Mynd.Ai, Inc. (then Gravitas Education Holdings, Inc.) — FY2022 Form 20-F
Reporting period: Fiscal year ended December 31, 2022, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and amounts below are in U.S. dollars unless noted. The filing was signed April 28, 2023.
Business context and major restructuring
On April 30, 2022, the company completed a divestiture of its directly operated mainland China kindergarten business, including 90 kindergartens, and ended its contractual control of the former VIE. It reclassified that business as discontinued operations. The company shifted toward providing brand, training, IT, recruitment and curriculum services to the divested kindergartens under 15-year service agreements, while continuing play-and-learn operations in China and kindergarten and student-care operations in Singapore. The new VIE contributed 0.9% of continuing-operations revenue in 2022.
After the reporting period, the company announced a proposed transaction with NetDragon: a proposed sale of all China education operations for $15 million and a merger involving NetDragon’s education businesses outside China. The transaction also contemplated a $65 million secured convertible note investment and NetDragon becoming the controlling shareholder. Completion was subject to shareholder, regulatory and other conditions; these were proposals, not FY2022 results.
Key financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Continuing-operations revenue | $50.0 million | $51.9 million |
| Gross profit; gross margin | $4.5 million; 8.9% | $2.5 million; 4.8% |
| Operating loss | $80.1 million | $17.4 million |
| Net loss from continuing operations | $79.2 million | $19.6 million |
| Total net loss / income | $45.9 million loss | $3.5 million income |
| Net loss / income per ordinary share | $1.46 loss | $0.24 income |
| Operating cash flow | $1.9 million generated | $19.2 million generated |
| Investing cash flow | $34.6 million used | $6.4 million used |
| Financing cash flow | $2.7 million used | $1.4 million used |
| Cash and cash equivalents at year-end | $31.2 million | $33.3 million |
FY2022 discontinued operations reported $33.3 million of net income, including a $30.5 million after-tax gain on deconsolidation. Thus, total net loss was substantially smaller than the continuing-operations loss but included a material one-time disposal gain. Continuing revenue fell 3.6% year over year. Management attributed declines in tuition, franchise fees and merchandise sales to facility closures, fewer franchise facilities and COVID-related disruption; $5.4 million of new teaching and management services revenue partly offset them.
Operating expenses rose to $84.6 million, including impairment charges of $19.2 million for goodwill, $3.5 million for long-lived assets, $22.1 million for consideration receivable and $23.3 million for loan receivables. Gross margin improved, but these charges drove the sharp increase in operating loss.
Balance sheet, liquidity and debt
At December 31, 2022, total assets were $80.7 million, total liabilities $55.8 million and total equity $24.8 million, compared with assets of $283.1 million and liabilities of $203.9 million at year-end 2021. The large decrease primarily reflects the divestiture and discontinued-operations presentation. Current assets of $41.2 million exceeded current liabilities of $32.2 million by about $9.0 million. Operating lease liabilities totaled $17.7 million; the filing does not present a material conventional borrowing balance at year-end. It reports $24.2 million of contractual obligations, comprising $21.2 million in operating leases and $3.0 million in purchase commitments.
Cash and cash equivalents declined by $2.2 million from year-end 2021; cash, cash equivalents and restricted cash declined by $35.1 million during 2022, reflecting mainly the $29.8 million cash outflow reported for disposal of business and other investing activity. Management stated that cash on hand would be sufficient for anticipated general corporate needs for at least 12 months. Cash transfers from mainland China remain subject to legal, regulatory, statutory-reserve and foreign-exchange restrictions.
Outlook, risks and unusual items
- Restructuring and customer credit: The former VIE and divested kindergartens faced difficult market and regulatory conditions. The company fully impaired the $24.0 million consideration receivable and approximately $24.0 million loan receivable from the former VIE. The service model depends on a limited number of customers, including the former VIE.
- China structure and regulation: The company is a Cayman Islands holding company and uses contractual VIE arrangements rather than direct equity ownership for certain mainland China operations. Their enforceability and regulatory status remain uncertain; restrictions on cash remittances also constrain access to operating funds.
- COVID-19 and operations: Renewed outbreaks and closures affected facilities, franchise activity and merchandise sales in 2022. The company also cited inflation, operating costs and weaker-than-expected Singapore performance in assessing impairments.
- Proposed NetDragon transaction and dividend: The company said it expected to complete the proposed merger and China divestiture, subject to conditions. It also expected a cash dividend conditional on merger closing, funded from remaining IPO proceeds; amount and terms were not finalized. No formal operating guidance was provided.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end, citing insufficient personnel with U.S. GAAP and SEC reporting expertise. The filing reports a material weakness and planned remediation. The auditor issued an unqualified opinion on the FY2022 financial statements, but did not opine on internal control effectiveness.
- Restatement: The company restated interim financial statements to classify enrichment-course results associated with the divested business as discontinued rather than continuing operations. It said the adjustments affected presentation and related balances but not previously reported cash.
- Auditor and listing: Marcum Asia audited FY2022. The filing says the PCAOB had regained inspection access to China and Hong Kong firms in December 2022 and the company did not expect FY2022 identification under the HFCAA; future inspection access remains a risk. The company had regained NYSE minimum-bid compliance after changing its ADS ratio to 20 ordinary shares per ADS.
Investor verification priorities
- Verify the status, final terms and closing conditions of the proposed NetDragon merger, China divestiture, convertible notes and any dividend.
- Review the collectability, repayment status and accounting treatment of the fully impaired former-VIE receivables, as well as the performance and payment terms of the 15-year service agreements.
- Reconcile the reported $29.8 million disposal cash outflow with the disposal accounting and cash-flow statements; assess remaining unrestricted cash and its location.
- Track remediation of the material weakness and any subsequent restatements, audit findings or regulatory inquiries.
- Assess continuing-operations profitability and cash generation without the one-time deconsolidation gain, and monitor customer concentration, VIE enforceability and PRC cash-transfer restrictions.