ATA Creativity Global — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone 2019 fourth-quarter filing; quarterly Q4 results are not separately provided. Financial statements are prepared under U.S. GAAP and reported primarily in RMB, with selected U.S. dollar translations at RMB 6.9618 per US$1.
Business context
- ATA Creativity Global shifted from computer-based testing and online education to creative arts-related international education after selling the ATA Online Business in August 2018.
- In August 2019, the Company acquired Huanqiuyimeng, a provider of portfolio training, overseas study counseling and related educational services. Huanqiuyimeng was consolidated from August 6, 2019, so 2019 results include only approximately five months of its operations.
- Principal services in 2019 were portfolio training, educational travel, overseas study counseling, other educational services, and K-12 education assessment and related services.
- The Company reported approximately 1,880 students enrolled during the Huanqiuyimeng partial-year period and operated 22 training centers in 21 Chinese cities as of April 22, 2020.
Key financial metrics
| RMB millions, except per-share data | 2018 | 2019 | 2019 US$ millions |
|---|
| Net revenues | 1.3 | 97.8 | 14.0 |
| Gross profit (loss) | (2.9) | 35.9 | 5.2 |
| Gross margin | (217.5%) | 36.7% | 36.7% |
| Operating expenses | 68.7 | 154.2 | 22.2 |
| Loss from continuing operations, net of tax | (68.1) | (134.1) | (19.3) |
| Net income (loss) | 850.6 | (129.2) | (18.6) |
| Net loss attributable to ACG | 854.9 income | (122.3) | (17.6) |
| Basic and diluted loss per common share | RMB 18.25 income | RMB (2.52) | US$ (0.36) |
- 2019 revenue consisted of portfolio training services of RMB 63.8 million, educational travel of RMB 10.5 million, overseas study counseling of RMB 8.1 million, other educational services of RMB 9.0 million, and K-12 assessment and other services of RMB 6.3 million.
- Portfolio training represented approximately 65.3% of total 2019 revenue; educational travel, overseas study counseling and other educational services represented 10.7%, 8.3% and 9.2%, respectively.
- Operating expenses included general and administrative expenses of RMB 81.9 million, sales and marketing expenses of RMB 34.1 million, research and development expenses of RMB 11.8 million, intangible-asset impairment of RMB 8.9 million, and a RMB 17.4 million provision for Beijing Biztour receivables.
- Other significant charges included RMB 26.8 million of impairment losses on long-term investments, including RMB 20.9 million related to ApplySquare and RMB 5.9 million related to GlobalWisdom.
Cash flow, liquidity and debt
| RMB millions | 2018 | 2019 |
|---|
| Cash and cash equivalents at year-end | 190.6 | 154.2 |
| Net cash used in operating activities | (312.6) | (57.9) |
| Net cash provided by (used in) investing activities | 1,201.7 | (36.9) |
| Net cash provided by (used in) financing activities | (949.9) | 57.6 |
| Total liabilities at year-end | 19.7 | 325.6 |
- 2019 operating cash outflow reflected cash paid for payroll and operating costs exceeding collections, despite RMB 122.6 million of cash collections, including RMB 112.0 million from Huanqiuyimeng.
- Investing cash outflows included RMB 34.6 million for the Huanqiuyimeng acquisition, RMB 6.0 million invested in Xiaozhi and RMB 1.3 million of capital expenditures.
- Financing inflows included RMB 61.7 million received from the December 2019 private placement and RMB 5.0 million contributed by a non-controlling shareholder, partly offset by RMB 9.0 million of assumed short-term debt repayment.
- Outstanding short-term bank loans were RMB 5.0 million at December 31, 2019, with terms of less than one year. The filing states that, other than these loans, the Company had no other outstanding debt securities, mortgages or liens.
- Lease liabilities totaled RMB 33.1 million, comprising RMB 20.6 million current and RMB 12.5 million non-current. Contractual operating lease obligations were RMB 37.3 million, and remaining Tsinghua University funding commitments were RMB 20.0 million.
- Management stated that cash and expected operating cash flows were sufficient for anticipated working capital and capital expenditures for the next 12 months, while noting that acquisitions or adverse business conditions could require additional financing.
Material changes versus the prior comparable period
- Revenue increased by RMB 96.5 million, or 7,201.7%, primarily because Huanqiuyimeng contributed RMB 91.4 million of revenue during the partial-year consolidation period. The comparison is not representative of a full-year operating trend.
- Gross profit improved from a RMB 2.9 million loss to RMB 35.9 million of profit, primarily due to Huanqiuyimeng.
- Continuing-operations net loss widened from RMB 68.1 million to RMB 134.1 million because operating expenses expanded substantially following the acquisition and because of investment, intangible-asset and receivable impairments.
- 2018 net income of RMB 850.6 million was largely nonrecurring and resulted from the RMB 937.6 million gain on the sale of the ATA Online Business. The 2019 comparison therefore reflects the absence of that gain.
- Cash declined by RMB 36.4 million during 2019, compared with a RMB 65.5 million decline during 2018, when the Company paid a special dividend of approximately RMB 946.6 million.
- Balance-sheet assets increased from RMB 335.1 million to RMB 676.1 million, primarily reflecting the Huanqiuyimeng acquisition, including RMB 200.5 million of goodwill and RMB 135.6 million of intangible assets.
- The Company issued 9.36 million common shares as consideration for Huanqiuyimeng and 5.66 million common shares in the December 2019 private placement, increasing outstanding shares from approximately 45.8 million to 62.4 million at year-end.
Guidance, outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management expects to expand creative arts-related international education services, develop online and small-group courses, expand its training-center network and consider additional acquisitions.
- COVID-19 began affecting operations after year-end. Training centers and offices were temporarily closed, some courses were moved online, and educational travel was delayed or canceled. Management expected a material adverse effect on 2020 revenue, cash flow and financial position, but stated that the impact could not yet be reasonably estimated.
- The Company relies substantially on part-time teachers, faces competition for qualified instructors, and stated that only approximately 15% of teachers were full-time employees.
- Some training centers may require private-school operating permits; as of the filing date, some had not obtained such permits. The regulatory status of private education, online education and travel-related services remained uncertain.
- The Company operates a PRC variable-interest-entity structure through ATA Intelligent Learning. The filing warns that changes in PRC regulation or inability to enforce contractual arrangements could result in penalties, loss of control or deconsolidation.
- Two loans and advances to Beijing Biztour remained unpaid as of the filing date. The Company recorded a RMB 17.4 million provision, but stated that collateral and guarantees might be insufficient for full recovery.
- Three lawsuits relating to the sale of ATA Online were in preliminary stages. Plaintiffs sought to invalidate the transaction, recover ATA Online interests and obtain aggregate specified compensation and legal fees. No loss contingency was accrued because an adverse outcome was not considered probable and the amount could not be reasonably estimated.
- Management concluded that internal control over financial reporting was effective as of December 31, 2019, but excluded Huanqiuyimeng from the assessment. Huanqiuyimeng represented RMB 436.6 million of assets and RMB 91.4 million of 2019 revenue included in the consolidated statements.
- The Company stated that its China-based auditor was not subject to PCAOB inspection at the filing date, creating potential investor, reporting and listing risks.
Most important facts for investors to verify
- Whether Huanqiuyimeng can sustain or improve its partial-year revenue and profitability after a full year of consolidation.
- Whether operating cash flow turns positive and whether the RMB 154.2 million cash balance is sufficient given continuing losses, lease commitments and acquisition plans.
- The collectability of the Beijing Biztour loan and advances beyond the RMB 17.4 million provision.
- The carrying value and impairment risk of RMB 200.5 million of goodwill and RMB 135.6 million of acquired intangible assets.
- The outcome and potential financial exposure from litigation challenging the ATA Online sale.
- Compliance of training centers, online courses, educational travel activities and the VIE structure with evolving PRC regulations.
- The effect of COVID-19 on student enrollment, overseas study demand, educational travel and 2020 results.
- The dilution and governance implications of the Huanqiuyimeng consideration shares, private placement shares, outstanding equity awards and significant insider ownership.
