Tarena(TEDU) - 2023 Q4 - Annual Report

Introduction This section defines key terms and highlights TCTM Kids IT Education Inc.'s Cayman Islands holding company structure, its operations through mainland China subsidiaries and VIEs, and the associated risks Definitions This section defines key terms, including ADSs, VIEs, China/PRC, Divestiture, former VIE, current VIE, STEM education, and currency translations, emphasizing TCTM's Cayman Islands holding structure and its operational risks - TCTM Kids IT Education Inc. is a Cayman Islands holding company with operations primarily conducted through mainland China subsidiaries and Variable Interest Entities (VIEs), a structure that entails unique risks to investors[6] - The company's professional education business was divested in December 2023, with consummation by the end of March 2024, leading to a reclassification of this business as discontinued operations[6] - Financial results are presented in RMB, with U.S. dollar translations provided for convenience at an exchange rate of RMB7.0999 to US$1.00 as of December 29, 2023[6] Forward-Looking Information This section cautions that the annual report contains forward-looking statements, which are subject to known and unknown risks and uncertainties, and actual results may differ materially - Forward-looking statements are based on current expectations and projections, but actual results may differ materially due to known and unknown risks and uncertainties[8][10] - Goals and growth strategies, and ability to implement them - Expectations regarding demand for and market acceptance of courses - Ability to retain and increase courses and student enrollments - Ability to maintain and increase the utilization rate of learning centers - Ability to offer new courses in existing and new subject areas - Future business development, results of operations, and financial condition - Expected growth of, and trends in, the markets for services in mainland China - Government policies and regulations relating to corporate structure, business, and industry - The company operates in an evolving environment, with new risk factors and uncertainties emerging, making it difficult to predict all potential impacts[10] PART I. This part covers the company's foundational information, including its corporate structure, key operations, risk factors, and regulatory environment in China ITEM 1. Identity of Directors, Senior Management and Advisers This item is not applicable, indicating no information on directors, senior management, or advisers is provided in this section ITEM 2. Offer Statistics and Expected Timetable This item is not applicable, indicating no information on offer statistics or expected timetable is provided in this section ITEM 3. Key Information This section provides critical information on the company's corporate structure, reliance on VIEs, recent business divestiture, regulatory environment, cash flows, and a comprehensive summary of significant risk factors Our Holding Company Structure and Contractual Arrangements with the Variable Interest Entities TCTM, a Cayman Islands holding company, operates in mainland China through subsidiaries and VIEs due to foreign investment restrictions, using contractual arrangements to control operations and consolidate financial results - TCTM is a Cayman Islands holding company operating in mainland China through subsidiaries and VIEs due to foreign investment restrictions in certain internet value-added businesses[13] - Revenues from continuing operations contributed by VIEs accounted for 1.3%, 2.9%, and 6.6% of net revenues for 2021, 2022, and 2023, respectively[13] - The professional education business was divested in December 2023 (consummated March 2024), reclassified as discontinued operations, with the remaining STEM education business reclassified as continuing operations[14] Permissions Required from the PRC Government Authorities for Our Operations The company's operations in mainland China require various licenses and permits from PRC government authorities, with future overseas offerings subject to CSRC filing procedures - The company's subsidiaries and VIEs in mainland China have obtained material requisite licenses and permits, including an ICP license and school operation permits[22] - Uncertainties in the interpretation and implementation of relevant laws and regulations may require obtaining additional licenses, permits, filings, or approvals in the future[22] - The CSRC's Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (Filing Rules), effective March 31, 2023, will require future overseas offerings of equity and equity-linked securities to be filed with the CSRC[23] Cash and Asset Flows through Our Organization TCTM relies on dividends from mainland China subsidiaries and service fees from VIEs for funding, subject to PRC regulatory restrictions on distributable profits and statutory reserve appropriations - TCTM's ability to pay dividends depends on distributions from its mainland China subsidiaries and service fees from VIEs, which are subject to PRC regulatory restrictions[24] - PRC subsidiaries and VIEs must appropriate profits to statutory reserve funds, which are not distributable as cash dividends, totaling RMB1,228.2 million (US$173.0 million) as of December 31, 2023[26] - No service fees were paid by VIEs to TCTM, and no dividends or distributions were made to TCTM by its subsidiaries or VIEs for the years ended December 31, 2021, 2022, and 2023[25][26] Hypothetical Tax Calculation for Earnings Distribution in Mainland China | Indicator | Percentage | | :--- | :--- | | Hypothetical pre-tax earnings | 100% | | Tax on earnings at statutory rate of 25% | (25)% | | Net earnings available for distribution | 75% | | Withholding tax at standard rate of 10% | (7.5)% | | Net distribution to Parent/Shareholders | 67.5% | Financial Information Related to the Variable Interest Entities This section presents condensed consolidated financial information for the Variable Interest Entities (VIEs) and other entities, reflecting the reclassification of the professional education business as discontinued operations - The professional education business was reclassified as discontinued operations following an equity transfer agreement in December 2023, with consummation in March 2024[31] Selected Condensed Consolidated Statements of Income (VIEs and Other Entities) (RMB in thousands) | Indicator | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net revenues from continuing operations | 1,236,273 | 1,399,844 | 1,375,192 | | Net income/(loss) | (475,780) | 85,233 | 10,354 | | Net cash provided by/(used in) operating activities | 8,610 | (27,528) | (118,935) | | Net cash provided by investing activities | 33,693 | (22,709) | 72,048 | | Net cash provided by/(used in) financing activities | 23,237 | (2,105) | (35,781) | D. Risk Factors This section outlines significant risks associated with TCTM's business, corporate structure, operations in China, and its ADSs, including regulatory uncertainties and market competition Summary of Risk Factors Investment in TCTM ADSs involves significant risks, particularly those related to operations in mainland China, categorized into business, corporate structure, doing business in China, and ADSs-specific factors - Investment in TCTM ADSs involves significant risks, especially those related to operations in mainland China, which are governed by different laws than Hong Kong[47] Risks Related to Our Business TCTM faces substantial business risks, including uncertainties from divesting its professional education business and a heavy reliance on IT-focused STEM education, and challenges in student attraction and retention - Uncertainties and risks accompany the strategy to divest the professional education business, which was a significant revenue driver - Reliance on IT-focused supplementary STEM education programs for a substantial part of net revenues, making the business vulnerable to decreased popularity of these courses - Difficulty in attracting and retaining students, recruiting and retaining qualified instructors and teaching assistants, and developing new courses in a timely and cost-effective manner - Adverse effects from downturns in the global or Chinese economy, and potential decline in student performance or satisfaction - Intense competition in the fragmented STEM education market in China - Complex and evolving Chinese laws and regulations regarding cybersecurity, information security, privacy, and data protection, with potential for claims, negative publicity, and increased costs - Risks related to the operations of certain learning centers potentially being beyond authorized business scope or without proper licenses, leading to administrative penalties - Dependence on market recognition of 'TongchengTongmei' brand,