ATA Creativity Global (ATA Inc.) — Transition Report Summary
Business context and reporting period
ATA Inc. is a Cayman Islands holding company whose operations were primarily conducted in China through computer-based testing, online education and related services. The filing is a transition report covering the nine-month period from April 1, 2017 through December 31, 2017, following the change in fiscal year-end from March 31 to December 31. Accordingly, the period is not a standalone fiscal fourth quarter or a full-year comparison. Financial statements are prepared under U.S. GAAP and audited by KPMG Huazhen LLP.
Testing services remained the core business, representing 92.5% of nine-month revenue. ATA operated 3,344 authorized test centers and delivered approximately 12.4 million tests, including 12.35 million billable tests.
Key financial metrics
| Metric | Nine months ended Dec. 31, 2017 | Comparable nine months ended Dec. 31, 2016 | Change |
|---|---|---|---|
| Net revenue | RMB 490.1 million; US$75.3 million | RMB 435.4 million | +12.5% |
| Testing services revenue | RMB 453.2 million | RMB 402.5 million | +12.6% |
| Online education revenue | RMB 6.6 million | RMB 7.1 million | -7.3% |
| Gross profit | RMB 231.0 million | RMB 216.6 million | +6.7% |
| Gross margin | 47.1% | 49.7% | -2.6 percentage points |
| Income from operations | RMB 69.5 million | RMB 95.7 million | -27.4% |
| Operating margin | 14.2% | 22.0% approximately | Declined |
| Net income | RMB 27.8 million; US$4.3 million | RMB 43.9 million | -36.7% |
| Net income attributable to ATA Inc. | RMB 29.6 million; US$4.6 million | RMB 44.0 million | Declined |
| Basic and diluted EPS | RMB 0.48 per common share; RMB 0.96 per ADS | RMB 0.96 per common share; RMB 1.92 per ADS | Declined |
| Cash flow from operations | RMB 95.6 million; US$14.7 million | Not provided in the filing excerpt | Not clearly comparable |
Revenue growth was driven by increased test volumes for existing examinations and new exams. The number of billable tests increased from 11.41 million to 12.35 million. Testing revenue from the CPA, tax adviser, tour guide and housing and construction examinations rose in aggregate from RMB 123.6 million to RMB 163.7 million, while revenue from fund practitioner and banking examinations declined from RMB 134.8 million to RMB 116.8 million.
Cost of revenues increased to RMB 259.0 million, or 52.9% of revenue, from RMB 218.9 million, or 50.3%. Test monitoring costs rose to RMB 191.8 million. Operating expenses increased to RMB 161.5 million from RMB 120.8 million, principally because of higher general and administrative expenses, consulting fees, academic project spending, labor costs and share-based compensation.
Balance sheet, cash flow, debt and liquidity
| Metric | Dec. 31, 2017 | Mar. 31, 2017 |
|---|---|---|
| Cash and cash equivalents | RMB 256.1 million; US$39.4 million | RMB 222.4 million |
| Accounts receivable, net | RMB 100.1 million | RMB 56.2 million |
| Total assets | RMB 568.4 million | RMB 519.8 million |
| Total liabilities | RMB 167.1 million | RMB 127.4 million |
| Shareholders’ equity | RMB 365.1 million | RMB 392.5 million |
| Long-term investments | RMB 75.1 million | RMB 88.9 million |
| Outstanding debt | None as of the filing date | Short-term loan had been outstanding but was repaid |
- Net cash provided by operating activities was RMB 95.6 million.
- Net cash used in investing activities was RMB 20.6 million, including RMB 31.1 million for property, equipment and intangible assets and RMB 5.5 million invested in EEO.
- Net cash used in financing activities was RMB 40.1 million, primarily reflecting the RMB 65.7 million special cash dividend, partly offset by the release of RMB 30.0 million of restricted cash.
- Capital expenditures totaled RMB 31.1 million.
- Accounts receivable increased materially and should be considered in assessing the quality and timing of operating cash flow.
- Management stated that existing cash and expected operating cash flow were sufficient for anticipated working capital and capital expenditures. The filing also contemplated proceeds from the proposed ATA Online sale as a future liquidity source.
Material changes versus the prior comparable period
- Revenue increased 12.5%, but gross margin declined from 49.7% to 47.1% because of higher test monitoring costs, licensing fees and share-based compensation.
- Operating income fell 27.4% as operating expenses increased 33.6%. General and administrative expenses rose 58.8%, including RMB 12.2 million of investing and financing-related consulting fees and RMB 10.0 million for a Tsinghua University academic project.
- Share-based compensation increased materially and contributed to higher cost of revenues and operating expenses.
- Net income declined despite revenue growth, reflecting lower operating income, higher income tax expense and increased labor and project costs. The decline was partly offset by lower investment-related losses.
- ATA recorded RMB 15.2 million of impairment losses on long-term investments, primarily related to Brilent, which experienced negative operating cash flows, a severe working-capital shortage and turnover of key personnel.
- ATA acquired 65% of Qihuang Huizhi for RMB 0.65 million and sold its 60% interest in Puhua Technology for RMB 2.0 million.
- ATA declared and paid a special cash dividend of US$0.205 per common share, or US$0.41 per ADS, totaling RMB 65.7 million.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management expected continued demand for computer-based testing and planned to expand K-12 assessment, international education, vocational training and evaluation services.
The most significant strategic event was the proposed sale of ATA Online. On February 6, 2018, ATA agreed to sell all of ATA Online for US$200.0 million in cash. The first closing occurred on April 4, 2018, with US$35.0 million received; the second and third closings remained subject to conditions and uncertainty as of the filing date. Completion would remove the testing development and delivery business that generated 98.9% of nine-month revenue and leave ATA substantially dependent on retained education initiatives and investments.
- If the final closing does not occur after earlier closings, ATA warned of up to approximately US$27.35 million of taxes and approximately US$3 million of other expenses, with limited ability to recover those amounts.
- Following the sale, ATA may face increased risk of failing Nasdaq continued-listing requirements because ATA Online represents most of its operating assets and revenue.
- Revenue is concentrated among government-controlled entities and major clients. CICPA, AMAC and CBI represented 23.3%, 14.5% and 10.7% of nine-month revenue, respectively; the five largest testing clients represented 61.6%.
- Results are seasonal, with higher testing revenue generally in the quarters ending June 30 and December 31. December 2017 quarterly revenue was RMB 316.4 million versus RMB 69.6 million in September 2017, primarily because CICPA examinations occurred in December.
- PRC regulatory, foreign-exchange, data-security, privacy, education-industry and variable-interest-entity risks could affect operations and the ability to transfer funds or pay dividends.
- ATA relies on preferential 15% HNTE tax treatment for certain PRC entities. ATA Online and Muhua Shangce were seeking renewal; absent renewal, the standard tax rate would be 25%.
- The company had RMB 54.6 million of other commitments, including up to RMB 50.0 million of funding support for a Tsinghua University research institute, of which RMB 40.0 million was payable over four years.
- Operating lease commitments totaled RMB 36.6 million. The filing stated that ATA had no outstanding debt, debt securities, contingent liabilities, mortgages or liens as of the report date.
- Management, and KPMG, concluded that internal control over financial reporting was effective as of December 31, 2017, and KPMG issued an unqualified audit opinion.
Most important facts for investors to verify
- Whether the second and third closings of the US$200.0 million ATA Online transaction were completed and the total cash proceeds actually received.
- The post-transaction revenue base, profitability, cash balances and Nasdaq compliance after disposal of the business contributing nearly all historical revenue.
- The collectability and aging of the RMB 100.1 million accounts receivable balance, particularly amounts owed by CICPA and AMAC.
- The renewal status and effective tax rates of ATA Online and Muhua Shangce under the HNTE program.
- The recoverability of the remaining RMB 75.1 million of long-term investments and the potential for further impairments.
- The funding schedule and enforceability of the Tsinghua University commitment and other commitments totaling RMB 54.6 million.
- The impact of PRC foreign-exchange controls, dividend withholding taxes, statutory reserves and the newly established ATA Intelligent Learning VIE on access to cash and distributions.
- Whether the company’s retained businesses can replace testing-services revenue and generate sustainable operating cash flow.