ATA Creativity Global (ATA Inc.) — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone 2018 fourth-quarter filing. Comparisons primarily use unaudited twelve-month data for the year ended December 31, 2017 because the company changed its fiscal year-end from March 31 to December 31 in 2017.
Business context
ATA completed the sale of its ATA Online Business on August 16, 2018 for US$200.0 million in cash. The disposed business historically operated the company’s computer-based testing, online education and related services and is presented as discontinued operations. ATA’s continuing operations were focused mainly on K-12 education assessment services, early-stage project-based learning (PBL) education services and related education initiatives. The PBL business did not generate revenue in fiscal 2018.
The company reports under U.S. GAAP, primarily operates in China, and its ADSs trade on Nasdaq under the symbol ATAI. Each ADS represents two common shares.
Key financial metrics
| Metric | FY2018 | FY2017 comparable | Change |
|---|---|---|---|
| Net revenues | RMB 1.3 million | RMB 7.4 million | Down 81.9% |
| Gross profit (loss) | RMB (2.9) million | RMB 2.4 million | Turned to gross loss |
| Gross margin | (217.5%) | 32.9% | Down 250.4 percentage points |
| Operating expenses | RMB 68.7 million | RMB 74.1 million | Down 7.3% |
| Loss from continuing operations | RMB 68.1 million | RMB 87.5 million | Loss narrowed |
| Income from discontinued operations | RMB 918.7 million | RMB 61.4 million | Includes disposal gain |
| Net income attributable to ATA | RMB 854.9 million | RMB (24.1) million | Turned profitable |
| Basic and diluted EPS | RMB 18.25 per share | RMB (0.69) per share | Improved materially |
| Cash and cash equivalents | RMB 190.6 million | RMB 53.5 million | Up 256.4% |
The FY2018 net income was dominated by a RMB 937.6 million after-tax gain on the sale of ATA Online. Continuing operations remained loss-making and generated minimal revenue.
Cash flow, liquidity, debt and balance sheet
- Net cash used in operating activities was RMB 312.6 million, including approximately RMB 213.0 million of income-tax payments, primarily related to the ATA Online sale transaction.
- Net cash provided by investing activities was RMB 1.20 billion, mainly from RMB 1.22 billion of net proceeds from the disposal of discontinued operations.
- Net cash used in financing activities was RMB 949.9 million, primarily reflecting the special cash dividend.
- Cash and cash equivalents declined from RMB 256.1 million at the beginning of the year to RMB 190.6 million at year-end, after the sale proceeds and dividend.
- Total assets were RMB 335.1 million, total liabilities were RMB 19.7 million, and total shareholders’ equity was RMB 276.2 million at December 31, 2018.
- The filing states that ATA had no outstanding debt, debt securities, contingent liabilities, mortgages or liens as of the filing date. A RMB 15.0 million related-party loan facility drawn in 2018 was fully repaid on October 15, 2018, and the related property pledge was released in April 2019.
- Contractual obligations included RMB 3.3 million of operating lease payments and RMB 30.0 million of remaining funding commitments to a Tsinghua University research project.
Material changes versus the prior comparable period
- Revenue fell sharply because the ATA Online Business was sold and because RMB 5.9 million of rental income was reclassified from revenue to other operating income under ASC 606. Excluding that reclassification, the revenue decline was still material.
- Continuing-operations losses narrowed by RMB 19.4 million, largely because fiscal 2017 included RMB 12.2 million of non-recurring investment-related consulting fees and RMB 15.2 million of investment impairment charges, compared with RMB 6.4 million of impairment in fiscal 2018.
- General and administrative expense declined 10.8% to RMB 43.5 million, while research and development expense was broadly stable at RMB 19.6 million and sales and marketing expense was RMB 5.6 million.
- The company recorded RMB 6.4 million of impairment on its GlobalWisdom investment and a RMB 2.8 million fair-value gain on its ApplySquare investment.
- ATA paid a special dividend of approximately RMB 946.6 million, equal to US$3.00 per common share or US$6.00 per ADS, following completion of the ATA Online sale.
- Employee count declined from 551 at December 31, 2017 to 101 at December 31, 2018, reflecting the sale and strategic shift.
Guidance, outlook, risks and unusual items
- Management stated that current cash and expected operating cash flows were expected to fund present working-capital and capital-expenditure needs, but acknowledged that continuing businesses may not generate sufficient cash flow.
- ATA plans to develop PBL programs in areas such as big data, artificial intelligence, e-sports, drone technology and intelligent manufacturing. The company was also evaluating the proposed acquisition of Beijing Huanqiuyimeng Education Consultation Corp. (ACG), with completion uncertain and a potential RMB 20.0 million deposit at risk if the transaction failed for reasons attributable to ATA.
- The proposed Beijing Biztour acquisition was terminated on March 6, 2019. ATA had provided a US$2.0 million loan at 8% interest; the loan was overdue as of April 6, 2019, and repayment remained uncertain despite guarantees and a property mortgage.
- Key risks include limited revenue after the ATA Online sale, the short operating history of the PBL business, reliance on a limited number of business partners, potential Nasdaq delisting, acquisition and integration risks, PRC regulatory and foreign-exchange restrictions, VIE enforceability, currency volatility and possible future PFIC status.
- ATA uses contractual arrangements to control and consolidate ATA Intelligent Learning, a PRC variable interest entity. The filing states that the structure is legally binding under current legal opinions, but acknowledges uncertainty in PRC law and enforcement.
- Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018. The auditor’s report covered the financial statements but did not provide an attestation opinion on internal control.
- ATA adopted ASC 606 in 2018 and expected the January 1, 2019 adoption of ASC 842 to recognize approximately RMB 3.5 million of right-of-use assets and RMB 3.0 million of lease liabilities.
Important facts for investors to verify
- Whether the reported FY2018 profit is appropriately assessed as a one-time disposal-driven result rather than evidence of recurring operating profitability.
- The company’s ability to generate meaningful revenue and positive cash flow from PBL and other remaining businesses.
- Status and collectability of the US$2.0 million Beijing Biztour loan, including the effectiveness of the personal guarantee and property mortgage.
- Status, terms and final outcome of the proposed ACG acquisition and the potential RMB 20.0 million deposit exposure.
- Compliance with Nasdaq continued-listing requirements given the limited revenue-generating operations.
- Legal and regulatory enforceability of the ATA Intelligent Learning VIE arrangements and the ability to transfer cash from PRC subsidiaries.
- Use of the remaining sale proceeds, future acquisitions, potential external financing needs and any resulting dilution or capital-allocation changes.
- Future tax obligations, including PRC withholding tax on undistributed earnings and the continuation of preferential 15% HNTE tax rates.