20-F: Four Seasons Education Reports Mixed Fiscal 2025 Results Amidst Strategic Shift to Non-Academic and Tourism Services

Four Seasons Education (Cayman) Inc. announced its fiscal year 2025 results, revealing a significant revenue increase driven by its pivot to tourism and non-academic services, despite reporting a net loss and a material weakness in internal controls.

Summary

• Four Seasons Education (Cayman) Inc. reported total revenue of RMB 251.1 million (US$34.5 million) for the fiscal year ended February 28, 2025, a 100.1% increase from RMB 125.4 million in fiscal year 2024.
• The company recorded a net loss of RMB 0.6 million (US$0.1 million) in fiscal year 2025, compared to a net income of RMB 2.8 million in fiscal year 2024.
• Adjusted net income, a non-GAAP measure, was RMB 2.4 million (US$0.3 million) in fiscal year 2025, down from RMB 5.7 million in fiscal year 2024.
• The business has strategically shifted its focus towards tourism services, non-academic tutoring, and learning technology and content solutions, ceasing K-9 Academic AST Services in mainland China by the end of 2021 due to regulatory policies.
• The company identified a material weakness in its internal control over financial reporting, specifically lacking sufficient and appropriate review over financial reporting in accordance with U.S. GAAP.

Sentiment

Score: 4

Explanation: The sentiment is cautious due to the shift from net income to net loss, significant gross margin erosion, and the ongoing, highly uncertain regulatory environment in China, despite strong revenue growth in new business segments. The identified material weakness in internal controls also adds a negative element.

Positives

• Total revenue increased significantly by 100.1% to RMB 251.1 million (US$34.5 million) in fiscal year 2025, driven by expansion in tourism and learning businesses.
• The company successfully completed the construction and made operational a new study camp site in Jiangxi province, aligning with its strategy to integrate education with travel.
• Adjusted net income remained positive at RMB 2.4 million (US$0.3 million) in fiscal year 2025, indicating underlying profitability when excluding certain non-cash and non-recurring items.
• The company's auditor, Marcum Asia CPAs LLP, is headquartered in New York and subject to PCAOB inspection, reducing the likelihood of the company being identified as a Commission-Identified Issuer under the HFCA Act for fiscal year 2025.

Negatives

• The company reported a net loss of RMB 0.6 million (US$0.1 million) in fiscal year 2025, a decline from a net income of RMB 2.8 million in fiscal year 2024.
• Gross margin significantly decreased to 18.8% in fiscal year 2025 from 36.3% in fiscal year 2024, primarily due to increased costs related to tourism services and staff costs in the learning business.
• General and administrative expenses increased by 10.2% to RMB 48.8 million (US$6.7 million) in fiscal year 2025, mainly due to increased headcount and share-based compensation.
• Sales and marketing expenses increased by 107.7% to RMB 14.0 million (US$1.9 million) in fiscal year 2025, reflecting expanded sales teams and marketing activities.
• The company believes it was a Passive Foreign Investment Company (PFIC) for United States federal income tax purposes for fiscal year 2025 and may be for the current taxable year, which could result in adverse tax consequences for U.S. holders.

Risks

• Substantial uncertainties exist regarding the interpretation and application of current and future PRC laws and regulations, particularly concerning the VIE structure and foreign investment in education, which could lead to severe penalties or operational restrictions.
• The PRC government's 'Double Alleviating Opinions' prohibit foreign investment in after-school tutoring for academic subjects in compulsory education, and while the company ceased K-9 Academic AST Services, there's no assurance against penalties for historical violations or future changes in interpretation.
• The company relies on contractual arrangements with Variable Interest Entities (VIEs) for its PRC operations, which may not be as effective as direct ownership and could be challenged by PRC authorities, potentially leading to loss of control or inability to consolidate financial results.
• The PRC government's significant oversight and discretion over business operations, including potential new rules on overseas listings and data security, could materially and adversely affect operations and the value of ADSs.
• Failure to obtain or maintain various operating licenses and permits, or to comply with evolving data privacy and cybersecurity regulations in China, could subject the company to penalties, damage its reputation, and harm business operations.
• The company faces significant competition in the rapidly evolving and fragmented learning solution, enrichment activity, and tourism markets in China, which could lead to loss of market share and adversely affect profitability.
• The inability to recruit, train, and retain qualified faculty members is a critical risk to maintaining service quality and brand reputation, especially with new regulations on teacher qualifications.
• The company has limited insurance coverage for various business risks, including accidents, injuries, and natural disasters, which could result in substantial costs and adversely affect financial condition.
• System disruptions to websites or computer systems could damage reputation and limit the ability to retain learners and customers.
• The trading price of the company's ADSs is likely to be volatile due to broad market factors, industry-specific factors, and regulatory developments in China.
• Restrictions on currency exchange in the PRC may limit the company's ability to use Renminbi-denominated revenues to fund operations outside the PRC or make dividend payments in U.S. dollars.
• The company's leased property interests may be defective or challenged, potentially disrupting business operations.
• Failure to comply with PRC labor contract laws could result in penalties or significant liabilities.
• The company's status as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes could result in adverse tax consequences for United States Holders of its ADSs or ordinary shares.
• The company's memorandum and articles of association contain anti-takeover provisions that could adversely affect the rights of ADS holders.
• Shareholders may face difficulties in protecting their interests and enforcing rights through U.S. courts due to the company's incorporation under Cayman Islands law and primary operations in China.

Future Outlook

The company intends to continue shifting its focus towards non-academic educational products and services, and explore other business opportunities by leveraging its accumulated educational resources. It also plans to further broaden its footprint and launch new products and services to accommodate a broader audience.

Management Comments

• Management is committed to maximizing a learner's potential by providing access to an engaging learning experience empowered by technology and content capabilities.
• The company has crafted a wide variety of both learning and tourism products and services to address learners' and customers' evolving needs in well-rounded development.
• Management believes their ability to deliver high-quality products and services well positions them to remain competitive in existing businesses.
• The company is closely monitoring the evolving regulatory environment and making efforts to seek guidance from and cooperate with government authorities to comply with relevant laws and regulations.

Industry Context

The learning solution and enrichment activity market in China is rapidly evolving, highly fragmented, and competitive. The company's strategic pivot to tourism and non-academic services is a direct response to the 'Double Alleviating Opinions' and other stringent regulatory policies impacting the K-9 academic after-school tutoring sector. The travel industry in China is also highly competitive, with the company competing against traditional and online travel agencies, as well as hotels and airlines increasing direct selling efforts. The company aims to differentiate itself through technology integration, content solutions, and immersive learning experiences like study camps.

Corporate Governance

Legal Proceedings

• The company is not a party to, nor aware of, any legal proceeding, investigation, or claim which is likely to have a material adverse effect on its business, financial condition, or results of operations.

Related Party Transactions

• Extensive transactions with entities controlled by Mr. Peiqing Tian (Chairman), including purchases of IT services, learning services, rent, management, and cleaning services from Shanghai Four Season Online School (SHFSOS), Shanghai Jingan Dangdai Art Training School (Dangdai), Shanghai Jiading Four Seasons Bole Training School (Bole), Shanghai Changning Four Seasons Training School (Changning FSTS), Shanghai Minhang Four Seasons Culture Training School (Minhang FSCS), and Shanghai Xuhui Four Seasons Training School (Xuhui FSTS).
• Provided course design and development services, digital learning system, student management platform, and promotional assistance to SHFSOS.
• Provided tourism services to Shanghai Jiaxin Travel Agency (Jiaxin Travel), an entity controlled by Mr. Tian Peiqing.
• Purchased services from East China Normal University Electronic and Audio-visual Publishing House (ESNU E&A Publishing), a wholly-owned subsidiary of a non-controlling shareholder.
• Purchased resource usage service from Jiangxi Wuyuan Tourism Co., Ltd (Wuyuan Tourism), a non-controlling interest shareholder.
• Provided interest-free, unsecured, and due-on-demand loans to Dangdai and other related parties.
• Received loans from non-controlling interest shareholders that are non-interest bearing, unsecured, and due on demand.

Stakeholder Impact

• **Shareholders/Investors**: Potential adverse tax consequences due to PFIC status, volatility in ADS price, and limited ability to enforce rights through U.S. courts due to Cayman Islands incorporation and PRC operations. Dividend payments were made in 2024.
• **Employees**: Continued employment and potential for share-based compensation, but also subject to business restructuring and evolving regulatory requirements for teacher qualifications.
• **Customers (Learners/Travelers)**: Benefit from expanded offerings in non-academic tutoring, tourism services, and learning technology solutions. Quality of service and customer satisfaction are critical for retention.
• **Suppliers/Business Partners**: Continued relationships for integrated travel resources and content development, but also subject to the company's financial health and operational efficiency.
• **Regulatory Authorities**: The company is actively working to comply with complex and evolving PRC laws and regulations, particularly those related to education, foreign investment, data privacy, and cybersecurity.

Next Steps

• Continue to invest in and expand PRC operations.
• Launch new programs and further broaden the company's footprint.
• Strengthen fundamental capabilities, including technology and content solutions.
• Implement remediation measures to address the identified material weakness in internal control over financial reporting, including refining control caliber, enhancing communication, and implementing additional supervision and review activities.

Key Dates

Recommendation

Keywords

Education, China, Tourism, Learning services, Non-academic tutoring, SEC filing, 20-F, Financial results, VIE structure, PRC regulation, Risk factors, Corporate governance, NYSE, PFIC, Study camps, Financial performance