ATA Creativity Global annual report, Q4 FY2021

ATA Creativity Global: FY2021 Form 20-F Summary

Business context and reporting period

ATA Creativity Global is a Cayman Islands holding company whose operations are conducted primarily in China through Huanqiuyimeng and its subsidiaries. The company provides portfolio training for students seeking overseas art education, research-based learning, overseas study counselling, language training, junior art education and related services. The filing covers the fiscal year ended December 31, 2021, with audited comparisons for 2020 and 2019. It is not a quarterly filing; the filing does not provide separate Q4 results.

2021 enrollment was 4,287 students; 53.3% were enrolled in portfolio training programs.
The company operated 21 training centers in 20 Chinese cities and had 1,371 teachers, including 147 full-time and 1,224 part-time teachers.
Approximately 9% of services were delivered online in 2021.
ADSs trade on Nasdaq under AACG; each ADS represents two common shares.

Financial performance and key metrics

RMB millions, except per-share data	2021	2020	Change
Net revenue	202.2	162.2	+24.7%
Gross profit	104.8	63.6	+64.8%
Gross margin	51.8%	39.2%	+12.6 pts
Operating loss	(66.4)	(107.5)	Improved by 41.1
Net loss	(36.4)	(100.6)	Improved by 64.2
Net loss attributable to ACG	(33.6)	(92.2)	Improved by 58.5
Basic and diluted loss per common share	RMB(0.57)	RMB(1.57)	Improved by RMB1.00
Net cash used in operating activities	(31.8)	(27.9)	Use increased by 3.9
Capital expenditures	4.5	4.9	Down 9.3%

Revenue mix in 2021 was portfolio training 74.9% (RMB151.4 million), overseas study counselling 11.7% (RMB23.6 million), other educational services 10.4% (RMB21.2 million), and research-based learning 3.0% (RMB6.0 million). K-12 education assessment revenue was nil following the disposal of Muhua Shangce in June 2021.

The improvement in gross margin was attributed primarily to a greater use of project-based programs, improved teacher utilization and related cost optimization. Sales and marketing expense increased 23.6% to RMB66.1 million, while research and development expense increased 34.1% to RMB11.8 million. General and administrative expense decreased 6.8% to RMB93.3 million.

Financial position, cash flow, debt and liquidity

Cash and cash equivalents were RMB71.3 million (US$11.2 million) at December 31, 2021, down from RMB112.7 million at December 31, 2020.
Total assets were RMB507.2 million and total liabilities were RMB316.3 million at year-end 2021.
Current liabilities were RMB268.0 million, including RMB202.5 million of deferred revenue and RMB48.2 million of accrued expenses and other payables.
The company reported no short-term loans at December 31, 2021; the RMB2.0 million outstanding bank borrowing at December 31, 2020 was repaid on March 31, 2021.
Lease liabilities totaled RMB40.7 million at year-end 2021. Contractual operating lease obligations disclosed under Item 5 totaled RMB46.5 million, including RMB19.4 million due within one year.
Operating cash flow remained negative at RMB31.8 million. Investing cash use was RMB10.0 million, primarily for acquisition-related payments and training-center renovations. Financing cash inflow was RMB0.8 million.
Management stated that expected future operating cash flow and existing cash were sufficient for present working-capital requirements, but additional financing may be needed for acquisitions, investments or adverse changes in business conditions.
No dividends were paid in 2021, and the company has no current plans to distribute earnings. PRC subsidiaries are subject to foreign-exchange, statutory-reserve and dividend-distribution restrictions.

Material changes versus the prior comparable period

Revenue increased 24.7%, driven primarily by RMB38.2 million of growth in portfolio training services.
Cost of revenue declined 1.1% despite higher revenue, producing a significant gross-margin expansion.
Net loss narrowed 63.8%, although the company remained unprofitable and generated negative operating cash flow.
ACG sold its 54.6% interest in Muhua Shangce, its legacy K-12 education assessment business, in June 2021 and recognized a gain on disposal of RMB33.5 million. The disposal also eliminated related assets, liabilities and revenue.
ACG recognized a RMB6.0 million impairment of its investment in Beijing Xiaozhi Education & Technology, reducing that investment to zero.
Deferred revenue increased to RMB202.5 million from RMB199.4 million, reflecting substantial customer prepayments and remaining service obligations.
Goodwill remained RMB194.8 million, representing approximately 38% of total assets. No goodwill impairment was recorded, but the valuation depends on forecast revenue growth, operating margins and discount rates.
The company’s internal-control assessment for December 31, 2021 concluded that internal control over financial reporting was effective. The 2020 material weakness related to U.S. GAAP expertise was described as addressed; the independent auditor was not engaged to attest to internal controls.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide quantified revenue, earnings or margin guidance. Management’s stated priorities include expanding project-based, small-group, online and hybrid delivery models; improving teacher utilization and margins; expanding foundation courses and international education services; and evaluating strategic acquisitions.

COVID-19 and travel restrictions: Training-center closures, online conversion, reduced overseas travel and delayed or cancelled study plans continued to affect operations and research-based learning services, although management said the impact was progressively mitigated in 2021.
PRC regulatory risk: The company may face evolving requirements involving education permits, travel-agency permits, ICP licensing, data security, cybersecurity review, cross-border data transfers and potential CSRC filings for overseas listings. Only one training center had obtained a private-school operating permit as of the filing date.
VIE structure: The company consolidates ATA Intelligent Learning through contractual arrangements rather than equity ownership. The VIE had no substantive business operations but held 30.96% of Huanqiuyimeng and other investments. If the arrangements become unenforceable or non-compliant, ACG could lose control and cease consolidating the VIE.
HFCAA and PCAOB access: The auditor is based in mainland China and was not subject to complete PCAOB inspection at the filing date, creating potential future trading prohibition or Nasdaq delisting risk.
Litigation: Three lawsuits relating to the 2018 sale of the ATA Online Business remained unresolved and in early stages. The plaintiffs sought, among other relief, damages of RMB100.0 million in two Beijing actions and attorney’s fees of RMB15.0 million in the transferred Ningbo action. No loss contingency was accrued because the outcome could not be reasonably estimated.
Concentration and execution risk: The business depends on student enrollment, qualified teachers, overseas school relationships, brand development and the ability to transition toward more efficient online and group-based delivery.
Currency and cash-transfer risk: Most revenue and expenses are denominated in RMB, while the holding company depends on distributions or service payments from PRC entities. Foreign-exchange controls may limit transfers outside China.
Unusual items: The RMB33.5 million disposal gain materially benefited 2021 results. Excluding this item, the improvement in pre-tax results would have been less pronounced.

Most important facts for an investor to verify

Whether the gross-margin improvement is sustainable as the company shifts from one-on-one instruction toward project-based, small-group, online and hybrid programs.
Whether negative operating cash flow improves and whether RMB71.3 million of cash is adequate after considering deferred-revenue obligations, lease payments and possible acquisitions.
The recoverability of RMB194.8 million of goodwill and the sensitivity of the valuation to enrollment, revenue-growth and margin assumptions.
The final status and potential financial exposure of the three ATA Online sale lawsuits.
Whether PRC authorities require additional private-school, travel, ICP, cybersecurity, data-transfer or overseas-listing approvals.
The enforceability of the VIE agreements and the extent to which cash and operating assets are accessible to the Cayman Islands parent.
The company’s continuing compliance with HFCAA, PCAOB inspection requirements and Nasdaq listing standards.
The effect of the Muhua Shangce disposal and the RMB33.5 million gain when assessing recurring profitability.
The company’s customer refund exposure, including the RMB16.1 million refund liability recorded at December 31, 2021.