Four Seasons Education (Cayman) Inc. — Form 20-F Summary
Reporting period: Fiscal year ended February 28, 2019 (FY2019), compared primarily with FY2018. This is an annual report, not a standalone 2018 fourth-quarter filing. Financial statements are prepared under U.S. GAAP; amounts below are RMB unless stated otherwise.
Business context
The company provides after-school education in China, with a focus on mathematics and programs for kindergarten, elementary and middle-school students. It operated 52 learning centers in nine cities at February 28, 2019, including 44 in Shanghai. All reported revenue came from China, and the company operates its education business principally through contractual arrangements with consolidated variable interest entities (VIEs), rather than direct ownership.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Revenue | RMB335.6 million | RMB300.5 million | Up 11.7% |
| Gross profit / margin | RMB163.8 million / 48.8% | RMB191.1 million / 63.6% | Profit down 14.3%; margin down 14.8 percentage points |
| Operating income / margin | RMB1.1 million / 0.3% | RMB61.6 million / 20.5% | Marked decline |
| Net income (loss), consolidated | Loss of RMB1.5 million | Income of RMB41.8 million | Returned to a GAAP loss |
| Adjusted net income (non-GAAP) | RMB35.6 million | RMB65.3 million | Down about 45.6%; excludes share-based compensation and specified fair-value changes |
| Operating cash flow | RMB53.1 million | RMB96.0 million | Down about 44.6% |
| Cash and cash equivalents at year-end | RMB439.6 million | RMB583.3 million | Down RMB143.7 million |
| Total assets / total liabilities | RMB932.1 million / RMB175.1 million | RMB792.3 million / RMB134.3 million | Assets and liabilities increased |
FY2019 cash flow from investing was an outflow of RMB187.2 million, including RMB133.9 million for acquisitions, RMB34.8 million for investments and RMB17.9 million for property and equipment. Financing cash flow was an outflow of RMB0.6 million. The balance sheet separately reports RMB31.7 million of restricted cash; cash, cash equivalents and restricted cash together were RMB471.2 million at year-end. Current assets were RMB495.7 million versus current liabilities of RMB164.2 million. The filing reports no material conventional borrowings; related-party amounts due included small, unsecured, non-interest-bearing loans payable on demand, alongside acquisition consideration and other payables.
Material changes and unusual items
- Revenue growth reflected expanded course offerings, enrollment and learning-center expansion, including acquired centers. Standard-program revenue rose to RMB255.1 million; Ivy-program revenue rose to RMB75.1 million. Special-program and other revenue fell to RMB6.8 million from RMB29.7 million, in part as math-competition-focused classes were affected by regulatory changes.
- Student enrollment, defined as paid course enrollments rather than unique students, increased 28.7% to 157,759. Management said the change in enrollment scheduling under new rules contributed to the increase, so it may not represent comparable underlying growth.
- Cost of revenue rose 57.0% to RMB171.8 million, driven by faculty costs, rent and learning-center depreciation. Management attributed lower gross margin in part to new centers operating below mature utilization during ramp-up.
- General and administrative expense rose 38.7% to RMB128.9 million, including higher staff costs, share-based compensation and depreciation and amortization. Share-based compensation was RMB32.2 million, versus RMB23.5 million in FY2018.
- The company acquired 90% of Wupin Education, 51% of Fantasy and other education businesses. Acquisition-related goodwill reached RMB149.8 million; RMB0.6 million of prior goodwill for Shane Education was impaired. Acquired businesses contributed revenue, but their full-year contribution and acquisition costs affect period comparisons.
- FY2019 income included RMB4.2 million of government subsidies and a RMB4.8 million loss from fair-value changes in investments. The company adopted revenue-recognition Topic 606 in FY2019 using the modified retrospective method and reported no impact on measurement or recognition of prior-period revenue.
- Operating cash flow fell partly amid a RMB21.4 million decrease in deferred revenue, reflecting timing of advance tuition receipts and revenue recognition. FY2019 also included a RMB14.1 million increase in other receivables, deposits and other assets.
Outlook, risks and contingencies
Management gave no quantified revenue or earnings guidance. It said available cash and cash equivalents should meet ordinary-course working-capital and capital-expenditure needs for the next 12 months, while noting that acquisitions or changing conditions could require additional financing. Management expects costs and expenses to rise with expansion, partly offset by scale and efficiency; it also identified relatively weak performance at new centers during ramp-up and a rapidly changing regulatory environment.
- Licensing and safety: As of the report date, 14 of 52 fully operational centers lacked a required educational permit or business license; these centers represented 21.1% of FY2019 revenue. Two centers lacked fire-safety permits, representing 1.5% of revenue, and eight centers were above the third floor, representing 17.1% of revenue. The company was pursuing permits and relocations. It had not accrued a loss for permit-related contingencies because management did not consider fines or penalties probable and could not reasonably estimate an amount.
- Regulation: New national and local rules impose requirements on licenses, premises, fire safety, fees, staff and curricula. Implementation and re-registration rules for private schools remained uncertain. Noncompliance could lead to fines, suspension, loss of permits or closure.
- Geographic concentration: Shanghai generated 93.9% of FY2019 gross billings, exposing results to local market and regulatory developments.
- VIE and China-related risks: All revenue was generated through VIEs and affiliates. Contractual control may be less enforceable than direct ownership, and changes in PRC law, foreign-investment rules, tax treatment, currency controls or remittance restrictions could impair operations or access to cash.
- Other risks: Teacher attrition increased to 17.0% from 12.6%; competition, lease costs, student demand, exam-policy changes and acquisition integration could affect performance. The company also disclosed two significant deficiencies in internal control over financial reporting, with remediation in progress; management concluded controls were effective and no material weakness existed at year-end. The auditor did not provide an internal-controls attestation.
- Commitments and dividends: Future operating-lease commitments were RMB265.1 million and remaining education-fund commitments were RMB55.0 million. The company paid a previously declared US$20 million dividend in 2018 and said it did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Whether all required educational, business and fire-safety permits were obtained after the filing, and whether affected centers had to suspend, relocate or refund classes.
- Whether the enrollment increase reflects sustained demand or was materially affected by the revised semester registration schedule.
- Whether new centers and acquisitions can improve utilization and margins enough to offset higher staffing, occupancy, depreciation and amortization costs.
- How cash conversion, advance tuition receipts, acquisition spending and investment valuations develop; distinguish unrestricted cash from restricted cash.
- Whether the VIE arrangements remain enforceable and whether PRC rules permit the company to access and remit operating cash as expected.
- Progress in remediating the two significant internal-control deficiencies and any subsequent findings or auditor developments.