Mynd(MYND) - 2021 Q4 - Annual Report

Introduction This section defines key terms and abbreviations while providing a standard safe harbor statement for forward-looking information, which is subject to risks and uncertainties - Key definitions clarify the corporate structure, including the distinction between the 'former VIE' associated with the divested kindergarten business and the 'new VIE' established for licensing purposes[14] - The forward-looking statements cover goals, business development, industry growth expectations, and the impact of government policies, but are qualified by cautionary statements regarding potential risks[17][18][20] Part I Item 3. Key Information This section outlines the company's Cayman Islands holding structure, its reliance on VIEs for Chinese operations, associated risks, and presents selected historical financial data - RYB is a Cayman Islands holding company, not a Chinese operating company. It controls its Chinese operations through contractual arrangements with a VIE, meaning ADS holders own shares in the holding company, not the Chinese operating entity[24] - In March 2022, the company terminated its contractual arrangements with the 'former VIE' and divested its directly operated kindergarten business, effective April 30, 2022. A new VIE structure was established in April 2022 for licensing purposes[24] - Revenues from the VIE constituted 89.2%, 73.0%, and 78.8% of total revenues in 2019, 2020, and 2021, respectively, highlighting the company's heavy reliance on the VIE structure[25] - The company states that as of the report date, it is not required to obtain permissions from the CSRC or go through a cybersecurity review by the CAC for its offshore offerings[28] Selected Financial Data (2019-2021) | Financial Metric | 2019 (USD thousands) | 2020 (USD thousands) | 2021 (USD thousands) | | :--- | :--- | :--- | :--- | | Total Net Revenues | 182,283 | 109,715 | 180,313 | | Gross Profit (Loss) | 26,749 | (7,186) | 31,171 | | Operating Income (Loss) | 166 | (43,386) | 3,835 | | Net Income (Loss) | (2,190) | (41,183) | 3,529 | | Net cash from operating activities | 12,982 | (6,526) | 19,230 | Risk Factors This section details significant risks related to business operations, corporate structure, operating in China, and American Depositary Shares, including regulatory changes and potential delisting - Business Risks: The company faces uncertainty from its new strategy of divesting directly operated kindergartens and now relies significantly on service agreements with the former VIE, creating customer concentration risk[54][57] - Corporate Structure Risks: The VIE structure is a primary risk. If the PRC government finds these arrangements non-compliant, the company could face severe penalties, including being forced to relinquish its interests in the VIE operations[142][147] - China-Specific Risks: The company is subject to significant PRC government oversight, which could change at any time. Furthermore, under the Holding Foreign Companies Accountable Act (HFCAA), its ADSs may be prohibited from trading in the U.S. if the PCAOB cannot inspect its auditor for three (or potentially two) consecutive years[174][175][179] - ADS Risks: The company's ADSs face delisting risk from the NYSE if the price remains below $1.00 for an extended period. The dual-class share structure gives co-founders and a major shareholder significant voting control, limiting the influence of public ADS holders[217][221][223] Item 4. Information on the Company This section provides an overview of RYB Education's history, business operations, organizational structure, and the regulatory landscape, including its recent strategic shift to an asset-light model History and Development of the Company This section outlines the company's history, including its 2017 NYSE listing, the 2022 divestiture of its kindergarten business, establishment of a new VIE, and proposed name change - The company divested its directly operated kindergarten business in China, effective April 30, 2022, by terminating its 'former VIE' agreements. It will now provide services to these divested kindergartens[250] - In conjunction with the divestiture, the company established a new VIE structure with Zhudou Investment in April 2022 for licensing purposes[251] - The company is proposing a name change from RYB Education Inc. to Gravitas Education Holdings Inc., signaling a potential rebranding following its strategic shift[252] Business Overview This section describes the company's early childhood education services, network size in China and Singapore, and its strategic shift to an asset-light service model post-divestiture Network Size as of Dec 31, 2021 | Facility Type | Location | Directly Operated | Franchised | | :--- | :--- | :--- | :--- | | Kindergartens | China | 90 | 238 | | Play-and-learn centers | China | 5 | 1,012 | | Kindergartens | Singapore | 18 | 9 | | Student care centers | Singapore | 36 | 4 | - Post-divestiture, the business model in China has transformed into an educational service platform, aiming for an asset-light structure with greater scalability and lower operational risk[290][292] - The company emphasizes stringent network control over its franchisees, including standardized operations, mandatory training, centralized curriculum delivery via a whiteboard system, and exclusive procurement of certain goods[270][273][275] Organizational Structure This section details the company's complex holding structure, its historical and new VIE arrangements, and the termination of former VIE agreements as part of the 2022 divestiture - The company terminated its long-standing contractual arrangements with its 'former VIE' in March 2022, divesting control over the directly operated kindergarten business effective April 30, 2022[448] - As part of the divestiture, the company's subsidiaries entered into new 15-year service agreements with the former VIE to provide brand, training, IT, and curriculum services[449] - A new VIE structure was established in April 2022 with Zhudou Investment to manage licensing concerns, utilizing a standard set of control agreements (e.g., exclusive service, equity pledge, power of attorney)[450][451][455] Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance, including revenue recovery in 2021, liquidity, and the expected financial impact of the 2022 divestiture and critical accounting estimates Operating Results This section details the company's strong financial rebound in 2021, with significant increases in net revenues, gross profit, and net income, and outlines the expected impact of the 2022 divestiture Comparison of Operating Results (2020 vs. 2021) | Metric (USD thousands) | 2020 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | 109,715 | 180,313 | 64.3% | | Gross Profit (Loss) | (7,186) | 31,171 | N/A | | Operating Income (Loss) | (43,386) | 3,835 | N/A | | Net Income (Loss) | (41,183) | 3,529 | N/A | - The significant increase in 2021 revenue and profitability was primarily due to directly operated kindergartens in China being in normal operation for most of the year, whereas they were temporarily closed for much of 2020 due to COVID-19[505] - The company recorded a goodwill impairment loss of $4.6 million in 2021 and $8.5 million in 2020, citing changes in the regulatory environment and the impact of COVID-19[512][527] - Post-divestiture, the company's cost structure will change significantly. It will cease to incur direct operating costs like rent and staff compensation for the divested kindergartens, leading to an expected increase in profit margins from the new service-based model[542] Liquidity and Capital Resources This section details the company's liquidity, primarily from operations, highlighting cash balances, cash flow improvements in 2021, and the expected positive impact of the 2022 divestiture Cash Flow Summary (USD thousands) | Cash Flow | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 12,982 | (6,526) | 19,230 | | Net cash used in investing activities | (34,378) | (2,585) | (6,429) | | Net cash (used in)/from financing activities | (13,454) | 556 | (1,397) | | Cash at end of year | 69,438 | 54,581 | 66,256 | - Capital expenditures were $7.0 million in 2021, primarily for facility renovations that were postponed from 2020 due to the pandemic[602] - The divestiture is expected to improve liquidity, as the company will receive RMB 158.5 million (approx. $24.0 million) in compensation payments and will shift to a less capital-intensive business model[589] Critical Accounting Estimates This section outlines critical accounting estimates, focusing on the valuation allowance for deferred tax assets and goodwill impairment testing, which relies on significant management judgment and assumptions - Goodwill impairment testing is a critical estimate. The company uses a discounted cash flow model, with key assumptions including revenue growth (2%-14%), WACC (14%-18%), and terminal growth rates (2%-2.3%) for its 2021 assessment[619][620][992] - The 2021 impairment test resulted in a full impairment of goodwill amounting to $4.6 million for the Shanghai Peidi reporting unit[993] - Determining the valuation allowance for deferred tax assets requires significant judgment regarding future taxable income and the feasibility of tax planning strategies[616] Item 6. Directors, Senior Management and Employees This section details the company's leadership, compensation, board structure, employee base, and concentrated share ownership with significant voting control by co-founders and a major shareholder - For the fiscal year ended December 31, 2021, the aggregate cash compensation paid to directors and executive officers was approximately RMB 13.1 million[632] - As of December 31, 2021, the company employed 6,341 people, with 4,033 being teaching staff in directly operated facilities[669] - As of February 28, 2022, co-founders Mr. Cao and Ms. Shi, along with Ascendent Rainbow (Cayman) Limited, collectively held approximately 90.0% of the company's total voting power due to the dual-class share structure[222] Item 7. Major Shareholders and Related Party Transactions This section details major shareholders and related party transactions, including new 15-year service agreements and a 10-year guaranteed loan agreement with the former VIE following the 2022 divestiture - Following the divestiture, the company entered into new 15-year service agreements with the former VIE, which is now a related party customer[687] - A guaranteed loan agreement for RMB 240.5 million was established with the former VIE, formalizing historical loans. The loan has a 10-year term with a 4% annual interest rate, with repayments starting May 1, 2023[688] Item 8. Financial Information This section presents the company's consolidated financial statements, discusses the voluntary dismissal of prior class action lawsuits, and outlines its policy of retaining earnings for business expansion - Two separate class action lawsuits related to the company's 2017 IPO were voluntarily dismissed or discontinued by the plaintiffs in late 2020[691][692] - The company does not expect to pay any cash dividends in the foreseeable future, intending to retain earnings for business operations and growth[696] Item 10. Additional Information This section details the company's corporate governance, including its dual-class share structure, and discusses PRC and U.S. tax considerations, notably the risk of PFIC classification - The company has a dual-class share structure: each Class A share has one vote, while each Class B share has ten votes. Class B shares are convertible to Class A, but not vice-versa[221][706] - There is a risk that PRC tax authorities could classify the Cayman Islands holding company as a PRC resident enterprise, which would subject it to a 25% tax on its global income[736][737] - There is a material risk that the company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, particularly due to recent market capitalization fluctuations and changes in its asset composition following the divestiture. PFIC status could result in adverse tax consequences for U.S. Holders[242][749] Item 11. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's market risks, primarily foreign exchange volatility between RMB and USD, and notes minimal interest rate risk - The company's primary market risk is foreign exchange volatility between the RMB and the U.S. dollar, as most of its business is denominated in RMB while its ADSs are traded in USD[772] - As of December 31, 2021, a hypothetical 10% depreciation of the RMB against the USD would result in a $3.5 million decrease in the value of its RMB-denominated cash and cash equivalents[775] Item 15. Controls and Procedures This section reports management's conclusion that disclosure controls and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[788] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO 2013 framework[789] Item 16. Various Governance and Accountant Items This section covers governance, including the audit committee financial expert, code of conduct, changes in independent auditors, a 2019 share repurchase program, and reliance on foreign private issuer exemptions - The company changed its independent auditor to Friedman LLP on December 10, 2021, after having replaced Deloitte with KPMG on November 18, 2020[802][807] - In 2019, the company completed a $12 million share repurchase program, buying back 1,627,455 ADSs[799][801] - The company utilizes the foreign private issuer exemption to follow home country governance practices, and its board does not have a majority of independent directors[811] Item 18. Financial Statements This section presents the company's consolidated financial statements for 2019-2021, prepared under U.S. GAAP, including audit reports from multiple firms and notes on the 2022 kindergarten business divestiture - The financial statements include audit opinions from three different firms for the three years presented: Friedman LLP (2021), KPMG Huazhen LLP (2020), and Deloitte Touche Tohmatsu (2019)[825][831][836] - Note 26 to the financial statements details the significant subsequent event of the divestiture of the directly operated kindergarten business in China, which became effective on April 30, 2022. This event fundamentally changes the company's operational and financial structure going forward[1079]