Four Seasons Education (Cayman) Inc. — Form 20-F Summary
Business context and reporting period
This is an annual report for the fiscal year ended February 29, 2020, filed June 24, 2020—not a standalone 2019 Q4 filing. The company provides after-school education in China, primarily math tutoring, through 53 learning centers in 11 cities. All reported revenue came from China, and 91.6% of FY2020 gross billings came from Shanghai. Financial statements are audited and prepared under U.S. GAAP; amounts below are RMB unless stated otherwise.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | 389.0 million (US$55.7 million), up 15.9% | 335.6 million |
| Gross profit / gross margin | 188.1 million / 48.4% | 163.8 million / 48.8% |
| Operating income (loss) | (131.0) million | 1.1 million |
| Net income (loss) | (109.6) million (US$15.7 million) | (1.5) million |
| Adjusted net income (non-GAAP) | 47.9 million (US$6.8 million) | 36.1 million |
| Net cash from operating activities | 82.2 million | 53.1 million |
| Cash and cash equivalents at year-end | 404.7 million | 439.6 million |
FY2020 operating expenses included RMB145.4 million of impairment losses on goodwill and intangible assets (US$20.8 million), which drove the operating loss. Adjusted net income excludes share-based compensation, investment fair-value changes and impairment losses, net of tax; it is a non-GAAP measure and should not be treated as a substitute for GAAP results.
Total assets were RMB1,037.6 million and total liabilities were RMB362.7 million at year-end. Current assets were RMB616.2 million and current liabilities RMB213.0 million. The company reported RMB37.7 million of restricted cash in addition to cash and cash equivalents. Lease liabilities recognized after adopting lease accounting totaled RMB199.4 million; undiscounted lease payments were RMB225.8 million. The filing does not provide a clear figure for conventional bank borrowings. It reports RMB1.3 million of non-interest-bearing, unsecured related-party loans due on demand.
Material changes versus the prior comparable period
- Revenue rose 15.9%, attributed mainly to enrollment growth, expanded course offerings and the ramp-up of recently opened learning centers. Student enrollment, defined as paid course enrollments rather than unique students, increased 26.9% to 200,177.
- Gross margin was nearly flat year over year at 48.4%, following a substantial decline from 63.6% in FY2018. The company cited new-center ramp-up costs and higher faculty costs for the earlier decline.
- Operating results deteriorated sharply: impairment losses rose from RMB0.6 million to RMB145.4 million. The company cited underperformance, cost structure, market conditions and COVID-19 effects in its impairment assessment.
- Operating cash flow increased to RMB82.2 million despite the GAAP net loss, partly because the loss included large noncash impairment, lease and share-based compensation expenses. Cash and cash equivalents decreased RMB34.9 million year over year.
- Adoption of lease accounting (Topic 842) added right-of-use assets and lease liabilities to the balance sheet; comparative periods were not restated.
Outlook, commentary and risks
- COVID-19: Mandatory closures of in-person classes led the company to shift courses online beginning February 2020. It said in-person classes began resuming gradually in late May, but expected lower revenue, operating income and margins in FY2021’s first and second quarters. The duration and financial impact were uncertain; the company provided no quantified full-year guidance.
- Regulatory and licensing exposure: Seven of 53 operating learning centers lacked required educational permits, representing 10.7% of FY2020 revenue; one center lacked a fire-safety permit. Nine centers were above the third floor, where children’s activity venues may face restrictions. Required permits and possible penalties or closures remain material compliance matters.
- Concentration and operating risks: Shanghai generated most gross billings. The company also cited competition, teacher recruitment and retention, student refunds, new-center utilization and changing admission and tutoring rules as risks.
- Corporate structure: The company consolidates its China education operations through contractual arrangements with variable interest entities (VIEs), rather than direct equity ownership. All revenue was generated by VIEs and affiliated entities. Enforcement of the arrangements and access to their cash flows depend on PRC law and regulatory interpretation.
- Liquidity and funding: Management said available cash and cash equivalents should cover ordinary working-capital and capital-expenditure needs for the next 12 months. Cash is subject to PRC currency and transfer restrictions; RMB92.4 million of net assets were restricted from transfer to the group. Lease and funding commitments totaled RMB280.8 million, including RMB225.8 million of lease payments and a RMB55.0 million remaining university funding commitment.
- Governance and reporting: Management reported effective disclosure controls and internal control over financial reporting, while the audit identified two significant deficiencies and no material weakness. The auditor did not attest to internal controls. The auditor also stated that PCAOB inspections in China were restricted at the time.
Most important facts an investor should verify
- Whether enrollment, online-course retention, refunds and pricing recovered after the COVID-related closures, and the actual FY2021 impact versus management’s stated near-term expectations.
- Progress and outcomes in obtaining permits for the seven unlicensed centers and the fire-safety permit; exposure at centers located above the third floor.
- Impairment assumptions and the remaining carrying value of goodwill and intangible assets after the FY2020 write-down.
- Cash availability after restricted cash, lease payments, funding commitments, repurchases and the subsequent related-party investment; confirm how much liquidity is accessible outside the PRC.
- Enforceability and ongoing compliance of the VIE arrangements, including the March 2020 termination and restructuring of arrangements involving one VIE.
- The two significant internal-control deficiencies, remediation progress and any subsequent auditor or regulatory developments.