NaaS(US:NAAS)2020-04-17 10:31PART I ITEM 3. KEY INFORMATION This section presents key financial data and outlines significant risks related to business operations, the VIE structure, and market factors Selected Financial Data Highlights consistent revenue and gross profit growth from 2015 to 2019, with significant expansion in total assets Selected Consolidated Statements of Operations Data (2017-2019) | Financial Metric | 2017 (RMB) | 2018 (RMB) | 2019 (RMB) | 2019 (US$) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | 969,275 | 1,271,888 | 1,529,447 | 219,691 | | Gross Profit | 517,055 | 695,358 | 834,754 | 119,905 | | Operating (Loss)/Income | (628) | 207,612 | 222,789 | 32,002 | | Net (Loss)/Income | (53,600) | 142,436 | 144,560 | 20,765 | | Net (Loss)/Income Attributable to RISE | (47,974) | 142,958 | 148,100 | 21,273 | Selected Consolidated Balance Sheet Data (as of Dec 31) | Financial Metric | 2018 (RMB) | 2019 (RMB) | 2019 (US$) | | :--- | :--- | :--- | :--- | | Total Assets | 2,280,774 | 2,801,955 | 402,476 | | Total Liabilities | 1,839,940 | 2,177,654 | 312,800 | | Total Equity | 440,834 | 624,301 | 89,676 | Risk Factors Identifies significant risks including competition, brand dependency, VIE structure uncertainties, and the adverse impact of COVID-19 - The company's success is critically dependent on its ability to attract new students and retain existing ones, which is influenced by product quality, teaching methodologies, and marketing effectiveness23 - The junior English Language Teaching (ELT) market in China is highly fragmented and competitive, and the company faces pressure from competitors who may have greater financial resources25 - The company operates through a Variable Interest Entity (VIE) structure which carries substantial uncertainties regarding its interpretation and legality under current and future PRC laws, potentially leading to severe penalties737475 - The COVID-19 outbreak has materially and adversely affected the business, leading to temporary closure of learning centers, and the company expects to report a net loss for the year ending December 31, 2020135139 - As of December 31, 2019, Bain Capital beneficially owns approximately 59.8% of the company's voting power, giving it substantial control over corporate actions161 ITEM 4. INFORMATION ON THE COMPANY Details the company's history, business model, franchise network, critical VIE structure, and property portfolio History and Development of the Company Outlines the company's growth since 2007, its 2017 IPO, and the expansion of its learning center network - As of December 31, 2019, the company's network consisted of 472 learning centers, including 89 self-owned and 383 franchised centers, across China, Hong Kong, and Singapore178 - The company completed its Initial Public Offering (IPO) on the NASDAQ Global Market on October 24, 2017, listing its ADSs under the symbol 'REDU'183 Business Overview Explains the 'subject-based learning' approach, course offerings, franchise model, and key intellectual property licenses - The company utilizes a 'subject-based learning' philosophy, teaching English through subjects like language arts, math, and science to create an immersive learning environment185 Student Enrollment and In-Class Numbers (Regular Courses at Self-Owned Centers) | Metric | As of/Year Ended Dec 31, 2018 | As of/Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | New Students Enrolled | 25,862 | 29,049 | | Students in Class | 49,365 | 54,383 | Learning Center Network Growth | Center Type | As of Dec 31, 2017 | As of Dec 31, 2018 | As of Dec 31, 2019 | | :--- | :--- | :--- | :--- | | Self-owned | 64 | 76 | 89 | | Franchised | 206 | 304 | 383 | | Total | 270 | 380 | 472 | - The company holds an exclusive, royalty-free, and permanent license from Houghton Mifflin Harcourt (HMH) to use certain courseware for after-school tutoring in China211267 - The PRC government has issued stringent regulations for after-school tutoring, setting standards for facilities, teacher qualifications, and fee collection, such as no more than three months of tuition collected at a time288289290 Organizational Structure Details the Variable Interest Entity (VIE) structure used to control its PRC operations due to foreign ownership restrictions - The company uses a VIE structure because PRC law requires foreign investors in the education sector to be experienced educational institutions, a criterion its offshore holding entities do not meet341 - Control over the VIE is established through key contracts including a Proxy Agreement, a Call Option Agreement, and an Equity Pledge Agreement344345357 - In 2017, 2018, and 2019, the consolidated VIE and its subsidiaries contributed 94%, 92%, and 94% of the company's total revenues, respectively, highlighting the structure's critical importance342 Property, Plants and Equipment Describes the company's leased properties for its headquarters and self-owned learning centers - As of December 31, 2019, the company leased a total of approximately 106,016 square meters for its self-owned learning centers361 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS Provides management's analysis of financial performance, liquidity, capital resources, and the impact of COVID-19 on future trends Operating Results Analyzes the 20.3% revenue growth in 2019, margin pressures from rising operating expenses, and non-GAAP financial measures Year-over-Year Performance Comparison (2018 vs. 2019) | Metric (in thousands) | 2018 (RMB) | 2019 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenues | 1,271,888 | 1,529,447 | +20.3% | | Educational Programs | 1,097,619 | 1,324,654 | +20.7% | | Franchise Revenues | 125,341 | 156,509 | +24.9% | | Gross Profit | 695,358 | 834,754 | +20.0% | | Operating Income | 207,612 | 222,789 | +7.3% | | Net Income | 142,436 | 144,560 | +1.5% | - The increase in 2019 revenue was primarily due to a rise in students at self-owned learning centers and higher course prices, coupled with growth from an expanding franchise network, which grew from 304 to 383 centers391 - Operating expenses grew faster than revenue in 2019, driven by higher marketing staff headcount, incentives, new share-based compensation, and professional fees for acquisitions394395 Reconciliation of Net Income to Adjusted EBITDA (Non-GAAP) | Metric (in thousands) | 2017 (RMB) | 2018 (RMB) | 2019 (RMB) | | :--- | :--- | :--- | :--- | | Net (Loss)/Income | (53,600) | 142,436 | 144,560 | | EBITDA | 56,064 | 279,852 | 301,419 | | Adjusted EBITDA | 242,510 | 300,204 | 349,308 | Liquidity and Capital Resources Details the company's cash position, a significant decrease in operating cash flow, and outstanding debt obligations Summary of Cash Flows (in thousands RMB) | Cash Flow Activity | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from/(used in) operating activities | 350,100 | 380,034 | (39,854) | | Net cash used in investing activities | (53,067) | (100,875) | (114,716) | | Net cash from/(used in) financing activities | 137,402 | (57,306) | (140,732) | - The significant decrease in operating cash flow in 2019 was primarily due to a RMB 331.7 million decrease in deferred revenue and customer advances attributed to a change in the tuition fee collection schedule423 - The company has a long-term loan facility with scheduled principal repayments of US$19.25 million, US$24.75 million, and US$30.25 million due in September 2020, 2021, and 2022, respectively432811 Trend Information Focuses on the material adverse impact of the COVID-19 outbreak and the company's strategic shift towards digitalization - The COVID-19 outbreak caused the temporary closure of all learning centers and offices since late January 2020, materially and adversely affecting results of operations and liquidity487 - In response to the closures, the company accelerated its digitalization strategy by upgrading its Rise+ platform to support online small group classes, which began generating revenue in March 2020487 - Due to the adverse effects of COVID-19, the company currently expects to report a net loss for the fiscal year ending December 31, 2020490861 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES Outlines the company's leadership, compensation structure, employee base, and controlling shareholder ownership Directors and Senior Management Lists the company's board of directors and executive officers, highlighting key figures from Bain Capital Key Directors and Executive Officers | Name | Position/Title | | :--- | :--- | | Lihong Wang | Chairwoman, Chief Executive Officer, Director | | Jonathan Jia Zhu | Director, Chairman of the corporate governance and nominating committees | | Yiding Sun | Vice Chairman, Director | | Zhongjue Chen | Director | | Jiandong Lu | Director, Chief Financial Officer, Chief Operating Officer | Compensation Details executive compensation for 2019 and the structure of the company's two share incentive plans - In 2019, the total compensation paid to all directors and executive officers was approximately RMB 6.4 million (US$0.9 million)511 - The company has two active equity incentive plans: the 2016 ESOP Plan (7,000,000 shares authorized) and the 2017 ESOP Plan (5,000,000 shares authorized)515525 Employees Shows steady growth in the company's workforce, with teachers comprising the largest employee group Employee Count by Function | Function | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2019 | | :--- | :--- | :--- | :--- | | Teachers | 1,543 | 1,911 | 2,315 | | Sales and marketing | 565 | 668 | 723 | | Administration | 646 | 933 | 976 | | Total | 2,754 | 3,512 | 4,014 | Share Ownership Confirms Bain Capital's controlling stake with 62.8% of the company's total voting power - Bain Capital Rise Education IV Cayman Limited is the controlling shareholder, holding 70,800,808 ordinary shares, which represents 62.8% of the total voting power as of March 31, 2020549 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Details transactions with related parties, including a consulting agreement with a Bain Capital affiliate and entrustment loans - The company engaged in significant related party transactions, including a consulting agreement with a Bain Capital affiliate that terminated upon the IPO after a final payment of RMB 33.9 million553 - The company granted entrustment loans to an affiliate of its principal shareholder, amounting to RMB 150.0 million in 2018 and RMB 100.0 million in 2019, all of which have been fully repaid554 ITEM 8. FINANCIAL INFORMATION Contains the company's consolidated financial statements and discusses legal proceedings and dividend policy - The company does not currently plan to pay any cash dividends, intending to retain earnings to fund business operations and growth559 ITEM 10. ADDITIONAL INFORMATION Covers supplementary corporate information, including articles of association, exchange controls, and detailed tax considerations - The company is not subject to income or capital gains tax in its jurisdiction of incorporation, the Cayman Islands566 - In the PRC, the company's entities are subject to a statutory Enterprise Income Tax (EIT) rate of 25%, though its WFOE qualified for a preferential rate of 15% as a "High and New Technology Enterprise" (HNTE) in 2019481814 - For U.S. investors, there is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which could result in adverse U.S. federal income tax consequences580583 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risks are foreign exchange risk, credit risk, and interest rate risk - The company has significant foreign exchange risk related to its U.S. Dollar-denominated debt; a 10% depreciation of the RMB against the USD would result in a decrease of US$14.0 million in the value of its RMB-denominated cash598602 - The company is exposed to interest rate risk on its long-term loan, where a hypothetical 1% change in annual interest rates would impact interest expense by approximately RMB 5.2 million (US$0.7 million) per year604 ITEM 15. CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end 2019 - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were effective617 - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2019622 ITEM 16. CORPORATE GOVERNANCE AND OTHER ITEMS Covers corporate governance matters, including accountant fees and the completion of a share repurchase program Principal Accountant Fees (in thousands USD) | Fee Category | 2018 | 2019 | | :--- | :--- | :--- | | Audit fees | - | 1,106 | | Audit-related fees | - | - | | Tax fees | 4 | 15 | | All other fees | 64 | 265 | - The company completed its share repurchase program in Q3 2019, having repurchased a total of 1,158,741 ADSs for an aggregate consideration of US$10.0 million630 PART III ITEM 18. FINANCIAL STATEMENTS Presents the audited consolidated financial statements for 2017-2019 prepared in accordance with U.S. GAAP Notes to the Consolidated Financial Statements Provides detailed explanations of accounting policies, business combinations, and the subsequent material impact of COVID-19 - The company adopted ASC 606 (Revenue from Contracts with Customers) on January 1, 2018, resulting in a RMB 44.1 million adjustment to opening accumulated deficit441734 - The company adopted ASC 842 (Leases) on January 1, 2019, recognizing Right-of-Use (ROU) assets of RMB 601.6 million and total lease liabilities of RMB 610.5 million upon adoption476750 - On July 1, 2019, the Group acquired a 51% equity interest in 7 learning centers in Shijiazhuang for RMB 44.1 million, resulting in the recognition of RMB 150.7 million in goodwill788790 - Subsequent to December 31, 2019, the COVID-19 outbreak led to the temporary closure of all offline learning centers, which is expected to have a materially adverse impact on 2020 results and lead to a net loss for the year860861