make appropriations to certain statutory reserve funds or may make appropriations to certain discretionary funds, which are not distributable as cash dividends except in the event of a solvent liquidation of the companies. For more details, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure” and “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could limit our ability to pay dividends to holders of our ADSs and common shares.”
In November 2010, we paid a $30 million cash dividend to our shareholders of record as of September 29, 2010 out of our cash balance. In December 2012, we paid a $39.0 million cash dividend with $0.25 per share to our shareholders of record at the close of business on December 7, 2012 out of our cash balance. In May 2017, we paid $41.2 million special cash dividend with $0.25 per share to our shareholders of record at the close of business on May 11, 2017 out of our cash balance. No dividends or distributions have been made to the holding company by WFOEs, the VIEs or other subsidiaries. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.” For PRC and United States federal income tax considerations of an investment in our ADSs, see “Item 10. Additional Information—E. Taxation.”
9
We currently do not have cash management policies in place that dictate how funds are transferred between TAL Education Group, our subsidiaries, the VIEs, VIE Subsidiaries and the investors. Rather, the funds can be transferred in accordance with applicable PRC laws and regulations. For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within China, assuming that: (i) we have taxable earnings, and (ii) we determine to pay a dividend in the future:
| Tax calculation (1) |
| |
Hypothetical pre-tax earnings(2) |
| 100 | % |
Tax on earnings at statutory rate of 25%(3) |
| (25) | % |
Net earnings available for distribution |
| 75 | % |
Withholding tax at standard rate of 10%(4) |
| (7.5) | % |
Net distribution to Parent/Shareholders |
| 67.5 | % |
Notes:
| (1) | For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings amount, not considering timing differences, is assumed to equal taxable income in China. |
| (2) | Under the terms of the VIE Contractual Arrangements, our PRC subsidiaries may charge the VIEs and VIE Subsidiaries for services provided to such entities. These service fees shall be recognized as costs and expenses of the VIEs and VIE Subsidiaries, with corresponding amounts as service income by our PRC subsidiaries and eliminated in consolidation. For income tax purposes, our PRC subsidiaries and the VIEs and VIE Subsidiaries file income tax returns on a separate company basis. The service fees paid are recognized as tax deductions by the VIEs and VIE Subsidiaries and as income by our PRC subsidiaries and are tax neutral. |
| (3) | Certain of our PRC subsidiaries and the VIEs and VIE Subsidiaries qualify for a preferential income tax rate which is lower than the statutory rate of 25%. However, such rate is subject to qualification, is temporary in nature, and may not be available in a future period when distributions are paid. For purposes of this hypothetical example, the table above reflects a maximum tax scenario under which the full statutory rate would be effective. |
| (4) | The PRC Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise, or FIE, to its immediate holding company outside of China. A lower withholding income tax rate of 5% is applied if the FIE’s immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with China, subject to a qualification review at the time of the distribution. For purposes of this hypothetical example, the table above assumes a maximum tax scenario under which the full withholding tax would be applied. |
The table above has been prepared under the assumption that all profits of the VIEs and VIE Subsidiaries will be distributed as fees to TAL Beijing under tax-neutral contractual arrangements. If, in the future, the accumulated earnings of the VIEs and VIE Subsidiaries exceed the service fees paid to TAL Beijing (or if the current and contemplated fee structure between the intercompany entities is determined to be non-substantive and disallowed by PRC tax authorities), the VIEs and VIE Subsidiaries could make a non-deductible transfer to our PRC subsidiaries for the amounts of the stranded cash in the VIEs and VIE Subsidiaries. This would result in such transfer being non-deductible expenses for the VIEs and VIE Subsidiaries but still taxable income for our PRC subsidiaries. Such a transfer and the related tax burdens would reduce our after-tax income. Our management believes that there is only a remote possibility that this scenario would happen.
10
Financial Information Related to the VIEs and VIE Subsidiaries
The following table presents the condensed consolidating schedule of financial position for the VIEs and VIE Subsidiaries and other entities as of the dates presented.
Selected Condensed Consolidated Statements of Operations Information
For the Year Ended February 29, 2024 | ||||||||||||
VIEs and | ||||||||||||
VIE | Consolidated | |||||||||||
The Company | WFOEs(1) | Subsidiaries | Others | Eliminations | Total | |||||||
US$ | ||||||||||||
(In thousands) | ||||||||||||
Third-party net revenues |
| — |
| 197,856 |
| 1,230,855 |
| 61,729 |
| — |
| 1,490,440 |
Inter-company revenues |
| — |
| 324,271 |
| 51,595 |
| 3,413 |
| (379,279) |
| — |
Total costs and operating expenses |
| (60,915) |
| (542,655) |
| (1,277,759) |
| (73,382) |
| 378,597 |
| (1,576,114) |
Income from government subsidies and non-operations |
| 63,764 |
| 17,698 |
| 7,293 |
| 26,531 |
| (12,129) |
| 103,157 |
Income/(loss) from subsidiaries and VIEs |
| 3,357 |
| 3,771 |
| — |
| (1,650) |
| (5,478) |
| — |
Income before income tax and (loss)/income from equity method investments |
| 6,206 |
| 941 |
| 11,984 |
| 16,641 |
| (18,289) |
| 17,483 |
Less: income tax expenses |
| (1,852) |
| (2,632) |
| (10,390) |
| (505) |
| — |
| (15,379) |
(Loss)/income from equity method investments |
| (7,927) |
| — |
| 1,685 |
| — |
| — |
| (6,242) |
Net (loss)/income |
| (3,573) |
| (1,691) |
| 3,279 |
| 16,136 |
| (18,289) |
| (4,138) |
For the Year Ended February 28, 2023 | ||||||||||||
VIEs and | ||||||||||||
VIE | Consolidated | |||||||||||
The Company | WFOEs(1) | Subsidiaries | Others | Eliminations | Total | |||||||
US$ | ||||||||||||
(In thousands) | ||||||||||||
Third-party net revenues |
| — |
| 112,260 |
| 865,846 |
| 41,666 |
| — |
| 1,019,772 |
Inter-company revenues |
| — |
| 107,282 |
| 30,204 |
| 428 |
| (137,914) |
| — |
Total costs and operating expenses |
| (117,005) |
| (297,313) |
| (782,753) |
| (50,217) |
| 114,103 |
| (1,133,185) |
(Loss)/income from government subsidies and non-operations |
| (138,504) |
| 81,786 |
| 63,419 |
| (24,620) |
| 21,613 |
| 3,694 |
Income from subsidiaries and VIEs |
| 123,668 |
| 153,225 |
| — |
| 158,557 |
| (435,450) |
| — |
(Loss)/income before income tax and income/(loss) from equity method investments |
| (131,841) |
| 157,240 |
| 176,716 |
| 125,814 |
| (437,648) |
| (109,719) |
Less: income tax (expenses)/benefits |
| (1,796) |
| 1,318 |
| (19,630) |
| (246) |
| 343 |
| (20,011) |
Loss from equity method investments |
| (1,975) |
| — |
| (273) |
| — |
| — |
| (2,248) |
Net (loss)/income |
| (135,612) |
| 158,558 |
| 156,813 |
| 125,568 |
| (437,305) |
| (131,978) |
For the Year Ended February 28, 2022 | ||||||||||||
VIEs and | ||||||||||||
VIE | Consolidated | |||||||||||
The Company | WFOEs(1) | Subsidiaries | Others | Eliminations | Total | |||||||
US$ | ||||||||||||
(In thousands) | ||||||||||||
Third-party net revenues |
| — |
| 177,551 |
| 4,193,212 |
| 20,144 |
| — |
| 4,390,907 |
Inter-company revenues |
| — |
| 1,173,049 |
| 11,449 |
| 5,175 |
| (1,189,673) |
| — |
Total costs and operating expenses |
| (521,184) |
| (812,986) |
| (4,812,029) |
| (70,319) |
| 1,190,283 |
| (5,026,235) |
(Loss)/income from government subsidies and non-operations |
| (125,514) |
| 9,534 |
| (20,547) |
| 2,157 |
| (8,432) |
| (142,802) |
Loss from subsidiaries and VIEs |
| (501,143) |
| (918,903) |
| — |
| (452,185) |
| 1,872,231 |
| — |
Loss before income tax and income/(loss) from equity method investments |
| (1,147,841) |
| (371,755) |
| (627,915) |
| (495,028) |
| 1,864,409 |
| (778,130) |
Less: income tax (expenses)/benefits |
| — |
| (80,454) |
| (316,832) |
| 294 |
| — |
| (396,992) |
Income/(loss) from equity method investments |
| 11,726 |
| — |
| (939) |
| — |
| — |
| 10,787 |
Net loss |
| (1,136,115) |
| (452,209) |
| (945,686) |
| (494,734) |
| 1,864,409 |
| (1,164,335) |
11
Selected Condensed Consolidated Balance Sheets Information
As of February 29, 2024 | ||||||||||||
VIEs and | ||||||||||||
VIE | Consolidated | |||||||||||
The Company | WFOEs(1) | Subsidiaries | Others | Eliminations | Total | |||||||
US$ | ||||||||||||
(In thousands) | ||||||||||||
Assets |
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| 1,318,870 |
| 315,155 | 524,271 | 50,460 | — | 2,208,756 | ||||
Amount due from Group companies |
| 338,795 |
| 2,649,515 | 401,958 | 19,251 | (3,409,519) | — | ||||
Other current assets |
| 944,222 |
| 230,230 | 312,149 | 3,817 | — | 1,490,418 | ||||
Total current assets |
| 2,601,887 |
| 3,194,900 | 1,238,378 | 73,528 | (3,409,519) | 3,699,174 | ||||
Investment in subsidiaries and VIEs |
| 977,442 |
| — | — | 1,114,662 | (2,092,104) | — | ||||
Property and equipment, net |
| — |
| 64,161 | 347,032 | 1,475 | (7,349) | 405,319 | ||||
Other non-current assets |
| 126,360 |
| 23,389 | 611,982 | 61,725 | — | 823,456 | ||||
Total assets |
| 3,705,689 |
| 3,282,450 | 2,197,392 | 1,251,390 | (5,508,972) | 4,927,949 | ||||
Liabilities |
|
| ||||||||||
Deferred revenue-current |
| — |
| 32,811 | 350,887 | 16,588 | — | 400,286 | ||||
Amount due to Group companies |
| 42,370 |
| 509,134 | 2,622,625 | 236,667 | (3,410,796) | — | ||||
Other current liabilities |
| 1,221 |
| 132,483 | 540,620 | 7,608 | — | 681,932 | ||||
Total current liabilities |
| 43,591 |
| 674,428 | 3,514,132 | 260,863 | (3,410,796) | 1,082,218 | ||||
Deficits of investment in subsidiaries and VIEs |
| — |
| 1,479,385 | — | — | (1,479,385) | — | ||||
Other non-current liabilities |
| — |
| 13,979 | 188,149 | 4,839 | — | 206,967 | ||||
Total liabilities |
| 43,591 |
| 2,167,792 | 3,702,281 | 265,702 | (4,890,181) | 1,289,185 | ||||
Total equity |
| 3,662,098 |
| 1,114,658 | (1,504,889) | 985,688 | (618,791) | 3,638,764 | ||||
Total liabilities and equity |
| 3,705,689 |
| 3,282,450 | 2,197,392 | 1,251,390 | (5,508,972) | 4,927,949 | ||||
As of February 28, 2023 | ||||||||||||
VIEs and | ||||||||||||
The | VIE | Consolidated | ||||||||||
| Company |
| WFOEs(1) |
| Subsidiaries |
| Others |
| Eliminations |
| Total | |
US$ | ||||||||||||
(In thousands) | ||||||||||||
Assets | ||||||||||||
Cash and cash equivalents |
| 1,336,235 | 330,994 | 331,081 | 23,617 | — | 2,021,927 | |||||
Amount due from Group companies |
| 361,461 | 2,555,380 | 341,862 | 19,435 | (3,278,138) | — | |||||
Other current assets |
| 936,003 | 271,245 | 234,186 | 5,046 | — | 1,446,480 | |||||
Total current assets |
| 2,633,699 | 3,157,619 | 907,129 | 48,098 | (3,278,138) | 3,468,407 | |||||
Investment in subsidiaries and VIEs |
| 919,829 | — | — | 1,127,388 | (2,047,217) | — | |||||
Property and equipment, net |
| — | 55,431 | 238,898 | 2,177 | (7,629) | 288,877 | |||||
Other non-current assets |
| 324,237 | 18,245 | 619,221 | 5,367 | — | 967,070 | |||||
Total assets |
| 3,877,765 | 3,231,295 | 1,765,248 | 1,183,030 | (5,332,984) | 4,724,354 | |||||
Liabilities |
| |||||||||||
Deferred revenue-current |
| — | 7,072 | 213,239 | 14,578 | — | 234,889 | |||||
Amount due to Group companies |
| 30,388 | 461,489 | 2,554,768 | 232,356 | (3,279,001) | — | |||||
Other current liabilities |
| 2,734 | 90,797 | 449,854 | 5,591 | — | 548,976 | |||||
Total current liabilities |
| 33,122 | 559,358 | 3,217,861 | 252,525 | (3,279,001) | 783,865 | |||||
Deficits of investment in subsidiaries and VIEs |
| — | 1,539,489 | — | — | (1,539,489) | — | |||||
Other non-current liabilities |
| — | 5,065 | 112,807 | 1,704 | — | 119,576 | |||||
Total liabilities |
| 33,122 | 2,103,912 | 3,330,668 | 254,229 | (4,818,490) | 903,441 | |||||
Total equity |
| 3,844,643 |
| 1,127,383 |
| (1,565,420) |
| 928,801 |
| (514,494) |
| 3,820,913 |
Total liabilities and equity |
| 3,877,765 |
| 3,231,295 |
| 1,765,248 |
| 1,183,030 |
| (5,332,984) |
| 4,724,354 |
12
Selected Condensed Consolidated Cash Flows Information
For the Year Ended February 29, 2024 | ||||||||||||
VIEs and | ||||||||||||
The | VIE | Consolidated | ||||||||||
| Company |
| WFOEs(1) |
| Subsidiaries |
| Others |
| Eliminations |
| Total | |
US$ | ||||||||||||
(In thousands) | ||||||||||||
Net cash provided by / (used in) operating activities | 78,285 | (31,207) | 264,755 | (5,661) | — | 306,172 | ||||||
Loan and fund pool to entities within the Group |
| — |
| (47,921) |
| — |
| — |
| 47,921 |
| — |
Repayment of loan to entities within the Group |
| — |
| 2,942 |
| — |
| — |
| (2,942) |
| — |
Investment in entities within the Group |
| (60,544) |
| — |
| — |
| — |
| 60,544 |
| — |
Other investing activities |
| 197,989 |
| 75,952 |
| (137,073) |
| (41,800) |
| — |
| 95,068 |
Net cash provided by / (used in) investing activities |
| 137,445 |
| 30,973 |
| (137,073) |
| (41,800) |
| 105,523 |
| 95,068 |
Net proceeds from loan and fund pool from entities within the Group |
| — |
| — |
| 34,028 |
| 13,893 |
| (47,921) |
| — |
Repayment of loan to entities within the Group |
| — |
| — |
| (2,941) |
| (1) |
| 2,942 |
| — |
Proceeds from group capital contribution |
| — |
| — |
| — |
| 60,544 |
| (60,544) |
| — |
Other financing activities |
| (233,095) |
| — |
| — |
| — |
| — |
| (233,095) |
Net cash (used in) / provided by financing activities |
| (233,095) |
| — |
| 31,087 |
| 74,436 |
| (105,523) |
| (233,095) |
For the Year Ended February 28, 2023 | ||||||||||||
VIEs and | ||||||||||||
The | VIE | Consolidated | ||||||||||
| Company |
| WFOEs(1) |
| Subsidiaries |
| Others |
| Eliminations |
| Total | |
US$ | ||||||||||||
(In thousands) | ||||||||||||
Net cash provided by / (used in) operating activities |
| 14,674 | 40,908 | (56,397) | 8,173 | — | 7,358 | |||||
Loan and fund pool to entities within the Group |
| (4,557) |
| (13,124) |
| (2,100) |
| — |
| 19,781 |
| — |
Repayment of loan to entities within the Group |
| 2,717 |
| 121,641 |
| 5 |
| — |
| (124,363) |
| — |
Investment in entities within the Group |
| (865) |
| — |
| — |
| — |
| 865 |
| — |
Other investing activities |
| (24,024) |
| (201,092) |
| (76,209) |
| (301) |
| — |
| (301,626) |
Net cash used in investing activities |
| (26,729) |
| (92,575) |
| (78,304) |
| (301) |
| (103,717) |
| (301,626) |
Net proceeds from loan and fund pool from entities within the Group |
| 2,100 |
| — |
| 13,124 |
| 4,557 |
| (19,781) |
| — |
Repayment of loan to entities within the Group |
| (3) |
| — |
| (121,635) |
| (2,725) |
| 124,363 |
| — |
Proceeds from group capital contribution |
| — |
| — |
| — |
| 865 |
| (865) |
| — |
Other financing activities |
| (66,184) |
| — |
| — |
| — |
| — |
| (66,184) |
Net cash (used in) / provided by financing activities |
| (64,087) |
| — |
| (108,511) |
| 2,697 |
| 103,717 |
| (66,184) |
13
| For the Year Ended February 28, 2022 | |||||||||||
VIEs and | ||||||||||||
The | VIE | Consolidated | ||||||||||
| Company |
| WFOEs(1) |
| Subsidiaries |
| Others |
| Eliminations |
| Total | |
US$ | ||||||||||||
(In thousands) | ||||||||||||
Net cash provided by / (used in) operating activities |
| 74,281 | 433,808 | (1,418,908) | (28,365) | — | (939,184) | |||||
Loan and fund pool to entities within the Group |
| (212,542) |
| (1,538,343) |
| — |
| — |
| 1,750,885 |
| — |
Repayment of loan to entities within the Group |
| 2,352 |
| 2,085 |
| — |
| — |
| (4,437) |
| — |
Investment in entities within the Group |
| — |
| — |
| — |
| (110,200) |
| 110,200 |
| — |
Other investing activities |
| 994,197 |
| 569,214 |
| (194,349) |
| (346) |
| — |
| 1,368,716 |
Net cash provided by / (used in) investing activities |
| 784,007 |
| (967,044) |
| (194,349) |
| (110,546) |
| 1,856,648 |
| 1,368,716 |
Net proceeds from loan and fund pool from entities within the Group |
| — |
| 70,757 |
| 1,538,343 |
| 141,785 |
| (1,750,885) |
| — |
Repayment of loan to entities within the Group |
| — |
| — |
| (2,085) |
| (2,352) |
| 4,437 |
| — |
Proceeds from group capital contribution |
| — |
| 110,200 |
| — |
| — |
| (110,200) |
| — |
Other financing activities |
| (2,766,679) |
| — |
| — |
| — |
| — |
| (2,766,679) |
Net cash (used in) / provided by financing activities |
| (2,766,679) |
| 180,957 |
| 1,536,258 |
| 139,433 |
| (1,856,648) |
| (2,766,679) |
Notes:
| (1) | As used in this section, “WFOEs” include WFOEs that are the primary beneficiary of the VIEs, their designated affiliates, also being WFOEs, which charged service fees on the VIEs, VIE Subsidiaries and other PRC subsidiaries. |
Cessation of K-9 Academic AST Services in the Mainland of China
In compliance with regulatory policies promulgated in 2021, including the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education published in July 2021 by the General Office of the CPC Central Committee and the General Office of the State Council, or the Alleviating Burden Opinion Regarding Compulsory Education, we ceased offering the K-9 Academic AST Services in the mainland of China at the end of 2021. The cessation has had a substantial adverse impact on our revenues for the fiscal year ended February 28, 2022 and subsequent periods. In fiscal year ended February 28, 2022, the revenues from offering K-9 Academic AST Services in the mainland of China accounted for a substantial majority of our total net revenues prior to the cessation of such services. More specifically, the impact of cessation of K-9 Academic AST Services in the mainland of China includes the following items in our consolidated financial statements.
Net Revenues
Our total net revenues decreased by 76.8% from $4,390.9 million for the fiscal year ended February 28, 2022 to $1,019.8 million for the fiscal year ended February 28, 2023, which was mainly driven by the cessation of the K-9 Academic AST Services in the mainland of China by the end of December 2021.
Property and Equipment
$256.0 million and $0.7 million impairment loss were recorded for certain property and equipment and the leasehold improvements of certain learning centers and offices in the fiscal years ended February 28, 2022 and 2023, respectively. The impairment loss in the fiscal year ended February 28, 2022 was mostly due to the downsize of learning centers as result of regulatory and market changes and the cessation of K-9 Academic AST Services in the mainland of China.
Intangible Assets
For the fiscal year ended February 28, 2022, an impairment loss of $51.5 million was recorded on our acquired intangible assets as a result of the changes in business outlook primarily due to the regulatory development which led to the cessation of K-9 Academic AST Services in the mainland of China. We recorded nil impairment loss on acquired intangible assets for the fiscal year ended February 28, 2023.
14
Goodwill
Due to regulatory developments over after-school tutoring services, we noted impairment indicators during the fiscal year ended February 28, 2022. As a result, an impairment loss amounting to $453.6 million was recorded for the year. Goodwill was fully impaired as of February 28, 2022 as a result of changes in the regulatory and the operating environment which led to the changes of our business outlook. The fair value of the reporting units was determined by us with the assistance of independent valuation appraisers using the income-based valuation methodology. We recorded nil impairment loss on goodwill for the fiscal year ended February 28, 2023.
Leases
Certain of our leases were terminated before the expiration of the lease term due to the downsized capacity relating to the cessation of K-9 Academic AST Services in the mainland of China, and the relevant right-of-use asset, with a carrying amount totaled at $1.1 billion and $57.7 million during the fiscal years ended February 28, 2022 and 2023, respectively, and the corresponding lease liability were derecognized upon the effectiveness of the early termination.
A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Summary of Risk Factors
An investment in our ADSs involves significant risks. Below is a summary of material risks we face, organized under relevant headings. These risks are discussed in more details in “Item 3. Key Information—D. Risk Factors.”
Risks Related to Our Business and Industry
| ● | If we are not able to develop new types of learning products or services under the recent regulatory policies in China to successfully attract prospective learners and customers in a timely or cost-effective manner or to continue to attract learners and customers to purchase our existing products or services, our business, results of operations and prospects will continue to be materially and adversely affected. |
| ● | If we fail to successfully design and execute our growth strategies, our business and prospects may be materially and adversely affected. |
| ● | If we are not able to maintain and enhance the value of our brands, our business and operating results may be harmed. |
| ● | Significant uncertainties exist in relation to the interpretation and implementation of, or proposed changes to, the PRC laws, regulations and policies regarding the after-school tutoring industry. In particular, our compliance with the Alleviating Burden Opinion Regarding Compulsory Education and the implementation measures issued by the relevant PRC government authorities has had, and could have further, material adverse effect on us. |
| ● | We are required to obtain various operating licenses and permits and to make registrations and filings for our current business in China; failure to comply with these requirements may materially and adversely affect our business and results of operations. |
15
| ● | We face significant competition, and if we fail to compete effectively, we may lose our market share or fail to gain additional market share, and our profitability may be adversely affected. |
| ● | Our historical financial and operating results, growth rates and profitability may not be indicative of future performance. |
| ● | We may not be able to recruit, train and retain qualified and dedicated teachers, who are critical to the success of our business and the effective delivery of our services to learners. |
| ● | We are subject to risks related to global expansion. |
Risks Related to Our Corporate Structure
| ● | TAL Education Group is not a PRC operating company but a Cayman Islands holding company with no equity ownership in the VIEs. We primarily conduct our operations in China through (i) our PRC subsidiaries and (ii) the VIEs with which we have maintained contractual arrangements, and VIE Subsidiaries. Investors of our ADSs thus are not purchasing equity interest in the VIEs in China but instead are purchasing equity interest in a Cayman Islands holding company. If the PRC government deems that the VIE Contractual Arrangements do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company, our PRC subsidiaries, the VIEs and VIE Subsidiaries, and the investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the VIE Contractual Arrangements and, consequently, significantly affect the financial performance of the VIEs, VIE Subsidiaries and our company as a group. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government determines that the agreements that establish the structure for operating our business in China are not in compliance with applicable PRC laws and regulations, we could be subject to severe penalties” for details. |
| ● | We rely on the VIE Contractual Arrangements for our operations in China, which may not be as effective in providing operational control as direct ownership. |
| ● | Any failure by the VIEs or their respective equity holders or VIE Subsidiaries to perform their obligations under the VIE Contractual Arrangements would have a material adverse effect on our business and financial condition. |
| ● | The legal owners of the VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition. |
Risks Related to Doing Business in China
| ● | Uncertainties with respect to the PRC legal system could have a material adverse effect on us. Certain laws and regulations are relatively new and can change quickly with little advance notice. In addition, the interpretations of many laws, regulations and rules are not always consistent, and enforcement of these laws, regulations and rules involve uncertainties, which may limit the available legal protections. Furthermore, the PRC administrative and court authorities have significant discretion in interpreting and implementing or enforcing statutory rules and contractual terms, and it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we may enjoy in China than under some more developed legal systems. These uncertainties may affect our judgment on the relevance of legal requirements and our decisions on the measures and actions to be taken to fully comply therewith and may affect our ability to enforce our contractual or tort rights. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could have a material adverse effect on us” for details. |
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| ● | We conduct our business primarily in China. Our operations in China are governed by PRC laws and regulations. The PRC government has significant oversight and discretion over the operation of our business, and it may influence our operations at any time, which could result in a material adverse change in our operation and the value of our ADSs. In addition, implementation of industry-wide regulations directly targeting our operations could cause the value of our securities to significantly decline. Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s oversight and discretion over our business operations could result in a material adverse change in our operations and the value of our ADSs” for details. |
| ● | Failure to comply with various evolving PRC laws and regulations regarding cybersecurity and data privacy could subject us to penalties, damage our reputation and brand, and harm our business and results of operations. |
| ● | The PRC government has recently indicated an intent to exert more oversight over overseas offerings by and foreign investment in China-based issuers like us. On February 17, 2023, the CSRC released the Overseas Listing Trial Measures, and five supporting guidelines, effective on March 31, 2023. Pursuant to the Overseas Listing Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedure and report relevant information to the CSRC. In addition, domestic companies that have been listed on a foreign stock exchange prior to the effective date of the Overseas Listing Trial Measures are required to file with the CSRC within three working days after such domestic companies complete a securities offering on the foreign stock exchange on which their securities have been listed. Since the Overseas Listing Trial Measures were newly promulgated, there are substantial uncertainties as to its interpretation, application and enforcement. If the filing procedure with the CSRC under the Overseas Listing Trial Measures is required for any future offerings, listings or any other capital raising activities by us, it is uncertain whether we could complete the filing procedure in a timely manner, or at all. Any such circumstance could significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval of or filing with the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC laws, and, if required, we cannot predict whether or for how long we will be able to obtain such approvals or complete such filings” for details. |
| ● | The PCAOB had historically been unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections of our auditor in the past has deprived our investors of the benefits of such inspections. |
| ● | Our ADSs may be prohibited from trading in the United States under the HFCAA in the future if the PCAOB is unable to inspect or investigate completely auditors located in the mainland of China. The delisting of the ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. |
| ● | We may rely on dividends paid by our subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. In particular, PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. PRC companies are also required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their statutory surplus reserves until the accumulative amount of such reserves reaches 50% of their registered capital. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries and the VIEs in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. To the extent cash or assets in our business are in the mainland of China or Hong Kong or a mainland of China or Hong Kong entity, such cash or assets may not be available to fund operations or for other use outside of China due to interventions in, or the imposition of restrictions and limitations on, the ability of our holding company, our PRC subsidiaries, or VIEs or VIE Subsidiaries by the PRC government to transfer cash or assets. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could limit our ability to pay dividends to holders of our ADSs and common shares” for details. |
17
Risks Related to Our ADSs
| ● | The market price for our ADSs may be volatile. |
| ● | Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change-of-control transactions that holders of our Class A common shares and ADSs may view as beneficial. |
| ● | Our corporate actions are substantially controlled by our officers, directors and their affiliated entities. |
Risks Related to Our Business and Industry
If we are not able to develop new types of learning products or services under the recent regulatory policies in China to successfully attract prospective learners and customers in a timely or cost-effective manner or to continue to attract learners and customers to purchase our existing products or services, our business, results of operations and prospects will continue to be materially and adversely affected.
The success of our business in the future depends primarily on our ability to develop new types of learning products or services to meet market needs while in compliance with the then effective regulatory policies in China. This will depend on several factors, including our ability to adapt existing programs or solutions to respond to changes in regulatory policies, market trends and learner demands, expand our geographic reach, effectively market our services or solutions to a broader base of prospective learners and customers, develop additional high-quality learning content solutions, maintain consistent and high teaching quality and respond effectively to competitive pressures. If we are unable to successfully attract prospective learners and customers with new types of learning products or services in a timely or cost-effective manner or if we are not able to continue to attract learners and customers to purchase our existing products or services and to increase the spending of our learners and customers, there is no guarantee that our revenues may resume or maintain growth in the future, which may have a material adverse effect on our business, financial condition and results of operations.
We also engage in new initiatives from time to time to expand our offerings or market reach. We may dedicate significant resources to our new initiatives, but fail to achieve expected results from such new initiatives. However, some of those new initiatives may be easily replicable by our competitors in a short timeframe, which may render our efforts less valuable. In addition, if such new initiatives are not well accepted by market, the reputation of our other offerings and our overall brand and reputation may be harmed. As a result, our overall business and results of operations may be materially and adversely affected. In addition, some of these new initiatives have not generated significant or any profit to date. We have limited experience responding quickly to changes and competing successfully for certain of these new areas. In addition, newer offerings may require more financial and managerial resources than available. Furthermore, there is limited operating history on which you can base your evaluation of the business and prospects of these relatively more recent offerings. For example, although we had significant growth in the sales of certain new and existing products and services during the fiscal year ended February 29, 2024, we cannot assure you that we will be able to maintain such growth going forward.
If we fail to successfully design and execute our growth strategies, our business and prospects may be materially and adversely affected.
It is paramount that we properly design our growth strategies amidst the current regulatory policies and competitive environment. Our current growth strategies include continuing to enhance the learning services and others with better learning experience and wider offerings, enhancing learning content solutions, and making further investments to strengthen our fundamental capabilities. We may not succeed in executing our growth strategies due to a number of factors, including, without limitation, the following:
| ● | we may fail to promote our current business in existing markets or identify, or market our current business in, new markets with sufficient growth potential; |
| ● | we may fail to obtain the requisite licenses and permits necessary to operate our business at our desired locations from local government authorities or face risks in opening without the requisite licenses and permits; |
| ● | we may not be able to further expand our existing content library or solutions; |
18
| ● | we may not be able to retain core talents that are critical to our business; |
| ● | we may fail to maintain our competitive advantages in the market; |
| ● | we may not be able to expand the scale of our current business in a cost-effective and timely manner; |
| ● | we may not be able to successfully replicate or adapt our business model in overseas markets; and |
| ● | we may not be able to successfully identify new business opportunities, if any, or integrate acquired businesses and may not be able to achieve the benefits we expect from recent and future acquisitions or investments. |
If we fail to successfully execute on our growth strategies, we may not be able to maintain our growth rate and our business and prospects may be materially and adversely affected as a result.
If we are not able to maintain and enhance the value of our brands, our business and operating results may be harmed.
We believe that market awareness of our “Xueersi” brand has contributed significantly to the success of our business, and that maintaining and enhancing the value of this brand is critical to maintaining and enhancing our competitive advantage. If we are unable to successfully promote and market our brands and services, our ability to attract new learners could be adversely impacted and, consequently, our financial performance could suffer. We engage in a range of marketing activities to enhance our brands. We have also sought to strengthen recognition for our other brands, such as our “Haoweilai” brand, which is the umbrella brand for all our brands, and our “Think Academy,” through which we provide our offerings outside the mainland of China. A number of factors could prevent us from successfully promoting our brands, including learner dissatisfaction with our services, and the failure of our marketing tools and strategies to attract prospective learners. In addition, our brands may be adversely affected by misconduct and non-compliance, including those related to licensing or qualification requirements, of our business partners who purchase our services and solutions. If we are unable to maintain and enhance our existing brands, successfully develop additional brands, or utilize marketing tools in a cost-effective manner, our revenues and profitability may suffer. See “—Our brand image, business and results of operations may be adversely impacted by illegal, fraudulent or collusive activities or other wrongdoings by our employees and third parties.”
Furthermore, we cannot assure you that our sales and marketing efforts will be successful in further promoting our brands in a cost-effective manner. If we are unable to further enhance our brand recognition and increase awareness of our services, or if we incur excessive sales and marketing expenses, our business and results of operations may be materially and adversely affected.
Significant uncertainties exist in relation to the interpretation and implementation of, or proposed changes to, the PRC laws, regulations and policies regarding the after-school tutoring industry. In particular, our compliance with the Alleviating Burden Opinion Regarding Compulsory Education and the implementation measures issued by the relevant PRC government authorities has had, and could have further, material adverse effect on us.
The regulatory environment with respect to the industry that we have been operating in China is changing rapidly for the past years and therefore is subject to substantial uncertainties. Prior to the end of December 2021, we primarily operated the K-9 Academic AST Services in China. In July 2021, the General Office of the CPC Central Committee and the General Office of the State Council promulgated the Alleviating Burden Opinion Regarding Compulsory Education, which contains high-level policy directives in terms of the requirements and restrictions on after-school tutoring institutions, including, among other things, (i) institutions providing after-school tutoring services on academic subjects in China, or Academic AST Institutions, need to be registered as non-profit institutions; (ii) foreign ownership in Academic AST Institutions is prohibited, including through contractual arrangements, and companies with existing foreign ownership need to rectify the situation; (iii) listing or raising capital from capital markets to invest in, or acquire, Academic AST Institutions is prohibited and local government authorities shall no longer approve any new Academic AST Institutions; (iv) online Academic AST Institutions that have previously filed with the local education administration authorities shall be re-approved; (v) for non-academic tutoring, local government authorities shall identify corresponding competent authorities for different tutoring categories, set forth standards and approve relevant non-academic tutoring institutions; and (vi) other compliance requirements for the operation of after-school tutoring institutions, including without limitation that after-school tutoring institutions shall not provide tutoring services during national holidays, weekends and school breaks, and that risk management and control shall be established over the pre-collection of fees by after-school tutoring institutions. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations—Regulations on Private Education—Regulations on After-school Tutoring Institutions and Online Education” for more details.
19
The Alleviating Burden Opinion Regarding Compulsory Education also provides that administration over academic tutoring services for high school students, which do not fall within China’s compulsory education system, shall be implemented by reference to the relevant provisions of the Alleviating Burden Opinion Regarding Compulsory Education, however, it remains uncertain as to how and to what extent such implementation by reference will be. Therefore, we may be required to take further actions regarding our high-school academic tutoring services to comply with the Alleviating Burden Opinion Regarding Compulsory Education and its implementation measures. Further, the Ministry of Education of the PRC, or the MoE, together with other government authorities, issued several implementation regulations and rules, including without limitation, a circular requiring all Academic AST Institutions providing K-9 Academic AST Services to complete registration as non-profit by the end of 2021 and a circular requiring all online Academic AST Institutions that have filed with the local education administration authorities providing tutoring services on academic subjects to obtain the private school operating permit by the end of 2021. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations—Regulations on Private Education—Regulations on After-school Tutoring Institutions and Online Education” for more details.
We have been closely monitoring the evolving regulatory environment and are making efforts to seek guidance from and cooperate with the government authorities to comply with the Alleviating Burden Opinion Regarding Compulsory Education and its implementation measures. In compliance with the Alleviating Burden Opinion Regarding Compulsory Education and applicable rules, regulations and measures, we ceased offering K-9 Academic AST Services in China by the end of December 2021. The cessation has had a substantial adverse impact on our revenues for the fiscal year ended February 28, 2022 and subsequent periods. In the fiscal year ended February 28, 2022, the revenues from offering K-9 Academic AST Services in the mainland of China accounted for a substantial majority of our total net revenues prior to the cessation of such services. Due to the complexity and substantial uncertainty of the regulatory environment and considering that local authorities in different regions may adopt different interpretation and implementation measures, we cannot assure you that our operations would be in full compliance with applicable laws, regulations and policies, including the Alleviating Burden Opinion Regarding Compulsory Education and its implementation measures, in a timely manner, or at all, in all geographic areas where we operate our business. We may become subject to fines or other penalties or be required to terminate certain operations or incur material costs and expenses to comply with such applicable laws, regulations and policies, in which case our business, financial condition and results of operations could be materially and adversely affected. In addition, there may be new PRC rules or regulations on the business we currently operate, and such new rules and regulations may subject our business operations to further adjustments. In the event of such changes, our business operations may be adversely impacted.
We are required to obtain various operating licenses and permits and to make registrations and filings for our current business in China; failure to comply with these requirements may materially and adversely affect our business and results of operations.
We are required to obtain and maintain various licenses and permits and fulfill registration and filing requirements in order to operate our current business. For instance, pursuant to the Private Education Law and the Amended Implementation Rules for the Private Education Law, or the Amended Implementation Rules, effective on September 1, 2021, private schools shall obtain private school operating permits and their branches shall make filings with the relevant education authorities. It is further provided in the relevant directives that local government authorities shall identify corresponding competent authorities for different tutoring categories and set forth standards by categories to approve relevant non-academic tutoring institutions. As of the date of this annual report, some local government authorities have issued rules or recently released draft rules for public comments requiring non-academic tutoring institutions to obtain private school operating permits or other approvals and comply with relevant implementation measures. Given these local rules are recently promulgated, there are substantial uncertainties as to their interpretation, application and enforcement. Furthermore, the Alleviating Burden Opinion Regarding Compulsory Education provides that administration and supervision over institutions providing academic tutoring services for high school students, which do not fall within China’s compulsory education system, shall be implemented by reference to the relevant provisions of the Alleviating Burden Opinion Regarding Compulsory Education. However, it remains uncertain as to how and to what extent the administration over institutions providing academic tutoring services for high school students will be implemented. Therefore, we cannot assure you that we would not be required to take further actions, including obtaining any operation permits regarding our academic tutoring services for high school students to comply with the Alleviating Burden Opinion Regarding Compulsory Education and its implementation measures, if applicable.
Although we follow internal guidelines to make necessary registrations and filings and obtain, maintain and renew necessary licenses and permits on a timely basis, we cannot assure you we could obtain, maintain and renew all requisite licenses, permits, approvals and filings or pass all requisite assessments in a timely manner, or at all. Even if we obtain relevant licenses and permits, such as private school operating permits, there is no assurance that such licenses and permits cover all the learning services we currently provide or that we would not be required to obtain additional licenses or permits, such as additional private school operating permits, in the future. Besides, we are subject to various compliance requirements under applicable laws and regulations regarding our current business. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations” for more details.
20
We are closely monitoring the evolving regulatory environment and making efforts to seek guidance from and cooperate with the competent local government authorities to comply with relevant administrative measures regarding our current business. While we have internal control mechanism in place to promote regulatory compliance, such mechanism may not always be effective or be strictly implemented at each of our schools. In the fiscal year ended February 29, 2024, we were subject to administrative penalties, including fines and orders for rectification measures, for isolated instances in which tutoring services were not provided in a fully compliant manner. We have undertaken measures to rectify such non-compliances. However, we cannot assure you that the operations of our current business would be in full compliance with applicable laws, regulations and policies, in a timely manner, or at all as relevant government authorities have significant discretion in interpreting and implementing such laws and regulations and their related local rules. We also cannot assure you that there will not be new PRC rules or regulations on the current business we operate, or such new rules and regulations will not subject our business operations to additional license or filing requirements. If we fail to comply with applicable legal requirements, we may be subject to fines, confiscation of the gains derived from our non-compliant operations or the suspension of our non-compliant operations, which may materially and adversely affect our business and results of operations.
We face significant competition, and if we fail to compete effectively, we may lose our market share or fail to gain additional market share, and our profitability may be adversely affected.
The learning solutions market in China is rapidly evolving, highly fragmented and competitive, and we expect competition to persist and intensify. We face competition in each type of products or services we offer and in each geographic market where we operate. Our competitors include providers of learning services and learning content solutions.
Our learner enrollments and sales of products or solutions may decrease due to intense competition. Some of our competitors may be able to dedicate greater resources than we can to the development, promotion and sale of their solutions, programs, services and products, respond more quickly than we can to changes in learner needs, market trends or new technologies and have gained more experience in certain areas than we have due to their longer operating history. Moreover, the increasing use of the internet and advancement in internet, mobile internet and computer-related technologies, such as online live broadcasting technologies, are eliminating geographic and physical facility-related entry barriers to providing learning services or solutions. As a result, smaller local companies or internet-content providers may be able to use the internet or mobile internet to offer their programs, services and products quickly and cost-effectively to a large number of learners with lower capital expenditures than previously required. Consequently, we may be pressured to reduce course fees or increase spending in response to competition in order to retain or attract learners or pursue new market opportunities, which could result in a decrease in our revenues and profitability. We will also face increased competition as we expand our operations. We cannot assure you that we will be able to compete successfully against current or future competitors. If we are unable to maintain our competitive position or otherwise effectively respond to competition, we may lose our market share or fail to gain additional market share, and our profitability may be materially and adversely affected.
Our historical financial and operating results, growth rates and profitability may not be indicative of future performance.
Our net revenues decreased from $4,390.9 million in the fiscal year ended February 28, 2022 to $1,019.8 million in the fiscal year ended February 28, 2023, but increased to $1,490.4 million in the fiscal year ended February 29, 2024. Any evaluation of our business and our prospects must be considered in light of the risks and uncertainties encountered by companies at our stage of development, especially considering the recent change of regulatory policies on the after-school tutoring services market. In addition, our past results may not be indicative of future performance because of the cessation of K-9 Academic AST Services in the mainland of China by the end of December 2021 as well as any new businesses developed or acquired by us. Substantial uncertainties exist with respect to the profitability and cash generating capability of such new businesses. Furthermore, our results of operations may vary from period to period in response to factors beyond our control, including general economic conditions, regulations or government actions pertaining to the learning solutions market in China, changes in spending on learning solutions and non-recurring charges incurred under unexpected circumstances or in connection with acquisitions, equity investments or other extraordinary transactions. Due to these and other factors, our historical financial and operating results, growth rates and profitability as well as quarter-to-quarter comparisons of our operating results may not be indicative of our future performance and investors should not rely on them to predict our future performance.
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If we fail to adopt new technologies or upgrade existing technologies that are important to our business, our competitive position and ability to generate revenues may be materially and adversely affected.
We believe our technologies are core to our success and are critical to the implementation of our business model. We operate a highly digital business and rely on innovative technologies and research and development capabilities to fuel our growth. For instance, our enrichment learning is empowered by our self-developed intelligent class content development system as well as AI-driven teaching methodologies, such as computer vision, speech recognition and natural language processing. We also provide learning solutions premised on our core technology capabilities empowering private learning institutions in China. However, we cannot assure you that we can keep up with the fast pace of the technology industry, and continue to develop, innovate and utilize our proprietary capabilities. Our technologies may become obsolete or insufficient due to the new solutions and technologies developed and introduced by competitors, and we may have difficulties in following and adapting to technological changes in the learning solutions industry in a timely and cost-effective manner. Developing and integrating new technologies into our existing offerings and algorithms could be expensive and time-consuming and we may not succeed in developing and incorporating new technologies at all. If we fail to continue to develop, innovate and utilize our technologies effectively and in a timely manner, we may not be able to continue to develop our business or empower other industry players including teachers and learning institutions and our business, financial performance and prospects could be materially and adversely affected.
Moreover, the adjustments, updates and expansions of our technology functionalities and the development of new product and service features may not be accepted by existing or prospective learning institutions, teachers and learners, and we may not be able to introduce them as quickly as teachers require or as quickly as our competitors introduce competing offerings. If we are unsuccessful in pursuing technology and content development and upgrading opportunities due to factors beyond our control, unable to attract technology and content development personnel, or encounter other related challenges, our ability to maintain existing relationships with learning institutions or attract new learning institutions to adopt our solutions and our business and reputation may be materially and adversely affected.
We may be subject to liability claims for any inappropriate or illegal content in our learning content or that is otherwise displayed on our websites or mobile apps, which could cause us to incur legal costs and damage our reputation.
Although we have deployed content-monitoring technologies and procedures, we cannot assure you that there will be no inappropriate or illegal content included in our learning content or websites and mobile apps. Moreover, as we have limited control over the behaviors of our learners or users of our websites or mobile apps, such learners or users may engage in conversations or activities on our websites or mobile apps that may be inappropriate or illegal under applicable laws and regulations. For instance, learners may upload presentations, texts or videos to our learning platform for interactive in-class discussions or post-class references. We cannot assure you that such presentations, texts or videos do not contain inappropriate or illegal content. If inappropriate or illegal content were to be displayed on our learning platform, websites or mobile apps, we may not be able to correct or remove it on a timely basis. In such an event, we may face civil, administrative or criminal liability or legal or regulatory sanctions, such as being required to restrict or discontinue our content, products or services, if an individual or corporate, governmental or other entity believes that any of our learning content or content displayed by us or posted by third parties on our platform, websites or mobile apps violates any laws, regulations or governmental policies or infringes upon such entity’s legal rights. Even if such a claim were not successful, defending such a claim may lead to significant negative publicity, cause us to incur substantial costs and involve significant time and attention of our management and other resources, which could materially and adversely affect our business, financial condition, results of operations and prospects.
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We may not be able to recruit, train and retain qualified and dedicated teachers, who are critical to the success of our business and the effective delivery of our services to learners.
Our teachers are critical to the quality of our services and our reputation. We seek to hire qualified and dedicated teachers who are able to deliver effective and inspirational instructions to learners. There is a limited pool of teachers with these attributes, and we must provide competitive compensation packages to attract and retain such teachers. We must also provide continued training to our teachers to ensure that they stay abreast of changes in learner demands and other key trends necessary to teach effectively. We may not be able to recruit, train and retain a sufficient number of qualified teachers in the future to keep pace with our business development while maintaining consistently high teaching quality in the different markets we serve. In addition, PRC laws and regulations require teachers to have requisite licenses if they teach, among others, academic subjects such as Chinese, mathematics, English, physics, chemistry, biology, history and geography, and teachers are also required to have relevant qualifications if they teach non-academic subjects. However, we cannot assure you that our teachers can all apply for and obtain the teaching licenses and relevant qualifications in a timely manner or at all due to various reasons, such as the time gap between the recruitment and the newly-recruited teachers taking the requisite examinations and ultimately obtaining the teacher licenses or relevant qualifications, or cancellations and delays of teacher license or other qualification examinations in recent years due to COVID-19. If some of our teachers are unable to apply for and obtain the requisite teaching licenses or relevant qualifications on a timely basis, or at all, we may be required to rectify such non-compliance and may not be able to continue to retain such teachers. A shortage of qualified teachers or a decrease in the quality of our teachers’ services, whether actual or perceived, or a significant increase in compensation for us to retain qualified teachers, would have a material adverse effect on our business, financial condition and results of operations.
We may not be able to continue to improve our current business to meet the demand of learners, parents, teachers and learning institutions in a cost-effective manner. If the level of satisfaction of our leaners, parents, teachers and learning institutions with our services declines, they may decide to withdraw from our programs and request refunds and our business, financial condition, results of operations and reputation would be adversely affected.
Our current offerings encompass (i) learning services and others, and (ii) learning content solutions, in order to meet the demands of learners, parents, teachers and learning institutions. Since we launched certain of our current business relatively recently, we cannot assure you that such business will turn out to be successful in the long term. In addition, further improvements to solutions, services and content quality may involve significant costs and we cannot guarantee that the improved services or solutions will meet the needs of learners, parents, teachers and learning institutions more precisely, or at all. If we are not able to continue to improve our current business or not able to do so in a cost-effective manner to meet their demand, our results of operations and financial performance may suffer as a result.
The success of our business largely depends on our ability to deliver a satisfactory learning experience. For instance, in providing our enrichment learning services, we may fail to arouse or maintain a learner’s interests in the subject or improve a learner’s capabilities, and the learner may perform below expectations even after using our services. We may also fail to continually update and enhance our learning materials and teaching methods to accommodate the ever-changing admission and assessment processes. A learner’s learning experience may also suffer if his or her interactions with our teachers do not meet the learner’s expectations. If a significant number of learners fail to become interested in the subject or fail to improve their capabilities after using our services, or if they are not satisfied with our services or their learning experiences, they may decide to seek refunds or to not purchase our services or solutions again, and our business, financial condition, results of operations and reputation would be materially and adversely affected.
We offer refunds for any remaining classes in a course to learners who withdraw from the course. Our refund policies in these scenarios vary from service to service. The number of refund requests and the amount of refunds could be affected by a number of factors, many of which are beyond our control. These factors include, without limitation, then-current market conditions, learner preferences over the content and style of courses, competitiveness of our service offerings, learner dissatisfaction with our teaching quality and our service offerings, negative publicity regarding us or the learning solutions market in general, and any change or development in PRC laws and regulations with respect to fees charged by learning service providers like us. As of the date of this annual report, we did not have any material liabilities in connection with the refunds. Any refund payments that we may be required to make to our learners, as well as the expenses we could incur for processing refunds and resolving refund disputes, if any, could adversely affect our cash flows, business operations and financial results.
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We derive a significant portion of our revenues from a limited number of cities. Any event negatively affecting the learning solutions market in these cities, or any increase in the level of competition for the types of services we offer in these cities, could have a material adverse effect on our overall business and results of operations.
Although we have expanded our offerings into a broad range of cities in China, we derive a significant portion of our revenues from a limited number of cities. In the fiscal years ended February 28, 2022, 2023 and February 29, 2024, we derived a significant portion of our total net revenues from learning services and others, such as in Beijing, Shanghai, Guangzhou, Shenzhen, and Tianjin. If any of these cities experiences an event negatively affecting its learning solutions market, such as a serious economic downturn, natural disaster or outbreak of contagious disease, adopts regulations relating to private education that place additional restrictions or burdens on us, or experiences an increase in the level of competition for the types of services we offer, our overall business and results of operations may be materially and adversely affected.
We face a number of manufacturing, supply chain, distribution channel and inventory risks as well as product quality risks that, if not properly managed, could harm our financial condition, operating results and prospects.
Our learning content solutions provide the development and distribution of next-generation diverse learning content in both paper and digital formats. The offering of learning content solutions involves various risks in the course of paper content and product manufacturing, supply chain management, distribution channel identification and maintenance as well as inventory management and sales. For instance:
| ● | the costs of raw materials and logistics may increase significantly, which may decrease our profits for this business if the sale prices could not be lifted; |
| ● | our inventories may be negatively affected by disruptions to our supply chains or disputes with our suppliers, which would result in additional costs; |
| ● | we may incur increased inventory costs or lose sales opportunities if we are unable to maintain adequate production capacity or an appropriate level of product inventory; |
| ● | our products may be subject to errors, defects or other quality issues that negatively affect our results of operations and reputation; |
| ● | we may not be able to successfully maintain and expand the distribution network for our products; |
| ● | our ready-for-publish paper content may fail to be published in a timely manner, or at all, if a valid publish number for such content fails to be obtained; and |
| ● | we may also face credit risks from our customers as our accounts receivables may not be collected in a timely manner, or at all. |
If we cannot properly manage these risks, our financial condition, operating results and prospects may be adversely affected.
We are subject to risks related to global expansion.
We expect to expand our business globally. Since fiscal year 2020, we have established a new school in the United States and expanded our business into other countries or regions, such as Singapore and United Kingdom. In addition, we provide learning services through our website and mobile apps to learners worldwide. Furthermore, we are selling our products, such as print books, to learners in certain foreign jurisdictions. As a result, our business and operations are subject to a variety of laws and regulations in foreign jurisdictions that are constantly evolving and subject to potentially differing interpretations, which may include but are not limited to, learning services, labor and employment, advertising, digital content, consumer protection, mobile communications and media, intellectual property ownership and infringement, tax, import and export controls, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy and security, anti-competition as well as health and safety.
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For example, we are subject to the General Data Protection Regulation, or the GDPR, in the European Union, the Data Protection Act 2018 in the United Kingdom and anti-long-arm jurisdiction related laws and regulations. When exporting our products, we must also comply with various economic and trade sanctions laws in different jurisdictions, such as the United States and United Kingdom, which prohibit the provision of products and services to countries, governments and persons on certain target lists. Furthermore, our global business may subject us to risks associated with reduced or varied protection for intellectual property rights in some markets, and we may face intellectual property infringement claims in relation to online classes, mobile apps and other products and services that we offer in overseas markets. We may also be required to obtain and maintain permits, licenses and approvals from relevant local government authorities in order to offer our solutions or products, such as providing learning services to learners in foreign jurisdictions, and we cannot assure you that we will be able to obtain or maintain such permits, licenses or approvals. In addition, some foreign jurisdictions may have national security laws or policies that restrict our ability to: (i) invest in or acquire companies; (ii) develop, import or export certain technologies; or (iii) utilize technologies that are deemed by foreign government authorities to pose a threat to their national security.
There is no harmonized approach to these laws and regulations globally. Consequently, we could face increased risks and uncertainties of non-compliance with applicable laws and regulations by expanding internationally. We may need to change and limit the way we operate our business and may have difficulty maintaining the current operating model that is compliant. There also can be no assurance that our employees, contractors, agents or business partners will not violate such laws and regulations or our compliance policies and procedures. As a general matter, compliance with laws and regulations may result in substantial costs and may necessitate changes to our business practices, and otherwise materially and adversely affect our business, financial condition and results of operations.
We have made, and expect to continue to make, investments to expand our global business operations and compete with local market players. Such investments may not be successful and may negatively affect our operating results. Conducting our business internationally, particularly in jurisdictions in which we have limited experience, exposes us to risks and challenges that we do not face to the same degree in China, which include but are not limited to:
| ● | failure to understand and adapt to cultural differences, local consumer behaviors and preferences and localize our solutions to appeal to local tastes; |
| ● | competition with businesses that understand local markets and local business practice better than we do, that have pre-existing relationships with potential customers in those markets, or that are favored by government or regulatory authorities in those markets; |
| ● | challenges in replicating or adapting our policies, procedures and systems to operating environments different from that of China, including technology and logistics infrastructure; |
| ● | increased financial accounting and reporting burdens, and complexities associated with implementing and maintaining adequate internal controls; |
| ● | failure to attract and retain capable talent with international perspectives who can effectively manage and operate local businesses; |
| ● | adverse tax consequences, including the complexities of foreign tax systems, and restrictions on the repatriation of earnings; |
| ● | heightened restrictions and barriers on the transfer of data between different jurisdictions; |
| ● | availability, reliability and security of international and cross-border payment systems and logistics infrastructure; |
| ● | exchange rate fluctuations, which may have a material adverse effect on cross-border product sales and businesses in the affected jurisdictions; |
| ● | credit and collectability risk on our trade receivables with customers in certain international markets; and |
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| ● | general geopolitical environment among the countries and regions where we have operations or may expand into. |
Failure to manage these risks could negatively affect our ability to expand our global businesses and operations as well as materially and adversely affect our business, financial condition and results of operations.
Our success depends on the continuing efforts of our senior management team and other key personnel and our business may be harmed if we lose their services.
Our future success depends heavily upon the continuing services of the members of our senior management team. If any member of our senior management team leaves us and we fail to effectively manage a transition to new personnel in the future or if we fail to attract and retain qualified and experienced professionals on acceptable terms, or at all, our business, financial condition and results of operations could be materially and adversely affected. Competition for experienced management personnel in the industry we operate is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or key personnel, or to attract and retain high-quality senior executives or key personnel in the future.
Our success also depends on our having highly trained financial, technological, human resource, sales and marketing staff, management personnel and qualified and dedicated teachers for local markets. We may need to hire additional personnel as our business grows. A shortage in the supply of personnel with requisite skills or our failure to recruit them could impede our ability to increase revenues from our existing courses and services, to launch new courses and services and to expand our operations, and may have a material adverse effect on our business and financial results.
Our brand image, business and results of operations may be adversely impacted by illegal, fraudulent or collusive activities or other wrongdoings by our employees and third parties.
Illegal, fraudulent or collusive activities or other wrongdoings by our employees or third parties could subject us to liability or negative publicity and harm our business. Negative publicity generated as a result of actual or alleged wrongdoings by our employees or any third parties could damage our reputation and diminish the value of our brand, and materially and adversely affect our business, financial condition and results of operations.
We are exposed to the risk of various types of illegal, fraudulent or collusive activities or other wrongdoings, including but not limited to taking kickbacks, forging documentation, among others. It is not always possible to deter or discover wrongdoings, and the precautionary or remedial measures we take may not be effective in controlling unknown or unmanaged risks or losses. An example of such incident is the one related to the “Light Class” business. For more details, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings.” While we have adopted codes of conduct for our employees and implemented policies and procedures relating to data privacy, intellectual property, anti-corruption, among other aspects, we cannot assure you that our employees will abide by these codes, policies and procedures or that the precautions we take to detect and prevent employee misconduct will be effective.
Our reputation and the trading price of our ADSs may be negatively affected by adverse publicity or detrimental conduct against us.
Adverse publicity concerning any actual or perceived failure to comply with legal and regulatory requirements, especially the Alleviating Burden Opinion Regarding Compulsory Education, alleged accounting or financial reporting irregularities, regulatory scrutiny and further regulatory action, litigation or penalties could harm our reputation and cause the trading price of our ADSs to decline and fluctuate significantly. For example, after Muddy Waters Capital LLC, an entity unrelated to us, issued a series of reports containing various allegations about us in June and July 2018, the trading price of our ADSs declined sharply and we received numerous investor inquiries. The negative publicity and the resulting decline of the trading price of our ADSs also led to the filing of shareholder class action lawsuits against us and some of our current and former executives.
Moreover, adverse publicity, regardless of its merits and veracity, about us and our business, shareholders, affiliates, directors, officers, teaching staff and other employees, as well as the industry in which we operate, could also harm our reputation and cause the trading price of our ADSs to fluctuate significantly. Adverse publicity could be related to a wide variety of matters, including but not limited to:
| ● | false or malicious allegations or rumors of our business about failure to comply with legal and regulatory requirements; |
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| ● | alleged misconduct or other improper activities committed by our students or our directors, officers, teaching staff and other employees, including misrepresentation made by our employees to potential students during sales and marketing activities, and other fraudulent activities to artificially inflate the popularity of our services or course offerings; |
| ● | false or malicious allegations or rumors about us or our directors, shareholders, affiliates, officers, teaching staff and other employees; |
| ● | complaints by our students about our offerings and sales and marketing activities; |
| ● | complaints about the truthfulness or authenticity of the advertisements for our offerings; |
| ● | refund disputes of course fees between us and our students or administrative penalties; and |
| ● | employment-related claims relating to alleged employment discrimination, wage and hour violations. |
We may continue to be the target of adverse publicity and detrimental conduct, including complaints, anonymous or otherwise, to regulatory agencies regarding our operations, accounting, revenues and regulatory compliance practices. In particular, we may become the target of anti-competitive, harassing, or other detrimental conduct by third parties. Such conduct includes allegations, anonymous or otherwise, sent to our auditors and/or other third parties regarding our operations, accounting, revenues, business relationships, business prospects and business ethics. Additionally, allegations, directly or indirectly against us, may be posted in social media platforms and similar channels by anyone at any time, whether or not related to us, on an anonymous basis. We may be subject to government or regulatory investigations or inquiries, or shareholder lawsuits, as a result of such third-party conduct and may be required to incur significant time and substantial costs to defend ourselves, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Our reputation may also be negatively affected as a result of the public dissemination of allegations or malicious statements about us, which in turn may materially and adversely affect the trading price of our ADSs.
We have been and may again be subject to legal proceedings, claims and investigations and could be adversely impacted by unfavorable results of legal proceedings and investigations.
We are subject to various legal proceedings, claims and investigations from time to time in the ordinary course of our business and have not yet been fully resolved, and new legal proceedings, claims, investigations, penalties or actions may arise in the future. The existence of litigation, claims, investigations and proceedings have adversely affected and may continue to adversely affect our reputation, business, results of operations and financial condition.
We have been defending putative shareholder class action lawsuits described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings—Litigation,” including any appeals of such lawsuits.
On February 4, 2022, a complaint was filed in the U.S. District Court for the Southern District of New York against our company and certain of our current and former executives, advancing claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (2013). The plaintiff seeks to represent all purchasers of our company’s ADSs between April 26, 2018 and July 22, 2021. On February 10, 2023, our company filed a motion to dismiss the amended complaint. On March 27, 2023, the lead plaintiff filed an opposition to our company’s motion to dismiss. On April 26, 2023, our company filed a reply to the lead plaintiff’s opposition. On October 2, 2023, the Court granted our company’s motion to dismiss in its entirety and dismissed the amended complaint in its entirety without prejudice. After requesting for and obtaining an extension from the Court, the lead plaintiff filed a second amended complaint on November 20, 2023. Our company filed a motion to dismiss the second amended complaint on January 19, 2024. On February 15, 2024, the lead plaintiff filed the opposition to our company’s motion to dismiss. On March 15, 2024, our company filed its reply to lead plaintiff’s opposition. The Court has not yet ruled on the motion to dismiss.
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Furthermore, on March 29, 2023, a complaint was filed in the U.S. District Court for the District of New Jersey against our company and our chief executive officer, advancing claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (2013). The plaintiff seeks to represent all purchasers of our company’s ADSs between June 14, 2022 and March 14, 2023. On August 17, 2023, the Court appointed a lead plaintiff. On October 16, 2023, the lead plaintiff filed an amended complaint, which named our company and several executives as co-defendants. On December 15, 2023, our company and the other defendants filed a joint motion to dismiss the amended complaint. On February 13, 2024, the lead plaintiff filed the opposition to the defendants’ motion to dismiss. On March 29, 2024, our company and other defendants filed a reply to the lead plaintiff’s opposition. The Court has not yet ruled on the motion to dismiss. These actions are in their preliminary stages. We are defending against these actions vigorously.
We are currently unable to estimate the possible loss or possible range of loss, if any, associated with the resolution of these lawsuits. In the event that our initial defense of these lawsuits is unsuccessful, there can be no assurance that we will prevail in any appeal. Any adverse outcome of these cases, including any plaintiff’s appeal, could have a material adverse effect on our business, financial condition, results of operation, cash flows and reputation. In addition, there can be no assurance that our insurance carriers will cover all or part of the defense costs, or any liabilities that may arise from these matters. The litigation process may utilize a significant portion of our cash resources and divert management’s attention from the day-to-day operations of our company, all of which could harm our business. We are also subject to claims for indemnification related to these matters, and we cannot predict the impact that indemnification claims may have on our business or financial results.
In addition, as described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal and Administrative Proceedings,” the SEC’s Division of Enforcement has sought the production of certain documents and information related to the transactions identified in the Muddy Waters reports, issues related to the “Light Class” business that we announced in April 2020, and the subsequent internal reviews regarding these issues and other related information. On September 28, 2023, the SEC and our company reached a settlement, under which our company neither admits nor denies the SEC’s allegations and agrees to pay a civil money penalty in the amount of US$1.25 million to the SEC to settle this matter. The penalty has been fully paid, and the SEC’s proceeding has concluded.
Besides, claims arising out of actual or alleged violations of law could be asserted against us by learners, teachers, vendors and business partners that utilize our services or solutions, by competitors, or by governmental entities in civil or criminal investigations and proceedings or by other entities. These claims could be asserted under a variety of laws, including but not limited to consumer protection laws, intellectual property laws, unfair competition laws, privacy laws, labor and employment laws, securities laws, real estate laws, tort laws, contract laws, property laws and employee benefit laws. For example, we are subject to ongoing contract disputes and other proceedings in China. We are unable to predict the outcome of these cases, or reasonably estimate a range of possible loss, if any, given the current status of the proceedings. We accrue liability when the loss payment with respect to these cases is probable and reasonably estimable, which is not material to our overall business operations. There is no guarantee that we will be successful in defending ourselves in legal and administrative actions or in asserting our rights under various laws. Even if we are successful in our attempt to defend ourselves in legal and administrative actions or to assert our rights under various laws, enforcing our rights against the various parties involved may be expensive, time-consuming and ultimately futile. These actions could expose us to negative publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including but not limited to suspension or revocation of licenses to conduct business.
Accidents or injuries suffered by our learners or other people caused by us, or perceived to be caused by us, may adversely affect our reputation, subject us to liability and cause us to incur substantial costs.
We have a large number of learners and their parents on our premises to attend classes and/or use our facilities, and they may suffer accidents or injuries or other harm on our premises, including those caused by or otherwise arising from the actions of our employees or independent contractors. Although we have enhanced preventive measures to avoid similar incidents, we cannot assure you that there will be no similar incidents in the future.
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In the event of accidents or injuries or other harm caused or perceived to be caused by us, our facilities and/or services may be perceived to be unsafe, which may discourage prospective learners and customers from using our services. Although we carry certain liability insurance policies for our learners and their parents, they may not be sufficient to cover all the compensation or even applicable to the accidents or injuries occurred. We could also face claims alleging that we should be liable for the accidents or injuries, or that we were negligent and provided inadequate supervision to our employees or independent contractors and therefore should be held jointly liable for harm caused by them. A material liability claim against us or any of our employees or independent contractors could adversely affect our reputation, learner enrollment and revenues. Even if unsuccessful, such a claim could create unfavorable publicity, cause us to incur substantial expenses and divert the time and attention of our management.
Our advertising and promotional content may subject us to penalties and other administrative actions and may harm our reputation.
Under the advertising, pricing and anti-unfair competition PRC laws and regulations, we are obligated to monitor our advertising and promotional content to ensure that such content is true and accurate and in full compliance with applicable laws and regulations. For example, the PRC Pricing Law provides that an operator is prohibited from using false or misunderstanding pricing methods to induce consumers or other operators into trading with it. In addition, education or training advertisements are prohibited from containing content such as guarantee of passing of examination or the effect of education or training, recommendation and/or endorsement by scientific research institutes, academic institutions, educational organizations, industry associations, professionals or beneficiaries using their name or image. Further, in accordance with recent regulatory requirements, no advertisements in connection with after-school tutoring services shall be published or broadcasted on the network platforms and billboards displayed on mainstream media, new media, public space or residential areas. Any violation of these laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders to cease dissemination of the advertisements and orders to publish an announcement correcting any misleading information. In circumstances of serious violations, government authorities may order us to terminate our advertising operations or revoke our licenses.
Relevant regulatory authorities have significant discretion in interpreting and implementing the advertising, pricing and anti-unfair competition laws and regulations. We cannot assure you that all of the content contained in our advertisements and promotional material is true and accurate as required by, and complies in all aspects with, the advertising, pricing and anti-unfair competition laws and regulations. We also cannot assure you that we can rectify such content which is deemed not in compliance with such laws and regulations in a timely manner or at all, especially given the uncertainty in the interpretation and implementation of relevant PRC laws and regulations. If we were found to be in violation of applicable advertising, pricing and anti-unfair competition PRC laws and regulations, we may be subject to penalties and our reputation may be harmed, which may negatively affect our operations, financial condition and prospects.
Our new products and services may compete with our existing offerings.
We are constantly developing new products, services and solutions to meet changes in the needs of learners, parents, teachers and learning institutions, learning materials, admission standards, market trends and technologies. While some of the products, services and solutions that we develop will expand our current offerings and increase learner enrollment and use of our services or solutions, others may compete with, or render obsolete, our existing offerings without increasing our total learner enrollment or usage of services or solutions.
If we are unable to increase our total learner enrollment, use of our services or solutions or profitability as we expand our product and service offerings, our business and growth may be materially and adversely affected.
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Failure to control rental costs, obtain leases at desired locations at reasonable prices or protect our leasehold interests could materially and adversely affect our business.
Our office space and service and learning centers are presently mainly located on leased premises. We may not be able to obtain new leases at desirable locations or renew our existing leases on acceptable terms or at all, which could adversely affect our business. We may have to relocate our operations for other reasons, such as increasing rentals, failure in passing the fire inspections, violations of the prescribed usage of properties, and early terminations of lease agreements. In addition, if any of the leased premises fail to pass fire inspections or comply with relevant fire safety regulations, we may have to close learning centers located on such premises. We also have not registered most of our lease agreements with relevant PRC government authorities as required by relevant PRC laws. We may be required by relevant government authorities to complete such registrations, or otherwise be subject to fines ranging from RMB1,000 to RMB10,000 for each lease agreement that has not been registered. However, failure to complete such registration would not affect the enforceability of the relevant lease agreements in practice.
In addition, a few of our lessors have not been able to provide us with documents proving completion of fire inspections of the leased premises, copies of title certificates or other evidentiary documents to prove that they have authorization to lease the properties to us. Our business and legal teams followed our internal guidelines to identify and assess risks in connection with leasing such properties, and a final business decision was made to lease such properties after our analysis of the likely impact of the defects on the leasehold interests and the value of the properties to our expansion plans. However, there is no assurance that our decision would always lead to favorable outcomes we expected to achieve. If any of our leases were terminated as a result of challenges by third parties or government authorities for a lack of title certificates or proof of authorization for leasing, we do not expect to be subject to any fines or penalties, but we may have to relocate the affected learning centers and incur additional expenses relating to such relocations. Furthermore, a few of our lessors have mortgaged the properties that we are renting. In the event that these properties are foreclosed upon due to such lessors’ failure to perform their obligations to the creditors, we may not be able to continue to use such leased properties and may incur additional expenses for relocation. If our use of the leased premises is challenged by relevant government authorities for a lack of fire inspections, we may be further subject to fines and also be ordered to relocate the affected learning centers and incur additional expenses. If we fail to find suitable replacement sites in a timely manner or on terms acceptable to us, our business and results of operations could be materially and adversely affected.
If we fail to protect our intellectual property rights, our brand and business may suffer.
We consider our copyrights, trademarks, trade names, internet domain names, patents and other intellectual property rights invaluable to our ability to continue to develop and enhance our brand recognition. Unauthorized use of our intellectual property rights may damage our reputation and brands. Our “Xueersi” brand and logo is a registered trademark in China. Our proprietary curricula and course materials are protected by copyrights. However, preventing infringement on or misuse of intellectual property rights could be difficult, costly and time-consuming, particularly in China. The measures we take to protect our intellectual property rights may not be adequate to prevent unauthorized uses. Furthermore, the application of laws governing intellectual property rights in China is uncertain and evolving, and could involve substantial risks to us. There have been several incidents in the past where third parties used our brand “Xueersi” without our authorization, and on occasion we had to resort to litigation to protect our intellectual property rights. In addition, we are still in the process of applying for the registration in China of the trademarks for our “Haoweilai” brand in certain categories. We cannot assure you that the relevant government authorities will grant us the approval to register such trademarks. As a result, we may be unable to prevent third parties from using this brand name, which may have an adverse impact on our brand image. If we are unable to adequately protect our intellectual property rights in the future, we may lose these rights, our brand name may be harmed, and our reputation and business may suffer materially. Furthermore, our management’s attention may be diverted by violations of our intellectual property rights, and we may be required to enter into costly and time-consuming litigation to protect our proprietary rights against any infringement or violation.
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We may encounter disputes from time to time relating to our use of the intellectual property of third parties or allegations of infringement of the intellectual properties of third parties, and we may be unable to be authorized to use third-party copyrighted materials.
We cannot assure you that our learning materials, marketing materials, products, programs or other intellectual properties developed or used by us do not, or will not, infringe upon valid copyrights or other intellectual property rights held by third parties. We are also authorized to use certain copyrighted materials from third parties. We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in those disputes. We have adopted policies and procedures to prohibit our employees and independent contractors from infringing upon third-party copyright or intellectual property rights. However, we cannot assure you that our teachers or other personnel will not, against our policies, use third-party copyrighted materials or intellectual properties without proper authorization in our classes, on our websites or mobile apps, at any of our physical locations or via any other medium through which we provide our services. Our users may also post unauthorized third-party content on our websites or mobile apps used as learning platforms. We may incur liability for unauthorized use, duplication or distribution of materials posted on our websites or mobile apps or used in our classes. We have been involved in claims against us alleging our infringement of third-party intellectual property rights and we may be subject to such claims in the future. Any such intellectual property infringement claim could result in costly litigation, harm our reputation and divert our management attention and resources and pay substantial damage.
We may fail to successfully make necessary or desirable acquisitions or investments, and we may not be able to achieve the benefits we expect from recent and future acquisitions or investments.
We have made and intend to continue to make acquisitions of, or equity investments in, additional businesses that complement our existing business. We may be unable to identify appropriate acquisition or investment targets when it is necessary or desirable to make such acquisition or investment to remain competitive or to expand our business. Even if we identify an appropriate acquisition or investment target, we may not be able to negotiate the terms of the acquisition or investment successfully or finance the proposed transaction. The valuation of the acquisition or investment targets may not be to our satisfaction or higher than it should be, and the pricing of the transaction may be higher as a result. Although we will conduct thorough and comprehensive due diligence on the acquisition or investment targets, we may be unable to identify all risks and issues which, when materialized, may deem the acquisitions or investments less valuable or less meaningful. Even after we have successfully acquired the targets, we may not be able to successfully integrate the acquired businesses. If the businesses we acquire or invest in do not subsequently generate the anticipated financial performance or if any triggering event for goodwill impairment tests occurs, we may need to revalue or write down the value of goodwill and other intangible assets in connection with such acquisitions or investments, which would harm our results of operations.
We may not have any control over the businesses or operations of our minority equity investments, the value of which may decline over time. For the investments accounted for by the equity method, we book a gain or loss of share of net income or loss of the investments. If the investee’s operation or financial performance deteriorated, we may need to revalue or record impairment to the carrying amount of the long-term investment, which would harm our results of operations. Furthermore, as we often do not have control over the companies in which we only have minority stake, we cannot ensure that these companies always will comply with applicable laws and regulations in their business operations. Material non-compliance by our investees may cause substantial harms to our reputations and the value of our investment.
Seasonal and other fluctuations in our results of operations could adversely affect the trading price of our ADSs.
Our business is subject to fluctuations caused by seasonality or other factors beyond our control, which may cause our operating results to fluctuate from quarter to quarter. This may result in volatility and adversely affect the price of our ADSs. We have experienced, and expect to continue to experience, seasonal fluctuations in our revenues and results of operations, primarily due to seasonal changes in learner enrollments. However, our expenses vary, and certain of our expenses do not necessarily correspond with changes in our learner enrollments and revenues. For example, we make investments in marketing and promotion, teacher recruitment and training, and product development throughout the year and we pay rent for our facilities based on the terms of the lease agreements. In addition, other factors beyond our control, such as special events that take place during a quarter when our learner enrollment would normally be high, may have a negative impact on our learner enrollments. As our revenues grow, these seasonal fluctuations may become more pronounced.
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If we cannot obtain sufficient cash when we need it, we may not be able to meet our payment obligations under our indebtedness.
We cannot assure you that we will have sufficient funds to fulfill our payment obligations under our indebtedness. Our ability to meet our payment obligations under our indebtedness depends on our ability to generate sufficient cash flow, which is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. In addition, our ability to obtain external financing in the future is subject to a variety of uncertainties, including:
| ● | our financial condition, results of operations and cash flows; |
| ● | general market conditions for financing activities; and |
| ● | economic, political and other conditions in China and elsewhere. |
If we are unable to obtain funding in a timely manner or on commercially acceptable terms, we may not be able to meet our payment obligations under our indebtedness.
Moreover, TAL Education Group is a Cayman Islands holding company with no material operations of its own. As a result, it relies upon dividends and other cash distributions paid to it by its subsidiaries to meet its payment obligations under indebtedness incurred at the holding company level. The subsidiaries are distinct legal entities and do not have any obligation, legal or otherwise, to provide TAL Education Group with dividends or other distributions. TAL Education Group may face tax or other adverse consequences, or legal limitations, on its ability to obtain funds from these entities.
We may need additional capital to pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, and financing may not be available on terms acceptable to us, or at all.
Growing and operating our business will require significant cash investments, capital expenditures and commitments to respond to business challenges, including developing or enhancing new or existing services and technologies and expanding our infrastructure. If cash on hand and cash generated from operations are not sufficient to meet our cash and liquidity needs, we may need to seek additional capital, potentially through debt or equity financings. We may not be able to raise required cash on terms acceptable to us, or at all. Volatility in the credit markets may have an adverse effect on our ability to obtain debt financing. Issuances of equity or convertible debt securities may be on terms that are dilutive or potentially dilutive to our shareholders. The holders of new securities may also have rights, preferences, or privileges that are senior to those of existing stockholders. If new financing sources are required, but are insufficient or unavailable, we may need to modify our growth and operating plans and business strategies based on available funding, if any, which would harm our ability to grow our business.
We have experienced recent fluctuations in our margins and incurred net losses in recent fiscal periods.
In recent years, we have experienced fluctuations in our margins. We incurred net losses in each of the fiscal years ended February 28, 2022, 2023 and February 29, 2024. Many factors may cause our margins to decline or lead to net losses. For example, costs incurred in the expansion of our business may increase faster than our revenues. New investments and acquisitions may cause our margins to decline before we successfully integrate the acquired businesses into our operations and realize the full benefits of these investments and acquisitions. A significant increase in operating expenses or impairment loss on long-term investments and goodwill may lead to a net loss. Our ability to improve our financial performance is affected by various factors that are beyond our control, such as outbreak of contagious disease and the regulatory environment. There can be no assurance that our margins will not decline or fluctuate, or that we will not incur net losses again, in the future.
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We have limited liability insurance coverage and do not carry business disruption insurance.
We have limited liability insurance coverage for our learners and their parents in our learning centers. A successful liability claim against us due to injuries suffered by our learners or their parents on our premises could materially and adversely affect our financial conditions, results of operations and reputation. Even if unsuccessful, such a claim could cause adverse publicity on us, require substantial costs to defend and divert the time and attention of our management. See “—Accidents or injuries suffered by our learners or other people caused by us, or perceived to be caused by us, may adversely affect our reputation, subject us to liability and cause us to incur substantial costs.” In addition, we do not have any business disruption insurance. Furthermore, any business disruption event could result in substantial costs to us and diversion of our resources, which may materially and adversely affect our business and results of operations.
Significant disruptions to our websites, mobile apps or information technology systems, cybersecurity incidents or data leakages could damage our reputation, limit our ability to retain and increase customers or give rise to negative financial or legal consequences.
The performance and reliability of our online and technology infrastructure is critical to our reputation and ability to retain learners and increase learner enrollment. Any system error or failure, or a sudden and significant increase in online traffic, could disrupt or slow access to our websites or mobile apps. We cannot assure you that we will be able to expand our online and technology infrastructure in a timely and cost-effective manner to meet the increasing demands of our learners and their parents. In addition, our information technology systems store and process important information including, without limitation, class schedules and registrations and customer data, and they could be vulnerable to interruptions or malfunctions due to events beyond our control, such as natural disasters and technology failures. For instance, we have in the past experienced interruptions to our operations due to temporary failures of our information technology systems. Any disruption to our computer systems could therefore have a material adverse effect on our on-site operations and ability to retain learners and increase learner enrollments.
Although we have a daily backup system that runs on different servers, including a combination of internet data centers and cloud servers for our operating data, we may still lose important customer data or suffer disruptions to our operations if there is a failure of the database or backup systems. In addition, computer hackers may attempt to penetrate our network security and our website. We have in the past experienced several computer attacks, although they did not materially affect our operations. We may be required to invest significant resources in protecting against the foregoing technological disruptions and/or security breaches, or to remediate problems and damages caused by such incidents, which could increase our cost of doing business, lead to non-compliance with applicable laws and regulations, and in turn adversely affect our financial conditions and results of operations.
Furthermore, unauthorized access to our proprietary business information or customer data may be obtained through break-ins, sabotage, breaches of our secure network by unauthorized parties, computer viruses, computer denial-of-service attacks, employee theft or misuse, breaches of the security of the networks of our third party providers, or other misconduct. Because the means used by computer hackers who may attempt to penetrate and sabotage our network security or websites change frequently and may not be recognized until launched against a target, we may be unable to anticipate such attempts, or respond to them in a timely manner. Unauthorized access to customer data may also be obtained due to inadequate use of security controls by our customers. Although there has not been any material compromise in the past, we may suffer economic and reputational damages and legal or regulatory actions in the future if a technical failure of our systems or a security breach compromises student or other customer data, including identification or contact information. See also “—Failure to comply with various evolving PRC laws and regulations regarding cybersecurity and data privacy could subject us to penalties, damage our reputation and brand, and harm our business and results of operations” for further details regarding privacy and cybersecurity regulations.
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Any deficiencies in internet infrastructure and unavailability of third-party platforms could impair our ability to offer our solutions and services over our websites and mobile apps, which could harm our operating results.
We rely on certain third-party platforms to facilitate the offering of our solutions and services. If we are unable to conduct the activities on those third-party platforms on acceptable terms or at reasonable costs, we may have to switch to other third-party platforms for similar activities. However, we cannot assure you that we will be able to switch to other third-party platforms in a timely manner, or at all. Moreover, the availability of our websites and mobile apps depends on telecommunications carriers and other third-party providers for communications and storage capacity. If we are unable to enter into and renew agreements with these providers on acceptable terms, or if any of our existing agreements with such providers are terminated, our ability to provide our solutions and services could be adversely affected. In addition, frequent service disruptions at the external telecommunications service providers may prevent learners from accessing our websites and mobile apps, which could affect their learning experience and in turn harm our learner enrollment and retention and operating results.
We face risks related to natural and other disasters, including outbreaks of health epidemics such as COVID-19, and other extraordinary events, which could significantly disrupt our operations
The worldwide outbreak of the COVID-19 pandemic has resulted in significant disruptions in the global economy, and affected many aspects of our business in the past few years. We experienced temporary closures of some of our offline learning centers from time to time. COVID-19 also had an adverse impact on our abilities to manage learning centers, acquire customers, and recruit talents. In addition, we experienced supply chain shortages and logistics disruptions for our learning content solutions due to the impact of COVID-19. Moreover, we had two major facilities under construction for the development of office buildings, the progress of which were delayed.
Since December 2022, many of the restrictive measures previously adopted by the PRC government at various levels to control the spread of COVID-19 have been lifted or replaced with more flexible measures. However, the extent to which COVID-19 may impact our results of operations going forward remains uncertain and depends on future development of COVID-19. Consequently, COVID-19 may continue to materially and adversely affect our business, financial condition and results of operations in the current and future years.
In addition to the impact of COVID-19, our business could be materially and adversely affected by natural and other disasters, including earthquakes, fire, floods, environmental accidents, power loss, communication failures and similar events. Additionally, our business could be materially and adversely affected by the outbreak of monkeypox, H7N9 bird flu, H1N1 swine influenza, severe acute respiratory syndrome (SARS), Ebola or another health epidemic. While we have not suffered any material loss or experienced any significant increase in costs as a result of any natural and other disaster or other extraordinary event, our learner attendance and our business could be materially and adversely affected by any such occurrence in any of the cities in which we have major operations.
Increasing scrutiny and evolving expectations from investors, customers, employees, business partners, governmental authorities and other stakeholders with respect to environmental, social and governance matters may cause us to incur additional costs, devote additional resources and expose us to additional risks, which could adversely affect our reputation, business, financial performance and the price of our ADSs.
Companies across many industries are facing increased scrutiny relating to their environmental, social and governance, or ESG, practices and disclosures. In particular, investors, customers, employees, business partners and other stakeholders placed increasing importance on the implications and social costs of their investments, purchases and other interactions with companies. For example, many investors focus on positive ESG business practices and sustainability scores, and may consider a company’s ESG or sustainability scores when making investment decisions. In addition, some institutional investors have used such scores to benchmark companies against their peers and, if the companies are perceived to be lagging with respect to ESG matters, may engage with these companies to improve ESG practices or disclosures, or make voting decisions on this basis. The increasing levels of investor focus on ESG matters may hinder our access to capital, as investors may decide to reallocate capital or to not commit capital as a result of their assessment of our ESG practices and disclosures.
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In addition, evolving government regulations could result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. Collecting, measuring and reporting ESG information and metrics can be costly, difficult and time consuming, and can present numerous operational, reputational, financial, legal and other risks, any of which could have a material impact on us. Inadequate processes to collect and review this information prior to disclosure could subject us to potential liability related to such information.
We are currently disclosing certain ESG information. Our business may face increased scrutiny related to relevant ESG areas, including from the investment community, and our failure to achieve progress in these ESG areas on a timely basis, or at all, could impact our customer acquisition and retention, employee engagement, business partner relationship and access to capital, which could adversely affect our reputation, business, financial performance and the price of our ADSs.
Failure to maintain effective internal control over financial reporting could cause us to inaccurately report our financial results or fail to prevent fraud and have a material adverse effect on our business, results of operations and the trading price of our ADSs.
We are subject to the reporting obligations under U.S. securities laws. For example, Section 404 of the Sarbanes-Oxley Act of 2002 and related rules require a public company to include a report of management on its internal control over financial reporting in its annual reports. This management report must contain an assessment by management of the effectiveness of the public company’s internal control over financial reporting. In addition, an independent registered public accounting firm for a public company must attest to and report on management’s assessment of the effectiveness of the public company’s internal control over financial reporting. Our efforts to implement standardized internal control procedures and develop the internal tests necessary to verify the proper application of the internal control procedures and their effectiveness are a key area of focus for our board of directors, our audit committee and senior management.
Our management and our independent registered public accounting firm, which has issued an attestation report, have concluded that our internal control over financial reporting was effective as of February 29, 2024. However, we cannot assure you that we will not identify any additional material weaknesses or significant deficiencies in the future.
If we fail to maintain effective internal control over financial reporting in the future, our management and our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. Moreover, maintaining effective internal controls over financial reporting is necessary for us to produce reliable financial reports and prevent fraud. In addition, we need to continue to evaluate the consolidation of the VIEs and VIE Subsidiaries if there are changes in the ownership or voting power of our company by the nominee equity holders of the VIEs. As a result, although we have incurred and expect to continue to incur considerable costs, management time and other resources to comply with Section 404 and other requirements of the Sarbanes-Oxley Act of 2002, any failure to maintain effective internal control over financial reporting could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs.
Any failure by us to comply with anti-corruption laws could result in penalties, which may harm our reputation and have an adverse impact on our business and results of operations.
We are subject to anti-corruption laws, including PRC anti-corruption laws and the U.S. Foreign Corrupt Practices Act, or the FCPA, which generally prohibits companies and anyone acting on their behalf from offering or making improper payments or providing benefits to foreign officials for the purpose of obtaining or keeping business and that requires an “issuer” like us to maintain accurate books and records. Our company’s policies require that our employees comply with applicable laws. However, there is no assurance that such policies will work effectively or protect us from liability under the FCPA or other anti-corruption laws for actions taken by our employees and intermediaries with respect to our business or any business that we may acquire. We may be subject to government investigations of potential violations of the FCPA or other applicable anti-corruption laws, and, if we were found to violate such laws, we may be subject to significant penalties and requirements to implement remedial measures. These may cause us to incur significant expenses, divert management attention, and materially and adversely affect our reputation, business and results of operations.
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We have granted and will continue to grant restricted shares, share options and other share-based awards in the future, which may materially reduce our net income.
In June 2010, we adopted a share incentive plan (as amended and restated in August 2013), or the 2010 Plan, that permits granting of options to purchase our Class A common shares, restricted shares, restricted share units, share appreciation rights, dividend equivalent rights and other instruments as deemed appropriate by the administrator under the 2010 Plan. The amended and restated 2010 Plan ceased to be used for grants of future awards upon the effectiveness of a share incentive plan adopted in June 2020, or the 2020 Plan. Pursuant to the 2020 Plan, the maximum aggregate number of shares that may be issued pursuant to all awards (including incentive share options), or the Award Pool, is initially five percent (5%) of our total issued and outstanding shares as of the effective date of the 2020 Plan, provided that (A) the Award Pool shall be increased automatically if and whenever the number of shares that may be issued pursuant to ungranted awards pursuant to the 2020 Plan, or the Ungranted Portion, accounts for less than one percent (1%) of the then total issued and outstanding shares of our company, so that for each automatic increase, the Ungranted Portion immediately after such increase shall equal five percent (5%) of the then total issued and outstanding shares of our company, and (B) the size of the Award Pool shall be equitably adjusted in the event of any share dividend, subdivision, reclassification, recapitalization, split, reverse split, combination, consolidation or similar transactions. As of April 30, 2024, 5,849,370 non-vested restricted Class A common shares and 828,799 share options to purchase 828,799 Class A common shares under the 2010 Plan and the 2020 Plan previously granted to our employees and directors are outstanding. As a result of the outstanding grants under the 2010 Plan and the 2020 Plan, we have incurred and will continue to incur share-based compensation expenses. We had share-based compensation expenses of $174.8 million, $108.6 million and $88.9 million for the fiscal years ended February 28, 2022, 2023 and February 29, 2024, respectively. As of February 29, 2024, the unrecognized compensation expenses amounted to $152.4 million related to the non-vested restricted shares, which will be recognized over a weighted-average period of 3.5 years for service based non-vested restricted shares and 2.7 years for performance based non-vested restricted shares, and $4.4 million related to share options, which will be recognized over a weighted-average period of 2.8 years. Expenses associated with share-based compensation awards granted under our share incentive plans may materially reduce our future net income. However, if we limit the size of grants under our share incentive plans to minimize share-based compensation expenses, we may not be able to attract or retain key personnel.
Risks Related to Our Corporate Structure
If the PRC government determines that the agreements that establish the structure for operating our business in China are not in compliance with applicable PRC laws and regulations, we could be subject to severe penalties.
TAL Education Group is not a PRC operating company but a Cayman Islands holding company with no equity ownership in the VIEs. We primarily conduct our operations in China through (i) our PRC subsidiaries and (ii) the VIEs with which we have maintained contractual arrangements, and VIE Subsidiaries. Investors of our ADSs are not purchasing equity interest in the VIEs in China but instead are purchasing an equity interest in a holding company incorporated in the Cayman Islands. If the PRC government deems that the VIE Contractual Arrangements do not comply with PRC regulatory restrictions on foreign investments in the relevant industries, or if these regulations or the interpretations of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. The PRC regulatory authorities could disallow the VIE structure, which would likely result in a material adverse change in our operations, and our ADSs may decline significantly in value or become worthless. Our holding company, our PRC subsidiaries, the VIEs and VIE Subsidiaries, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the VIE Contractual Arrangements and, consequently, significantly affect the financial performance of the VIEs, VIE Subsidiaries and our company as a whole.
PRC laws and regulations currently require any foreign entity that invests in the education business in China to be an educational institution with relevant experience in providing education services outside of China. None of the offshore holding companies of our subsidiaries in the mainland of China is an educational institution or provides education services. In addition, foreign ownership in entities that provide value-added telecommunication services, with a few exceptions, is subject to restrictions under the current PRC laws and regulations. Specifically, foreign ownership of an internet information service provider may not exceed 50%. To comply with PRC laws and regulations, we have entered into a series of contractual arrangements among TAL Beijing, on the one hand, and Xueersi Education, Xueersi Network, Xinxin Xiangrong and their respective equity holders, subsidiaries and schools, on the other hand. Accordingly, Xueersi Education, Xueersi Network and Xinxin Xiangrong are the VIEs, and we rely on the VIE Contractual Arrangements to conduct most of our operations in China.
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We have been and are expected to continue to be dependent on the VIEs and VIE Subsidiaries in China to operate our learning business until we are qualified for direct ownership of such business in China. Pursuant to the VIE Contractual Arrangements, we, through our wholly owned PRC subsidiaries, exclusively provide comprehensive intellectual property licensing, technical and business support services to the VIEs and VIE Subsidiaries in exchange for payments from them. In addition, the VIE Contractual Arrangements provide us with the ability to effectively control the VIEs and VIE Subsidiaries, as applicable, under U.S. GAAP. TAL Education Group is also considered the primary beneficiary of the VIEs for accounting purposes on the conditions that we have consolidated the financial results of the VIEs and VIE Subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. However, neither TAL Education Group nor its investors have an equity ownership in, direct foreign investment in, or control through such ownership or investment of, the VIEs, and the VIE Contractual Arrangements are not equivalent to an equity ownership in the business of the VIEs. As of the date of this annual report, the VIE Contractual Arrangements have not been tested in a court of law.
It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. For example, the Alleviating Burden Opinion Regarding Compulsory Education provides, among others, that foreign ownership in Academic AST Institutions is prohibited, including through contractual arrangements, and companies with existing foreign ownership need to rectify the situation. Such regulatory directives also provide that administration over academic tutoring services for high school students shall be implemented by reference to the relevant provisions, but it remains uncertain as to how and to what extent the administration over academic tutoring services for high school students will be implemented by reference of the Alleviating Burden Opinion Regarding Compulsory Education. In addition, the Amended Implementation Rules provide that relevant government authorities shall enhance the supervision on the agreements entered into between non-profit private schools and their related parties and shall review such transactions on an annual basis. We cannot preclude the possibility that relevant government authorities would determine transactions between our subsidiaries and VIE Subsidiaries that are non-profit private schools to be in violation of any existing or future PRC laws or regulations during such supervision as relevant government authorities have significant discretion in interpreting and implementing such laws and regulations. In addition, on February 17, 2023, the CSRC released the Overseas Listing Trial Measures, and five supporting guidelines, effective on March 31, 2023. At the press conference held for the Overseas Listing Trial Measures on the same day, officials from the CSRC clarified that, as for companies seeking overseas listing with contractual arrangements, the CSRC will solicit opinions from relevant regulatory authorities and complete the filing of the overseas listing of such companies if they duly meet the compliance requirements, and support the development and growth of these companies by enabling them to utilize two markets and two kinds of resources. If we fail to complete the filing with the CSRC in a timely manner or at all, for any future offerings, listing or any other capital raising activities, which are subject to the filings under the Overseas Listing Trial Measures, due to our contractual arrangements, our ability to raise or utilize funds could be materially and adversely affected, and we may even need to unwind our contractual arrangements or restructure our business operations to rectify the failure to complete the filings. However, given that the Overseas Listing Trial Measures were recently promulgated, there remain substantial uncertainties as to their interpretation, application, and enforcement and how they will affect our operations and our future financing.
If the corporate structure and VIE Contractual Arrangements through which we conduct our business in China are found to be in violation of any existing or future PRC laws or regulations, or such arrangements are determined as illegal and invalid by PRC courts, arbitration tribunals or regulatory authorities, or if we fail to obtain or maintain any of the required permits or approvals, we may be subject to severe actions by the relevant PRC regulatory authorities with broad discretion, which may include but are not limited to the following:
| ● | revoke our business and operating licenses; |
| ● | require us to discontinue or restrict our operations; |
| ● | limit our business expansions in China by way of entering into contractual arrangements; |
| ● | restrict our right to collect revenues; |
| ● | impose fines; |
| ● | confiscate any of our income that is deemed to be obtained through illegal operations; |
| ● | block our websites or mobile apps; |
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| ● | require us to restructure our operations in such ways as to compel us to establish a new enterprise, re-apply for the necessary licenses or permits, or relocate our businesses, staff and assets; |
| ● | restrict or prohibit our use of the proceeds from overseas offering to finance our PRC subsidiaries’ or the VIEs’ or VIE Subsidiaries’ business and operations; |
| ● | impose additional conditions or requirements with which we may not be able to comply; and |
| ● | take other regulatory or enforcement actions against us that could be detrimental to our business. |
Any of these actions could cause significant disruptions to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our corporate structure and VIE Contractual Arrangements. See “—Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and how it may impact our business, financial condition and results of operations.” If any of these actions results in our inability to direct the activities of the VIEs or VIE Subsidiaries that most significantly impact their economic performance, and/or our failure to receive the economic benefits from the VIEs and VIE Subsidiaries, we may not be able to consolidate the VIEs and VIE Subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. However, we do not believe that such actions would result in the liquidation or dissolution of our company, our wholly-owned PRC subsidiaries or the VIEs or the VIE Subsidiaries.
We rely on the VIE Contractual Arrangements for our operations in China, which may not be as effective in providing operational control as direct ownership.
We have relied and expect to continue to rely on the VIE Contractual Arrangements to operate our learning business in China. See “Item 4. Information on the Company—C. Organizational Structure—VIE Contractual Arrangements.” The VIE Contractual Arrangements may not be as effective in providing us with control over the VIEs or VIE Subsidiaries as direct ownership. If we had direct ownership of the VIEs or VIE Subsidiaries, we would be able to exercise our rights as an equity holder to effect changes in the board of directors of these entities, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the VIE Contractual Arrangements, we rely on the performance by the VIEs and their respective equity holders and VIE Subsidiaries of their obligations under the contracts to exercise control over and receive economic benefits from the VIEs and VIE Subsidiaries.
We have entered into equity pledge agreements with the VIEs and their respective equity holders to guarantee the performance of the obligations of the VIEs and VIE Subsidiaries under the exclusive business cooperation agreements they have entered into with us. The equity pledge agreements with the equity holders of the VIEs provide that the pledged equity interest shall constitute continuing security for any and all of the indebtedness, obligations and liabilities under all of the principal service agreements and the scope of pledge shall not be limited by the amount of the registered capital of the VIEs. However, it is possible that a PRC court may take the position that the amount listed on the equity pledge registration forms represents the full amount of the collateral that has been registered and perfected. If this is the case, the obligations that are supposed to be secured in the equity pledge agreements in excess of the amount listed on the equity pledge registration forms could be determined by the PRC court as unsecured debt, which takes last priority among creditors.
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In addition, we have not entered into agreements with the VIEs that pledge the assets of the VIEs for the benefit of us or our wholly owned subsidiaries. Consequently, the assets of the VIEs are not secured on behalf of our wholly owned subsidiary, and the amounts owed by the VIEs are not collateralized. As a result, if the VIEs fail to pay any amount due to us under, or otherwise breach, the exclusive business service agreements, we will not be able to directly seize the assets of the VIEs. If the nominee equity holders of the VIEs do not act in the best interests of us when conflicts of interest arise, or if they act in bad faith towards us, they may attempt to cause the VIEs or VIE Subsidiaries to transfer or encumber the assets of the VIEs or VIE Subsidiaries without our authorization. In such a scenario, we may choose to exercise our option under the call option agreements to demand the equity holders of the VIEs to transfer their respective equity interests in the VIEs to a PRC person designated by us, and we may need to resort to litigation in PRC courts to effect such an equity interests transfer and prevent the transfer or encumbrance of the VIEs’ assets without our authorization. However, uncertainties in the PRC legal system could limit our ability to enforce the VIE Contractual Arrangements. See also “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could have a material adverse effect on us.” In the event we are unable to enforce the VIE Contractual Arrangements, we may not have the power to direct the activities that most significantly affect the economic performance of the VIEs and VIE Subsidiaries, and our ability to conduct our business may be negatively affected, and we may not be able to consolidate the financial results of the VIEs and VIE Subsidiaries into our consolidated financial statements in accordance with U.S. GAAP.
Any failure by the VIEs or their respective equity holders or VIE Subsidiaries to perform their obligations under the VIE Contractual Arrangements would have a material adverse effect on our business and financial condition.
If the VIEs or any of their respective equity holders or VIE Subsidiaries fail to perform their obligations under the VIE Contractual Arrangements, we may have to incur substantial costs and resources to enforce our rights under the contracts, and rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the equity holders of the VIEs were to refuse to transfer their equity interest in these entities to us or our designee when we exercise the call option pursuant to the VIE Contractual Arrangements, or if they were otherwise to act in bad faith toward us, we may have to take legal actions to compel them to perform their contractual obligations. See also “—We rely on the VIE Contractual Arrangements for our operations in China, which may not be as effective in providing operational control as direct ownership.”
All the material agreements under the VIE Contractual Arrangements, which are summarized under “Item 4. Information on the Company—C. Organizational Structure—VIE Contractual Arrangements,” are governed by PRC laws and provide for the resolution of disputes under the agreements through arbitration in Beijing. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in China is constantly evolving and may involve more uncertainty compared to some other jurisdictions. As a result, uncertainties in the PRC legal system could limit our ability to enforce the VIE Contractual Arrangements. Under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In the event we are unable to enforce the VIE Contractual Arrangements, we may not be able to exert effective control over the VIEs, and our ability to conduct our business may be negatively affected.
The legal owners of the VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The four legal owners of Xueersi Education and Xueersi Network are Mr. Bangxin Zhang, Mr. Yachao Liu, Mr. Yunfeng Bai and Mr. Yundong Cao. Mr. Zhang and Mr. Liu are shareholders, directors and officers of TAL Education Group. The interests of Mr. Zhang, Mr. Liu, Mr. Bai and Mr. Cao as beneficial owners of the VIEs may differ from the interests of our company as a whole, since these parties’ respective equity interests in the VIEs may conflict with their respective equity interests in our company.
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We cannot assure you that when conflicts of interest arise, any or all of these individual equity holders of VIEs will act in the best interests of our company or such conflicts will be resolved in our favor. In addition, these individual equity holders of VIEs may breach, or cause the VIEs to breach, or refuse to renew, the existing VIE Contractual Arrangements. In June 2013, we entered into a deed of undertaking with Mr. Zhang, which prevents Mr. Zhang from using his majority voting power to remove, replace or appoint any of our directors, and from casting any votes he has as our director or shareholder on any resolutions or matters concerning the deed itself. The deed is irrevocable, and applies to any and all periods during which Mr. Zhang beneficially owns shares representing more than 50% of the aggregate voting power of our then total issued and outstanding shares. However, there can be no assurance that such arrangement is sufficient to address potential conflicts of interests Mr. Zhang may encounter. Other than this deed of undertaking we have entered into with Mr. Zhang, we currently do not have any arrangements to address potential conflicts of interest Mr. Zhang or Mr. Liu may encounter in their capacity as direct or indirect nominee equity holders of the VIEs (and, as applicable, as directors of the VIEs), on the one hand, and as beneficial owners of our company (and, as applicable, director and/or officers of our company), on the other hand. To a large extent, we rely on the legal owners of the VIEs to abide by the laws of the Cayman Islands and China, which provide that directors and officers owe a fiduciary duty to our company that requires them to act in good faith and in the best interests of our company and not to use their positions for personal gains. If we cannot resolve any conflict of interest or dispute between us and these individuals, we would have to rely on legal proceedings, which could result in disruptions to our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.
Under PRC laws, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts that our business enters into, are executed using chops or seals of signing entities or with the signatures of legal representatives whose designations are registered and filed with the relevant local branches of the State Administration for Market Regulation, or the SAMR (formerly known as the State Administration for Industry and Commerce). We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.
We have three major types of chops, namely corporate chops, contract chops and finance chops. We use corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use corporate chops or contract chops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including, but not limited to issuing invoices. Use of chops must be approved by the responsible departments and follow our internal procedure. Although we usually utilize chops to execute contracts, the designated legal representatives of our PRC subsidiaries, VIEs and VIE Subsidiaries have the apparent authority to enter into contracts on behalf of such entities without chops.
In order to physically secure our chops, we generally have them stored in locations that are secured and accessible only to authorized employees. Our designated legal representatives generally do not have access to the chops. Although we monitor such authorized employees and designated legal representatives, the monitoring procedures may not be sufficient to prevent all instances of abuse or negligence. The authorized employees or designated legal representatives may abuse their authority, for example, by binding the relevant entities with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any of our designated legal representatives obtains control of the chop in an effort to obtain control over the relevant entity, we would need to pass a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the chop, apply for a new chop with the relevant government authorities, or otherwise seek legal remedies for the legal representative’s violation of his or her duties owed to us.
If any of our authorized employees or designated legal representatives obtains, misuses or misappropriates our chops and seals or other controlling intangible assets for whatever reason, we may experience disruptions to our normal business operations and suffer economic losses. We may have to take corporate or legal actions, which may take significant time and resources to resolve while distracting management from our operations. If any of these occurs, our business and results of operations may be materially and adversely affected.
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The VIE Contractual Arrangements may be subject to scrutiny by PRC tax authorities and a finding that we or the VIEs owe additional taxes could substantially reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if PRC tax authorities determine that the VIE Contractual Arrangements do not represent an arm’s-length price and consequently adjust the VIEs’ or VIE Subsidiaries’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by the VIEs or VIE Subsidiaries, which could in turn increase their tax liabilities. In addition, PRC tax authorities may impose late payment fees and other penalties to the VIEs and VIE Subsidiaries for unpaid taxes. Our consolidated net income may be materially and adversely affected if the VIEs’ or VIE Subsidiaries’ tax liabilities increase or if they are subject to late payment fees or other penalties.
If any of our PRC subsidiaries or any of the VIEs or VIE Subsidiaries becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use certain important assets, which could reduce the size of our operations and materially and adversely affect our business, ability to generate revenue and the market price of our ADSs.
At present, we primarily conduct our operations in China through the VIE Contractual Arrangements. As part of these arrangements, the VIEs and VIE Subsidiaries hold operating permits and licenses and some of the assets that are important to the operation of our business. If any of these entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations.
We do not have priority pledges and liens against the assets of the VIEs or VIE Subsidiaries. As a contractual and property rights matter, this lack of priority pledges and liens has remote risks. If any of the VIEs or VIE Subsidiaries undergoes an involuntary liquidation proceeding, third-party creditors may claim rights to some or all of its assets and we may not have priority against such third-party creditors on the assets. If any of the VIEs or VIE Subsidiaries liquidates, we may take part in the liquidation procedures as a general creditor under the PRC Enterprise Bankruptcy Law and recover any outstanding liabilities owed by the entity to our PRC subsidiaries under applicable service agreements.
If the equity holders of the VIEs were to attempt to voluntarily liquidate the VIEs without obtaining our prior consent, we could effectively prevent such unauthorized voluntary liquidation by exercising our option under the call option agreements to demand such equity holders to transfer their respective equity interests in the VIEs to a PRC person designated by us. In the event that the equity holders of any of the VIEs initiates a voluntary liquidation proceeding without our authorization or attempts to distribute the retained earnings or assets of the relevant VIE without our prior consent, we may need to resort to legal proceedings to enforce the terms of the VIE Contractual Arrangements. Any such litigation may be costly and may divert our management’s time and attention away from the operation of our business, and the outcome of such litigation would be uncertain.
Risks Related to Doing Business in China
Uncertainties with respect to the PRC legal system could have a material adverse effect on us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil law system may be cited for reference but have limited precedential value. Since 1979, PRC laws, rules and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws, rules and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretation and enforcement of many laws, rules and regulations involve uncertainties, which may limit the available legal protections. In addition, the PRC administrative and court authorities have significant discretion in interpreting, implementing and enforcing statutory rules and contractual terms, and it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we may enjoy in China than under some more developed legal systems. These uncertainties may affect our judgment on the relevance of legal requirements and our decisions on the measures and actions to be taken to fully comply therewith and may affect our ability to enforce our legal rights. In addition, regulatory uncertainties may be exploited through unmerited legal actions or threats in an attempt to extract payments or other benefits from us. Such uncertainties may therefore increase our operating expenses and costs, and materially and adversely affect our business and results of operations.
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The PRC government’s oversight and discretion over our business operations could result in a material adverse change in our operations and the value of our ADSs.
We conduct our business and operations primarily in China, which are governed by the PRC laws, rules and regulations. The PRC government has significant oversight, discretion and influence over our business and operations, which could result in material adverse changes in our business and operations and the value of our ADSs.
The PRC government has recently indicated an intent to exert more oversight over overseas offerings by and foreign investment in China-based issuers like us. For example, on July 6, 2021, relevant PRC government authorities promulgated the Opinions on Lawfully and Strictly Cracking Down Illegal Securities Activities, which stated that the administration and supervision of overseas-listed China-based companies will be strengthened, and the special provisions of the State Council on overseas issuance and listing of shares by such companies will be revised to clarify the responsibilities of the relevant domestic industry regulatory authorities and other regulatory authorities, among other purposes. On February 17, 2023, the CSRC released the Overseas Listing Trial Measures, and five supporting guidelines, effective on March 31, 2023. Pursuant to the Overseas Listing Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedure and report relevant information to the CSRC. In addition, domestic companies that have been listed on a foreign stock exchange prior to the effective date of the Overseas Listing Trial Measures are required to file with the CSRC within three working days after such domestic companies complete a securities offering on the foreign stock exchange on which their securities have been listed. Since the Overseas Listing Trial Measures were newly promulgated, there are substantial uncertainties as to its interpretation, application and enforcement. If the filing procedure with the CSRC under the Overseas Listing Trial Measures is required for any future offerings, listing or any other capital raising activities by us, it is uncertain whether we could complete the filing procedure in a timely manner, or at all. In addition, we cannot assure you that any new rules or regulations promulgated in the future will not impose additional requirements on us.
In addition, on December 28, 2021, the CAC, the National Development and Reform Commission, or the NDRC, the Ministry of Industry and Information Technology, or the MIIT, and several other PRC government authorities jointly issued the Revised Cybersecurity Review Measures, which took effect on February 15, 2022. Pursuant to the Revised Cybersecurity Review Measures, “critical information infrastructure operators,” or CIIOs, and network platform operators engaging in data processing activities that affect or may affect national security are subject to cybersecurity reviews. The relevant government authorities may initiate the cybersecurity reviews against the relevant operators if the authorities believe that the network products or services or data processing activities of such operators affect or may affect national security. In addition, the Revised Cybersecurity Review Measures provides that network platform operators holding personal information of over one million users must apply with the Cybersecurity Review Office for a cybersecurity review before listing abroad. The cybersecurity review will evaluate, among others, the risks of critical information infrastructure, core data, important data, or a large amount of personal information being affected, controlled, or maliciously used by a foreign government and network information security risks in connection with the listing. There are substantial uncertainties as to the interpretation, application, and enforcement of the Revised Cybersecurity Review Measures.
Furthermore, in November 2021, the CAC released the Administrative Regulations on Internet Data Security (Draft for Comments), or the Draft Data Security Regulations, which provides that data processors refer to individuals or organizations that, during their data processing activities such as data collection, storage, utilization, transmission, publication and deletion, have autonomy over the purpose and manner of data processing. In accordance with the Draft Data Security Regulations, data processors shall apply for a cybersecurity review for certain activities, including, among other things, (i) the listing abroad of data processors that process the personal information of more than one million individuals and (ii) any data processing activity that affects or may affect national security. However, there have been no clarifications from the relevant authorities as of the date of this annual report as to the standards for determining whether an activity is one that “affects or may affect national security.” In addition, the Draft Data Security Regulations requires that data processors that process “important data” or are listed overseas must conduct an annual data security assessment by itself or engage a data security service provider to do so, and submit the assessment report of the preceding year to cybersecurity departments at the districted city level by the end of January each year. As of the date of this annual report, the Draft Data Security Regulations was released for public comment only, their respective provisions and anticipated adoption or effective date may be subject to changes with substantial uncertainty. As such, it remains unclear whether the formal version adopted in the future will have any further material changes, and it is uncertain how the measures will be enacted, interpreted or implemented and how they will affect us. See also “—Failure to comply with various evolving PRC laws and regulations regarding cybersecurity and data privacy could subject us to penalties, damage our reputation and brand, and harm our business and results of operations” for further details regarding cybersecurity and privacy regulations.
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It also remains uncertain whether and how PRC government authorities will issue new law, rules, regulations, implement measures or interpretations to regulate overseas listing in general and whether we are required to complete additional filings or obtain any specific regulatory approvals from the CSRC, CAC or any other PRC government authorities for our overseas offerings. If the CSRC, CAC or other government authorities later promulgate new rules or explanations requiring that we obtain additional approvals or complete additional filing or registration procedures for our future overseas offerings, we may be unable to obtain such approvals or complete such filings or registration procedures in a timely manner, or at all, and such approvals, filings or registrations may be rescinded even if obtained or completed. Any such circumstance could significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. In addition, implementation of industry-wide regulations directly targeting our operations could cause the value of our securities to significantly decline. Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business.
Failure to comply with various evolving PRC laws and regulations regarding cybersecurity and data privacy could subject us to penalties, damage our reputation and brand, and harm our business and results of operations.
We routinely collect, store and use personal information and other data during the ordinary course of our business. If we are unable to protect such personal information and other data from unauthorized access, use, disclosure, disruption, modification, or destruction, such security breaches or issues may subject us to economic losses, legal liabilities to the owners or subjects of compromised information or data, or fines and other penalties. In addition, complying with various laws and regulations could cause us to incur substantial costs or require us to change our business practices, including our data practices, in a manner adverse to our business.
In general, we expect that data security and data protection compliance will receive greater attention and focus from regulators, both domestically and globally, as well as attract continued or greater public scrutiny going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, we could become subject to penalties, including fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
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The regulatory and enforcement regime of China with regard to data security and data protection is evolving and may be subject to different interpretations or significant changes. Moreover, various PRC legislative and regulatory bodies, including the Standing Committee of the PRC National People’s Congress, or the NPC, the MIIT, the CAC, the Ministry of Public Security and the SAMR have enforced data privacy and protections laws and regulations with varying standards and applications. We are subject to PRC laws and regulations governing the collection, storing, sharing, using, processing, disclosure and protection of personal information and other data on the internet and mobile platforms including, without limitation, the PRC Civil Code, the PRC Cybersecurity Law, the PRC Data Security Law and the PRC Personal Information Protection Law. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations—Laws of Protection of Personal Information of Citizen” and “—Cybersecurity and Data Security.” The following are examples of certain recent PRC regulatory activities in this area:
Cybersecurity and Data Security
| ● | In June 2021, the Standing Committee of the NPC promulgated the PRC Data Security Law, which took effect in September 2021. The PRC Data Security Law, among other things, provides for security review procedures for data-related activities that may affect national security. In January 2022, the CAC, together with other government authorities, jointly promulgated the Revised Cybersecurity Review Measures, which became effective on February 15, 2022 and replaces its predecessor regulation. Pursuant to the Revised Cybersecurity Review Measures, CIIOs that procure internet products and services and network platform operators engaging in data processing activities must be subject to the cybersecurity review if their activities affect or may affect national security. The Cybersecurity Review Measures further stipulates that any network platform operator that holds personal information of over one million users shall apply with the Cybersecurity Review Office for a cybersecurity review before listing abroad. In August 2021, the state council promulgated the Regulations on Critical Information Infrastructure Security Protection, which became effective on September 1, 2021. Pursuant to this regulation, critical information infrastructure means key network facilities or information systems of critical industries or sectors, such as public communications and information services, energy, transportation, water conservation, finance, public services, e-government affairs and national defense science, the damage, malfunction or data leakage of which may endanger national security, national economy and public interests. Relevant government authorities for each critical industry and sector shall be responsible for formulating eligibility criteria and determining the scope of CIIOs in the respective industry or sector, and such operators will be informed of the final determinations as to whether they are categorized as CIIOs. As of the date of this annual report, no implementation rules have been issued by any government authority, and we have not been informed by any government authority that we are a CIIO. Furthermore, the exact scope of CIIOs under the current regulatory regime remains unclear, and the PRC government authorities have wide discretion in the interpretation and enforcement of applicable laws and regulations. We cannot assure you that we will not be deemed to be a CIIO under PRC laws. If we were so deemed, we may be subject to additional obligations and incur additional compliance costs under the cybersecurity PRC laws and regulations. |
| ● | In November 2021, the CAC released the Draft Data Security Regulations, which provides that data processors refer to individuals or organizations that, during their data processing activities such as data collection, storage, utilization, transmission, publication and deletion, have autonomy over the purpose and manner of data processing. In accordance with the Draft Data Security Regulations, data processors shall apply for a cybersecurity review for certain activities, including, among other things, (i) the listing abroad of data processors that process the personal information of more than one million individuals and (ii) any data processing activity that affects or may affect national security. However, there have been no clarifications from the relevant authorities as of the date of this annual report as to the standards for determining whether an activity is one that “affects or may affect national security.” In addition, the Draft Data Security Regulations requires that data processors that process “important data” or are listed overseas must conduct an annual data security assessment by itself or commission a data security service provider to do so, and submit the assessment report of the preceding year to the municipal cybersecurity department by the end of January each year. As of the date of this annual report, the Draft Data Security Regulations was released for public comment only, and their respective provisions and anticipated adoption or effective date may be subject to changes with substantial uncertainty. |
| ● | On July 7, 2022, the CAC promulgated the Security Assessment Measures for Outbound Data Transfer, or the Outbound Data Transfer Measures, effective from September 1, 2022, to regulate outbound data transfer activities, protect the rights and interests of personal information, safeguard national security and social public interests, and promote the cross-border security and free flow of data. On March 22, 2024, the CAC published the Provisions on Promoting and Regulating Cross-border Data Flow, which streamline and provide clarity to the governance framework for outbound data transfer. |
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Personal Information and Privacy
| ● | The Anti-Monopoly Guidelines for the Platform Economy Sector published by the Anti-monopoly Committee of the State Council, effective on February 7, 2021, prohibits the collection of user information through coercive means by operators of online platforms. |
| ● | In August 2021, the Standing Committee of the NPC promulgated the PRC Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. The Personal Information Protection Law elevates the protection requirements for personal information processing, and many specific requirements of this law remain to be clarified by the CAC, other regulatory authorities, and courts in practice. We may be required to make further adjustments to our business practices to comply with applicable laws and regulations concerning the protection of privacy and personal information. |
Many of the data-related legislations are relatively new and certain concepts thereunder remain subject to interpretations by the regulators. If any data that we possess belongs to data categories that are subject to heightened regulatory scrutiny, we may be required to adopt stricter measures for protecting and managing such data. The Revised Cybersecurity Review Measures and the Draft Data Security Regulations remain unclear on whether relevant requirements will be applicable to companies that are already listed in the United States, such as us. We continue to closely monitor and assess any development in the rule-making processes, we cannot predict the impact of the Revised Cybersecurity Review Measures or the Draft Data Security Regulations, if any, at this stage. If the Cybersecurity Review Measures and the enacted version of the Draft Data Security Regulations mandate clearance of cybersecurity reviews and other specific actions to be taken by issuers like us, we face uncertainties as to whether these additional procedures can be completed by us in a timely manner, or at all, which may subject us to government enforcement actions and investigations, fines, penalties, or orders to suspend non-compliant operations or remove our mobile apps from relevant app stores, and materially and adversely affect our business and results of operations. As of the date of this annual report, we have not been involved in any formal investigations or cybersecurity reviews conducted by the CAC on such basis.
In general, compliance with existing PRC laws and regulations, as well as additional laws and regulations that PRC government authorities may enact in the future, related to data security, cybersecurity and personal information protection, may subject us to additional costs and negative publicity, which could harm our reputation and business operations. As advised by our PRC counsel, there are uncertainties with respect to how such PRC laws and regulations will be implemented and interpreted in practice as they are relatively new. We may need to adjust our business or take additional measures to comply with the evolving laws and regulations concerning data security, cybersecurity and personal information protection.
In addition, government authorities around the world have adopted or are considering legislative and regulatory proposals concerning data protection. These legislative and regulatory proposals, if adopted, and the uncertain interpretations and applications thereof could subject us to fines, penalties or government orders requiring that we change our data practices and policies, which could have a material adverse effect on our business and results of operations. For example, the GDPR, which came into effect on May 25, 2018, includes operational requirements for companies that receive or process personal data of residents of the European Economic Area, which primarily covers members states of the European Union and certain countries of the European Free Trade Association. The GDPR establishes new requirements applicable to the processing of personal data, affords new data protection rights to individuals and imposes penalties for serious data breaches. Individuals also have a right to compensation under the GDPR for financial or non-financial losses. In the event that residents of the European Economic Area access our websites or mobile apps and input protected information, we may become subject to provisions of the GDPR.
Our introduction and use of AI may not be successful and may present business, compliance, and reputational challenges which could lead to operational or reputational damage, competitive harm, legal and regulatory risk, and additional costs, any of which could materially and adversely affect our business, financial condition, and results of operations.
We have incorporated, and expect to continue to incorporate, AI in our learning services and content solutions, as well as in our AI-powered platform innovations and features, and this incorporation of AI in our business and operations may become more significant over time.
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As with most emerging technologies, AI comes with its own set of risks and challenges that could affect its adoption and our business. AI algorithms may be flawed, and the data used could be incomplete or biased. Inappropriate or controversial data practices, by us or by others, could impair our AI solutions. Certain AI applications could trigger ethical issues. Should our AI-based product and service offerings become controversial due to their effects on human rights, privacy, employment, or other social matters, we risk reputational harm or legal repercussions. While the generative AI technology has the potential to streamline content creation processes and reduce costs, there may be significant upfront investments required for businesses to integrate generative AI into our products and service offerings. Also, uncertainty exists with respect to the economic feasibility of commercializing generative AI. Although generative AI holds much promise for commercial applications, there still exists substantial uncertainties, such as quality and reliability of outputs, customer acceptance and clear industry standards, which need to be addressed before widespread adoption.
Additionally, there are uncertainties around the ownership and intellectual property protection of AI generated content, or AIGC. Using AIGC tools could also lead to potential intellectual property infringement and other legal issues. If we are unable to obtain any needed authorization or licenses for using AIGC tools, whether due to failure to identify the rights holder or any other reason, we might infringe on others’ rights and encounter claims. Such third-party infringement claims might lead to monetary claims, increasing licensing or usage fees or less content for our users.
The regulatory and legal framework on generative AI is constantly evolving. On November 25, 2022, the CAC, the MIIT and the Ministry of Public Security jointly issued the Administrative Provisions on Deep Synthesis of Internet Information Services, which became effective on January 10, 2023. According to these Provisions, no organization or individual may use deep synthesis services to produce, reproduce, release or disseminate information prohibited by laws and administrative regulations, or to engage in activities that endanger national security and interests, damage the national image, infringe upon social public interests, disrupt the economic and social order or undermine the legitimate rights and interests of others. Additionally, the providers of deep synthesis services shall, among other things, establish and maintain management systems for algorithmic mechanism review, data security and personal information protection. On July 10, 2023, the CAC published the Provisional Administrative Measures for Generative Artificial Intelligence Services, which took effect on August 15, 2023. These Measures provide, among others, that any providers of generative AI products with public opinion attributes or social mobilization capabilities shall conduct security assessment in accordance with relevant regulations, and complete the filing procedures in accordance with the Administrative Provisions on Internet Information Service Algorithm Recommendation. See “Item 4. Information on the Company—B. Business Overview—PRC Regulations—Regulations Relating to Generative AI” for details on regulations over Generative AI in the PRC. However, since these laws and regulations are still relatively new and significant uncertainties remain with respect to their interpretation and implementation, there remain uncertainties whether we are required to complete such security assessment and algorithm filing, and if so, we cannot assure you whether we will be able to comply with the requirements of such laws and regulations or complete additional registrations and filings in a timely manner or at all. If we are unable to complete all necessary filings and/or assessments, or to comply with applicable laws and regulations, or if we have any dispute with any third party relating to intellectual property or data security, our reputation, business operation and financial condition may be materially and adversely affected.
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Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and how it may impact our business, financial condition and results of operations.
On March 15, 2019, the NPC promulgated the Foreign Investment Law, which came into effect on January 1, 2020 and replaced the previous laws regulating foreign investments in China, namely, the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-Invested Enterprise Law, together with their implementation rules and ancillary regulations. On December 26, 2019, the State Council published the Implementation Rules of Foreign Investment Law, which came into effect on January 1, 2020. The Foreign Investment Law and its Implementation Rules embody an expected regulatory trend in China to rationalize the regulatory regime over foreign investments in line with prevailing international practices, as well as legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The enacted Foreign Investment Law and its Implementation Rules do not mention concepts such as “actual control” and “controlling PRC companies by contracts or trusts” that were included in the previous drafts, nor did it specify regulation on controlling through contractual arrangements, and thus this regulatory topic regarding corporate control remains unclear under the Foreign Investment Law. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, though the Foreign Investment Law or its Implementation Rules do not explicitly classify contractual arrangements as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment,” which includes investments made by foreign investors in China through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, such as unwinding the VIE Contractual Arrangements and/or disposal of our related business operations, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.
The approval of or filing with the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC laws, and, if required, we cannot predict whether or for how long we will be able to obtain such approvals or complete such filings.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of domestic PRC companies using the equity interests in such overseas special purpose vehicle as a means of payment and controlled by persons or entities in China to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and our offshore offerings may ultimately require approval of the CSRC. If the CSRC approval is required, it is uncertain whether we can or how long it will take us to obtain the approval and, even if we obtain such CSRC approval, the approval could be rescinded. Any failure to obtain or delay in obtaining the CSRC approval for any of our offshore offerings, or a rescission of such approval if obtained by us, would subject us to sanctions imposed by the CSRC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, financial condition and results of operations.
Furthermore, on July 6, 2021, the relevant PRC government authorities issued the Opinions on Lawfully and Strictly Cracking Down Illegal Securities Activities. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to address the risks and incidents faced by PRC-based overseas-listed companies. As a follow-up, on February 17, 2023, the CSRC released the Overseas Listing Trial Measures, and five supporting guidelines, effective on March 31, 2023. Pursuant to the Overseas Listing Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedure and report relevant information to the CSRC. In addition, domestic companies that have been listed on a foreign stock exchange prior to the effective date of the Overseas Listing Trial Measures are required to file with the CSRC within three working days after such domestic companies complete a securities offering on the foreign stock exchange on which their securities have been listed. Since the Overseas Listing Trial Measures were newly promulgated, there are substantial uncertainties as to its interpretation, application and enforcement. If the filing procedure with the CSRC under the Overseas Listing Trial Measures is required for any future offerings, listing or any other capital raising activities by us, it is uncertain whether we could complete the filing procedure in a timely manner, or at all.
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In addition, new rules or regulations promulgated in the future may impose additional requirements on us. If it were determined in the future that additional approval and filing from the CSRC or other regulatory authorities or other procedures, including cybersecurity reviews under the Revised Cybersecurity Review Measures and the Draft Data Security Regulations, are required for our offshore offerings, we may not be able to complete the requisite filing procedures or obtain approvals in a timely manner, or at all. Approvals or filings that have been obtained or completed by us may also be rescinded. Any failure to, or delay in, completing such filing procedures or obtaining such approvals for our offshore offerings, or any rescission of approvals or filings that have been obtained or completed by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offshore offerings before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures for our prior offshore offerings, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding such approval requirement could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our ADSs.
If we fail to obtain and maintain licenses, permits or approvals or to complete registrations and filings required under the evolving regulatory regime for online learning in China, our business, financial condition and results of operations may be materially and adversely affected.
The online learning industry in China is highly regulated. As an online learning service provider, we are required to obtain and maintain all necessary approvals, licenses and permits. Meanwhile, the online learning industry in China is still in its nascent stage. The relevant laws and regulations are relatively new and still evolving, and involve significant uncertainties as to their interpretation and enforcement. As a result, it may be difficult to determine whether a given licensing, permit or approval requirement applies to us and what actions or omissions may be deemed to violate the laws and regulations applicable to our online education business. If relevant government authorities determine that we must obtain additional licenses, permits or approvals, or complete additional registrations or filings for our business or operations, we may not be able to obtain or complete them in a timely manner, on commercially reasonable terms, or at all. Failure to obtain such licenses, permits or approvals, or complete such registrations or filings, may subject us to fines, legal sanctions or government orders to suspend our related business or operations.
We currently hold the Value-added Telecommunications Business Operating Licenses and Licenses for the Production and Operation of Radio and Television Programs by some of the VIEs. As further explained below, we may be required to apply for and obtain additional licenses or permits for our online operations as the interpretation and implementation of current PRC laws and regulations are still evolving, and new laws and regulations may also be promulgated.
| ● | License for Online Transmission of Audio-Visual Programs. Applicable PRC laws and regulations require an entity providing certain audio-visual program services via the internet to hold a License for Online Transmission of Audio-visual Programs, or the AVSP, or complete relevant registration procedures with the State Administration of Press, Publication, Radio, Film and Television, or the SAPPRFT (currently known as National Radio and Television Administration) or its local bureaus. As of the date of this annual report, only wholly state-owned or state-controlled enterprises are eligible to apply for the AVSP. We offer certain online courses in live-streaming or video-recording formats and other audio-video content through our online learning platforms to our learners. Due to the significant uncertainty regarding the scope of audio-visual program services, we may be required to obtain an AVSP or to complete the relevant registration procedures. However, we may not be able to obtain the AVSP as we are not a wholly state-owned or state-controlled entity. |
| ● | Online Publishing License. If relevant government authorities deem our online distribution of content, including our course materials, to constitute “online publishing service,” we may be required to obtain an Online Publishing License. However, there is uncertainty regarding what activity constitutes online publishing service that is subject to such licensing requirements. |
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| ● | Publication License. If relevant government authorities deem our printing and providing physical learning materials to users to constitute “publishing” or “publication distribution,” we may be required to obtain a Publication License. |
| ● | Private School Operating Permit. If relevant government authorities deem our online learning content and solutions to constitute “online education activities” under the Amended Implementation Rules for the Private Education Law, our relevant operating entities may be required to obtain a private school operating permit. However, there is no definition of “online education activities” under the Amended Implementation Rules for the Private Education Law. |
| ● | Applying for or refiling of Education Apps |