Hudson Labs Red Flags - Dirty Laundry
Welcome to our weekly reports featuring impactful and usual disclosures as extracted by Hudson Labs' algorithms.
Filings from the week of September 20 - 24, 2021
NEW ORIENTAL EDUCATION & TECHNOLOGY GROUP INC (EDU)
20-F | Market cap: $3.4B
The company has recorded $31.8M in impairment losses in the current year ($28.9M from goodwill and $2.9M from intangible assets). The company does not specify the reporting unit(s) related to the goodwill write-down in their financial statement notes. [1]
China is expanding regulation of private education and education providers, prohibiting certain related party transactions [2] and proposing limits on foreign investment. [3]
The company has amended related party master service agreements to comply with the new regulations. [2]
- “We recorded US$5.2 million, nil and US$28.9 million goodwill impairment losses for the years ended May 31, 2019, 2020 and 2021, respectively and recorded US$2.9 million intangible assets impairment losses for the year ended May 31, 2021.”
- “The Amended Implementation Rules provide that a private school providing compulsory education is prohibited from conducting transactions with its related party. Relevant government authorities shall enhance the supervision on the agreements entered into between non-profit private schools and its related party and shall review such transaction on an annual basis. New Oriental China has two private schools providing compulsory education, Beijing Changping New Oriental Bilingual School and Beijing New Oriental Yangzhou Foreign Language School. As a result of the effectiveness of the Amended Implementation Rules from September 1, 2021, we shall not conduct any related party transaction, including the related party transaction under our contractual arrangements with these two compulsory education schools. One of our wholly-owned subsidiaries, Beijing Pioneer, has entered into a master exclusive service agreement on September 19, 2014, as amended, with New Oriental China. In accordance with the Amended Implementation Rules, the master exclusive service agreement was further amended and effective from September 1, 2021, to exclude Beijing Changping New Oriental Bilingual School and Beijing New Oriental Yangzhou Foreign Language School from such agreement. We may take further necessary measures to comply with the Amended Implementation Rules. The contribution of Beijing Changping New Oriental Bilingual School and Beijing New Oriental Yangzhou Foreign Language School have been immaterial to our business, we derived less than 1% of our total net revenues from these two schools for each of the fiscal years ended May 31, 2019, 2020 and 2021.”
- “On July 24, 2021, the General Office of State Council and the General Office of Central Committee of the Communist Party of China jointly promulgated the Alleviating Burden Opinion, which provides, among others, that (i) Academic AST Institutions are prohibited from raising funds by listing on stock markets or conducting any capitalization activities; (ii) foreign capital is prohibited from controlling or participating in any Academic AST Institutions through mergers and acquisitions, entrusted operation, joining franchise or variable interest entities; (iii) online tutoring for preschool-age children is prohibited, and offline academic subjects (including foreign language) tutoring services for preschool-age children is also strictly prohibited. The Alleviating Burden Opinion provides that any violation of the foregoing shall be rectified. The Alleviating Burden Opinion further states that the administration and supervision over academic subjects tutoring institutions for students on grade ten to twelve shall be implemented by reference to the relevant provisions of the Alleviating Burden Opinion. It remains uncertain as to how and to what extent the administration over academic subjects tutoring institutions for students on grade ten to twelve will be implemented by reference of the Alleviating Burden Opinion.”
PIEDMONT LITHIUM INC (PLL)
10-K | Market cap: $890M
In July 2021 a new class action lawsuit was filed against the company, alleging false/misleading statements relating to required permits. No accrual has been made for the lawsuit. [1]
The company has new at-will employment agreements with top executives (CEO and EVP). [2]
Compensation for these positions (respectively) includes salary ($500k, $350k), bonus (target 75% salary, target 50% salary, both payable up to 200% of target), annual stock compensation (125% base salary, 75% base salary). [3]
In August 2021, subsequent to year-end, the company had two significant transactions:
- acquired a 10% interest in IronRidge Resources (IRR), entering into a long-term supply agreement, and acquiring the right to purchase up to 50% of the equity of IRR lithium portfolio in Ghana for $87M. [4]
- The company paid $19.5M as a 25% equity contribution to Sayona Quebec, providing Sayona with the ability to purchase North American Lithium Inc.’s assets for $77M. [5]
- “In July 2021, a lawsuit was filed against us in the United States District Court for the Eastern District of New York on behalf of a class of putative plaintiffs claiming violations of the Exchange Act. The complaint alleged, among other things, that we made false and/or misleading statements and/or failed to make disclosure relating to proper and necessary permits.“
- “Mr. Phillips, President and Chief Executive Officer, entered into an at-will employment agreement with us on September 22, 2021, which may be terminated for any reason at any time.”... “Mr. Brindle, Executive Vice President and Chief Development Officer, entered into an at-will employment agreement with us on September 22, 2021, which may be terminated for any reason at any time.”
- “The agreement provides Mr. Phillips with a base salary of $500,000 per annum and a discretionary annual bonus with a target bonus amount equal to 75% of base salary, with the ability to earn a maximum amount of up to 200% of the target bonus amount based upon performance criteria determined by the Board or the Compensation Committee of the Board. The employment agreement also provides that it is currently contemplated that Mr. Phillips will receive an annual equity-based compensation award having a fair value equal to approximately 125% of base salary.”
- In August 2021, subsequent to the year ended June 30, 2021 and as part of our strategic partnership, we (i) acquired an equity interest of approximately 10% in IRR, (ii) entered into a long-term supply agreement whereby IRR will sell 50% of spodumene concentrate produced in Ghana to Piedmont Lithium, and (iii) have the ability to acquire an equity interest of 50% in IRR’s lithium-based portfolio in Ghana through expected future staged investments totaling $87 million.
- “The Company paid CAD 24.5 million ($19.5 million) to Sayona Quebec, representing its 25% equity interest contribution, and Sayona paid CAD 73.4 million ($58.3 million), representing Sayona’s 75% equity interest contribution, which collectively gave Sayona Quebec the ability to fund the purchase of North American Lithium Inc.’s assets. On August 20, 2021, the Company invested AUD 9.8 million ($7.0 million) in equity offerings by Sayona. The Company’s equity interest in Sayona, including the additional shares acquired, was approximately 19% on August 20, 2021.”
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