Filing Overview
The supplied filing is Tarena International, Inc.’s annual report on Form 20-F for the fiscal year ended December 31, 2020, not a 2020 quarterly filing and not a filing for “Visionsys AI Inc.” The company provides adult professional education and K-12 education services in China and reports under U.S. GAAP. Its ADSs trade on Nasdaq under TEDU.
The filing was signed April 13, 2021. The consolidated financial statements were audited by Marcum Bernstein & Pinchuk LLP, which issued unqualified opinions on the financial statements and internal control over financial reporting.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | RMB1,897.9 million | RMB2,051.4 million | Down 7.5% |
| Gross profit | RMB831.0 million | RMB877.5 million | Down 5.3% |
| Gross margin | 43.8% | 42.8% | Up 1.0 percentage point |
| Operating loss | RMB806.4 million | RMB1,098.2 million | Loss narrowed |
| Net loss | RMB771.2 million | RMB1,038.9 million | Loss narrowed 25.8% |
| Net loss attributable to ordinary shareholders | RMB766.6 million | RMB1,036.1 million | Loss narrowed |
| Loss per share and ADS | RMB14.11 | RMB19.41 | Improved |
| Operating cash flow | Use of RMB108.8 million | Use of RMB31.7 million | Cash use increased |
| Capital expenditures | RMB71.5 million | RMB161.3 million | Down 55.7% |
U.S. dollar figures use RMB6.5250 per US$1.00. Reported 2020 revenue and net loss were approximately US$290.9 million and US$118.2 million, respectively.
Revenue and Operating Trends
- Adult education revenue declined 25.6% to RMB1,136.1 million, while adult enrollments fell 23.3% to approximately 83,400.
- K-12 revenue increased 45.3% to RMB761.8 million, while K-12 enrollments increased 42.7% to approximately 141,600.
- K-12 gross profit was RMB115.3 million, compared with a gross loss of RMB21.9 million in 2019, but the segment remained much less profitable than adult education.
- Cost of revenue declined 9.1% to RMB1,066.8 million. Selling and marketing expense declined 19.1% to RMB906.3 million, general and administrative expense declined 12.8% to RMB630.6 million, and research and development expense declined 24.3% to RMB100.5 million.
- Four courses represented 66.9% of 2020 revenue: K-12 computer programming, digital arts, K-12 robotics programming and Java.
Cash, Liquidity and Debt
- Cash, cash equivalents, time deposits and restricted cash totaled RMB364.8 million at December 31, 2020, including RMB320.2 million of cash and cash equivalents and RMB38.4 million of restricted cash.
- Total liabilities were RMB3,098.5 million versus total assets of RMB1,959.2 million. Shareholders’ equity attributable to Tarena was negative RMB1,132.0 million.
- Current liabilities were RMB2,669.1 million, including RMB1,980.1 million of current deferred revenue and RMB199.1 million of current operating lease liabilities.
- Short-term bank loans totaled RMB10.7 million at year-end. The company repaid RMB89.2 million of borrowings during 2020. Office buildings with a carrying value of RMB197.7 million secured the borrowing and were released from pledge in February 2021.
- Operating lease commitments totaled RMB686.7 million, including RMB243.9 million due in 2021.
- Management stated that available liquidity and expected operating cash flow should support the next 12 months. However, the financial statement note reported substantial doubt about going-concern status before considering management’s plans, citing net losses, net current liabilities of RMB2,132.9 million and insufficient cash to meet obligations as they become due. The auditor identified going-concern assessment as a critical audit matter.
Material Changes Versus the Prior Period
- Revenue declined because COVID-19 reduced course consumption and adult enrollments. Learning centers were temporarily closed from February through May 2020, with online instruction used during the disruption.
- Cost reductions and lower marketing, administrative and research spending improved the gross margin and reduced the operating loss, but the company remained deeply unprofitable.
- Cash flow deteriorated from RMB31.7 million of operating cash use in 2019 to RMB108.8 million in 2020, despite a RMB412.2 million increase in deferred revenue.
- Deferred revenue increased from RMB1,586.0 million to RMB1,998.2 million. Revenue expected from contracts with original terms exceeding one year was RMB131.3 million, primarily expected to be recognized in 2021 and 2022.
- The company reduced adult learning centers from 130 to 104 and increased K-12 learning centers from 217 to 236.
- Material weaknesses in internal control reported for 2019 were remediated according to management and the auditor; both concluded controls were effective as of December 31, 2020.
- The filing reiterates that prior financial information for 2014 through 2017 was restated following an audit committee investigation into revenue recognition and related controls. Prior filings and related audit opinions should not be relied upon.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue, earnings or enrollment guidance is provided. Management’s stated priorities include increasing revenue, expanding online courses, controlling costs, improving operating assessments and enhancing internal controls.
- Management identified potential funding sources including an unused RMB200 million credit line, sale of certain properties and possible sale of treasury shares. The filing does not establish that these sources will be available on acceptable terms or sufficient to resolve liquidity pressure.
- COVID-19 remains a material risk because renewed outbreaks could interrupt in-person classes, recruiting and operations. The ultimate duration and financial effect were described as not reasonably estimable.
- Regulatory and licensing risks are significant. As of December 31, 2020, 118 subsidiary-operated learning centers lacked “professional education services” or education-information consultation in their authorized business scope, and 18 school-operated centers operated outside their registered address without required registration.
- The company operates through a PRC variable interest entity for certain online services. Changes in PRC foreign-investment, education, telecommunications or VIE regulation could impair control, licensing or consolidation.
- On December 8, 2020, founder and chairman Shaoyun Han submitted a preliminary non-binding proposal to acquire unaffiliated Class A shares for US$4.00 per ADS. A special committee retained Duff & Phelps and Gibson Dunn. As of the filing date, no definitive offer or agreement had been reached.
- The company reported no material pending legal proceedings, but remains exposed to potential regulatory inquiries, shareholder claims and costs related to the prior investigation and restatement.
- Student-loan guarantees create potential credit losses. Only 15.0% of 2020 students used financing, down from 52.3% in 2019, but the company remains exposed to financing-provider availability and borrower defaults.
- The company had RMB288.6 million of gross deferred tax assets and a RMB146.4 million valuation allowance. Tax-loss carryforwards totaled RMB2,353.8 million, with substantial amounts expiring between 2021 and 2025 if unused.
Investor Verification Checklist
- Confirm the issuer identity: the source filing is for Tarena International, Inc., whereas the request identifies Visionsys AI Inc.
- Reconcile the going-concern disclosure with management’s liquidity assertion, including the availability of the RMB200 million credit line, property-sale proceeds and treasury-share proceeds.
- Assess whether K-12 growth can offset continued adult-education contraction while improving K-12 margins and cash generation.
- Verify the status, terms and financing of the proposed US$4.00-per-ADS privatization transaction.
- Review the effectiveness and durability of the 2020 internal-control remediation, particularly given the prior revenue-recognition investigation and restatement.
- Monitor PRC education, online-training, licensing and VIE regulations and the compliance status of affected learning centers.
- Evaluate deferred-revenue quality, refund liabilities, student-loan guarantee exposure and the convertibility of deferred revenue into cash.
- Confirm the company’s ability to fund RMB686.7 million of lease commitments and other obligations while operating cash flow remains negative.