Epicquest Education Group International Ltd annual report, Q4 FY2021

Business context and reporting period

Elite Education Group International Limited (NASDAQ: EEIQ) filed this annual report on Form 20-F for the fiscal year ended September 30, 2021. Although the request labels the period “2021 Q4,” this filing reports full-year results, not standalone fourth-quarter results. The BVI holding company primarily provides international education programs and student accommodation services, especially for Chinese students studying in the United States. Financial statements are prepared under U.S. GAAP.

Financial results and liquidity

Revenue fell 41%, primarily because COVID-19 travel restrictions reduced enrollment in the 2020 Fall program to 105 students from 179 in the 2019 Fall program. Gross margin declined as the company used a local Chinese university’s facilities to continue program delivery during travel restrictions. Operating expenses decreased 10%, but remained greater than gross profit, resulting in an operating loss. FY2021’s tax benefit was $307,168, including a $321,057 deferred tax benefit associated with loss carryforwards.

Investing activities used $514,529, including $618,529 for property and equipment, partly offset by note-receivable collections. Financing activities provided $9.32 million, principally from the March 2021 IPO. The company reported net IPO proceeds of approximately $8.7 million after underwriting commissions and offering expenses. Current assets were $19.58 million and current liabilities $8.61 million at year-end. Total liabilities were $9.07 million, including $721,294 of operating lease liabilities and $140,000 due to a related party; the filing reports no significant borrowing or other long-term obligations beyond the lease.

Material changes versus the prior comparable period

• Revenue declined from $9.06 million to $5.34 million and the company moved from $1.01 million of net income to a $1.08 million net loss.
• Gross margin fell from 74% to 64%, while operating expenses declined from $5.43 million to $4.88 million.
• Year-end cash increased by $9.13 million, largely reflecting IPO financing; operating cash flow was positive $322,190 after being negative $144,043 in FY2020.
• As of September 30, 2021, 136 students admitted to the Miami University Regional Campuses English Language Program had paid full tuition, versus 134 a year earlier. Application-to-enrollment conversion rose to 36.4% from 25.7%.

Outlook, risks and unusual items

The filing provides no quantified revenue or earnings guidance. Management’s plans include expanding recruitment and education partnerships in the U.S., Canada, the U.K. and Southeast Asia, and upgrading student housing. Management expected online promotion to continue and anticipated possible recovery in international enrollment as schools and travel resumed, but cautioned that COVID-19 and travel restrictions could continue to affect demand, revenue and costs. It stated that available resources were expected to support operations for at least 12 months.

After year-end, the company sold a Middletown building for gross proceeds of $2.0 million and, on November 26, 2021, completed an acquisition of 70% of Ameri-Can’s equity and 77.78% of its voting equity. Consideration included $1.25 million cash and 201,613 company shares to sellers, plus $2.5 million cash to Ameri-Can. Ameri-Can’s primary asset was convertible debt giving it the right to acquire 100% of Davis College before March 31, 2022; the filing does not establish that this conversion occurred.

Key risks include dependence on student recruitment and partner relationships, COVID-19 and international travel, education regulation in China, competition, and U.S.-China political and economic tensions. The filing identifies a material weakness in financial reporting controls: insufficient dedicated accounting personnel contributed to cut-off errors in earlier periods and restatements. Management said it assigned dedicated personnel, hired a consultant and intended to add experienced accounting staff. Management concluded disclosure controls were ineffective as of September 30, 2021. The auditor gave an unqualified opinion on the financial statements, but did not audit or express an opinion on internal control effectiveness. The filing also notes ownership concentration: CEO Jianbo Zhang beneficially owned approximately 61.54% of shares as of December 23, 2021.

Most important facts for investors to verify

• Whether student enrollment, revenue and gross margin recovered after the COVID-related FY2021 decline, and whether housing and marketing investments supported that recovery.
• Whether the accounting-control remediation was implemented and effective, and whether any further restatements or reporting deficiencies arose.
• The status, financial contribution and obligations of Ameri-Can and Davis College, including whether the Davis College debt was converted and the company’s total acquisition-related cash and share commitments.
• How much of the reported cash remains available after the post-year-end building sale, acquisition payments, and any restricted or committed uses.
• The terms and potential dilution from outstanding IPO warrants, acquisition shares, and subsequent equity awards; also verify the filing’s stated share counts and ownership percentages.