Four Seasons Education(FEDU) - 2023 Q4 - Annual Report

PART I This section details the company's corporate structure, regulatory compliance, financial performance, and governance framework Key Information This section details the company's VIE structure, essential for its operations in China, and highlights associated legal and regulatory risks, including condensed consolidating financial schedules Holding Company and VIE Structure Four Seasons Education (Cayman) Inc. is a Cayman Islands holding company operating in the PRC through contractual arrangements with Variable Interest Entities (VIEs) due to foreign investment restrictions - The company is a Cayman Islands holding company and does not directly operate in the PRC, controlling its PRC operations through a Variable Interest Entity (VIE) structure[14] - The VIE structure navigates PRC laws restricting foreign investment in private education, with investors purchasing equity in the Cayman holding company, not the PRC operating entities[14] VIE Revenue Contribution | Fiscal Year Ended | Net Revenue Contribution from VIEs | | :--- | :--- | | February 28, 2021 | 100% | | February 28, 2022 | 100% | | February 28, 2023 | 97.6% | - The contractual arrangements, including Exclusive Service, Call Option, Equity Pledge, and Voting Rights Proxy agreements, grant the company effective control over the VIEs, allowing for financial consolidation[18][19][22] Permissions and Regulatory Approvals The company asserts its PRC subsidiaries and VIEs have obtained all necessary licenses for current operations, acknowledging uncertainties regarding evolving PRC regulations - The company ceased offering K9 Academic AST Services in the PRC at the end of 2021 to comply with regulations and stopped renewing related Permits for Operating Private School[35] - As of the report date, the company believes its PRC subsidiaries and VIEs have obtained all requisite licenses for their business operations, and the Cayman holding company does not require any PRC permits[35] - Under the new CSRC Overseas Listing Trial Measures effective March 31, 2023, the company, as an existing listed issuer, is not required to make an immediate filing but must comply with filing requirements for any future securities offerings[38] The Holding Foreign Companies Accountable Act (HFCA Act) The company addresses HFCA Act risks, which could lead to delisting if its auditor is not inspected by the PCAOB for two consecutive years, though its current auditor is subject to inspection - The HFCA Act, as amended, requires the SEC to prohibit trading of a company's securities if its auditor is not subject to PCAOB inspection for two consecutive years[42] - On December 15, 2022, the PCAOB determined it was able to inspect and investigate registered public accounting firms in mainland China and Hong Kong, vacating its previous negative determination, though future access remains subject to uncertainty[42] - The company's current auditor, Marcum Asia CPAs LLP, is headquartered in New York and subject to regular PCAOB inspection, so the company does not expect to be identified as a "Commission-Identified Issuer" for the fiscal year ended February 28, 2023[42] Risk Factors This section outlines principal risks, including developing new products under PRC policies, COVID-19 impact, competition, VIE structure, evolving PRC regulations, and potential delisting - Business risks include the challenge of developing new learning products compliant with recent Chinese regulatory policies, failure to execute growth strategies, and the ongoing impact of the COVID-19 pandemic[46] - Corporate structure risks stem from reliance on contractual arrangements with VIEs, which may be less effective than direct ownership and could be challenged by PRC authorities, potentially leading to severe penalties[51] - Risks of doing business in the PRC include uncertainties in the legal system, significant government oversight and discretion, evolving data privacy and cybersecurity laws, and potential delisting under the HFCA Act if the PCAOB cannot inspect auditors[52][54][56] - Risks related to the ADSs include price volatility, potential dilution from future share sales, and limited voting rights for ADS holders[61] Condensed Consolidating Schedule This section provides detailed condensed consolidating financial schedules for fiscal years 2021, 2022, and 2023, breaking down statements for the parent, WFOE, other subsidiaries, and VIEs Condensed Consolidating Statement of Operations (FY 2023, RMB in thousands) | Entity | Revenue | Operating (Loss) Income | Net (Loss) Income | | :--- | :--- | :--- | :--- | | Four Seasons (Parent) | — | (11,768) | (29,668) | | WFOE | 502 | (7,652) | (5,463) | | Other Subsidiaries | 884 | (3,557) | (3,472) | | VIEs | 33,381 | (12,688) | (11,077) | | Consolidated | 34,216 | (35,665) | (33,488) | Condensed Consolidating Balance Sheet (As of Feb 28, 2023, RMB in thousands) | Entity | Total Assets | Total Liabilities | Total Equity (Deficit) | | :--- | :--- | :--- | :--- | | Four Seasons (Parent) | 494,735 | 37,003 | 457,732 | | WFOE | 123,700 | 15,928 | 107,772 | | Other Subsidiaries | 127,403 | 7,161 | 120,242 | | VIEs | 101,958 | 111,462 | (9,504) | | Consolidated | 601,040 | 89,150 | 511,890 | Condensed Consolidating Statement of Cash Flows (FY 2023, RMB in thousands) | Entity | Net Cash from Operating | Net Cash from Investing | Net Cash from Financing | | :--- | :--- | :--- | :--- | | Four Seasons (Parent) | 16,945 | (157,194) | (239) | | WFOE | 12,005 | (3,333) | — | | Other Subsidiaries | 19,484 | 13,745 | — | | VIEs | (73,927) | 4,841 | 44,640 | | Consolidated | (25,493) | (96,702) | (838) | Information on the Company This section provides a comprehensive overview of the company's business, history, organizational structure, and the complex PRC regulatory environment governing private education History and Development of the Company The company began operations in 2007, focusing on after-school math education in Shanghai, establishing its offshore holding company structure in 2014 for international investment - The company was founded in 2007 by Mr. Peiqing Tian, initially focusing on after-school math education for elementary students in Shanghai[289] - The current holding company structure was established in 2014 with the incorporation of Four Seasons Education (Cayman) Inc. and its subsidiaries in Hong Kong and the PRC[289] Business Overview Following 2021 regulatory changes, the company ceased K9 Academic AST Services, realigning its focus to non-academic tutoring, study camps, and learning technology solutions - In compliance with 2021 regulatory policies, the company ceased offering K9 Academic AST Services in mainland China at the end of 2021 and has realigned its business focus[291] - Current business offerings are divided into three main categories: Non-Academic Tutoring Programs (e.g., calligraphy, art, sudoku), Study Camp and Learning Trips, and Learning Technology and Content Solutions for other educational institutions[293][295][296][297] - As of February 28, 2023, the company operated two learning centers (Shanghai and Chongqing) and two study camps (Hubei and Anhui)[301] - The company had 76 teachers as of February 28, 2023, with a highly selective recruitment process and a focus on continuous on-the-job training[302][303][304] Organizational Structure The company operates through a VIE structure due to PRC restrictions on foreign investment in education, controlling its PRC operating entities via contractual arrangements managed by its WFOE - The company's organizational structure is centered around a VIE model to comply with PRC foreign investment restrictions in the education sector[439] - Key entities include the Cayman parent, a Hong Kong subsidiary, a PRC WFOE (Shanghai Fuxi), and two main VIEs: Shanghai Luoliang Network Technology Co., Ltd. and Shanghai Four Seasons Education Investment Management Co., Ltd[438][439] - A series of contractual arrangements grants the WFOE effective control over the VIEs, enabling the consolidation of their financial statements under U.S. GAAP[442][445][446] Property, Plants and Equipment The company leases its headquarters and all learning centers, and has acquired land use rights for study camp development, with construction in Wuyuan expected by June 2024 - The company leases its headquarters and all of its learning centers, with a total leased area of approximately 1,485 square meters[454] - The company has acquired land use rights in Wuyuan, Jiangxi, for approximately RMB 15.5 million to construct study camps, with completion expected in June 2024[454] Operating and Financial Review and Prospects This section analyzes the company's financial performance, significantly reshaped by the cessation of K9 Academic AST Services, detailing revenue decline, narrower net loss, and liquidity Operating Results The company's operating results were dominated by the cessation of K9 Academic AST Services, leading to a sharp revenue decline in FY2023 but a narrower net loss due to cost-cutting and non-recurring impairment charges Key Financial Performance (RMB in millions) | Metric | FY 2021 | FY 2022 | FY 2023 | | :--- | :--- | :--- | :--- | | Total Revenue | 280.3 | 250.2 | 34.2 | | Gross Profit | 111.5 | 100.6 | 14.3 | | Operating Loss | (36.5) | (66.2) | (35.7) | | Net Loss | (27.9) | (118.7) | (33.5) | | Adjusted Net Loss (Non-GAAP) | (2.5) | (58.4) | (32.2) | - The primary driver for the 86.3% revenue decrease in FY2023 was the cessation of K9 Academic AST Services, which accounted for a substantial majority of revenues prior to its discontinuation[469][498] - Cost of revenue decreased by 86.7% in FY2023 due to the closure of learning centers and a reduction in the number of teachers following the business restructuring[500] - The significant net loss in FY2022 included a RMB 44.6 million impairment loss on intangible assets and goodwill and a RMB 7.9 million impairment loss on other long-lived assets, which were not recurring in FY2023[510] Liquidity and Capital Resources The company's liquidity primarily stems from operations and IPO proceeds, with cash and cash equivalents declining in FY2023, and access to PRC cash subject to regulatory restrictions Cash and Cash Equivalents Trend (RMB in millions) | As of | Cash and Cash Equivalents | | :--- | :--- | | Feb 28, 2021 | 378.4 | | Feb 28, 2022 | 262.4 | | Feb 28, 2023 | 175.7 | Summary of Cash Flows (FY 2023, RMB in millions) | Cash Flow Category | Amount | | :--- | :--- | | Net cash used in operating activities | (25.5) | | Net cash used in investing activities | (96.7) | | Net cash used in financing activities | (0.8) | | Effect of foreign exchange rate changes | 27.4 | | Net decrease in cash | (95.6) | - As a holding company, its ability to pay dividends depends on distributions from its PRC subsidiaries, which are restricted by PRC laws; total restricted net assets were RMB 111.5 million (US$16.1 million) as of February 28, 2023[522] Contractual Obligations as of Feb 28, 2023 (RMB in thousands) | Obligation Type | Total | Less Than 1 Year | 1-3 Years | | :--- | :--- | :--- | :--- | | Lease Obligations | 5,685 | 4,386 | 1,299 | | Long-term investment obligations | 17,500 | 17,500 | — | | Capital commitments | 5,826 | 5,826 | — | | Total | 29,011 | 27,712 | 1,299 | Critical Accounting Estimates The company identifies key areas requiring significant management judgment and estimation in financial reporting, including income tax provisions and asset impairment assessments - Key critical accounting policies involve significant judgment in revenue recognition, fair value of investments, income taxes, and leases[488] - For income taxes, management makes significant estimates in determining the provision for tax expenses, including calculating tax credits and assessing the realizability of deferred tax assets; a valuation allowance of RMB 30.8 million was recorded against deferred tax assets as of Feb 28, 2023[489][492] - The company evaluates long-lived assets for impairment when events indicate their carrying amount may not be recoverable, requiring assumptions about future undiscounted cash flows; in FY2022, the company recognized a RMB 7.9 million impairment loss on property and equipment and a RMB 2.3 million impairment loss on intangible assets[493] Directors, Senior Management and Employees This section provides information on the company's leadership, including board composition, executive compensation, share incentive plans, board committees, and a significant reduction in workforce Directors and Senior Management The company is led by a five-member Board of Directors, including Chairman Peiqing Tian and CEO Yi Zuo, with independent directors bringing diverse professional experience - The board consists of five directors: Peiqing Tian (Chairman), Yi Zuo (Director and CEO), Shaoqing Jiang (Director), Zongwei Li (Independent Director), and Bing Yuan (Independent Director)[548] - Mr. Peiqing Tian, the founder, has been Chairman since inception; Ms. Yi Zuo has served as CEO since November 2019 and previously served as CFO[548][549] Compensation For FY2023, the company paid RMB 2.5 million in cash and benefits to executive officers and US$0.1 million to independent directors, maintaining share incentive plans for equity awards - In FY2023, aggregate cash compensation for executive officers was RMB 2.5 million (US$0.4 million), and for independent directors was US$0.1 million[558] - The company has two share incentive plans, the 2015 Plan and the 2017 Plan, which permit the grant of options, restricted shares, and restricted share units[559][560][565] Board Practice The board consists of five directors and has established three committees: Audit, Compensation, and Nominating and Corporate Governance, all composed of independent directors - The Board of Directors has three committees: Audit, Compensation, and Nominating and Corporate Governance[577] - The Audit Committee consists of two independent directors, Zongwei Li (Chair) and Bing Yuan; Mr. Li is designated as the "audit committee financial expert"[578] - Directors' duties are governed by Cayman Islands law, which includes duties of loyalty, honesty, and acting in the company's best interests[582] Employees As of February 28, 2023, the company had a total of 167 employees, a significant decrease from previous years, primarily composed of teachers and general administration staff Employee Headcount by Function (as of Feb 28, 2023) | Function | Number of Employees | | :--- | :--- | | Teachers | 76 | | Learning center student services | 12 | | General and administration | 61 | | Sales, marketing and business development | 18 | | Total | 167 | - Total employee count has decreased significantly, from 716 in FY2021 and 286 in FY2022 to 167 in FY2023[587] Share Ownership As of May 31, 2023, directors and executive officers collectively owned 51.5% of outstanding shares, with Chairman Peiqing Tian being the largest shareholder at 44.4% beneficial ownership Principal Shareholders (as of May 31, 2023) | Shareholder | Beneficial Ownership (%) | | :--- | :--- | | Peiqing Tian | 44.4% | | Chengwei Capital HK Limited | 14.8% | | Theodore Walker Cheng-De King | 10.5% | | Jun Guo | 9.9% | | Yi Zuo | 5.9% | - All directors and executive officers as a group beneficially own 51.5% of the company's ordinary shares[591] Major Shareholders and Related Party Transactions This section details the company's major shareholders and outlines significant transactions with related parties, including services provided to an entity controlled by the Chairman's brother - The company's major shareholders are detailed under Item 6.E[595] - In FY2023, the company provided course design, digital learning system, and other services to Shanghai Four Season Online School (SHFSOS), an entity controlled by the Chairman's brother, for a total of RMB 7.4 million[598] - In FY2022, due to the cessation of K9 Academic AST services, the company disposed of related deferred revenue and a subsidiary (Shanghai Jing'an Dangdai Art Training School) to Jiaxin Travel, another related party, recognizing a total gain of RMB 4.0 million[601] Financial Information This section confirms the inclusion of consolidated financial statements, states no material legal proceedings, and outlines the company's dividend policy of retaining earnings for growth - The company's consolidated financial statements are included at the end of the annual report[603] - The company is not currently a party to any legal proceedings expected to have a material adverse effect on its business[604] - The company has no current plans to declare or pay dividends, intending to retain earnings for business operations and expansion; a dividend of US$20 million was paid in 2018[605] Additional Information This section provides supplementary corporate and legal information, detailing the company's memorandum and articles of association, and summarizing tax implications across jurisdictions, including its PFIC status for U.S. federal income tax purposes Memorandum and Articles of Association The company is an exempted company incorporated in the Cayman Islands, governed by its articles and the Companies Act, with provisions for shareholder rights, dividends, and meeting protocols - The company is an exempted company incorporated under the laws of the Cayman Islands[613][616] - Holders of ordinary shares are entitled to receive dividends as declared by the board and have the right to vote at general meetings; a special resolution requires a two-thirds affirmative vote[619][623] - Shareholders holding at least one-third of voting shares can requisition an extraordinary general meeting[625] Taxation This subsection details the tax environment in the Cayman Islands (no corporate tax), the PRC (25% enterprise income tax), and the U.S., where the company believes it was a Passive Foreign Investment Company (PFIC) for FY2023 - The company is not subject to profits, income, gains, or appreciation taxes in the Cayman Islands[642] - PRC subsidiaries are subject to a 25% enterprise income tax; dividends paid to its Hong Kong subsidiary may be subject to a 5% or 10% withholding tax[424][425] - The company believes it was a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for the fiscal year ended February 28, 2023; this status can lead to adverse tax consequences for U.S. holders, including punitive tax rates on "excess distributions" and gains[262][666] - The company does not intend to provide the information necessary for U.S. holders to make a Qualified Electing Fund (QEF) election, which could otherwise mitigate the adverse PFIC tax effects[677] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign exchange, interest rate, and inflation, with foreign exchange risk significant due to RMB-denominated operations and U.S. dollar holdings - The company's main market risks are foreign exchange, interest rate, and inflation risk[688][691][692] - Foreign exchange risk is significant as most revenue is in RMB, while the company holds U.S. dollars from its IPO; as of February 28, 2023, the company held RMB 70.6 million in RMB-denominated cash and equivalents[688][690] - A hypothetical 10% depreciation of the RMB against the U.S. dollar would result in a US$1.0 million decrease in the value of its cash, cash equivalents, and restricted cash[690] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of February 28, 2023, due to a material weakness in internal control over financial reporting, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of February 28, 2023[701] - A material weakness was identified in internal control over financial reporting, specifically a lack of sufficient and appropriate review over financial reporting in accordance with U.S. GAAP[701][706] - Remediation plans include refining controls, enhancing communication and documentation procedures, and implementing additional supervision and review activities[707] Corporate Governance and Other Matters This section covers corporate governance, including the audit committee financial expert, code of ethics, auditor fees, a share repurchase program, and the change of certifying accountant - The board has determined that Mr. Zongwei Li, an independent director, qualifies as an "audit committee financial expert"[711] Principal Accountant Fees (USD in thousands) | Fiscal Year | Audit Fees | | :--- | :--- | | 2021 | 830 | | 2022 | 653 | | 2023 | 480 | - In November 2022, the Board authorized a share repurchase program of up to US$5 million; as of February 2023, US$4.96 million remained available under the plan[717][719] - On December 3, 2021, the company changed its independent registered public accounting firm from Deloitte Touche Tohmatsu Certified Public Accountants LLP to Marcum Asia CPAs LLP[720] PART III This section presents the company's audited consolidated financial statements and related notes Financial Statements This section contains the company's audited consolidated financial statements for fiscal years 2021, 2022, and 2023, prepared under U.S. GAAP, including reports from independent accounting firms and detailed notes Consolidated Balance Sheet Data (RMB in thousands) | As of Feb 28 | 2022 | 2023 | | :--- | :--- | :--- | | Total Assets | 602,533 | 601,040 | | Cash and cash equivalents | 262,429 | 175,696 | | Total Liabilities | 100,039 | 89,150 | | Total Equity | 502,494 | 511,890 | Consolidated Statement of Operations Data (RMB in thousands) | For Year Ended Feb 28 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Total Revenue | 280,282 | 250,223 | 34,216 | | Gross Profit | 111,450 | 100,608 | 14,294 | | Operating Loss | (36,475) | (66,214) | (35,665) | | Net Loss | (27,886) | (118,732) | (33,488) | | Net Loss per Share (Basic) | (1.22) | (5.04) | (1.40) | Consolidated Statement of Cash Flows Data (RMB in thousands) | For Year Ended Feb 28 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 31,124 | (91,321) | (25,493) | | Net cash from investing activities | (68,004) | 4,297 | (96,702) | | Net cash from financing activities | 198 | (25,555) | (838) | | Net decrease in cash | (53,142) | (116,511) | (95,644) |