Four Seasons Education(FEDU) - 2022 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section details the company's VIE corporate structure, essential for its operations in China due to foreign investment restrictions in the education sector, including condensed financial schedules, selected historical financial data, and a comprehensive breakdown of risk factors Holding Company Structure and Contractual Arrangements Four Seasons Education (Cayman) Inc. operates in the PRC through Variable Interest Entities (VIEs) due to foreign ownership restrictions, controlling them via contractual arrangements and consolidating their financial results - The company is a Cayman Islands holding company with no equity ownership in its Chinese operating entities (VIEs), relying on contractual arrangements for control and consolidation[15] - Net revenues from the VIEs accounted for 100% of the company's total net revenues in fiscal years 2020, 2021, and 2022[15][29] - The company ceased offering K9 Academic AST Services in mainland China at the end of 2021 to comply with the "Double Alleviating Opinions," which prohibit foreign investment in this sector, including through VIE structures[18] - In fiscal year 2022, the PRC subsidiary (Shanghai Fuxi) received RMB 20.8 million in service fees from the VIEs and did not distribute any dividends to the parent company[29][31] Selected Financial Data The company's revenue declined from RMB 389.0 million in FY2020 to RMB 250.2 million in FY2022, with net losses widening significantly to RMB 118.7 million in FY2022 Selected Consolidated Financial Performance (RMB in millions) | Indicator | FY 2020 | FY 2021 | FY 2022 | | :--- | :--- | :--- | :--- | | Revenue | 389.0 | 280.3 | 250.2 | | Gross Profit | 188.1 | 111.5 | 100.6 | | Operating Loss | (131.0) | (36.5) | (66.2) | | Net Loss | (109.6) | (27.9) | (118.7) | | Net Loss per Share (Basic) | (4.63) | (1.22) | (5.04) | Selected Consolidated Balance Sheet Data (RMB in millions) | Indicator | As of Feb 29, 2020 | As of Feb 28, 2021 | As of Feb 28, 2022 | | :--- | :--- | :--- | :--- | | Total Assets | 1,037.6 | 967.2 | 602.5 | | Total Liabilities | 362.7 | 320.8 | 100.0 | | Total Equity | 675.0 | 646.4 | 502.5 | Reconciliation of Net Loss to Adjusted Net Loss (Non-GAAP) (RMB in millions) | Line Item | FY 2020 | FY 2021 | FY 2022 | | :--- | :--- | :--- | :--- | | Net loss | (109.6) | (27.9) | (118.7) | | Add: Share-based compensation | 30.9 | 27.5 | 9.0 | | Add: Fair value change of investments | (11.1) | (2.1) | (1.1) | | Add: Impairment loss on intangible assets and goodwill | 137.7 | — | 44.6 | | Add: Impairment loss on long-lived assets | 0.8 | — | 7.9 | | Adjusted net income (loss) (non-GAAP) | 48.6 | (2.5) | (58.4) | Risk Factors This section outlines significant risks facing the company, including business, corporate structure, PRC operations, and ADS-related risks, such as regulatory changes, VIE enforceability, and potential delisting - The company's compliance with the "Double Alleviating Opinions," which led to the cessation of K9 Academic AST Services in late 2021, has had and is expected to continue having a material adverse effect on its business and financial results[74][96][98] - There are substantial uncertainties regarding the PRC government's interpretation of the VIE structure, potentially leading to severe penalties if contractual arrangements are found to be non-compliant with PRC laws[77][135][139] - The PCAOB's inability to inspect the company's auditors in China could lead to the trading of its ADSs being prohibited in the U.S. under the Holding Foreign Companies Accountable Act (HFCA Act), potentially as early as 2023 if proposed changes are enacted[78][228][229] - The company believes it was a Passive Foreign Investment Company (PFIC) for the fiscal year ended February 28, 2022, which could result in adverse U.S. federal income tax consequences for U.S. shareholders[249] ITEM 4. INFORMATION ON THE COMPANY This section provides a detailed overview of the company's business, history, and organizational structure, describing the strategic shift from K-12 academic tutoring to diversified smart learning solutions and reiterating the critical role of the VIE structure History and Development of the Company The company began operations in March 2007, focusing on after-school math education, and established its current offshore holding company structure in 2014 to facilitate international investment - The company was founded in 2007, initially focusing on after-school math education in Shanghai[276] - The current holding company structure, with a Cayman parent, was established in 2014 to facilitate international capital investment[276] Business Overview Following 2021 regulatory changes, the company ceased K9 Academic AST Services and realigned its focus to diversified learning services and technology solutions, operating three learning centers and employing 150 teachers as of February 28, 2022 - In compliance with 2021 regulations, the company ceased offering K9 Academic AST Services in mainland China at the end of 2021 and shifted its focus to enrichment learning and technology solutions[278][282] - Current offerings are categorized into Enrichment Learning Programs (calligraphy, art, bridge, go), Immersive Learning Programs (workshops, study camps), and Learning Technology and Content Solutions for other institutions[280][283][285][286] - As of February 28, 2022, the company operated three learning centers in China and employed 150 teachers[277][290][291] - The company's Intellectual Math Lab, a proprietary technology and content solution, has been adopted by 111 K-12 schools in Shanghai and integrates AI-driven features like speech recognition for mathematical formulas[286] Organizational Structure The company operates through a VIE structure in the PRC due to foreign investment restrictions, controlling its PRC operating entities via contractual agreements that grant effective control and economic benefits, allowing for financial consolidation - The company's operations in the PRC are conducted through VIEs due to legal restrictions on foreign ownership in the private education sector[438] - A series of contractual arrangements (Exclusive Service, Call Option, Equity Pledge, and Voting Rights Proxy agreements) provide the company with effective control over the VIEs[440][443] Property, Plants and Equipment The company's headquarters are in Shanghai, China, and it leases all its properties, including its headquarters and three learning centers, with plans to continue leasing for future expansion - The company leases all of its facilities, including its headquarters and learning centers, with a total leased area of approximately 2,341 square meters[452] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial performance and condition, highlighting a revenue decrease to RMB 250.2 million in FY2022 and a significant net loss of RMB 118.7 million due to business restructuring and impairment charges Operating Results The company's revenue declined by 10.7% YoY to RMB 250.2 million in FY2022 due to the cessation of K9 Academic AST services, leading to a significant net loss of RMB 118.7 million driven by increased operating expenses and impairment losses Fiscal Year 2022 vs 2021 Performance (RMB in millions) | Metric | FY 2022 | FY 2021 | Change | | :--- | :--- | :--- | :--- | | Revenue | 250.2 | 280.3 | -10.7% | | Cost of Revenue | 149.6 | 168.8 | -11.4% | | Gross Profit | 100.6 | 111.5 | -9.8% | | Operating Loss | (66.2) | (36.5) | +81.4% | | Net Loss | (118.7) | (27.9) | +325.4% | - The decrease in revenue in FY2022 was primarily due to the cessation of K9 Academic AST Services in mainland China by the end of 2021[499] - The company recorded significant impairment losses in FY2022, including RMB 44.6 million on intangible assets and goodwill and RMB 7.9 million on other long-lived assets, due to the business restructuring[505][506] Liquidity and Capital Resources The company's liquidity primarily stems from cash from operations and IPO proceeds, with cash and cash equivalents at RMB 262.4 million as of February 28, 2022, and significant cash requirements for working capital and lease obligations Cash and Cash Equivalents (RMB in millions) | Date | Amount | | :--- | :--- | | Feb 29, 2020 | 404.7 | | Feb 28, 2021 | 378.4 | | Feb 28, 2022 | 262.4 | Summary of Cash Flows (RMB in millions) | Activity | FY 2021 | FY 2022 | | :--- | :--- | :--- | | Net cash from/(used in) operating activities | 31.1 | (91.3) | | Net cash from/(used in) investing activities | (68.0) | 4.3 | | Net cash from/(used in) financing activities | 0.2 | (25.6) | - As of February 28, 2022, the company had contractual obligations of RMB 56.4 million, primarily consisting of RMB 45.0 million in funding commitments and RMB 11.4 million in lease obligations[539] - Due to PRC laws, the company's PRC subsidiaries and VIEs have restricted net assets of RMB 116.4 million as of February 28, 2022, which are not available for transfer to the parent company as dividends[528][939] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, compensation practices, board structure, and employee base, noting a significant decrease in employee count to 286 as of February 28, 2022, reflecting business restructuring Directors and Senior Management The company is led by Chairman Peiqing Tian and CEO Yi Zuo, with a five-member board of directors including two independent directors and a management team experienced in education, finance, and investment banking - The key leadership includes Peiqing Tian (Chairman) and Yi Zuo (Director and CEO)[552] Compensation For FY2022, aggregate cash compensation for executive officers was RMB 2.3 million, and the company utilizes 2015 and 2017 Share Incentive Plans to grant equity awards to management and employees - In FY2022, aggregate cash compensation for executive officers was RMB 2.3 million (US$0.4 million)[562] - The company has two active share incentive plans, the 2015 Plan and the 2017 Plan, to grant equity awards to employees and directors[565][566][570] Board Practice The board of directors consists of five members and has established an audit, compensation, and nominating and corporate governance committee, with Mr. Zongwei Li serving as the audit committee financial expert - The board has three committees: Audit, Compensation, and Nominating and Corporate Governance[580] - Mr. Zongwei Li is the designated "audit committee financial expert"[580][582] Employees As of February 28, 2022, the company had 286 employees, a sharp decline from 716 in the previous year, with teachers comprising the largest group Employee Headcount by Year | As of | Total Employees | | :--- | :--- | | Feb 29, 2020 | 910 | | Feb 28, 2021 | 716 | | Feb 28, 2022 | 286 | Share Ownership As of the report date, Chairman Peiqing Tian was the largest beneficial owner with 44.1% of ordinary shares, and executive officers and directors as a group beneficially owned 50.6% of the company's shares Principal Shareholders | Shareholder | Beneficial Ownership (%) | | :--- | :--- | | Peiqing Tian (Chairman) | 44.1% | | Chengwei Capital HK Limited | 14.8% | | Jun Guo | 9.9% | | Theodore Walker Cheng-De King | 8.9% | | Yi Zuo (CEO) | 5.5% | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details transactions with related parties, including the disposal of deferred revenue liabilities and a subsidiary to an entity controlled by the Chairman's brother, resulting in a gain of RMB 4.0 million in FY2022 - The company disposed of deferred revenue liabilities and its subsidiary, Dangdai, to Jiaxin Travel, an entity related to the Chairman, resulting in a recognized gain of RMB 4.0 million in FY2022[605] - In FY2022, the company provided services worth RMB 0.9 million to Shanghai Fuxi Network Co., Ltd., an equity method investee controlled by the Chairman[603] ITEM 8. FINANCIAL INFORMATION This section confirms the inclusion of consolidated financial statements, states the company is not party to any material legal proceedings, and outlines its dividend policy to retain earnings for business expansion - The company has no plans to declare or pay dividends in the foreseeable future, intending to retain earnings for business operations and expansion[609] - The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business[608] ITEM 9. THE OFFER AND LISTING The company's American Depositary Shares (ADSs) have been listed on the New York Stock Exchange under the symbol "FEDU" since November 8, 2017, with a change in ADS ratio to 1 ADS representing ten ordinary shares in June 2022 - The company's ADSs are listed on the NYSE under the ticker "FEDU"[612] - In June 2022, the ADS to ordinary share ratio was changed from 2:1 to 1:10, effectively a 1-for-20 reverse ADS split[612] ITEM 10. ADDITIONAL INFORMATION This section details the company's corporate governance under Cayman Islands law, exchange controls, and taxation summary, noting the company's belief that it was a Passive Foreign Investment Company (PFIC) for U.S. tax purposes in FY2022 - The company is an exempted company incorporated in the Cayman Islands, and its corporate affairs are governed by its memorandum and articles of association and the Companies Act of the Cayman Islands[616][619] - The company believes it was a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for its taxable year ended February 28, 2022, which could have adverse tax consequences for U.S. holders of its ADSs or shares[672] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company identifies foreign exchange risk as its primary market exposure, with a 10% RMB depreciation against the USD resulting in a US$1.2 million decrease in cash value as of February 28, 2022, while interest rate and inflation risks have not been material - The primary market risk is foreign exchange risk due to operations being denominated in RMB; a 10% depreciation of the RMB would have resulted in a US$1.2 million decrease in the value of its cash, cash equivalents, and restricted cash as of February 28, 2022[694][697] - Interest rate risk is mainly tied to interest income from bank deposits, and inflation risk has not materially impacted results of operations so far[698][699] ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section details the fees and charges that holders of the company's American Depositary Shares (ADSs) may incur, including issuance, cancellation, and cash dividend distribution fees of up to US$0.05 per ADS ADS Holder Fees | Service | Fee | | :--- | :--- | | Issuance of ADSs | Up to US$0.05 per ADS | | Cancellation of ADSs | Up to US$0.05 per ADS | | Distribution of cash dividends | Up to US$0.05 per ADS held | | Depositary services (annual) | Up to US$0.05 per ADS held | PART II ITEM 15. CONTROLS AND PROCEDURES Management concluded that disclosure controls were effective as of February 28, 2022, but identified a material weakness in internal control over financial reporting due to insufficient review over U.S. GAAP financial reporting - Management concluded that disclosure controls and procedures were effective as of February 28, 2022[708] - Management identified a material weakness in its internal control over financial reporting, concluding it was ineffective as of February 28, 2022, relating to insufficient review over financial reporting in accordance with U.S. GAAP[711][713] ITEM 16. OTHER INFORMATION This section covers governance and compliance, including the audit committee's financial expert, a US$15 million share repurchase program, a change in certifying accountant, and the company's use of Cayman Islands home country corporate governance practices - On December 3, 2021, the company changed its independent registered public accounting firm from Deloitte Touche Tohmatsu Certified Public Accountants LLP to Marcum Bernstein & Pinchuk LLP[726] - A share repurchase program of up to US$15 million was authorized in September 2021; as of January 2022, the company had repurchased 3,784,777 ADSs, leaving approximately US$10.7 million available under the plan[721][725] - The company follows certain Cayman Islands home country corporate governance practices, which exempt it from NYSE requirements such as having a majority-independent board and an audit committee of at least three independent directors[731] PART III ITEM 18. FINANCIAL STATEMENTS This section contains the company's audited consolidated financial statements for the fiscal year ended February 28, 2022, prepared in accordance with U.S. GAAP, including independent auditors' reports and notes on significant events like business restructuring due to regulatory changes - The financial statements were audited by Marcum Bernstein & Pinchuk LLP for the fiscal year ended February 28, 2022[745][746] - The financial statements for the two years ended February 28, 2021, were audited by the previous auditor, Deloitte Touche Tohmatsu Certified Public Accountants LLP[751][752] - A significant event noted is the business restructuring in response to the July 2021 "Opinion" from PRC authorities, which led the company to cease offering K9 Academic AST Services by the end of 2021[780][781] - On June 21, 2022, after the fiscal year-end, the company changed its ADS ratio from 2 ADSs per ordinary share to 1 ADS per 10 ordinary shares, equivalent to a 1-for-20 reverse ADS split[940] ITEM 19. EXHIBITS This section lists all exhibits filed as part of the annual report, including the company's articles of association, descriptions of securities, material contracts like VIE agreements, share incentive plans, and certifications from CEO, CFO, and auditors