ATA Creativity Global: FY2020 Form 20-F Summary
Reporting period: Annual report for the fiscal year ended December 31, 2020, filed April 13, 2021. The filing does not present standalone fourth-quarter results; the figures below are full-year results. Financial statements were prepared under U.S. GAAP.
Business context
ATA Creativity Global is a Cayman Islands holding company whose operations are primarily in China. Following the 2018 sale of the ATA Online testing business and the 2019 acquisition of Huanqiuyimeng, the Company focused on creative-arts international education, including portfolio training, research-based learning, overseas study counseling, other educational services, and K-12 assessment services. The Company had approximately 3,800 enrolled students and 22 training centers as of the filing date.
Key financial metrics
| RMB millions, except percentages and per-share data | FY2019 | FY2020 | Change |
|---|---|---|---|
| Net revenue | 97.8 | 162.2 | +65.9% |
| Gross profit | 35.9 | 63.6 | +77.5% |
| Gross margin | 36.7% | 39.2% | +2.5 percentage points |
| Operating expenses | 154.2 | 171.5 | +11.2% |
| Loss from continuing operations, net of tax | (134.1) | (100.6) | Loss narrowed |
| Net loss attributable to ACG | (122.3) | (92.2) | Loss narrowed |
| Basic and diluted loss per common share | RMB (2.52) | RMB (1.57) | Improved |
| Net cash used in operating activities | (57.9) | (27.9) | Outflow reduced |
| Cash and cash equivalents at year-end | 154.2 | 112.7 | (26.9%) |
FY2020 revenue included a full year of Huanqiuyimeng operations, compared with approximately five months in FY2019. Portfolio training generated RMB113.2 million, or 69.8% of revenue; research-based learning generated RMB4.5 million; overseas study counseling RMB21.1 million; other educational services RMB20.0 million; and K-12 assessment and other services RMB3.4 million.
Operating expenses included RMB100.1 million of general and administrative expense, RMB53.5 million of sales and marketing expense, and RMB8.8 million of research and development expense. The Company also recorded RMB3.1 million of intangible-asset impairment, RMB5.9 million of provisions for Beijing Biztour receivables, and RMB1.7 million of long-term investment impairment.
Liquidity, debt and commitments
- Cash and cash equivalents were RMB112.7 million, or approximately US$17.3 million, at December 31, 2020.
- Operating cash flow remained negative at RMB27.9 million; investing cash outflow was RMB19.1 million and financing cash inflow was RMB6.3 million.
- Reported short-term loans were RMB6.8 million, including RMB2.0 million of bank borrowings and RMB4.8 million of other borrowings. The RMB2.0 million bank balance was fully repaid by March 31, 2021.
- The Company stated that it had no other outstanding debt securities, contingent liabilities, mortgages or liens, apart from disclosed borrowings and commitments.
- Contractual obligations included RMB45.8 million of operating lease payments and RMB10.0 million payable to Tsinghua University under a research-support agreement, principally due within one year.
- Deferred revenue increased to RMB199.4 million from RMB171.9 million, reflecting significant customer prepayments and remaining service obligations.
Material changes versus FY2019
- Revenue growth primarily reflected the inclusion of a full year of Huanqiuyimeng results in FY2020 rather than a comparable full-year organic increase.
- Gross margin improved to 39.2% from 36.7%, while the gross profit increase was partly offset by higher administrative and sales and marketing expenses.
- Sales and marketing expense rose 56.8%, largely because FY2020 included a full year of Huanqiuyimeng costs.
- Research and development expense declined 25.3% because of lower headcount and labor costs.
- Operating cash outflow improved but remained negative, and cash declined by RMB41.5 million during the year.
- COVID-19 caused most training centers to close from February through May 2020. Most reopened by June, but enrollment, offline courses, overseas study counseling and travel-related services were adversely affected. Approximately 30% of services were delivered online on average during 2020, rising to approximately 75% during January through May.
- The Company repurchased 450,337 ADSs for approximately US$0.6 million under a program that expired December 31, 2020.
Guidance, outlook and management commentary
The filing provides no quantitative revenue or earnings guidance. Management stated that expected operating cash flows were sufficient for present working-capital and capital-expenditure needs and that current expansion plans did not require significant capital commitments. Management continued to explore strategic acquisitions and investments in international education, while acknowledging that additional financing could be required for future projects or changed business conditions.
Management planned to expand online and hybrid course delivery, increase small-group classes, improve teacher utilization and margins, and broaden domestic and online research-based learning programs. The Company emphasized that future performance depends on COVID-19 developments, student enrollment, pricing, teacher retention, regulatory requirements, overseas-school relationships and competition.
Principal risks, contingencies and unusual items
- COVID-19 and travel restrictions: Further closures, delayed enrollments, refunds, canceled travel programs and reduced overseas study demand could materially affect revenue and cash flow.
- Accounting controls: Management identified one material weakness as of December 31, 2020 involving complex U.S. GAAP accounting and disclosure issues and insufficient qualified financial-reporting personnel. Disclosure controls and procedures were deemed ineffective. The auditor did not provide an internal-control attestation.
- Goodwill concentration: Goodwill was RMB194.8 million at year-end, including RMB176.0 million assigned to overseas art study services. The goodwill impairment test depends on forecast revenue growth, operating margins and discount rates.
- VIE structure and PRC regulation: The Company relies on contractual arrangements with ATA Intelligent Learning, rather than direct ownership, to control certain restricted activities. Changes in PRC law or enforcement could impair control or require restructuring.
- Education licensing: Some training centers had not obtained private-school operating permits, and HQYM had not obtained an ICP license, creating regulatory uncertainty for online and training activities.
- Litigation: Three lawsuits relating to the 2018 sale of ATA Online remained in preliminary stages. Plaintiffs sought to invalidate transaction-related actions, recover assets or damages, and obtain legal-cost reimbursement. No loss was accrued because an unfavorable outcome was not considered probable and the amount could not be reasonably estimated.
- Foreign exchange and fund transfers: Most revenue and expenses are denominated in RMB. Currency controls and restrictions on dividends from PRC subsidiaries may limit the Company’s ability to move cash offshore or fund the parent.
- Listing and audit-access risk: The Company regained compliance with Nasdaq’s minimum bid-price requirement in July 2020, but continued listing and PCAOB inspection restrictions remain risks for China-based issuers.
Important facts for investors to verify
- Separate the effect of the full-year Huanqiuyimeng consolidation from underlying organic revenue and margin trends.
- Review the audited cash-flow statement, particularly recurring operating cash burn, customer prepayments and the decline in cash balances.
- Assess the recoverability of RMB194.8 million of goodwill and the sensitivity of the valuation assumptions.
- Track remediation of the material weakness and whether disclosure controls and internal control over financial reporting become effective.
- Monitor COVID-19 effects on enrollment, refunds, online-course economics and overseas study and travel demand.
- Review the status and potential financial exposure of the three ATA Online sale lawsuits.
- Confirm outstanding related-party borrowings, guarantees, VIE arrangements and required PRC registrations or permits.
- Evaluate the liquidity available at the Cayman Islands parent versus cash held by PRC subsidiaries and the ability to transfer funds across jurisdictions.