ATA Creativity Global — Form 20-F Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2022, with audited comparative information for 2020 and 2021. The filing does not provide a separate fourth-quarter 2022 income statement or cash-flow presentation. ATA Creativity Global is a Cayman Islands holding company whose operations are conducted primarily in China through Huanqiuyimeng and its subsidiaries, with the VIE consolidated under U.S. GAAP through contractual arrangements.
The company provides portfolio training for students seeking overseas art education, research-based learning, overseas study counselling, in-school art classes, junior art education and related services. It reported 4,029 enrolled students in 2022, with 56.4% enrolled in portfolio training programs. Approximately 23.2% of services were delivered online during 2022.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net revenue | RMB 206.8 million (US$30.0 million) | RMB 202.2 million | Up 2.3% |
| Gross profit | RMB 102.5 million | RMB 104.8 million | Down 2.2% |
| Gross margin | 49.6% | 51.8% | Down 2.2 percentage points |
| Operating loss | RMB 56.6 million | RMB 66.4 million | Improved 14.8% |
| Net loss | RMB 48.6 million (US$7.0 million) | RMB 36.4 million | Loss increased 33.5% |
| Net loss attributable to ACG | RMB 47.9 million | RMB 33.6 million | Loss increased 42.3% |
| Basic and diluted loss per common share | RMB 0.76 (US$0.11) | RMB 0.57 | Loss per share increased |
| Net cash used in operating activities | RMB 14.6 million | RMB 31.8 million | Outflow improved |
| Capital expenditures | RMB 1.6 million | RMB 4.5 million | Down 63.7% |
| Cash and cash equivalents | RMB 55.0 million (US$8.0 million) | RMB 71.3 million | Down 22.9% |
Revenue mix in 2022 was 74.0% portfolio training, 1.8% research-based learning, 12.1% overseas study counselling and 12.1% other educational services. Portfolio training revenue increased to RMB 153.1 million from RMB 151.4 million, while research-based learning revenue declined to RMB 3.7 million from RMB 6.0 million.
Operating expenses were RMB 159.1 million, or 76.9% of revenue, compared with RMB 171.2 million, or 84.7%, in 2021. Sales and marketing expense increased 13.9% to RMB 75.3 million. General and administrative expense decreased 17.4% to RMB 77.1 million, primarily because of a prior-year donation to Tsinghua University. Research and development expense decreased 42.4% to RMB 6.8 million.
At December 31, 2022, total assets were RMB 474.5 million and total liabilities were RMB 331.0 million. Current liabilities included RMB 219.7 million of deferred revenue and RMB 16.9 million of current lease liabilities. The company reported no drawn balance under a RMB 20.0 million secured credit facility established in May 2022. Total operating lease obligations were RMB 41.4 million as of December 31, 2022.
Material changes versus the prior comparable period
- Revenue grew modestly, but cost of revenues grew faster than revenue, reducing gross margin from 51.8% to 49.6%.
- Operating loss narrowed because lower general and administrative and research and development expenses more than offset higher teaching compensation and sales and marketing costs.
- Net loss widened because 2021 included a RMB 33.5 million gain from the disposal of Muhua Shangce, while 2022 did not have a comparable gain. The 2022 filing also reported only RMB 1.3 million of gain from deconsolidation and other disposals.
- No long-term investment impairment was recorded in 2022, compared with RMB 6.0 million in 2021.
- In July 2022, the company disposed of 70% of Quanouyimeng, its foreign-language training subsidiary, and deconsolidated the business. In October 2022, it acquired the remaining 40% interest in Sichuan Huanqiuyilian.
- Cash usage improved, but cash declined by RMB 16.4 million during the year because operating and investing cash outflows exceeded limited financing inflows.
Outlook, management commentary, risks and unusual items
Management expects operations to continue returning toward normal following the relaxation of China’s COVID-19 controls in late 2022. The company intends to increase offline course delivery, resume international summer-camp and overseas educational travel programs as cross-border restrictions ease, and continue developing small-group, online and hybrid offerings to improve efficiency and margins. The filing does not provide quantitative revenue or profit guidance.
- Regulatory exposure: The company states that its training centers have not obtained private-school operating permits or local approvals for non-academic after-school tutoring, except that one non-operating subsidiary holds such a permit. The applicability of evolving PRC rules to art education for high-school and undergraduate students remains unclear.
- Licensing and data: PRC subsidiaries do not hold ICP licenses; the VIE holds an ICP license. The company believes third-party online platforms may not require its subsidiaries to hold ICP licenses, but regulators could disagree. Cross-border personal-information, cybersecurity and data-transfer requirements remain evolving.
- VIE structure: The company has no equity ownership in the VIE and relies on contractual arrangements with nominee shareholders who include the chairman and CEO and the president. The arrangements have not been tested in court and could be challenged or become unenforceable under future PRC rules.
- Internal controls: Management identified a material weakness in IT general controls related to program change management and software-development testing and approval. Management stated that the weakness did not result in identified financial-statement misstatements, but disclosure controls and internal control over financial reporting were considered ineffective at year-end.
- Goodwill concentration: Goodwill was RMB 196.3 million, approximately 41% of total assets. The company recorded no impairment, but the valuation used discounted cash-flow assumptions including a 20% discount rate and 3% terminal growth rate. Changes in forecasts or market conditions could result in future impairment.
- Litigation: Three lawsuits related to the 2018 sale of the ATA Online Business remain relevant. Two cases are pending before the Second International Commercial Court of the Supreme People’s Court, and a third case dismissed by the Beijing Intermediate Court is under appeal. The company has not accrued a loss because outcomes and potential losses cannot be reasonably estimated.
- Off-balance-sheet commitment: Huanqiuyimeng has an un funded RMB 30.0 million investment commitment due December 31, 2031 for a 15% interest in a new company.
- Cash transfer restrictions: The company has not paid dividends and its ability to move cash from PRC subsidiaries to the offshore holding company is subject to PRC profit-distribution, foreign-exchange and statutory-reserve requirements. PRC subsidiaries had RMB 25.7 million in statutory reserves restricted from distribution.
- HFCAA and listing risk: The PCAOB determined in December 2022 that it could inspect the company’s mainland China auditor, interrupting the prior HFCAA identification period. Future loss of PCAOB access could again create trading-prohibition or delisting risk.
Investor verification checklist
- Verify the consolidated cash balance, its location between mainland China and Hong Kong, and the practical ability to fund offshore obligations.
- Assess whether deferred revenue, refund liabilities and the RMB 41.4 million operating lease commitment are consistent with expected future service delivery and cash needs.
- Review the status of private-school, non-academic tutoring, travel-agency and ICP licensing requirements for each training center and online service.
- Evaluate the enforceability and economic substance of the VIE agreements and the related RMB 63.6 million payable balance eliminated on consolidation.
- Stress-test goodwill using lower revenue growth, lower operating margins or higher discount rates.
- Track remediation of the IT-control material weakness and whether future filings report effective disclosure controls.
- Monitor the three ATA Online sale lawsuits, the RMB 30.0 million investment commitment and any related-party transactions with affiliates or management-controlled entities.
- Confirm future PCAOB inspection access, Nasdaq listing compliance and any required CSRC filings for follow-on securities offerings.