| ORGANIZATION AND PRINCIPAL ACTIVITIES | 1. ORGANIZATION AND PRINCIPAL ACTIVITIES a. Background The accompanying consolidated financial statements include the financial statements of Ambow Education Holding Ltd. (the Company), its subsidiaries and variable interest entities (VIEs) for which the Company or its subsidiaries are the primary beneficiaries. The Company, its subsidiaries and VIEs are hereinafter collectively referred to as the Group. The Company was incorporated in the Cayman Islands on June 26, 2007. Pursuant to group reorganization in February 2005 and a share exchange agreement in July 2007, the Company became the ultimate parent company of the Group. In 2008 and 2009, the Group entered into 24 23 one On August 5, 2010, the Company and certain selling shareholders of the Company (the Selling Shareholders) completed its initial public offering of 355,907 300.0 two 6,558 22.5 19,673 362 In December 2011, the Company disposed of 5 On December 30, 2011, the Group signed an agreement to sell 2 100 In 2011 and 2012, the Group completed 7 1 8 In the board meeting at December 19, 2012, management proposed and was authorized by the board to explore possible sale of all of the 70 On June 3, 2013, the Company issued 1,026,705 128,035 21,000 60,969 10,000 67,066 11,000 On May 5, 2014, 537,797 67,066 11,000 On June 7, 2013, the Joint Provisional Liquidators (JPLs) were appointed as provisional liquidators of the Company by the Cayman Court following the filing of a winding up petition by GL Asia Mauritius II Cayman Limited (the Petitioner). Upon the satisfaction of conditions and deliverables under the restructuring agreement (the Restructuring Agreement) and associated agreements to implement the core parts of the restructuring plan sanctioned by the Cayman Court pursuant to its order dated May 7, 2014 (the Restructuring Plan), the Court approved the return of management to the Board of Directors of the Company (as reconstituted pursuant to the Restructuring Plan). Upon the discharge, the Company was to proceed with the completion of the Restructuring Plan transactions. The Group deconsolidated Tianjin Ambow Huaying Education Technology Co., Ltd., which owns the 100 On September 5, 2014, US$ 31,692 China Education Investment Holding Limited (CEIHL) 16,716,954 5,678,963 2,786,159 5,000 6,308 5,000 4,457,854 2,786,159 On April 8, 2015 the Group disposed all of the 100 Technology Co., Ltd. (Beijing JH Tutoring) and Beijing Jinghan Taihe Education Technology Co., Ltd. (Beijing JT Tutoring), 64 in Ambow Jingxue (Beijing) Technology Co., Ltd, which are hereinafter collectively referred to as the Jinghan Group. Please refer to Note 23(c) for details. On September 4, 2015, the Company effected a 1-for- 30 presented in notes of the consolidated financial statements The Company established Ambow Rongye Education and Technology Co., Ltd. (Ambow Rongye) and Ambow Zhixin Education and Technology Co., Ltd. (Ambow Zhixin) on September 8, 2015 and October 14, 2015, respectively. Ambow Rongye and Ambow Zhixin are VIEs of Beijing Ambow Shengying Education and Technology Co., Ltd. (Ambow Shengying). On October 31, 2015, the Company transferred its 100 quity interests of Beijing Intelligent Training School (Beijing YZ Tutoring'), Beijing Huairou Xinganxian Training School and Beijing Century Passion Consulting Co., Ltd. (Beijing Century Tutoring) from Ambow Sihua Education and Technology Co., Ltd. (Ambow Sihua) to Ambow Rongye and Ambow Zhixin. By December 31, 2015, the Company regained control over the previously deconsolidated subsidiaries, Tianjin Tutoring, Guangzhou ZS Career Enhancement, Guangzhou DP Tutoring and Jilin Tutoring, and reconsolidated these entities in its 2015 consolidated financial statements. Please refer to Notes 25 for details. b. Nature of operations The Group is a national provider of educational and career enhancement services in the People's Republic of China (PRC). The Group offers a wide range of educational and career enhancement services and products focusing on improving educational opportunities for primary and advanced degree school students and employment opportunities for university graduates. c. Major subsidiaries and VIEs As of December 31, 2015, the Company's major subsidiaries and VIEs include the following entities:
Name Date of incorporation or establishment Place of Incorporation (or establishment) /operation Principal activity
Subsidiaries
Beijing Ambow Online Software Co., Ltd. (Ambow Online) August 24, 2000 PRC Software product and Investment holding
Ambow Education Co., Ltd. January 25, 2005 Cayman Islands Investment holding
Ambow Education Ltd. June 6, 2007 Cayman Islands Investment holding
Ambow Education (Hong Kong) Ltd. December 17, 2007 Hong Kong Investment holding
Beijing Ambow Chuangying Education and Technology Co., Ltd. January 18, 2008 PRC Investment holding
Wenjian Gongying Venture Investment Enterprise July 20, 2009 PRC Investment holding
Ambow (Dalian) Education and Technology Co., Ltd March 10, 2009 PRC Career enhancement and Investment holding
Ambow Education Management (Hong Kong ) Ltd November 9, 2009 Hong Kong Investment holding
Ambow Education Management Ltd. June 6, 2007 Cayman Islands Investment holding
Ambow Shengying October 13, 2008 PRC Investment holding
Tianjin Ambow Yuhua Software Information Co., Ltd. (Ambow Yuhua) March 31, 2010 PRC Software product and Investment holding
Variable interest entities ( VIEs )
Beijing Normal University Ambow Education Technology Co., Ltd. (Ambow Shida) July 30, 2004 PRC Investment holding
Shanghai Ambow Education Information Consulting Co., Ltd. (Ambow Shanghai) May 16, 2006 PRC Investment holding
Ambow Sihua April 17, 2007 PRC Investment holding
Suzhou Wenjian Venture Investment Management Consulting Co., Ltd. (Suzhou Wenjian) February 25, 2009 PRC Investment holding
Ambow Rongye September 8, 2015 PRC Investment holding
Ambow Zhixin October 14, 2015 PRC Investment holding
Name Date of incorporation or establishment Place of Incorporation (or establishment) /operation Principal activity
Subsidiaries of VIEs
Jinan Wangrong Investment Consulting Co., Ltd. May 21,2010 PRC Career Enhancement
Hebei Yuanlong Corporate Management Co., Ltd. (Hebei YL Career Enhancement) January 13, 2011 PRC Career Enhancement
Beijing Genesis Education Group (Genesis Career Enhancement) May 1, 2011 PRC Career Enhancement
Changsha Newer Education Consulting Co., Ltd. (Changsha Career Enhancement) September 16, 2002 PRC Career Enhancement
Kunshan Ambow Education Technology Co., Ltd August 28, 2008 PRC Career Enhancement
Shanghai Hero Further Education Institute January 9, 2009 PRC Career Enhancement
Beijing Century Tutoring April 1, 2002 PRC Tutoring
Beijing Ambow Dacheng Education and Technology Co., Ltd. December 2, 2013 PRC Career Enhancement
Shanghai Tongguo Education Technology Co., Ltd (Shanghai Tongguo) June 1, 2014 PRC Career Enhancement
Schools of VIEs
Changsha Study School (Changsha Tutoring) June 1, 1984 PRC Tutoring
Beijing YZ Tutoring December 30, 1994 PRC Tutoring
Hunan Changsha Tongsheng Lake Experimental School (Changsha K-12) June 18, 1999 PRC K-12 School
Shenyang Universe High School (Shenyang K-12) December 8, 2003 PRC K-12 School
Shuyang Galaxy School (Shuyang K-12) November 1, 2008 PRC K-12 School
Beijing Haidian Ambow Xinganxian Training School March 28, 2005 PRC Tutoring
Beijing Huairou Xinganxian Training School March 10, 2011 PRC Tutoring The names of certain schools or companies referred to above represent management's best effort in translating the Chinese names of these entities as no English names for these entities have been registered. d. VIE arrangements VIEs of the Company PRC regulations restrict foreign owned companies from directly investing in certain businesses providing educational services in PRC. In order to comply with these regulations the Company, through its PRC subsidiaries, the Company has entered into exclusive technical consulting and service agreements (the Service Agreements) with a number of VIEs in PRC, which are able to provide such educational services. The shareholders of the VIEs, through share pledge agreements, have pledged all of their rights and interests in the VIEs, including voting rights and dividend rights, to the Company or its subsidiaries as collateral for their obligation to perform in accordance with the Service Agreements. Further, the shareholders of the VIEs, through exclusive call option agreements, granted to the Company or its subsidiaries an exclusive, irrevocable and unconditional right to purchase part or all of the equity interests in the VIEs for an amount equal to the original cost of their investment should the purchase become permissible under the relevant PRC law. Through the contractual agreements described above, the following companies: Ambow Shida, Ambow Shanghai, Ambow Sihua, Suzhou Wenjian, Ambow Rongye and Ambow Zhixin are considered to be VIEs in accordance with US GAAP for the following reasons:
Shareholders of the VIEs lack the right to receive any expected residual returns from the VIEs;
Shareholders of VIEs lack the ability to make decisions about the activities of the VIEs that have a significant effect on their operation; and
Substantially all of the VIEs' businesses are conducted on behalf of the Company or its subsidiaries. Through the equity pledge arrangements, call option agreements and powers of attorney with the shareholders of VIEs, the Company controls decisions in relation to the operations of the VIEs, VIE's subsidiaries and schools controlled. Specifically, the Company can make the following decisions which most significantly affect the economic performance of the VIEs:
The Company has the power to appoint the members of the VIE's board of directors and senior management as a result of the powers of attorney;
The Company is closely involved in the daily operation of the VIE via appointing management personnel such as VP and other staff to oversee the operation of the VIEs;
Generally, the VIE's board of directors and senior management may (1) modify the articles of the schools / centers; (2) approve the department structure of the schools / centers, and (3) approve the division, combination, termination of the schools / centers;
T he principals of the schools are involved in curriculum design, course delivery, hiring teachers, student recruitment, and approving school budgets and monthly spending plan; and
The principals sign significant contracts on behalf of the schools / training centers such as service arrangement, leasing contract etc. Further, the Company is also able to make the following decisions that enable it to receive substantially all of the economic returns from the VIEs:
The Company has the exclusive right to provide management / consulting services to VIEs. Given the Company controls the VIE's board of directors, the Company has the discretion to set the service fees which enable the Company to extract the majority of the profits from the Company;
The Company has the right to renew the service contracts indefinitely, which ensures the Company will be able to extract profits on a perpetual basis; and The Company, either directly or through its subsidiaries, is the primary beneficiary of the VIEs because it holds all the variable interests in the VIEs. As a result, the accounts and operations of the VIEs and their subsidiaries are included in the accompanying consolidated financial statements. Other than the contractual control arrangements as disclosed, the Group's officers, directors or shareholders do not have any written or oral agreement with the VIE shareholders. Subsidiaries of the VIEs The Company conducts education business in PRC primarily through contractual arrangements among the Group's subsidiaries in PRC and VIEs. The Group's VIEs have power over the activities of subsidiaries (mainly including schools and centers) through their role as the registered sponsors of schools or controlling shareholders of corporate centers. The VIEs control the equity in these schools and are also entitled to the economic benefits from the schools. The schools and centers, which are controlled by the VIEs, hold the necessary business and education licenses or permits to perform education activities. The schools and centers also sign all significant contracts, including leases, relating to the performance of these activities. In addition, the responsibilities of the schools and centers, under the direction of the VIEs and Company's management (through the power invested in them by the VIEs) include the following:
Providing suitable facilities to house staff and deliver courses to students;
Designing an appropriate curriculum for the delivery of courses, in accordance with the Ministry of Education (MOE), or the MOE stipulations, where applicable;
Hiring, training and terminating the employment of teachers and other support staff to run the schools and centers; and
Selecting and recruiting students, in accordance with the Company's entry requirements and to maximize the usage of capacity. Based on the nature of schools, the Company has categorized the schools into two For the schools requiring reasonable returns, the VIEs have a 100 According to the Private Education Promotion Law, which regulates the education industry in China, schools not requiring reasonable returns are prohibited from distributing annual dividends. The Company through the VIEs has the power to direct the schools' most significant activities for as long as the VIEs remain the equity holders of the schools and has the obligation to absorb operating losses and the rights to receive the schools' expected residual returns. The Company is able to extract profits through technical service agreements / software agreements. Therefore, the Company through the VIEs is the primary beneficiary of the schools not requiring reasonable returns and consolidates them under the VIE model. Aggregation of VIEs The Company identifies and aggregates its subsidiaries and VIEs with similar nature for consolidation and reporting purpose. The VIEs and their schools and centers have very similar characteristics and are facing similar kinds/levels of risks:
The principal business of the VIEs are sponsors of the schools and centers, or the controlling shareholders of the companies which are the sponsors of the schools and centers;
All the schools of the VIEs require licenses from MOE (or commercial and business regulators if they are registered as companies);
The schools and centers, in addition to holding the business/education licenses, have to operate by conducting all necessary activities, including but not limited to, acquiring and provisioning of appropriate facilities, hiring and management of teachers and supporting staff, recruitment of students and course/training delivery;
The schools and centers operated their business in the education industry and hence subject to the regulations and risks associated with the industry; and
The VIEs, schools and centers are all registered and located in PRC. As such, they are facing similar risks in related to governmental, economic and currency. In addition, the Company enters into different contractual agreements with the six As a result, the Company considers it is appropriate to, according to ASC 810, aggregate all these VIEs together for reporting in the periodic financial statements. Risk in relation to the VIE structure There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including those that govern the Group's VIE contractual arrangements. If the Group's ownership structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violation, including (i) revoking the business and operating licenses of the Company's PRC subsidiaries and VIEs; (ii) discontinuing or restricting the operations of any related-party transactions among the Company's PRC subsidiaries and VIEs; (iii) imposing fines or other requirements with which the Group or the Company's PRC subsidiaries and VIEs may not be able to comply; (iv) revoking the preferential tax treatment enjoyed by the Company's PRC subsidiaries and VIEs; (v) requiring the Group or the Company's PRC subsidiaries and VIEs to restructure the ownership structure or operations. If any of the above penalties is imposed on the Group, the Group's business operations and expansion, financial condition and results of operations will be materially and adversely affected. The new issued The foreign investment law draft as at January 19, 2015 will require the Group to apply access permit under the new foreign investment access system to ratify whether the Group's subsidiaries and operations are already out of the fields of prohibited and restricted foreign investments. However, if not, the above draft law did not give any definite solution and the risk in revoking the current business and operating licenses would be low. Furthermore, The foreign investment law is to set up a new law not to revise any of the other laws, so it would spend more time from its consultation to final, so at least during this period, the Group's VIE contractual arrangements will be legal. The Company's operations depend on the VIEs and their respective shareholders to honor their contractual agreements with the Company. All of these agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. The management believes that the VIE agreements are in compliance with PRC law and are legally enforceable. However, the interpretation and implementation of the laws and regulations in the PRC and their application to the legality, binding effect and enforceability of contracts are subject to the discretion of competent PRC authorities, and therefore there is no assurance that relevant PRC authorities will take the same position as the Group herein in respect of the legality, binding effect and enforceability of each of the contractual agreements. Meanwhile, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to the Company to enforce the contractual arrangements should the VIEs or their shareholders fail to perform their obligation under those arrangements. In addition, if the Company is unable to maintain effective control over its VIEs, the Company would not be able to continue to consolidate the Group's VIEs' financial results with its financial results. The Company's ability to conduct its education business may be negatively affected if the PRC government were to carry out of any of the aforementioned actions. As a result, the Company may not be able to consolidate Ambow Shanghai, Ambow Shida, Ambow Sihua, Suzhou Wenjian, Ambow Rongye and Ambow Zhixin, their respective schools and subsidiaries in its consolidated financial statements as it may lose the ability to exert effective control over these entities and their respective schools and subsidiaries and their shareholders, and it may lose the ability to receive economic benefits from these respective entities, schools and subsidiaries. The Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, the subsidiaries or the VIEs, and believes that the risk of losing the ability to maintain effective control over its VIEs is remote. Currently there are no contractual arrangements that could require the Company to provide additional financial support to the VIEs. As the Company is conducting its PRC educational and career enhancement services through the VIEs and their subsidiaries, the Company may provide such support on a discretional basis in the future, which could expose the Company to a loss. Financial information of the VIEs and their subsidiaries/schools: The combined financial information of the Group's VIEs and, as applicable, subsidiaries/schools of the Group's VIEs was included in the accompanying consolidated financial statements of the Group as follows:
As of December 31,
2014 2015
RMB RMB
Total assets 1,264,577 718,514
Total liabilities 1,179,550 565,818
Years ended December 31,
2013 2014 2015
RMB RMB RMB
Net revenue 534,545 403,643 411,315
Net income (loss) (479,323 ) (550,911 ) 370,818 The following table sets forth cash and cash equivalents of RMB held by the Group's VIEs and non-VIEs in PRC as of December 31, 2014 and 2015:
As of December 31,
2014 2015
RMB RMB
VIEs in PRC 110,353 125,850
Non-VIEs in PRC 67,678 109,820
Total RMB 178,031 235,670 |
