Four Seasons Education (Cayman) Inc. — Form 20-F Summary
Reporting period: Fiscal year ended February 28, 2021 (FY2021), with comparisons to fiscal years ended February 29, 2020 (FY2020) and February 28, 2019 (FY2019). This is an annual report, not a standalone 2020 Q4 report. Financial statements are prepared under U.S. GAAP; amounts below are RMB unless stated otherwise.
Business context
The company provides after-school education, principally math, for kindergarten, elementary- and middle-school students in China. It operated 50 learning centers across 11 cities at FY2021 year-end, including 38 in Shanghai. All reported revenue came from its PRC operations, conducted primarily through a variable interest entity (VIE) and affiliated entities under contractual arrangements.
Key financial metrics
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Revenue | RMB280.3m (US$43.3m) | RMB389.0m | Down 27.9%; management cited COVID-19 disruption and lower enrollment. |
| Gross profit / margin | RMB111.5m / 39.8% | RMB188.1m / 48.4% | Margin contracted 8.6 percentage points. |
| Operating loss | RMB36.5m | RMB131.0m | Improved as FY2021 had no impairment charge, versus RMB145.4m in FY2020. |
| Net loss | RMB27.9m (US$4.3m) | RMB109.6m | Loss narrowed; the prior-year impairment materially affected comparison. |
| Adjusted net income (loss), non-GAAP | Loss of RMB2.5m (US$0.4m) | Income of RMB47.9m | Reversed from adjusted profit to adjusted loss. |
| Operating cash flow | RMB31.1m | RMB82.2m | Down from the prior year. |
| Investing cash flow | Use of RMB68.0m | Use of RMB98.7m | FY2021 included RMB44.5m invested in equity-method investees and net investment purchases. |
| Cash and cash equivalents | RMB378.4m | RMB404.7m | Down RMB26.3m; restricted cash was RMB10.9m at FY2021 year-end. |
| Total assets / liabilities | RMB967.2m / RMB320.8m | RMB1,037.6m / RMB362.7m | Liabilities include substantial operating lease obligations. |
Current assets were RMB516.8m and current liabilities RMB227.0m at FY2021 year-end. The filing reports no conventional borrowings as a material debt balance; operating lease liabilities were RMB144.8m in total, including current and non-current portions. Separately, undiscounted lease commitments were RMB164.4m, and a further RMB45.0m funding commitment was outstanding. The company reported RMB101.4m of PRC restricted net assets.
Elementary-school programs generated RMB207.7m (74.1% of revenue), middle-school programs RMB50.9m (18.2%), and other programs RMB21.7m (7.7%). Student enrollment, defined as paid course enrollments rather than unique students, fell to 165,555 from 200,177 in FY2020. Shanghai generated 87.6% of FY2021 gross billings.
Material changes versus prior year
- Revenue declined 27.9%, while enrollment fell approximately 17.3%. Elementary-school revenue fell to RMB207.7m from RMB300.3m; middle-school revenue was broadly stable at RMB50.9m versus RMB52.1m.
- Cost of revenue declined 16.0%, but less than revenue, contributing to the gross-margin decline. Management attributed lower faculty costs partly to the pandemic.
- General and administrative expenses fell 16.1% to RMB117.0m, and sales and marketing expenses fell 9.9% to RMB31.0m. FY2021 still included RMB20m of annual funding-commitment accrual to East China Normal University.
- FY2020 included RMB145.4m of impairment losses on goodwill and intangible assets; FY2021 recorded none. Consequently, the improvement in GAAP net loss does not indicate a return to adjusted profitability.
- Online course revenue was RMB90.4m in FY2021, compared with RMB19.0m in FY2020, as the company shifted delivery during mandated center closures.
- Cash and cash equivalents decreased, while operating cash generation fell to RMB31.1m. Net cash decreased by RMB53.1m, including foreign-exchange effects.
Outlook, commentary, risks and unusual items
- COVID-19 and operations: Learning centers were temporarily closed from January through May 2020, with courses moved online; offline operations resumed from June 2020, with online courses continuing as a supplement. Management reported recovery and growth since the second half of 2020, but said the longer-term effects remained uncertain. No quantified earnings or revenue guidance was provided.
- Regulatory exposure: Four of 50 operating centers lacked required educational permits as of the report date; those centers represented 5.4% of FY2021 revenue. The company was pursuing permits. Four centers were also located above the third floor, a potential compliance and relocation risk. The filing says all centers had fire-safety permits, but regulatory compliance and possible operating restrictions remain important risks.
- Changing education rules: The filing discusses evolving restrictions on tutoring content, school permits, online education and related-party dealings. New private-education implementation rules were scheduled to take effect September 1, 2021; their impact was not yet clear. Subsequent regulatory developments described in the report post-date the fiscal year.
- VIE structure: The company does not hold equity in its principal operating VIE and relies on contractual arrangements to control it and receive economic benefits. The VIE generated 100% of consolidated revenue. Adverse legal or regulatory treatment, or failure to enforce the contracts, could impair control, cash access or consolidation.
- Liquidity and cash access: Management said available cash and cash equivalents should meet ordinary working-capital and capital-expenditure needs for the next 12 months. However, PRC capital controls and distribution rules restrict transfers from PRC entities; Shanghai Fuxi received RMB27.3m in service fees from the VIE in FY2021 and paid no dividends.
- Reporting controls: Management concluded disclosure controls were effective, but internal control over financial reporting was ineffective due to one material weakness: insufficient and appropriate review of financial reporting under U.S. GAAP. Remediation was underway. The auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- Other items: FY2021 included RMB11.9m in government subsidy income and a RMB3.9m loss from equity-method investments. The company believes it was a PFIC for U.S. tax purposes in FY2021. Its auditor, located in China, was described as not subject to PCAOB inspection at the time, creating potential HFCA Act trading and delisting risk.
Important facts for investors to verify
- Whether student enrollment, revenue and gross margin recover after center reopenings, and whether adjusted results return to profitability.
- Whether all four centers obtain the required educational permits, and whether the four above-third-floor locations require closure, relocation or additional expense.
- How the September 2021 private-education rules and other PRC tutoring regulations affect permitted courses, licensing, pricing and related-party arrangements.
- Whether the company remediates the material weakness in financial-reporting controls and how its VIE contractual structure and cash-transfer constraints affect access to operating cash.
- The composition, liquidity and valuation risk of investment holdings, the remaining lease and university-funding commitments, and the implications of PFIC and PCAOB-inspection disclosures.