UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
☐
☒
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
Commission file number: 001-33910
For the transition period from to
OR
ATA Creativity Global
(Exact Name of Registrant as Specified in Its Charter)
Not applicable
(Translation of Registrant’s Name Into English)
Cayman Islands
(Jurisdiction of Incorporation or Organization)
c/o 1/F East Gate, Building No. 2, Jian Wai Soho,
No. 39 Dong San Huan Zhong Road,
Chao Yang District, Beijing 100022, China
(Address of Principal Executive Offices)
Amy Tung
Chief Financial Officer
ATA Creativity Global
c/o 1/F East Gate, Building No. 2, Jian Wai Soho,
No. 39 Dong San Huan Zhong Road,
Chao Yang District, Beijing 100022, China
Telephone: +8610-6518-1133
Facsimile: +8610-5869-8106
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
American Depositary Shares, each representing two common shares,
par value $0.01 per share
Trading
Symbol(s)
AACG
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Name of each exchange on which
registered
Nasdaq Global Market
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
63,247,176 common shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued
by the International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Item 17 ☐ Item 18
☐ Yes ☒ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
☐ Yes ☐ No
TABLE OF CONTENTS
Page
Introduction
Forward-looking Statements
Part I.
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on the Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II.
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fee and Services
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16F. Change in Registrant’s Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Item 16I. Disclosure regarding Foreign Jurisdictions that Prevent Inspections
Part III.
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Signature
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Except where the context otherwise requires and for purposes of this annual report only:
INTRODUCTION
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unless otherwise noted, all references to years are to the calendar years from January 1 to December 31 and references to our fiscal year or years are to the
fiscal year or years ended December 31.
the “Company” refers to ATA Creativity Global, formerly known as ATA Inc.
the “VIE” refers to ATA Intelligent Learning (Beijing) Technology Limited, our variable interest entity based in China, and its subsidiary, as the context
requires.
“we,” “us,” “our company,” “our” and “ACG” refer to the Company and its subsidiaries, as the context requires. On August 16, 2018, we completed the sale of
ATA Online (Beijing) Education Technology Co., Ltd., or ATA Online, and its subsidiaries as well as ATA Learning (Beijing) Inc., or ATA Learning, and
Zhongxiao Zhixing Education Technology (Beijing) Limited, or Zhongxiao Zhixing, which were former subsidiaries of the Company incorporated under the
laws of China and holding companies of ATA Online (collectively referred to as the “ATA Online Business”). After the completion of such sale of the ATA
Online Business, the Company’s subsidiaries no longer include ATA Online and its direct shareholding companies, ATA Learning and Zhongxiao Zhixing. In
2019, we and the VIE completed the acquisition of 100% equity interests in Beijing Huanqiuyimeng Education Consultation Corp., or Huanqiuyimeng, a
leading provider of educational services for students in China interested in applying for overseas art study (the “Huanqiuyimeng Acquisition”). After the
completion of the Huanqiuyimeng Acquisition, the Company’s subsidiaries include Huanqiuyimeng and its subsidiaries.
the “WFOE” refers to ATA Education Technology (Beijing) Limited, formerly known as ATA Testing Authority (Beijing) Limited.
“China,” “Chinese” and “PRC” refer to the People’s Republic of China, excluding, for purposes of this annual report only, Taiwan and the Special
Administrative Regions of Hong Kong and Macau.
all references to “Renminbi” or “RMB” are to the legal currency of China, and all references to “U.S. dollars,” “dollars,” “$” or “US$” are to the legal
currency of the United States.
“U.S. GAAP” refers to generally accepted accounting principles in the United States.
“PRC GAAP” refers to generally accepted accounting principles in the People’s Republic of China.
“credit hour” refers to the standard unit we use to measure educational credit for our portfolio training services (as defined below) and other educational
services; each credit hour roughly equals one hour of time committed by our teachers in our portfolio training services and other educational services.
This annual report on Form 20-F includes our audited consolidated financial statements as of December 31, 2020 and 2021 and for each of the years in the three-year
period ended December 31, 2021, and the related notes. Each of our American depositary shares, or ADSs, represents two common shares. Our ADSs are listed on the Nasdaq
Global Market, or Nasdaq, under the symbol “AACG”.
We conduct our business primarily in China and the majority of our revenues and expenses are denominated in Renminbi. The conversion of Renminbi into U.S. dollars
in this annual report is based on the noon buying rate in the City of New York for cable transfers of Renminbi per U.S. dollars certified for customs purposes by the Federal
Reserve Bank of New York, as set forth in the H.10 weekly statistical release of the Federal Reserve Board. Unless otherwise noted, all translations from Renminbi to U.S.
dollars in this annual report are made at a rate of RMB 6.3726 to US$1.00, the noon buying rate in effect as of December 31, 2021. We make no representation that any
Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all.
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FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and
our industry. All statements other than statements of historical facts in this annual report are forward-looking statements. In some cases, these forward-looking statements can
be identified by words and phrases such as “may,” “should,” “intend,” “predict,” “potential,” “continue,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “believe,” “is /are
likely to” or the negative form of these words and phrases or other comparable expressions. The forward-looking statements included in this annual report relate to, among
others:
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our goals and strategies;
our future prospects and market acceptance of our products and services;
our future business development and results of operations;
our plans for mergers and acquisitions;
the impact of the sale of the ATA Online Business;
the impact of the Huanqiuyimeng Acquisition;
projected revenues, profits, earnings and other estimated financial information;
our plans to expand and enhance our products and services, and increase our online and hybrid offerings;
the potential market size and growth of our products and services;
competition in the market for our products and services;
Chinese laws, regulations and policies, including those applicable to the education industry, internet content providers, variable interest entity and foreign
exchange;
the impact of the political tensions between the United States and China or other countries, and the impact of actual or potential international military actions;
the impact of the outbreak and continuing spread of the coronavirus disease, or COVID-19, and other pandemics or natural disasters; and
assumptions underlying or related to any of the foregoing.
These forward-looking statements involve various risks, assumptions and uncertainties. Although we believe that our expectations expressed in these forward-looking
statements are reasonable, our expectations may turn out to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that
could cause our actual results to be materially different from our expectations are generally set forth in “Item 3.D. Risk Factors” and elsewhere in this annual report.
The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. All
forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section and under the heading “Risk Factors” below. Except to the extent required by applicable laws and regulations, we undertake no
obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of
unanticipated events.
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PART I.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
Overview
We are an international educational services provider focusing on providing quality international educational experiences related to the cultivation and improvement of
students’ creativity. Currently, our principal product and service are portfolio training services which we provide to students in China who are interested in studying art
overseas. We believe we are one of the leading players in the portfolio training market in many regards, including geographic coverage, product breadth and student enrollment,
among others. To achieve our one-stop service strategy, we also provide research-based learning services, overseas study counselling services, in-school art classes through
cooperation with high schools, foreign language training services, junior art education and other educational services to our students. We have successfully helped thousands of
students in China gain entry into art universities and colleges in the U.S., UK, Europe, Japan, Australia and other countries, among which quite some have gained entry into top
art universities and colleges in such countries. While working on developing new international education related products and services, we are also exploring acquisition
opportunities in the international education sector to broaden our service spectrum.
For the fiscal year ended December 31, 2021, we had 4,287 students enrolled, of which 53.3% were enrolled in our portfolio training programs and the remainder were
enrolled in our other programs. Our net revenues were RMB 97.8 million, RMB 162.2 million and RMB 202.2 million ($31.7 million) in the fiscal years ended December 31,
2019, 2020 and 2021, respectively.
We are not a Chinese operating company but a Cayman Islands holding company with operations conducted through our PRC subsidiary Huanqiuyimeng and its
subsidiaries. The Company, through its wholly owned subsidiary ACG International Group Limited, or ACGIGL, holds 69.04% of the equity interests of Huanqiuyimeng. The
Company also has the power to direct activities of the VIE through the WFOE and consolidates the VIE into its consolidated financial statements under U.S. GAAP. As of the
date of this annual report, the VIE has no business operations of its own, but holds 30.96% equity interests in Huanqiuyimeng, and 70% equity interests in Beijing Zhenwu
Technology Development Co., Ltd., or Beijing Zhenwu, a PRC company newly established in August 2021 for purpose of developing and marketing our project-based learning
services in form of short-term art courses but has no business operations as of the date of this annual report. Other than holding equity interests in Huanqiuyimeng and Beijing
Zhenwu, the VIE also holds minority investments in two PRC companies. Notwithstanding the foregoing, as we are currently expanding our online courses and other services,
for which an internet content provision license, or ICP license, may be required under PRC law, we may elect to provide such services through the VIE in the future if and to
the extent that an ICP license or any other license or permission not available for foreign-invested companies is required. The variable interest entity structure is a structure
commonly used to provide contractual exposure to foreign investment in China-based companies where PRC law prohibits direct foreign investment in the related Chinese
operating companies, and investors may never be able to directly hold equity interests in the VIE. This structure involves unique risks to investors and PRC regulatory
authorities could disallow our variable interest entity structure, which may result in a material change in our operations and/or value of our ADSs, including that it could cause
the value of our ADSs to significantly decline or become worthless. See “Item 3.D. Risk Factors — Risks Relating to our Corporate Structure.” for more detailed discussions.
We operate business primarily in China and are subject to complex and evolving PRC laws and regulations. Uncertainties in the PRC legal system and the interpretation
and enforcement of PRC laws and regulations could limit the legal protection available to you and us, hinder our ability to offer our ADSs in the future, result in a material
adverse effect on our business operations, and damage our reputation, which might further cause our ADSs to significantly decline in value or become worthless. See “Item
3.D. Risk Factors — Risks Relating to Doing Business in the People’s Republic of China.”
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Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations and overseas listing in China with little advance
notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using variable interest entity
structure, publishing new regulations for public comment requiring Chinese companies conducting direct and indirect overseas securities offering and listing to complete filing
procedure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. Since these statements and regulatory
actions are new or still evolving, it is highly uncertain what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated,
if any, and the potential impact of such modified or new laws and regulations will have on our daily business operation, the ability to accept foreign investments and list on an
U.S. or other foreign exchange. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business” and “Item 3.D. Risk Factors — Risks Relating to Doing
Business in the People’s Republic of China.”
Our Corporate Structure
We are not a Chinese operating company but a Cayman Islands holding company with operations conducted through our PRC subsidiary Huanqiuyimeng and its
subsidiaries. 69.04% of the equity interests of Huanqiuyimeng is indirectly owned by the Company through ACGIGL, a wholly owned subsidiary of the Company, and 30.96%
equity interests of Huanqiuyimeng is owned by the VIE. We, through the WFOE, entered into a series of contractual arrangements with the VIE and its shareholders, including
(i) powers of attorney under which we can exclusively exercise all rights of shareholders of the VIE; (ii) exclusive technical consulting and services agreement that allows us to
have sole and exclusive right to provide specified technical and consulting services to the VIE and receive certain consulting fees from the VIE; (iii) call option and cooperation
agreement and loan agreements that provide us with the option to purchase the equity interest in the VIE; and (iv) equity interest pledge agreements that guarantee the
performance of the VIE and its shareholders’ obligations under the exclusive technical consulting and services agreement and the call option and cooperation agreement. Under
U.S. GAAP, pursuant to such contractual arrangements, the Company (i) has the power, through the WFOE, to direct activities of the VIE that most significantly impact the
economic performance of the VIE; and (ii) the obligation to absorb the losses and the right to receive benefits of the VIE that could potentially be significant to the VIE. As
such, the Company is deemed to be the primary beneficiary of the VIE for accounting purposes and must consolidate the VIE. See “Item 4.A. History and Development of the
Company — Our Consolidated Variable Interest Entity.” and “Item 4.A. History and Development of the Company — Contractual Arrangements with the VIE.” However,
these contractual arrangements may be less effective in providing operational control than direct ownership as the VIE’s shareholders may fail to perform their obligations
under the contractual arrangements and we could incur substantial costs in enforcing these contractual arrangements if we are able to enforce these contractual arrangements at
all. Our rights under such contractual arrangements have not been tested in a court of law, and we cannot assure you that a court would enforce our contractual rights. There are
substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to such contractual arrangements, including
potential future actions by the PRC government, which could affect the enforceability of our contractual arrangements with the VIE, and consequently, significantly affect our
financial condition and results of operations. If the PRC government finds such agreements non-compliant with relevant PRC laws, regulations, and rules, we could be subject
to severe penalties or be forced to relinquish our interests in the VIE or forfeit our rights under the contractual arrangements. See “Item 3.D. Risk Factors — Risks Relating to
our Corporate Structure.”
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The following diagram illustrates the simplified corporate structure of us and the VIE as of the date of this annual report:
(1)
(2)
(3)
(4)
Notes:
ATA Creativity Global is the entity in which investors hold or can purchase their interest.
As of the date of this annual report, the VIE has no business operations of its own.
Beijing Zhenwu was established in August 2021 mainly for purposes of developing and marketing our project-based learning services in the form of short-term art
courses, and has no substantive business operations as of the date of this annual report.
We conduct our operations through Huanqiuyimeng and its subsidiaries. Huanqiuyimeng provides most of the portfolio training services, overseas study counselling
services and research-based learning services, as well as certain other educational services by itself, and also provides some of such services through its wholly or
majority owned subsidiaries. Huanqiuyimeng has 9 directly or indirectly wholly owned subsidiaries and 6 directly or indirectly majority owned subsidiaries.
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Government Regulations and Permissions
As of the date of this annual report, we believe that the Company, its subsidiaries and the VIE have received all requisite permissions and approvals from the PRC
government authorities to operate their business in the PRC and offer securities to foreign investors, and no permissions or approvals have been denied. We have obtained an
opinion from Jincheng Tongda & Neal Law Firm, our PRC legal counsel, with respect to all permissions and approvals necessary to operate our business in the PRC and offer
securities to foreign investors. However, as PRC laws and regulations with respect to certain licenses and permissions are unclear and are subject to interpretations and
enforcement of local governmental authorities, we may inadvertently conclude that certain permissions and approvals are not required but the regulators do not take the same
view as we do. Also, if applicable laws, regulations or interpretations change, the Company, its subsidiaries and the VIE may be required to obtain additional licenses or
approvals.
Below is a table summarizing (i) all permissions and approvals the Company, its subsidiaries or the VIE are required to obtain from the PRC government authorities for
their business operations in the PRC as of the date of this annual report; (ii) permissions and approvals which we may inadvertently conclude are not required but the regulators
may not take the same view as we do, and (iii) permissions and approvals that are not required as of the date of this annual report but we believe may be required in the future
due to changes or passing of applicable laws, regulations, or interpretations, based on information available to the Company.
Permissions and approvals the
Company, its subsidiaries or
the VIE are required to obtain
from the PRC government
authorities for their business
operations in the PRC
Permissions and approvals
which we may inadvertently
conclude are not required but
the regulators may not take
the same view as we do
Permissions and
approvals
Holders of permissions
and approvals
Consequences for not obtaining such permissions
and approvals
Business License
PRC subsidiaries of the
Company and the VIE
Registration and Filing
of Foreign-invested
Enterprises
The WFOE and
Huanqiuyimeng
Not applicable as all entities required to obtain such
permissions and approvals have obtained such
permissions and approvals.
Operating Permit for
Private School (see
below for more detailed
discussion)
Qingdao Haili Education
Consultation Co., Ltd. has
obtained an Operating
Permit for Private School for
our training center in
Qingdao. Other than that,
none of our training centers
have obtained an Operating
Permit for Private School
Our training centers may be subject to various
penalties, including fines, orders to promptly rectify
the non-compliance, or if the non-compliance is
deemed serious by the regulators, our training centers
may be ordered to return course and service fees
collected and pay a multiple of the amount of returned
course and/or service fees to regulators as a penalty or
may even be ordered to cease operations, which could
materially and adversely affect our business, results
of operations, financial condition, and the value of
our ADSs.
None
Travel Agency
Business License (see
below for more detailed
discussion)
Our PRC subsidiaries engaged in research-based
learning services may be subject to non-compliance
rectification order, confiscation of illegal income
from such business, or fines, which could materially
and adversely affect our business, financial condition,
results of operations and the value of our ADSs.
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Permissions and
approvals
Holders of permissions
and approvals
Consequences for not obtaining such permissions
and approvals
ICP license (see below
for more detailed
discussion)
The VIE
Permissions and approvals
that are not required as of the
date of this annual report but
we believe may be required in
the future due to changes or
passing of applicable laws,
regulations, or interpretations
Filing with the CSRC
under the Overseas
Offering and Listing
Regulations Drafts (see
below for more detailed
discussion)
Not applicable
Not applicable
Cybersecurity review
clearance (see below
for more detailed
discussion)
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Our PRC subsidiaries delivering online courses
services may be subject to non-compliance
rectification order, confiscation of illegal income
from such business, or fines; or if the non-compliance
is deemed serious by the regulators, may be ordered
to suspend business for rectification, which could
materially and adversely affect our business, financial
condition, results of operations and the value of our
ADSs.
The PRC subsidiaries of the Company or the VIE
may be subject to non-compliance rectification order,
disciplinary conversations, warning letters, or fines, or
if the non-compliance is deemed serious by the
regulators, may be ordered to cease operations and
subject to revocation of relevant business operation
permissions or business licenses, which could
materially and adversely affect our business, financial
condition, and results of operations, and/or the value
of our ADSs, or could significantly limit or
completely hinder our ability to offer or continue to
offer securities to investors and cause the value of
such securities to significantly decline or be
worthless.
The Company, its subsidiaries and the VIE may be
required to suspend relevant business, shut down
relevant website, or face other penalties, which could
materially and adversely affect our business, financial
condition, and results of operations, and/or the value
of our ADSs, or could significantly limit or
completely hinder our ability to offer or continue to
offer securities to investors and cause the value of
such securities to significantly decline or be
worthless.
Permissions and
approvals
Holders of permissions
and approvals
Consequences for not obtaining such permissions
and approvals
Not applicable
Security Assessment of
Cross-border Transfer
of Personal
Information/ Personal
Information Protection
Certification
Not applicable
Clearance under the
Draft Confidentiality
Provisions (see below
for more detailed
discussion)
The Company, its subsidiaries and the VIE may be
subject to non-compliance rectification order,
warning, confiscation of illegal income or fines, or if
the non-compliance is deemed serious by the
regulators, suspension of relevant business and
revocation of relevant business operation permissions
or business licenses, which could materially and
adversely affect our business, financial condition, and
results of operations, and/or the value of our ADSs.
The Company, its subsidiaries and the VIE may be
subject to investigation, fines and other penalties; and
if any related behavior is suspected as a crime, may
be subject to criminal penalties, which could
materially and adversely affect our business, financial
condition, and results of operations, and/or the value
of our ADSs.
Potential Permissions and Approvals for Business Operations
Operating Permit for Private School
According to the Law for Promoting Private Education, as amended by the Standing Committee of the National People’s Congress of the PRC, or the NPC, on
December 29, 2018 (the “Amended Private Education Law”), and the Amended Implementation Rules for the Law for Promoting Private Education newly promulgated by the
State Council on April 7, 2021 which became effective since September 1, 2021 (the “Amended Implementation Rules”), private schools are required to obtain operating
permits from relevant PRC authorities for carrying out educational activities. Although the Amended Private Education Law generally states that private education institutions
are also included in the category of “private schools”, as of the date of this annual report, relevant implementing rules only require private education institutions providing
tutoring services on academic subjects for K-12 students and certain vocational skill education services to obtain private school operating permits, and there are no implementing
rules that require private education institutions focusing on art or other non-academic cultural education to obtain private school operating permits. To date, our PRC
subsidiaries operating our training centers have not received any notifications which require them to obtain private school operating permits. However, since related regulatory
regime of education industry in the PRC continues to rapidly evolve, the interpretations of relevant regulations and rules are not always uniform, and the enforcement of relevant
regulations and rules involve uncertainties, we cannot assure you that our training centers will not be classified as “private schools” and thus be required to obtain the private
school operating permits by the regulators due to any future and further development, interpretation and enforcement of relevant regulations and rules. To date, only one of our
training centers in Qingdao has obtained an private school operating permit. If we inadvertently conclude that such permissions are not required but the regulators do not take
the same view as we do, our training centers may be subject to various penalties, including fines, orders to promptly rectify the non-compliance, or if the non-compliance is
deemed serious by the regulators, our training centers may be ordered to return course and service fees collected and pay a multiple of the amount of returned course and/or
service fees to regulators as a penalty or may even be ordered to cease operations. If this occurs, our business, results of operations, financial condition and the value of our
ADSs could be materially and adversely affected.
Operating Permit for Travel-related Activity
The Tourism Law of the PRC, which was promulgated by the Standing Committee of the NPC and most recently amended on October 26, 2018, provides that, among
other things, to engage in the businesses of outbound tourism, a travel agency shall obtain the corresponding business permit, and the specific conditions shall be provided for by
the State Council and that when organizing an outbound touring group, or organizing or receiving an inbound touring group, a travel agency shall, in accordance with the
relevant provisions, arrange for a tour leader or tour guide to accompany the touring group in the whole tour. Regulations on Travel Agencies
8
promulgated by the State Council, revised on November 29, 2020, and the implementation rules of Regulations on Travel Agencies, provide that, among other things, the travel
agency shall mean any entity that engages in the business of attracting, organizing, and receiving tourists, providing tourism services for tourists and operating domestic,
inbound or outbound tourism; the aforementioned business shall include but not limit to arranging for transport services, arranging for accommodation services, providing
services for tour guides or team leaders, providing services of tourism consultation and tourism activities design. According to the Regulations on Travel Agencies and its
implementation rules, any tourism agency engages in domestic and outbound tourism shall apply for corresponding permits to engage in such tourism activities from the
administrative department of tourism under the State Council, the governments of provinces, autonomous regions, or municipalities. With respect to our research-based learning
services, our PRC subsidiaries cooperate with third party travel agencies which have travel agency permits for our educational travel activities, such as accommodation and tour
guiding. We don’t think our PRC subsidiaries engaged in such travel-related activities under their cooperation with third party travel are also required to obtain travel agency
permits under the current law rules, and such PRC subsidiaries have not received any notifications which require them to obtain travel agency permit. If we inadvertently
conclude that such permissions are not required but the regulators do not take the same view as we do, the relevant regulators may order such PRC subsidiaries to rectify the
non-compliance, confiscate the illegal income from such business and impose fines on such PRC subsidiaries. If this occurs, our business, results of operations, financial
condition and the value of our ADSs could be materially and adversely affected.
ICP license
On September 25, 2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Measures, which was amended in
January 2011. Under the Internet Measures, commercial internet information services operators shall obtain an ICP license from the relevant government authorities before
engaging in any commercial internet information services operations within the PRC. According to the Special Administrative Measures for Market Access of Foreign
Investment (Negative List) (2021 Edition), the provision of information services falls in the restricted category and the percentage of foreign ownership cannot exceed
50%. Since the outbreak of the COVID-19, we have shifted some of our offline courses to online courses and provided them to our students through online platforms of third
party IT service providers. We believe that our PRC subsidiaries providing such online courses are not required to obtain the ICP license as they have not developed their own
platforms but delivered such courses through third party online platforms. To date, our PRC subsidiaries have not received any notifications from PRC governmental
authorities to require them to obtain the ICP license. However, since the enforcement of relevant regulations and rules involve uncertainties, we cannot assure you that the
regulators will take the same view as we do. If we inadvertently conclude that the ICP license is not required for our PRC subsidiaries, our PRC subsidiaries delivering online
courses services may be subject to non-compliance rectification order, confiscation of illegal proceeds, or fines; or if the non-compliance is deemed serious by the regulators,
may be ordered to suspend business for rectification. If this occurs, our business, results of operations, financial condition and the value of our ADSs could be materially and
adversely affected. To date, none of our PRC subsidiaries have obtained the ICP license due to the foreign investment restriction for the ICP license, but the VIE has obtained
the ICP license to preserve our flexibility to operate relevant business. If the ICP license is required in the future or we choose to provide information services through our own
online platform, we will transfer relevant businesses to the VIE to comply with the compliance requirements.
Potential Permissions and Approvals for Offering Securities to Foreign Investors
The Crackdown Opinion
On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions
on Severe and Lawful Crackdown on Illegal Securities Activities, or the Crackdown Opinions. The Crackdown Opinions emphasized the need to strengthen the administration
over illegal securities activities and the supervision on overseas listings by China-based companies. The Crackdown Opinions proposed to take effective measures, such as
promoting the construction of relevant regulatory systems to deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity
and data privacy protection. As of the date of this annual report, we believe the permission and approval of the China Securities Regulatory Commission, or the CSRC, is not
required for the Company, its subsidiaries and the VIE in connection with our listing on Nasdaq, but as the Crackdown Opinions were recently issued, official guidance and
interpretation of the opinions remain unclear in several respects at this time, we cannot assure you that the Company, its subsidiaries and the VIE will remain fully compliant
with all new regulatory requirements of the Crackdown Opinions or any future implementation rules on a timely basis, or at all. If the Company, its subsidiaries and the VIE
are unable to obtain such permission or approval if required in the future, our securities may be delisted from Nasdaq and/or the value of our ADSs may significantly decline or
become worthless. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — The approval, filing or other requirements of the CSRC or other PRC
government authorities may be required under PRC law in connection with our issuance of securities overseas.”
9
Filing with the CSRC under the Overseas Offering and Listing Regulations Drafts
Further to the Crackdown opinion, on December 24, 2021, the CSRC published Provisions of the State Council on the Administration of Overseas Securities Offering
and Listing by Domestic Companies (Draft for Comments) (the “Draft Overseas Offering and Listing Provisions”) and the Administrative Measures for the Filing of Overseas
Securities Offering and Listing by Domestic Companies (Draft for Comments) (the “Draft Registration Measures”, and collectively with the Draft Overseas Offering and
Listing Provisions, the “Overseas Offering and Listing Regulations Drafts”), which provide principles and guidelines for direct and indirect issuance of securities overseas by a
Chinese domestic company. Under the Overseas Offering and Listing Regulations Drafts, the substance rather than the form of issuance will govern when determining whether
an issuance constitutes “indirect issuance of securities overseas by a Chinese domestic company”, and in the event any listing or issuance of securities falls under such
definition, the issuer shall assign one of its related major Chinese domestic operating entities to make filings with CSRC within three business days after its initial public
offering or any offerings after the initial public offering. As of the date of this annual report, the Company, its subsidiaries and the VIE are not required to make filings with or
obtain approval from CSRC in order to maintain the listing status of our common shares on Nasdaq or to conduct offerings of securities as the Offering and Listing Regulations
Drafts have not been issued and taken effect. It is uncertain when the final regulations of the Overseas Offering and Listing Regulations Drafts will be issued and take effect,
and how they will be enacted, interpreted or implemented. We cannot assure you that the Company, its subsidiaries and the VIE will not in the future be required to make
filings with or obtain approvals from the CSRC or potentially other regulatory authorities in order to maintain the listing status of our common shares on Nasdaq or to conduct
offerings of securities in the future. In the event that it is determined that the Company, its subsidiaries and the VIE are required to make filings with or obtain approvals from
the CSRC or any other regulatory authority but fail to make such filings or obtain such approvals timely or at all, the PRC subsidiaries of the Company or the VIE may be
subject to non-compliance rectification order, disciplinary conversations, warning letters, or fines, or if the non-compliance is deemed serious by the regulators, may be ordered
to cease operations and subject to revocation of relevant business operation permissions or business licenses, which could materially and adversely affect our business, financial
condition, and results of operations, and/or the value of our ADSs, or could significantly limit or completely hinder our ability to offer or continue to offer securities to investors
and cause the value of such securities to significantly decline or be worthless. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — The approval,
filing or other requirements of the CSRC or other PRC government authorities may be required under PRC law in connection with our issuance of securities overseas.”
Cybersecurity Review
On December 28, 2021, the Cyberspace Administration of China, or the CAC, published the Measures for Cybersecurity Review (the “Cybersecurity Review
Measures”), which became effective on February 15, 2022, pursuant to which, (i) critical information infrastructure operators purchasing network products and services that
affect or may affect national security, (ii) internet platform operators engaging in data processing activities that affect or may affect national security, and (iii) any internet
platform operator possessing personal information of more than one million users and applying for listing on a foreign exchange, shall be subject to the cybersecurity review by
the CAC. We believe the Company, its subsidiaries and the VIE would not be subject to the cybersecurity review by the CAC, given that the Company, its subsidiaries and the
VIE do not possess a large amount of personal information in our business operations, and data processed in our business does not have a bearing on national security and thus
may not be classified as core or important data by the authorities. However, there remains uncertainty as to how the Cybersecurity Review Measures will be interpreted or
implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the
Cybersecurity Review Measures. If the relevant laws, regulations or interpretations change in the future and the Company, its subsidiaries and the VIE are subject to mandatory
cybersecurity review and other specific actions required by the CAC, we will face uncertainty as to whether any clearance or other required actions can be timely completed, or
at all. If not, the Company, its subsidiaries and the VIE may be required to suspend relevant business, shut down relevant website, or face other penalties, which could
materially and adversely affect our business, financial condition, and results of operations, and/or the value of our ADSs, or could significantly limit or completely hinder our
ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. As of the date of this annual report, the
Company, its subsidiaries and the VIE have not received any notice from regulatory authorities requiring us to go through the cybersecurity review by the CAC. See “Item 3.D.
Risk Factors — Risks Relating to Regulations of Our Business — The approval, filing or other requirements of the CSRC or other PRC government authorities may be required
under PRC law in connection with our issuance of securities overseas.” and “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — Failure to comply with
regulations relating to information security and privacy protection, breaches or perceived breaches of our security measures relating to our service offerings, unauthorized
disclosure or misuse of personal data through breaches of our computer systems or otherwise, could result in negative publicity and loss of students, expose us to protracted and
costly litigation, and harm our business and results of operations. Additionally, it is unclear whether we will be subject to the oversight of the CAC and how such oversight may
impact us.”
10
Security Assessment of Cross-border Transfer of Personal Information/Personal Information Protection Certification
On August 20, 2021, the Standing Committee of the NPC promulgated the Personal Information Protection Law, which took effect on November 1, 2021, pursuant to
which, the personal information processor, where it is necessary to transfer personal information out of the PRC for business and other needs, shall satisfy one of the following
conditions: (i) passing the security assessment by the national cyberspace authorities; (ii) being certified by professional organizations for personal information protection; (iii)
entering into contracts providing the rights and obligations of both parties with overseas recipients in accordance with the standard contract formulated by the national
cyberspace authorities; and (iv) other conditions specified by laws, administration regulations and the national cyberspace authorities. The personal information processors shall
take necessary measures to ensure that the activities of the overseas recipients handling personal information meet the standards of personal information protection stipulated in
the Personal Information Protection Law. If a personal information processor provides personal information cross the border of the PRC, it shall inform the information owners
the name and contact information of the overseas recipients, the purpose and manner of information processing, the type of personal information, and the manner and procedure
for the information owners to exercise their rights under the Personal Information Protection Law over the overseas recipients, and obtain consent of the information owners. As
of the date of this annual report, the amount of personal information transmitted by the Company, its subsidiaries and the VIE across the border is relatively small, and none of
them has received any notice from the national cyberspace authorities requiring them to conduct security assessment. As the national cyberspace authorities have not yet
authorized any professional organizations to conduct personal information protection certification or formulated a standard model contract with overseas recipients, the
Company, its subsidiaries and the VIE would not have any access to complete the personal information protection certification or enter into standard model contracts with
overseas recipients as of the date of this annual report. However, if the relevant laws, regulations or interpretations change in the future and the Company, its subsidiaries and
the VIE are subject to security assessment or personal information protection certification, we will face uncertainty as to whether any required actions can be timely completed,
or at all. If not, the Company, its subsidiaries and the VIE may be subject to non-compliance rectification, warning, confiscation of illegal income or fines, or if the non-
compliance is deemed serious by the regulators, suspension of relevant business and revocation of relevant business operation permissions or business licenses, which could
materially and adversely affect our business, financial condition, and results of operations, and/or the value of our ADSs. See “Item 3.D. Risk Factors — Risks Relating to
Regulations of Our Business — Failure to comply with regulations relating to information security and privacy protection, breaches or perceived breaches of our security
measures relating to our service offerings, unauthorized disclosure or misuse of personal data through breaches of our computer systems or otherwise, could result in negative
publicity and loss of students, expose us to protracted and costly litigation, and harm our business and results of operations. Additionally, it is unclear whether we will be
subject to the oversight of the CAC and how such oversight may impact us.”
Clearance under the Draft Confidentiality Provisions
On April 2, 2022, the CSRC published Provisions on Strengthening the Relevant Confidentiality and Archives Management Work Relating to the Overseas Issuance of
Securities and Listing of Domestic Enterprises (Draft for Comments) (the “Draft Confidentiality Provisions”). According to the Draft Confidentiality Provisions, both “direct
issuance of securities overseas by a Chinese domestic company” and “indirect issuance of securities overseas by a Chinese domestic company” (i.e., issuance of securities by
relevant overseas holding company) shall be subject to the Draft Confidentiality Provisions. Domestic enterprises that provide, publicly disclose files and documents that
contain state secrets and work secrets of the authorities to relevant securities companies, securities service agencies, foreign regulatory agencies and other institutions and
individuals or do so through its overseas listing entities, shall obtain the approval of the competent authorities, file with the competent confidentiality administrative
authorities. As of the date of this annual report, the Draft Confidentiality Provisions has not been officially issued and taken effect. It is uncertain when the final regulations of
the Draft Confidentiality Provisions will be officially issued and take effect, and how it will be enacted, interpreted or implemented. We believe the Company, its subsidiaries
and the VIE would not be subject to clearance under the Draft Confidentiality Provisions as the Company, its subsidiaries and the VIE do not possess any document or file that
involves state secrets or work secrets of the authorities. As of the date of this annual report, the Company, its subsidiaries and the VIE have not received any notice from
regulatory authorities requiring them to obtain the foregoing approval or complete any of the forgoing procedures. However, if the relevant laws, regulations or interpretations
change in the future and the Company, its subsidiaries and the VIE are subject to such clearance, we will face uncertainty as to whether any required approval can be timely
obtained and any actions can be timely completed, or at all. If not, the Company, its subsidiaries and the VIE may be subject to investigation, fines and other penalties; and if
any related behavior is suspected as a crime, may be subject to criminal penalties, which could materially and adversely affect our business, financial condition, and results of
operations, and/or the value of our ADSs. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — The approval, filing or other requirements of the
CSRC or other PRC government authorities may be required under PRC law in connection with our issuance of securities overseas.”
11
Transfer of Cash within Our Organization
We adopt a holding company structure, and our holding companies may rely on dividends and other distributions on equity paid by our current and future PRC
subsidiaries or cash paid by the VIE under the VIE arrangement for their cash requirements, including the funds necessary to service any debt we may incur or financing we may
need for operations not carried through our PRC subsidiaries or the VIE. Due to restrictions on foreign exchange placed on our PRC subsidiaries and the VIE by the PRC
government under PRC laws and regulations, to the extent cash is located in the PRC or within a PRC domiciled entity and may need to be used to fund our operations outside
of the PRC, the funds may not be available due to such limitations unless and until related approvals and registrations are obtained. See “— Restrictions on Foreign Exchange
and Our Ability to Transfer Cash Between Entities, Across Borders, and to U.S. Investors, and Restrictions and Limitations on Our Ability to Distribute Earnings from Our
Businesses” for more detailed discussions.
The Company may transfer funds to ATA BVI, Xing Wei and ACGIGL through capital contribution into or a shareholder loan to such subsidiaries respectively. ATA
BVI and ACGIGL may transfer funds through capital contribution into or a shareholder loan to the WFOE and Huanqiuyimeng respectively. The WFOE and Huanqiuyimeng
may transfer funds to their respective subsidiaries through capital contribution into or a shareholder loan to them. The WFOE provides services including comprehensive
business support, technical services, and consultancy, in exchange for service fees from the VIE. The WFOE may also provide loans to the VIE, subject to statutory limits and
restrictions. In addition, the VIE may also receive dividends from its subsidiaries or investing companies, including Huanqiuyimeng, Beijing Zhenwu, and others.
The following diagram illustrates the typical fund flow through our organization (including the VIE).
12
Cash Flow and Assets Transfer between the Company, Its Subsidiaries, and the VIE
For the years ended December 31, 2019 and 2020, the Company received cash inflows of US$8.8 million and US$1.2 million, respectively, from new investors through
private placements. See line item of “Cash flows from financing activities - Cash received upon private placement” in the Company’s condensed consolidating schedule
depicting the consolidated cash flows under “— VIE Consolidation Schedule” (the “Condensed Cash Flow Schedule”) for fiscal years 2019 and 2020, and the Company’s
consolidated statements of cash flows for fiscal years 2019 and 2020. The Company received RMB4.1 million from subsidiaries of the Company and paid RMB9,692 to
subsidiaries of the Company, respectively, for the year ended December 31, 2021. See line item of “Cash flows from investing activities - Cash received from inter-
companies/Cash paid to inter-companies” in the Condensed Cash Flow Schedule for fiscal year 2021.
Cash is transferred from the Company to its subsidiaries through shareholder loan and capital contribution. For the year ended December 31, 2019, ATA BVI, a
subsidiary of the Company, provided a loan of US$2.0 million to its subsidiaries. These cash flows were classified as investing activities of ATA BVI and financing activities of
its subsidiaries, respectively, and were eliminated within the column of “Subsidiaries of the Company” of the Condensed Cash Flow Schedule for fiscal year 2019. See note 6 to
the Condensed Cash Flow Schedule for fiscal year 2019. For the year ended December 31, 2020, ATA BVI made capital contribution of US$5.0 million to its subsidiaries.
These cash flows were classified as investing activities of ATA BVI and financing activities of its subsidiaries, respectively, and were eliminated within the column of
“Subsidiaries of the Company” of the Condensed Cash Flow Schedule for fiscal year 2020. See note 3 to the Condensed Cash Flow Schedule for fiscal year 2020. For the year
ended December 31, 2020, the Company transferred RMB72.8 million, primarily the proceeds it received from the private placement, to its subsidiaries in support of their
operations. See line items of “Cash flows from investing activities – Cash paid to inter-companies” and “Cash flows from financing activities – Cash received from inter-
companies” in the Condensed Cash Flow Schedule for fiscal year 2020. The Company also received RMB3.8 million from its subsidiaries as repayment of financial support
from the Company. See line items of “Cash flows from investing activities – Cash received from inter-companies” and “Cash flows from financing activities – Cash paid to
inter-companies” in the Condensed Cash Flow Schedule for fiscal year 2020 and note 4 thereto. For the year ended December 31, 2021, subsidiaries of ATA BVI repaid
RMB2.7 million to ATA BVI in relation to the loan borrowed from ATA BVI during the year ended December 31, 2019. This cash flow was classified as investing activities of
ATA BVI and financing activities of its subsidiaries, respectively, and was eliminated within the column of “Subsidiaries of the Company” of the Condensed Cash Flow
Schedule for fiscal year 2021. See note 1 to the Condensed Cash Flow Schedule for fiscal year 2021.
To date, we and the VIE have not distributed any earnings or settled any amounts owed under the VIE Agreements (defined below). We and the VIE do not currently
have any plans to distribute earnings or settle amounts owed under the VIE Agreements.
For the years ended December 31, 2019, 2020 and 2021, due to the fact that the VIE did not provide material services, the VIE did not generate material cash inflows
from the delivery of services, and its cash inflows were primarily provided via loan arrangement from subsidiaries of the Company. For the years ended December 31, 2019,
2020 and 2021, the VIE borrowed RMB42.0 million, RMB15.1 million and RMB5.9 million from subsidiaries of the Company respectively. The VIE repaid RMB28.0 million
and RMB250,000 to subsidiaries of the Company during the years ended December 31, 2019 and 2021 respectively. See line items of “Cash flows from investing activities –
Cash paid to inter-companies/Cash received from inter-companies” and “Cash flows from financing activities – Cash received from inter-companies/Cash repaid to inter-
companies” in the Condensed Cash Flow Schedule for fiscal years 2019, 2020 and 2021. As of December 31, 2021, the outstanding payables due from the VIE to subsidiaries
of the Company were RMB62.8 million, which was eliminated during the consolidation process. See note 1 to the condensed consolidating schedule depicting the consolidated
balance sheets as of December 31, 2021. These cash flows were classified as investing activities of subsidiaries of the Company and financing activities of the VIE,
respectively.
The WFOE provided loans of RMB0.9 million and RMB0.1 million to Mr. Xiaofeng Ma (Chairman and CEO of the Company) and Mr. Haichang Xiong (former
General Legal Counsel of the Company), nominee shareholders of the VIE, as initial capital contribution into the VIE in April 2018, respectively. In December 2018, the
WFOE provided additional loans of RMB8.1 million and RMB0.9 million to Mr. Xiaofeng Ma and Mr. Haichang Xiong as capital contribution into the VIE, respectively. In
April and June 2019, the WFOE provided additional loans in total of RMB36.0 million and RMB4.0 million to Mr. Xiaofeng Ma and Mr. Haichang Xiong as another round of
capital contribution into the VIE, respectively. See the line items of “Cash flows from investing activities - Cash lent to nominee shareholders of the VIE” and “Cash flows from
financing activities - Cash received from nominee shareholders of the VIE” in the Condensed Cash Flow Schedule for fiscal year 2019. In August 2020, the prior nominee
shareholder Mr. Haichang Xiong transferred his 10% equity shares in the VIE to Mr. Jun Zhang (President and Director of the Company, or “new nominee shareholder”) and
paid back the entire RMB5.0 million loan to the WFOE. The WFOE provided a loan in RMB5.0 million to Mr. Jun Zhang to acquire the 10% equity interests of the VIE. See
line item of “Cash flows from investing activities - Cash received upon repayment of loan to a nominee shareholder of the VIE/ Cash paid for issuance loan to a nominee
shareholder of the VIE” respectively in the Condensed Cash Flow Schedule for fiscal year 2020 and note 5 thereto. These cash flows were classified as the related subsidiaries’
investing activities and financing activities of the VIE, respectively. As of December 31, 2021, receivables due from Mr. Xiaofeng Ma and Mr. Jun Zhang in the balance of
RMB45.0 million and RMB5.0 million respectively were recorded as the receivables due from related parties for VIE. See note 2 to the condensed consolidating schedule
depicting the consolidated balance sheets as of December 31, 2021.
13
Other than the above, no assets were transferred among the Company, its subsidiaries, and the VIE for the years ended December 31, 2019, 2020 and 2021.
Dividends or Distributions Made to the Company and Tax Consequences Thereof
The Company’s subsidiaries and the VIE did not make any dividends or distributions to the Company in the fiscal years ended December 31, 2019, 2020 and 2021. If
any dividend is paid by our PRC subsidiaries to the Company in the future, under the PRC Enterprise Income Tax Law, or the EIT Law, and its implementation rules, dividends
from our PRC subsidiaries to its non-PRC shareholders may be subject to a 10% withholding tax if such dividends are derived from profits. If the Company or its offshore
subsidiaries are deemed to be a PRC resident enterprise (we do not currently consider the Company or its offshore subsidiaries to be PRC resident enterprises), the withholding
tax may be exempted, but the Company or its offshore subsidiaries will be subject to a 25% tax on our worldwide income, and our non-PRC enterprise investors may be subject
to PRC income tax withholding at a rate of 10%. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — Under the EIT Law, we may be classified as
a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and U.S. holders of our ADSs or common shares” and “Item 10.E.
Taxation — People’s Republic of China Taxation.” If any payment is made from the VIE to the WFOE pursuant to the contractual arrangements between them, such payments
will be subject to PRC taxes, including business taxes and value-added tax, or VAT.
Dividends or Distributions Made to the U.S. Investors and Tax Consequences Thereof
The Company did not make any dividends or distributions to its shareholders in the fiscal years ended December 31, 2019, 2020 and 2021. Any future determination to
pay dividends will be made at the discretion of our board of directors and will be based upon our future operations and earnings, capital requirements and surplus, general
financial condition, shareholders’ interests, contractual restrictions and other factors our board of directors may deem relevant.
Under the current laws of the Cayman Islands, no Cayman Islands withholding tax is imposed upon any payments of dividends by the Company. However, if the
Company is considered a PRC tax resident enterprise for tax purposes (we do not currently consider the Company to be a PRC resident enterprise), any dividends that the
Company pays to its overseas shareholders may be regarded as China-sourced income and as a result may be subject to PRC withholding tax. See “Item 3.D. Risk Factors —
Risks Relating to Regulations of Our Business — Under the EIT Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in
unfavorable tax consequences to us and U.S. holders of our ADSs or common shares” and “Item 10.E. Taxation — People’s Republic of China Taxation.”
In addition, subject to the passive foreign investment company rules, the gross amount of any distribution that the Company makes to investors with respect to our ADSs
or common shares (including any amounts withheld to reflect PRC withholding taxes) will be taxable as a dividend, to the extent paid out of our current or accumulated
earnings and profits, as determined under United States federal income tax principles. See “Item 10.E. Taxation — United States Federal Income Taxation.”
Restrictions on Foreign Exchange and Our Ability to Transfer Cash Between Entities, Across Borders, and to U.S. Investors, and Restrictions and Limitations on Our
Ability to Distribute Earnings from Our Businesses
We are not a Chinese operating company but a Cayman Islands holding company with operations conducted through our PRC subsidiary Huanqiuyimeng and its
subsidiaries and we may elect to provide such services through the VIE in the future. Due to restrictions on foreign exchange placed on our PRC subsidiaries and the VIE by
the PRC government under PRC laws and regulations, to the extent cash is located in the PRC or within a PRC domiciled entity and may need to be used to fund our operations
outside of the PRC, the funds may not be available due to such limitations unless and until related approvals and registrations are obtained. As a result, although other means
are available for us to obtain financing at the Company level, the Company’s ability to fund operations not carried through our PRC subsidiaries or the VIE, pay dividends to its
shareholders, or service any debt it may incur may depend upon dividends paid by our PRC subsidiaries and license and service fees paid by the VIE. If any of our PRC
subsidiaries or the VIE incurs debt on its own in the future, the instruments governing such debt may restrict its ability to pay dividends to the Company. If any of our PRC
subsidiaries or the VIE is unable to receive all or the majority of the revenues from their operations, we may be unable to pay dividends on our ADSs or common shares.
14
The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. The
majority of our revenue is or will be received in Renminbi and shortages in foreign currencies may restrict our ability to pay dividends or other payments. Under existing PRC
foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made
in foreign currencies without prior approval from the State Administration of Foreign Exchange, or SAFE, as long as certain procedural requirements are met. Approval from
or filing with appropriate government authorities is required if Renminbi is converted into foreign currency and remitted out of China to pay capital expenses such as the
repayment of loans denominated in foreign currencies. The PRC government may, at its discretion, impose restrictions on access to foreign currencies for current account
transactions and if this occurs in the future, we may not be able to pay dividends in foreign currencies to our shareholders or repay our loans.
Also, PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with
PRC GAAP. Each of our PRC subsidiaries is also required under PRC laws and regulations to allocate at least 10% of its after-tax profits determined in accordance with PRC
GAAP to statutory reserves until such reserves reach 50% of its registered capital. Allocations to these statutory reserves and funds can only be used for specific purposes and
are not transferable to us in the form of loans, advances or cash dividends. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal
in the PRC, up to the amount of net assets held in each operating subsidiary. See “Item 3.D. Risk factors — Risks Relating to Regulations of Our Business — Because we may
rely on dividends and other distributions on equity paid by our current and future PRC subsidiaries for our cash requirements, restrictions under Chinese law on their ability to
make such payments could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and
otherwise fund and conduct our businesses.”
In addition, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules relating to VIE
Agreements, and the VIE Agreements with the VIE and its shareholders may not be as effective as direct ownership in providing us with control over the VIE. The uncertainty
with respect to the validity and enforceability of the VIE Agreements may limit our ability to settle amounts owed under the VIE Agreements. See “Item 3.D. Risk Factors —
Risks Relating to Our Corporate Structure.”
VIE Consolidation Schedule
The following tables present the Company’s condensed consolidating schedule depicting the consolidated statements of comprehensive income (loss) for the fiscal
years ended December 31, 2019, 2020 and 2021 of the Company, its subsidiaries, the VIE, and the corresponding eliminating adjustments separately.
Net revenues
Cost and expenses:
Cost of revenues
Operating expenses
Total cost and expenses
Other operating income, net
Loss from operations
Other income
Investment loss
Gain on disposal of subsidiaries and others
Impairment loss of long-term investments
Loss from operations before income taxes
Income tax benefit
Loss from operations, net of income taxes
Net loss
Net loss attributable to non-controlling interests
Net loss attributable to ATA Creativity Global
Year Ended December 31,
2021
The Company
RMB
Subsidiaries
of the
Company
RMB
VIE
RMB
Elimination
adjustments
RMB
—
202,209,465
—
—
Consolidated
RMB
202,209,465
97,323,886
163,895,033
261,218,919
155,369
(58,854,085 )
894,258
—
33,542,154
—
(24,417,673 )
(1,539,577 )
(22,878,096 )
(22,878,096 )
(9,747,545 )
(13,130,551 )
—
1,032,971
1,032,971
—
(1,032,971 )
3,283
(7,042,524 )
—
(6,000,000 )
(14,072,212 )
—
(14,072,212 )
(14,072,212 )
(55,503 )
(14,016,709 )
90,029
6,412,398
6,502,427
—
(6,502,427 )
94
(5,120,016 )
—
—
(11,622,349 )
—
(11,622,349 )
(11,622,349 )
—
(11,622,349 )
15
(2)
—
(133,351 ) (1)
(133,351 )
(133,351 ) (1)
—
—
12,162,540
—
—
12,162,540
—
12,162,540
12,162,540
7,042,524
5,120,016
(2)
97,413,915
171,207,051
268,620,966
22,018
(66,389,483 )
897,635
—
33,542,154
(6,000,000 )
(37,949,694 )
(1,539,577 )
(36,410,117 )
(36,410,117 )
(2,760,524 )
(33,649,593 )
Net revenues
Cost and expenses:
Cost of revenues
Impairment loss of intangible assets
Provision for loan receivable and other receivables
Operating expenses
Total cost and expenses
Other operating income, net
Loss from operations
Other income
Investment loss
Loss on disposal of subsidiaries and others
Impairment loss of long-term investments
Loss from operations before income taxes
Income tax benefit
Loss from operations, net of income taxes
Net loss
Net loss attributable to non-controlling interests
Net loss attributable to ATA Creativity Global
Net revenues
Cost and expenses:
Cost of revenues
Impairment loss of intangible assets and other non-current assets
Provision for loan receivable and other receivables
Operating expenses
Total cost and expenses
Other operating income, net
Loss from continuing operations
Other income (loss)
Investment loss
Loss on disposal of subsidiaries and others
Impairment loss of long-term investments
Loss from continuing operations before income taxes
Income tax benefit
Loss from continuing operations, net of income taxes
Income from discontinued operations, net of income
taxes
Net loss
Net loss attributable to non-controlling interests
Net loss attributable to ATA Creativity Global
Year Ended December 31,
2020
The
Company
RMB
—
—
—
3,943,902
10,748,782
14,692,684
—
(14,692,684 )
63,608
(83,753,528 )
—
—
(98,382,604 )
—
(98,382,604 )
(98,382,604 )
—
(98,382,604 )
Subsidiaries
of the
Company
RMB
162,167,547
98,521,027
3,120,425
1,960,403
151,212,911
254,814,766
330,224
(92,316,995 )
50,050
—
(1,767,800 )
(1,726,391 )
(95,761,136 )
(10,268,836 )
(85,492,300 )
(85,492,300 )
(22,227,546 )
(63,264,754 )
VIE
RMB
—
—
—
—
468,695
468,695
—
(468,695 )
5,323
(13,840,830 )
—
—
(14,304,202 )
—
(14,304,202 )
(14,304,202 )
—
(14,304,202 )
Elimination
adjustments
RMB
Consolidated
—
—
—
—
—
—
—
—
—
97,594,358 (2 )
—
—
97,594,358
—
97,594,358
97,594,358
13,840,830 (2 )
83,753,528
RMB
162,167,547
98,521,027
3,120,425
5,904,305
162,430,388
269,976,145
330,224
(107,478,374 )
118,981
—
(1,767,800 )
(1,726,391 )
(110,853,584 )
(10,268,836 )
(100,584,748 )
(100,584,748 )
(8,386,716 )
(92,198,032 )
Year Ended December 31,
2019
The Company
RMB
—
—
—
11,843,167
6,928,823
18,771,990
—
(18,771,990 )
1,391,184
(110,881,674 )
—
—
(128,262,480 )
—
(128,262,480 )
—
(128,262,480 )
—
(128,262,480 )
Subsidiaries
of the
Company
RMB
97,770,167
61,914,502
8,932,439
5,587,658
115,188,774
191,623,373
588,147
(93,265,059 )
2,117,988
—
(7,850 )
(20,895,309 )
(112,050,230 )
(7,149,119 )
(104,901,111 )
—
(104,901,111 )
(14,484,814 )
(90,416,297 )
VIE
RMB
Elimination
adjustments
RMB
—
—
Consolidated
RMB
97,770,167
—
—
—
841,189
841,189
—
(841,189 )
(175,995 )
(7,520,504 )
—
(5,919,198 )
(14,456,886 )
—
(14,456,886 )
—
(14,456,886 )
—
(14,456,886 )
—
—
—
4,894,197
4,894,197
(3)
—
(4,894,197 )
—
(2)
118,402,178
—
—
113,507,981
—
113,507,981
(3)
4,894,197
118,402,178
7,520,504
110,881,674
(2)
61,914,502
8,932,439
17,430,825
127,852,983
216,130,749
588,147
(117,772,435 )
3,333,177
—
(7,850 )
(26,814,507 )
(141,261,615 )
(7,149,119 )
(134,112,496 )
4,894,197
(129,218,299 )
(6,964,310 )
(122,253,989 )
(1)
To eliminate the rental income and rental expense recognized in WFOE and Beijing Zhenwu respectively for the real estate premise that WFOE has leased to Beijing
Zhenwu for its business initiatives. The lease has been terminated before the year-end of 2021.
16
(2)
(3)
To eliminate the investment income or loss recognized in the Company derived from earnings or losses picked up from its subsidiaries and the VIE, as well as the
investment loss recorded in the VIE with the net loss attributable to the VIE as non-controlling interests recorded in the subsidiaries of the Company.
To reclassify the legal and consulting fee reimbursement from the buyer related to the disposal of discontinued operations, which was presented under “operating
expenses” of the Company’s condensed statement of comprehensive income (loss) versus “gain from disposal of discontinued operations, net of income taxes” of the
consolidated statement of comprehensive income (loss).
The following tables present the Company’s condensed consolidating schedule depicting the consolidated balance sheets as of December 31, 2020 and 2021 of the
Company, its subsidiaries, the VIE and corresponding eliminating adjustments separately.
ASSETS
Current assets:
Cash and cash equivalents
Receivables
Prepaid expenses and other current assets
Inter-company receivables
Amounts due from nominee shareholders for the VIE
Total current assets
Non-current assets:
Other non-current assets
Goodwill
Long-term investments
Total non-current assets
Total assets
LIABILITIES
Current liabilities:
Accrued expenses and other payables
Deferred revenues and other current liabilities
Inter-company payables
Total current liabilities
Total non-current liabilities
Total liabilities
Shareholders' equity:
Common shares
Paid-in capital
Treasury shares
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings (accumulated deficits)
Non-redeemable non-controlling interests
Total shareholders’ equity
Total liabilities and shareholders’ equity
The
Company
RMB
Subsidiaries
of the
Company
RMB
2,235,730
—
3,892
—
—
2,239,622
—
—
187,780,984
187,780,984
190,020,606
(1)
(2)
68,912,585
938,189
3,109,667
62,767,353
50,000,000
185,727,794
199,010,119
194,754,963
38,000,000
431,765,082
617,492,876
2,251,514
—
—
2,251,514
2,251,514
45,798,492
219,804,519
—
265,603,011
48,297,162
313,900,173
December 31,
2021
VIE
RMB
191,046
—
16,041
—
—
207,087
3,078
—
62,722,195
62,725,273
62,932,360
124,089
—
62,767,353
62,891,442
Elimination
adjustments
RMB
Consolidated
RMB
—
—
—
(62,767,353 ) (1)
(50,000,000 ) (2)
(112,767,353 )
71,339,361
938,189
3,129,600
—
—
75,407,150
—
—
(250,503,179 ) (3)
(250,503,179 )
(363,270,532 )
199,013,197
194,754,963
38,000,000
431,768,160
507,175,310
—
—
(1)
(62,767,353 ) (1)
(62,767,353 )
48,174,095
219,804,519
—
267,978,614
48,297,162
316,275,776
62,891,442
(62,767,353 )
4,720,147
—
—
15,984,800
—
(121,495,877 )
(37,920,623 )
381,116,261
65,908,142
303,592,703
617,492,876
(2)
50,000,000
—
—
—
(49,903,579 )
(55,503 )
40,918
62,932,360
—
(9,818,754 )
540,583,564
(37,559,847 )
(310,156,018 )
—
187,769,092
190,020,606
17
—
4,720,147
(65,984,800 )
—
121,495,877
37,920,623
(2)
(3)
(3)
(3)
(3)
(331,212,682 ) (3)
(62,722,197 ) (3)
(300,503,179 )
(363,270,532 )
—
(9,818,754 )
540,583,564
(37,559,847 )
(310,156,018)
3,130,442
190,899,534
507,175,310
December 31,
2020
The
Company
RMB
Subsidiaries
of the
Company
RMB
VIE
RMB
Elimination
adjustments
RMB
Consolidated
RMB
ASSETS
Current assets:
Cash and cash equivalents
Receivables
Prepaid expenses and other current assets
Inter-company receivables
Amounts due from nominee shareholders for the VIE
Total current assets
Non-current assets:
Other non-current assets
Goodwill
Long-term investments
Total non-current assets
Total assets
LIABILITIES
Current liabilities:
Accrued expenses and other payables
Short-term loans
Payable for business acquisition
Deferred revenues and other current liabilities
Inter-company payables
Total current liabilities
Total non-current liabilities
Total liabilities
2,486,636
—
3,983
—
—
2,490,619
—
—
198,028,805
198,028,805
200,519,424
2,114,561
—
—
—
—
2,114,561
—
2,114,561
110,145,679
2,245,194
5,882,810
57,122,000
50,000,000
225,395,683
215,917,712
194,754,963
38,000,000
448,672,675
674,068,358
44,834,059
6,801,000
—
216,420,299
—
268,055,358
52,991,237
321,046,595
Mezzanine equity-redeemable non-controlling interests
—
48,498,368
Shareholders' equity:
Common shares
Paid-in capital
Treasury shares
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings (accumulated deficits)
Non-redeemable non-controlling interests
Total shareholders’ equity
Total liabilities, mezzanine equity and shareholders’ equity
4,716,675
—
—
(11,625,924 )
541,272,503
(37,424,722 )
(298,533,669 )
—
198,404,863
200,519,424
15,984,800
—
(121,460,091 )
(20,210,953 )
359,601,917
70,607,722
304,523,395
674,068,358
91,118
—
84,180
—
—
175,298
8,757
—
75,764,719
75,773,476
75,948,774
71,562
—
4,642,082
—
57,122,000
61,835,644
—
61,835,644
—
—
50,000,000
—
—
—
(35,886,870 )
—
14,113,130
75,948,774
—
—
—
(57,122,000 ) (1)
(50,000,000 ) (2)
(107,122,000 )
—
—
(267,793,524 ) (3)
(267,793,524 )
(374,915,524 )
—
—
—
—
(57,122,000 ) (1)
(57,122,000 )
—
(57,122,000 )
112,723,433
2,245,194
5,970,973
—
—
120,939,600
215,926,469
194,754,963
44,000,000
454,681,432
575,621,032
47,020,182
6,801,000
4,642,082
216,420,299
—
274,883,563
52,991,237
327,874,800
—
48,498,368
(65,984,800 )
—
(2)
(3)
—
121,460,091
20,210,953
(3)
(3)
(323,715,047 ) (3)
(69,764,721 ) (3)
(317,793,524 )
(374,915,524 )
4,716,675
—
(11,625,924 )
541,272,503
(37,424,722 )
(298,533,669 )
843,001
199,247,864
575,621,032
(1)
(2)
(3)
To eliminate the amounts related to the loans provided by subsidiaries of the Company to the VIE.
To eliminate the loans that the WFOE provided to Mr. Xiaofeng Ma and Mr. Jun Zhang as capital contribution (common shares) into the VIE.
To eliminate the Company’s equity pick-up from subsidiaries or the VIE under respective equity accounts with corresponding long-term investment balances of the
subsidiaries or the VIE.
18
The following tables present the Company’s condensed consolidating schedule depicting the consolidated cash flows for the fiscal years ended December 31, 2019,
2020 and 2021 of the Company, its subsidiaries, the VIE, and corresponding eliminating adjustments separately.
Net cash used in operating activities
Cash flows from investing activities:
Payment for acquisition of a subsidiary
Cash received from inter-companies
Cash paid to inter-companies
Cash paid for property and equipment
Other cash movements
Net cash used in investing activities
Cash flows from financing activities:
Cash received from short-term loans
Repayment of short-term loans
Cash received from inter-companies
Cash paid to inter-companies
Other cash movements
Net cash provided by financing activities
Effect of foreign currency exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Year Ended December 31,
2021
The
Company
RMB
(4,529,860 )
Subsidiaries
of the
Company
RMB
(26,400,482 )
(1)
—
250,000
(5,895,353 )
(4,451,589 )
(935,321 )
(11,032,263 )
2,710,000
(2,000,000 )
9,692
(4,113,412 ) (1)
(114,729 )
(3,508,449 )
(291,900 )
(41,233,094 )
110,145,679
68,912,585
—
4,113,412
(9,692 )
—
—
4,103,720
—
—
—
—
232,245
232,245
(57,011 )
(250,906 )
2,486,636
2,235,730
19
VIE
RMB
(903,343 )
(4,642,082 )
—
—
—
—
(4,642,082 )
—
—
5,895,353
(250,000 )
—
5,645,353
—
99,928
91,118
191,046
Elimination
adjustments
RMB
—
—
Consolidated
RMB
(31,833,685 )
(4,363,412 )
5,905,045
—
—
1,541,633
(2)
(4,642,082 )
—
—
(4,451,589 )
(935,321 )
(10,028,992 )
—
—
(5,905,045 )
4,363,412
—
(1,541,633 ) (2)
—
—
—
—
2,710,000
(2,000,000 )
—
—
117,516
827,516
(348,911 )
(41,384,072 )
112,723,433
71,339,361
Net cash used in operating activities
Cash flows from investing activities:
Payment for acquisition of a subsidiary
Cash paid to inter-companies
Cash paid for property and equipment
Cash received from inter-companies
Cash received upon repayment of loan to a nominee shareholder of the VIE
Cash paid for issuance loan to a nominee shareholder of the VIE
Other cash movements
Net cash used in investing activities
Cash flows from financing activities:
Cash received from short-term loans
Repayment of short-term loans
Cash received upon repayment of loan to a nominee
shareholder of the VIE
Cash paid for issuance loan to a nominee shareholder of the
VIE
Cash received from inter-companies
Cash received upon private placement
Cash paid for repurchase of common shares
Cash paid to inter-companies
Other cash movements
Net cash provided by financing activities
Effect of foreign currency exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Year Ended December 31,
2020
Subsidiaries
of the
Company
RMB
(17,256,377 )
VIE
RMB
Elimination
adjustments
RMB
Consolidated
RMB
(466,004 )
—
(27,873,360 )
The
Company
RMB
(10,150,979 )
—
(72,794,230 )
(4)
—
3,804,240
—
—
—
(68,989,990 )
—
(15,122,000 ) (3)
(4,910,407 )
—
5,000,000
(5)
(5,000,000 ) (5)
819,979
(19,212,428 )
(15,000,000 )
—
—
—
—
—
—
(15,000,000 )
—
—
—
19,618,000
(17,808,000 )
—
—
—
8,530,931
(4,003,530 )
—
—
4,527,401
(895,932 )
(75,509,500 )
77,996,136
2,486,636
20
(3)
—
72,794,230
—
—
(3,804,240 ) (4)
(33,807 )
70,766,183
81,801
34,379,179
75,766,500
110,145,679
—
—
—
—
15,122,000
—
—
—
—
15,122,000
—
(344,004 )
435,122
91,118
—
87,916,230
—
(3,804,240 )
(5,000,000 )
5,000,000
—
84,111,990
(2)
—
—
(15,000,000 )
—
(4,910,407 )
—
—
—
819,979
(19,090,428 )
19,618,000
(17,808,000 )
5,000,000
5,000,000
(5,000,000 )
(87,916,230 )
—
—
3,804,240
—
(84,111,990 ) (2)
—
—
—
—
(5,000,000 )
—
8,530,931
(4,003,530 )
—
(33,807 )
6,303,594
(814,131 )
(41,474,325 )
154,197,758
112,723,433
Net cash used in operating activities
Cash flows from investing activities:
Payment for acquisition of a subsidiary, less cash acquired
Cash received from inter-companies
Cash paid to inter-companies
Cash lent to nominee shareholders of the VIE
Cash paid for property and equipment
Cash paid for long-term investments
Proceeds from disposal of discontinued operations, net of cash
disposed in the amount of RMB147,738,996, RMB nil and
nil for the years ended December 31, 2018, 2019 and 2020
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Cash received upon private placement
Cash paid to inter-companies
Cash received from inter-companies
Cash received from nominee shareholders of the VIE
Cash contributed by non-controlling interest holder of Muhua
Shangce
Repayment of short-term loans
Other cash movements
Net cash provided by (used in) financing activities
Effect of foreign currency exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Year Ended December 31,
2019
The
Company
RMB
(4,797,830 )
Subsidiaries
of the
Company
RMB
(51,637,369 )
—
—
—
—
—
—
4,894,197
4,894,197
61,693,192
—
—
—
—
—
—
61,693,192
810,196
62,599,755
36,929,271
28,000,000
(42,000,000 ) (6)
(40,000,000 )
(1,275,916 )
—
—
—
—
—
—
(6)
5,000,000
(9,000,000 )
(126,723 )
(4,126,723 )
56,631
(74,054,106
)
15,396,381
77,996,136
149,820,606
75,766,500
VIE
RMB
(1,441,360 )
(71,483,973 )
—
—
—
(8,900 )
(6,000,000 )
—
—
(28,000,000 )
42,000,000
40,000,000
—
—
—
54,000,000
—
(24,934,233 )
25,369,355
435,122
Elimination
adjustments
RMB
—
—
(28,000,000 )
42,000,000
40,000,000
—
—
Consolidated
RMB
(57,876,559 )
(34,554,702 )
—
—
—
(1,284,816 )
(6,000,000 )
—
54,000,000
(2)
4,894,197
(36,945,321 )
—
28,000,000
(42,000,000 )
(40,000,000 )
—
—
—
(54,000,000 ) (2)
—
—
61,693,192
—
—
—
5,000,000
(9,000,000 )
(126,723 )
57,566,469
866,827
(36,388,584 )
—
—
190,586,342
154,197,758
(18,346,645 )
(77,492,873 )
(1)
(2)
(3)
(4)
(5)
For the fiscal year ended December 31, 2021, ATA BVI, a subsidiary of the Company, received RMB2.7 million repayment of loan from its subsidiaries. These
transactions were eliminated as intercompany transactions upon preparation of the consolidated information presented under the column of "Subsidiaries of the
Company".
Eliminated the amounts of cash inflows or outflows among the Company, subsidiaries of the Company and the VIE, mainly comprised of 1) loans provided by the
Company to its subsidiaries and by the subsidiaries of the Company to the VIE, offset by repayments; and 2) loans provided by the WFOE to nominee shareholders of
the VIE, which were injected into the VIE as capital contribution. The transactions of nominee shareholder loan repayment and issuance were reclassified as financing
activities in the Company’s consolidated financial statements. See below note 5 for more details.
For the fiscal year ended December 31, 2020, ATA BVI, a subsidiary of the Company, made capital contribution of US$5.0 million to its subsidiaries. These
transactions were eliminated as intercompany transactions upon preparation of the consolidated information presented under the column of "Subsidiaries of the
Company".
Includes the RMB3.8 million the Company received from its subsidiaries as repayment of financial support from the Company, which was eliminated as intercompany
transaction upon consolidation.
Includes the RMB5.0 million loan repayment made by the prior nominee shareholder Mr. Haichang Xiong to the WFOE, offset by the RMB5.0 million loan the
WFOE provided to the new nominee shareholder Mr. Jun Zhang in relation to his acquisition of the 10% equity shares in the VIE.
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(6)
For the fiscal year ended December 31, 2019, ATA BVI provided a loan of US$2.0 million to its subsidiaries. This transaction was eliminated as intercompany
transaction upon preparation of the consolidated information presented under the column of "Subsidiaries of the Company".
Effect of Holding Foreign Companies Accountable Act and Related SEC Rules
Trading in our common shares may be prohibited under the Holding Foreign Companies Accountable Act, or HFCAA, because our auditor is not currently inspected by
the U.S. Public Company Accounting Oversight Board (United States), or PCAOB. See “Item 3.D. Risk Factors — Risks Relating to Doing Business in the People’s Republic
of China — The audit report included in this annual report is prepared by an auditor who is not inspected by the PCAOB and, as such, trading in our securities may be
prohibited and our ADSs may be delisted under the HFCAA. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of
your investment. Additionally, the inability of the PCAOB to conduct full inspections deprives you of the benefits of such inspections.”
A.
B.
[Reserved]
Capitalization and Indebtedness
Not applicable.
C.
Reasons for the Offer and Use of Proceeds
Not applicable.
D.
Risk Factors
Summary of Risk Factors
Investing in our ADSs may expose you to a number of risks, including risks relating to our business, risks relating to regulations of our business, risks relating to doing
business in the People’s Republic of China, risks relating to our corporate structure and risks relating to our ADSs. The following summarizes part, but not all, of these risks.
Please carefully consider all of the information discussed in “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report which contains a more thorough
description of risks relating to investing in us.
Risks Relating to Our Business
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We may not be able to generate sufficient net income from our business operations to sustain our continued expansion.
Failure to develop or market our businesses could impact our competitive position.
If market acceptance for and the growth of our products and services declines, or demand for our products and services stagnates or declines, we may
experience a decrease in revenues.
If we are not able to continue to attract students to enroll in our portfolio training services without a significant decrease in course fees, our revenues may
decline.
If we are not able to continue to hire and retain qualified teachers, or if our teachers fail to deliver quality services, we may not be able to maintain consistent
teaching quality.
If we fail to build, maintain and enhance the value of our brand, our business may not grow.
If we are not able to develop and expand our online course services and adapt them to rapid technological changes and student needs, we may lose market
share and our business could be adversely affected.
Any deterioration in our relationships with overseas schools and institutions may adversely affect our business.
Terrorist attacks, geopolitical uncertainty, pandemics, economic slowdown and international conflicts may discourage more students from studying outside of
China, which could cause declines in the student enrollment for our courses.
We depend on our senior management team and other key personnel and our business may be severely disrupted if we lose their services and are unable to
replace them.
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Refunds or potential refund disputes of our course fees may negatively affect our business, financial condition and results of operations.
Risks Relating to Regulations of Our Business
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The approval, filing or other requirements of the CSRC or other PRC government authorities may be required under PRC law in connection with our issuance
of securities overseas.
Because we may rely on dividends and other distributions on equity paid by our current and future PRC subsidiaries for our cash requirements, restrictions
under Chinese law on their ability to make such payments could materially and adversely affect our ability to grow, make investments or acquisitions that
could benefit our business, pay dividends to you, and otherwise fund and conduct our businesses.
The discontinuation of any of the preferential tax treatments currently enjoyed by our subsidiaries in China could materially increase our tax obligations.
As PRC laws and regulations with respect to certain licenses and permissions are unclear and are subject to interpretations and enforcement of local
governmental authorities, the Company, its subsidiaries and the VIE may be required to obtain additional licenses.
Failure to comply with regulations relating to information security and privacy protection, breaches or perceived breaches of our security measures relating to
our service offerings, unauthorized disclosure or misuse of personal data through breaches of our computer systems or otherwise, could result in negative
publicity and loss of students, expose us to protracted and costly litigation, and harm our business and results of operations. Additionally, it is unclear whether
we will be subject to the oversight of the CAC and how such oversight may impact us.
Risks Relating to Doing Business in the People’s Republic of China
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China’s economic, political and social conditions, as well as changes in any laws and regulations could adversely affect our financial performance. See “—
Risks Relating to Doing Business in the People’s Republic of China — China’s economic, political and social conditions, as well as changes in any
government policies, laws and regulations, could adversely affect the overall economy in China or the prospects of the industries in which we operate, which in
turn could impact our financial performance.” for a more detailed discussion.
The PRC legal system has inherent uncertainties that could limit the legal protections available to you and us and the VIE, and rules and regulations in China
can change quickly with little advance notice. See “— Risks Relating to Doing Business in the People’s Republic of China — The PRC legal system has
inherent uncertainties that could limit the legal protections available to you and us and the VIE, and rules and regulations in China can change quickly with
little advance notice.” for a more detailed discussion.
PRC government may exert substantial influence over our operations, and may exert more control over offerings conducted overseas and/or foreign
investment in China-based issuers like us, which may cause us to make material changes to our operation, may limit or completely hinder our ability to offer
or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless. See “— Risks Relating to Doing
Business in the People’s Republic of China — PRC government may exert substantial influence over our operations, and may exert more control over
offerings conducted overseas and/or foreign investment in China-based issuers like us, and any actions by Chinese government, including any decision to
intervene or influence our operations or to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers,
may cause us to make material changes to our operation, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may
cause the value of such securities to significantly decline or be worthless.” for a more detailed discussion.
The audit report included in this annual report is prepared by an auditor who is not inspected by the PCAOB and, as such, trading in our securities may be
prohibited and our ADSs may be delisted under the HFCAA. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely
affect the value of your investment. Additionally, the inability of the PCAOB to conduct full inspections deprives you of the benefits of such inspections.
Fluctuations in exchange rates could result in foreign currency exchange losses.
The outbreak of COVID-19 and any future outbreak of severe acute respiratory syndrome, avian flu or coronavirus in China, or similar adverse public health
developments, may disrupt our business and operations and adversely affect our financial results.
23
Risks Relating to Our Corporate Structure
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We are not a Chinese operating company but a Cayman Islands holding company primarily operating in China through our PRC subsidiaries and may conduct
business through the VIE in the future. Investors purchasing our ADSs are not purchasing, and may never directly hold, equity interests in the VIE. See “—
Risks Relating to Our Corporate Structure — We are not a Chinese operating company but a Cayman Islands holding company primarily operating in China
through our PRC subsidiaries and may conduct business through the VIE in the future. Investors purchasing our ADSs are not purchasing, and may never
directly hold, equity interests in the VIE. There are substantial uncertainties regarding the interpretation and application of current and future PRC laws,
regulations, and rules relating to such agreements, including potential future actions by the PRC government, which could affect the enforceability of our
contractual arrangements with the VIE, and consequently, significantly affect our financial condition and results of operations.” for a more detailed discussion.
We rely on contractual arrangements with the VIE and its shareholders to consolidate the VIE, which may not be less effective than direct ownership. See “—
Risks Relating to Our Corporate Structure — We rely on contractual arrangements with the VIE and its shareholders to consolidate the VIE, which may not be
as effective in providing operational control as direct ownership, and the VIE’s shareholders may fail to perform their obligations under the contractual
arrangements.” for a more detailed discussion.
The shareholders of the VIE may have conflicts of interest with us and may breach the existing contractual arrangements we have with them and the VIE. See
“— Risks Relating to Our Corporate Structure — The shareholders of the VIE may have conflicts of interest with us, which may materially and adversely
affect our business. The shareholders of the VIE may breach, or cause the VIE to breach, or refuse to renew, the existing contractual arrangements we have
with them and the VIE, which would have a material adverse effect on our ability to effectively direct activities of the VIE and receive economic benefits from
the VIE. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could
result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.” for a more detailed discussion.
Contractual arrangements relating to the VIE may be subject to scrutiny by the PRC tax authorities.
Risks Relating to Our ADSs
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Our ADS prices and the ADS or stock prices of other educational services providers with business operations primarily in China have fluctuated widely in
recent years, which fluctuations could result in substantial losses to investors.
The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
We previously failed to comply with Nasdaq’s minimum bid price requirement and although we regained compliance within the grace period, we may fail to
comply with Nasdaq’s minimum bid price requirement again or any other listing requirements, and our shares may be delisted if we are unable to regain
compliance with Nasdaq rules within the applicable grace periods.
The voting rights of holders of ADSs must be exercised in accordance with the terms of the deposit agreement, the American Depositary Receipts, or ADRs,
and the procedures established by the depositary.
We are not a Chinese operating company but a Cayman Islands company, and because judicial precedent regarding the rights of shareholders is more limited
under Cayman Islands law than under U.S. federal or state laws, you may have less protection of your shareholder rights than you would under U.S. federal or
state laws.
Certain judgments obtained against us by our shareholders may not be enforceable.
We have been named as a defendant or interested third party in three lawsuits in connection with our sale of ATA Online.
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Risks Relating to Our Business
Historically, we were dependent on revenues from the ATA Online Business; after the completion of our sale of the ATA Online Business and the Huanqiuyimeng
Acquisition, we may not be able to generate sufficient net income from our business operations to sustain our continued expansion, and it is difficult for us to predict our
results of operations since we have a limited operating history in such new business.
The ATA Online Business historically represented the principal source of revenues and profit for the Company. On August 16, 2018, we completed the sale of the ATA
Online Business which was consequently reclassified as discontinued operations. In 2019, we and the VIE completed the acquisition of 100% equity interests of
Huanqiuyimeng, a leading provider of educational services for students in China interested in applying for overseas art study. After the Huanqiuyimeng Acquisition, our
business operations primarily include portfolio training services, research-based learning services, overseas study counselling services and other educational services. Although
our management team has been endeavoring to adapt to such business change and have made prominent progress in integrating, managing and developing the new business,
given that we have only a short operating history for such business after the acquisition, we may not be able to manage and develop the new business effectively, compete and
build our brand successfully in the new market, and generate sufficient net income from the new business to sustain our continued operations and expansion, and it is difficult
for us to predict our results of operations with respect to our business and you should not rely on our historical results of operations as an indication of our future financial
performance.
Failure to develop or market our businesses could impact our competitive position and have an adverse effect on our financial results.
Our operating results in the future will depend on our ability to develop our businesses, including our creative arts related international education services and other
services, and bring those services to the market. This ability could be adversely affected by difficulties or delays in product development and marketing such as greater than
anticipated development costs, technical difficulties, regulatory obstacles, competition, lack of demand, insufficient intellectual property protection, or lack of market
acceptance of our new products and services. There can be no assurance that any of the products and services we are currently developing or marketing, or begin to develop or
market in the future, will achieve substantial commercial success. If we fail to develop or market our businesses in the way or on the timeline as we expect, or at all, our growth
and financial results will be adversely impacted.
If market acceptance for and the growth of our products and services declines, or demand for our products and services stagnates or declines, our revenue growth
may slow down, or we may experience a decrease in revenues.
Currently, we are focused on providing creative arts related international education services to high school and undergraduate students. We cannot assure you that a
market decline will not happen. A decline in the demand for creative arts related international education services by high school and undergraduate students could negatively
affect the demand for our services. Even if the demand for our creative arts related international education services continues to grow, this demand may not grow as quickly as
we anticipate. If market acceptance of our creative arts related international education services declines or fails to grow, our revenue growth may slow down, or we may
experience a decrease in revenues.
If we are not able to continue to attract students to enroll in our portfolio training services without a significant decrease in course fees, our revenues may decline,
and our profitability may be adversely affected.
The success of our business depends primarily on the number of students enrolled in our portfolio training services and the amount of course fees that our students are
willing to pay. Therefore, our ability to continue to attract students to enroll in our portfolio training services without a significant decrease in course fees is critical to the
continued success and growth of our business. This in turn will depend on several factors, including without limitation our ability to effectively market our services to a broader
base of prospective students, develop new services and enhance existing services to respond to changes in market trends and student demands, develop additional high-quality
educational content and respond to competitive pressures, and manage our growth while maintaining the consistency of our teaching quality. If we are unable to continue to
attract students to enroll in our portfolio training services without a significant decrease in course fees, our revenue may decline, and we may not be able to maintain
profitability.
We depend on our dedicated and capable teachers, and if we are not able to continue to hire and retain qualified teachers, or if our teachers fail to deliver quality
services, we may not be able to maintain consistent teaching quality and our brand, business and results of operation may be materially and adversely affected.
Our teachers are critical for maintaining our service quality, our brand and reputation. It is critical for us to continue to attract qualified teachers who have the relevant
art background, professional skills, excellent communication skills and commitment and dedication to creative arts related international education services. We also need to hire
teachers who are capable of delivering innovative and inspirational instruction to students. The number of teachers that meet our qualifications is limited and we must provide
competitive compensation packages to attract and retain such qualified teachers. We also face increasing competition from our
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competitors for teachers with good reputations and excellent teaching skills. If we fail to hire and retain qualified teachers, we may not be able to maintain consistent teaching
quality and our brand, business and operating results may be materially and adversely affected. Additionally, our teachers may join our competitors or set up competing
businesses after they discontinue their relationship with us, which could further adversely affect our operating results.
Only around 11% of our teachers are our full-time employees, and the rest are academics from universities and colleges or designers of private studios within their
respective specializations who typically work for us on a part-time basis. If our part-time teachers fail to deliver quality courses as a result of inadequate devotion of their time
and energy to our courses, our business may also be adversely affected. Furthermore, China promulgated certain regulations in November 2016 requiring post-secondary school
teachers to obtain approval from their employers prior to engaging in part-time jobs. If these part-time teachers choose to, or are forced to, discontinue their relationship with us
to comply with such regulations, we will need to seek new teachers to replace them. We cannot assure you we will be able to find replacements at a reasonable cost on a timely
basis, if at all.
If we fail to build, maintain and enhance the value of our brand, our business may not grow and our financial results may be adversely impacted.
We believe that market awareness of our “ACG” brand is important to the success of our creative arts related international education businesses, and that maintaining
and enhancing the value of our brand is critical to increasing our competitive advantage. Our brand promotion initiatives primarily include cooperating with overseas study
counselling agents, language test preparation institutions and other similar sales channels to enhance our brand awareness among students of such sales channels, advertising
our brand on the mainstream online search engines and social media platforms, participating in educational seminars, art workshops and on-campus events to give free speeches
and lectures in order to introduce and promote our brand name, and periodically participating in and hosting educational expositions and other community events to distribute
information brochures and promote our brand name.
As we are still at the stage of building and enhancing our brand recognition, negative comments on our services may result in unfavorable publicity for us, and could
materially and adversely damage our brand and reputation, whether or not the comments are objective and fair. Moreover, as we continue to grow in size, expand our service
offerings and extend our geographic reach, it may be more difficult to maintain the quality and consistent standards of our services and to protect and promote our brand name.
Furthermore, we cannot assure you that our marketing methods and strategies will be successful in promoting our brand in a cost-effective manner.
If we fail to build, maintain and enhance the value of our brand, or if we incur excessive sales and marketing expenses, our ability to attract new students could be
adversely impacted and our business and results of operations may be materially and adversely affected.
Failure to effectively and efficiently manage the expansion of our training center network may materially and adversely affect our brand, business and operating
results.
We have established 21 training centers in China as of April 26, 2022. We established our first one in 2012. We may continue to expand our operations in different
geographic locations in China and abroad. Our expansion has resulted, and will continue to result, in substantial demands on our management, faculty and operational,
technological and other resources. Our expansion will also place significant demands on us to maintain the consistency of our teaching quality and our culture to ensure that our
brand does not suffer as a result of any decreases in our teaching quality. To manage and support our growth, we must continue to improve our existing operational,
administrative and technological systems and our financial and management controls, and recruit, train and retain additional qualified teachers, management personnel and other
administrative and sales and marketing personnel, particularly as we expand into new markets. We cannot assure you that we will be able to effectively and efficiently manage
the growth of our operations, recruit and retain qualified teachers and management personnel and integrate new training centers into our operations, especially amid the
COVID-19 pandemic. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business
opportunities, which in turn may have a material adverse impact on our financial condition and results of operations.
Failure to adequately and promptly respond to changes in requirements and expectations for portfolios could cause our programs, services and products to be less
attractive to students.
Requirements and expectations for portfolios for overseas art program applications vary by school and program. Some schools have strict criteria while others are open
and flexible, and such requirements and expectations, whether on substance or format, change continuously. In response to such changes in requirements and expectations for
portfolios, we need to adapt our training programs and materials to new requirements and expectations from time to time. Any inability to track and respond to these changes in
a timely and cost-effective manner would make our programs, services and products less attractive to students, which may materially and adversely affect our reputation and
ability to continue to attract students without a significant decrease in course fees.
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Failure to effectively improve our margins may adversely affect our business and operating results.
Many factors may affect our gross and net margins. For example, in the portfolio training industry, offline one-on-one classes and small-sized classes are the most
prevalent types of class format. Currently, the vast majority of our portfolio training courses are delivered through offline one-on-one classes, while only a small amount of our
portfolio training courses is delivered through small-sized classes, generally with three to five students in each class or through online platform. Although our offline one-on-
one classes are profitable, they are marginally less profitable on average than small-sized classes and online classes. Currently, we are concentrating on developing and
expanding our small-sized class model and online–merge–offline model and reducing the cost of our offline one-on-one classes. If we fail to do so, we may not be able to
effectively improve our margins, which may adversely affect our business and operating results.
If we are not able to develop and expand our online course services and adapt them to rapid technological changes and student needs, we may lose market share
and our business could be adversely affected.
Although offline courses are still important and prevalent in the portfolio training industry, the market need for online courses is growing rapidly because online courses
enable students to take classes from highly skilled teachers who live in other cities and are easier to hold and take amid the COVID-19 pandemic. Currently, only a limited
amount of our portfolio training courses is delivered through online courses and we have limited experience with generating revenues from online courses. Ongoing
development and expansion of our online courses and related technology may entail significant expense and technical risks. We may fail to use new technologies effectively or
adapt our online courses and related technology on a timely and cost-effective basis. If the development and expansion of our online courses and the related technology are
delayed, result in system interruptions or are not aligned with market expectations or preferences, we may lose market share and our business could be adversely affected.
Any deterioration in our relationships with overseas schools and institutions may adversely affect our business.
We have business collaborations with various overseas schools and institutions to provide education resources for our creative arts related international educational
programs. We derive direct benefits from these relationships, such as the ability to provide more professional and effective overseas study counselling services, deliver our
portfolio training programs abroad in cooperation with local art training institutions, offer more diverse programs and courses, such as our summer and winter camps for our
research-based learning programs, and charge a premium for the services we offer with these overseas schools and institutions. We also derive indirect benefits from these
relationships, including the enhancement of our brand and reputation and exposure to international education methods and experiences.
If our relationships with any of these overseas schools and institutions deteriorate or are otherwise damaged or terminated, or if the benefits we derive from these
relationships diminishes, whether as a result of our own actions, actions of our partners, actions of any third party, including our competitors, or of regulatory authorities or
other entities beyond our control, our business, prospects, financial condition and results of operations could be adversely affected.
Terrorist attacks, geopolitical uncertainty, pandemics, economic slowdown and international conflicts involving the United States, the United Kingdom and
elsewhere may discourage more students from studying in the United States, the United Kingdom and elsewhere outside of China, which could cause declines in the
student enrollment for our courses.
Terrorist attacks, geopolitical uncertainty, pandemics, economic slowdown and international conflicts involving the United States, the United Kingdom and elsewhere,
such as the attacks on September 11, 2001, the Boston marathon bombings on April 15, 2013, the referendum on Brexit in June 2016, the ongoing global coronavirus outbreak,
and the outbreak of hostilities in Europe, could have an adverse effect on our portfolio training services, research-based learning services, overseas study counselling services
and other educational services. Such events may discourage students from studying in the United States, the United Kingdom and elsewhere outside of China and may also
make it more difficult for Chinese students to obtain visas to study abroad. These factors could cause declines in the student enrollment for our portfolio training services,
research-based learning services, overseas study counselling services and other educational services and could have an adverse effect on our overall business and results of
operations.
Failure to control rental costs, obtain leases at desired locations at reasonable prices or protect our leasehold interests could materially and adversely affect our
business.
Our offices and training centers are mainly located on leased premises. The lease terms generally range from one to five years and the lease agreements are renewable
upon mutual consent at the end of the applicable lease period. We may not be able to obtain new leases at desirable locations or renew our existing leases on acceptable terms or
at all, which could adversely affect our business. We may have to relocate our operations for various other reasons, including increasing rents, failure to pass fire inspection or
to comply with the relevant fire safety regulations in certain locations and the early termination of lease agreements. Our lease agreements are governed by applicable PRC laws
and regulations and may be subject to fines ranging from RMB 1,000 to RMB 10,000 for each lease agreement that has not been registered. However, failure to complete such
registration would not affect the enforceability of a lease agreement, in practice.
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If any of our use of a leased premise is challenged by the relevant government authorities for the lack of a fire inspection, we may be subject to fines, rectifications and
we may need to relocate the affected training centers. We will incur additional expenses relating to such relocation. If we fail to find a suitable replacement site in a timely
manner or on terms acceptable to us, our business and results of operations could be materially and adversely affected.
We may face challenges and risks in connection with our strategic investments and acquisitions as well as forming joint ventures, including producing the intended
benefits or synergies, identifying suitable opportunities and integrating acquired or new businesses and assets with our existing operations, which could interrupt our
business operations or adversely affect our results of operations.
As part of our business strategy, we previously made strategic investments and acquisitions in complementary businesses. For example, we have made some equity
investments in the past and most of them have been fully impaired. We cannot assure you that any particular acquisition or investment will produce the intended benefits or
synergies. In the fiscal years ended December 31, 2019, we recorded impairment losses of RMB 5.9 million related to our investment in GlobalWisdom through the VIE, as it
failed to meet the expected milestones and operational forecasts and encountered a shortage of working capital resulting from continuous negative operating cash flows. We also
recorded an impairment loss of RMB 20.9 million related to our investment in ApplySquare Education & Technology Co., Ltd., or ApplySquare, as it failed to meet the
expected milestones and operational forecasts and encountered a shortage of working capital resulting from continuous negative operating cash flows. Due to the severe
shortage of working capital and negative market impact on business of ApplySquare in 2020, we recognized an impairment loss of RMB 1.6 million to reduce the investment to
zero as of December 31, 2020. In the third quarter of 2021, ACG made a qualitative assessment and determined that Beijing Xiaozhi Education & Technology Co., Ltd., or
Xiaozhi failed to meet the expected milestones and operation forecasts and encountered a shortage of working capital resulted from continuous negative operating cash flows,
which indicates that impairment exists. The Company recognized an impairment loss of RMB6.0 million to reduce the investment to zero.
Currently, we are still exploring potential merger and acquisition targets in the international education sector. In addition, we may also seek to broaden our service
offerings in other business sectors, obtain additional students and strengthen our service quality by acquiring other companies or businesses or making strategic investments.
However, our ability to implement our acquisition or investment strategies will depend on a number of factors, including the availability of suitable acquisition candidates at an
acceptable cost or at all, our ability to compete effectively to attract and reach agreements with acquisition or investment candidates or joint venture partners on commercially
reasonable terms, and the availability of financing to complete acquisitions or investment or joint ventures as well as our ability to obtain any required government approvals or
licenses. As such, the identification of suitable acquisition or investment targets or joint venture candidates and the consummation of proposed acquisition, investment or joint
venture transactions could be difficult, time consuming and costly, and we may not be able to successfully capitalize on identified opportunities. In addition, we may not be
successful in integrating acquisitions with our existing operations and personnel. Moreover, the acquisitions or investments we pursue may require us to expend significant
management and other resources, which may result in interruptions to our business operations.
There are other risks associated with acquisitions, including:
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unforeseen or hidden liabilities, including exposure to legal proceedings, associated with acquired companies;
failure to generate sufficient revenues to offset the costs and expenses of acquisitions;
integration of the management of the acquired business into our own;
potential impairment losses or amortization expenses relating to goodwill and intangible assets arising from any such acquisitions, which may materially
reduce our net income or result in a net loss;
potential conflicts with our existing employees as a result of our integration of newly acquired companies;
possible contravention of Chinese regulations applicable to such acquisitions; and
possible disputes associated with terminated and failed acquisitions.
Furthermore, raising equity capital to finance acquisitions or investments could cause earnings or ownership dilution to your shareholding interests, which in turn could
result in losses to you. Any one or a combination of the above risks could interrupt our business operations and adversely affect our results of operations.
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Because we do not have any business liability, disruption or litigation insurance coverage for our operations in China and have limited insurance coverage with
respect to our research-based learning services, any business disruption or litigation we experience might result in our incurring substantial costs and diverting significant
resources to handle such disruption or litigation.
The insurance industry in China is not fully developed. Insurance companies in China offer limited business insurance products. While business disruption insurance
may be available to a limited extent in China, we have determined that the risks of disruption and the difficulties and costs associated with acquiring such insurance render it
commercially impractical for us to have such insurance. As a result, we do not have any business liability, disruption or litigation insurance coverage for our operations in
China. Any business disruption or litigation might result in our incurring substantial costs and the diversion of resources.
We could be held liable for accidents that occur at indoor or outdoor facilities where we organize our research-based learning programs and temporary housing facilities
that we lease for our students from time to time. In the event of on-site food poisoning, personal injuries, fires or other accidents suffered by students or other people, we could
face claims alleging that we were negligent, provided inadequate supervision or were otherwise liable for any injuries. We are exposed to various risks associated with our
research-based learning business and operations, and we have limited insurance coverage. Any successful liability claims against us due to injuries suffered by our students or
other people during our research-based learning programs could adversely affect our reputation and our financial results. Even if unsuccessful, such claims could cause
unfavorable publicity, require substantial cost to defend and divert the time and attention of our management.
We may face increasing competition from our competitors. If we fail to successfully compete, our revenues and market share may decrease, and our results of
operations may be adversely affected.
As our services and products continue to develop, we will face increasing competition, including competition from both established brands and new entrants, who will
try to gain market share from us. For our portfolio training services business, we compete with our competitors primarily on the basis of branding and customer acquisition,
educational quality, faculty, training center environment, product breadth and pricing, among which, branding and customer acquisition is regarded as the most important
factor, while pricing is the least. Our competitors may establish brands that have wider recognition than us, develop marketing and sale methods that are more effective than
ours, introduce new products and services that have better performance and gain broader acceptance than our products and services, hire and retain more qualified teachers, or
offer more satisfactory training center environments or lower prices to students. As a result, we may lose our market share due to increasing competition, which may negatively
affect our revenues and results of operations.
Our business is subject to fluctuations caused by seasonality or other factors beyond our control, which may cause our operating results to fluctuate from quarter
to quarter. This may result in volatility in and adversely affect the price of our ADSs.
We have experienced and expect to continue to experience slight seasonal fluctuations in our revenues and results of operations, with the quarter ending March 31
typically having relatively lower revenues compared with the other quarters. This is primarily because fewer students take classes in January and February due to spring festival
holidays in China as well as because some students have completed their application for overseas art programs in December of the previous year. We expect quarterly
fluctuations in our revenues and results of operations to continue. These fluctuations could result in volatility in and adversely affect the price of our ADSs.
We depend on our senior management team and other key personnel and our business may be severely disrupted if we lose their services and are unable to replace
them.
Our future success is dependent upon the continued services of our senior management team and other key personnel, as we rely on their industry experience and
expertise in our business operations. In particular, we rely heavily on Mr. Xiaofeng Ma, our Chairman and Chief Executive Officer, and Mr. Jun Zhang, our President, for their
business vision, management skills, technical expertise, experience in the education industry and working relationships with many of our business partners, shareholders and
other participants in the education industry. If one or more of our senior management team members or other key personnel, and in particular, Mr. Xiaofeng Ma or Mr. Jun
Zhang, are unable or unwilling to continue in their present positions, we may not be able to replace them easily, and our business may be disrupted. In addition, if any member
of our senior management team or any of our other key personnel joins a competitor of ours or forms a competing company, we may lose teachers, students, key professionals
and staff members. Each of our senior management team members and key employees is subject to the duty of confidentiality and non-competition restrictions. However, if any
disputes arise between any of our senior management team members or key personnel and us, it may be difficult to successfully pursue legal actions against these individuals
because of the uncertainties of the PRC legal system.
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Unauthorized use of our intellectual property by third parties, including infringement of our “ACG” brand, and the expenses incurred in protecting our intellectual
property rights, may adversely affect our business.
Our copyrights, trademarks, trade secrets, patents and other intellectual property are important to our success. Unauthorized use of any of our intellectual property may
adversely affect our business and reputation. We rely on trademark, patent, and copyright law, trade secret protection and confidentiality agreements with our employees,
students, business partners and others to protect our intellectual property rights. Nevertheless, it may be possible for third parties to obtain and use our intellectual property
without authorization. The unauthorized use of intellectual property is common and widespread in China and enforcement of intellectual property rights by Chinese regulatory
agencies is inconsistent. Moreover, litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and
diversion of our management’s attention and resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of
operations. Given the relative unpredictability of the PRC legal system and potential difficulties in enforcing a court judgment in China, there is no guarantee that we would be
able to halt the unauthorized use of our intellectual property through litigation.
We may be subject to intellectual property infringement claims, which may force us to incur substantial legal expenses and, if determined adversely against us, may
materially disrupt our business.
We cannot assure you that our business operations, in particular, our trademarks, software, know-how and other technologies do not or will not infringe upon
trademarks, valid copyrights, patents or other intellectual property rights held by third parties. We may become subject to legal proceedings and claims from time to time
relating to the intellectual property of others in the ordinary course of our business. If we were found to have violated the intellectual property rights of others, we may be
enjoined from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives. In addition, we may incur substantial expenses, and may be
forced to divert management and other resources from our business operations, to defend against these third-party infringement claims, regardless of their merits. Successful
infringement or licensing claims against us may result in substantial monetary liabilities or may materially disrupt the conduct of our business by restricting or prohibiting our
use of the intellectual property in question.
We may need additional capital and any failure by us to raise additional capital on terms favorable to us, or at all, could limit our ability to grow our business and
develop or enhance our product and service offerings to respond to market demands or competitive challenges.
Capital requirements are difficult to plan in the rapidly changing industries in which we operate. We believe that our current cash and expected future cash flows from
operations will be sufficient to meet our anticipated working capital and capital expenditures for the next 12 months and the foreseeable future beyond that point. We may,
however, require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to
pursue. If our sources of liquidity are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of
additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to
agree to operating and financing covenants that would restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties,
including:
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investors’ perception of, and demand for, securities of international education companies;
regulatory requirements or restrictions related to and the conditions of the U.S., PRC and other capital markets in which we may seek to raise funds;
our future results of operations and financial condition;
Chinese government regulation of foreign investment in China;
economic, political and other conditions in China; and
Chinese government policies relating to the borrowing and remittance of foreign currency outside China.
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to
us, or at all, could limit our ability to grow our business and develop or enhance our product and service offerings to respond to market demand or competitive challenges.
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Increases in labor costs in China may adversely affect our business and our profitability.
The economy of China has been experiencing significant growth, leading to inflation and increased labor costs. According to the National Bureau of Statistics of China,
the changes in China’s consumer price index was 2.9%, 2.5% and 0.9% in the years 2019, 2020 and 2021. China’s overall economy and the average wage in China are expected
to continue to grow. As a result, the average wage level for our employees and part-time teachers has also increased in recent years. Future increases in China’s inflation and
material increases in the cost of labor may diminish our competitive advantage and, unless we are able to pass on these increased labor costs to our students by increasing prices
for our services, our profitability and results of operations could be materially and adversely affected. The outbreak of COVID-19 may have a material adverse impact on the
general economic outlook, economic growth and business sentiment (see “Item 3.D. Risk Factors — Risks Relating to Doing Business in the People’s Republic of China — The
outbreak of COVID-19 and any future outbreak of severe acute respiratory syndrome, avian flu or coronavirus in China, or similar adverse public health developments, may
disrupt our business and operations and adversely affect our financial results.”), and may in turn influence the labor cost. Additionally, certain restrictive measures, including
quarantining policies and travel restrictions, implemented by China and other countries in response to the outbreak of COVID-19 may impose obstacles for us to recruit teachers
and operational staff suitable for our business, and may in turn influence our labor cost. Such influence, if any, however, remains unclear as of the date of this annual report.
We may be unable to maintain an effective system of internal control over financial reporting, and as a result, we may be unable to accurately report our financial
results or prevent fraud.
We are subject to provisions of the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act requires that we include a report from management on the
effectiveness of our internal control over financial reporting in our annual reports on Form 20-F. In the course of preparing our consolidated financial statements for the fiscal
year ended December 31, 2020, we identified one material weakness in our internal control over financial reporting as of December 31, 2020. In accordance with reporting
requirements set forth by the SEC, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a
material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. We failed to properly address complex
accounting issues and related disclosures in accordance with U.S. GAAP, which was caused by our lack of sufficient financial reporting and accounting personnel with
appropriate knowledge of U.S. GAAP to operate relevant key controls over the financial reporting process. We have implemented a number of measures to address the material
weakness that has been identified. However, we can give no assurance that the implementation of these measures will be sufficient to eliminate material weakness in our
internal control over financial reporting in the future. If we fail to maintain effective internal control over financial reporting in our existing or newly acquired businesses, our
management may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. Our failure to maintain effective
internal control over financial reporting could result in a loss of investor confidence in the reliability of our reporting processes, which could materially and adversely affect the
trading price of our ADSs.
Our reporting obligations as a public company will continue to place a significant strain on our management, operational and financial resources and systems for the
foreseeable future. Our failure to maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial
reporting processes, which in turn could harm our business and negatively impact the trading price of our ADSs.
Disruption to or failures of our and our third party IT service providers’ IT infrastructure and any failure to maintain the satisfactory performance, cyber-security
incidents, including data security breaches or viruses, could materially and adversely affect the business, reputation, financial condition and results of operations of us.
The proper functioning and reliability of our and our third party IT service providers’ IT infrastructure is critical to our operations and reputation. We rely on our own
IT system to conduct daily operations and management. In addition, due to the outbreak of the COVID-19, some of our services have been shifted to online channel and we
provide our services to students through online platforms provided by third party IT service providers. Accordingly, any errors, defects, disruptions or other performance
problems with our and the third party IT service providers’ IT infrastructure could damage our reputation, decrease user satisfaction, adversely impact our ability to attract new
customers, and materially disrupt our operations. Our and our third party IT service providers’ systems are vulnerable to damage or interruption as a result of fires, floods,
earthquakes, power losses, telecommunication failures, undetected errors in software, computer viruses, hacking and other attempts to harm these systems. In addition, we
cannot assure you that we and our third party IT service providers will be able to timely scale up and adjust the existing technology and infrastructure to respond to system
interruptions.
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Maintaining IT infrastructure security and cybersecurity is of critical importance to our customers because the IT infrastructure stores and transmits certain proprietary
and confidential information, which may include sensitive personally identifiable information that may be subject to stringent legal and regulatory obligations. If our security
measures are breached or failed as a result of third-party action, employee error, malfeasance or otherwise, we could be subject to liability or our business could be interrupted,
potentially over an extended period of time. Any or all of these issues could harm our reputation, adversely affect our ability to attract prospective customers.
We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or
common shares.
We believe that we were not a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for the taxable year ended December 31, 2021. PFIC
status is tested each year and depends on the composition of our assets and income and the value of our assets from time to time. Since we currently hold, and expect to
continue to hold, a substantial amount of cash and other passive assets and, since the value of our assets is to be determined in large part by reference to the market prices of our
ADSs and common shares, which is likely to fluctuate over time, there can be no assurance that we will not be a PFIC for any future taxable year.
We note that the portion of our assets that consisted of cash and other passive assets was more significant during the period between our sale of ATA Online Business in
2018, and our acquisition of the 100% equity interest in Huanqiuyimeng in 2019, than before or after this period, although we believe this did not result in our becoming a PFIC
for either the taxable year ended December 31, 2018 or the taxable year ended December 31, 2019. There is a change of business exception to PFIC status that, in general
terms, applies if a foreign corporation otherwise would be a PFIC for a year because it has disposed of one or more active businesses, so long as the foreign corporation is not a
PFIC during the two succeeding years, and that might apply to us if we were found to have been a PFIC for either (but not both) of the taxable years ended December 31, 2018
and December 31, 2019. There is limited guidance as to the application of this exception, including regulations that were promulgated in July 2019 and became effective in
January 2021, and it is unclear whether this exception would apply to us, if it were determined, absent this exception, that we were a PFIC for either the taxable year ended
December 31, 2018 or the taxable year ended December 31, 2019.
If we are deemed an “investment company” under the Investment Company Act of 1940, it would adversely affect the price of our ADSs and ordinary shares and
could have a material adverse effect on our business.
As part of our business strategy, we previously made strategic investments in complementary businesses and are still exploring potential investment targets in order to
expand our service offerings into new markets. See “— Risks Relating to Our Business — We may face challenges and risks in connection with our strategic investments and
acquisitions as well as forming joint ventures, including producing the intended benefits or synergies, identifying suitable opportunities and integrating acquired or new
businesses and assets with our existing operations, which could interrupt our business operations or adversely affect our results of operations.” These investments may be
deemed to be “investment securities” within the meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”). We may be deemed to be an
“investment company” as defined under the Investment Company Act based on the value of the investment securities we hold in relation to our total assets and on other factors
relevant to the definition of “investment company” under the Investment Company Act.
As an issuer not organized under the laws of the United States, we are not eligible to register as an investment company under the Investment Company Act without an
order from the SEC permitting such registration. Because such registration orders are rarely obtained, if we are deemed to be an “investment company” we would either have to
obtain an exemption from the SEC, or rely on an existing exemption, waiving registration and compliance generally from the Investment Company Act. Alternatively, we would
have to modify our contractual rights or dispose of certain investments in order to fall outside the definition of an investment company in the first instance. On an ongoing basis,
we may be required to forego potential future acquisitions of interests in certain companies if those interests were deemed to be “investment securities” and such acquisition or
acquisitions would cause us to come within the definition of “investment company.” Failure to avoid being deemed an investment company under the Investment Company Act
coupled with our inability as a foreign private issuer to register under the Investment Company Act could make us unable to comply with our reporting obligations as a public
company in the United States and lead to our being delisted from Nasdaq, which would have a material adverse effect on the liquidity and value of our ADSs and common
shares. We would also be unable to raise capital through the sale of securities in the United States or to conduct business in the United States. In addition, we may be subject to
SEC enforcement actions or civil litigation for alleged violations of U.S. securities laws. Defending ourselves against any such enforcement action or lawsuits would require
significant attention from our management and divert resources from our existing businesses and could have a material adverse effect on our results of operations and financial
condition.
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Refunds or potential refund disputes of our course fees may negatively affect our business, financial condition and results of operations.
Students make prepayments of course or service fees to us for most of our program offerings, for which they may request refunds later. Our refund policy varies for
different programs and is generally based on a number of factors, including the total length of the course or service to provide, progress of the course or service when the refund
request is made, among other things. Although we have not experienced any significant refund requests for prepaid course or service fees in the past, if an increasing number of
students request refunds, our cash flows, revenues and results of operations may be materially and adversely affected. A high volume of refunds and refund disputes may also
generate negative publicity that could harm our reputation.
Risks Relating to Regulations of Our Business
The approval, filing or other requirements of the CSRC or other PRC government authorities may be required under PRC law in connection with our issuance of
securities overseas.
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Provisions Regarding Mergers and Acquisitions of Domestic Companies by
Foreign Investors (the “M&A Rule”), which became effective on September 8, 2006 and was revised on June 22, 2009. The M&A Rule, among other things, requires that an
offshore company controlled by PRC companies or individuals that has acquired a PRC domestic company for the purpose of listing the PRC domestic company’s equity
interest on an overseas stock exchange must obtain the approval of the CSRC prior to the listing and trading of such offshore company’s securities on an overseas stock
exchange. On September 21, 2006, the CSRC, pursuant to the M&A Rule, published on its official website procedures specifying documents and materials required to be
submitted to it by offshore companies seeking CSRC approval of their overseas listings.
Our PRC counsel, Jincheng Tongda & Neal Law Firm, advised us that CSRC approval was not required for our initial public offering in February 2008 because the
CSRC approval required under the M&A Rule only applies to an offshore company that has acquired a domestic PRC company for the purpose of listing the domestic PRC
company’s equity interest on an overseas stock exchange, while (i) we obtained our equity interest in each of our PRC subsidiaries by means of direct investment other than by
acquisition of the equity or assets of a PRC domestic company in 2008, (ii) our former contractual arrangements with ATA Online did not constitute the acquisition of ATA
Online, (iii) the M&A Rule did not apply to the acquisition by ATA Learning, which had been a wholly foreign owned enterprise since incorporation until it was reformed into a
PRC domestic company in 2018, and (iv) although Article 11 of the M&A Rule prohibits the circumvention of the M&A Rule through establishing foreign-invested enterprises,
or FIEs, ATA Learning was established in 2003 before the M&A Rule was promulgated, which makes this acquisition not a circumvention of the M&A Rule. However, if it is
determined that CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies
may impose fines and penalties on our operations in China, limit our operating privileges in China, or take other actions that could have a material adverse effect on our
business, financial condition, and results of operations, reputation and prospects, as well as the trading price of our ADSs.
On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the
Crackdown Opinions. The Crackdown Opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by
China-based companies. The Crackdown Opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks
and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. As of the date of this annual report, we believe the
permission and approval of the CSRC is not required for the Company, its subsidiaries and the VIE in connection with our listing on Nasdaq, but as the Crackdown Opinions
were recently issued, official guidance and interpretation of the opinions remain unclear in several respects at this time, we cannot assure you that the Company, its subsidiaries
and the VIE will remain fully compliant with all new regulatory requirements of the Crackdown Opinions or any future implementation rules on a timely basis, or at all. If the
Company, its subsidiaries and the VIE are unable to obtain such permission or approval if required in the future, our securities may be delisted from Nasdaq and/or the value of
our ADSs may significantly decline or become worthless.
On December 24, 2021, the CSRC published the Overseas Offering and Listing Regulations Drafts, which provide principles and guidelines for direct and indirect
issuance of securities overseas by a Chinese domestic company. Under the Overseas Offering and Listing Regulations Drafts, the substance rather than the form of issuance will
govern when determining whether an issuance constitutes “indirect issuance of securities overseas by a Chinese domestic company”, and the following two situations will be
deemed as “indirect issuance of securities overseas by a Chinese domestic company”: (1) the income, total profits, total assets or net assets of the domestic company in the latest
financial year accounts for more than 50% of the total financials of the issuer in such year on a consolidated basis, or (2) the majority of senior management in charge of
business operation are Chinese citizens or have habitual residence within the territory of China, and the principal business place is within the territory of China or such business
is conducted in China. It still remains uncertain if the aforesaid two conditions shall be met at the same time or not when determining the constitution of “indirect issuance of
securities overseas by a Chinese domestic company.” In the event any listing and issuance of
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securities have fallen under the definition of “indirect overseas listing and issuance of securities overseas by a Chinese domestic company,” the issuer shall assign one of its
related major Chinese domestic operating entities to make filings with CSRC within three business days after its initial public offering or any offerings after the initial public
offering. For the filings after the initial public offering, the issuer’s related Chinese domestic entity shall submit relevant requisite documents, including but not limited to the
filing report and related commitments, opinion from Chinese competent authorities as to the supervisor of the domestic company (if applicable), security assessment opinion
from Chinese competent authorities (if applicable), PRC legal opinion, and prospectus. If a company issues such securities to be listed in an overseas public market after its
initial public offering, or purchases assets by means of issuance of securities overseas, it shall also file with CSRC within three business days thereafter and make related
undertakings, reports, and explanations to CSRC. The noncompliance of the filing requirements will lead to penalties imposed on the Chinese domestic companies, the
controlling shareholder, the actual controller, directors, supervisors, and officers of the Chinese domestic companies, and other related responsible persons. The potential
penalties for the Chinese domestic companies include fines within the range of RMB 1 million and RMB 10 million. If the noncompliance is deemed severe, the operations of
the Chinese domestic companies can be suspended and the permission and licenses held by the Chinese domestic companies could be cancelled.
It is uncertain when the final regulations of the Overseas Offering and Listing Regulations Drafts will be issued and take effect, and how they will be enacted,
interpreted or implemented. We cannot assure you that the Company, its subsidiaries and the VIE will not in the future be required to obtain the approval of the CSRC or of
potentially other regulatory authorities in order (i) to maintain the listing status of our common shares on Nasdaq or (ii) to conduct offerings of securities in the future. In the
event that Draft Registration Measures are issued in its current form and it is determined that we are required to obtain approval from the CSRC or any other regulatory
authority but fail to make such filings or obtain such approvals timely or at all, the PRC subsidiaries of the Company or the VIE may be subject to non-compliance rectification
order, disciplinary conversations, warning letters, or fines, or if the non-compliance is deemed serious by the regulators, may be ordered to cease operations and subject to
revocation of relevant business operation permissions or business licenses, which could materially and adversely affect our business, financial condition, and results of
operations, and/or the value of our ADSs, or could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of
such securities to significantly decline or be worthless.
On December 28, 2021, the CAC published the Cybersecurity Review Measures, which became effective on February 15, 2022, which, among others, provide that (i)
critical information infrastructure operators purchasing network products and services that affect or may affect national security, (ii) internet platform operators engaging in
data processing activities that affect or may affect national security, and (iii) any internet platform operators engaging in data processing activities that affect or may affect
national security should be subject to cybersecurity reviews and require that any internet platform operator applying for listing on a foreign exchange must go through
cybersecurity review if it possesses personal information of more than one million users. We believe the Company, its subsidiaries and the VIE would not be subject to the
cybersecurity review by the CAC, given that the Company, its subsidiaries and the VIE do not possess a large amount of personal information in our business operations, and
data processed in our business does not have a bearing on national security and thus may not be classified as core or important data by the authorities. However, there remains
uncertainty as to how the Cybersecurity Review Measures will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new
laws, regulations, rules, or detailed implementation and interpretation related to the Cybersecurity Review Measures. If the relevant laws, regulations or interpretations change
in the future and the Company, its subsidiaries and the VIE are subject to mandatory cybersecurity review and other specific actions required by the CAC, we will face
uncertainty as to whether any clearance or other required actions can be timely completed, or at all. If not, the Company, its subsidiaries and the VIE may be required to
suspend relevant business, shut down relevant website, or face other penalties, which could materially and adversely affect our business, financial condition, and results of
operations, and/or the value of our ADSs, or could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of
such securities to significantly decline or be worthless. As of the date of this annual report, the Company, its subsidiaries and the VIE have not received any notice from
regulatory authorities requiring us to go through cybersecurity review by the CAC.
On April 2, 2022, the CSRC published the Draft Confidentiality Provisions, pursuant to which, both “direct issuance of securities overseas by a Chinese domestic
company” and “indirect issuance of securities overseas by a Chinese domestic company” (i.e., issuance of securities by relevant overseas holding company) shall be subject to
the Draft Confidentiality Provisions. Domestic enterprises that provide, publicly disclose files and documents that contain state secrets and work secrets of the authorities to
relevant securities companies, securities service agencies, foreign regulatory agencies and other institutions and individuals or do so through its overseas listing entities, shall
obtain the approval of the competent authorities, file with the competent confidentiality administrative authorities. As of the date of this annual report, the Draft Confidentiality
Provisions has not been officially issued and taken effect. It is uncertain when the final regulations of the Draft Confidentiality Provisions will be officially issued and take
effect, and how it will be enacted, interpreted or implemented. We believe the Company, its subsidiaries and the VIE would not be subject to clearance under the Draft
Confidentiality Provisions as the Company, its subsidiaries and the VIE do not possess any document or file that involves state secrets or work secrets of the authorities. As of
the date of this annual report, the Company, its subsidiaries and the VIE have not received any notice from regulatory authorities requiring them to obtain the forgoing approval
or complete any of the foregoing procedures. However, if the relevant laws, regulations or interpretations change in the future and the Company, its subsidiaries and the VIE
are subject to such clearance, we will face uncertainty as to whether any required approval can be timely obtained and any actions can be timely completed, or at all. If not, the
Company, its subsidiaries and the VIE may be subject to
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investigation, fines and other penalties; and if any related behavior is suspected as a crime, may be subject to criminal penalties, which could materially and adversely affect our
business, financial condition, and results of operations, and/or the value of our ADSs.
We have been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC, the CAC or other PRC regulatory authorities
required for overseas listings. As of the date of this annual report, we have not received any inquiries, notices, warnings, sanctions, denials, or regulatory objections from the
CSRC, CAC, nor any other PRC regulatory authority related to any approval requirement of overseas listings.
Because we may rely on dividends and other distributions on equity paid by our current and future PRC subsidiaries for our cash requirements, restrictions under
Chinese law on their ability to make such payments could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our
business, pay dividends to you, and otherwise fund and conduct our businesses.
We adopt a holding company structure, and our holding companies rely on dividends and other distributions on equity paid by our current and future PRC subsidiaries
for their cash requirements, including the funds necessary to service any debt we may incur or financing we may need for operations other than through our PRC subsidiaries.
Chinese legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC
GAAP. Our PRC subsidiaries are also required under Chinese laws and regulations to allocate at least 10% of their after-tax profits determined in accordance with PRC GAAP
to statutory reserves until such reserves reach 50% of the company’s registered capital. Allocations to these statutory reserves and funds can only be used for specific purposes
and are not transferable to us in the form of loans, advances or cash dividends. As of December 31, 2021, our PRC subsidiaries allocated RMB25.7 million ($4.0 million) to the
general reserve fund, which is restricted for distribution to the Company. We are in full compliance with PRC laws and regulations relating to such allocations. Any limitations
on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to
our business, pay dividends and otherwise fund and conduct our business.
The discontinuation of any of the preferential tax treatments currently enjoyed by our subsidiaries in China could materially increase our tax obligations.
Effective from January 1, 2008 and amended on February 24, 2017 and December 29, 2018, the PRC Enterprise Income Tax Law, or the EIT Law, imposes a tax rate of
25% on all enterprises, including FIEs, and terminates many of the tax exemptions, reductions and preferential treatments available under previous tax laws. Under the EIT Law,
qualified “high-and-new technology enterprises eligible for key support from the State,” or HNTE, are entitled to a preferential income tax rate of 15%, subject to an annual
self-assessment review during the valid period of their HNTE certificates. If an HNTE enterprise does not satisfy the related requirements stipulated by the State Administration
of Taxation, or SAT, to enjoy the preferential income tax rate of 15% during the annual self-assessment review, it will not be able to implement the preferential income tax rate
for the tax year being assessed.
In December 2008, the WFOE obtained an HNTE certificate with a valid period of three years retrospectively starting from January 1, 2008 and renewed the certificate
in 2011, 2014, 2017 and 2020 for another three years, respectively. As a result, the WFOE was entitled to a preferential income tax rate of 15% for calendar years 2008 through
2022. In the event the WFOE is unable to meet all of the requirements stipulated by the SAT to enjoy the preferential income tax rate of 15% during the annual self-assessment
review when holding the HNTE certificate or fail to renew its HNTE certificate, it will be subject to the standard statutory enterprise income tax rate of 25%. We cannot assure
you that the WFOE will continue to qualify as an HNTE after the expiration of its HNTE certificate, or that the local tax authorities will not, in the future, change their position
and revoke any of our past preferential tax treatments.
The discontinuation of any of our preferential tax treatments could materially increase our tax obligations and adversely affect our business, operating results and
financial condition.
Under the EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and U.S.
holders of our ADSs or common shares.
Under the EIT Law, an enterprise established outside of China with its “de facto management body” in China is considered a “resident enterprise,” meaning that it can
be treated the same as a Chinese enterprise for enterprise income tax purposes. In addition, a tax circular issued by the SAT on April 22, 2009 regarding the standards used to
classify certain Chinese controlled enterprises established outside of China as “resident enterprises,” or Circular 82, clarified that dividends and other income paid by such
“resident enterprises” will be considered to be PRC source income, subject to PRC withholding tax currently at a rate of 10%, when paid to non-PRC enterprise shareholders.
Circular 82 also subjects such “resident enterprises” to various reporting requirements with the PRC tax authorities. Under the Implementation Rules to the EIT Law, a “de facto
management body” is defined as a body that exercises “substantial and overall management and control over the manufacturing and business operations, personnel, and human
resources, finances and properties of an enterprise.” In addition, Circular 82 details that certain Chinese-controlled enterprises will be classified as “resident enterprises” if the
following are located or resident in China: senior management personnel and departments that are
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responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of
board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.
Currently, a majority of the members of our management team as well as the management team of some of our offshore holding companies are located in China.
However, Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreign entities
like us. In the absence of detailed implementing regulations or other guidance determining that offshore companies controlled by PRC individuals or foreign entities like us are
PRC resident enterprises, we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise.
However, the SAT may take the view that the determining criteria set forth in Circular 82 reflects the general position on how the “de facto management body” test
should be applied in determining the tax resident status of all offshore enterprises, or additional implementing regulations or guidance may be issued determining that our
Cayman Islands holding company is a “resident enterprise” for PRC enterprise income tax purposes. If the PRC tax authorities determine that our Cayman Islands holding
company is a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we will be subject to enterprise
income tax at a rate of 25% on our worldwide income as well as PRC enterprise income tax reporting obligations. This would mean that income such as interest on offering
proceeds and other non-PRC source income would be subject to PRC enterprise income tax rate at 25%, in comparison to no taxation in the Cayman Islands. Second, although
under the EIT Law and its implementing rules, dividends paid to us by our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to
the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, a 10% withholding tax will be
imposed on dividends we pay to our non-PRC enterprise shareholders, and future guidance may extend the withholding tax to dividends we pay to our non-PRC individual
shareholders and gains derived by our non-PRC shareholders from transferring our ADSs or common shares. Similar results would follow if our BVI holding company is
considered a PRC “resident enterprise.” In addition to the uncertainty in how the “resident enterprise” classification could apply, it is also possible that the rules may change in
the future, possibly with retroactive effect. We are closely monitoring the development of this area of rules and are evaluating appropriate arrangements of our management
activity to avoid being classified as a PRC “resident enterprise.”
PRC regulations of loans and direct investments by offshore holding companies to their PRC subsidiaries and consolidated variable interest entity may restrict our
ability to execute our business strategy.
In order to execute our business strategy, we must invest funds in our PRC subsidiaries and the VIE through loans or capital contributions. Under applicable Chinese
laws, any loan made by us to the WFOE and Huanqiuyimeng, each an FIE, cannot exceed statutory limits and all such loans must be registered with SAFE, or its local
counterpart. According to a notice issued by the People’s Bank of China regarding foreign debt on January 11, 2017 and other PRC laws and regulations regarding foreign debt,
the statutory limit for the total amount of foreign debt of a foreign-invested company, which is subject to its own election, is either the difference between the amount of total
investment and the amount of registered capital as approved by the Ministry of Commerce or its local counterpart, or two times of their respective net assets. With respect to the
VIE or other domestic PRC entities, the limit for the total amount of foreign debt is twice of their respective net assets.
We may also decide to finance the WFOE and Huanqiuyimeng by increasing their registered capital through capital contributions. Any capital contributions to the
WFOE and Huanqiuyimeng are subject to registration with the State Administration for Market Regulation (previously known as State Administration for Industry and
Commerce, or SAIC), or SAMR. SAFE promulgated the Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the
Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19, on March 30, 2015. According to SAFE Circular 19, an FIE will be able to
convert foreign exchange in its capital account into RMB at any time. In order to use the converted RMB, the FIE still needs to provide supporting documents and go through
the review process with the banks. In June 2016, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the
Administrative Provisions on Capital Account Foreign Exchange Settlement, or SAFE Circular 16, which removed certain restrictions previously provided under several SAFE
circulars, including the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the
Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, in respect of conversion by an FIE of foreign
currency registered capital into RMB and the use of such RMB capital. However, SAFE Circular 19 and SAFE Circular 16 continue to prohibit an FIE from, among other
things, using RMB funds converted from its foreign exchange capital for expenditure beyond its business scope, and providing loans to non-affiliated enterprises except as
permitted in the business scope. On October 23, 2019, SAFE promulgated the Notice for Further Advancing the Facilitation of Cross-border Trade and Investment, or SAFE
Circular 28, which, among other things, allows all foreign-invested companies to use RMB converted from foreign currency-denominated capital for equity investments in
China, as long as the equity investment is genuine, does not violate applicable laws, and complies with the Special Administrative Measures for Access of Foreign Investment
(Negative List). On April 10, 2020, SAFE promulgated the Circular on Optimizing Administration of Foreign Exchange to Support the Development of Foreign-related
Business, under which eligible enterprises are allowed to make domestic
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payments by using their capital funds, foreign loans and the income under capital accounts of overseas listing without providing the evidentiary materials concerning the
authenticity of each expenditure in advance, provided that their capital use shall be authentic and conforms to the prevailing administrative regulations on the use of income
under capital accounts.
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you
that we and the VIE will be able to obtain the necessary government approvals or complete the necessary government registrations or other procedures on a timely basis, or at
all, with respect to future loans by us to our PRC subsidiaries or the VIE or its subsidiaries or with respect to future capital contributions by us to our PRC subsidiaries. A failure
by us to obtain such approvals or complete such registrations may restrict our ability to execute our business strategy, and materially and adversely affect our liquidity and our
ability to fund and expand our business.
A failure by our shareholders who are Chinese citizens or residents in China to comply with regulations issued by SAFE could restrict our ability to distribute
profits, restrict our overseas and cross-border investment activities or subject us to liabilities under Chinese laws, which could adversely affect our business and prospects.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in
connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally
owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further
requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed
by PRC individuals, a share transfer or exchange, a merger, a division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle
fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and
from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its
PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign
exchange controls.
Our significant shareholder, Mr. Xiaofeng Ma, has previously completed his registration with SAFE and is in the process of updating his registration, and we have urged
our other Chinese resident shareholders, including our president Mr. Jun Zhang, to register under SAFE Circular 37 and they are currently in the application process. However,
we cannot assure you that their applications will be accepted by SAFE. Failure by such shareholders to comply with SAFE Circular 37 could subject us to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure,
which could adversely affect our business and prospects. See “— Risks Relating to Regulations of Our Business — Because we may rely on dividends and other distributions on
equity paid by our current and future PRC subsidiaries for our cash requirements, restrictions under Chinese law on their ability to make such payments could materially and
adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our businesses.”
Furthermore, as there is uncertainty concerning the reconciliation of these SAFE regulations with other approval requirements, it is unclear how these regulations, and
any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot predict
how these regulations will affect our business operations or future strategy. For example, we may be subject to a more stringent review and approval process with respect to our
foreign exchange activities, such as remittance of dividends and foreign currency-denominated borrowings, which may adversely affect our financial condition and results of
operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to
obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our
acquisition strategy and could adversely affect our business and prospects.
We may be subject to fines and legal sanctions imposed by SAFE or other Chinese government authorities if we or our Chinese employees fail to comply with
Chinese regulations relating to employee share options granted by offshore listed companies to Chinese citizens.
Under applicable PRC regulations, Chinese citizens who are granted share options by an offshore listed company are required, through a Chinese agent, which can be a
Chinese branch or representative of the offshore listed company, a Chinese institution which has a controlling relationship or actual control over the offshore listed company or
a Chinese institution qualified for asset custody business, to register with SAFE and complete certain other procedures, including applications for foreign exchange payment
quotas and opening special bank accounts. We and our Chinese employees who have been granted share options are subject to such PRC regulations. If we or our Chinese
employees fail to comply with these regulations, we or our Chinese employees may be subject to fines and legal sanctions imposed by SAFE or other Chinese government
authorities, which may prevent us from further granting options under our share incentive plans to our employees. Such events could adversely affect our business operations.
See “Item 4.B. Information on the Company — Business overview — Regulation — SAFE Regulations on Employee Share Options.”
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As PRC laws and regulations with respect to certain licenses and permissions are unclear and are subject to interpretations and enforcement of local governmental
authorities, the Company, its subsidiaries and the VIE may be required to obtain additional licenses.
As of the date of this annual report, we believe that the Company, its subsidiaries and the VIE have received all requisite licenses and permits from the PRC government
authorities to operate their business in the PRC and offer securities to foreign investors, and no permissions or approvals have been denied. However, as PRC laws and
regulations with respect to certain licenses and permissions are unclear and are subject to interpretations and enforcement of local governmental authorities, we may
inadvertently conclude that certain permissions are not required but the regulators do not take the same view as we do.
According to the Amended Private Education Law and the Amended Implementation Rules, private schools are required to obtain operating permits from relevant PRC
authorities for carrying out educational activities. Although the Amended Private Education Law generally states that private education institutions are also included in the
category of “private schools”, as of the date of this annual report, relevant implementing rules only require private education institutions providing tutoring services on academic
subjects for K-12 students and certain vocational skill education services to obtain private school operating permits, and there is no implementing rules that require private
education institutions focusing on art or other non-academic cultural education to obtain private school operating permits. To date, our PRC subsidiaries operating our training
centers have not received any notifications which requires them to obtain private school operating permits. However, since related regulatory regime of education industry in
the PRC continues to rapidly evolve, the interpretations of relevant regulations and rules are not always uniform, and the enforcement of relevant regulations and rules involve
uncertainties, we cannot assure you that our training centers will not be classified as “private schools” and thus be required to obtain private school operating permits by the
regulators due to any future and further development, interpretation and enforcement of relevant regulations and rules. To date, only one of our training centers in Qingdao has
obtained private school operating permit. If we inadvertently conclude that such permissions are not required but the regulators do not take the same view as we do, our
training centers may be subject to various penalties, including fines, orders to promptly rectify the non-compliance, or if the non-compliance is deemed serious by the
regulators, our training centers may be ordered to return course and service fees collected and pay a multiple of the amount of returned course and/or service fees to regulators
as a penalty or may even be ordered to cease operations. If this occurs, our business, results of operations, financial condition and the value of our ADSs could be materially
and adversely affected.
The Tourism Law of the PRC provides that, among other things, to engage in the businesses of outbound tourism, a travel agency shall obtain the corresponding
business permit. The Regulations on Travel Agencies and the implementation rules of Regulations on Travel Agencies, provide that, among other things, the travel agency shall
mean any entity that engages in the business of attracting, organizing, and receiving tourists, providing tourism services for tourists and operating domestic, inbound or
outbound tourism; the aforementioned business shall include but not limit to arranging for transport services, arranging for accommodation services, providing services for tour
guides or team leaders, providing services of tourism consultation and tourism activities design. According to the Regulations on Travel Agencies and its implementation rules,
any tourism agency engages in domestic and outbound tourism shall apply for corresponding permits to engage in such tourism activities from the administrative department of
tourism under the State Council, the governments of provinces, autonomous regions, or municipalities. With respect to our research-based learning services, our PRC
subsidiaries cooperate with third party travel agencies which have travel agency permits for our educational travel activities, such as accommodation and tour guiding. We don’t
think our PRC subsidiaries engaged in such travel-related activities under their cooperation with third party travel are also required to obtain travel agency permits under the
current law rules, and such PRC subsidiaries have not received any notifications which requires them to obtain travel agency permit. If we inadvertently conclude that such
permissions are not required but the regulators do not take the same view as we do, the relevant regulators may order such PRC subsidiaries to rectify the non-compliance,
confiscate the illegal income from such business and impose fines to such PRC subsidiaries. If this occurs, our business, results of operations, financial condition and the value
of our ADSs could be materially and adversely affected.
Under the Internet Measures, commercial internet information services operators shall obtain an ICP license from the relevant government authorities before engaging
in any commercial internet information services operations within the PRC. According to the Special Administrative Measures for Market Access of Foreign Investment
(Negative List) (2021 Edition), the provision of information services falls in the restricted category and the percentage of foreign ownership cannot exceed 50%. Since the
outbreak of the COVID-19, we have shifted some of our offline courses to online courses and provided them to our students through online platforms of third party IT service
providers. We believe that our PRC subsidiaries providing such online courses are not required to obtain the ICP license as they have not developed their own platforms but
delivered such courses through third party online platforms. To date, our PRC subsidiaries have not received any notifications from PRC governmental authorities to require
them to obtain the ICP license. However, since the enforcement of relevant regulations and rules involve uncertainties, we cannot assure you that the regulators will take the
same view as we do. If we inadvertently conclude that the ICP license is not required for our PRC subsidiaries, our PRC subsidiaries delivering online courses services may be
subject to non-compliance rectification order, confiscation of illegal proceeds, or fines; or if the non-compliance is deemed serious by the regulators, may be ordered to suspend
business for rectification. If this occurs, our business, results of operations, financial condition and the value of our ADSs could be materially and adversely affected. To date,
none of our PRC subsidiaries have obtained the ICP license due to the foreign investment
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restriction for the ICP license, but the VIE has obtained the ICP license to preserve our flexibility to operate relevant business. If the ICP license is required in the future or we
choose to provide information services through our own online platform, we will transfer relevant businesses to the VIE to comply with the compliance requirements.
Failure to comply with regulations relating to information security and privacy protection, breaches or perceived breaches of our security measures relating to our
service offerings, unauthorized disclosure or misuse of personal data through breaches of our computer systems or otherwise, could result in negative publicity and loss of
students, expose us to protracted and costly litigation, and harm our business and results of operations. Additionally, it is unclear whether we will be subject to the
oversight of the CAC and how such oversight may impact us.
The PRC regulatory and enforcement regime with regard to data security and data protection has also been evolving rapidly in recent years. In July 2013, China’s
Ministry of Industry and Information Technology (and its predecessors), or MIIT, promulgated the Provisions on Protection of Personal Information of Telecommunication and
Internet Users to regulate the collection and use of users’ personal information in the provision of telecommunication services and internet information services in China. In
November 2016, the Standing Committee of the NPC promulgated the Cyber Security Law, which took effect on June 1, 2017, to protect cyberspace security and order. The
Cyber Security Law tightens control of cyber security and sets forth various security protection obligations for network operators. According to the Cyber Security Law,
network operators shall, among others, take security measures to protect networks from unauthorized interference, damage and unauthorized access to prevent data from being
divulged, stolen or tampered with. Since 2019, the CAC and other relevant authorities further issued detailed implementation rules and measures to refine these information
security and privacy protection related regulations. On August 20, 2021, the Standing Committee of the NPC promulgated the Personal Information Protection Law, which took
effect on November 1, 2021. The Personal Information Protection Law aims at protecting personal information rights and interests, regulating the processing of personal
information, ensuring the orderly and free flow of personal information in accordance with the law, and promoting the reasonable use of personal information. Our business is
facing and/or may face significant challenges regarding information security and privacy protection, particularly with regard to the collection, storage, transmission and sharing
of confidential information, among others. As part of our service offerings, we may collect, process, transmit and store the personal information of students. We and the VIE
have adopted various security measures pertaining to the collection, processing, transmission or storage of user information, and have not experienced any material cyber-
attacks on our and the VIE’s cyber systems. We cannot assure you, however, that our current security measures will be adequate or sufficient to prevent any theft, misuse, or
unauthorized interference, damage, or unauthorized or inappropriate disclosure of personal data of our students. In case of any misuse of information collected from our
students or any unauthorized interference, damage, or unauthorized or inappropriate disclosure of such information due to our failure to protect it, we could be subject to
negative publicity, liability or regulatory penalties. Any such negative publicity, liability or regulatory penalties could cause us to lose students, expose us to costly litigation
and have a material adverse impact on our business and results of operations.
On the other hand, pursuant to the Personal Information Protection Law, the personal information processor, where it is necessary to transfer personal information out of
the PRC for business and other needs, shall satisfy one of the following conditions: (i) passing the security assessment by the national cyberspace authorities; (ii) being certified
by professional organizations for personal information protection; (iii) entering into contracts providing the rights and obligations of both parties with overseas recipients in
accordance with the standard contract formulated by the national cyberspace authorities; and (iv) other conditions specified by laws, administration regulations and the national
cyberspace authorities. The personal information processors shall take necessary measures to ensure that the activities of the overseas recipients handling personal information
meet the standards of personal information protection stipulated in the Personal Information Protection Law. If a personal information processor provides personal information
cross the border of the PRC, it shall inform the information owners the name and contact information of the overseas recipients, the purpose and manner of information
processing, the type of personal information, and the manner and procedure for the information owners to exercise their rights under the Personal Information Protection Law
over the overseas recipients, and obtain consent of the information owners. As of the date of this annual report, the amount of personal information transmitted by the Company,
its subsidiaries and the VIE across the border is relatively small, and none of them has received any notice from the national cyberspace authorities requiring them to conduct
security assessment. As the national cyberspace authorities have not yet authorized any professional organizations to conduct personal information protection certification or
formulated a standard model contract with overseas recipients, the Company, its subsidiaries and the VIE would not have any access to complete the personal information
protection certification or enter into standard model contracts with overseas recipients as of the date of this annual report. However, if the relevant laws, regulations or
interpretations change in the future and the Company, its subsidiaries and the VIE are subject to security assessment or personal information protection certification, we will
face uncertainty as to whether any required actions can be timely completed, or at all. If not, the Company, its subsidiaries and the VIE may be subject to non-compliance
rectification, warning, confiscation of illegal income or fines, or if the non-compliance is deemed serious by the regulators, suspension of relevant business and revocation of
relevant business operation permissions or business licenses, which could materially and adversely affect our business, financial condition, and results of operations, and/or the
value of our ADSs.
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On July 1, 2015, the Standing Committee of the NPC promulgated the National Security Law (the “New National Security Law”), which took effect on the same date
and replaced the former National Security Law promulgated in 1993. Under the New National Security Law, we are obligated to safeguard national security by, for example,
providing evidence related to activities endangering national security, providing assistance for national security work and providing necessary support for national security
institutions, public security institutions and military institutions. As such, we may have to provide data to PRC government authorities and military institutions to ensure
compliance with the New National Security Law. Complying with such regulations could cause us to incur substantial costs, require us to change our data practices in a manner
adverse to our business, or even subject us to negative publicity which could harm our reputation with users and negatively affect our business operations and the trading price
of our ADSs.
On December 28, 2021, the CAC published the Cybersecurity Review Measures, which became effective on February 15, 2022. Under the Cybersecurity Review
Measures, critical information infrastructure operators purchasing network products and services and internet platform operators engaging in data processing activities that
affect or may affect national security shall be subject to cybersecurity review. The Cybersecurity Review Measures further require that any internet platform operator applying
for listing on a foreign exchange must go through cybersecurity review if it possesses personal information of more than one million users. The review focuses on several
factors, including, among others, (i) the risk of theft, leakage, corruption, illegal use or export of any core or important data, or a large amount of personal information, and (ii)
the risk of any critical information infrastructure, core or important data, or a large amount of personal information being affected, controlled or maliciously exploited by a
foreign government after a company is listed. We believe we would not be subject to the cybersecurity review by the CAC, given that: (i) we do not possess a large amount of
personal information in our business operations; and (ii) data processed in our business does not have a bearing on national security and thus may not be classified as core or
important data by the authorities. However, we cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and there remains
uncertainty as to how the Cybersecurity Review Measures will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new
laws, regulations, rules, or detailed implementation and interpretation related to the Cybersecurity Review Measures. In the event that we are subject to any mandatory
cybersecurity review and other specific actions required by the CAC, we will face uncertainty as to whether any clearance or other required actions can be timely completed, or
at all. Given such uncertainty, we may be further required to suspend our relevant business, shut down our website, or face other penalties, which could materially and
adversely affect our business, financial condition, and results of operations, and/or the value of our ADSs or could significantly limit or completely hinder our ability to offer or
continue to offer securities to investors. As of the date of this annual report, we have not received any notice from such authorities requiring us to go through cybersecurity
review by the CAC.
On January 8, 2021, the CAC published the Amended Measures for the Administration of Internet Information Services (Draft for Comments), which requires that any
organization or individual within the territory of the People’s Republic of China that provides internet information services to users in China using network resources at home
and abroad shall abide by the provisions of these measures. To engage in internet information services, which belong to the operation of telecommunications business, an ICP
license from the competent telecommunications department shall be obtained. Internet information service providers shall establish an information release review system. On
October 29, 2021, the CAC published the Draft Measures on Security Assessment for the Export of Data (Draft for Comments) which provides the scope of data that will be
subject to security assessment when being exported, including (i) personal information and important data collected and generated by a critical information infrastructure
operator; (ii) any important data that is to be exported; (iii) personal information of a data processor that processes personal information of 1,000,000 individuals or more; (iv)
personal information of a data processor that in aggregate exports personal information of over 100,000 individuals or sensitive personal information of over 10,000
individuals; and (v) other information as designated by the CAC.
On November 14, 2021, the CAC publicly solicited opinions on the Draft Data Security Regulations, which reiterates that data processors that handle personal
information of more than one million people intending to be listed abroad should apply for a cybersecurity review.
As the Amended Measures for the Administration of Internet Information Services (Draft for Comments), the Draft Measures on Security Assessment for the Export of
Data (Draft for Comments) and the Draft Data Security Regulations have not been adopted, and it remains unclear whether the formal versions to be adopted in the future will
have any further material changes, and it is uncertain how such regulations will be enacted, interpreted, or implemented or how they will affect us.
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Although we do not anticipate our business to be materially impacted by the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring
for Students in Compulsory Education, certain types of our ancillary services may fall under the coverage of the Opinion and its local implementing measures, which may
adversely affect our business, financial condition and results of operations. And we cannot assure you that any future development, interpretation and enforcement of
Opinion and relevant regulations would not materially and adversely impact our business and financial outlook.
On July 24, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the Opinions on
Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education, or the Opinion, which sets out a series of operating
requirements on after-school tutoring institutions focusing on compulsory education, including, among other things, (i) local government authorities shall no longer approve any
new after-school tutoring institutions providing tutoring services on academic subjects for students in compulsory education, or the Academic AST Institutions, and all the
existing Academic AST Institutions shall be registered as non-profit entities, and local government authorities shall no longer approve any new after-school tutoring institutions
providing tutoring services on academic subjects for pre-school-age children and students in grades ten to twelve; (ii) online Academic AST Institutions that have filed with the
local education administration authorities will be subject to review and re-approval procedures by competent government authorities, and any failure to obtain such approval will
result in the cancellation of its previous filing and ICP license; (iii) Academic AST Institutions are prohibited from raising funds by listing on stock markets or conducting any
capitalization activities, and listed companies are prohibited from investing in Academic AST Institutions through capital markets fund raising activities, or acquiring assets of
Academic AST Institutions by paying cash or issuing securities; (iv) foreign capital is prohibited from controlling or participating in any Academic AST Institutions through
mergers and acquisitions, entrusted operation, joining franchise or variable interest entities; (v) after-school tutoring institutions shall not provide tutoring services on academic
subjects during national holidays, weekends and school breaks, or engage foreign teachers residing overseas to carry out training activities; (vi) fees charged for academic
subjects tutoring in compulsory education will need to follow the guidelines from the government to prevent any excessive charging or excessive profit-seeking activity; and
(vii) government authorities will implement risk management and control for the pre-collection of fees by after-school tutoring institutions with requirements such as setting up
third-party custodians and risk reserves, and strengthen supervision over loans regarding tutoring services. The Opinion further provides that administration and supervision
over academic after-school tutoring institutions for students on grades ten to twelve shall be implemented by reference to the relevant provisions of the Opinion.
On July 28, 2021, the PRC Ministry of Education, or the MOE, issued a notice, or the Notice, to further clarify the scope of academic subjects in China’s compulsory
education system. The Notice states that academic subjects include the following courses provided in accordance with the learning content of the national curriculum standards:
Morality and Law, Chinese Language, History, Geography, Mathematics, foreign languages (English, Japanese, and Russian), Physics, Chemistry and Biology. The Notice also
states that sports (or sports and health), art (or music, fine arts) subjects, and comprehensive practical activities (including technical education, labor and technical education),
etc. shall be managed as non-academic subjects. On August 25, 2021, the MOE issued the Administrative Measures on Materials for After-School Tutoring for Primary and
Secondary School Students (for Trial Implementation). After-school tutoring materials refer to the learning materials independently compiled by after-school tutoring
institutions approved and registered for the purpose of primary and secondary school students, including the tutoring materials used for both academic and non-academic
subjects, whether online or offline. The tutoring materials shall be reviewed as required. It is imperative to establish the internal review and external review system for tutoring
materials under the principle of reviewing every compilation and use. The training materials used for academic subjects shall be reviewed through dual review by combining
internal review by the after-school tutoring institutions and the external review by the education administrative authorities.
On September 9, 2021, the MOE and the Ministry of Human Resources and Social Security jointly formulated the Administrative Measures for Employees of After-
School Tutoring Institutions (Trial). The employees of after-school tutoring institutions refer to the staff in the institutions that carry out after-school tutoring for primary and
secondary school students and preschool children over the age of 3 according to regulations, including: teaching staff, teaching and research staff and other staff. In principle,
the full-time teaching, teaching and research staff of after-school tutoring institutions shall not be less than 50% of the total number of employees in the institution. For offline
tutoring for primary and secondary school students, in principle, the full-time teaching staff per class shall not be less than 2% of the number of students; for offline training for
preschool children over 3 years old, in principle, full-time training staff per class shall not be less than 6% of the number of children. After-school tutoring institutions shall
publicly make a written commitment that the recruitment of practitioners complies with the provisions of relevant measures.
Based on our understanding of the Opinion, the Notice and relevant local implementing measures for the Opinion, our major business, including portfolio training
services and other art related services, is not academic subjects tutoring for students in compulsory education, and thus is not subject to the Opinion, the Notice and relevant
local implementing measures. Two types of our ancillary services, however, may fall under the coverage of the Opinion and its local implementing measures, including (i)
some art related academic educational learning services and transferrable credit courses carried out by foreign teachers residing overseas, which together only constitute a very
small portion of our business operations and contributed around 3.7% of our net revenues for the fiscal year ended December 31, 2021; and (ii) our foreign language training
services for English and Japanese offered to senior high school
41
students, which also only constitute a very small portion of our business operations and contributed approximately 2% of our net revenues for the fiscal year ended December
31, 2021. With respect to (i), although the Opinion states that after-school tutoring institutions shall not engage foreign teachers residing overseas to carry out training activities
and does not specifically limit this restriction to Academic AST Institutions, the Opinion itself is focused on regulating Academic AST Institutions, therefore, it is unclear
whether our services will fall under such restriction. With respect to (ii), as the Notice only states that English and Japanese language tutoring that is provided in accordance
with the learning content of the national curriculum standards shall be regulated as academic subjects, and our services focus on training students for taking language tests for
overseas university applications, it is unclear whether such services will be categorized as academic subjects. As of the date of this annual report, we have not received any
notifications for rectification or administrative measure which requires us to rectify any of our business in accordance with the Opinion. Overall, we do not believe the Opinion
and the relevant regulations would have a material adverse impact on our business. We are closely monitoring the evolving regulatory environment and is making efforts to
seek guidance from and cooperate with the government authorities to comply with the Opinion, and if there is no other available option, we may elect to change the business
model of or dispose of the foregoing art training services carried out by foreign teachers and foreign language training services to ensure compliance, which may adversely
affect our business, financial condition and results of operations.
Although currently we do not believe the Opinion and relevant regulations would have a material adverse impact on our business, since these regulations and policies
are relatively new and the related regulatory regime continues to rapidly evolve, the interpretations of these regulations and rules are not always uniform, and the enforcement of
these regulations and rules involve uncertainties, we cannot assure you that any future development, interpretation and enforcement of the Opinion and relevant regulations
would not materially and adversely impact our business and financial outlook.
Risks Relating to Doing Business in the People’s Republic of China
China’s economic, political and social conditions, as well as changes in any government policies, laws and regulations, could adversely affect the overall economy
in China or the prospects of the industries in which we operate, which in turn could impact our financial performance.
Substantially all of our operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects are subject, to a significant
extent, to economic, political and social developments in China.
The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of
development, growth rate, control of foreign exchange, and allocation of resources. Although the Chinese economy has been transitioning from a planned economy to a more
market-oriented economy since the late 1970s, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies.
The Chinese government also exercises significant control over China’s economic growth through the allocation of resources, controlling the incurrence and payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Changes in any of these policies, laws and
regulations could adversely affect the overall economy in China or the prospects of the industries in which we operate, which could harm our business. Additionally, the
outbreak of COVID-19 may have a material adverse impact on the overall economic outlook, economic growth and business sentiment in China (see “— The outbreak of
COVID-19 and any future outbreak of severe acute respiratory syndrome, avian flu or coronavirus in China, or similar adverse public health developments, may disrupt our
business and operations and adversely affect our financial results.”), and may in turn influence the operation of our business.
China’s social and political conditions are also not as stable as those of the United States and other developed countries. Any sudden changes to China’s political system
or the occurrence of widespread social unrest could have negative effects on our business and results of operations. In addition, China has contentious relations with some of its
neighbors. A significant further deterioration in such relations could have negative effects on the Chinese economy and lead to changes in governmental policies that would be
adverse to our business interests.
The PRC legal system has inherent uncertainties that could limit the legal protections available to you and us and the VIE, and rules and regulations in China can
change quickly with little advance notice.
Unlike common law systems, the PRC legal system is based on written statutes and decided legal cases have little precedential value. Since 1979, the PRC government
has promulgated a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation since then has been to significantly
enhance the protections afforded to various forms of foreign investment in China. Each of our PRC operating subsidiaries is a foreign investment enterprise, which is an
enterprise incorporated in China and wholly or partially owned by foreign investors, and is subject to PRC laws and regulations in general and laws and regulations applicable to
foreign investment in particular. PRC laws, regulations and legal requirements can change quickly with little advance notice and their interpretation and enforcement involve
uncertainties. In addition, we and the VIE may have to resort to administrative and court proceedings to enforce the legal protection that we and the VIE enjoy either by law or
contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more
difficult to evaluate the outcome of administrative and court proceedings and the level of legal
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protection we and the VIE enjoy than in more developed legal systems. Such uncertainties, including the inability to enforce our and the VIE’s contracts and intellectual
property rights, could materially and adversely affect our and the VIE’s business and operations. Accordingly, we cannot predict the effect of future developments in the PRC
legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national
laws. These uncertainties could limit the legal protections available to us and the VIE and other foreign investors, including you.
For example, on July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued
the Crackdown Opinions, which emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based
companies, and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents facing China-based
overseas-listed companies and the demand for cybersecurity and data privacy protection. On December 24, 2021, the CSRC published the Overseas Offering and Listing
Regulations Drafts, which provide principles and guidelines for direct and indirect issuance of securities overseas by a Chinese domestic company. On December 28, 2021, the
CAC published the Cybersecurity Review Measures which, among others, require that any internet platform operator applying for listing on a foreign exchange must go
through cybersecurity review if it possesses personal information of more than one million users. As of the date of this annual report, we believe the permission and approval of
the CSRC or the CAC is not required for our operations, but as these rules and regulations were newly issued or are still in the process of being formulated, official guidance
and interpretation of such rules and regulations remain unclear in several respects at this time, we cannot assure you that we will remain fully compliant with all new regulatory
requirements of such rules and regulations or any future implementation rules on a timely basis, or at all.
PRC government may exert substantial influence over our operations, and may exert more control over offerings conducted overseas and/or foreign investment in
China-based issuers like us, and any actions by Chinese government, including any decision to intervene or influence our operations or to exert control over any offering
of securities conducted overseas and/or foreign investment in China-based issuers, may cause us to make material changes to our operation, may limit or completely hinder
our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be impaired by changes in its laws and regulations, including those relating to foreign investment limitations, taxation, data
security, education regulation, land use rights and other matters. The central or local governments of these jurisdictions may impose new, stricter regulations or interpretations
of existing regulations that would require additional expenditures and efforts on our part to ensure compliance with such regulations or interpretations. As such, our business
segments may be subject to various government and regulatory interference in the provinces in which they operate. We could be subject to regulation by various political and
regulatory entities, including various local and municipal agencies and government sub-divisions. We may incur increased costs necessary to comply with existing and newly
adopted laws and regulations or penalties for any failure to comply.
Recently, the Chinese government has stepped up its supervision on Chinese companies listed offshore and may exert more control over offerings conducted overseas
and/or foreign investment in China-based issuers in the future. For example, on July 6, 2021, the General Office of the Central Committee of the Communist Party of China and
the General Office of the State Council jointly issued the Crackdown Opinions, which emphasized the need to strengthen the administration over illegal securities activities and
the supervision on overseas listings by China-based companies, and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to
deal with the risks and incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. On December 24, 2021, the CSRC
published the Overseas Offering and Listing Regulations Drafts, which provide principles and guidelines for direct and indirect issuance of securities overseas by a Chinese
domestic company. On December 28, 2021, the CAC published the Cybersecurity Review Measures which, among others, require that any internet platform operator applying
for listing on a foreign exchange must go through cybersecurity review if it possesses personal information of more than one million users. On April 2, 2022, the CSRC
published the “Draft Confidentiality Provisions, which provides that, domestic enterprises that issue securities overseas directly or indirectly and that provide publicly disclose
files and documents containing state secrets and work secrets of the authorities to relevant securities companies, securities service agencies, foreign regulatory agencies and
other institutions and individuals or do so through its overseas listing entities, shall obtain the approval of the competent authorities, file with the competent confidentiality
administrative authorities. Although we believe we are currently not required to obtain permission from any of the PRC central or local government and has not received any
notice of denial of permission to list on the U.S. exchange, it is uncertain when and whether we will be required to obtain permission from the PRC government to list on U.S.
exchanges if the relevant laws, regulations or interpretations change in the future, and even when such permission is obtained, whether it will be denied or rescinded. As a
result, you, the Company, its subsidiaries and the VIE all face uncertainty about future actions by the PRC government that could significantly affect our business operations
and our ability to offer or continue to offer securities to investors and any such future actions may cause the value of our securities to significantly decline or be worthless.
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The audit report included in this annual report is prepared by an auditor who is not inspected by the PCAOB and, as such, trading in our securities may be
prohibited and our ADSs may be delisted under the HFCAA. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value
of your investment, and the inability of the PCAOB to conduct full inspections deprives you of the benefits of such inspections.
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are
traded publicly in the United States and a firm registered with the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess
its compliance with the laws of the United States and professional standards. On December 16, 2021, the PCAOB issued a report on its determination that the PCAOB is
currently unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China or Hong Kong because of positions taken by
PRC authorities in those jurisdictions. Because our auditor is located in mainland China, our auditor is subject to such PCAOB determination.
On December 18, 2020, the HFCAA was enacted, according to which, among others, if the SEC determines that we have filed audit reports issued by a registered public
accounting firm that has not been subject to inspection by the PCAOB for three consecutive years, the SEC shall prohibit our common shares or ADSs from being traded on a
national securities exchange or in the over the counter trading market in the United States. On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of
Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years
to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCAA. On
September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under
the HFCAA, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken
by one or more authorities in that jurisdiction. On December 2, 2021, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements
in the HFCAA. The rules apply to registrants the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located
in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate (the “Commission-Identified Issuers”). The final amendments require Commission-Identified
Issuers to submit documentation to the SEC establishing that, if true, it is not owned or controlled by a governmental entity in the public accounting firm’s foreign jurisdiction.
The amendments also require that a Commission-Identified Issuer that is a “foreign issuer,” as defined in Rule 3b-4 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, provide certain additional disclosures in its annual report for itself and any of its consolidated foreign operating entities. Further, the amendments provide notice
regarding the procedures the SEC has established to identify issuers and to impose trading prohibitions on the securities of certain Commission-Identified Issuers, as required by
the HFCAA. A Commission-Identified Issuer will be required to comply with the submission and disclosure requirements in the annual report for each year in which it was
identified. As of the date of this annual report, the SEC has identified a significant number of China-based companies as Commission-Identified Issuers. The SEC is
continuously adding more mainland China and Hong Kong based issuers to the list of Commission-Identified Issuers after such issuers file their annual reports for fiscal year
2021. If we are identified as a Commission-Identified Issuer based on our annual report for the fiscal year ended December 31, 2021, we will be required to comply with the
submission or disclosure requirements in our annual report filing covering the fiscal year ending December 31, 2022. If we are identified as a Commission-Identified Issuer for
three consecutive years based on our annual reports for fiscal years 2021, 2022 and 2023, the SEC would prohibit our securities from trading on a securities exchange or in the
over the counter trading market in the United States the earliest in early 2024. While we understand that there has been dialogue among the CSRC, the SEC and the PCAOB
regarding the inspection of PCAOB-registered accounting firms in China, there is no certainty that any agreement will be reached.
The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the
President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the
then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the
PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCAA. However,
some of the recommendations were more stringent than the HFCAA. For example, if a company was not subject to PCAOB inspection, the report recommended that the
transition period before a company would be delisted would end on January 1, 2022.
The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCAA and to address the
recommendations in the PWG report. The implications of possible additional regulation in addition to the requirements of the HFCAA and what was recently adopted on
December 2, 2021 are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or
prohibited from being traded “over-the-counter” earlier than would be required by the HFCAA. If our securities are unable to be listed on another securities
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exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a
potential delisting would have a negative impact on the price of our ADSs.
In addition, inspections of other firms that the PCAOB has conducted outside the PRC have identified deficiencies in those firms’ audit procedures and quality control
procedures, which may be addressed as part of the inspection process to improve future audit quality. The PCAOB’s inability to conduct full inspections in the PRC prevents it
from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ADSs or common
shares are deprived of the benefits of such PCAOB inspections. Furthermore, the inability of the PCAOB to conduct full inspections of auditors in the PRC makes it more
difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of
the PRC that are subject to the PCAOB inspections, which could cause our investors and potential investors to lose confidence in our auditor’s audit procedures and our
reported financial information and the quality of the consolidated financial statements.
Other than the foregoing, U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative
publicity by investors, financial commentators and regulatory agencies centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over
financial accounting, and inadequate corporate governance policies or a lack of adherence thereto. For example, on May 21, 2021, Nasdaq filed three proposals with the SEC to
(i) apply minimum offering size requirement for companies primarily operating in a “Restrictive Market”, (ii) prohibit Restrictive Market companies from directly listing on
Nasdaq Capital Market, and only permit them to list on Nasdaq Global Select or Nasdaq Global Market in connection with a direct listing, and (iii) apply additional and more
stringent criteria to an applicant or listed company based on the qualifications of the company’s auditors. These scrutiny, criticism and negative publicity could add uncertainties
to and may adversely affect our future offerings, business and our share price.
Restrictions on currency exchange may limit our ability to utilize our cash generated from sales of our services effectively and the ability of our PRC subsidiaries to
obtain financing.
Majority of our revenues and operating expenses are denominated in Renminbi. Restrictions on currency exchange imposed by the Chinese government may limit our
ability to utilize cash generated from sales of our services in Renminbi to fund our business activities outside China, if any, or expenditures denominated in foreign currencies.
Under current Chinese regulations, Renminbi may be freely converted into foreign currency for payments relating to “current account transactions,” which include, among other
things, dividend payments and payments for the import of goods and services, by complying with certain procedural requirements. Cash generated from sales of our services in
China can be converted into foreign currency to pay salaries of employees located outside of China upon the employee completing certain registration procedures. Cash
generated from sales of our services in China can also be used to pay off debt generated outside of China, provided that we comply with the applicable foreign debt registration
or approval requirements. Although the Renminbi has been fully convertible for current account transactions since 1996, we cannot assure you that the relevant Chinese
government authorities will not limit or eliminate our ability to purchase and retain foreign currencies for current account transactions in the future.
Conversion of Renminbi into foreign currencies and of foreign currencies into Renminbi for payments relating to “capital account transactions”, which include, among
other things, investments, loans and acquisitions of land and other fixed assets overseas, generally requires the approval of or registration or filing with SAFE or its authorized
banks and other relevant Chinese governmental authorities. Restrictions on the convertibility of Renminbi for capital account transactions could affect the ability of our PRC
subsidiaries to make investments overseas or to obtain foreign currency through debt or equity financing, including by means of loans or capital contributions from us.
Fluctuations in exchange rates could result in foreign currency exchange losses.
Because majority of our revenues and expenditures are denominated in Renminbi, fluctuations in the exchange rate between U.S. dollar and Renminbi will affect our
balance sheet and earnings per share in U.S. dollars. In addition, appreciation or depreciation in value of the Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in exchange rate will also affect the
relative value of any dividends we issue that are exchanged into U.S. dollars and the earnings from and the value of any U.S. dollar-denominated investments we make in the
future.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and
China’s foreign exchange policies. It is difficult to predict how economic conditions, or PRC or U.S. government policy, in particular, the outbreak of trade war between PRC
and U.S. and the imposition of additional tariffs on goods sold to each other beginning in 2018, may impact the exchange rate between the Renminbi and the U.S. dollar in the
future. The People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy goals. Very limited
hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to
reduce our exposure to foreign currency exchange risk.
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While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedging transactions may be limited, and we may not be able to
successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert
Renminbi into foreign currency.
The outbreak of COVID-19 and any future outbreak of severe acute respiratory syndrome, avian flu or coronavirus in China, or similar adverse public health
developments, may disrupt our business and operations and adversely affect our financial results.
Our financial results, business and operations could be materially and adversely affected by the outbreak of COVID-19, avian influenza, severe acute respiratory
syndrome, or SARS, or other similar adverse public health developments. In recent years, there have been reports on the occurrences of avian influenza in various parts of
China and neighboring countries, including confirmed human cases.
Additionally, since late 2019, there has been an outbreak of respiratory disease caused by COVID-19 pandemic, which has expanded widely within China and globally.
On January 30, 2020, the World Health Organization reportedly declared this COVID-19 outbreak a health emergency of international concern. In March 2020, the World
Health Organization declared the COVID-19 a pandemic. Since the COVID-19 outbreak, the PRC government has imposed various strict measures with the aim to contain the
virus including, but not limited to, travel restrictions, mandatory quarantine requirements, and postponed resumption of business operations. The outbreak of COVID-19 has
adversely affected our business operations in certain aspects. For example, after the outbreak of COVID-19, our training centers were mostly closed down from February 2020
to May 2020 as required by local regulatory authorities. After the COVID-19 pandemic was gradually under control and following the directives of local governments, most of
our training centers had progressively resumed operation by June 2020. However, the COVID-19 pandemic continues to evolve, and restrictions have been re-imposed from
time to time thereafter in certain cities to combat local sporadic outbreaks. We have experienced and expect to continue to experience temporary close-down of our training
centers in one or more cities from time to time in response to such local sporadic outbreaks. As a response to the situation, we have implemented certain practical plans,
including converting some of our offline courses to online courses and delivering them to students through third-party platforms since February 2020.
However, as the COVID-19 pandemic continues to pose a serious public health threat to countries and territories all over the world as of the date of this annual report, a
number of countries and territories have implemented quarantining policies and travel restrictions from and to seriously affected cities or areas. Those measures, though
temporary in nature, may continue and increase depending on developments in the coronavirus outbreak. In the first half year of 2020, although our students with any on-
campus training have been given the option to take their classes online since the COVID-19 outbreak, some of them prefer the traditional classroom format and have postponed
their training, which have adverse impact on our revenues to be recognized from portfolio training services, and enrollment from offline training centers have also been
adversely affected due to the aforementioned temporary closure of training centers. Such impact was progressively mitigated after the COVID-19 pandemic was gradually under
control in the second half year of 2020. In addition, our ability to deliver our overseas related travel services has adversely impacted since the outbreak of COVID-19. Some
students have delayed or cancelled their overseas study or travel plans due to these restrictive measures or safety considerations, and thus the demand for our services, especially
demand for our overseas related travel services and overseas study counselling services decreased, which has adversely affected our business, financial performance and results
of operations.
We adopted a written policy to guide our and the VIE’s employees in response to the outbreak of COVID-19 in January 2020. We are uncertain as to when the outbreak
of COVID-19 will be completely controlled in China and globally, and the prolonged adverse effects of the COVID-19 pandemic and any other adverse public health
developments may result in the possibility of the closure of our training centers or our offices again while we remain obligated to pay rent and other expenses for these facilities,
the quarantining of infected or potentially infected students, teachers, or employees and the disinfection of the affected properties along with the temporary suspension of our
operations, or the cancellation or deferments of student enrollment to avoid the spread of disease. We are closely monitoring the development of the COVID-19 pandemic and
continuously evaluating any further potential impact on our business, results of operations and financial condition, which we believe will depend on the duration and degree of
the pandemic. If the outbreak persists or escalates without being effectively controlled in the future, our business operations and financial performance may be materially and
adversely affected as a result of various factors, such as changes in general economic outlook, slowdowns in economic growth and negative business sentiment, and measures
taken by government authorities which may restrict our operations in China and abroad.
Our business, financial performance and results of operations may be adversely affected by deterioration of the relation between China and the United States.
Recent international trade disputes, including those between the United States and China, and the uncertainty created by these disputes could seriously destabilize the
global and Chinese economies, which could be detrimental to our business. Any escalation of existing trade tensions or the emergence of a trade war, or news and rumors of a
potential trade war escalation, could affect consumer confidence, which could adversely affect our business, results of operations and ultimately the trading price of our ADSs.
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As a result of the outbreak of COVID-19, the passage of Hong Kong national security legislation by the NPC, the imposition of sanctions by the U.S. Treasury
Department on certain officials of the Hong Kong Special Administrative Region and China’s central government, an executive order issued by the prior president of the United
States in August 2020 prohibiting certain transactions with ByteDance Ltd. and Tencent Holdings Ltd. and the respective subsidiaries of these companies, and China’s Ministry
of Commerce released Provisions on the Unreliable Entity List in response to United States sanctions, political tensions between the United States and China have escalated. An
increase in political tensions could reduce the level of trade, investment, technology exchanges and other economic activity between the two major economies, which would
have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our
business, financial performance and results of operations. Such tense relation may also discourage students from studying in the United States or make it more difficult for
Chinese students to obtain visas to study in the United States, as well as discourage U.S. persons and organizations to work for, provide services to or cooperate with Chinese
companies, which could make it difficult for us and the VIE to hire or retain qualified personnel and find suitable partners for our business. The regulations adopted by either
government of United States or China could negatively affect certain investors’ willingness to invest in or hold our ADSs, consequently may have a negative influence on the
trading price of our ADSs. If any such deliberations or policies were to materialize, there might also be material adverse effect on the stock performance of China-based
companies listed in the United States.
Risks Relating to Our Corporate Structure
We are not a Chinese operating company but a Cayman Islands holding company primarily operating in China through our PRC subsidiaries and may conduct
business through the VIE in the future. Investors purchasing our ADSs are not purchasing, and may never directly hold, equity interests in the VIE. There are substantial
uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to such agreements, including potential future
actions by the PRC government, which could affect the enforceability of our contractual arrangements with the VIE, and consequently, significantly affect our financial
condition and results of operations.
We are not a Chinese operating company but a Cayman Islands holding company with operations primarily conducted through our PRC subsidiary Huanqiuyimeng and
its subsidiaries. 69.04% of the equity interests of Huanqiuyimeng is indirectly owned by the Company through a wholly owned subsidiary and 30.96% of the equity interests of
Huanqiuyimeng is owned by the VIE. As we are currently expanding our online courses and other services, for which an ICP license may be required under PRC law, we may
elect to provide such services through the VIE in the future if and to the extent that an ICP license or any other license or permission not available for foreign-invested
companies is required.
The VIE is 90% owned by Mr. Xiaofeng Ma, our Chairman of the Board of Directors and Chief Executive Officer, and 10% owned by Mr. Jun Zhang, our President.
Mr. Ma and Mr. Zhang are PRC citizens. We entered into a series of contractual arrangements with the VIE and its shareholders, which enable us to:
•
•
•
exercise all rights of shareholders of the VIE;
exclusively provide specified technical and consulting services to the VIE and receive consulting fees from the VIE; and
have an exclusive option to purchase all or part of the equity interests in the VIE when and to the extent permitted by PRC law.
Pursuant to such contractual arrangements, the Company has power to direct activities of the VIE through the WFOE, and consolidates the VIE into its consolidated
financial statements under U.S. GAAP. For a detailed discussion of these contractual arrangements, see “Item 4.A. History and Development of the Company — Contractual
Arrangements with the VIE.”
In the opinion of Jincheng Tongda & Neal Law Firm, our PRC legal counsel, the abovementioned contractual arrangements are legally binding and enforceable and do
not violate current PRC laws and regulations. However, such contractual arrangements have not been tested in a court of law, and uncertainties in the PRC legal system could
limit our ability to enforce the contractual arrangements, and we cannot assure that the PRC regulatory authorities will not ultimately take a contrary view to our opinion. If our
current ownership structure and contractual arrangements with the VIE are found to be in violation of any existing or future PRC laws and regulations, the PRC government
could:
•
•
•
revoke our and the VIE’s business and operating licenses;
levy fines on us and the VIE;
confiscate any of our and the VIE’s income that they deem to be obtained through illegal operations;
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•
•
•
•
•
shut down a portion or all of our or the VIE’s servers or block a portion or all of our or the VIE’s websites;
discontinue or restrict our and the VIE’s operations in China;
impose conditions or requirements with which we and the VIE may not be able to comply;
require us and the VIE to restructure its corporate and contractual structure; and
take other regulatory or enforcement actions that could be harmful to our and the VIE’s business.
In addition, these contractual arrangements may not be as effective as direct ownership in providing us with operational control over the VIE. See “— Risks Relating to
Our Corporate Structure — We rely on contractual arrangements with the VIE and its shareholders to consolidate the VIE, which may not be as effective in providing
operational control as direct ownership, and the VIE’s shareholders may fail to perform their obligations under the contractual arrangements.” In the event we are unable to
enforce these contractual arrangements or we experience significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to
exert effective control over the VIE and may lose control over the assets owned by the VIE for accounting purposes. Our financial performance may be adversely and
materially affected as a result and we may not be eligible to consolidate the financial results of the VIE into the Company’s consolidated financial results.
We rely on contractual arrangements with the VIE and its shareholders to consolidate the VIE, which may not be as effective in providing operational control as
direct ownership, and the VIE’s shareholders may fail to perform their obligations under the contractual arrangements.
We rely on the contractual arrangements with the VIE and its shareholders to consolidate the VIE. Pursuant to the contractual arrangements, the Company has the
power to direct activities of the VIE through the WFOE, and consolidates the VIE into its consolidated financial statements under U.S. GAAP.
Although we have been advised by our PRC legal counsel, that our contractual arrangements constitute valid and binding obligations enforceable against each party of
such agreements in accordance with their terms, the contractual arrangements may not be as effective in providing operational control over the VIE as direct ownership. If we
had direct ownership of the VIE, we would be able to exercise our rights as a shareholder to vote with respect to matters subject to shareholder approval and also to effect
changes in the VIE’s board of directors, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level.
However, under the current contractual arrangements, we rely on the performance by the VIE and its shareholders of their obligations under the contracts to exercise
control over the VIE for accounting purpose. The shareholders of the VIE may not act in the best interests of the Company or may not perform their obligations under these
contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with the VIE. If the VIE or its shareholders
fail to perform their obligations under our contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. For
example, if the shareholders of the VIE were to refuse to transfer their equity interest in the VIE to us or our designee when we exercise the purchase option pursuant to these
contractual arrangements, or if they were otherwise to act in bad faith toward us, we may have to take legal actions to compel them to perform their contractual obligations. All
of these contractual arrangements are governed by and interpreted in accordance with PRC laws, and disputes arising from these contractual arrangements will be resolved
through arbitration or litigation in the PRC. However, the legal system in the PRC is not as developed as in other jurisdictions, such as the United States. See “— Risks
Relating to Doing Business in the People’s Republic of China — The PRC legal system has inherent uncertainties that could limit the legal protections available to you and us
and the VIE, and rules and regulations in China can change quickly with little advance notice.” Meanwhile, there are very few precedents and little formal guidance as to how
contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an
arbitration panel would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual
arrangements. Additionally, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the
arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings,
which would require additional expenses and delay. Therefore, our contractual arrangements with the VIE may not be as effective in ensuring our control over the VIE for
accounting purpose as direct ownership would be. In the event we are unable to enforce our contractual arrangements, we may not be able to exert effective control over the VIE
for accounting purpose, and we may not be eligible to consolidate the financial results of the VIE into the Company’s consolidated financial results.
48
The shareholders of the VIE may have conflicts of interest with us, which may materially and adversely affect our business. The shareholders of the VIE may
breach, or cause the VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and the VIE, which would have a material adverse effect
on our ability to effectively direct activities of the VIE and receive economic benefits from the VIE. If we cannot resolve any conflict of interest or dispute between us and
these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome
of any such legal proceedings.
Mr. Xiaofeng Ma and Mr. Jun Zhang are the shareholders of the VIE. Mr. Xiaofeng Ma is our Chairman and Chief Executive Officer, and Mr. Jun Zhang is our
President. The shareholders of the VIE may have potential conflicts of interest with us. These shareholders may breach, or cause the VIE to breach, or refuse to renew, the
existing contractual arrangements we have with them, and which would materially and adversely affect our ability to effectively control the VIE, and hence enjoy substantially
all the economic benefits received by the VIE. For example, the shareholders may cause our agreements with the VIE to not be performed or be performed in a manner adverse
to us by, among other things, failing to remit payments due to us under the contractual arrangements on a timely basis. We cannot assure you that when conflicts of interest
arise, either of these shareholders will act in the best interests of our company or that such conflicts will be resolved in our favor.
Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. Mr. Xiaofeng Ma is also the
Chairman of the Board of Directors and Chief Executive Officer of the Company and Mr. Jun Zhang is also one of the directors and President of our Company. We rely on Mr.
Ma and Mr. Zhang to abide by the laws of the Cayman Islands and China, where directors owe fiduciary duties to the company that requires them to act in good faith and in
what they believe to be the best interests of the company and not to use their positions for personal gain. If we cannot resolve any conflicts of interest or dispute between us and
the shareholders of the VIE, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the
outcome of any such legal proceedings.
Contractual arrangements relating to the VIE may be subject to scrutiny by the PRC tax authorities, and they may determine that we or our PRC variable interest
entity owe additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We
could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among the WFOE, the VIE and the VIE’s shareholders
were not entered into on an arm’s length basis and in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and to
adjust the VIE’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions
recorded by the VIE for PRC tax purposes, which could in turn increase tax liabilities. In addition to a transfer pricing adjustment, the PRC tax authorities may also enquire
about the substance of the consulting fee to be paid to the WFOE pursuant to applicable PRC laws. If the consulting fees do not have business substance or are not authentic,
they may not be deductible and may result in additional tax liability to the VIE.
Moreover, the PRC tax authorities may impose punitive interest on the VIE for adjusted taxes according to the applicable regulations. Our financial position could be
materially and adversely affected if the VIE’s tax liabilities increase or if they are required to pay punitive interest.
Economic substance legislation of the Cayman Islands may impact us and our operations.
Pursuant to the International Tax Cooperation (Economic Substance) Act (2021 Revision) of the Cayman Islands, or the ES Act, a “relevant entity” carrying on a
relevant activity is required to satisfy the economic substance test set out in the ES Act. A “relevant entity” includes an exempted company incorporated in the Cayman Islands
as is ATA Creativity Global. Based on the current interpretation of the ES Act, we believe that our company, ATA Creativity Global, is a pure equity holding company since it
only holds equity participation in other entities and only earns dividends and capital gains. Accordingly, for so long as our company, ATA Creativity Global, is a “pure equity
holding company,” it is only subject to the minimum substance requirements, which require us to (i) comply with all applicable filing requirements under the Companies Act,
Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands, or the Companies Act; and (ii) have adequate human resources and adequate premises in the
Cayman Islands for holding and managing equity participations in other entities. However, there can be no assurance that ATA Creativity Global will not be subject to more
requirements under the ES Act. Although it is presently anticipated that the ES Act will have little material impact on us and our operations, as the legislation remains subject to
further clarification and interpretation, it is not currently possible to ascertain the precise impact of such legislation on us and our operations.
49
The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or
misuse these assets.
Under the PRC law, legal documents for corporate transactions, including agreements and contracts such as the leases and business contracts, are executed using the
chop or seal of the signing entity or with the signature of a legal representative, whose designation is registered and filed with the relevant local branch of the market supervision
administration.
For the purpose of maintaining the security of our chops and the chops of our PRC subsidiaries and the VIE, we have established internal control procedures and rules
for using these chops and seals and we generally store these items in secured locations accessible only by the authorized personnel of each of our PRC subsidiary and the VIE.
Even with all procedures aforementioned, we cannot guarantee that such procedures will prevent all instances of abuse or negligence. If any of our authorized personnel misuses
or misappropriates the chops or seals of our PRC subsidiaries and the VIE, or such chops or seals are not kept safely, stolen or otherwise used by unauthorized persons or for
unauthorized purposes, it would be difficult to maintain control over the relevant entities and experience significant disruption to our and the VIE’s business operations. If a
designated legal representative obtains control of the chops in an effort to obtain control over any of our PRC subsidiaries or the VIE, we may need to take legal actions as well
as pass new resolutions to regain control of those companies. In addition, there is a risk that we may not be able to recover corporate assets that are sold or transferred out of our
control in the event of such a misappropriation if a bona fide third party relies on the apparent authority of the representative.
Risks Relating to Our ADSs
Our ADS prices and the ADS or stock prices of other educational services providers with business operations primarily in China have fluctuated widely in recent
years, which fluctuations could result in substantial losses to investors.
The trading prices of our ADSs are volatile, and this volatility may continue. For instance, between January 1, 2021 and December 31, 2021, our ADS prices as reported
on Nasdaq ranged between a low of $1.00 and a high of $19.75. Numerous factors that are beyond our control may cause the market price of our ADSs to fluctuate
significantly. In particular, the performance and fluctuation of the market prices of other educational services providers with business operations mainly in China that have listed
their securities in the United States may affect the volatility in the price of and trading volumes for our ADSs. The trading performance of these Chinese companies’ securities at
the time of or after their offerings may affect the overall investor sentiment towards Chinese companies listed in the United States and consequently may impact the trading
performance of our ADSs. These broad market and industry factors may significantly affect the market price and volatility of our ADSs, regardless of our actual operating
performance.
In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for specific business reasons. Factors such as variations in
our revenues, earnings and cash flow, announcements of new investments, cooperation arrangements or acquisitions, and fluctuations in market prices for our services could
cause the market price of our ADSs to change substantially. Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
We cannot give any assurance that these factors will not occur in the future.
Techniques employed by short sellers may drive down the market price of our ADSs.
Public companies listed in the United States that conduct most of their business in China have been the subject of short selling. Short selling refers to the sale of
securities that the seller does not own, but rather has borrowed from a third party with the intent of buying back the same securities at a later date to pay back to the lender. The
short seller expects to profit from the decline in the value of the security between the sale of the borrowed security and the purchase of the replacement security, because the
short seller expects to pay less when he or she purchases than when he or she sells. In the short seller's interest in the falling price of the security, many short sellers publish, or
arrange to publish, negative opinions about the issuer and its business prospects after short selling the security in order to create negative market momentum and generate profits
for themselves. In the past, these attacks from short sellers have led to a market sell-off of stocks. Much of the scrutiny and negative coverage has focused on allegations of a
lack of effective internal controls over financial reporting, which have resulted in financial and accounting irregularities and mistakes, inadequate corporate governance policies
or failure to comply with those policies, and in many cases, allegations of fraud. As a result, many of these companies are currently conducting internal and external
investigations into these allegations and have been subject to shareholder litigations and/or SEC enforcement actions in the interim.
We may be the subject of adverse allegations from short sellers in the future. Any such allegation may be accompanied by periods of instability in the market price of
our ADSs. If we become the subject of any adverse allegation, whether proven to be true or not, we may need to expend significant resources to investigate the allegation and/or
defend ourselves. While we will vigorously defend ourselves against any such attack by short sellers, the manner in which we bring a lawsuit against the relevant short sellers
may be limited by free speech principles, applicable federal or state laws, or trade secret issues. This situation can be costly and time consuming and may divert our
management’s attention from growing our business. Even if such allegations ultimately prove unfounded, the allegations against us could have a material impact on our
business operations and shareholders’ equity, and the value of any investment in our ADSs could be substantially diminished.
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Although publicly traded, the trading market in our ADSs has been substantially less liquid than the ADSs or stock of many companies quoted on Nasdaq, and this
low trading volume may adversely affect the price of our ADSs.
Although our ADSs are traded on Nasdaq, the trading volume of our ADSs has generally been very low. Reported average daily trading volume of our ADSs for the
three-month period ended March 31, 2022 was approximately 672,759 ADSs. Limited trading volume will subject our ADSs to greater price volatility and may make it difficult
for our shareholders to sell their ADSs at a price that is attractive to them, if at all.
The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs in the public market or the perception that these sales could occur, could adversely affect the market price of our ADSs and
could materially impair our future ability to raise capital through offerings of our ADSs.
As of April 22, 2022, there were 63.2 million common shares outstanding. In addition, there were issued options to purchase an aggregate of 2,930,874 common shares,
including options to purchase an aggregate of 706,448 common shares immediately exercisable as of April 22, 2022. All of the ADSs sold in our initial public offering are
freely tradable without restriction or further registration under the U.S. Securities Act of 1933, as amended, or the Securities Act, unless held by our “affiliates” as that term is
defined in Rule 144 under the Securities Act. If ADSs representing the shares held by our affiliates or that were privately placed are registered for resale or sold in compliance
with Rule 144, such sales or the perception of the possibility of such sales may depress the trading prices of our ADSs. In addition, the common shares subject to options for the
purchase of our common shares will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, and Rules 144 and
701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold in the public market as ADSs, the trading price of our ADSs could
decline.
We previously failed to comply with Nasdaq’s minimum bid price requirement and although we regained compliance within the grace period, we may fail to comply
with Nasdaq’s minimum bid price requirement again or any other listing requirements, and our shares may be delisted if we are unable to regain compliance with Nasdaq
rules within the applicable grace periods.
On May 14, 2020, we received a notification letter (the “Notification Letter”) from The Nasdaq Capital Market advising us that for 30 consecutive business days
preceding the date of the Notification Letter, the bid price of the Company’s ADSs had closed below the minimum $1.00 per ADS required for continued listing under Nasdaq
Listing Rule 5550(a)(2) (the “Minimum Bid Price Rule”). We were provided 180 calendar days to regain compliance with the Minimum Bid Price Rule. On July 9, 2020, we
were informed by Nasdaq that we regained compliance with the minimum bid price requirement under the Minimum Bid Price Rule as a result of the closing bid price of our
ADSs having been at $1.00 per ADS or greater for at least 10 consecutive business days from June 22, 2020 to July 6, 2020.
However, it is possible that we may fail to comply with the continued listing requirement of the Nasdaq Marketplace Rule 5550(a)(2) again or any other listing
requirements. If so, Nasdaq may delist our shares if we cannot regain compliance timely, even though we may still trade our shares over the Over-the-Counter Bulletin Board
(OTCBB) or the pink sheets system.
A significant percentage of our outstanding common shares are held by a small number of our existing shareholders, and these shareholders may have significant
influence on us and our corporate actions by virtue of the size of their shareholdings relative to our public shareholders.
One of our existing shareholders, Mr. Xiaofeng Ma, beneficially owns approximately 40% of our outstanding common shares as of April 22, 2022. Accordingly,
Mr. Ma has had, and may continue to have, significant influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for
approval, including mergers, consolidations and the sale of all or substantially all of our assets, the election of directors and other significant corporate actions. In addition,
without the consent of Mr. Ma, we could be prevented from entering into transactions that could be beneficial to us.
In addition, as of the date of this annual report, Mr. Xiaofeng Ma owns substantial equity interest in ATA Online. Mr. Xiaofeng Ma also acts as the chairman of the
board of directors of ATA Online. A potential conflict of interest may exist as the businesses of ATA Online may require the time and attention of Mr. Xiaofeng Ma and, as a
result, his interest may not be well aligned with the interest of our shareholders.
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Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at
a premium.
Our fourth amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our
structure or cause us to engage in change of control transactions, including, among other things, the following:
•
•
•
provisions that provide for a staggered board which operates to prevent a third party from obtaining control of our board in a relatively short period of time
because at least two annual shareholders’ meetings, instead of one, would generally be required to effect a change in majority of the board;
provisions that restrict the ability of our shareholders to call meetings and to propose special matters for consideration at shareholder meetings; and
provisions that authorize our board of directors, without action by our shareholders, to issue preferred shares and to issue additional common shares, including
common shares represented by ADSs.
These provisions could have the effect of depriving you of an opportunity to sell your ADSs at a premium over prevailing market prices by discouraging third parties
from seeking to acquire control of us in a tender offer or similar transactions.
The voting rights of holders of ADSs must be exercised in accordance with the terms of the deposit agreement, the American Depositary Receipts, or ADRs, and the
procedures established by the depositary. The process of voting through the depositary may involve delays that limit the time available to you to consider proposed
shareholders’ actions and also may restrict your ability to subsequently revise your voting instructions.
A holder of ADSs may exercise its voting rights with respect to the underlying common shares only in accordance with the provisions of the deposit agreement and the
ADRs. We do not recognize holders of ADSs representing our common shares as our shareholders; instead, we recognize the ADS depositary as our shareholder.
When the depositary receives notice of a shareholders’ meeting from us, it will distribute the information in the meeting notice and any proxy solicitation materials to
you. The depositary will determine the record date for distributing these materials, and only ADS holders registered with the depositary on that record date will, subject to
applicable laws, be entitled to instruct the depositary to vote the underlying common shares. The depositary will also determine and inform you of the manner for you to give
your voting instructions, including instructions to give discretionary proxies to a person designated by us. Upon the receipt of voting instructions of a holder of ADSs, if voting
is by poll, the depositary will endeavor to vote the underlying common shares in accordance with these instructions, if voting is by show of hands, the depositary will vote the
underlying common shares in accordance with these instructions received from a majority of holders of ADSs who provide voting instructions. You may not receive sufficient
notice of a shareholder meeting for you to withdraw your common shares and cast your vote with respect to any proposed resolution as a holder of our common shares. In
addition, the depositary and its agents may not be able to send materials relating to the meeting and voting instruction forms to you, or to carry out your voting instructions, in a
timely manner. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. The additional time
required for the depositary to receive from us and distribute to you meeting notices and materials, and for you to give voting instructions to the depositary with respect to the
underlying common shares, will result in your having less time to consider meeting notices and materials than holders of common shares who receive such notices and materials
directly from us and who vote their common shares directly. If you have given your voting instructions to the depositary and subsequently decide to change those instructions,
you may not be able to do so in time for the depositary to vote in accordance with your revised instructions. The depositary and its agents will not be responsible for any failure
to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote.
Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote our common shares underlying your ADSs if you do not vote
at shareholders’ meetings, which could adversely affect your interests.
Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our common shares underlying your ADSs at shareholders’
meetings if you do not vote, unless we notify the depositary that:
•
•
•
we do not wish to receive a discretionary proxy;
we think there is substantial shareholder opposition to the particular question; or
we think the subject of the particular question would have a material adverse impact on our shareholders.
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The effect of this discretionary proxy is that, absent the situations described above, you cannot prevent our common shares underlying your ADSs from being voted and
it may make it more difficult for shareholders to influence the management of our company. Holders of our common shares are not subject to this discretionary proxy.
You may not receive distributions on our common shares or any value for them if such distribution is illegal or if any required government approval cannot be
obtained in order to make such distribution available to you.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian for our ADSs receives on our common shares or other
deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of our common shares your ADSs represent.
However, the depositary is not responsible to make a distribution available to any holders of ADSs if it decides that it is unlawful to make such distribution. For example, it
would be unlawful to make a distribution to a holder of ADSs if it consisted of securities that required registration under the Securities Act but that were not properly registered
or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any holders of ADSs if any
government approval or registration required for such distribution cannot be obtained after reasonable efforts made by the depositary. We have no obligation to take any other
action to permit the distribution of our ADSs, common shares, rights or anything else to holders of our ADSs. This means that you may not receive the distributions we make on
our common shares or any value for them if it is unlawful or unreasonable from a regulatory perspective for us to make them available to you. These restrictions may have a
material adverse effect on the value of your ADSs.
You may be subject to limitations on transfer of your ADSs.
Your ADSs represented by ADRs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it
deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with
corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The
depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs
generally when the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or any government
or government body, or under any provision of the deposit agreement, or for any other reason.
We are not a Chinese operating company but a Cayman Islands company, and because judicial precedent regarding the rights of shareholders is more limited
under Cayman Islands law than under U.S. federal or state laws, you may have less protection of your shareholder rights than you would under U.S. federal or state laws.
Our corporate affairs are governed by our fourth amended and restated memorandum and articles of association, the Cayman Islands Companies Act and the common
law of the Cayman Islands. The notice of registered office is a matter of public record. A list of the names of the current directors and alternate directors (if applicable) are made
available by the Registrar of Companies in the Cayman Islands for inspection by any person on payment of a fee. The register of mortgages is open to inspection by creditors
and members. Shareholders of Cayman Islands companies like us have no general rights under the Cayman Islands law to inspect corporate records, or to obtain copies of lists
of shareholders of these companies. Our directors have discretion under our fourth amended and restated memorandum and articles of association to determine whether or not,
and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. And as a Cayman
Islands exempted company, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate
governance requirements, therefore, we may provide less protection to shareholders compared with U.S. domestic issuers.
The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman
Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of
our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent
in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. In addition, some jurisdictions,
such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. As a result of all of the above, public shareholders
may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would
as public shareholders of a U.S. company.
Certain judgments obtained against us or the VIE by our shareholders may not be enforceable.
We are not a Chinese operating company but a Cayman Islands company and majority of our assets are located outside of the United States. Substantially all of our
current operations are conducted in China. In addition, most of our directors and officers are nationals and residents of countries other than the United States. A substantial
portion of the assets of these persons are located outside
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the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce
judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us, the VIE and our officers and directors, none of whom is
resident in the United States and the majority of whose assets is located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman
Islands or China would recognize or enforce judgments of U.S. courts against us, the VIE or such persons predicated upon the civil liability provisions of the securities laws of
the United States or any state. In addition, there is uncertainty as to whether such Cayman Islands or Chinese courts would be competent to hear original actions brought in the
Cayman Islands or China against us or the VIE or such persons predicated upon the securities laws of the United States or any state.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United
States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. We are
under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective.
Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and
may experience dilution in your holdings.
We have been named as a defendant or interested third party in three lawsuits in connection with our sale of ATA Online, which could have a material adverse
impact on our business, financial condition, results of operation, cash flows and reputation.
Three lawsuits were filed in connection with our sale of the ATA Online Business, the details of which are described in “Item 8.A. Financial Information—Consolidated
Statements and Other Financial Information—Legal Proceedings.” These three lawsuits remain in their early stages and while we do not believe there are any merit to the
plaintiffs’ allegations and intend to vigorously defend against these lawsuits, we are currently unable to estimate the possible outcome of such lawsuits. In the event that our
initial defense of the lawsuits is unsuccessful, there can be no assurance that we will prevail in any appeal. Any adverse outcome could have a material adverse effect on our
business, financial condition, results of operation, cash flows and reputation. The litigation process may utilize a significant portion of our resources and divert management’s
attention from our day-to-day operations, either of which could harm our business. Also, as these three lawsuits remain in their early stages and the plaintiffs may revise their
claims for damages related to these matters, we cannot predict the impact of these damage claims on our business or financial results.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Our predecessor company, American Testing Authority, Inc., a New York company, began operations in 1999, and in the same year established the WFOE with a
company name of ATA Testing Authority (Beijing) Limited as a wholly-owned subsidiary in China,
which changed its company name to ATA Education Technology (Beijing)
Limited on February 18, 2019. In November 2001, our founders established ATA Testing Authority (Holdings) Limited, or ATA BVI, in the British Virgin Islands. In the
following year, American Testing Authority, Inc. merged into ATA BVI and ATA BVI became our holding company.
We incorporated ATA Inc. in the Cayman Islands in September 2006 as our listing vehicle. ATA Inc. became our ultimate holding company in November 2006 when it
issued shares to the existing shareholders of ATA BVI in exchange for all of the outstanding shares of ATA BVI. We completed our initial public offering in 2008.
In February 2009, we acquired the entire equity of Muhua Shangce Learning Data & Technology (Beijing) Limited (previously named Beijing Jindixin Software
Technology Limited), or Muhua Shangce, a company initially engaged in the development and marketing of software for computer-based tests and then focused on K-12
education assessment service. From 2017 and 2019, our equity interest in Muhua Shangce was reduced to 54.60% due to certain external investment and share transfer, and in
June 2021, we disposed of the entire 54.60% equity interest we held in Muhua Shangce to focus our efforts on growing our core international education services business.
In November 2013, we completed the acquisition of the entire equity interest of Xing Wei Institute (Hong Kong) Limited, or Xing Wei, a private education technology
company that provides training solutions as well as online and mobile training platforms for corporations in China.
In connection with the listing of our testing service business on the Chinese National Equities Exchange and Quotations (also known as the New Third Board), we
acquired the entire equity interest of ATA Online in May 2015. ATA Online operated computer-based testing services, online education services and other related services,
which historically represented our principal business before our sale of ATA Online. On August 16, 2018, we completed the sale of our equity interests in ATA Online. As a
result of such sale, we no longer hold, directly or indirectly, any interest in ATA Online and its subsidiaries. As of the date of this annual report,
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the sale of the ATA Online Business is being challenged by two shareholders, the details of which are described in “Item 8.A. Financial Information—Consolidated Statements
and Other Financial Information—Legal Proceedings.”
In March 2018, we established the VIE, a Chinese limited liability company, to preserve our flexibility to operate, invest in or hold businesses that are restricted from
receiving foreign investments.
In 2019, we completed the acquisition of 100% equity interests of Huanqiuyimeng, a leading provider of educational services for students in China interested in
applying for overseas art study. On September 13, 2019, we changed the name of our Cayman holding company from “ATA Inc.” to “ATA Creativity Global” in connection
with the Huanqiuyimeng Acquisition. On October 17, 2019, we changed the trading symbol for our ADSs listed on Nasdaq from “ATAI” to “AACG.”
On December 24, 2019, we completed the private issuance of 5,662,634 common shares to CL-TCC, a company focusing on investments in the cultural and education
industry for an aggregate price of US$10,022,862, or US$1.77 per share (the “Private Placement”).
For an organizational structure of the Company, its subsidiaries and the VIE and a detailed description of the Company’s significant subsidiaries, see “Item 3. Key
Information — Our Corporate Structure.”
Corporate Information
We are a Cayman Islands exempted company limited by shares, operating under the Companies Act of the Cayman Islands. Our principal executive offices are located
at 1/F East Gate, Building No. 2, Jian Wai Soho, No. 39 Dong San Huan Zhong Road, Chao Yang District, Beijing, China, and our telephone number is (86-10) 6518-1133. Our
primary website address is http://www.atai.net.cn. The information on our websites do not form a part of this annual report. On February 1, 2008, we completed our initial
public offering, which involved the sale by us of 4,874,012 of our ADSs, representing 9,748,024 of our common shares. Our agent for service of process in the United States is
CT Corporation System, located at 111 Eight Avenue, New York, New York 10011. The SEC maintains an Internet site at http://www.sec.gov that contains electronic reports,
proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC. For information regarding our principal capital
expenditures, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures.”
Our Consolidated Variable Interest Entity
The VIE was established in March 2018 to preserve our flexibility to operate, invest in or hold businesses that are restricted from receiving foreign investments. As of
the date of this annual report, the VIE is not engaged in any business operations itself. Our primary business operations, including our portfolio training business, research-
based learning services, overseas study counselling services and other educational services, are conducted through our PRC subsidiary Huanqiuyimeng and its subsidiaries.
69.04% of the equity interests of Huanqiuyimeng is indirectly owned by the Company through a wholly owned BVI holding company, and 30.96% equity interests of
Huanqiuyimeng is owned by the VIE. Currently, the VIE also holds 70% equity interests in Beijing Zhenwu, a PRC company newly established in August 2021 for purposes of
developing and marketing our project-based learning services in form of short-term art courses but has no business operations as of the date of this annual report. Other than
holding 30.96% equity interests in Huanqiuyimeng and 70% equity interests in Beijing Zhenwu, the VIE also holds minority investments in two other PRC companies. As we
are currently expanding our online courses and other services, for which ICP license may be required under PRC law, we may elect to provide such services through the VIE in
the future if and to the extent that an ICP license or any other license or permission not available for foreign-invested companies is required.
We, through the WFOE, entered into a series of contractual arrangements with the VIE and the shareholders of the VIE, which we refer to as the VIE Agreements. As a
result of the VIE Agreements, we have the power, through the WFOE, to direct activities of the VIE that most significantly impact the economic performance of the VIE; and
the obligation to absorb the losses and the right to receive benefits of the VIE that could potentially be significant to the VIE. As such, we became the primary beneficiary of the
VIE for accounting purposes and must consolidate the VIE under U.S. GAAP.
The VIE Agreements allow us to:
•
•
•
exercise all rights of shareholders of the VIE;
exclusively provide specified technical and consulting services to the VIE and receive consulting fees from the VIE; and
have an exclusive option to purchase all or part of the equity interests in the VIE when and to the extent permitted by PRC law.
In the opinion of Jincheng Tongda & Neal Law Firm, our PRC legal counsel:
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•
•
•
the ownership structures of the VIE and our wholly owned subsidiaries in China are in compliance with existing published PRC laws and regulations;
our contractual arrangements among our wholly owned subsidiaries in China and the VIE and its shareholders, are valid and binding, will not result in any
material violation of published PRC laws or regulations currently in effect, and are enforceable in accordance with their terms and conditions; and
the business operations of our company and all of our PRC subsidiaries, as described in this annual report, are in compliance with existing published Chinese
laws and regulations in all material aspects.
However, operational control through these contractual arrangements may be less effective than direct ownership as the VIE’s shareholders may fail to perform their
obligations under the contractual arrangements and we could incur substantial costs in enforcing these contractual arrangements if we are able to enforce these contractual
arrangements at all. Our rights under the VIE Agreements have not been tested in a court of law, and we cannot assure you that a court would enforce our contractual rights. In
addition, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules relating to such contractual
arrangements, including potential future actions by the PRC government, which could affect the enforceability of our contractual arrangements with the VIE, and consequently,
significantly affect our financial condition and results of operations. If the PRC government finds such agreements non-compliant with relevant PRC laws, regulations, and
rules, we could be subject to severe penalties or be forced to relinquish our interests in the VIE or forfeit our rights under the contractual arrangements. See “Item 3.D. Risk
Factors — Risks Relating to our Corporate Structure.”
Contractual Arrangements with the VIE
The following is a summary of the currently effective VIE Agreements.
Agreements that Allow Us to Exclusively Exercise All Rights of Shareholders of the VIE
Powers of Attorney. On March 15, 2018, Xiaofeng Ma and Haichang Xiong, both of which were the shareholders of the VIE, granted an irrevocable power of attorney
to the WFOE. On August 12, 2020, the power of attorney granted by Haichang Xiong to the WFOE terminated as a result of the equity interest transfer by Haichang Xiong to
Jun Zhang in the VIE. On the same day, Jun Zhang, as the new shareholder of the VIE, granted an irrevocable power of attorney to the WFOE on the same terms as the power of
attorney previously granted by Haichang Xiong to the WFOE. Pursuant to the irrevocable powers of attorney granted by Xiaofeng Ma and Jun Zhang to the WFOE, each of the
shareholders of the VIE appointed the WFOE or any eligible person designated by the WFOE as his attorney-in-fact to exercise all voting rights and other shareholder rights of
the VIE, including but not limited to appointing or electing their directors and executive officers. The person designated by the WFOE is entitled to sign the transfer documents
necessary for the fulfillment of the exclusive technical consulting and services agreement and the call option and cooperation agreement, and to join the liquidation group and
participate in the liquidation of the VIE. The term of the powers of attorney shall be consistent with the terms of the equity interest pledge agreements and call option and
cooperation agreement and shall be extended along with the equity interest pledge agreements and call option and cooperation agreement.
Agreements that Allow Us to Have Sole and Exclusive Rights to Provide Specified Technical and Consulting Services to the VIE and Receive Certain Consulting
Fees from the VIE
Exclusive Technical Consulting and Services Agreement. On March 15, 2018, the WFOE and the VIE entered into an exclusive technical consulting and services
agreement. Pursuant to the exclusive technical consulting and services agreement, the WFOE has the sole and exclusive right to provide specified technical and consulting
services to the VIE. The WFOE and the VIE agreed that the intellectual property rights created by the WFOE in the course of performing this agreement, including without
limitation any copyrights, trademarks or logos, registered or not, patents and proprietary technology, shall belong to the WFOE. The consulting fee payable by the VIE to the
WFOE shall be confirmed by the WFOE in writing and be calculated based on the actual time spent by the WFOE in providing services to the VIE on a quarterly basis. The
consulting fee shall be settled on a quarterly basis, and at the end of each year, the WFOE shall confirm the total consulting and other fees incurred for the year in writing and
the VIE shall settle any outstanding fees on a timely basis. This agreement shall continue for a period of 30 years from March 15, 2018 and shall be automatically extended for
another 10 years unless the WFOE gives written notice terminating this agreement three months before the expiration of this agreement.
Agreements that Provide Us with the Option to Purchase the Equity Interest in or the assets of the VIE
Call Option and Cooperation Agreement. On March 15, 2018, the WFOE, the VIE and Xiaofeng Ma and Haichang Xiong, both of which were the shareholders of the
VIE, entered into a call option and cooperation agreement, or the Prior Call Option and Cooperation Agreement. On August 12, 2020, the Prior Call Option and Cooperation
Agreement terminated as a result of the equity interest transferred by Haichang Xiong to Jun Zhang in the VIE. On the same day, Jun Zhang, as the new shareholder of the VIE,
together with Xiaofeng Ma, the WFOE and the VIE entered into a new call option and cooperation agreement on the same terms as the
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Prior Call Option and Cooperation Agreement. Pursuant to the new call option and cooperation agreement, when permitted by applicable law, the WFOE (or any eligible party
designated by the WFOE) shall have the right to acquire, at any time, all of the VIE’s assets or its share equity owned by the shareholders of the VIE, at a price equal to the sum
of the principal amounts of the loans from the WFOE to the shareholders of the VIE. If the WFOE elects to purchase a portion of the VIE’s share equity or assets, the exercise
price for such purpose shall be adjusted accordingly based on the percentage of such share equity or assets to be purchased relative to the total share equity or assets. Without
the prior written consent of the WFOE, the VIE may not sell or otherwise dispose of its assets or interests in its business, create or allow any encumbrance on its assets or
interests in its business, enter into any material contracts (except those contracts entered into in the ordinary course of business), or distribute dividends to the shareholders. The
new call option and cooperation agreement was effective upon the execution date and remain effective thereafter.
Loan Agreements. On March 15, 2018, Xiaofeng Ma and Haichang Xiong, both of which were the shareholders of the VIE, respectively entered into a loan agreement
with the WFOE. Pursuant to the loan agreements, the WFOE made loans in an aggregate principal amount of RMB10.0 million to the shareholders of the VIE solely for the
capitalization of the VIE. The shareholders of the VIE can only repay the loans by transferring all their equity interest in the VIE to the WFOE or its designated persons. In the
event that the shareholders of the VIE transfer their equity interests to the WFOE or its designee at a price equivalent to or less than the principal amount of the loans, the loans
will be interest free. If the price is higher than the principal amount of the loan, the excess amount will be paid to the WFOE as loan interest. The maturity date of the loans is on
the tenth anniversary of the execution date of the relevant loan agreement. The terms of the loans can be extended with the written consent of the WFOE and the VIE. On March
19, 2019 and April 20, 2019, the WFOE, the VIE and each of Xiaofeng Ma and Haichang Xiong entered into two supplementary agreements to the VIE Agreements, pursuant
to which the aggregate principal amount of loans made by the WFOE to the shareholders of the VIE for the capitalization of the VIE increased from RMB10.0 million to
RMB50.0 million with all other terms and conditions under the VIE Agreements remain unchanged. On August 12, 2020, the loan agreement entered by Haichang Xiong with
the WFOE, and the rights and obligations of Haichang Xiong under the two supplementary agreements terminated as a result of the equity interest transfer by Haichang Xiong
to Jun Zhang in the VIE, and Haichang Xiong repaid his borrowing of RMB 5.0 million under such agreements to the WFOE on August 17, 2020. On August 12, 2020, Jun
Zhang, as the new shareholder of the VIE, entered into a new loan agreement with the WFOE on the same terms as the loan agreement and the two supplementary agreements
previously entered by Haichang Xiong and borrowed RMB5.0 million from the WFOE on August 17, 2020 pursuant to aforementioned loan agreement.
Agreements that Guarantee the Performance of the VIE and Its Shareholders’ Obligations
Equity Interest Pledge Agreements. On March 15, 2018, Xiaofeng Ma and Haichang Xiong, both of which were the shareholders of the VIE, respectively entered into
an equity interest pledge agreement with the WFOE and the VIE. Pursuant to the equity interest pledge agreements, each of the shareholders of the VIE has pledged all of his
equity interest in the VIE to guarantee his and the VIE’s performance of obligations under, where applicable, the exclusive technical consulting and services agreement and the
call option and cooperation agreement. If the VIE or the shareholders of the VIE breach their contractual obligations under these agreements, the WFOE, as pledgee, will have
the right to acquire the pledged equity interests. The shareholders of the VIE agree that, during the term of the equity interest pledge agreements, they will not dispose of the
pledged equity interests or create or allow any encumbrance on the pledged equity interests, and they also agree that the WFOE’s rights relating to the equity pledge should not
be suspended or hampered by the shareholders, their successors or their designees. During the term of the equity interest pledge agreements, the WFOE has the right to receive
all of the dividends and profits distributed on the pledged equity. The term of the equity interest pledge agreements commenced on March 15, 2018 and shall expire on the
earlier of (a) the date on which all outstanding secured obligations are paid in full or otherwise satisfied (as applicable); (b) the WFOE enforces the equity interest pledge
agreements, pursuant to the terms and conditions, to satisfy its rights regarding the secured obligations and pledged collateral in full, or (c) the shareholders of the VIE complete
their transfer of the equity interest to another party (individual or legal entity) pursuant to the applicable call option and cooperation agreement and no longer hold any equity
interests in the VIE (together with (a) and (b), the “Expiration Conditions”). The VIE has registered these equity interest pledge agreements with the competent SAMR on April
27, 2018. The registration of the equity pledge enables the WFOE to enforce the equity pledges against third parties who acquire the equity interests of the VIE in good faith.
According to the equity transfer agreement entered into by Haichang Xiong and Jun Zhang on August 12, 2020, Haichang Xiong transferred all his equity interest in the VIE to
Jun Zhang, as well as his obligations and rights under the equity interest pledge agreement entered into by himself. On the same day, Jun Zhang, as the new shareholder of the
VIE, entered into a new equity interest pledge agreement with the WFOE and the VIE on the same terms as the equity pledge agreement previously entered into by Haichang
Xiong. The term of the equity interest pledge agreements entered into by Jun Zhang commenced on August 12, 2020 and shall expire on the earlier of the Expiration Conditions.
The VIE has registered the equity interest pledge agreement entered into by Jun Zhang with SAMR on February 26, 2021.
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B. Business Overview
Overview
We are an international educational services provider focusing on providing quality international educational experiences related to the cultivation and improvement of
students’ creativity. Currently, our principal product and service are portfolio training services which we provide to students in China who are interested in studying art
overseas. We believe we are one of the leading players in the portfolio training market in many regards, including geographic coverage, product breadth and student enrollment,
among others. To achieve our one-stop service strategy, we also provide research-based learning services, overseas study counselling services, in-school art classes through
cooperation with high schools, foreign language training services, junior art education and other related educational services to our students. We have successfully helped
approximately ten thousand students in China gain entry into art universities and colleges in the U.S., UK, Europe, Japan, Australia and other countries as of December 31,
2021, among which quite a few gained entry into top art universities and colleges in these countries. While working on developing new international education related products
and services, we are also exploring acquisition opportunities in the international education sector to broaden our product spectrum. In June 2021, we disposed of the legacy
business of K-12 education assessment services by disposing of the entire 54.60% equity interest we held in Muhua Shangce, to focus our efforts on growing our core
international education services business.
For the fiscal year ended December 31, 2021, we had 4,287 students enrolled, of which 53.3% were enrolled in our portfolio training programs and the remainder were
enrolled in our other programs. We deliver educational services to students primarily through our extensive network of training centers in China.
Our total net revenues for the fiscal year ended December 31, 2021 were RMB 202.2 million ($31.7 million). Net revenues from our portfolio training services,
research-based learning services, overseas study counselling services, and other educational services accounted for 74.9%, 3.0%, 11.7% and 10.4%, respectively, of our total net
revenues in the fiscal year ended December 31, 2021. Our total net loss for the fiscal year ended December 31, 2021 was RMB 36.4 million ($5.7 million). Our total net
revenues for the fiscal year ended December 31, 2020 were RMB 162.2 million. Net revenues from our portfolio training services, research-based learning services, overseas
study counselling services, other educational services, and our disposed K-12 education assessment and other services accounted for 69.8%, 2.7%, 13.0%, 12.4% and 2.1%,
respectively, of our total net revenues in the fiscal year ended December 31, 2020. Our total net loss for the fiscal year ended December 31, 2020 was RMB 100.6 million. For
the fiscal year ended December 31, 2019, our total net revenues were RMB 97.8 million, mainly derived from our portfolio training services, research-based learning services,
overseas study counselling services, other educational services, and our disposed K-12 education assessment and other services. Net revenues for the fiscal year ended
December 31, 2019 only include the results of our portfolio training services, research-based learning services, overseas study counselling services, and other educational
services conducted through Huanqiuyimeng for the period from August 6, 2019, or the Acquisition Date, when we consolidated the financial statements of Huanqiuyimeng and
its subsidiaries, to December 31, 2019, or the Partial Year 2019.
Our Programs, Services and Products
We provide a wide variety of creative arts related international educational services to our students. Our services include portfolio training services, research-based
learning services, overseas study counselling services and other educational services. Catering to the different needs of our customers, these services can be offered in a bundle
setting or separately. We update and expand our service offerings frequently in response to the evolving market needs, the outbreak of COVID-19 and the relationship between
China and the U.S. or other countries related to our services and business.
Portfolio Training Services
In addition to meeting the academic and language proficiency requirements, overseas art universities and colleges typically require a practical art portfolio as part of the
application process. A portfolio is a collection of art work that shows how a candidate’s skills and ideas have developed over a period of time and helps universities and
colleges evaluate the candidate’s potential. A portfolio can be in digital or hardcopy reproductions or original artwork, depending on the requirements of overseas art schools
and personal preference of students. A portfolio usually consists of three to five sections, of which requirements and expectations vary by schools and programs; some have
strict criteria while others are open and flexible. The variation in requirements and expectations may leave students with uncertainty about how to proceed with the preparation
of their portfolios. Even when criteria are clear, applicants may feel overwhelmed and wonder what to draw, paint, make or create, which media to use and how to best select
and present their art work. Compared to other requirements, portfolio preparation is the most difficult but important step in overseas art subject’s application, and thus has
generated market needs for professional portfolio training services.
The portfolio training market in China has witnessed growth in recent years, primarily due to increasing ability of Chinese families to afford overseas education, higher
recognition of the value of art, more career opportunities for art specialists, the low admission rates of top domestic art universities and colleges, and growing market awareness
and recognition of professional portfolio training services. For these reasons, we believe that portfolio training market has room to grow going forward. In addition to being one
of the leading players in the portfolio training market, we have gained a strong reputation in the market for our professional services and premier offer rates.
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Our Portfolio Training Courses
We provide customized and systematic portfolio training services to our beginners, intermediate and advanced students. When a student applies for our portfolio
training program, a study mentor will be assigned to such student to assess his or her educational background, art-related skills, creativity and innovation abilities and personal
interests. Based on the assessment results and preferences of the student, the study mentor will help the student select an area of art to specialize in, configure a tailored training
plan and assign one or more professional art teachers in the specialization for his or her training. The training plan will outline what types of programs to attend, how many
credit hours are needed and whether research-based learning programs and overseas education application consulting services are needed. After the training plan is completed,
the assigned professional art teachers (including domestic and international professors and masters in relevant art industry) will structure and develop a tailored program
schedule and curriculum for the student and guide him or her through the preparation of a portfolio step by step. Generally, our programs are structured to include fundamental
courses, creativity courses and professional courses. Credit hours needed to finish each type of course may vary by student due to differences in their educational background,
art-related skills, creativity and level of innovation as well as class performance.
Fundamental courses. In fundamental courses, students will learn and practice the basic skills required in the specialization they have selected under the instructions and
supervision of our teachers. For example, students in fashion design, architectural design or fine arts area will learn and practice elementary drawing skills and techniques in
their fundamental courses.
Creativity courses. In creativity courses, our teachers will guide and instruct students to practice observational drawing or other forms of art work that can be included in
a portfolio, and work with them to select the materials and media to present in a portfolio. Observational drawing is a realistic representation of an object or scene that has been
viewed directly in real life, as opposed to something that has been imagined or drawn from a photograph. It can be produced using any medium or combination of media such
as graphite pencil, charcoal, pen, ink and/or paint. Observational drawing is essential for applicants in many specializations. Our teachers will give guidance on the selection of
subject matter, as well as advice on the different angles, media and styles of observational drawing. Apart from observational drawing, there are other forms of art work that can
be included in a portfolio; for example, three-dimensional sculptures, installations, casts and/or model constructions made from cardboard, paper, wire, wood or other materials
can be included in a portfolio for architectural design. Our teachers will guide students through the selection of materials and media to work on their art work.
Professional Courses. In professional courses, students will learn how to create a portfolio step by step under the guidance and supervision of our teachers. The whole
process primarily includes theme development, research, art work creation and refinement, art work selection, and portfolio presentation and composition. Students will first
develop a theme for their portfolio, and then drill down to develop the theme into more detailed and symbolic ideas. Students will conduct research to explore and refine the
ideas generated previously. After research, they will make preliminary pieces reflecting the content and structure of their ideas and refine such art work in subsequent rounds.
Students will make a few pieces of art work for the purpose of selecting the best ones to be included in their portfolios. When the selected pieces are in place, students will put
them together in a professional, coherent and aesthetically pleasing layout. Our teachers will give advice and directions to students along the whole process to ensure that their
portfolios are creative, well-developed and meet the admission requirements and expectations of the universities or colleges for which the students apply.
Currently, the majority of our fundamental, creativity and professional courses are delivered through one-on-one model. We plan to develop more small-sized classes of
2 to 15 students going forward to improve our teaching efficiency and profit margin, especially for fundamental courses where most of the course content can be standardized.
Generally, our courses are conducted offline and delivered through our nation-wide training center network. We also conduct online courses for certain portfolio
training programs through third-party platforms; as an example, we provide online courses for students applying for art schools in Japan. After the outbreak of COVID-19, in
order to avoid interruption of our services due to closedown of our training centers required by local government authority from time to time and for offering flexible options to
students, we have converted some of the offline courses of our portfolio training services to online courses since February 2020 and provided options for students to take
courses via online platforms. In 2021, approximately 9% of our services were provided online. Accelerated by the COVID-19 pandemic, we are increasingly embracing the
experience in providing online services by launching our virtual online courses and moving our portfolio training courses online. We are changing our model of service delivery
to a hybrid model, a mix of online and offline delivery, and plan to develop more regularly scheduled online curriculums going forward in response to growing market demands,
through which students can attend classes of professional or highly skilled teachers nationwide. Due to travel ban caused by the COVID-19 pandemic, some of our overseas
professors cannot come to China to teach face to face. We have developed a multi-teacher model, where an international professor is paired with a domestic teacher to assist him
or her to deliver courses online. The international professor mainly focuses on teaching, with the domestic teacher mainly focuses on tutoring the students.
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Our portfolio training programs vary from one to three years in duration, primarily depending on the needs of the students, which are driven by the admission deadlines
of the schools they plan to apply for. Our portfolio training programs consist of time-based programs and project-based programs. Students who elect the time-based program
enroll in a certain number of consulting/training hours, whereas students who elect the project-based programs have no consulting/training hour constraint but will be guided
through a certain number of projects needed to complete a portfolio. Under project-based programs, the number of credit hours required to complete a project may vary
depending on the background and requirements of the students.
Our Portfolio Training Specializations
We provide customized portfolio training services in different creative arts related specializations. Portfolio requirements for different specializations may share some
common criteria but are different in many perspectives. For example, although observational drawing is required or useful for both architecture and fashion design, architecture
design students will focus more on observational drawings of city scenes or building interiors, while students in fashion design will focus more on drawing clothing on models.
For digital arts, such as animation and games, the admission staff of overseas art schools like to see candidates’ technological awareness and the capability to work with a range
of digital platforms, along with traditional observational drawing. We primarily provide portfolio training in the following nine art specializations.
Architectural & Space. Our architectural & space portfolio training mainly includes training in the areas of architecture and landscape design, interior and spatial design
and city planning. An architectural space portfolio typically includes evidence of creativity using a range of media, such as 3D composition, installations, models of buildings,
3D modeling, spatial plans, design blueprints and strong observational drawing skills showing a student’s ability to represent space, perspective and 3D form.
Visual Communication. Our visual communication portfolio training mainly includes training in the areas of graphic design, brand visual identity design, user interface
design and illustration. A visual communication portfolio typically includes visual identity design, web/user interface design, font design, package design, illustration design,
logo design, book design and poster design.
Industrial & Interaction Design. Our industrial & interaction design portfolio training mainly focuses on product design, furniture design, user experience design, game
design, service design, human/computer interaction, information design, virtual reality and interactive media. An industrial & interaction design portfolio typically includes art
work in both 2D and 3D that showcases strong practical, analytical and communication skills, as well as the technical and conceptual ideas and self-motivation capability of the
student.
Film & Drama. Our film & drama portfolio training mainly includes training in the areas of stage design, property design, film making, film & television production,
film editing, screen writing, theatre directing, film directing and performance studies. Making film and drama combines many different skills including performing arts, music,
literature and writing. As a result, the requirements and format of a film & drama portfolio may be quite different from other specializations. For example, a film portfolio may
be submitted in the format of a short video via DVD or flash drives or as URL links to YouTube, or embedded on a personal website or blog.
Digital Arts. Our digital arts portfolio training mainly includes training in the areas of animation, computer art, visual effects, game design, concept design and digital
comics. A digital arts portfolio typically includes storyboards, character designs, 3D character modeling, scene design, design sketches, figure drawing, short animated films,
short essays regarding game and finished key frames.
Music. Our music portfolio training mainly includes training in the areas of vocal music, instrumental music and music education. A music portfolio typically includes
videos or recordings of musical work.
Fine Arts. Our fine arts portfolio training mainly includes training in the areas of sculpture, printmaking, painting & drawing, photography, performance art, artistic
installation, ceramics & glass, imaging art and contemporary curating. A fine arts portfolio typically includes a series of paintings and drawings, crafts, contemporary
installations or a series of photographs showing the foregoing.
Art theory & administration. Our art theory & administration portfolio training mainly includes training in the areas of art history, art education, art curating, arts
administration and art management. An art theory & administration portfolio typically includes an arts study proposal and an art history writing sample.
Fashion & Jewelry. Our fashion & jewelry portfolio training mainly includes training in the areas of fashion design, fashion management, fashion merchandising,
jewelry design, metalsmithing and accessories design. A fashion & jewelry portfolio typically includes fashion illustration, design sketches, pattern cutting & tailoring, textiles
design, metalsmithing, jewelry design, accessory design and a final photo shoot.
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Undergraduate Foundation Course Programs
As most students applying for undergraduate studies at art universities and colleges in the U.K., Germany and other European countries need to take foundation courses
offered by such universities and colleges before formal admission, to provide students with flexibility and convenience, and as an extension to our portfolio training services,
since 2021, we have developed foundation courses recognized by certain overseas art universities and colleges that allow students to fulfill such requirements locally in China.
As of the date of this annual report, our foundation courses have been recognized by eight overseas universities, including Bath Spa University, Bournemouth University, De
Montfort University, Kingston School of Art of Kingston University, Manchester Metropolitan University, Nottingham Trent University, Teesside University and Winchester
School of Art of University of Southampton.
Research-Based Learning Services
We have offered research-based learning, mainly including overseas educational travel services to our portfolio training students and other students since 2014. After
the outbreak of COVID-19 in late 2019, we adjusted our products and began offering domestic educational travel services and other research-based learning services to
students, and also developed programs with services rendered online. The research-based learning market in China enjoyed an increase over the past several years, mainly due to
the growing demand for high-quality out-of-classroom education and the increasing affluence of Chinese families. The art-themed research-based learning market in China is
still developing and has high growth potential. We are looking for expanding our overseas and domestic partnerships to develop more overseas and domestic educational travel
and other research-based learning programs with different destinations and themes at variable length of time to match the needs of the growing market.
By providing research-based study through different learning styles in our research-based learning services, we bring art-related learning experiences to students of all
ages and backgrounds. Traveling while researching and learning will help broaden students’ horizons, enrich students’ experiences, develop students’ interest in art, and
improve students’ practical skills in art industry. Most applicants for overseas art programs have research-based learning experience or have showed interest in research-based
learning services, as including valuable research-based learning experience or recommendation letters received after completing the projects create highlights in their
applications for overseas studies. Our research-based learning services currently are more directed towards students who are interested in studying art overseas, which enhance
their skills and background while taking our portfolio training programs and overseas study counselling services simultaneously. We intend to expand our research-based
learning services to serve a broader range of students who are interested in art going forward.
The types of research-based learning services provided by us mainly include academic educational learning, workshop experience, themed educational travel and
transferrable credit courses. Typically, the duration of the services is from one to four weeks. The main destinations of our travel-related services are the United States, the
United Kingdom, Japan, France and Italy. Our overseas travel-related services were adversely affected by the COVID-19 pandemic due to the global travel freeze resulted
therefrom. In response, we have developed more domestic educational travel services and planned on probing into more cities to allow students to study and explore within the
territory of China. We have also made our research-based learning services available online so that students can still enjoy our services amid the COVID-19 pandemic.
Academic Educational Learning. We provide students with learning experience in reputable art schools, or chances to learn from famous professors or masters from
various art industries through our multiple academic educational learning programs. Our academic educational learning services target high school or undergraduate students
who intend to study abroad. Typically, our programs include summer camp and winter camp programs where students will visit reputable art schools and take specialized art
courses taught by famous professors. We also invite admissions officers who are in charge of recruiting candidates to meet and communicate with students. We also provide
online certificate programs where students attend courses jointly delivered by us and overseas prestigious art schools we have partnered with, and at the end of which, students
will receive certificates from these art schools indicating their completion of the online certificate programs. Due to international travel restrictions and in response to the
COVID-19 pandemic since 2020, we have conducted the art school camps and admission officer events online.
Workshop Experience. We provide students with on-site and online workshop experiences in professionals’ studios or by working on art projects at our partner
universities. Students practice in the areas they are interested in during the workshop and gain practical experience. Our workshop experience targets high school or
undergraduate students who intend to study abroad.
Themed Educational Travel. We organize and guide students to local or overseas museums, art galleries, cultural relics, etc. in themed educational travel programs,
during which we teach relevant knowledge to cultivate students’ interest in art, or guide students to conduct research online or on-site on specific art themes. For example, in
July 2021, we organized students to conduct field research with respect to the intangible cultural heritage of Tibetan thangkas, Gesar stone carvings and Tibetan medicinal clay
masks in Daofu, Western Sichuan. In July and October 2021, we organized students to conduct field research with respect to the murals and Buddha statues in Mogao Grottoes
and Yulin Grottoes in Dunhuang, and completed practical creation of Dunhuang intangible cultural heritage sculptures. Themed educational travel is suitable for students at all
ages, and especially attractive to lower age groups where the primary goals are to broaden their horizons, cultivate their interest in art and help them acquire art-related
knowledge and appreciations.
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Transferable Credit Courses. We partner with an accredited third party and offer transferrable online credit courses in different majors (including art) to college and
university undergraduate or graduate students who wish to take courses during their holidays or breaks and get credits for their school programs. Students will receive
transcripts after completing the transferrable credit courses. Such credits can be counted or converted to GPAs in many school programs and optimize study time and cost for
students.
Overseas Study Counselling Services
We offer art-related overseas study counselling services to students as part of our comprehensive service package. The overseas study counselling market in China has
witnessed growth in recent years, driven by the rapid growth of students looking to study overseas. Riding on the demand of overseas study, we believe art-related overseas
study counselling services will have considerable growth potential as well. Being a portfolio training service provider, we possess professional knowledge in choosing art
schools and programs and will better serve students applying in this area. We provide counselling advice in both academic and practical aspects and help students make
decisions from the application stage through to the admission stage. Typically, our services include the following:
•
•
•
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•
Background Development. We set a customized timetable for applicants, which mainly includes schedule for portfolio preparation, language tests, internships
and paperwork preparation. We also recommend and introduce our other services to the applicants according to the needs of such applicant.
University and Program Selection. We offer guidance on university and program selection based on the individual academic background, personality, career
goal and other factors of each student.
Paper Writing . We help students develop professional content and logical layout of their personal statements, resume, recommendation letters and other
paperwork for art school applications.
Interview Simulation. We provide sample interview questions that have previously been used and help students practice the interview process.
Application Preparation. We present a checklist of documents required in school applications for students to prepare, such as graduation certificate and proof
of deposits.
Other Educational Services
Foreign Language Training Services. We offer classes in foreign languages, including English, German, French, Spanish, Italian and Japanese, to students who need to
take language tests when applying for overseas universities or students interested in learning foreign languages. Our foreign language training services focus on helping students
improve their language abilities and test preparation techniques. We also promote our portfolio training services, research-based learning services and overseas study
counselling services to students enrolled in our foreign language training services.
Junior Art Education: Our junior art education services aim to provide art-related tutoring courses for junior students from ages 3 to 12, which are mainly designed to
supplement students’ regular school curriculum and help students cultivate and enhance their interest in art. Our primary subject for junior art education is painting. In 2020, we
disposed three of the four junior art training centers which we previously operated, and provided most of our junior art education services via online platform during the first
half of fiscal year 2020. We continue to provide online course options after reopening of offline training center since late second quarter of 2020.
In-School Classes. In order to attract potential students at younger ages and expand our array of products, we partner with international schools to establish in-school
art-related classes. We typically provide professional art teachers and customized art course content in these partnerships. Our goal is to cultivate and enhance students’ interest
in art at an early age and foster purchasing our products of portfolio training services, research-based learning services, overseas study counselling services and other
educational services.
Our Teachers
We are equipped with a team of professional art teachers who are specialists in different areas and who work either full-time or part-time for the delivery of our
programs. As of December 31, 2021, we have a total of 1,371 teachers, including 147 full-time employees and 1,224 part-time teachers who are academics from universities
and colleges or designers with private studios within their respective specializations. Most of our teachers have graduated from reputable domestic or overseas universities with
master’s degrees in China, the United Kingdom, the United States, Japan or other countries. Around 38% of our full-time teachers have over 5 years of related experience in the
art industry, while around 27% of our full-time teachers have over 3 years of related experience. Our part-time teachers are generally experienced and have been working in the
art industry for years. Most of our part-time teachers are experts in the relevant industries or teachers from prestige art schools and institutions who are familiar with the latest
development in the relevant industries.
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We have adopted a quantitative approach to comprehensively assess our teacher candidates on a wide set of criteria, including among others, educational background,
professional abilities, teaching skills, previous teaching experience and communication skills. Since 2020, we have established a centralized management system to allocate the
national teaching resources for our domestic training center network, through which we manage and oversee the procurement sharing and development of teaching resources as
well as to ensure consistency in the quality of our education. We rank our full-time teachers of portfolio training services in 5 levels, classified by educational background,
social experience, teaching completion efficiency and teaching quality. The top three levels constitute around 68% of our full-time teachers. With respect to level one teachers,
we plan to develop high-quality scheduled online curriculum in the form of small-sized classes facing nationwide students. Level two and level three teachers mainly focus on
advanced creative art and design courses in both one-to-one courses and small-sized classes. With respect to level four teachers, they are mainly involved in the foundation
curriculum in small-sized classes. With respect to level five teachers, they work as teaching assistant in small-sized classes. We offer different salary and compensation for
teachers at different levels. In the future, we plan to recruit more teaching assistants who have professional background in certain aspects to pair with our professional art
teachers, and to substitute study mentors who are solely responsible for administrative affairs. We believe this arrangement can provide better services to our students and more
effectively utilize the teaching time of our professional teachers.
Our teachers deliver courses to students to equip them with fundamental knowledge and skills, aesthetic appreciation for art, creative thinking capabilities, critical
thinking abilities, professional skills, craftsmanship, software techniques and studio practice skills. We have also developed a systematic orientation training program and on-
the-job training sessions, which reinforce the capabilities of our instructors to deliver our services effectively and assist students with learning efficiently. Our teachers’
retention, compensation and promotion are largely based on their performance. We offer our teachers with performance-based compensation packages and provide them with
career advancement prospects within ACG. We intend to continue leveraging our teaching resources within our nationwide network to ensure consistency in teaching quality.
Research and Curriculum Development
We have devoted significant resources to continuous research and curriculum development. We have a dedicated and experienced research and curriculum development
team composed of a number of curriculum development specialists and professional art teachers who analyze market demand, study cutting-edge developments and related
techniques, and develop the most appropriate curriculum and teaching methods to provide up-to-date and quality education services to our students.
Our research and curriculum development process mainly include the following:
Research. Our R&D team periodically conducts market research to study market needs, the cutting-edge knowledge required in each field of the creative arts, and
information of similar or related services and products in the market, which are then used to tailor our curriculum and education plans. Our R&D team also pays visits to
domestic universities and professional art colleges and researches their courses to capture the knowledge or technical skills that are not covered in their curriculum but are
expected in overseas art subjects’ applications. In addition, our R&D team will research the requirements and admission focuses of overseas art schools to tailor our services and
products to closely match such requirements and admission focuses.
Curriculum Design and Development. After comprehensive market research and study, our R&D team converts the information they collect into new portfolio training
themes, curricula and training materials after extensive discussion with our professional art teachers. We also establish new training courses to fill the knowledge and technical
skill gap between the art courses provided by domestic universities and professional art colleges and the requirements and expectation on applications for overseas art programs.
Curriculum Test and Optimization. After completing the design and development process, our R&D team tests the new themes, curricula or teaching materials within a
relatively small range of classes and collects feedbacks from teachers, students and parents to revise and upgrade new content before we bring it to market. Our R&D team also
regularly revises and upgrades our training materials and curricula post-development to better serve market needs and improve the quality of our services.
Our Customers
Our customers primarily consist of high school and undergraduate students who intend to pursue overseas undergraduate or graduate art studies. For our portfolio
training services, research-based learning services and overseas study counselling services, our customers are mainly high school and undergraduate students. We also provide
services to certain other students. For foreign language training services, we mainly target high school and undergraduate students and other non-student professionals who need
to pass relevant language tests in connection with overseas school application. For in-school classes, we mainly target junior-level high school students, who may be interested
in pursuing creative art studies in the future. For junior art education, our primary customers are junior students from ages 3 to 12. We plan to extend our service life-cycle and
expand our customer range, through adjusting our products and introducing new services, such as internships, opportunities or employment referrals for job-hunting candidates,
interest-based learning courses for younger market, etc.
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High School Student Customers. We provide portfolio training services, research-based learning services, overseas study counselling services and other educational
services to high school students who aim to pursue overseas undergraduate studies in art. High school students enrolled in our services are mainly from private bilingual high
schools or the international classes of public high schools. Compared with undergraduate students, high school students generally have relatively weaker foundations of art-
related knowledge and skills, and possess less information on how to apply for overseas art programs; thus many of them prefer purchasing a full set of our services, which can
comprehensively enrich their artistic knowledge, improve their artistic thinking and perception, enhance their professional skills and provide them with information on applying
for overseas art programs. Without their own source of income, almost all high school students are sponsored by their famil ies who tend to be less price sensitive but more
concerned with application results.
Undergraduate Student Customers. We primarily provide portfolio training services, research-based learning services, overseas study counselling services and other
educational services to undergraduate students who aim to pursue overseas graduate studies in art. Majority of the undergraduate students enrolling in our services have studied
art-related majors in domestic universities or professional art colleges and aim to pursue overseas graduate studies in the arts, while the remaining have studied in other majors
but desire to transfer to art programs in overseas graduate schools. Most undergraduate students have gained a certain amount of art-related expertise during their undergraduate
art studies. As a result, whilst they still rely on our services, resources and guidance to improve their applications for overseas art programs, they tend to care more about the
cost-effectiveness of our services and products and usually only purchase the types of our services they need instead of purchasing for the full package.
Other Customers. For the fiscal year ended December 31, 2021, we also had enrollments from other students and non-student customers besides high school and
undergraduate students. These customers cover a wide range in age. For example, we provide research-based learning services to secondary school students who are not
motivated by the desire to submit art school applications but to cultivate their interests in art and acquire art-related knowledge and appreciation, as well as other creative art
related services to children aged 3 to 12 years old, such as printmaking teaching services.
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Our Training Center Network
We operate 21 training centers in 20 cities in China as of the date of this annual report. We deliver our educational services to students primarily through our training
center network and we plan to further expand our training center network in China and abroad to increase our market penetration and market share.
*
Domestic business footprint of ACG as of April 26, 2022
Our training center network covers 20 major cities, 16 provinces and municipalities in China, including:
Northern China: Beijing, Tianjin, Jinan, Qingdao, Dalian and Shenyang, accounting for 38% of our total student enrollment. Beijing has two training centers
representing 24% of our total student enrollment in fiscal year ended December 31, 2021.
Southern China: Shenzhen, Wuhan, Changsha and Guangzhou, accounting for 17% of our total student enrollment in fiscal year ended December 31, 2021.
Eastern China: Shanghai, Hangzhou, Nanjing, Hefei and Suzhou, accounting for 30% of our total student enrollment in fiscal year ended December 31, 2021.
Western China: Xi’an, Zhengzhou, Kunming, Chongqing and Chengdu, accounting for 15% of our total student enrollment in fiscal year ended December 31, 2021.
Marketing, Sales and Business Development
As an international educational services provider, we focus on providing international education experiences that enrich and cultivate students’ creativity. We believe
our quality services and products, unique and practical curricula, and our “ACG” brand, teachers and resources generally play a significant role in attracting our prospective
students.
We employ a variety of marketing and student recruiting methods to attract prospective students, including:
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Partnership with Sales Channels. We acquire potential student leads through our partnership with overseas study counselling or foreign language training service
providers. Currently, our partnerships with such sales channels are an essential marketing method to acquire new students.
Internet and Mobile Advertisement. We advertise on the mainstream online search engines to promote our services to potential students and to those who actively search
keywords relevant to portfolio training, art study, etc. We also advertise through social media platforms to potential students, including without limitation, WeChat, Dianping
and TikTok. Internet and mobile advertising are also important marketing methods for us to acquire new students. For example, we produce some free or low-price short
teaching videos which introduce art-related knowledge, and upload them to internet platforms, such as our official WeChat account, official website, and other third-party
platforms to attract potential students.
Word of Mouth Referral. Due to our high-quality services and products as well as strong rate of admissions to reputed institutions for our students, our existing and
previous students frequently recommend our services and products to others who are in need of similar services and products. We believe our brand is recognized in the
portfolio training market and has a competitive advantage from word of mouth referrals.
Marketing Events and Activities. We frequently participate in educational seminars, art workshops and on-campus events and give free speeches and lectures in order to
introduce and promote our brand name and services. We also periodically participate and host educational expositions and other community events in addition to distributing
informational brochures or addressing queries from potential interested students.
Competition
The market for art related educational services, and portfolio training services in particular, has quickly ramped up in recent years, and is currently undergoing fierce
competition with all players aggressively up-scaling. Market players can be classified into leading players, other organized players and individual studios.
We believe we are one of the leading players in the portfolio training market in terms of, among others, geographic coverage, product breadth, and student enrollment.
In research-based learning services and other creative arts related international education services, we are also a player with competitive edges. Our main competitors are other
domestic and international art training institutions and organizations, which focus on some of our targeted markets. We also face potential competition from small to middle-
sized organized players and individual studios. Amid the COVID-19 pandemic, an increasing number of small-sized players and individual studios are forced to suspend
operations or discontinue their business compared to medium and large-sized players. Therefore, leading players with established brand, including ACG, which have more
diversified products/services and geographical coverage are comparatively more favorable choices for potential customers.
We compete primarily on the basis of branding and student acquisition, training quality, faculty, training center environment, product breadth and pricing, among
which, branding and student acquisition is generally regarded as the most important factor, while pricing is the least. Amid the COVID-19 pandemic, we increased our
competitive edges with our brand and reputation, which typically tend to engender the trust of clients, and play a role in helping us maintain and recruit prominent teachers and
employees. We believe that our competitive advantages include our “ACG” brand, high admission rate to art institutions, qualified faculty, competitive training quality and
comprehensive product mix. However, our competitors may establish brands that have wider recognition than us, develop marketing and sales methods that are more effective
than ours, introduce new products and services that have better performance and hence gain broader acceptance, hire and retain more qualified teachers, offer more satisfactory
training center environment or lower prices to students, which may cause us to lose our market share.
Seasonality
We have experienced and expect to continue to experience slight seasonal fluctuations in our revenues and results of operations, with the quarter ending March 31
typically having relatively lower revenues compared with the other quarters primarily for our portfolio training services. This is primarily because fewer students take classes in
January and February due to spring festival holidays in China, and that some students have already completed their application to study art overseas in December of the previous
year.
Intellectual Property
Intellectual property protections, including copyrights, trademarks, patents, and trade secrets are important to our success. We rely on copyright, trademark and patent
law, trade secret protection and confidentiality agreements with our employees, clients, business partners and others to protect our intellectual property rights. All of our senior
management and R&D employees are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, innovations and other processes
generated by them that relate to our business are our property, and to assign to us any ownership rights in those works. Despite our efforts, it may be possible for third parties to
obtain and use our intellectual property without authorization.
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As of April 26, 2022, we and the VIE have registered 85 trademarks for our products and services with the Trademark Office of the SAMR in China.
As of April 26, 2022, we have registered 55 software copyrights and one work copyright relevant to our product and service offerings with the National Copyright
Administration of the People’s Republic of China.
As of April 26, 2022, we and the VIE have also registered 42 domain names relating to our websites, including www.atai.net.cn, www.acgedu.cn and www.acgorg.com,
the primary URLs for our three main websites, with the Internet Corporation for Assigned Names and Numbers and the China Internet Network Information Center, a domain
name registration service provider in China.
Regulation
This section sets forth a summary of the most significant laws, regulations, policies and requirements that affect our business activities in China, the industries in which
we operate, and our shareholders’ right to receive dividends and other distributions from us.
Education Law of the PRC
On March 18, 1995, the NPC, enacted the Education Law of the PRC, or the Education Law, which was first amended on August 27, 2009. The Education Law sets
forth provisions relating to the fundamental education systems of the PRC, including a school education system comprising kindergarten education, primary education,
secondary education and higher education, a system of nine-year compulsory education, a national education examination system, and a system of education certificates. The
Education Law stipulates that the government formulates plans for the development of education, establishes and operates schools and other education institutions. Furthermore,
it provides that in principle, enterprises, social organizations and individuals are encouraged to establish and operate schools and other types of education institutions in
accordance with PRC laws and regulations. Meanwhile, no organization or individual may establish or operate a school or any other education institution for profit-making
purposes. The Education Law was further amended on December 27, 2015, which became effective on June 1, 2016, and was subsequently amended on April 29, 2021, which
became effective on April 30, 2021. The amended Education Law repudiates a specific paragraph of the old law, which prohibits any organization or individual from
establishing or operating a school or any other education institution for profit-making purposes. Nevertheless, schools and other education institutions sponsored wholly or
partially by government financial funds and donated assets remain prohibited from being established as for-profit organizations.
The Law for Promoting Private Education and the Implementation Rules for the Law for Promoting Private Education
The Law for Promoting Private Education of the PRC became effective on September 1, 2003 and was respectively amended on June 29, 2013, November 7, 2016 and
December 29, 2018, and the Implementation Rules for the Law for Promoting Private Education of the PRC became effective on April 1, 2004 and was amended on April 7,
2021. Under these regulations, “private schools” are defined as schools established by social organizations or individuals using non-government funds. Private schools providing
academic qualifications education, kindergarten education, education for self-study examination and other education shall be subject to approval by the education authorities at
or above the county level, while private schools engaging in occupational qualification training and occupational skill training shall be subject to approvals from the authorities
in charge of labor and social welfare at or above the county level. A duly approved private school will be granted a Permit for Operating a Private School, and shall be
registered with the Ministry of Civil Affairs of the PRC, or the MCA, or its local counterparts as a privately run non-enterprise institution.
Under the above regulations, the operations of a private school are highly regulated. For example, the types and amounts of fees charged by a private school providing
academic qualifications education shall be approved by relevant government authorities and publicly disclosed, and a private school that provides non-academic qualifications
education shall file its pricing information with the relevant government authorities and publicly discloses such information.
According to PRC laws and regulations, entities and individuals who establish private schools are commonly referred to as “sponsors” rather than “owners” or
“shareholders.” The economic substance of “sponsorship” with respect to private schools is substantially similar to that of shareholder’s ownership with respect to companies in
terms of legal, regulatory and tax matters. For example, the name of the sponsor shall be entered into the private schools’ articles of association and Permit for Operating a
Private School, similar to that of shareholders where their names shall be entered into the company’s articles of associations and corporate records filed with relevant authority.
From the perspective of control, the sponsor of a private school also has the right to exercise ultimate control over the school by means such as adopting the private school’s
constitutional documents, electing the school’s decision-making bodies, including the school’s board of directors and principals. The sponsor can also profit from the private
schools by receiving “reasonable returns,” as explained in detail below, or disposing its sponsorship interests in the schools for economic gains. However, the rights of sponsors
vis-à-vis private schools also differ from the rights of shareholders vis-à-vis companies. For example, under the PRC laws, a company’s ultimate decision-making body is its
shareholders meeting, while for private schools, it is the board of directors, though the members of which are substantially appointed by the sponsor. The sponsorship interest
also differs from the ownership interests with regard to the right to the distribution of residual properties upon liquidation of a private school, mainly because private education is
treated as a public welfare undertaking under the current regulations. While private education is treated as
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a public welfare undertaking under the current regulations, sponsors of a private school may choose to require “reasonable returns” from the annual net balance of the school
after deduction of costs for school operations, donations received, government subsidies (if any), the reserved development fund and other expenses as required by the
regulations. Private schools whose sponsor does not require reasonable returns shall be entitled to the same preferential tax treatment as public schools, while the preferential tax
treatment policies applicable to private schools whose sponsor require reasonable returns shall be formulated by the finance authority, taxation authority and other authorities
under the State Council. To date, however, no regulations have been promulgated by such authorities in this regard.
The Decision of the Standing Committee of the NPC on Amending the Law for Promoting Private Education of the PRC, or the Amendment, has been promulgated by
Order No. 55 of the President of the PRC on November 7, 2016 and has come into force on September 1, 2017.
Under the Amendment, the term “reasonable return” is no longer used and sponsors of private school may choose to establish non-profit or for-profit private schools at
their own discretion, while before the Amendment, all private schools shall not be established for for-profit purposes. Nonetheless, school sponsors are not allowed to establish
for-profit private schools that are engaged in compulsory education. In other words, the schools engaged in compulsory education should retain their non-profit status after the
Amendment comes into force.
The Amendment further establishes a new classification system for private schools to be classified by whether they are established and operated for profit-making
purposes.
According to the Amendment, the key features of the aforesaid new classification system for private schools include the following:
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sponsors of for-profit private schools are entitled to retain the profits and proceeds from the schools and the operation surplus may be allocated to the sponsors
pursuant to the PRC Company Law and other relevant laws and regulations;
sponsors of non-profit private schools are not entitled to the distribution of profits or proceed from the non-profit schools and all operation surplus of non-profit
schools shall be used for the operation of the schools;
for-profit private schools are entitled to set their own tuition and other miscellaneous fees without the need to seek prior approvals from or report to the
relevant government authorities. The collection of fees by non-profit private schools, on the other hand, shall be regulated by the provincial, autonomous
regional or municipal government;
private schools (for-profit and non-profit) may enjoy preferential tax treatments. Non-profit private schools will be entitled to the same tax benefits as public
schools. Taxation policies for for-profit private schools after the Amendment taking effect are still unclear as more specific provisions are yet to be introduced;
where there is construction or expansion of a non-profit private school, the school may acquire the required land use rights in the form of allocation by the
government as a preferential treatment. Where there is construction or expansion of a for-profit private school, the school may acquire the required land use
rights by purchasing them from the government;
the remaining assets of non-profit private schools after liquidation shall continue to be used for the operation of non-profit schools. The remaining assets of
for-profit private schools shall be distributed to the sponsors in accordance with the PRC Company Law; and
people’s governments at or above the county level may support private schools by subscribing to their services, provision of student loans and scholarships,
and leases or transfers of unused state assets. The governments may further take such measures as government subsidies, bonus funds and incentives for
donation in support of non-profit private schools.
On December 29, 2016, the State Council issued the Several Opinions of the State Council on Encouraging the Operation of Education by Social Forces and Promoting
the Healthy Development of Private Education, or the State Council Opinions, which requires to ease the access to the operation of private schools and encourages social forces
to enter the education industry. The State Council Opinions also provides that each level of the people’s governments shall increase their support to the private schools in terms
of financial investment, financial support, autonomy policies, preferential tax treatments, land policies, fee policies, autonomy operation, protecting the rights of teachers and
students etc. Further, the State Council Opinions require each level of the people’s governments to improve its local policies on government support to for-profit and non-profit
private schools by ways of preferential tax treatments etc. In addition, under the State Council Opinions, private schools shall strengthen its construction of the Chinese
Communist Party, or the CCP, and further the theoretical system of Socialism with Chinese Characteristics by introducing such system into textbooks and teaching programs.
The construction of the CCP’s organizations by the private schools as well as the CCP’s leadership to private schools shall constitute an important part of such schools’ annual
inspections.
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On December 30, 2016, the MOE, MCA, SAMR, the Ministry of Human Resources and Social Welfare and the State Commission Office of Public Sectors Reform
jointly issued the Implementation Rules on the Classification Registration of Private Schools to reflect the new classification system for private schools as set out in the
Amendment. Generally, if a private school established before promulgation of the Amendment chooses to register as a non-profit school, it shall amend its articles of
association, continue its operation and complete the new registration process. If such private school chooses to register as a for-profit school, it shall conduct financial
liquidation process, have the property rights of its assets such as lands, school buildings and net balance being authenticated by relevant government authorities, pay up relevant
taxes, apply for a new Permit for Operating a Private School, re-register as for-profit schools and continue its operation. Specific provisions regarding the above registrations are
yet to be introduced by people’s governments at the provincial level.
On December 30, 2016, the MOE, SAMR and the Ministry of Human Resources and Social Welfare jointly issued the Implementation Rules on the Supervision and
Administration of For-profit Private Schools, pursuant to which the establishment, division, merger and other material changes of a for-profit private school shall first be
approved by the education authorities or the authorities in charge of labor and social welfare, and then be registered with the competent branch of SAMR.
On September 1, 2017, SAMR and MOE jointly issued the Notice of Relevant Work on the Registration and Management of the Name of For-Profit Private Schools,
which specifies the requirements on the names of for-profit private schools.
On December 29, 2018, the Decision of the Standing Committee of the NPC on Amending the Seven Laws of the Labor Law of the People’s Republic of China was
promulgated by Order No. 24 of the President of the PRC and took effect on the same date, which made two minor adjustments to Article 26 and Article 64 of the Law for
Promoting Private Education of the PRC. These minor adjustments do not materially affect our business and operations.
On April 7, 2021, the State Council promulgated the Amended Implementation Rules for the Private Education Law, or the Amended Implementation Rules, which
became effective on September 1, 2021. The Amended Implementation Rules provides, among others, that private schools are required to obtain operating permits from
relevant PRC authorities for carrying out educational activities. Under the Law for Promoting Private Education, as private education institutions established under the PRC law
are also included in the category of “private schools,” we cannot assure you that our training centers will not be classified as “private schools” and thus be required to obtain
private school operating permits by the regulators. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — As PRC laws and regulations with respect to
certain licenses and permissions are unclear and are subject to interpretations and enforcement of local governmental authorities, the Company, its subsidiaries and the VIE may
be required to obtain additional licenses.”
Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education
On July 24, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council issued the Opinion, which
sets out a series of operating requirements on after-school tutoring institutions focusing on compulsory education, including, among other things, (i) local government
authorities shall no longer approve any new Academic AST Institutions, and all the existing Academic AST Institutions shall be registered as non-profit entities, and local
government authorities shall no longer approve any new after-school tutoring institutions providing tutoring services on academic subjects for pre-school-age children and
students in grade ten to twelve; (ii) online Academic AST Institutions that have filed with the local education administration authorities will be subject to review and re-
approval procedures by competent government authorities, and any failure to obtain such approval will result in the cancellation of its previous filing and ICP license; (iii)
Academic AST Institutions are prohibited from raising funds by listing on stock markets or conducting any capitalization activities, and listed companies are prohibited from
investing in Academic AST Institutions through capital markets fund raising activities, or acquiring assets of Academic AST Institutions by paying cash or issuing securities;
(iv) foreign capital is prohibited from controlling or participating in any Academic AST Institutions through mergers and acquisitions, entrusted operation, joining franchise or
variable interest entities; (v) after-school tutoring institutions shall not provide tutoring services on academic subjects during national holidays, weekends and school breaks, or
engage foreign teachers residing overseas to carry out training activities; (vi) fees charged for academic subjects tutoring in compulsory education will need to follow the
guidelines from the government to prevent any excessive charging or excessive profit-seeking activity; and (vii) government authorities will implement risk management and
control for the pre-collection of fees by after-school tutoring institutions with requirements such as setting up third-party custodians and risk reserves, and strengthen supervision
over loans regarding tutoring services. The Opinion further provides that administration and supervision over academic after-school tutoring institutions for students in grades
ten to twelve shall be implemented by reference to the relevant provisions of the Opinion.
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On July 28, 2021, the MOE issued the Notice to further clarify the scope of academic subjects in China’s compulsory education system. The Notice states that academic
subjects include the following courses provided in accordance with the learning content of the national curriculum standards: Morality and Law, Chinese Language, History,
Geography, Mathematics, foreign languages (English, Japanese, and Russian), Physics, Chemistry and Biology. The Notice also states that sports (or sports and health), art (or
music, fine arts) subjects, and comprehensive practical activities (including technical education, labor and technical education), etc. shall be managed as non-academic subjects.
On August 25, 2021, the MOE issued the Administrative Measures on Materials for After-School Tutoring for Primary and Secondary School Students (for Trial
Implementation). After-school tutoring materials refer to the learning materials independently compiled by after-school tutoring institutions approved and registered for the
purpose of primary and secondary school students, including the tutoring materials used for both academic and non-academic subjects, whether online or offline. The tutoring
materials shall be reviewed as required. It is imperative to establish the internal review and external review system for tutoring materials under the principle of reviewing every
compilation and use. The training materials used for academic subjects shall be reviewed through dual review by combining internal review by the after-school tutoring
institutions and the external review by the education administrative authorities.
On September 9, 2021, the MOE and the Ministry of Human Resources and Social Security jointly formulated the Administrative Measures for Employees of After-
School Tutoring Institutions (Trial). The employees of after-school tutoring institutions refer to the staff in the institutions that carry out after-school tutoring for primary and
secondary school students and preschool children over the age of 3 according to regulations, including: teaching staff, teaching and research staff and other staff. In principle,
the full-time teaching, teaching and research staff of after-school tutoring institutions shall not be less than 50% of the total number of employees in the institution. For offline
tutoring for primary and secondary school students, in principle, the full-time teaching staff per class shall not be less than 2% of the number of students; for offline training for
preschool children over 3 years old, in principle, full-time training staff per class shall not be less than 6% of the number of children. After-school tutoring institutions shall
publicly make a written commitment that the recruitment of practitioners complies with the provisions of relevant measures.
Although we do not anticipate our business to be materially impacted by the Opinion and related rules and regulations, certain types of our ancillary services may fall
under the coverage of the Opinion and its local implementing measures, which may adversely affect our business, financial condition and results of operations. See “Item 3.D.
Risk Factors — Risks Relating to Regulations of Our Business — Although we do not anticipate our business to be materially impacted by the Opinions on Further Alleviating
the Burden of Homework and After-School Tutoring for Students in Compulsory Education, certain types of our ancillary services may fall under the coverage of the Opinion
and its local implementing measures, which may adversely affect our business, financial condition and results of operations. And we cannot assure you that any future
development, interpretation and enforcement of Opinion and relevant regulations would not materially and adversely impact our business and financial outlook.”
Guidelines for Overseas Educational Travel Participated by Primary and Middle School Students (Trial)
On July 15, 2014, the MOE promulgated the Guidelines for Overseas Educational Travel Participated by Primary and Middle School Students (Trial), or the Guidelines,
which became effective on July 15, 2014. Under the Guidelines, overseas educational travels participated in by primary and middle school students means, by adapting to the
characteristics of primary and middle school students and the educational needs, programs that organize primary and middle school students to go overseas to learn foreign
languages and other short-term curriculum, perform art shows, compete in contests, visit schools, attend summer/winter school programs, or take part in other activities that
help students expand their horizon and promote enrichment and enhancement, in the manner of group travel and group accommodation during the academic semesters or
vacations. Overseas educational travels attended by primary and middle school students shall follow the principles of safety, civility and efficiency. The schedule for study, from
the perspective of both the content and the duration, shall be no less than 1/2 of the total schedule. The organizer shall choose legitimate and qualified cooperation institutions,
and stress the importance of safe education, and shall appoint a guiding teacher for each group. The organizer shall apply the rules of cost accounting, notify the students and
their supervisors of the composition of the fees and expenses, and enter into an agreement as required by law. The school and its staff shall not seek any economic benefit from
organizing its own students to attend an overseas educational travel.
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Regulations on Tourism
The Tourism Law of the PRC, which was promulgated by the Standing Committee of the NPC and most recently amended on October 26, 2018, provides that, among
other things, to engage in the businesses of outbound tourism, a travel agency shall obtain the corresponding business permit, and the specific conditions shall be provided for by
the State Council and that when organizing an outbound touring group, or organizing or receiving an inbound touring group, a travel agency shall, in accordance with the
relevant provisions, arrange for a tour leader or tour guide to accompany the touring group in the whole tour. Regulations on Travel Agencies promulgated by the State Council,
revised on November 29, 2020, and the implementation rules of Regulations on Travel Agencies, provide that, among other things, travel agent shall mean any entity that
engages in the business of attracting, organizing, and receiving tourists, providing tourism services for tourists and operating domestic, outbound or border tourism; the
aforementioned business shall include but not limit to arranging for transport services, arranging for accommodation services, providing services for tour guides or team leaders,
providing services of tourism consultation and tourism activities design. According to the Regulations on Travel Agencies and its implementation rules, any tourism agent
engages in domestic and outbound tourism shall apply for corresponding permits to engage in such tourism activities from the administrative department of tourism under the
State Council, the governments of provinces, autonomous regions, or municipalities. In the event that any person is engaged in tourism business without holding the permits
required, the competent administrative department or branch of SAMR may order such person to obtain the permits required, confiscate the illegal income from such business
and impose fines to such person. With respect to our research-based learning services, we cooperate with third party travel agencies which have travel agency permits for our
educational travel activities, such as accommodation and tour guiding, while we are also engaged in certain travel-related activities ourselves, such as attracting and organizing
students, and arranging for some transport services. Under the current law rules, it is not clear whether we are required to obtain a travel agency permit.
Regulations Relating to Internet Content and Information Security
Internet content in China is regulated and restricted by the PRC government. The Administrative Measures on Internet Information Services, which was amended in
2011, specify that internet information services regarding news, publications, education, medical and health care, pharmacy and medical appliances, among other things, are to
be examined, approved and regulated by the relevant authorities. Internet information providers are prohibited from providing services beyond those included in the scope of
their ICP licenses or filings. Furthermore, these measures clearly specify a list of prohibited content. Internet information providers are prohibited from producing, copying,
publishing or distributing information that is humiliating or defamatory to others or that infringes the lawful rights and interests of others. Internet information providers that
violate the prohibition may face criminal charges or administrative sanctions by the PRC authorities. Internet information providers must monitor and control the information
posted on their websites. If any prohibited content is found, they must remove the offending content immediately, keep a record of it and report to the relevant authorities.
Internet information in China is also regulated and restricted from a national security standpoint. In 2009, the Standing Committee of the NPC has enacted the Decision
of the Standing Committee of the NPC on Preserving Computer Network Security, which may subject violators to criminal punishment for any effort to: (i) gain improper entry
into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or
(v) infringe intellectual property rights.
In addition, the Standing Committee of the NPC promulgated the Cyber Security Law of the People’s Republic of China, or the Cyber Security Law, which took effect
on June 1, 2017, to protect cyberspace security and order. Pursuant to the Cyber Security Law, any individual or organization using the network must comply with the
constitution and the applicable laws, follow the public orders and respect social moralities, and must not endanger cyber security, or engage in activities by making use of the
network that endanger the national security, honor and interests, or infringe on the fame, privacy, intellectual property and other legitimate rights and interests of others. The
Cyber Security Law sets forth various security protection obligations for network operators, which are defined as “owners and administrators of networks and network service
providers,” including, among others, complying with a series of requirements of tiered cyber protection systems; verifying users’ real identities; localizing the personal
information and important data gathered and produced by key information infrastructure operators during operations within China; and providing assistance and support to
government authorities where necessary for protecting national security and investigating crimes. On May 28, 2019, the CAC promulgated the Draft Data Security
Administrative Measures. According to the Draft Data Security Administrative Measures, cyberspace operators shall, in accordance with relevant laws and administrative
regulations, with reference to national cyber security standards, fulfill the obligation for data security protection, establish data security management responsibility as well as
evaluation and appraisal systems, develop data security plans, implement data security technology protection, and carry out assessment of data security risks, develop
emergency plans for cyber security incidents, promptly handle security incidents and organize data security-related education and training. On June 10, 2021, the Standing
Committee of the NPC promulgated the Data Security Law, which became effective on September 1, 2021. The Data Security Law, among others, provides for security review
procedures for data activities that may affect national security.
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On April 13, 2020, the CAC, the MIIT and certain other government authorities jointly promulgated the Measures for Cybersecurity Reviews, which took effect on June
1, 2020, or the Prior Cybersecurity Review Measures. The Prior Cybersecurity Review Measures requires that critical information infrastructure operators purchasing network
products and services, which affects or may affect national security, shall apply for cybersecurity review to the cyberspace administrations in accordance with the provisions
thereunder. On December 28, 2021, CAC published the Cybersecurity Review Measures, which became effective on February 15, 2022 and replaced the Prior Cybersecurity
Review Measures. Under the Cybersecurity Review Measures, the scope of cybersecurity reviews is extended to also cover internet platform operators engaging in data
processing activities that affect or may affect national security. The Cybersecurity Review Measures further require that any internet platform operator applying for listing on a
foreign exchange must go through cybersecurity review if it possesses personal information of more than one million users. The review focuses on several factors, including,
among others, (i) the risk of theft, leakage, corruption, illegal use or export of any core or important data, or a large amount of personal information, and (ii) the risk of any
critical information infrastructure, core or important data, or a large amount of personal information being affected, controlled or maliciously exploited by a foreign government
after a company is listed. We believe we would not be subject to the cybersecurity review by the CAC, given that: (i) we do not possess a large amount of personal information
in our business operations; and (ii) data processed in our business does not have a bearing on national security and thus may not be classified as core or important data by the
authorities. However, we cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and there remains uncertainty as to how the
Cybersecurity Review Measures will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or
detailed implementation and interpretation related to the Cybersecurity Review Measures. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business —
Failure to comply with regulations relating to information security and privacy protection, breaches or perceived breaches of our security measures relating to our service
offerings, unauthorized disclosure or misuse of personal data through breaches of our computer systems or otherwise, could result in negative publicity and loss of students,
expose us to protracted and costly litigation, and harm our business and results of operations. Additionally, it is unclear whether we will be subject to the oversight of the CAC
and how such oversight may impact us.”
On January 8, 2021, the CAC published the Amended Measures for the Administration of Internet Information Services (Draft for Comments), which requires that any
organization or individual within the territory of the People’s Republic of China that provides internet information services to users in China using network resources at home
and abroad shall abide by the provisions of these measures. To engage in internet information services, which belong to the operation of telecommunications business, an ICP
license from the competent telecommunications department shall be obtained. Internet information service providers shall establish an information release review system. On
October 29, 2021, the CAC published the Draft Measures on Security Assessment for the Export of Data (Draft for Comments) which provides the scope of data that will be
subject to security assessment when being exported, including (i) personal information and important data collected and generated by a critical information infrastructure
operator; (ii) any important data that is to be exported; (iii) personal information of a data processor that processes personal information of 1,000,000 individuals or more; (iv)
personal information of a data processor that in aggregate exports personal information of over 100,000 individuals or sensitive personal information of over 10,000
individuals; and (v) other information as designated by the CAC. On November 14, 2021, the CAC publicly solicited opinions on the Draft Data Security Regulations, which
reiterates that data processors that handle personal information of more than one million people intending to be listed abroad should apply for a cybersecurity review.
As the Amended Measures for the Administration of Internet Information Services (Draft for Comments), the Draft Measures on Security Assessment for the Export of
Data (Draft for Comments) and the Draft Data Security Regulations have not been adopted, and it remains unclear whether the formal versions to be adopted in the future will
have any further material changes, it is uncertain how the measures will be enacted, interpreted, or implemented, or how they will affect us.
Regulation of Domain Names and Website Names
PRC laws require owners of Internet domain names to register their domain names with qualified domain name registration agencies approved by MIIT and obtain a
registration certificate from such registration agencies. A registered domain name owner has an exclusive usage right over its domain name. Unregistered domain names may
not receive proper legal protections and may be misappropriated by unauthorized third parties. As of April 26, 2022, we have registered 42 domain names relating to our
websites, including www.atai.net.cn, www.acgedu.cn and www.acgorg.com the primary URL for our website, with the Internet Corporation for Assigned Names and Numbers
and the China Internet Network Information Center, a domain name registration service provider in China.
PRC law requires entities operating commercial websites to register their website names with SAMR or its local offices and obtain a commercial website name
registration certificate. If any entity operates a commercial website without obtaining such certificate, it may be charged a fine or suffer other penalties imposed by the SAMR or
its local offices.
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Regulation of Privacy Protection
PRC law does not prohibit Internet content providers from collecting and analyzing personal information from their users. PRC law prohibits Internet content providers
from disclosing to third parties any information transmitted by users through their networks unless otherwise permitted by law. If an Internet content provider violates these
regulations, MIIT or its local offices may impose penalties and the Internet content provider may be liable for damages caused to its users.
On July 16, 2013, the MIIT issued the Order for the Protection of Telecommunication and Internet User Personal Information. Most requirements under the order that
are relevant to internet content provision operators are consistent with pre-existing requirements, but the new requirements are often more stringent and have a wider scope. If
an internet content provision operator wishes to collect or use personal information, it may do so only if such collection is necessary for the services it provides. Further, it must
disclose to its users the purpose, method and scope of any such collection or use, and must obtain consent from its users whose information is being collected or used. Internet
content provision operators are also required to establish and publish their rules relating to personal information collection or use, keep any collected information strictly
confidential, and take technological and other measures to maintain the security of such information. Internet content provision operators are required to cease any collection or
use of the user personal information and de-register the relevant user account when a given user stops using the relevant internet service. Internet content provision operators are
further prohibited from divulging, distorting or destroying any such personal information, or unlawfully selling or providing such information to other parties. In addition, if an
internet content provision operator appoints an agent to undertake any marketing and technical services that involve the collection or use of personal information, the internet
content provision operator is still required to supervise and manage the protection of such information. As for penalties, violators may face warnings, fines, and disclosure to the
public and, in most severe cases, criminal liability under the order.
Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the NPC in August 2015, which became effective in November 2015, any
internet service provider that fails to fulfill the obligations related to internet information security administration as required by applicable laws and refuses to rectify upon
orders, shall be subject to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii) any severe effect due to the leakage of the client’s
information; (iii) any serious loss of criminal evidence; or (iv) other severe situation, and any individual or entity that (i) sells or provides personal information to others in a
way violating the applicable law, or (ii) steals or illegally obtains any personal information, shall be subject to criminal penalty in severe situation.
On November 7, 2016, the Standing Committee of the NPC issued the Cyber Security Law of the People’s Republic of China, or the Cyber Security Law, which took
effect on June 1, 2017. The Cyber Security Law requires providers of services over Internet networks to keep user information that they have collected in strict confidence and
to establish improved systems for the protection of user information. Such service providers must provide notice of the purpose, methods and scope of their collection and use of
user information, and obtain the consent of each person whose personal information will be collected. Providers of services over Internet networks may not collect any personal
information that is not related to the services they provide, or disclose or tamper with personal information that they have collected, unless such information is encoded to
prevent identification of individuals whose information is so disclosed or tampered with. Service providers who do not comply with the Cyber Security Law may be subject to
fines, suspension of their businesses, shutdown of their websites, and revocation of their business licenses.
On May 8, 2017, the Supreme People’s Court and the Supreme People’s Procuratorate jointly issued the Interpretations on Several Issues concerning the Application of
Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information which further clarified the meaning of certain terms of Article 253A of the
Criminal Law, including but not limited to the terms of “personal information of a citizen,” “one providing citizen’s personal information” and “serious case.”
On August 20, 2021, the Standing Committee of the NPC promulgated the Personal Information Protection Law, which took effect on November 1, 2021. The Personal
Information Protection Law aims at protecting the personal information rights and interests, regulating the processing of personal information, ensuring the orderly and free
flow of personal information in accordance with the law, and promoting the reasonable use of personal information. According to the Personal Information Protection Law,
personal information includes all kinds of identified or identifiable information related to natural persons recorded by electronic or other means, but excludes de-identified
information. The Personal Information Protection Law also specified the rules for handling sensitive personal information, which includes biometrics, religious beliefs, specific
identities, medical health, financial accounts, trails and locations, and personal information of teenagers under fourteen years old and other personal information, which, upon
leakage or illegal usage, may easily infringe the personal dignity or harm of safety of livelihood and property. Personal information handlers shall bear responsibility for their
personal information handling activities, and adopt necessary measures to safeguard the security of the personal information they handle. Otherwise, the personal information
handlers will be ordered for rectification or suspension or termination of provision of services, confiscation of illegal income, subject to fines or other penalties.
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Regulation of Foreign Investment
According to the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested
Enterprise Law, foreign invested enterprises can be established in the form of a Sino-foreign equity joint venture, a Sino-foreign cooperative joint venture or a wholly foreign-
owned enterprise. Prior to its registration, the enterprise must be approved by the commerce authorities, upon which a certificate of approval for an FIE will be issued.
On December 27, 2021, MOFCOM and National Development and Reform Commission, or NDRC jointly promulgated the Special Administrative Measures for the
Access of Foreign Investment (Negative List) (2021 Edition) (the “2021 Negative List”), which came into effect on January 1, 2022. The 2021 Negative List replaced the
negative list provided under the Special Administrative Measures for the Access of Foreign Investment (Negative List) (2020 Edition) (the “2020 Negative List”). Pursuant to
the 2021 Negative List, the number of items subject to the special administrative measures has been reduced from 33 to 31. The 2021 Negative List remains unchanged with
respect to the education industry.
On March 15, 2019, Second Session of the 13th National People’s Congress adopted the Foreign Investment Law of the People’s Republic of China, and came into
effect as of January 1, 2020. On December 12, 2019, State Council promulgated the Implementation Rules of Foreign Investment Law, effective from January 1, 2020. On
December 16, 2019, Supreme People’s Court promulgated the Interpretations of the Supreme People’s Court on Certain Issues on Application of the Foreign Investment Law,
effective from January 1, 2020. After the Foreign Investment Law became effective, the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign
Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their
implementation rules and ancillary regulations, were abolished.
After the formal implementation of the Foreign Investment Law, the organization form and institutional framework of a newly established foreign-funded enterprise are
subject to the relevant provisions of the Company Law of the People’s Republic of China or the Partnership Enterprise Law of the People’s Republic of China. Foreign-funded
enterprises established in accordance with the laws on the foregoing three types of foreign-funded enterprises before the implementation of the Foreign Investment Law may
continue to retain their original organizational forms for five years after the implementation of the Foreign Investment Law. In other words, existing foreign-funded enterprises
will have a transition period of five years to modify their existing organizational forms and organizational structure to meet and abide by the relevant provisions of the Company
Law of the People’s Republic of China or the Partnership Enterprise Law of the People’s Republic of China.
Regulation of Foreign Exchange
The PRC government imposes restrictions on the convertibility of the Renminbi and on the collection and use of foreign currency by PRC entities. Under current
regulations, the Renminbi is convertible for current account transactions, which include dividend distributions, interest payments, and the import and export of goods and
services. Conversion of Renminbi into foreign currencies and foreign currencies into Renminbi for payments relating to “capital account transactions,” which include, among
other things, investment, loans and acquisitions of land and other fixed assets overseas, generally require the approval of or registration or filing with SAFE or its authorized
banks and other relevant Chinese governmental authorities.
Under current PRC regulations, FIEs such as our PRC subsidiaries are required to apply to the banks by SAFE for Foreign Exchange Registration. With such a
registration, an FIE may open foreign exchange bank accounts at banks authorized to conduct foreign exchange business by SAFE and may buy, sell and remit foreign
exchange through such banks, subject to documentation and approval requirements. FIEs are required to open and maintain separate foreign exchange accounts for capital
account transactions and current account transactions. In addition, there are restrictions on the amount of foreign currency that FIEs may retain in such accounts.
According to Article 22 of the Regulations on the Foreign Exchange System of the People’s Republic of China, if the Company’s PRC subsidiaries liquidate, the
Renminbi distributable to its foreign shareholders after the liquidation and payment of relevant taxes can be freely converted into foreign currency and remitted abroad.
Therefore, there are no legal impediments to remitting the proceeds from a liquidation of our PRC subsidiaries outside of China to investors who are not PRC nationals.
Further, SAFE promulgated a new circular (known as Circular 142) in August 2008 with respect to the administration of conversion of foreign exchange capital
contributions of a foreign invested enterprise. The circular clarifies that Renminbi converted from foreign exchange capital contributions can only be used for the activities
within the approved business scope of such foreign invested enterprise and cannot be used for domestic equity investments unless otherwise permitted.
In addition, SAFE also strengthened its oversight over the flow and use of Renminbi converted from the foreign currency denominated capital of a foreign-invested
company. The use of such Renminbi may not be changed without approval from SAFE, and such Renminbi may not be used to repay Renminbi loans if the proceeds of such
loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the related foreign exchange administration
rules. In
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addition, SAFE promulgated a circular on November 9, 2010, or Circular 59, which tightens the regulation over settlement of the fund which is raised from overseas offerings
such as our initial public offering and follow-on public offering and is transferred back to China and requires that the settlement of such fund must be consistent with the
description in the prospectuses for the initial public offering and follow-on public offering. Furthermore, it has recently come to our attention that SAFE issued an internal
guideline to its local counterparts, referred to as Circular 45, in November 2011. Circular 45 has never been formally announced by SAFE to the public or posted on SAFE’s
website. Based on the version made publicly available by certain local governmental authorities on their websites, we understand that Circular 45 requires SAFE’s local
counterparts to strengthen the control imposed by Circulars 142 and 59 over the conversion of a foreign-invested company’s capital contributed in foreign currency into RMB.
Circular 45 stipulates that a foreign-invested company’s RMB funds, if converted from such company’s capital contributed in foreign currency, may not be used by such
company to (i) extend loans (in the form of entrusted loans), (ii) repay borrowings between enterprises, or (iii) repay bank loans it has obtained and on-lent to third parties.
On May 10, 2013, SAFE released Circular 21, which came into effect on May 13, 2013. According to Circular 21, SAFE has simplified the foreign exchange
administration procedures with respect to the registration, account openings and conversions, receipt and payment, settlements and sale of foreign exchange in relation to
foreign direct investment.
SAFE promulgated the Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Foreign
Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19, on March 30, 2015, which abolished Circular 142. According to SAFE Circular 19, up to all of the
foreign exchange capital in the capital account of FIEs can be settled at the banks based on the actual operation needs of the FIEs. The capital in Renminbi obtained by FIEs
from the discretionary settlement of foreign exchange capital shall be managed under the account pending foreign exchange settlement payment. The expenditure scope of such
account includes: the expenditure within the scope of business, the payment of the capital of domestic equity investment and deposits in Renminbi, the repayment of the used
loans in Renminbi, the purchase payment of foreign exchange or direct external repayment of foreign debts or other expenditure approved by the foreign exchange bureaus, but
the capital of FIEs and capital in Renminbi obtained by them from foreign exchange settlement shall not be used for the following purposes: (i) directly or indirectly used for
the payment beyond the business scope of the enterprises or the payment prohibited by national laws and regulations; (ii) directly or indirectly used for investment in securities
unless otherwise provided by laws and regulations; (iii) directly or indirectly used for granting the entrust loans in Renminbi (unless permitted by the scope of business),
repaying the inter-enterprise borrowings (including advances by the third party) or repaying the bank loans in Renminbi that have been sub-lent to the third party; and
(iv) paying the expenses related to the purchase of real estate not for self-use, except for the foreign-invested real estate enterprises.
On February 13, 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct
Investment, or SAFE Circular 13, which became effective on June 1, 2015. Pursuant to SAFE Circular 13, annual foreign exchange inspection of direct investment is not
required anymore, and the registration of existing equity is required. SAFE Circular 13 also grants the authority to banks to directly examine and process foreign exchange
registration with respect to both domestic and overseas direct investment. SAFE issued Notice on reform and regulations of the Administration Policy of Foreign Exchange
under Capital Account, or SAFE Circular 16, effective from June 9, 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts
from foreign currency to Renminbi on a self-discretionary basis. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account
items (including but not limited to foreign currency capital and foreign debts) on a self-discretionary basis which applies to all enterprises registered in China. SAFE Circular 16
reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its
business scope or prohibited by PRC laws or regulations, while such converted Renminbi shall not be provided as loans to its non-affiliated entities.
On October 23, 2019, SAFE issued the Notice for Further Advancing the Facilitation of Cross-border Trade and Investment, or SAFE Circular 28. Among others,
SAFE Circular 28 relaxes the prior restrictions and allows the FIEs without having equity investment in their approved business scope to use their capital obtained from foreign
exchange settlement to make domestic equity investment as long as the investments are real and in compliance with the foreign investment-related laws and regulations. In
addition, SAFE Circular 28 stipulates that qualified enterprises in certain pilot areas may use their capital income from registered capital, foreign debt and overseas listing, for
the purpose of domestic payments without providing authenticity certifications to the relevant banks in advance for those domestic payments.
Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in
connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally
owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further
requires amendment to the registration in the event of any significant changes with respect to the special
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purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a
PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be
prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle
may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described
above could result in liability under PRC law for evasion of foreign exchange controls.
Our significant shareholder, Xiaofeng Ma, has previously completed his registration with SAFE and has submitted relevant materials to update his registration, and we
have urged our other Chinese resident shareholders to register under SAFE Circular 37 and they are preparing for such application. However, we cannot assure you that the
application will be accepted by SAFE.
Failure by such shareholders to comply with SAFE Circular 37 could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects. Failure to
register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’ ability to
distribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of operations.
Regulation of Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the M&A Rule, which became effective on September 8, 2006 without retroactive
effect and was amended by the PRC Ministry of Commerce on June 22, 2009. The M&A Rule, among other things, requires that an offshore company controlled by PRC
companies or individuals that has acquired a PRC domestic company for the purpose of listing the PRC domestic company’s equity interest on an overseas stock exchange must
obtain the approval of the CSRC prior to the listing and trading of such offshore company’s securities on an overseas stock exchange. On September 21, 2006, the CSRC,
pursuant to the M&A Rule, published on its official website procedures specifying documents and materials required to be submitted to it by offshore companies seeking CSRC
approval of their overseas listings.
We believe CSRC approval was not required for our initial public offering in February 2008 because the CSRC approval required under the M&A Rule only applies to
an offshore company that has acquired a domestic PRC company for the purpose of listing the domestic PRC company’s equity interest on an overseas stock exchange, while
(i) we obtained our equity interest in each of our PRC subsidiaries by means of direct investment other than by acquisition of the equity or assets of a PRC domestic company in
2008, (ii) our former contractual arrangements with ATA Online do not constitute the acquisition of ATA Online, (iii) the M&A Rule does not apply to the acquisition by ATA
Learning, which had been a wholly foreign owned enterprise since incorporation until it was reformed into a PRC domestic company in 2018, and (iv) although Article 11 of
M&A Rule prohibits the circumvention of the M&A Rule through establishing FIEs, ATA Learning was established in 2003 before the M&A Rule was promulgated, which
makes this acquisition not a circumvention of the M&A Rule.
On December 24, 2021, the CSRC published the Overseas Offering and Listing Regulations Drafts, which provide principles and guidelines for direct and indirect
issuance of securities overseas by a Chinese domestic company. Under the Overseas Offering and Listing Regulations Drafts, the substance rather than the form of issuance will
govern when determining whether an issuance constitutes “indirect issuance of securities overseas by a Chinese domestic company,” and the following two situations will be
deemed as “indirect issuance of securities overseas by a Chinese domestic company”: (1) the income, total profits, total assets or net assets of the domestic company in the latest
financial year accounts for more than 50% of the total financials of the issuer in such year on a consolidated basis, or (2) the majority of senior management in charge of
business operation are Chinese citizens or have habitual residence within the territory of China, and the principal business place is within the territory of China or such business
is conducted in China. It still remains uncertain if the aforesaid two conditions shall be met at the same time or not when determining the constitution of “indirect issuance of
securities overseas by a Chinese domestic company.” In the event any listing and issuance of securities have fallen under the definition of “indirect overseas listing and issuance
of securities overseas by a Chinese domestic company,” the issuer shall assign one of its related major Chinese domestic operating entities to make filings with CSRC within
three business days after its initial public offering or any offerings after the initial public offering. For the filings after the initial public offering, the issuer’s related Chinese
domestic entity shall submit relevant requisite documents, including but not limited to the filing report and related commitments, opinion from Chinese competent authorities as
to the supervisor of the domestic company (if applicable), security assessment opinion from Chinese competent authorities (if applicable), PRC legal opinion, and prospectus. If
a company issues such securities to be listed in an overseas public market after its initial public offering, or purchases assets by means of issuance of securities overseas, it shall
also file with CSRC within three business days thereafter and make related undertakings, reports, and explanations to CSRC. The noncompliance of the filing requirements will
lead to penalties imposed on the Chinese domestic companies, the controlling shareholder, the actual controller, directors, supervisors, and officers of the Chinese domestic
companies, and other related responsible persons. The potential penalties for the Chinese domestic companies include fines within the range between RMB 1 million and RMB
10 million. If the noncompliance is deemed severe, the operations of the Chinese domestic companies can be suspended and the permission and licenses held by the Chinese
domestic companies could be canceled. It is uncertain when the final regulations of the Overseas Offering and Listing Regulations Drafts will be issued and take effect, and
how
76
they will be enacted, interpreted or implemented. We cannot assure you that we will not in the future be required to obtain the approval of the CSRC or of potentially other
regulatory authorities in order to maintain the listing status of our common shares on Nasdaq or to conduct offerings of securities in the future.
On December 28, 2021, the CAC published the Cybersecurity Review Measures, which became effective on February 15, 2022. Under the Cybersecurity Review
Measures, the scope of cybersecurity reviews is extended to internet platform operators engaging in data processing activities that affect or may affect national security. The
Cybersecurity Review Measures further require that any internet platform operator applying for listing on a foreign exchange must go through cybersecurity review if it
possesses personal information of more than one million users.
On April 2, 2022, the CSRC published the “Draft Confidentiality Provisions, which provides that, domestic enterprises that issue securities overseas directly or
indirectly and that provide publicly disclose files and documents containing state secrets and work secrets of the authorities to relevant securities companies, securities service
agencies, foreign regulatory agencies and other institutions and individuals or do so through its overseas listing entities, shall obtain the approval of the competent authorities,
file with the competent confidentiality administrative authorities. Although we believe we are currently not required to obtain permission from any of the PRC central or local
government and has not received any notice of denial of permission to list on the U.S. exchange, it is uncertain when and whether we will be required to obtain permission from
the PRC government to list on U.S. exchanges if the relevant laws, regulations or interpretations change in the future, and even when such permission is obtained, whether it will
be denied or rescinded.
We have been closely monitoring regulatory developments in China regarding any necessary approvals from the CSRC, the CAC or other PRC regulatory authorities
required for overseas listings. As of the date of this annual report, we have not received any inquiries, notices, warnings, sanctions, denials, or regulatory objections from the
CSRC, CAC, nor any other PRC regulatory authority related to any approval requirement of overseas listings. See “Item 3. Key Information — Government Regulations and
Permissions” and “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — The approval, filing or other requirements of the CSRC or other PRC
government authorities may be required under PRC law in connection with our issuance of securities overseas.”
SAFE Regulations on Employee Share Options
On February 15, 2012, SAFE issued the Notice on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive
Plan of Overseas Publicly-Listed Company, or the Stock Option Rules. According to the Stock Option Rules, PRC residents who participate in an employee share incentive plan
of an overseas publicly-listed company are required to register with SAFE and complete certain other procedures. These participants should retain a PRC agent, which can be a
branch or representative office of the overseas listed company in China, a Chinese institution which has controlling relationship or actual control relationship with the offshore
listed company, or a Chinese institution qualified for asset custody business, to handle various foreign exchange matters associated with their employee share incentive plan.
The PRC agent should file on behalf of the PRC resident an application with SAFE to register such employee share incentive plan, apply annually for a quota for the payment of
foreign currencies in connection with the exercise of the employee share options by the PRC resident and open a special foreign exchange account at a PRC domestic bank to
hold the funds required in connection with the share incentive plan. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive
plan if there is any material change to the employee share incentive plan, PRC agent or overseas entrusted institution.
In addition, the SAT has issued a few circulars concerning employee share options. Under these circulars, our employees working in China who exercise share options
will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents relating to employee share options with relevant tax authorities and
withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay and we fail to withhold their income taxes, we may face
sanctions imposed by tax authorities or other PRC government authorities.
Employment Laws
In accordance with the Labor Law, which became effective in January 1995, amended on December 29, 2018, and the Labor Contract Law, which was promulgated on
June 29, 2007, amended on December 28, 2012 and became effective on July 1, 2013, employers must execute written labor contracts with full-time employees in order to
establish an employment relationship. According to the Labor Contract Law, an employer is under an obligation to sign an unlimited-term labor contract with any employee
who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into
twice consecutively, the resulting contract must have an unlimited term, with certain exceptions. The employer must also pay severance to an employee in nearly all instances
where a labor contract, including a contract with an unlimited term, is terminated or expires. All employers must compensate their employees equal to at least the local
minimum wage standards. All employers are required to establish a system for labor safety and sanitation, strictly abide by state rules and standards and provide employees with
appropriate workplace safety training. In addition, the government has continued to introduce various new labor-related regulations after the Labor Contract Law. Among other
things, new annual leave requirements mandate that annual leave ranging from 5 to 15 days is available to nearly all employees and further require that the employer
compensate an employee for any
77
annual leave days the employee is unable to take in the amount of three times his daily salary, subject to certain exceptions. In addition, companies operating in China are
required to participate in social insurance and housing fund plans in which the employers must pay for the employees’ social welfare and housing fund based upon certain
percentages of employees’ salaries.
C. Organizational Structure
For an organizational structure of the Company, its subsidiaries and the VIE and a detailed description of the Company’s significant subsidiaries, see “Item 3. Key
Information — Our Corporate Structure.”
D. Property, Plant and Equipment
Our principal executive offices are located at 1/F East Gate, Building No. 2, Jian Wai Soho in Beijing. We occupy and operate through our training center network with
an aggregate of approximately 17,329 square meters of space in various cities in China, major ones include, Beijing, Shanghai, Guangzhou, Shenzhen and Chengdu, all of
which are leased. We also own 2,124 square meters office space, with 1,062 square meters for each of the two floors at Tower E, 6 Gongyuan West Street, Jian Guo Men Nei,
Beijing 100005, China, or the Gongyuan Real Estate Property. As of the date of this annual report, the office space on the 8 th floor of the Gongyuan Real Estate Property was
not occupied. We believe our existing facilities are adequate for our current requirements and that additional space can be obtained on commercially reasonable terms to meet
our future requirements.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
Overview
Our Business
After the completion of the Huanqiuyimeng Acquisition, we generated revenues primarily from our portfolio training services, research-based learning services,
overseas study counselling services, other educational services, K-12 education assessment and other services. Our services are conducted through Huanqiuyimeng and its
subsidiaries. We disposed of our K-12 education assessment business in June 2021 to focus our efforts on growing our core international education services business.
Our net revenues were RMB 97.8 million, RMB 162.2 million and RMB 202.2 million ($31.7 million) in the fiscal years ended December 31, 2019, 2020 and 2021,
respectively. We had net loss of RMB 129.2 million, RMB 100.6 million and RMB 36.4 million ($5.7 million) in the fiscal years ended December 31, 2019, 2020 and 2021,
respectively.
Factors Affecting Our Results of Operations
The key factors affecting our results of operations presented in this annual report are:
•
•
•
•
•
•
overall economic growth and rising income levels in China contributing to the increasing spending on education and related services;
potential changes in regulations and policies that may directly or indirectly impact the scope and credibility of services we could deliver;
our capability to develop and create content that can accommodate needs of potential students, in the classroom, online and in hybrid settings;
our ability to provide effective creative arts related international education services and control sales and marketing expenses;
recognition in the marketplace for services we deliver and branding we have established; and
competition from both established brands and new entrants, and our ability to maintain our market share in the face of increasing competition.
78
In addition, our results of operations have been, and may continue to be, significantly affected by the following factors:
•
•
•
•
•
•
•
•
•
•
•
the impacts of our sale of the ATA Online Business;
the impacts of the Huanqiuyimeng Acquisition;
our share-based compensation;
the impacts of PRC tax policies, including certain preferential tax rates;
the impact of the termination of our proposed acquisition of Beijing Biztour International Travel Service Co., Ltd., or Beijing Biztour, and the receipt (or
failure to receive) of the related receivables;
the relative proportion of our net revenues derived from higher- and lower-gross margin service offerings;
the impacts of strategic investments and acquisitions;
our ability to maintain similar margins, locate students, etc.;
the impact of political tensions between the United States and China;
the impact of international tensions and conflicts generally; and
the impact of the COVID-19 pandemic or other similar pandemics or natural disasters. Please see “Item 3.D. Risk Factors — Risks Relating to Doing Business
in the People’s Republic of China — The outbreak of COVID-19 and any future outbreak of severe acute respiratory syndrome, avian flu or coronavirus in
China, or similar adverse public health developments, may disrupt our business and operations and adversely affect our financial results” in this annual report
for more details.
Net Revenues
We derived revenues primarily from our portfolio training services, research-based learning services, overseas study counselling services and other educational services
in fiscal year ended December 31, 2021. Our net revenues are presented net of PRC VAT. The following table sets forth our net revenues from our continuing operations for the
periods presented.
The COVID-19 outbreak in China occurred in late January 2020, therefore, it did not have a material adverse impact on our revenues for the fiscal year ended
December 31, 2019. It, however, had material adverse impacts on our revenues for the fiscal years ended December 31, 2020 and 2021, although such impact was progressively
mitigated after COVID-19 was gradually under control beginning in the second half of 2020. See “Item 3.D. Risk Factors — Risks Relating to Doing Business in the People’s
Republic of China — The outbreak of COVID-19 and any future outbreak of severe acute respiratory syndrome, avian flu or coronavirus in China, or similar adverse public
health developments, may disrupt our business and operations and adversely affect our financial results.”
Net Revenues
Portfolio training services
Research-based learning services
Overseas study counselling services
Other educational services
K-12 education assessment and other services
Total net revenues
Portfolio Training Services.
For the fiscal year ended
December 31,
2019
RMB
2020
RMB
2021
RMB
US$
(in thousands)
63,829
10,456
8,092
9,045
6,348
97,770
113,191
4,453
21,060
20,026
3,438
162,168
151,434
5,977
23,624
21,174
—
202,209
23,763
938
3,707
3,323
—
31,731
We derive portfolio training services revenues primarily from fees charged to our students, mainly high school and undergraduate students, in the form of delivering
training programs. Our portfolio training programs consist of time-based programs and project-based programs. Students who elect the time-based programs enroll in a certain
number of consulting/training hours, whereas students who elect the project-based programs have no consulting/training hour constraint but will be guided through a certain
number of projects needed to complete a portfolio. Under project-based programs, the number of credit hours required to
79
complete a project may vary depending on the background and requirements of the students. In association with and as an extension to our portfolio training services, we also
provide undergraduate foundation course programs which are recognized by certain overseas art universities or colleges for students who need to take foundation courses before
formal admission to such overseas universities or colleges.
The most significant factors that affect our revenues from portfolio training services include the amount of credit hours for portfolio training we deliver to our students,
the number of individual students who enroll in our portfolio training services and the unit price level that we charge our students.
Research-based Learning Services.
We derive research-based learning services revenue primarily from research-based learning services fees charged to our students, who mainly consist of our portfolio
training students and other students interested in educational travels and research-based learning projects. Currently research-based learning services are primarily delivered
online because of the impact of the COVID-19 pandemic. These services include academic educational learning, workshop programs, themed educational travel services and
transferrable credit courses. Currently, research-based learning services are conducted mainly in the summer with a lesser amount in winter and the other seasons during the
year.
The most significant factors that affect our revenues from research-based learning services include the number of individual students who enroll in our research-based
learning services, the volume of services rendered and the unit price level that we charge our students.
Overseas Study Counselling Services.
We derive overseas study counselling services revenue primarily from overseas study counselling services fees charged to students who intend to pursue overseas art
and creativity education through providing relevant consulting services in the following aspects: timetable customization, university and program selection, paperwork writing,
interview simulation and enrollment documents preparation, etc.
The most significant factors that affect our revenues from overseas study counselling services include the number of individual students who enroll in our counselling
services, the unit price level that we charge our students and measurement of progress for services delivered during the reporting period.
Other Educational Services.
We derived our other educational services revenues primarily from services provided to students for language training, junior art education and in-school classes.
Language training services are mainly provided to students who need to take language tests in order to apply for overseas schools or universities. Junior art education services
are designed to provide art-related tutoring courses for junior students from ages 3 to 12. In-school classes are designed to partner with international schools to provide
professional art courses in the in-school art-related classes.
The most significant factors that affect our other educational services revenues include the unit price level of the various other educational services that we charge our
customers, the amount of credit hours we deliver to our customers and the measurement of progress for various services delivered during reporting periods.
K-12 Education Assessment and Other Services
For the fiscal years ended December 31, 2019 and 2020, we derived K-12 education assessment and other services revenue primarily from fees charged to our K-12
education assessment service customers, including schools, education bureaus and various education institutions. Our services included delivering the assessment reports of the
test takers to our customers. We disposed of the K-12 education assessment services business in June 2021 to focus on growing our core international education services
business and recorded nil in net revenues for the fiscal year ended December 31, 2021 for K-12 education assessment and other services.
Seasonality
We have experienced and expect to continue to experience slight seasonal fluctuations in our revenues and results of operations, with the quarter ending March 31
typically having relatively lower revenues compared with the other quarters. This is primarily because fewer students take classes in January and February due to spring festival
holidays in China and because some students complete their application for overseas art programs in December of the previous year. We expect quarterly fluctuations in our
revenues and results of operations to continue.
80
Cost of Revenues
Our cost of revenues consists primarily of payroll and compensation to our teachers, salary and compensation to other operational staffs, rental cost of our training
centers and offices, cost of teaching materials and outsourcing services costs, all of which are directly attributable to the rendering of various services. The following table
shows our cost of revenues and gross profit from our continuing operations for the periods presented:
Net Revenues
Cost of Revenues
Gross Profit
2019
RMB
%
97,770
61,914
35,856
100.0 %
63.3 %
36.7 %
For the fiscal year ended December 31,
2020
RMB
%
(In thousands, except for percentages)
162,168
98,521
63,647
100.0 %
60.8 %
39.2 %
RMB
2021
US$
202,209
97,414
104,795
31,731
15,286
16,445
%
100.0 %
48.2 %
51.8 %
Cost of revenues primarily consist of (1) teaching fees, payroll and compensation to teaching support staff and administrative staff from training centers, performance-
linked bonuses paid to teachers and rental payments for training centers as well as costs of course materials and teaching aids for portfolio training services, (2) payroll
compensation, outsourcing service costs, lodging and transportation expenses, overseas expenses, and other related costs which are directly attributable to the provision of
research-based learning services and overseas study counselling services, and (3) teaching fees, payroll compensation, content development costs, and other related costs, which
are directly attributable to the rendering of other educational services and K-12 education assessment and other services.
Factors Affecting Gross Margin
Our gross margin is primarily affected by unit price and the number of credit hours delivered for our portfolio training and other educational services, pricing and
volume of our other services rendered mainly for the research-based learning and overseas art study counselling services, payroll and compensation to our teachers, salary and
compensation to other operational staffs, costs paid to service providers, the rental costs of our training centers and offices, as well as costs of teaching materials and teaching
supporting fees.
Operating Expenses
Our operating expenses consist of general and administrative expenses, sales and marketing expenses and research and development expenses.
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries and benefits, traveling expenses, administration and share-based compensation expenses for our
administrative, management and finance personnel, as well as other expenses including professional fees, office expenses and rental costs.
Sales and Marketing Expenses
Our sales and marketing expenses consist primarily of salaries and benefits, traveling expenses, and share-based compensation expenses for our sales and marketing
personnel, as well as other expenses including meeting and conference expenses, advertising and promotional expenses, commissions for sales channels, online channel
platform expenses, entertainment expenses and other sales and marketing expenses.
Research and Development Expenses
Our research and development expenses consist primarily of the costs of equipment used in our research and development activities, salaries and benefits, traveling
expenses and share-based compensation expenses for our research and development personnel, the costs of outsourcing services and other costs relating to the design,
development, testing and enhancement of technology systems (such as the customer relationship management and sales lead management systems) in support for the rendering
of our products and services.
81
Impairment Loss of Long-term Investments
For equity method investments, we recognize an impairment loss when there is a decline in value below the carrying value of the equity method investment that is
considered to be other than temporary. The process of assessing and determining whether impairment on an investment is other than temporary requires significant amount of
judgment. To determine whether an impairment is other than temporary, management considers whether it has the ability and intent to hold the investment until recovery and
whether evidence indicating the carrying value of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons
for the impairment, the severity and duration of the decline in value, any change in value subsequent to the period end, and forecasted performance of the investee.
For other equity investments without a readily determinable fair value, we make a qualitative assessment considering the impairment indicators to evaluate whether an
equity investment without a readily determinable fair value is impaired at each reporting period, and write it down to its fair value if a qualitative assessment indicates that the
investment is impaired and the fair value of the investment is less than its carrying value.
Other Operating Income, Net
For the fiscal years ended December 31, 2019, 2020 and 2021, rental income net of rental cost was classified as “other operating income, net” as a result of the adoption
of revenue guidance ASC 606, effective January 1, 2018. Lease guidance ASC 842 was also adopted, effective January 1, 2019.
Taxation
Cayman Islands and British Virgin Islands
Under the current laws of Cayman Islands and British Virgin Islands, the Company, ATA BVI and ACGIGL are not subject to income tax. In addition, upon any
payments of dividends by the Company, ATA BVI or ACGIGL, no Cayman Islands or British Virgin Islands withholding tax is imposed.
Hong Kong
Xing Wei did not derive any income that is subject to Hong Kong profits tax for the fiscal years ended December 31, 2019, 2020 and 2021. Accordingly, no provision
for Hong Kong profits tax was required. The payment of dividends by Hong Kong companies is not subject to any Hong Kong withholding tax.
People’s Republic of China
Our subsidiaries operating in China are subject to PRC taxes as described below:
Enterprise Income Tax. EIT Law imposes an income tax rate of 25% on all enterprises, including FIEs. Under the EIT Law, qualified HNTE are entitled to a preferential
income tax rate of 15% and subject to an annual self-assessment review during the valid period of their HNTE certificates. If an HNTE enterprise does not satisfy the related
requirements stipulated by SAT to enjoy the preferential income tax rate of 15% during the annual self-assessment review, it will not be able to implement the preferential
income tax rate for the tax year being assessed. In December 2008, the WFOE obtained an HNTE certificate with a valid period of three years retrospectively starting from
January 1, 2008 and renewed the certificates in 2011, 2014, 2017 and 2020 for another three years, respectively. As a result, the WFOE was entitled to a preferential income tax
rate of 15% from 2008 through 2022. In the event the WFOE is unable to meet all of the requirements stipulated by the SAT to enjoy the preferential income tax rate of 15%
during the annual self-assessment review when holding the HNTE certificate or fails to renew its HNTE certificate after expiration, it will be subject to the standard statutory
enterprise income tax rate of 25%. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business —The discontinuation of any of the preferential tax treatments
currently enjoyed by our subsidiaries in China could materially increase our tax obligations.” The VIE, Huanqiuyimeng and their PRC subsidiaries are all subject to an income
tax rate of 25%.
Under applicable Chinese tax laws, FIEs and domestic Chinese companies may carry forward tax losses up to five years. On July 11, 2018, the MOF and SAT jointly
released Cai Shui [2018] No. 76, which provides that since January 1, 2018, HNTE or technology-based small-medium size enterprises are eligible to carry forward tax losses
up to ten years instead of five years. The WFOE, as an HNTE is eligible to apply for the above preferential tax rules and carry forward tax losses up to ten years. In view of the
accumulated losses of certain of our PRC subsidiaries, as of December 31, 2021, we provided the full valuation allowance for their deferred income tax assets after
consideration of the future reversal of existing taxable temporary differences.
82
In addition, under the EIT Law, an enterprise established under the laws of a foreign country or region whose “de facto management body” is located within the PRC
territory is considered a resident enterprise and will generally be subject to the enterprise income tax at the rate of 25% on its global income. According to the Implementation
Rules to the EIT Law, “de facto management body” refers to a managing body that exercises, in substance, overall management and control over the production and business,
personnel, accounting and assets of an enterprise. We have determined that our overseas entities are not PRC resident enterprises for PRC income tax purposes. However, if we
and our overseas entities were considered PRC resident enterprises, we would be subject to the enterprise income tax at the rate of 25% on our global income. See “Item 3.D.
Risk Factors — Risks Relating to Regulations of Our Business — Under the EIT Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely
result in unfavorable tax consequences to us and U.S. holders of our ADSs or common shares” and “Item 10.E. Additional Information — Taxation — People’s Republic of
China Taxation.”
PRC Withholding Tax. Pursuant to the EIT Law, a withholding tax of 10% (or other applicable withholding tax rates based on tax treaties between the PRC and other
jurisdictions) will generally be applicable to dividends payable to foreign investors. To the extent we and our overseas entities are not considered as PRC resident enterprises,
the dividends that our PRC subsidiaries pay to us will be subject to this withholding tax. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — Under
the EIT Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and U.S. holders of our ADSs
or common shares.” As of December 31, 2021, we had accrued withholding tax on substantially all of the earnings distributable by our PRC subsidiaries, except for those being
reserved for permanent reinvestment in the PRC of RMB 2,820,818.
PRC Value Added Tax ("VAT"). On March 24, 2016, the MOF and SAT promulgated the Circular Regarding Overall Promotion of Pilot Practice of Replacing Business
Tax with Value Added Tax, effective on May 1, 2016. The net revenues (i.e. VAT excluded) generated from services provided by our PRC subsidiaries are generally subject to
VAT at a rate of 6%, with some of our small-scale taxpaying subsidiaries subject to VAT at a rate of 3%.
Results of Operations
The following table and period to period comparison and discussion sets forth a summary, for the periods presented, of our consolidated results of operations and with
each item expressed as a percentage of our total net revenues. Our historical results presented below are not necessarily indicative of the results that may be expected for any
future period, and since the results for the year ended December 31, 2019 only include the results of our businesses conducted through Huanqiuyimeng from the Acquisition
Date to December 31, 2019, and the results for the years ended December 31, 2020 and 2021 include the results of our businesses conducted through Huanqiuyimeng for the
whole year, the following results and discussion may not be necessarily representative of our future operations.
83
Discontinued Operations
According to the Accounting Standards Codification Topic 205, the effects of the discontinued operations of computer-based testing services, online education services
and other related services for the fiscal years ended December 31, 2019, 2020 and 2021 has been accounted for in the consolidated statement of operations for all the periods
presented. The gain from the disposal of discontinued operations, net of income taxes, recorded for the year ended December 31, 2019, was to account for the reimbursement of
legal and consulting expenses received from the buyer in relation to the sale of the ATA Online Business. Results from operations of discontinued operations, net of income tax,
were gain of RMB 4.9 million, nil, and nil in the fiscal years ended December 31, 2019, 2020 and 2021.
2019
RMB
% of net
revenues
97,770
61,914
35,856
11,817
34,112
81,924
8,932
17,431
154,216
588
(117,772 )
100.0 %
63.3 %
36.7 %
12.1 %
34.9 %
83.8 %
9.1 %
17.8 %
157.7 %
0.6 %
(120.5 )%
For the fiscal year
ended December 31
2020
RMB
% of net
revenues
(In thousands, except for percentages)
2021
RMB
US$
% of net
revenues
162,168
98,521
63,647
8,832
53,500
100,098
3,121
5,904
171,455
330
(107,478 )
100.0 %
60.8 %
39.2 %
5.4 %
33.0 %
61.7 %
1.9 %
3.6 %
105.7 %
0.2 %
(66.3 )%
202,209
97,414
104,795
11,802
66,149
93,256
31,731
15,286
16,445
1,852
10,380
14,634
100.0 %
48.2 %
51.8 %
5.8 %
32.7 %
46.1 %
—
—
—
—
171,207
22
(66,390)
—
26,866
3
(10,418)
—
84.7 %
0.0 %
(32.8 )%
(8 )
(0.0 )%
(1,768 )
(1.1 )%
33,542
5,264
16.6 %
(26,815 )
3,282
51
(141,262 )
(7,150 )
(27.4 )%
3.4 %
0.1 %
(1,726 )
1,172
(1.1 )%
0.7 %
(6,000)
1,111
(942)
174
(3.0 )%
0.5 %
(1,053 )
(0.6 )%
(213)
(33)
(0.1 )%
(144.5 )%
(7.3 )%
(110,853 )
(10,268 )
(68.4 )%
(6.3 )%
(37,950)
(1,540)
(5,955)
(242)
(18.8 )%
(0.8 )%
(134,112 )
(137.2 )%
(100,585 )
(62.0 )%
(36,410)
(5,713)
(18.0 )%
4,894
5.0 %
—
4,894
(129,218 )
5.0 %
(132.2 )%
—
(100,585 )
—
—
(62.0 )%
—
—
—
—
(36,410)
—
(5,713)
—
(18.0 )%
(122,254 )
(125.0 )%
(92,198 )
(56.9 )%
(33,650)
(5,280)
(16.6 )%
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Impairment loss of intangible assets and
other non-current assets
Provision for loan receivable and other
receivables
Total operating expenses
Other operating income, net
Loss from continuing operations
Gain (Loss) on disposal of subsidiaries
and others
Impairment loss of long-term
investments
Interest income, net of interest expenses
Foreign currency exchange gains
(losses), net
Loss from continuing operations
before income taxes
Income tax benefit
Loss from continuing operations, net
of income taxes
Gain from disposal of discontinued
operations, net of income taxes
Income from discontinued operations,
net of income taxes
Net loss
Net loss attributable to ATA
Creativity Global
Basic and diluted loss per common share
Fiscal Year Ended December 31, 2021 Compared to Fiscal Year Ended December 31, 2020
Net Revenues
For the fiscal year
ended December 31,
2019
RMB
2020
RMB
2021
RMB
US$
(2.52 )
(1.57)
(0.57)
(0.09)
Our total net revenues increased by RMB 40.0 million, or 24.7%, to RMB 202.2 million ($31.7 million) in the fiscal year ended December 31, 2021 from RMB 162.2
million in the fiscal year ended December 31, 2020, primarily due to RMB 38.2 million net revenue growth in the portfolio training services resulted from more services
delivered during the year of 2021.
84
Cost of revenues
Our cost of revenues decreased by RMB1.1 million, or 1.1%, to RMB 97.4 million ($15.3 million) in the fiscal year ended December 31, 2021 from RMB 98.5 million
in the fiscal year ended December 31, 2020, primarily because, as our progressive shift to project-based programs, we have improved the service delivery efficiencies of full-
time teachers by restructuring their compensation and motivating them to use less credit hours for completing a project while continuing to maintain the quality of education and
support for students.
Gross Profit
Our gross profit increased by RMB 41.2 million, or 64.8%, to RMB 104.8 million ($16.4 million) in the fiscal year ended December 31, 2021 from RMB 63.6 million
in the fiscal year ended December 31, 2020. The increase was primarily contributed by improved operating efficiencies from the ongoing shift of ACG’s portfolio training
program mix toward project-based programs and related cost optimization efforts.
Operating Expenses
General and Administrative Expenses. Our general and administrative expenses decreased by RMB 6.8 million, or 6.8%, to RMB 93.3 million ($14.6 million) in the
fiscal year ended December 31, 2021 from RMB 100.1 million in the fiscal year ended December 31, 2020, primarily due to improved operational efficiencies gained within
the organization.
Sales and Marketing Expenses. Our sales and marketing expenses increased by RMB 12.6 million, or 23.6%, to RMB 66.1 million ($10.4 million) in the fiscal year
ended December 31, 2021 from RMB 53.5 million in the fiscal year ended December 31, 2020, primarily due to an RMB6.4 million increase in labor costs with increased
headcount and an RMB6.2 million increase in marketing promotion expenses incurred as a response to increased market competition.
Research and Development Expenses. Our research and development expenses increased by RMB 3.0 million, or 34.1%, to RMB 11.8 million ($1.9 million) in the
fiscal year ended December 31, 2021 from RMB 8.8 million in the fiscal year ended December 31, 2020, primarily due to expense associated with the development of our new
sales management system and IT platforms.
Impairment Loss of Intangible Assets and Other Non-current Assets. We recorded a full impairment loss of intangible assets of RMB 3.1 million for the education
assessment caseware of Muhua Shangce as no cash inflows are anticipated from this intangible asset as at the end of December 31, 2020. No such impairment loss was recorded
in the fiscal year ended December 31, 2021.
Provision for Loan Receivable and Other Receivables. We recorded provision of RMB 5.9 million for loan receivable and other receivables due from Beijing Biztour in
the fiscal year ended December 31, 2020 as we deem the likelihood of collecting the outstanding balance remote and reduced the balance to zero. No such provision was
recorded in the fiscal year ended December 31, 2021.
Impairment Loss of Long-term Investments
Impairment loss of long-term investments increased by RMB 4.3 million or 252.9%, to RMB 6.0 million ($0.9 million) in the fiscal year ended December 31, 2021
from RMB 1.7 million in the fiscal year ended December 31, 2020. Impairment loss recorded in the fiscal year ended December 31, 2021 was associated with one of our
strategic investments, which failed to meet the operation targets and encountered shortage of working capital resulted from continuous negative operating cash flows in the third
quarter of 2021. Impairment loss recorded in the fiscal year ended December 31, 2020 was associated with two of our long-term investments, which experienced declines in
results of operations caused by the COVID-19 pandemic and shortage of working capital resulted from continuous negative operating cash flows in the fiscal year ended
December 31, 2020.
Interest Income, Net of Interest Expense
Our interest income, net of interest expenses decreased to RMB 1.1 million ($0.2 million) in the fiscal year ended December 31, 2021 from RMB 1.2 million in the
fiscal year ended December 31, 2020, primarily due to decreased interest income derived from lower rate of return of interest on lower average cash balance compared with
prior year period.
Foreign Currency Exchange Losses, Net
Our net foreign currency exchange gains or losses primarily reflect the foreign exchange fluctuation effects of exchanging between U.S. dollar and Renminbi. We
recorded net foreign currency exchange loss of RMB 0.2 million ($33,432) in the fiscal year ended December 31, 2021, compared to a net loss of RMB 1.1 million in the fiscal
year ended December 31, 2020.
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Income Tax Benefit
Income tax benefit decreased by RMB 8.8 million, or 85.4% to RMB 1.5 million ($0.2 million) in the fiscal year ended December 31, 2021 from RMB 10.3 million in
the fiscal year ended December 31, 2020, primarily due to the decrease of our loss before income taxes.
Income (Loss) from Continuing Operations, Net of Income Taxes
Loss from continuing operations, net of income taxes, for the fiscal year ended December 31, 2021, was RMB 36.4 million ($5.7 million), as compared to RMB 100.6
million in the prior year period.
Net Income (Loss)
As a result of the above factors, we had net loss of RMB 36.4 million ($5.7 million) in the fiscal year ended December 31, 2021, compared to net loss of RMB 100.6
million in the fiscal year ended December 31, 2020, improving by RMB 64.2 million, or 63.8%.
We had basic and diluted loss per common share of RMB 0.57 ($0.09) in the fiscal year ended December 31, 2021 compared to basic and diluted loss per common share
of RMB 1.57 in the fiscal year ended December 31, 2020.
Fiscal Year Ended December 31, 2020 Compared to Fiscal Year Ended December 31, 2019
Net Revenues
Our total net revenues increased by RMB 64.4 million, or 65.9%, to RMB 162.2 million in the fiscal year ended December 31, 2020 from RMB 97.8 million in the fiscal
year ended December 31, 2019, primarily due to the fact that net revenues of prior-year period included approximately five months of contributions from the Huanqiuyimeng
business as the Company obtained the control of Huanqiuyimeng on August 6, 2019. Net revenues of RMB 158.7 million were contributed by Huanqiuyimeng business for the
year ended December 31, 2020, out of which RMB 113.2 million was generated from our primary service line of portfolio training services, whereas net revenues of RMB 91.4
million were contributed by the Huanqiuyimeng business for the Partial Year 2019, out of which RMB 63.8 million was generated from our primary service line of portfolio
training services.
Cost of revenues
Our cost of revenues increased by RMB 36.6 million, or 59.1%, to RMB 98.5 million in the fiscal year ended December 31, 2020 from RMB 61.9 million in the fiscal
year ended December 31, 2019, primarily due to the same reason as stated above for net revenues. Costs of RMB 93.9 million related to the Huanqiuyimeng business for the
year ended December 31, 2020, out of which RMB 71.7 million was incurred by our portfolio training services, whereas costs of RMB 56.1 million was related to the
Huanqiuyimeng business for the Partial Year 2019, out of which RMB 40.4 million was incurred by our portfolio training services.
Gross Profit (Loss)
Our gross profit increased by RMB 27.7 million, or 77.5%, to RMB 63.6 million in the fiscal year ended December 31, 2020 from RMB 35.9 million in the fiscal year
ended December 31, 2019. The increase was primarily because a full year operation from the Huanqiuyimeng business was included into our consolidated financial statements
in the fiscal year ended December 31, 2020, compared with a partial year contribution from Huanqiuyimeng business being included into the consolidated financial statements
in 2019 since the Acquisition Date.
Operating Expenses
General and Administrative Expenses. Our general and administrative expenses increased by RMB 18.2 million, or 22.2%, to RMB 100.1 million in the fiscal year
ended December 31, 2020 from RMB 81.9 million in the fiscal year ended December 31, 2019, primarily due to general and administrative expenses of RMB 63.0 million
incurred by Huanqiuyimeng for a full year 2020, compared with RMB 37.6 million incurred by Huanqiuyimeng for Partial Year 2019, which mainly consists of salaries and
share-based compensation expenses paid to our administrative and management personnel, as well as other expenses including professional fees, office expenses and rental
costs.
Sales and Marketing Expenses. Our sales and marketing expenses increased by RMB 19.4 million, or 56.8%, to RMB 53.5 million in the fiscal year ended December 31,
2020 from RMB 34.1 million in the fiscal year ended December 31, 2019, primarily due to sales and marketing expenses of RMB 53.1 million incurred by Huanqiuyimeng for
a full year 2020, compared with RMB 29.1 million incurred by Huanqiuyimeng for Partial Year 2019, which primarily consists of salaries, compensations, and performance-
linked bonuses for our sales and marketing personnel, commission expenses for sales channels, online channel platform expenses as well as other sales expenses including
meeting and conference expenses, advertising and promotion expenses, traveling and entertainment expenses, etc.
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Research and Development Expenses. Our research and development expenses decreased by RMB 3.0 million, or 25.3%, to RMB 8.8 million in the fiscal year ended
December 31, 2020 from RMB 11.8 million in the fiscal year ended December 31, 2019, primarily due to decrease in labor costs of RMB 2.5 million resulting from the
reduction in head counts of the research and development department.
Impairment Loss of Intangible Assets and Other Non-current Assets. Impairment loss of intangible assets and other non-current assets decreased by RMB 5.8 million, or
65.1%, to RMB 3.1 million in the fiscal year ended December 31, 2020 from RMB 8.9 million in the fiscal year ended December 31, 2019. We recorded a full impairment loss
of intangible assets of RMB 3.1 million for the education assessment caseware of Muhua Shangce as no cash inflows are anticipated from this intangible asset as at the end of
December 31, 2020. Impairment loss of RMB 8.9 million was recorded for the software platform developed under Project Shuang Chuang (a software platform purchased from
a third party for providing vocational assessment and training services that focuses on the innovation related competencies of college students) to reduce carrying amount of the
relevant assets for this project to zero in the year ended December 31, 2019.
Provision for Loan Receivable and Other Receivables. We recorded provision of RMB 5.9 million and RMB 17.4 million for loan receivable and other receivables due
from Beijing Biztour in the fiscal year ended December 31, 2020 and 2019 respectively. As of December 31, 2019, we assessed the collectability of the loan receivable and
other receivables and used the fair value of real estate adjusted by the estimated costs to sell to measure impairment and recorded a provision of RMB 17.4 million for the year
ended December 31, 2019. We deem the likelihood of collecting the outstanding balance remote and recorded an impairment of RMB 5.9 million to reduce the balance to zero
for the year ended December 31, 2020.
Impairment Loss of Long-term Investments
Impairment loss of long-term investments decreased by RMB 25.1 million or 93.6%, to RMB 1.7 million in the fiscal year ended December 31, 2020 from RMB 26.8
million in the fiscal year ended December 31, 2019. Impairment loss of RMB 1.7 million recorded in the fiscal year ended December 31, 2020 was associated with two of our
long-term investments, which encountered declines in results of operations caused by the COVID-19 pandemic and shortage of working capital resulted from continuous
negative operating cash flows. The impairment loss of RMB 26.8 million recorded was related to two of our strategic investments, which failed to meet the expected milestones
and operation forecasts and encountered shortage of working capital resulted from continuous negative operating cash flows for the year ended December 31, 2019.
Interest Income, Net of Interest Expense
Our interest income, net of interest expenses decreased to RMB 1.2 million in the fiscal year ended December 31, 2020 from RMB 3.3 million in the fiscal year ended
December 31, 2019, primarily due to decreased interest income derived from lower rate of return of interest on lower average cash balance compared with prior year period.
Foreign Currency Exchange Gains (Losses), Net
Our net foreign currency exchange gains or losses primarily reflect the foreign exchange fluctuation effects of exchanging between U.S. dollar and Renminbi. We
recorded net foreign currency exchange losses of RMB 1.1 million in the fiscal year ended December 31, 2020, compared to a net income of RMB 51,476 in the fiscal year
ended December 31, 2019.
Income Tax Benefit
Income tax benefit increased by RMB 3.1 million, or 43.6% to RMB 10.3 million in the fiscal year ended December 31, 2020 from RMB 7.1 million in the fiscal year
ended December 31, 2019. The income tax benefit recorded in both fiscal years was primarily related to effects of amortization of the difference between tax basis and
accounting basis of the intangible assets and deferred revenues recorded in connection with Huanqiuyimeng Acquisition.
Income (Loss) from Continuing Operations, net of Income Taxes
Loss from continuing operations, net of income taxes, for the fiscal year ended December 31, 2020, was RMB 100.6 million, as compared to RMB 134.1 million in the
prior year period.
Net Income (Loss)
As a result of the above factors, we had net loss of RMB 100.6 million in the fiscal year ended December 31, 2020, compared to net loss of RMB 129.2 million in the
fiscal year ended December 31, 2019.
We had basic and diluted loss per common share of RMB 1.57 in the fiscal year ended December 31, 2020 compared to basic and diluted loss per common share of
RMB 2.52 in the fiscal year ended December 31, 2019.
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B. Liquidity and Capital Resources
Cash Flows for the Fiscal Years Ended December 31, 2021, 2020, and 2019
We have financed our working capital and capital expenditure needs primarily through cash generated from operating activities and proceeds received from the Private
Placement.
As of December 31, 2021, we had RMB 71.3 million ($11.2 million) in cash. Our cash and cash equivalents were primarily deposited with reputable banks in China and
Hong Kong. We intend to finance our future working capital and capital expenditure needs principally from cash generated from future operating activities and possible plans
of financings from outside sources including public offerings or private placements.
We believe our expected future cash flows from our operating activities, which are mainly generated from the Huanqiuyimeng business, are sufficient to meet our
present working capital requirements. Our current expansion plans do not require significant capital commitments. We do not expect our short-term and long-term cash
requirements to be materially different. We do, however, expect to spend money on strategic acquisition and investment opportunities in the international education industry. If
any future projects would require additional funding, outside financing might be pursued as needed. Nevertheless, we may require additional sources of liquidity in the event of
changes in business conditions or other future developments. Factors affecting our sources of liquidity include our sales performance and changes in working capital. Any
changes in the significant factors affecting our revenues from the creative arts related international education services may cause material fluctuations in our cash generated
from operations. See “Item 5.A. Operating and Financial Review and Prospectus — Operating Results—Net Revenues” for a description of these significant factors. Changes in
working capital, including any significant shortening or lengthening of our accounts receivable cycle or client prepayment cycles, may also cause fluctuations in our cash
generated from operations. If our sources of liquidity are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit
facility to meet our cash needs. The sale of convertible debt securities or additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness
would result in debt service obligations and could result in operating and financial covenants that would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
The following table summarizes our net cash flows with respect to operating activities, investing activities and financing activities in the fiscal years ended
December 31, 2019, 2020 and 2021:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of foreign exchange rate changes on cash
Net decrease in cash
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Operating Activities
For the fiscal year ended December 31,
2019
RMB
2020
RMB
(In thousands)
2021
RMB
US$
(57,876 )
(36,945 )
57,566
867
(36,388 )
190,586
154,198
(27,874 )
(19,090 )
6,303
(814 )
(41,475 )
154,198
112,723
(31,834 )
(10,029 )
828
(349 )
(41,384 )
112,723
71,339
(4,995 )
(1,574 )
130
(55 )
(6,494 )
17,689
11,195
Net cash used in operating activities was RMB 31.8 million ($5.0 million) in the fiscal year ended December 31, 2021, mainly attributable to cash collection from sales
of RMB224.2 million, including RMB223.1 million from the Huanqiuyimeng operations and RMB1.1 million from other services (primarily from the K-12 education
assessment services prepayment received), partially offset by cash paid for payroll and compensation expenses of RMB146.2 million and cash paid for other cost and operating
expenses of RMB109.8 million.
Net cash used in operating activities was RMB 27.9 million in the fiscal year ended December 31, 2020, mainly attributable to cash collection from sales of RMB 209.8
million, including RMB 205.2 million from the Huanqiuyimeng operations and RMB 4.6 million from other services (primarily from the K-12 education assessment services
income and rental income), partially offset by cash paid for payroll and compensation expenses of RMB 141.1 million and cash paid for other cost and operating expenses of
RMB 96.6 million.
Net cash used in operating activities was RMB 57.9 million in the fiscal year ended December 31, 2019, mainly attributable to cash collection from sales of RMB 122.6
million, including RMB 112.0 million from the Huanqiuyimeng operations and RMB 10.6 million from other services (primarily from the K-12 education assessment services
income and rental income), partially offset by cash paid for payroll and compensation expenses of RMB 84.0 million and cash paid for other cost and operating expenses of
RMB 96.5 million.
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Investing Activities
Net cash used in investing activities in the fiscal year ended December 31, 2021 of RMB 10.0 million ($1.6 million) was primarily attributable to cash payment of
RMB4.6 million to the prior minority shareholders of Huanqiuyimeng in connection with Huanqiuyimeng Acquisition, payments of RMB4.5 million in connection with
renovation in various training centers and RMB 0.8 million cash disposed along with the dispose of K-12 education assessment business of Muhua Shangce.
Net cash used in investing activities in the fiscal year ended December 31, 2020 of RMB 19.1 million was primarily attributable to cash payment of RMB 15.0 million to
the prior minority shareholders of Huanqiuyimeng in connection with Huanqiuyimeng Acquisition and payments of RMB 4.1 million in connection with renovation in various
training centers.
Net cash used in investing activities in the fiscal year ended December 31, 2019 of RMB 36.9 million was primarily attributable to cash payment of RMB 34.7 million
made in the Huanqiuyimeng Acquisition (less cash acquired), cash payment of RMB 1.3 million for purchasing property and equipment, cash payment of RMB 6.0 million
invested in Xiaozhi, offset by RMB 4.9 million legal and consulting fee reimbursement received in the fiscal year ended December 31, 2019 associated with the sale of the ATA
Online Business.
Financing Activities
Net cash provided by financing activities in the fiscal year ended December 31, 2021 of RMB 0.8 million ($0.1 million) was primarily attributable to cash received from
short-term loan of RMB2.7 million, in association with the disposed K-12 education assessment business before its deconsolidation during the year of 2021, netting off by
RMB2.0 million repayment of short-term loan by Huanqiuyimeng during the first quarter of 2021.
Net cash provided by financing activities in the fiscal year ended December 31, 2020 of RMB 6.3 million was primarily attributable to RMB 8.5 million proceeds
received from the private placement and RMB 19.6 million received from the short-term loans, which was partially offset by repayments of RMB 17.8 million for the short-
term loans and payment of RMB 4.0 million for the repurchase of our ADS from the open market.
Net cash provided by financing activities in the fiscal year ended December 31, 2019 of RMB 57.6 million was primarily attributable to RMB 61.7 million received
from private placement and RMB 5.0 million capital increase of Muhua Shangce contributed by non-controlling shareholder, offset by RMB 9.0 million repayment of short-
term loans assumed in connection with the Huanqiuyimeng Acquisition.
Indebtedness
As of April 26, 2022, we do not have any outstanding debt securities, contingent liabilities, mortgages, or liens.
Capital Expenditures
The following table sets forth our historical capital expenditures for the periods presented. Actual future capital expenditures may differ from the amounts presented
below.
Total capital expenditures
For the fiscal year ended December 31,
2019
RMB
2020
RMB
2021
RMB
US$
1,285
(In thousands)
4,910
4,452
699
Historically, our capital expenditures have been made primarily for leasehold improvements, software, computer and office equipment.
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Contractual Obligations
Our contractual obligations comprise operating lease commitments and other commitments. The following table sets forth our contractual obligations as of
December 31, 2021:
Payment Due
Operating Lease Obligations (1)
46,542
19,427
Total
Within
1 Year
1-3 Years
(In thousands of RMB)
20,612
3-5 Years
More than
5 Years
6,503
—
(1)
Our operating lease obligations comprise office and training center lease obligations for our offices and training centers in China. These leases expire at different times
over the period from the date of this annual report through July 2026 and will become subject to renewal. We will evaluate the need to renew each lease on a case-by-
case basis prior to its expiration.
Off-Balance Sheet Arrangements
We do not currently have, and do not expect in the future to have, any off-balance sheet arrangements or commitments. In our ongoing business, we do not plan to enter
into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships established for the purpose of facilitating off-balance sheet
arrangements or commitments.
Foreign Currency Exchange
The functional currency of our offshore entities and subsidiaries, including ATA Creativity Global, ATA BVI, Xing Wei and ACGIGL, is the U.S. dollar. The
functional currency of our PRC subsidiaries and the VIE is Renminbi. As of December 31, 2021, we had RMB 71.3 million ($11.2 million) in cash and cash equivalents. The
non-Renminbi portion of our revenues primarily consists of U.S. dollar and British Pound denominated referral fees paid by overseas schools, institutions and their admission
agents as well as service fees collected from students enrolled from overseas, while the non-Renminbi portion of our expenditures primarily consists of professional fees
incurred and overseas costs and expenses incurred mainly for research-based learning services, either denominated in U.S. dollars, British Pound or Hong Kong dollars.
Fluctuations in exchange rates, primarily those involving the U.S. dollar against the Renminbi, may affect our costs and operating margins and reported operating results. Under
the current foreign exchange system in China, our operations in China may not be able to hedge effectively against currency risks, including any possible future Renminbi
devaluation. See “Item 3.D. Risk Factors — Risks Relating to Doing Business in the People’s Republic of China — Fluctuations in exchange rates could result in foreign
currency exchange losses.”
C. Research and Development, Patents and Licenses, Etc.
Research and development are important to our continued success. We have devoted significant resources to continuous research and curriculum development. We have
a dedicated and experienced research and curriculum development team based at our headquarters consisting of 13 permanent staff and supplemented by professional art
teachers as subject experts to analyze market demand, study cutting-edge developments and techniques, and develop the most appropriate curriculum and teaching methods that
can help us achieve our goals for providing up-to-date and high quality international educational services. We will continue to look selectively for experienced research and
development talents to further increase our research and development capabilities.
D. Trend Information
Other than as disclosed elsewhere in this annual report, including in “Item 3.D. Risk Factors”, we are not aware of any trends, uncertainties, demands, commitments or
events that are reasonably likely to have a material adverse effect on our revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed
financial information to be not necessarily indicative of future operating results or financial conditions.
E. Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the
reported amount of our assets and liabilities, and disclose contingent assets and liabilities on the date of each set of consolidated financial statements and the reported amount of
revenues and expenses during each financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our
own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the
financial reporting process, actual results could differ from those estimates as a result of changes in our estimates or changes in the facts or circumstances underlying our
estimates and assumptions.
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An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the
time such estimate is made, if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur
periodically, could materially impact the consolidated financial statements. Some of our accounting policies require higher degrees of judgment than others in their application.
We consider the policies discussed below to be critical to an understanding of our consolidated financial statements as their application places the most significant demands on
our management’s judgment. When reviewing our consolidated financial statements, you should take into account:
•
•
•
•
our critical accounting policies discussed below;
the related judgments made by us and other uncertainties affecting the application of these policies;
the sensitivity of our reported results to changes in prevailing facts and circumstances and our related estimates and assumptions; and
the risks and uncertainties described under Item 3.D. “Key Information — Risk Factors.”
See Note 2 to our audited consolidated financial statements for additional information regarding our significant accounting policies.
Goodwill
Periods prior to January 1, 2020
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired in a business combination. Goodwill is reviewed for impairment at
least annually based on our reporting units, which are defined as operating segments or one level below operating segments (also known as components). Prior to performing
the two-step goodwill impairment test, we perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its
carrying amount. If this is the case, a two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying
amount, a two-step goodwill impairment test is not required.
If a two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of
the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the impairment test
(measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that
goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair
value after this allocation is the implied fair value of the reporting unit’s goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. If the fair
value of the reporting unit exceeds its carrying amount, step two does not need to be performed.
Annual impairment review over goodwill was performed as of December 31 each year, and when a triggering event occurs between annual impairment tests.
Periods commencing January 1, 2020
In connection with the adoption of ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment as of January 1, 2020, the
goodwill impairment test was simplified by comparing the fair value of a reporting unit with its carrying amount and an impairment charge is measured as the amount by which
the carrying amount exceeds the reporting unit's fair value. Goodwill is not amortized, but tested annually for impairment on a qualitative or quantitative basis for the reporting
unit as of December 31, or more frequently when events or circumstances indicate an impairment may exist at the reporting unit level. In the qualitative assessment, we consider
primary factors such as industry and market considerations, the overall financial performance of the reporting unit, and other specific information related to the operations.
When performing the annual impairment test, we have the option of first performing a qualitative assessment to determine the existence of events and circumstances that would
lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If such a conclusion is reached, we shall then be
required to perform a quantitative impairment assessment of goodwill. However, if the assessment leads to a determination that it is more likely than not that the fair value of a
reporting unit is greater than its carrying amount, then no further assessments are required. A quantitative assessment for the determination of impairment is made by comparing
the carrying amount of the reporting unit with its fair value, which is generally calculated using the discounted cash flow method. We adopted ASU 2017-04 on January 1,
2020. The adoption did not have a material impact on the Company’s consolidated financial statements.
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Impairment of Long-lived Assets, Excluding Goodwill
Long-lived assets, including property and equipment, intangible assets, other non-current assets subject to amortization and right-of-use assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or
asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by such asset or asset group to its carrying value. If the
carrying value of such long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value
exceeds its fair value. The fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary.
Revenue Recognition
We generated revenue primarily from our portfolio training services, research-based learning services, overseas study counselling services, and other educational
services through our training center network in China and abroad as a result of Huanqiuyimeng Acquisition on August 6, 2019. Prior to the consummation of the sale of the
ATA Online Business, we primarily provided computer-based testing services, online education services and other related services, which have been classified and reported
under discontinued operations for all the periods presented.
Since the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018, we adopted ASC 606,
Revenue from Contracts with Customers, from January 1, 2018 using the modified retrospective method. In accordance with ASC 606, revenues were recognized upon the
satisfaction of its performance obligation (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which we expect
to be entitled to in exchange for those goods or services, excluding amounts collected on behalf of third parties (for example, value added taxes).
Under ASC 606, we are required to estimate variable consideration, the determination of stand-alone selling prices (“SSP”) of performance obligations, and
measurement of progress towards completion in revenue recognition.
In making the estimate of variable consideration, we apply judgments which are inherently subjective. This includes the assessment of the final outcome of the
performance targets and our historical experience and performance. The amount of estimated variable consideration included in the transaction price is limited only to the extent
that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable condition is
subsequently resolved. We review these estimates on a regular basis. Any changes in these factors which affect the estimated variable consideration and revenue recognized are
applied prospectively.
The contracts with customers also include promises to transfer multiple services. Judgment is required to determine the SSP for each distinct performance obligation. In
instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market
conditions and other observable inputs. For contracts with variable consideration, we determine that variable consideration is allocated according to the method as described
above, because variable consideration is attributable to all of the performance obligations in a contract.
For each performance obligation satisfied over time, revenues were recognized over time by measuring the progress toward complete satisfaction of that performance
obligation, including:
•
•
•
•
•
Portfolio training services. Revenue is recognized over a period of time based on the number of training hours expended and total hours of training under the
contracts with the students. Under project-based programs, the number of hours of trainings required to complete a project is not pre-determined and varies
depending on the background and requirements of individual students. We reassess the total hours of training pursuant to each contract of project-based
program with individual student on a quarterly basis. Any adjustments arising from the changes of estimated training hours are applied prospectively.
Research-based learning services. Revenue is recognized when control of promised services is transferred to the customers in an amount of consideration to
which we expect to be entitled in exchange for those services.
Overseas study counselling services. Revenue is recognized over the service period on the basis of costs incurred to-date to the total estimated costs.
Other educational services. Revenue is recognized when control of promised services is transferred to customers in an amount of consideration to which we
expect to be entitled to in exchange for those services.
Revenue from the disposed K-12 education assessment services and content development is recognized when we deliver the reports or developed content to
customers, which is when the control over the report or the content has been transferred to customers.
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Business Combination
Business combinations are recorded using the acquisition method of accounting in accordance with ASC Topic 805: Business Combinations. The acquisition method of
accounting requires an acquirer to determine the identifiable acquired assets, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date. The consideration transferred for an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets
given, liabilities assumed, and equity instruments issued as well as the contingent considerations as of the acquisition date. The costs directly attributable to an acquisition are
expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date,
irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of the acquisition, fair value of the non-controlling interests and acquisition date fair
value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of the
acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in earnings.
Long-term Investments
In connection with the adoption of the ASC 321 Investment- Equity Security as of January 1, 2018, we have elected to apply the measurement alternative to measure the
equity investments that do not have readily determinable fair values at cost, adjusted for changes resulting from impairments and observable price changes in orderly
transactions for identical or similar securities of the same issuer. We consider information in periodic financial statements and other documentation provided by the investees to
determine whether observable price changes have occurred.
We make a qualitative assessment considering impairment indicators to evaluate whether the equity investments without a readily determinable fair value is impaired at
each reporting period, and write down to its fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its
carrying value. If an equity security without a readily determinable fair value is impaired, we include an impairment loss in net income equal to the difference between the fair
value of the investment and its carrying amount.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Tax (Topic 740): Simplifying the Accounting for Income Taxes, or ASU 2019-12. ASU 2019-12 removes
certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds
guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. We adopted the
disclosure requirements of ASU 2019-12 on our consolidated financial statements on January 1, 2021. There was no material impact on our consolidated financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth certain information relating to our directors and executive officers as of the date of this annual report. The business address of each of our
directors and executive officers is 1/F East Gate, Building No. 2, Jian Wai Soho, No. 39 Dong San Huan Zhong Road, Chao Yang District, Beijing 100022, China.
Name
Xiaofeng Ma
Jun Zhang
Andrew Yan
Hope Ni
Alec Tsui
Zhilei Tong
Amy Tung
Age
58
49
64
49
72
47
50
Position
Chairman of the Board of Directors and Chief Executive Officer
President and Director
Director
Director
Director
Director
Chief Financial Officer
Xiaofeng Ma is co-founder, chairman of the board and chief executive officer of our company. He also serves as chairman on the board of directors of ATA Online.
Prior to co-founding our company, Mr. Ma co-founded Dynamic Technology Corporation and served as its chief executive officer from 1996 to 1998. From 1990 to 1996, Mr.
Ma served as a general manager in the Hainan High-Tech Industry International Cooperation Center. Previously, Mr. Ma gained experience as a vice president at the Beijing
MIDI High-Tech Center, as a director of Beijing Zhongjia Integrated Intelligent System Engineering, and as a reporter for China Radio International. Mr. Ma is a member of
the board of directors of a number of private enterprises with operations in China, which do not compete with our business. Mr. Ma graduated from Nanjing University with a
bachelor’s degree in economics.
93
Jun Zhang is the president and a director of our company. Prior to joining us, Mr. Zhang was the founder and president of Huanqiuyimeng. With over 20 years of
experience in art and creativity education, Mr. Zhang is recognized as an expert in the art and creativity education industry in China. He is a pioneer in the industrialization of
international art and creativity education in China and has been active in the fields of both art and vocational training as an educator in China. He has served as the head of the
graduate animation program at the Central Academy of Fine Arts’ School of City Design and as the director of the digital simulation graduate program at the Beijing Institute of
Technology’s School of Design and Arts. Mr. Zhang received a bachelor’s degree in arts education from Qufu Normal University.
Andrew Yan is a director of our company and is an independent director pursuant to Nasdaq Stock Market Rule 5605(a)(2). He is the founding managing partner of
SAIF Partners IV, III and SB Asia Investment Fund II L.P., and president and executive managing director of Softbank Asia Infrastructure Fund. Before joining Softbank Asia
Infrastructure Fund in 2001, Mr. Yan was a managing director and the head of the Hong Kong office of Emerging Markets Partnership, the management company of AIG
Asian Infrastructure Funds from 1994 to 2001. From 1989 to 1994, he worked in the World Bank, the Hudson Institute and US Sprint Co. as an economist, research fellow and
director for Asia respectively in Washington, DC. From 1982 to 1984, he was the chief engineer of Jianghuai Airplane Corp. He is currently an independent non-executive
director of China Resources Land Limited and China Southern Airlines Co Ltd and an independent director of 360 DigiTech, Inc. (former called 360 Finance, Inc.). He also
holds directorship in several SAIF portfolio companies. Mr. Yan received a master of arts degree from Princeton University, and a bachelor’s degree in engineering from the
Nanjing Aeronautic Institute.
Hope Ni is an independent director of ATA Creativity Global. Ms. Ni currently serves on the boards of Zhihu Inc. (NASDAQ: ZH), Digital China Holdings Ltd. (Stock
code: 00861.HK), Cogobuy Group (listed on the Main Board of the Stock Exchange of Hong Kong), Ucloudlink Group Inc. (NASDAQ: UCL) and Acotec Scientific Holdings
Limited (HKEX: 6699). From 2004 to 2007, Ms. Ni was the chief financial officer and director of Viewtran Group, Inc. (NASDAQ: VIEW), during which time, Viewtran
Group increased market capitalization approximately seven times. In 2008, Ms. Ni served as the vice chairman of Viewtran Group, Inc. Prior to that, Ms. Ni spent six years as a
practicing attorney at Skadden, Arps, Slate, Meagher & Flom LLP in New York and Hong Kong. Earlier in her career, Ms. Ni worked at Merrill Lynch’s investment banking
division in New York. Ms. Ni received her J.D. degree from the University of Pennsylvania Law School and her B.S. degree in applied economics and business management
from Cornell University.
Alec Tsui is an independent director on our board and has also served as director on the board of directors of ATA Online from July 2015 to August 2018. Mr. Tsui is
currently an independent non-executive director of a number of companies listed in Hong Kong and on Nasdaq, including, COSCO Shipping International (Hong Kong) Co
Ltd., Pacific Online Limited, Melco Resorts & Entertainment Limited, Hua Medicine and Brii Biosciences Limited. He was the chairman of the Hong Kong Securities Institute
from 2001 to 2004. He was an advisor and a council member of the Shenzhen Stock Exchange from 2001 to 2002. He joined the Hong Kong Stock Exchange in 1994 as an
executive director of the finance and operations services division and became its chief executive in 1997. Prior to that, Mr. Tsui served at the Securities and Futures Commission
of Hong Kong from 1989 to 1993. Mr. Tsui graduated from the University of Tennessee with a B.S. degree and a master’s degree in industrial engineering. He completed a
program for senior managers in government at the John F. Kennedy School of Government of Harvard University.
Zhilei Tong is a director of our board. Mr. Tong founded COL Digital Publishing Group Co., Ltd. in 2000 and is currently the chairman and CEO of COL Digital
Publishing Group Co., Ltd. He is also the executive director of Jianshui Wenrui Enterprise Management Consulting Co., Ltd., the executive director and CEO of Beijing COL
Culture Media Co., Ltd., the executive director and CEO of Beijing COL Education Technology Development Co., Limited, the executive director of Shanghai COL Culture
Development Co., Ltd., the chairman of Hangzhou COL Information Technology Co., Ltd., the executive director of COL (Tianjin) Culture Development Co., Ltd., the
chairman of COL (Tianjin) Culture and Education Industry Investment Management Co., Ltd., the executive director of Hubei COL Digital Publishing Co., Ltd., the executive
director of Guangzhou Siyuetian Information Technology Co., Ltd., the executive director of Beijing Tangyuan and its partners Network Technology Co., Ltd., the executive
director of COL Group Co., Limited, the executive director of Chinese Online Anti-Piracy Union Limited, the director of ATA Online (Beijing) Education Technology Co.,
Ltd., the chairman of Crazy Maple Studio, the director of Beijing Chinese Miracle Culture Technology Co., Ltd., the president of Asia America Multi-technology Association,
the vice-chairman of China Audio-video and Digital Publishing Association, and the vice president of China Editorial Association. Mr. Tong received his bachelor’s degree
from Tsinghua University and his IMBA degree from Tsinghua University.
Amy Tung is our Chief Financial Officer, having assumed such role on April 1, 2017. She also served as chairman on the supervisory board of ATA Online from July
2015 to August 2018. Ms. Tung has been with the Company since 2006, serving in roles previously include the assistant to the CEO and vice president/financial controller.
Prior to her service with ACG, Ms. Tung has held various financial and accounting positions with Bayer Healthcare Limited in Hong Kong, BEA Systems (Hong Kong)
Limited, Bureau Veritas Consumer Products Services (Hong Kong) Limited, Agilent Technologies Hong Kong Limited, and Compaq Computer Limited. Ms. Tung received her
master’s degree in financial engineering from Columbia University and her MBA and bachelor’s degree in computer science from the Chinese University of Hong Kong. She is
a fellow member of the Association of Chartered Certified Accountants and the Hong Kong Institute of Certified Public Accountants.
94
B. Compensation
For the fiscal year ended December 31, 2021, we and our subsidiaries paid aggregate cash compensation of RMB7.1 million ($1.1 million) to our directors and
executive officers as a group. We do not pay or set aside any amounts for pension, retirement or other benefits for our officers and directors.
Share Incentives
We adopted a share incentive plan, or the 2005 Plan, in April 2005, which was terminated in 2015. We adopted our 2008 Employee Share Incentive Plan, or the 2008
Plan, in January 2008. We amended and restated the 2008 Plan, or the Amended and Restated 2008 Plan, in December 2016, primarily to extend its term and expand the option
pool thereunder to include the reserved but unissued common shares under the 2005 Plan. We amended and restated the Amended and Restated 2008 Plan, or the Second
Amended and Restated 2008 Plan, in October 2018, primarily to extend its term, expand the option pool thereunder, and change the number of common shares automatically
added to the option pool in each calendar year during its term. Our share incentive plans are intended to promote our success and to increase shareholder value by providing
additional means to attract, motivate, retain and reward selected directors, officers, employees and other eligible persons. An aggregate of 3,310,300 common shares were
reserved for issuance under the 2005 Plan. Subject to any amendment of the Second Amended and Restated 2008 Plan by our directors, the maximum aggregate number of
common shares that may be issued pursuant to all awards under the Second Amended and Restated 2008 Plan is 6,965,846 shares (which was increased from 6,399,377 shares
under the Amended and Restated 2008 Plan), plus, unless the board of directors determines a lesser amount, an annual increase on January 1 of each calendar year beginning in
2019 equal to the lesser of (i) one percent (1%) of the total number of common shares issued and outstanding on December 31 of the immediately preceding calendar year, or
(ii) such number of common shares as may be established by the board of directors. As of December 31, 2021, 8,674,396 shares were authorized for issuance under the Second
Amended and Restated 2008 Plan.
We have issued share options and restricted shares under the 2005 Plan, the 2008 Plan, the Amended and Restated 2008 Plan and the Second Amended and Restated
2008 Plan to selected directors, officers, employees and individual consultants and advisors. The contractual term of these options is mostly for ten years.
Options and restricted shares granted under our share incentive plans generally do not vest unless the grantee remains under our employment or in service with us on the
given vesting date.
Generally, if the grantee’s employment or service with us is terminated for cause, all such grantee’s options under our share incentive plans, vested and unvested,
immediately terminate and become unexercisable. On the other hand, if the grantee’s employment or service with us is terminated for any reason other than for cause, all such
grantee’s vested options terminate and become unexercisable 90 days, or three months following the grantee’s last day of employment or service with us, while generally all
unvested options immediately terminate and become unexercisable. In circumstances where there is a death or total disability of the grantee, all such grantee’s vested options
terminate and become unexercisable 12 months following the grantee’s last day of employment or service with us, while generally all unvested options immediately terminate
and become unexercisable.
Our board of directors may amend, alter, suspend, or terminate our share incentive plans at any time, provided, however, that our board of directors must first seek the
approval of the participants of our share incentive plans if such amendment, alteration, suspension or termination would adversely affect the rights of participants under any
option granted prior to that date. The 2005 Plan was terminated in 2015, and without further action by our board of directors, the Second Amended and Restated 2008 Plan will
terminate in 2028.
The table below sets forth the share options issued and restricted share grants made to our current directors and executive officers pursuant to our share incentive plans:
Share Options
Name
Amy Tung
Jun Zhang*
Number of
Common
Shares to be
Issued
Upon Exercise
of Options
Exercise
Price per
Common
Share
Date of Issuance
Vesting Start Date
200,000 $
1,698,790 $
0.578
1.2611
November 6, 2018
August 6, 2019
November 6, 2018
See note below
Date of
Expiration
November 5, 2028
August 5, 2029
*One fourth (1/4) of the total number of common shares of the Company subject to the option of Jun Zhang have vested on April 1, 2022. The remaining three-quarters
(3/4) of the common shares of the Company subject to the option shall vest with one-quarter (1/4) on each of the first, second and third anniversary of April 1, 2022 on the
condition that specific performance target is achieved.
95
Restricted Shares
Name
Xiaofeng Ma
Andrew Yan
Hope Ni
Alec Tsui
Zhilei Tong
Amy Tung
C. Board Practices
Duties of Directors
Restricted Shares
Date of Grant
200,000
90,000
133,000
1,469,460
100,000
133,000
200,000
60,000
133,000
200,000
60,000
133,000
200,000
200,000
30,000
10,000
100,000
100,000
May 30, 2011
February 10, 2015
January 17, 2017
December 19, 2018
May 30, 2011
January 17, 2017
November 6, 2018
February 16, 2012
January 17, 2017
November 6, 2018
February 16, 2012
January 17, 2017
November 6, 2018
November 6, 2018
February 16, 2012
June 13, 2013
January 17, 2017
December 19, 2018
Vesting Start
Date
June 1, 2011
February 10, 2015
January 17, 2017
December 19, 2018
June 1, 2011
January 17, 2017
November 6, 2018
February 17, 2012
January 17, 2017
November 6, 2018
February 17, 2012
January 17, 2017
November 6, 2018
November 6, 2018
February 17, 2012
June 13, 2013
January 17, 2017
December 19, 2018
Under the Companies Act, our directors have a statutory duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to
exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must
ensure compliance with our fourth amended and restated memorandum and articles of association. A shareholder has the right to seek damages if a duty owed by our directors is
breached.
The functions and powers of our board of directors include, among others:
•
•
•
•
•
•
convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
issuing authorized but unissued shares;
declaring dividends and distributions;
exercising the borrowing powers of our company and mortgaging the property of our company;
approving the transfer of shares of our company, including the registering of such shares in our share register; and
exercising any other powers conferred by the shareholders’ meetings or under our fourth amended and restated memorandum and articles of association.
Terms of Directors
We have a board of six directors divided into class A, class B and class C directors. As of the date of this annual report, the class A directors are Xiaofeng Ma and Zhilei
Tong, the class B directors are Andrew Yan and Jun Zhang, and the class C directors are Hope Ni and Alec Tsui. One third of our directors for the time being (or, if their
number is not a multiple of three (3), the number nearest to but not greater than one third) shall retire from office every year at our annual general meeting of shareholders on a
rotating basis. Our class A director Zhilei Tong was re-elected at our 2021 annual general meeting. Our class C directors Hope Ni and Alec Tsui will retire from office and will
be eligible for re-election at our 2022 annual general meeting. Our chief executive officer, which currently is Xiaofeng Ma, shall not, while holding office, be subject to
retirement or be taken into account in determining the number of directors to retire in any year. Neither we nor our subsidiaries have any directors’ service contracts providing
for benefits upon termination of employment.
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Board Practices
Our board of directors has established an audit committee, a compensation committee and a nominations committee.
Audit Committee
Our audit committee consists of Hope Ni and Alec Tsui. Hope Ni is the chairman of our audit committee. Our board of directors has determined that Hope Ni and Alec
Tsui are “independent directors” within the meaning of Nasdaq Stock Market Rule 5605(a)(2) and meet the criteria for independence set forth in Rule 10A-3(b) of the Exchange
Act. Hope Ni meets the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. The third seat on our audit committee is vacant in
reliance on Nasdaq Stock Market Rule 5615(a)(3), which permits a foreign private issuer like us to follow “home country practices” in relation to the composition of its audit
committee. In this regard we have elected to adopt the practices of our home country, the Cayman Islands, which does not require us to have a three-member audit committee or
to fill all three seats on the audit committee at this time.
Our audit committee is responsible for, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
appointing the independent auditor;
pre-approving all auditing and non-auditing services permitted to be performed by the independent auditor;
annually reviewing the independent auditor’s report describing the auditing firm’s internal quality-control procedures, any material issues raised by the most
recent internal quality-control review, or peer review, of the independent auditor and all relationships between the independent auditor and our company;
setting clear hiring policies for employees and former employees of the independent auditor;
reviewing with the independent auditor any audit problems or difficulties and management’s responses;
reviewing and approving all related party transactions on an ongoing basis;
reviewing and discussing the annual audited financial statements with management and the independent auditor;
reviewing and discussing with management and the independent auditor major issues regarding accounting principles and financial statement presentations;
reviewing reports prepared by management or the independent auditor relating to significant financial reporting issues and judgments;
discussing earnings press releases with management, as well as financial information and earnings guidance provided to analysts and rating agencies;
reviewing with management and the independent auditor the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on our
financial statements;
discussing policies with respect to risk assessment and risk management with management, internal auditors and the independent auditor;
timely reviewing reports from the independent auditor regarding all critical accounting policies and practices to be used by our company, all alternative
treatments of financial information within U.S. GAAP that have been discussed with management and all other material written communications between the
independent auditor and management;
establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls,
or auditing matters, and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
annually reviewing and reassessing the adequacy of our audit committee charter;
such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
97
•
•
meeting separately, periodically, with management, internal auditors and the independent auditor; and
reporting regularly to the full board of directors.
Compensation Committee
Our compensation committee consists of Andrew Yan, Hope Ni and Alec Tsui. Andrew Yan is the chairman of our compensation committee. Our board of directors has
determined that all of our compensation committee members are “independent directors” within the meaning of Nasdaq Stock Market Rule 5605(a)(2).
Our compensation committee is responsible for:
•
•
•
•
•
•
reviewing and approving our overall compensation policies;
reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating our chief executive officer’s
performance in light of those goals and objectives, reporting the results of such evaluation to the board of directors, and determining our chief executive
officer’s compensation level based on this evaluation;
determining the compensation level of our other executive officers;
making recommendations to the board of directors with respect to our incentive-compensation plans and equity-based compensation plans;
administering our equity-based compensation plans in accordance with the terms thereof; and
such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
Nominations Committee
Our nominations committee consists of Xiaofeng Ma, Andrew Yan and Alec Tsui. Xiaofeng Ma is the chairman of the nominations committee. Although Nasdaq Stock
Market Rules generally require all members of the nominations committee of a listed company to be “independent directors” within the meaning of Nasdaq Stock Market Rule
5605(a)(2), Nasdaq Stock Market Rule 5615(a)(3) permits a foreign private issuer like us to follow “home country practices” in relation to composition of its nominations
committee. In this regard, we have elected to adopt the practices of our home country, the Cayman Islands, which does not require that any of the members of a company’s
nominations committee be independent directors.
Our nominations committee is responsible for, among other things:
•
•
•
seeking and evaluating qualified individuals to become new directors as needed;
reviewing and making recommendations to the board of directors regarding the independence and suitability of each board member for continued service; and
evaluating the nature, structure and composition of other board committees.
Corporate Governance
Our board of directors has adopted a code of ethics, which is applicable to our senior executive and financial officers. In addition, our board of directors has adopted a
code of conduct, which is applicable to all of our directors, officers, employees and advisors. Our code of ethics and our code of conduct are publicly available on our website,
http://www.atai.net.cn. In addition, our board of directors has adopted a set of corporate governance guidelines. The guidelines reflect certain guiding principles with respect to
our board’s structure, procedures and committees. The guidelines are not intended to change or interpret any law, or our fourth amended and restated memorandum and articles
of association.
Interested Transactions
A director may vote with respect to any contract or transaction in which he or she is interested, provided that the nature of the interest of any director in such contract or
transaction is disclosed by him or her at or prior to its consideration and any vote in that matter.
98
D. Employees
We had 768, 580 and 584 employees as of December 31, 2019, 2020 and 2021 in China, respectively, including 3 employees of the VIE as of December 31, 2021. As
of December 31, 2021, we had 147 employees in teaching, 150 employees in teaching administration and affairs (among which there are 13 permanent employees focusing on
research and curriculum development who are supplemented by professional art teachers), 182 employees in sales and marketing, 5 in research and development and 100 in
general and administrative functions.
We use our share incentive plans as additional means to further attract, motivate, retain and reward selected directors, officers, employees and third-party consultants
and advisors. For more information, see “Item 6.B. Directors, Senior Management and Employees — Compensation — Share Incentives.” We believe these initiatives have
contributed to our ability to attract and retain talent.
As required by Chinese laws and regulations, we and the VIE participate in various employee benefit plans that are organized by municipal and provincial governments,
including housing, pension, medical and unemployment benefit plans. We and the VIE make monthly payments to these plans in respect of each employee based on the
employee’s compensation. We believe that we and the VIE maintain a good working relationship with our and the VIE’s employees and we and the VIE have not experienced
any significant labor disputes. Our employees have not entered into any collective bargaining agreements.
According to our contracts with our and the VIE’s employees, our and the VIE’s employees are generally prohibited from engaging in any activities that compete with
our business during the period of their employment and for two years after termination of their employment with us. Furthermore, all employees are prohibited, for a period of
two years following termination, from soliciting other employees to leave us or the VIE and, for a period of five years following termination, from soliciting our existing clients.
However, we and the VIE may have difficulty enforcing these non-competition and non-solicitation terms in China because the Chinese legal system, especially with respect to
the enforcement of such terms, is still developing.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership, within the meaning of Section 13(d)(3) of the Exchange Act, of our common shares
as of April 22, 2022 by:
•
•
each person known to us to own beneficially more than 5% of common shares, and
each of our directors and executive officers.
Directors and Executive Officers:
Xiaofeng Ma(3)
Andrew Yan
Hope Ni
Alec Tsui
Zhilei Tong
Amy Tung
Jun Zhang(4)
Directors and Executive Officers Combined
Principal Shareholders:
Joingear Limited(5)
HSBC International Trustee Limited(6)
Able Knight Development Limited(3)
Alpha Advantage Global Limited(7)
Jiangong Zhao(7)
Arts Consulting Limited(8)
CL-TCC(9)
Pengjian Shi(9)
TCC Management Limited(9)
* Beneficially owns less than 1% of our common shares.
99
Common shares beneficially
owned
Number (1)
Percent (2)
25,160,508
*
*
*
*
*
9,784,698
36,655,548
18,427,074
9,804,588
4,998,988
4,717,100
4,717,100
9,360,000
5,662,634
5,662,634
5,662,634
39.8 %
*
*
*
*
*
15.4 %
57.5 %
29.2 %
15.5 %
7.9 %
7.5 %
7.5 %
14.8 %
9.0 %
9.0 %
9.0 %
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
The number of common shares beneficially owned by each of the listed persons includes common shares that such person has the right to acquire within 60 days after
April 22, 2022.
Percentage of beneficial ownership for each of the persons listed above is determined by dividing (i) the number of common shares beneficially owned by such person
by (ii) the total number of common shares outstanding, plus the number of common shares such person has the right to acquire within 60 days after April 22, 2022.
The total number of our common shares outstanding as of April 22, 2022 is 63,197,176.
Includes (i) 1,734,446 common shares held by Xiaofeng Ma, (ii) 4,998,988 common shares held by Able Knight Development Limited, which is a British Virgin
Islands company wholly-owned by Precious Time Holdings Limited and ultimately wholly owned by HSBC International Trustee Limited as trustee of an irrevocable
trust constituted under the laws of the Cayman Islands with Xiaofeng Ma as the settlor and certain family members of Xiaofeng Ma as the beneficiaries, and (iii)
18,427,074 common shares held by Joingear Limited, which is a British Virgin Islands company with 100% of its issued and outstanding share capital owned by
Xiaofeng Ma. Xiaofeng Ma is the sole director of Able Knight Development Limited. The business address of Able Knight Development Limited is Portcullis
Chambers, 4th Floor, Ellen Skelton Building, 3076 Sir Francis Drake Highway, Road Town, Tortola, British Virgin Islands. Xiaofeng Ma and Zhilei Tong are
directors of Joingear Limited. The business address of Joingear Limited is OMC Chambers, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands.
Includes 9,360,000 common shares held by Arts Consulting Limited, or ArtsCL, which is a British Virgin Islands company. Jun Zhang is the sole director and holds
75% of the issued and outstanding share capital of ArtsCL. The business address of ArtsCL is CCS Trustees Limited, Mandar House, 3 rd Floor, Johnson’s Ghut,
Tortola, British Virgin Islands. If Jun Zhang violates his non-compete obligation owned to the Company, the Company may require ArtsCL to either return 75% of the
9,360,000 common shares, or pay to the Company an amount equal to the valuation of 75% of such common shares if such common shares have been sold, calculated
using the per share price of our common shares on August 6, 2019.
Includes 18,427,074 common shares held by Joingear Limited, based on Schedule 13D/A Amendment No. 8 filed jointly by Xiaofeng Ma, Able Knight Development
Limited, Precious Time Holdings Limited, Ma Family Trust and Joingear Limited on May 21, 2020. Joingear Limited is a British Virgin Islands company. Xiaofeng
Ma and Zhilei Tong are directors of Joingear Limited.
Based on a Schedule 13G Amendment No. 7 filed by HSBC International Trustee Limited on February 7, 2018. The registered address of HSBC International Trustee
Limited is 21 Collyer Quay, #19-01 HSBC Building, Singapore 049320.
Based on a Schedule 13G Amendment No. 1 filed jointly by Jiangong Zhao, Dynamic Fame Limited and Alpha Advantage Global Limited on January 22, 2018.
Includes 188,000 common shares held of record by Dynamic Fame Limited and 4,529,100 common shares held of record by Alpha Advantage Global Limited.
Dynamic Fame Limited is a British Virgin Islands company and a wholly owned subsidiary of Alpha Advantage Global Limited. Alpha Advantage Global Limited is
a British Virgin Islands company wholly owned by Jiangong Zhao. The business address of Alpha Advantage Global Limited is Vistra Corporate Services Centre,
Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands and the business address of Dynamic Fame Limited is Office 1601, 16/F, 31 Queen’s Road
Central, Hong Kong.
Based on a Schedule 13D/A filed jointly by Jun Zhang and ArtsCL on May 21, 2020. ArtsCL is a British Virgin Islands company. Jun Zhang is the sole director of
ArtsCL.
Based on a Schedule 13G filed jointly by CL-TCC, TCC Management Limited and Pengjian Shi on February 18, 2020. Includes 5,662,634 common shares held of
record by CL-TCC. CL-TCC is a Cayman Islands company with 50% and 50% of its issued and outstanding share capital owned by CL Management Ltd. and TCC
Management Limited, respectively. TCC Management Limited is a Cayman Islands company wholly owned by Pengjian Shi, who may be deemed to have the sole
voting power and sole dispositive power with respect to the common shares held by CL-TCC. The business address of TCC Management Limited is c/o Solaris
Corporate Services Ltd., P.O. Box 1990, 3rd Floor, FirstCaribbean House, George Town Grand Cayman KY1-1104, Cayman Islands and the business address of CL-
TCC is Harbour Place, 2nd Floor, 103 South Church Street, P.O. Box 472, George Town, Grand Cayman KY1-1106, Cayman Islands.
None of our shareholders have different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of
control of our company. See “Item 6.B. Directors, Senior Management and Employees — Compensation — Share Incentives” for information on options granted to our current
directors and executive officers and “Item 6.D. Employees” for a discussion of our use of share incentive plans to incentivize our employees. To our knowledge, as of April 22,
2022, 100 of our common shares were held by holders of record in the United States. However, 25,873,068 common shares were registered in the name of a nominee of
Citibank, N.A., the depositary of our ADSs. It is likely that a large number of beneficial owners of our ADSs reside in the United Sates.
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Historical Changes in Shareholdings of Our Major Shareholders
On August 6, 2019, we completed the acquisition of 100% of the equity interests in ACGIGL, which held 69.04% of the equity interests in Huanqiuyimeng, by issuing
9,360,000 ordinary shares of the Company (the “Consideration Shares”) as consideration to ArtsCL, the sole shareholder of ACGIGL. Jun Zhang held 75% of the issued and
outstanding share capital of ArtsCL.
On December 24, 2019, we completed a transaction (the “PIPE Transaction”) in connection with private placement of 5,662,634 common shares to CL-TCC for an
aggregate price of US$10,022,862, or US$1.77 per share. CL-TCC is a company focusing on investments in the cultural and education industry. We plan to use the proceeds
from the PIPE Transaction to fund our day-to-day operations and M&A activities. In connection with the PIPE Transaction, we also entered into an Investor Rights Agreement
dated December 15, 2019 (the “IRA”) with CL-TCC. Under the IRA, without the prior written consent of the Company, CL-TCC shall not, directly or indirectly, (i) sell,
transfer or assign the common shares purchased by CL-TCC within two years following the date of the IRA, (ii) transfer the common shares purchased by CL-TCC to
competitors of the Company, or (iii) acquire additional securities of the Company that will result in CL-TCC and its controlled affiliates holding more than 30% of the
Company’s outstanding share capital on a fully-diluted basis. CL-TCC was also granted preemptive rights to ratably subscribe for new securities of the Company in any future
private placement of the Company as long as it holds no less than 5% of the share capital of the Company on an as-converted and fully-diluted basis. Additionally, Mr. Xiaofeng
Ma and his holding entities (together, the “Undertaking Shareholders”) issued an Undertaking Letter dated December 15, 2019 (the “Undertaking”) in connection with the PIPE
Transaction, pursuant to which, the Undertaking Shareholders shall not, without the prior written consent of the Company, sell, directly or indirectly, any securities of the
Company during the period commencing on the date of the Undertaking and ending on, and including, the earlier of (i) the second anniversary of the date of the Undertaking, or
(ii) the date on which CL-TCC transfers, assigns or disposes of more than 50% of the common shares purchased by CL-TCC.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to “Item 6.E. Directors, Senior Management and Employees — Share Ownership.”
B. Related Party Transactions
Contractual Arrangements with the VIE and Its Shareholders
PRC laws and regulations currently limit foreign ownership of companies that engage in, among other things, Internet content provision related business which requires
ICP license. Due to these restrictions, we set up contractual arrangements with the VIE to preserve our flexibility to operate, invest in or hold businesses that are restricted from
receiving foreign investments. For a description of these contractual arrangements, see “Item 4.A. Information on the Company — History and Development of the Company —
Contractual Arrangements with the VIE.”
Purchase of IT System Consulting Service, Office Sharing Service and System Development and Data Services from an Affiliate Company
Huanqiuyimeng has purchased consulting services relating to IT system from an affiliate company, ApplySquare Education & Technology Co., Ltd. (“Applysquare”) in
October 2021. The expense recorded for the year ended December 31, 2021 was RMB 50,913.
In October 2021, Huanqiuyimeng entered into an agreement for utilizing certain office space of ApplySquare in launching a co-operation project with ApplySquare to
explore solution for potential common customers with a term from October 16, 2021 to October 15, 2022. Expenses of RMB 275,967 was recorded for the year ended
December 31, 2021 in accordance with the agreement term.
In January 2022, Huanqiuyimeng entered into an agreement with Applysquare, pursuant to which ApplySquare shall develop system platforms and provide related data
services to support Huanqiuyimeng’s operations and service delivery. The total amount of the agreement was RMB 6.5 million, which includes a one-year charge of data and
system maintenance services.
Purchase of Online Education Platform Services from an Affiliate Company
Huanqiuyimeng has subscribed services of online educational platform provided by an affiliate company, EEO Empower Education Online Co., Ltd. (“EEO”), to
support its online delivery of credit hours and other relevant services from January to June 2020. Cost of revenues in the amount of RMB 115,968 was recognized for the
services purchased during the period.
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Muhua Shangce’s Loans and Guarantees
Amounts Due to a Related Party
The CEO, director and shareholder of the Company, Mr. Xiaofeng Ma has offered interest-free personal funding support of RMB 431,000 and RMB 200,000 on March
5 and March 30, 2020 respectively to Muhua Shangce, a then majority owned subsidiary of the Company, to support its operational cash needs during COVID-19, which
became due in September 2020 and was extended for one year to September 2021. The outstanding balance was RMB 631,000 as of December 31, 2020. Muhua Shangce was
disposed of in June 2021 and the related balance was derecognized from the Company’s consolidated financial statements.
Joint Liability Guarantee Provided by a Related Party
Muhua Shangce has borrowed RMB 3.0 million from a third-party company at an annual interest rate of 4.35% in April 2020, for which the Company’s CEO and
Director, Mr. Xiaofeng Ma, has provided a joint liability guarantee. Muhua Shangce was disposed of in June 2021 and the related balance was derecognized from the
Company’s consolidated financial statements.
Amounts Due to a Company Controlled by a Related Party
In November 2020 and May 2021, a partnership controlled by the Company’s CEO and Director, Mr. Xiaofeng Ma, provided a ten-month interest-free loan of RMB
500,000 and a fourteen-month interest free loan of RMB 700,000 to Muhua Shangce respectively. The outstanding balance was RMB500,000 as of December 31, 2020. Muhua
Shangce was disposed of in June 2021 and the related balance of RMB1,200,000 before the disposal was derecognized from the Company’s consolidated financial statements.
Expenses Paid to a Related Company on Behalf of Huanqiuyimeng
From January 1, 2020 to May 14, 2020, before Shanghai Aixue Culture Communication Co., Ltd. (“Shanghai Aixue”) became a wholly owned subsidiary of the
Company, Huanqiuyimeng prepaid RMB 672,254 to Shanghai Aixue, a company previously owned by president Mr. Jun Zhang and one of our employees, and Shanghai Aixue
paid a total of RMB 483,902 of Huanqiuyimeng’s operating expenses on behalf of Huanqiuyimeng.
From the Acquisition Date to December 31, 2019, Huanqiuyimeng prepaid RMB 1,038,494 to Shanghai Aixue, and Shanghai Aixue paid a total of RMB 1,037,126 of
Huanqiuyimeng’s operating expenses on behalf of Huanqiuyimeng. As of December 31, 2019, the outstanding balance was RMB 1,368 due from Shanghai Aixue, which is
unsecured, interest free and repayable on demand.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information.
Our consolidated financial statements are included at the end of this annual report.
Legal Proceedings
1. Beijing Litigation
In March 2020, Mr. Xiaofeng Ma, our chairman and chief executive officer, received copies of the civil complaints with respect to a lawsuit filed by our two
shareholders Alpha Advantage Global Limited (“Alpha”) and Dynamic Fame Limited (“Dynamic”), respectively with the Beijing Fourth Intermediate People’s Court (the
“Beijing Intermediate Court”) relating to the Company’s sale of the ATA Online Business (for details of the sale of the ATA Online Business, see “Item 4.A. Information on the
Company — History and Development of the Company”). The Company was also listed as a defendant and ATA Online was listed as an interested third party in such lawsuits.
Alpha was a holder of 4,529,100 common shares of the Company and Dynamic was a holder of 188,000 common shares of the Company at the time of the completion of the
sale of ATA Online Business.
The plaintiffs claimed that the sale of the ATA Online Business was a related-party transaction or a self-dealing transaction, for which approval by unrelated
shareholders is required and the board of the directors of the Company did not have the right to approve such transaction; the plaintiffs also claimed that the ATA Online
Business was worth more than the consideration of US$200.0 million paid by the buyer group, and thus the sale of ATA Online Business has caused losses to the plaintiffs as
shareholders of the Company. The plaintiffs are requesting that the Beijing Intermediate Court rule that (i) all board resolutions of the Company regarding the sale of the ATA
Online Business are invalid; (ii) Mr. Xiaofeng Ma shall compensate the loss incurred by Alpha and Dynamic from the Company’s sale of the ATA Online Business for RMB
95.0 million and RMB 5.0 million, respectively; and (iii) the Company and Mr.
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Xiaofeng Ma shall jointly bear the attorney’s fees of Alpha and Dynamic for RMB 1.5 million and RMB 0.5 million, respectively, and other litigation costs.
The Company filed an application for jurisdiction objection for each of the foregoing two cases, which was not supported by court order. As a result, these two cases
will be heard by the Beijing Intermediate Court. While the Company does not believe the plaintiffs have any merit in their claims, the Company is actively preparing for the
foregoing suits, and both cases have not yet been heard by the Beijing Intermediate Court as of the date of this annual report.
2. Ningbo Litigation (such case has been transferred to Beijing Intermediate Court)
In March 2020, Alpha and Dynamic jointly filed a lawsuit with the Ningbo City Intermediate People’s Court (the “Ningbo Intermediate Court”) against Mr. Xiaofeng
Ma, certain entities controlled by management members of ATA Online which were members of the buyer group, New Beauty Holdings Limited, the Company’s director
Zhilei Tong, ChineseAll Digital Publishing Group Co., Ltd. and ATA Learning in connection with the Company’s sale of the ATA Online Business, and listed the Company
and ATA Online as interested third parties. The plaintiffs are requesting that the Ningbo Intermediate Court rule that (i) all related party transactions between the defendants
and the Company relating to the sale of ATA Online Business are invalid; (ii) Mr. Xiaofeng Ma, the entities controlled by the management members of ATA Online and
ChineseAll Digital Publishing Group Co., Ltd. shall return the equity interest of ATA Online and ATA Learning they acquired to ATA Learning and ATA BVI, a wholly owned
subsidiary of the Company, as the case may be; and (iii) all defendants and the Company shall jointly bear the attorney’s fees of the plaintiffs for RMB 15.0 million and other
litigation costs.
The case was transferred by the Ningbo City Intermediate People’s Court to Beijing Intermediate Court for further proceeding. As of the date of this annual report, the
case has not yet been heard.
While we do not believe the allegations of the plaintiffs have any merit and intend to vigorously defend against these lawsuits, we are currently unable to estimate the
possible outcome of such lawsuits. For risks and uncertainties relating to pending lawsuits against us, please see “Item 3.D. Risk Factors — Risks Relating to Our ADSs — We
have been named as a defendant or interested third party in three lawsuits in connection with our sale of ATA Online, which could have a material adverse impact on our
business, financial condition, results of operation, cash flows and reputation.”
Other than the aforementioned lawsuits, we and the VIE are not currently involved in any material litigation, arbitration or administrative proceedings that could have a
material adverse effect on our financial condition or results of operations. From time to time, we and the VIE may be subject to various claims and legal actions arising in the
ordinary course of business.
Dividend Policy
The Company has not made any dividends or distributions to its shareholders for the fiscal years ended December 31, 2019, 2020 and 2021. Any future determination to
pay dividends will be made at the discretion of our board of directors and will be based upon our future operations and earnings, capital requirements and surplus, general
financial condition, shareholders’ interests, contractual restrictions and other factors our board of directors may deem relevant.
Holders of our ADSs will be entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same extent as the holders of our common shares.
Cash dividends will be paid to the depositary in U.S. dollars, which will distribute them to the holders of ADSs according to the terms of the deposit agreement. Other
distributions, if any, will be paid by the depositary to the holders of ADSs in any means it deems legal, fair and practical.
Under China’s EIT Law and its implementation rules, both of which became effective on January 1, 2008, dividends from our PRC subsidiaries to us may be subject to
a 10% withholding tax if such dividends are derived from profits generated after January 1, 2008. If we are deemed to be a PRC resident enterprise, the withholding tax may be
exempted, but we will be subject to a 25% tax on our worldwide income, and our non-PRC enterprise investors may be subject to PRC income tax withholding at a rate of 10%.
See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — Under the EIT Law, we may be classified as a ‘resident enterprise’ of China. Such
classification will likely result in unfavorable tax consequences to us and U.S. holders of our ADSs or common shares,” and “Item 10.E. Additional Information — Taxation —
People’s Republic of China Taxation.”
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B. Significant Changes
Except as disclosed elsewhere in this annual report, we and the VIE have not experienced any significant changes since the date of our audited financial statements
included in this annual report.
ITEM 9. THE OFFER AND LISTING
A. Offering and Listing Details
Price Range of Our ADSs
Our ADSs are listed for trading on Nasdaq under the symbol “AACG.”
B. Plan of Distribution
Not applicable.
C. Markets
See Item 9.A. above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share capital
Not applicable.
B. Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our fourth amended and restated memorandum and articles of association contained under the
heading “Description of Share Capital” in our registration statement on Form F-1 (File No. 333-148512) originally filed with the SEC on January 8, 2008, as amended. At our
2020 Annual General Meeting of Shareholders held on December 18, 2020, it was resolved as a special resolution that our third amended and restated memorandum and articles
of association be amended and restated into fourth amended and restated memorandum and articles of association to permit electronic and hybrid shareholders’ meetings and
make certain updates and editorial changes.
C. Material Contracts
We and the VIE have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the
Company”, “Item 5. Operating and Financial Review and Prospects”, “Item 7. Major Shareholders and Related Party Transactions” or elsewhere in this annual report on Form
20-F.
D. Exchange Controls
No foreign exchange controls exist in the Cayman Islands. The discussion below addresses the exchange controls that exist in the PRC.
Regulation of Foreign Exchange
The PRC government imposes restrictions on the convertibility of the Renminbi and on the collection and use of foreign currency by Chinese entities. Under current
regulations, the Renminbi is convertible for current account transactions, which include dividend distributions, interest payments, and the import and export of goods and
services. Conversion of Renminbi into foreign
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currency and foreign currency into Renminbi for capital account transactions, such as direct investment, portfolio investment and loans, however, generally requires the
approval of or registration or filing with SAFE or its authorized banks and other relevant Chinese governmental authorities.
Under current Chinese regulations, FIEs such as our PRC subsidiaries are required to apply to banks authorized by SAFE for foreign exchange registration. With such
foreign exchange registration, an FIE may open foreign exchange bank accounts at banks authorized to conduct foreign exchange business by SAFE and may buy, sell and
remit foreign exchange through such banks, subject to documentation and approval requirements. FIEs are required to open and maintain separate foreign exchange accounts for
capital account transactions and current account transactions. In addition, there are restrictions on the amount of foreign currency that FIEs may retain in such accounts. See
also “Item 4.B. Information on the Company — Business Overview — Regulation.”
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in PRC political and economic conditions and PRC
foreign exchange policies. The People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates and achieve policy
goals.
Dividend Distributions
We are not a Chinese operating company but a Cayman Islands holding company with operations conducted through our subsidiaries and through contractual
arrangements with the VIE based in China. As a result, although other means are available for us to obtain financing at the Company level, the Company’s ability to pay
dividends to its shareholders and to service any debt it may incur may depend upon dividends paid by our PRC subsidiaries and license and service fees paid by the VIE. PRC
legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC GAAP. Each
of our PRC subsidiaries is also required under PRC laws and regulations to allocate at least 10% of its after-tax profits determined in accordance with PRC GAAP to statutory
reserves until such reserves reach 50% of its registered capital. Allocations to these statutory reserves and funds can only be used for specific purposes and are not transferable
to us in the form of loans, advances or cash dividends. For the year ended December 31, 2021, our PRC subsidiaries allocated RMB25.7 million ($4.0 million) to the general
reserve fund. In addition, registered share capital and capital reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each
operating subsidiary. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business. See “Item 3.D. Risk Factors — Risks Relating to Regulations
of Our Business — Because we may rely on dividends and other distributions on equity paid by our current and future PRC subsidiaries for our cash requirements, restrictions
under Chinese law on their ability to make such payments could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our
business, pay dividends to you, and otherwise fund and conduct our businesses.”
In addition, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules relating to VIE
Agreements, and the VIE Agreements with the VIE and its shareholders may not be as effective as direct ownership in providing us with control over the VIE. The uncertainty
with respect to the validity and enforceability of the VIE Agreements may limit our ability to settle amounts owed under the VIE Agreements. See “Item 3.D. Risk Factors —
Risks Relating to Our Corporate Structure.”
E. Taxation
The following is a general summary of the material Cayman Islands, U.S. federal and People’s Republic of China income tax consequences relevant to an investment in
our ADSs and common shares. The discussion is not intended to be, nor should it be construed as, legal or tax advice to any particular prospective purchaser or current holders
of our ADSs. The discussion is based on laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change or different
interpretations, possibly with retroactive effect. The discussion does not address United States state or local tax laws, or tax laws of jurisdictions other than the Cayman Islands
and the United States. You should consult your own tax advisors with respect to the consequences of acquisition, ownership and disposition of our ADSs and common shares.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of
inheritance tax or estate duty or withholding tax applicable to us or to any holder of ADSs or common shares. There are no other taxes likely to be material to us levied by the
Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of the
Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman
Islands. The Cayman Islands is a party to a double tax treaty entered into with the United Kingdom in 2020 but is otherwise not party to any double tax treaties. There are no
exchange control regulations or currency restrictions in the Cayman Islands.
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Pursuant to Section 6 of the Tax Concessions Act (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Cabinet:
•
•
that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciations shall apply to the Company or
its operations; and
that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on the shares, debentures or other obligations of the
Company.
The undertaking for us is for a period of twenty years from October 3, 2006.
People’s Republic of China Taxation
In 2007 China passed a new Enterprise Income Tax Law, or the EIT Law, and its Implementing Rules, both of which became effective on January 1, 2008. The EIT
Law was subsequently amended in 2017 and 2018 and its Implementing Rules was subsequently amended in 2019. The EIT Law created a new “resident enterprise”
classification, which, if applied to us, would impose a 10% withholding tax on our non-PRC enterprise shareholders and, pursuant to Circular of the MOF and the SAT on Some
Policy Issues regarding Personal Income Tax (Cai Shui Zi [1994] No. 020), the dividend and bonus incomes received by individual aliens from the FIEs are temporarily
exempted from individual income tax and hence, the dividends we pay to our non-PRC individual shareholders may be qualified to enjoy the individual income tax exemption
if certain conditions are met; otherwise, a potential 20% individual income tax may be applied on dividends we pay to them if such dividends are derived from profits generated
after January 1, 2008 and with respect to gains derived by our non-PRC shareholders from disposition of our shares or ADSs, if such dividends or gains are determined to have
been derived from sources within China. See “Item 3.D. Risk Factors — Risks Relating to Regulations of Our Business — Under the EIT Law, we may be classified as a
‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and U.S. holders of our ADSs or common shares.”
If we are not deemed to be a resident enterprise, then dividends payable to our non-PRC shareholders and gains from disposition of our shares of ADSs by our non-
PRC shareholders will not be subject to PRC withholding income tax.
United States Federal Income Taxation
This discussion describes the material U.S. federal income tax consequences to U.S. Holders (as defined below) of the purchase, ownership and disposition of our ADSs
or common shares. This discussion does not address any aspect of U.S. federal gift or estate tax, the Medicare tax, or the state, local or non-U.S. tax consequences of an
investment in our ADSs and common shares. This discussion applies to you only if you beneficially own our ADSs or common shares as capital assets for U.S. federal income
tax purposes. This discussion does not apply to U.S. Holders who are members of a class of holders subject to special rules, such as:
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•
•
•
•
•
•
•
•
•
•
dealers in securities or currencies;
traders in securities that elect to use a mark-to-market method of accounting for securities holdings;
banks or certain financial institutions;
insurance companies;
tax-exempt organizations;
partnerships or other entities treated as partnerships or other pass-through entities for U.S. federal income tax purposes or persons holding ADSs or common
shares through any such entities;
regulated investments companies or real estate investment trusts;
persons that hold ADSs or common shares as part of a hedge, straddle, constructive sale, conversion transaction or other integrated investment;
persons whose functional currency for tax purposes is not the U.S. dollar;
persons liable for alternative minimum tax; or
persons who actually or constructively own 10% or more of the total combined voting power of all classes of our shares (including ADSs and common shares)
entitled to vote.
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This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, which we refer to in this discussion as the Code, its legislative history, existing and
proposed regulations promulgated thereunder, published rulings and court decisions, all as of the date of this annual report. These laws are subject to change, possibly on a
retroactive basis. In addition, this discussion relies on our assumptions regarding the value of our ADSs and common shares and the nature of our business over time. Finally,
this discussion is based in part upon the representation of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be
performed in accordance with its terms.
U.S. holders of our ADSs are urged to consult their own tax advisor concerning the particular U.S. federal income tax consequences to them of the purchase,
ownership and disposition of our ADSs and common shares, as well as the consequences to them arising under the laws of any other taxing jurisdiction.
For purposes of the U.S. federal income tax discussion below, you are a “U.S. Holder” if you beneficially own ADSs or common shares as capital assets within the
meaning of Section 1221 of the Code and are:
•
•
•
•
an individual citizen or resident of the United States for U.S. federal income tax purposes;
a corporation, or other entity taxable as a corporation, that was created or organized in or under the laws of the United States or any state thereof or the District
of Columbia;
an estate the income of which is subject to U.S. federal income tax regardless of its source; or
a trust if (a) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to
control all substantial decisions of the trust, or (b) the trust has a valid election in effect to be treated as a U.S. person.
For U.S. federal income tax purposes, income earned through a U.S. or non-U.S. partnership or other flow-through entity is attributed to its owners. Accordingly, if a
partnership or other flow-through entity holds ADSs or common shares, the tax treatment of the holder will depend on the status of the partner or other owner and the activities
of the partnership or other flow-through entity.
The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS
may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of ADSs. Such actions would also be inconsistent with the claiming of the
reduced rate of tax, as described below, applicable to dividends received by certain non-corporate holders. Accordingly, the availability of the reduced tax rate for dividends
received by certain non-corporate holders could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company.
Dividends on ADSs or Common Shares
Subject to the “Passive Foreign Investment Company” discussion below, if we make distributions and you are a U.S. Holder, the gross amount of any distributions with
respect to your ADSs or common shares (including the amount of any taxes withheld therefrom) will be includible in your gross income on the day you actually or
constructively receive such income as dividend income if the distributions are made from our current or accumulated earnings and profits, calculated according to U.S. federal
income tax principles. With respect to non-corporate U.S. holders, certain dividends received from a qualified foreign corporation may be subject to a reduced capital gains rate
of taxation. A non-U.S. corporation (other than passive foreign investment corporation) is treated as a qualified foreign corporation with respect to dividends from that
corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. U.S. Treasury Department guidance
indicates that our ADSs, which are listed on Nasdaq, but not our common shares, will be readily tradable on an established securities market in the United States. You should
consult your own tax advisor as to the rate of tax that will apply to you with respect to dividend distributions, if any, that you receive from us.
Subject to the “Passive Foreign Investment Company” discussion below, to the extent, if any, that the amount of any distribution by us on ADSs or common shares
exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles, it will be treated first as a tax-free return of the U.S. Holder’s
adjusted tax basis in the ADSs or common shares and thereafter as capital gain. However, we do not intend to calculate our earnings and profits according to U.S. federal income
tax principles. Accordingly, distributions on our ADSs or common shares, if any, will generally be reported to you as dividend distributions for U.S. tax purposes. Corporations
will not be entitled to claim a dividends-received deduction with respect to distributions made by us. Dividends may constitute foreign source passive income for purposes of the
U.S. foreign tax credit rules. You should consult your own tax advisors as to your ability, and the various limitations on your ability, to claim foreign tax credits in connection
with the receipt of dividends.
107
Sales and Other Dispositions of ADSs or Common Shares
Subject to the “Passive Foreign Investment Company” discussion below, when you sell or otherwise dispose of ADSs or common shares, you will recognize capital
gain or loss in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the ADSs or common shares. Any
such gains or losses that you recognize will be treated as U.S. source income for foreign tax credit purposes. Your adjusted tax basis will equal to the amount you paid for the
ADSs or common shares. Any gain or loss you recognize will be long-term capital gain or loss if your holding period in our ADSs or common shares is more than one year at
the time of disposition. If you are a non-corporate U.S. Holder, including an individual, any such long-term capital gain will be taxed at preferential rates. Your ability to deduct
capital losses will be subject to various limitations.
Passive Foreign Investment Company
We believe that we were not a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2021.
However, PFIC status is tested each year and depends on the composition of our assets and income and the value of our assets from time to time. Since we currently hold, and
expect to continue to hold, a substantial amount of cash and other passive assets and, since the value of our assets is to be determined in large part by reference to the market
prices of our ADSs and common shares, which is likely to fluctuate over time, there can be no assurance that we will not be a PFIC for any taxable year.
We note that the portion of our assets that consisted of cash and other passive assets was more significant during the period between our sale of ATA Online Business in
2018, and our acquisition of the 100% equity interest in Huanqiuyimeng in 2019, than before or after this period, although we believe this did not result in our becoming a PFIC
for either the taxable year ended December 31, 2018 or the taxable year ended December 31, 2019. There is a change of business exception to PFIC status that, in general
terms, applies if a foreign corporation otherwise would be a PFIC for a year because it has disposed of one or more active businesses, so long as the foreign corporation is not a
PFIC during the two succeeding years, and that might apply to us if we were found to have been a PFIC for either (but not both) of the taxable years ended December 31, 2018
and December 31, 2019. There is limited guidance as to the application of this exception, including regulations that were promulgated in July 2019 and were finalized in
January 2021, and it is unclear whether this exception would apply to us, if it were determined, absent this exception, that we were a PFIC for either the taxable year ended
December 31, 2018 or the taxable year ended December 31, 2019.
We will be classified as a PFIC in any taxable year, in general, if either: (a) the average quarterly value of our gross assets that produce passive income or are held for
the production of passive income is at least 50% of the average quarterly value of our total gross assets or (b) 75% or more of our gross income for the taxable year is passive
income (such as certain dividends, interest or royalties). For purposes of the first test: (a) any cash and cash invested in short-term, interest bearing, debt instruments, or bank
deposits that are readily convertible into cash will count as producing passive income or held for the production of passive income, and (b) the total value of our assets is
calculated based on our market capitalization. However, various exceptions can apply.
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly
or indirectly, at least 25% (by value) of the stock.
If we were a PFIC for any taxable year during which you held ADSs or common shares, certain adverse U.S. federal income tax rules would apply. You would be
subject to additional taxes and interest charges on certain “excess distributions” we make and on any gain realized on the disposition or deemed disposition of your ADSs or
common shares, regardless of whether we continue to be a PFIC in the year in which you receive an “excess distribution” or dispose of or are deemed to dispose of your ADSs
or common shares. Distributions in respect of your ADSs or common shares during a taxable year would constitute “excess distributions” if, in the aggregate, they exceed 125%
of the average amount of distributions with respect to your ADSs or common shares over the three preceding taxable years or, if shorter, the portion of your holding period
before such taxable year.
To compute the tax on “excess distributions” or any gain, (a) the “excess distribution” or the gain would be allocated ratably to each day in your holding period, (b) the
amount allocated to the current year and any tax year prior to the first taxable year in which we were a PFIC would be taxed as ordinary income in the current year, (c) the
amount allocated to other taxable years would be taxable at the highest applicable marginal rate in effect for that year, and the interest charge generally applicable to
underpayments of tax will be imposed on the resulting tax attributable to each such year. In addition, if we were a PFIC, no distribution that you might receive from us would
qualify for taxation at the preferential rate discussed in the Item 10.E. “Additional Information — Taxation — Dividends on ADSs or Common Shares” section above.
Under certain attribution rules, if we are a PFIC, you will be deemed to own your proportionate share of lower-tier PFICs, and will be subject to U.S. federal income tax
on (a) a distribution on the shares of a lower-tier PFIC and (b) a disposition of shares of a lower-tier PFIC, both as if you directly held the shares of such lower-tier PFIC.
108
Each U.S. Holder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require and may be required to file Internal
Revenue Service Form 8621 regarding distributions received on the ADSs or common shares and any gain realized on the disposition of the ADSs or common shares. You
should consult with your own tax advisor regarding reporting requirements with regard to your ADSs and common shares.
If we were a PFIC in any year, you would generally be able to avoid the “excess distribution” rules described above by making a timely so-called “mark-to-market”
election with respect to your ADSs provided our ADSs are “marketable.” Our ADSs will be “marketable” as long as they remain regularly traded on a national securities
exchange, such as Nasdaq. If you made this election in a timely fashion, you would recognize as ordinary income or ordinary loss the difference between the fair market value of
the ADSs as of the close of your taxable year over your adjusted basis in such ADSs. Any ordinary income resulting from this election would be taxed as ordinary income rates
and would not be eligible for the reduced rate of tax applicable to qualified dividend income. Any ordinary losses would be limited to the extent of the net amount of previously
included income as a result of the mark-to-market election, if any. Your basis in the ADSs would be adjusted to reflect any such income or loss. You should consult your own
tax advisor regarding potential advantages and disadvantages to you of making a “mark-to-market” election with respect to your ADSs. The mark-to-market election will not be
available for any lower tier PFIC that is deemed owned pursuant to the attribution rules discussed above. We do not intend to provide you with the information you would need
to make or maintain a “Qualified Electing Fund” election and therefore, you will not be able to make or maintain such an election with respect to your ADSs or common shares.
U.S. Information Reporting and Backup Withholding Rules
Dividend payments with respect to the ADSs or common shares and the proceeds received on the sale or other disposition of ADSs or common shares may be subject to
information reporting to the IRS and to backup. Backup withholding will not apply, however, if you (a) are a corporation or come within certain other exempt categories and,
when required, can demonstrate that fact or (b) provide a taxpayer identification number, certify as to no loss of exemption from backup withholding and otherwise comply with
the applicable backup withholding rules. To establish your status as an exempt person, you will be required to provide certification on IRS Form W-9. Backup withholding is
not an additional tax. The amount of any backup withholding will generally be allowed as a refund or a credit against your U.S. federal income tax liability, provided that you
furnish the required information to the IRS. Certain individuals holding the ADSs or common shares other than in an account at a U.S. financial institution may be subject to
additional information reporting requirements.
PROSPECTIVE PURCHASERS OF OUR ADSS AND COMMON SHARES SHOULD CONSULT THEIR OWN TAX ADVISOR REGARDING THE
APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES RESULTING
FROM PURCHASING, HOLDING OR DISPOSING OF OUR ADSS AND COMMON SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX
LAWS OF ANY STATE, LOCAL OR NON-US JURISDICTION AND INCLUDING ESTATE, GIFT AND INHERITANCE LAWS.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We previously filed with the SEC our registration statement on Form F-1 as amended.
We have filed this annual report on Form 20-F with the SEC under the Exchange Act. Statements made in this annual report as to the contents of any document referred
to are not necessarily complete. With respect to each such document filed as an exhibit to this annual report, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.
We are subject to the informational requirements of the Exchange Act and file reports and other information with the SEC.
Copies of these material may be obtained from the SEC’s Commission’s Internet site at http://www.sec.gov.
I. Subsidiaries Information
Not applicable.
109
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to interest rate risk primarily relates to interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. We have not used
derivative financial instruments in our investment portfolio. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate
being exposed, to material risks due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes in market interest
rates.
Foreign Currency Risk
Because majority of our revenues and expenditures are denominated in Renminbi, fluctuations in the exchange rate between the U.S. dollar and Renminbi will affect
our balance sheet and earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our
financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also
affect the relative value of any dividend we issue that will be exchanged into U.S. dollars and earnings from and the value of any U.S. dollar-denominated investments we make
in the future.
The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in PRC political and economic conditions and PRC
foreign exchange policies. For instance, in August 2015, the People’s Bank of China, or PBOC, changed the way it calculates the mid-point price of Renminbi against U.S.
dollar, requiring the market-makers who submit for the PBOC’s reference rates to consider the previous day’s closing spot rate, foreign-exchange demand and supply as well as
changes in major currency rates. This change, and other changes such as widening the trading band that may be implemented, may increase volatility in the value of the
Renminbi against foreign currencies. The value of Renminbi against the U.S. dollar depreciated approximately 1.6% in 2019, appreciated approximately 6.8% in 2020 and
appreciated approximately 2.3% in 2021. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and
the U.S. dollar in the future. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater
fluctuations of the Renminbi against the U.S. dollar.
The functional currency of our offshore entities and subsidiaries, including ATA Creativity Global, ATA BVI, Xing Wei and ACGIGL, is the U.S. dollar, which results
in our exposure to foreign currency exchange risk. Primarily as a result of the appreciation of the Renminbi against the U.S. dollar, the translation of the net assets of our
offshore entities and subsidiaries, including ATA Creativity Global, ATA BVI, Xing Wei and ACGIGL to Renminbi during consolidation resulted in translation losses of RMB
135,125 ($21,204) which we recognized as a component of other comprehensive loss for the fiscal year ended December 31, 2021. If the Renminbi against U.S. dollar as of
December 31, 2021 had appreciated by 10% from 6.3757 to 5.7961 as of December 31, 2021, the other comprehensive loss would have increased by RMB 831,510 ($130,482).
Further, we recognized a net foreign currency exchange loss of RMB 213,741 ($33,541) as a result of the re-measurement of our foreign currency denominated monetary assets
and liabilities. If the Renminbi had appreciated against the U.S. dollar as of December 31, 2021 by 10% from 6.3757 to 5.7961 as of December 31, 2021, our foreign currency
exchange loss would have decreased by RMB 18,117 ($2,843).
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and
effectiveness of these hedging transactions may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be
magnified by Chinese exchange control regulations that restrict our ability to convert Renminbi into foreign currency.
Inflation
China has generally not experienced significant inflation in recent years. According to China’s National Bureau of Statistics, the changes in China’s consumer price
index was 2.9 %, 2.5% and 0.9% in the years 2019, 2020 and 2021, respectively. In February 2022, the year-over-year change in China’s consumer price index was 0.9%.
Neither inflation nor deflation has had a material impact on our results of operations to date, and we do not currently expect the recent inflation in China to have a significant
effect on our operations.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees Payable by ADS Holders
Citibank, N.A., the depositary of our ADR program, collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering
ADSs for the purpose of withdrawal or from intermediaries acting for them. Such fees are typically paid to the depositary by the brokers (on behalf of their clients) receiving the
newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for cancellation. The brokers in turn charge these
transaction fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary service fee are charged by the
depositary to the holders of record of ADSs as of the applicable ADS record date. In the case of cash distributions, the depositary fees are generally deducted from the cash
being distributed. In the case of distributions other than cash (e.g. stock dividends, rights, etc.), the depositary charges the applicable fee to the ADS record date holders
concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or in DRS), the depositary sends invoices to the applicable
record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary generally collects its fees through the settlement systems
provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and
custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.
In the event of refusal to pay the depositary fees the depositary may, under the terms of the deposit agreement, refuse the requested service until payment is received or
may set off the amount of the depositary fees (subject payment of the applicable fees) from any distribution to be made to the ADS holder.
An ADS holder is required to pay the following service fees to the depositary:
Service
• Issuance of ADSs
• Cancellation of ADSs
• Distribution of cash dividends or other cash distributions
• Distribution of ADSs pursuant to stock dividends, free stock distributions
or exercise of rights
Fees
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) issued
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) cancelled
US$2.00 (or less) per 100 ADSs (or portion of 100 ADSs) held
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) held
• Distribution of securities other than ADSs or rights to purchase additional
US$5.00 (or less) per 100 per share (or share equivalent) held
ADSs
• Depositary services
US$2.00 (or less) per 100 ADSs (or portion of 100 ADSs) held on the
applicable record date(s) established by the depositary
An ADS holder will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges such as:
•
•
taxes (including applicable interest and penalties) and other governmental charges;
such registration fees as may from time to time be in effect for the registration of shares or other deposited securities on the share register and applicable to
transfers of shares or other deposited securities to or from the name of the custodian, the depositary or any nominees upon the making of deposits and
withdrawals, respectively;
111
•
•
•
•
such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of the person
depositing or withdrawing shares or holders and beneficial owners of ADSs;
the expenses and charges incurred by the depositary in the conversion of foreign currency;
such fees and expenses as are incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements
applicable to shares, deposited Securities, ADSs and ADRs; and
the fees and expenses incurred by the depositary, the custodian, or any nominee in connection with the servicing or delivery of deposited securities. The fees
and charges an ADS holder may be required to pay may vary over time and may be changed by us and by the depositary bank. ADS holders will receive prior
notice of such changes.
Fees and Other Payments Made by the Depositary to Us
We had received from our depositary a reimbursement of $110,551 during the fiscal year ended December 31, 2021.
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PART II.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
The rights of securities holders have not been materially modified.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this annual report, an evaluation has been carried out under the supervision and with the participation of our management,
including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is
defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on that evaluation, our chief executive officer and
chief financial officer have concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed in this annual
report is recorded, processed, summarized and reported to them for assessment, and required disclosure is made within the time period specified in the rules and forms of the
Securities and Exchange Commission.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended, for our company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements in accordance with generally accepted accounting principles and includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted
accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on
the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial
statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, management assessed the
effectiveness of our internal control over financial reporting as of December 31, 2021 using criteria established in Internal Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management concluded that the internal control over financial reporting was effective as of December 31, 2021 based on the criteria
established in this Internal Control-Integrated Framework (2013).
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the
Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
There were no significant changes in our internal control over financial reporting that occurred during the year ended December 31, 2021 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our audit committee consists of Hope Ni and Alec Tsui. Hope Ni is the chairman of our audit committee. Our board of directors has determined that Hope Ni and Alec
Tsui are “independent directors” within the meaning of Nasdaq Stock Market Rule 5605(a)(2) and meet the criteria for independence set forth in Rule 10A-3(b) of the Exchange
Act. Hope Ni meets the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that is applicable to our principal executive officer, principal financial officer, and principal accounting officer. In
addition, our board of directors adopted a code of conduct that is applicable to all of our directors, officers and employees. Our code of ethics and our code of conduct are
publicly available on our website, http://www.atai.net.cn.
ITEM 16C. PRINCIPAL ACCOUNTANT FEE AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by KPMG Huazhen LLP, our
principal accountant for the periods presented.
Audit fees(1)
Audit-related fees(2)
For the fiscal year ended
December 31, 2020
RMB
4,337,146
1,510,875
December 31, 2021
RMB
4,769,329
1,586,419
US$
748,412
248,944
(1)
(2)
“Audit fees” means the aggregate fees billed or payable for professional services rendered by our principal accountant for the audits of our consolidated financial
statements of ATA Creativity Global and its subsidiaries.
“Audit-related fees” means the aggregate fees billed or payable for assurance and related services that are reasonably related to the performance of the audit or review
of our consolidated financial statements and are not reported under “Audit fees.” Services comprising the fees disclosed under the category of “Audit-related fees” in
the fiscal years ended December 31, 2020 and 2021 were limited procedures performed in relation to our quarterly financial information.
The audit committee or our board of directors is to pre-approve all auditing services and permitted non-audit services to be performed for us by our independent
registered public accounting firm, including the fees and terms thereof.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
114
ITEM 16G. CORPORATE GOVERNANCE
As a foreign private issuer with shares listed on Nasdaq, we are subject to corporate governance requirements imposed by Nasdaq. Under Nasdaq Stock Market Rule
5615(a)(3), a foreign private issuer such as us may follow its home-country corporate governance practices in lieu of certain of the Nasdaq Stock Market Rules corporate
governance requirements. We are committed to a high standard of corporate governance. As such, we strive to comply with most of the Nasdaq corporate governance practices.
However, our current corporate governance practices differ from Nasdaq corporate governance requirements for U.S. companies in certain respects, as summarized below:
•
•
•
•
•
Nasdaq Stock Market Rule 5605(b)(1) requires a Nasdaq-listed company to have a board of directors composed of at least a majority of independent directors.
In this regard we have elected to adopt the practices of our home country, the Cayman Islands, which does not require us to have a majority of the board of
directors composed of independent directors at this time.
Nasdaq Stock Market Rule 5605(e)(1) requires a Nasdaq-listed company to have a nominations committee composed solely of independent directors to select
or recommend for selection director nominees. In this regard we have elected to adopt the practices of our home country, the Cayman Islands, which does not
require that any of the members of a company’s nominations committee be independent directors.
Nasdaq Stock Market Rule 5635(a) requires a Nasdaq-listed company to obtain shareholder approval for issuance of securities in connection with acquisitions
under certain circumstances. As a foreign private issuer, however, we may adopt the practices of our home country, the Cayman Islands, which do not require
shareholder approval for issuance of securities in connection with acquisitions.
Nasdaq Stock Market Rule 5635(c) requires a Nasdaq-listed company to obtain shareholder approval for the establishment of or material amendments to
equity compensation plans. As a foreign private issuer, however, we may adopt the practices of our home country, the Cayman Islands, which do not require
shareholder approval for establishment or material amendments to equity compensation plans. None of the 2005 Plan, the 2008 Plan, the Amended and
Restated 2008 Plan and the Second Amended and Restated 2008 Plan requires shareholder approval for material amendments to the plan or awards granted
under the plan, including without limitation increasing the number of share awards that may be issued under the plan or the repricing of outstanding options.
Nasdaq Stock Market Rule 5635(d) requires a Nasdaq-listed company to obtain shareholder approval for sale, issuance or potential issuance of securities in
private placements under certain circumstances. As a foreign private issuer, however, we may adopt the practices of our home country, the Cayman Islands,
which do not require shareholder approval for sale, issuance or potential issuance of securities in private placements.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III.
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
Our consolidated financial statements are included at the end of this annual report.
ITEM 19. EXHIBITS
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Index to Exhibits
Description
Fourth Amended and Restated Memorandum and Articles of Association of the Registrant (1)
Form of Common Share Certificate (2)
Form of Deposit Agreement between the Registrant and Citibank, N.A., as depositary (3)
Form of American depositary receipt evidencing American depositary shares (4)
Exhibit
Number
1.1
2.1
2.2
2.3
2.4*
Description of Securities
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
2005 Share Incentive Plan of ATA Testing Authority (Holdings) Limited (5)
2008 Employee Share Incentive Plan of the Registrant and form of ISO Option Agreement and NQSO Option Agreement (6)
2008 Employee Share Incentive Plan of the Registrant (amended and restated as of December 30, 2016) (7)
2008 Employee Share Incentive Plan of the Registrant (amended and restated as of October 26, 2018) (8)
Form of Indemnification Agreement between the Registrant and its directors (9)
Share Purchase Agreement among the Registrant, ATA Testing Authority (Holdings) Limited, Xing Wei Institute (Hong Kong) Limited, ATA Learning
(Beijing) Inc., Delta Horizon Limited, Alpha Metric Horizon Limited, New Beauty Holdings Limited, Xiaofeng Ma and other parties listed therein, dated
February 6, 2018 (10)
Loan Agreement between ATA Testing Authority (Beijing) Limited and Xiaofeng Ma, dated March 15, 2018 (11)
Equity Transfer Agreement between Haichang Xiong and Jun Zhang, dated August 12, 2020 (12)
Loan Agreement between ATA Testing Authority (Beijing) Limited and Haichang Xiong, dated March 15, 2018 (13)
Loan Agreement between ATA Education Technology (Beijing) Limited and Jun Zhang, dated August 12, 2020 (14)
Call Option and Cooperation Agreement among ATA Testing Authority (Beijing) Limited, Xiaofeng Ma, Haichang Xiong and ATA Intelligent Learning
(Beijing) Technology Limited, dated March 15, 2018 (15)
Call Option and Cooperation Agreement among ATA Education Technology (Beijing) Limited, Xiaofeng Ma, Jun Zhang and ATA Intelligent Learning
(Beijing) Technology Limited, dated August 12, 2020 (16)
Exclusive Technical Consulting and Services Agreement between ATA Intelligent Learning (Beijing) Technology Limited and ATA Testing Authority
(Beijing) Limited, dated March 15, 2018 (17)
Equity Interest Pledge Agreement between ATA Testing Authority (Beijing) Limited and Xiaofeng Ma, dated March 15, 2018 (18)
Equity Interest Pledge Agreement between ATA Testing Authority (Beijing) Limited and Haichang Xiong, dated March 15, 2018 (19)
Equity Interest Pledge Agreement between ATA Education Technology (Beijing) Limited and Jun Zhang, dated August 12, 2020 (20)
Power of Attorney by Xiaofeng Ma in favor of ATA Testing Authority (Beijing) Limited, dated March 15, 2018 (21)
Power of Attorney by Haichang Xiong in favor of ATA Testing Authority (Beijing) Limited, dated March 15, 2018 (22)
Power of Attorney by Jun Zhang in favor of ATA Education Technology (Beijing) Limited, dated August 12, 2020 (23)
116
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
8.1*
11.1
Supplementary Agreement to ATA Intelligent Learning (Beijing) Technology Limited VIE Agreements among ATA Education Technology (Beijing)
Limited, ATA Intelligent Learning (Beijing) Technology Limited, Xiaofeng Ma and Haichang Xiong, dated March 19, 2019 (24)
Supplementary Agreement II to ATA Intelligent Learning (Beijing) Technology Limited VIE Agreements among ATA Education Technology (Beijing)
Limited, ATA Intelligent Learning (Beijing) Technology Limited, Xiaofeng Ma and Haichang Xiong, dated April 20, 2019 (25)
Deed of Assignment among Ningbo Meishan Bonded Port Area Maikaiwen Equity Investment Management Partnership (LP), Ningbo Meishan Bonded
Port Area Zhenming Equity Investment Management Partnership (LP), Ningbo Meishan Bonded Port Area Xinyi Equity Investment Management
Partnership (LP), Ningbo Meishan Bonded Port Area Qixin Equity Investment Management Partnership (LP), ZHUHAI LIHONGHUAYING EQUITY
INVESTMENT PARTNERSHIP (LP), New Beauty Holdings Limited, Xiaofeng Ma, the Registrant, ATA Testing Authority (Holdings) Limited and ATA
Learning (Beijing) Inc., dated June 27, 2018 (26)
Equity Transfer Agreement among the Registrant, Arts Consulting Limited, ACG International Group Limited, Beijing Huanqiuyimeng Education
Consultation Corp., Jun Zhang, and Rui Deng, dated June 28, 2019 (27)
Consent Letter by Arts Consulting Limited, Jun Zhang and Rui Deng in favor of the Registrant, dated August 6, 2019 (28)
Letter by the Registrant in favor of Arts Consulting Limited, Jun Zhang and Rui Deng dated December 30, 2019 (29)
Subscription Agreement between the Registrant and CL-TCC, dated December 15, 2019 (30)
Investor Rights Agreement between the Registrant and CL-TCC, dated December 15, 2019 (31)
List of Subsidiaries
Code of Conduct (32)
12.1*
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2*
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1**
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2**
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1*
Consent of KPMG Huazhen LLP
15.2*
Consent of Jincheng Tongda & Neal Law Firm
15.3*
Opinion of Jincheng Tongda & Neal Law Firm
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
117
(1)
Incorporated by reference to Exhibit 99.2 to the Registrant’s report on Form 6-K (File No. 001-33910) filed with the SEC on December 18, 2020.
(2)
Incorporated by reference to Exhibit 4.1 to the Registrant’s registration statement on Form F-1 (File No. 333-148512) filed with the SEC on January 08, 2008.
(3)
Incorporated by reference to the Exhibit 99.(A) to the Registration Statement on Form F-6 (File No. 333-148641) filed with the SEC on January 14, 2008.
(4)
Incorporated by reference to the Prospectus filed with the SEC on October 1, 2019 supplement to the Registration Statement on Form F-6 (File No. 333-148641) filed
with the SEC on January 14, 2008.
(5)
Incorporated by reference to Exhibit 10.1 to the Registrant’s registration statement on Form F-1 (File No. 333-148512) filed with the SEC on January 08, 2008.
(6)
Incorporated by reference to Exhibit 10.2 to the Registrant’s registration statement on Form F-1 (File No. 333-148512) filed with the SEC on January 08, 2008.
(7)
(8)
Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-215674) filed with the Securities and Exchange
Commission on January 24, 2017.
Incorporated by reference to Exhibit 4.4 to the Registrant’s annual report on Form 20-F (File No. 001-33910), filed with the SEC on April 18, 2019.
(9)
Incorporated by reference to Exhibit 10.3 to the Registrant’s registration statement on Form F-1 (File No. 333-148512) filed with the SEC on January 08, 2008.
(10)
Incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 6-K (File No. 001-33910) filed with the SEC on February 6, 2018.
(11)
Incorporated by reference to Exhibit 4.18 to the Registrant’s transition report on Form 20-F (File No. 001-33910) filed with the SEC on April 12, 2018.
(12)
Incorporated by reference to Exhibit 4.9 to the Registrant’s transition report on Form 20-F(File No. 001-33910) filed with the SEC on April 13, 2021.
(13)
Incorporated by reference to Exhibit 4.19 to the Registrant’s transition report on Form 20-F(File No. 001-33910) filed with the SEC on April 12, 2018.
(14)
Incorporated by reference to Exhibit 4.11 to the Registrant’s transition report on Form 20-F(File No. 001-33910) filed with the SEC on April 13, 2021.
(15)
Incorporated by reference to Exhibit 4.20 to the Registrant’s transition report on Form 20-F (File No. 001-33910) filed with the SEC on April 12, 2018.
(16)
Incorporated by reference to Exhibit 4.13 to the Registrant’s transition report on Form 20-F(File No. 001-33910) filed with the SEC on April 13, 2021.
118
(17)
Incorporated by reference to Exhibit 4.21 to the Registrant’s transition report on Form 20-F (File No. 001-33910) filed with the SEC on April 12, 2018.
(18)
Incorporated by reference to Exhibit 4.22 to the Registrant’s transition report on Form 20-F (File No. 001-33910) filed with the SEC on April 12, 2018.
(19)
Incorporated by reference to Exhibit 4.23 to the Registrant’s transition report on Form 20-F (File No. 001-33910) filed with the SEC on April 12, 2018.
(20)
Incorporated by reference to Exhibit 4.17 to the Registrant’s transition report on Form 20-F (File No. 001-33910) filed with the SEC on April 13, 2021.
(21)
Incorporated by reference to Exhibit 4.24 to the Registrant’s transition report on Form 20-F (File No. 001-33910) filed with the SEC on April 12, 2018.
(22)
Incorporated by reference to Exhibit 4.25 to the Registrant’s transition report on Form 20-F (File No. 001-33910) filed with the SEC on April 12, 2018.
(23)
Incorporated by reference to Exhibit 4.20 to the Registrant’s transition report on Form 20-F (File No. 001-33910) filed with the SEC on April 13, 2021.
(24)
(25)
Incorporated by reference to Exhibit 4.16 to the Registrant’s annual report on Form 20-F (File No. 001-33910), filed with the SEC on April 18, 2019.
Incorporated by reference to Exhibit 4.17 to the Registrant’s annual report on Form 20-F (File No. 001-33910), filed with the SEC on April 28, 2020.
(26)
Incorporated by reference to Exhibit 10.1 to the Registrant’s report on Form 6-K (File No. 001-33910) filed with the SEC on June 27, 2018.
(27)
Incorporated by reference to Exhibit 99.2 to the Registrant’s Report on Form 6-K (File No. 001-33910) filed with the SEC on June 28, 2019.
(28)
Incorporated by reference to Exhibit 99.3 to Jun Zhang’s Report on Schedule 13-D (File No. 001-83689) filed with the SEC on August 15, 2019.
(29)
Incorporated by reference to Exhibit 4.21 to the Registrant’s annual report on Form 20-F (File No. 001-33910), filed with the SEC on April 28, 2020.
(30)
Incorporated by reference to Exhibit 99.2 to the Registrant’s Report on Form 6-K (File No. 001-33910) filed with the SEC on December 18, 2019.
(31)
Incorporated by reference to Exhibit 99.3 to the Registrant’s Report on Form 6-K (File No. 001-33910) filed with the SEC on December 18, 2019.
(32)
Incorporated by reference to Exhibit 99.1 to the Registrant’s registration statement on Form F-1 (File No. 333-148512) filed with the SEC on January 08, 2008.
*
**
Filed with this annual report on Form 20-F.
Furnished with this annual report on Form 20-F.
119
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
SIGNATURE
Date: April 26, 2022
ATA Creativity Global
/s/ Amy Tung
Name: Amy Tung
Title:
Chief Financial Officer
120
ATA Creativity Global
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (KPMG Huazhen LLP, Beijing, China, Auditor Firm ID:
1186)
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
F-1
Page
F-2 - F-3
F-4
F-5
F-6
F-7 - F-8
F-9 - F-47
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
ATA Creativity Global:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of ATA Creativity Global and subsidiaries (the Company) as of December 31, 2020 and 2021, the related
consolidated statements of comprehensive income (loss), changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the
related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December
31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
Valuation of goodwill
As discussed in Note 9 to the consolidated financial statements, the Company has RMB 194,754,963 of goodwill as of December 31, 2021. The Company performs
goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a reporting unit likely exceeds its fair
value. This involves estimating the fair value of the reporting units using discounted cash flow models.
We identified the valuation of goodwill as a critical audit matter. The forecasted revenue growth rates, forecasted operating margins and the discount rates used to estimate
the fair values of the reporting units were challenging to test as they represented subjective determinations of future market and economic conditions that were sensitive to
variation. Additionally, the audit efforts associated with these estimates required specialized skills and knowledge.
F-2
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of an internal control over the Company’s process to
assess the valuation of goodwill, including the determination of forecasted revenue growth rates, forecasted operating margins and discount rates used to estimate the fair
values of the reporting units. We assessed the Company’s ability to accurately forecast revenue growth rates and operating margins by comparing the reporting units’
historical forecast on revenue growth rates and operating margins to actual results. We compared the reporting units’ forecasted revenue growth rates and operating
margins to historical results of the Company and forecasted revenue growth rates and operating margins of comparable companies using publicly available industry data.
We performed sensitivity analysis over the forecasted revenue growth rates, forecasted operating margins and the discount rates to assess their impact on the Company’s
impairment assessment. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the discount rates by
comparing them against discount rates that were independently developed using publicly available industry data and comparable companies’ information.
/s/ KPMG Huazhen LLP
We have served as the Company’s auditor since 2015.
Beijing, China
April 26, 2022
F-3
ATA CREATIVITY GLOBAL
Consolidated Balance Sheets
Note
December 31,
2020
RMB
December 31,
2021
RMB
December 31,
2021
USD
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses and other current assets
Total current assets
Long-term investments
Property and equipment, net
Intangible assets, net
Goodwill
Other non-current assets
Right-of-use assets
Deferred income tax assets
Total assets
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accrued expenses and other payables (including accrued expenses and other payables of the
consolidated VIE without recourse to the Company of RMB 71,562 and RMB124,089 as of
December 31, 2020 and 2021, respectively)
Short-term loans
Payable for business acquisition (including payable for business acquisition of the consolidated VIE
without recourse to the Company of RMB4,642,082 and nil as of December 31, 2020 and 2021,
respectively)
Lease liabilities-current
Deferred revenues
Total current liabilities
Lease liabilities-non-current
Deferred income tax liabilities
Total liabilities
Mezzanine equity-redeemable non-controlling interests
Shareholders’ equity:
Common shares:
Par value USD 0.01, authorized: 500,000,000 shares
Issued: 63,889,448 and 63,832,534 shares as of December 31, 2020 and 2021, respectively
Outstanding: 62,701,002 and 62,753,840 shares as of December 31, 2020 and 2021
Treasury shares—585,358 common shares as of December 31, 2020 and 2021, at cost
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders’ equity attributable to ATA Creativity Global
Non-redeemable non-controlling interests
Total shareholders’ equity
Commitments and contingencies
Total liabilities, mezzanine equity and shareholders’ equity
(1 )
(4 )
(6 )
(8 )
(9 )
(9 )
(10 )
(14 )
(12 )
(11 )
(3 )
(10 )
(13 )
(10 )
(14 )
(15 )
(21 )
112,723,433
2,245,194
5,970,973
120,939,600
44,000,000
38,119,216
110,586,111
194,754,963
22,950,264
41,779,086
2,491,792
575,621,032
71,339,361
938,189
3,129,600
75,407,150
38,000,000
36,503,984
93,352,778
194,754,963
26,739,026
42,417,409
—
507,175,310
11,194,702
147,222
491,103
11,833,027
5,963,029
5,728,272
14,649,088
30,561,304
4,195,937
6,656,217
—
79,586,874
47,020,182
6,801,000
48,174,095
—
7,559,567
—
4,642,082
16,972,187
199,448,112
274,883,563
24,005,765
28,985,472
327,874,800
48,498,368
4,716,675
(11,625,924 )
541,272,503
(37,424,722 )
(298,533,669 )
198,404,863
843,001
199,247,864
—
575,621,032
—
17,351,427
202,453,092
267,978,614
23,365,840
24,931,322
316,275,776
—
4,720,147
(9,818,754)
540,583,564
(37,559,847)
(310,156,018)
187,769,092
3,130,442
190,899,534
—
507,175,310
—
2,722,818
31,769,308
42,051,693
3,666,610
3,912,268
49,630,571
—
740,694
(1,540,777)
84,829,358
(5,893,960)
(48,670,247)
29,465,068
491,235
29,956,303
—
79,586,874
See accompanying notes to consolidated financial statements.
F-4
Year Ended December 31,
2020
RMB
2021
RMB
2021
USD
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Impairment loss of intangible assets and other non-current assets
Provision for loan receivable and other receivables
Total operating expenses
Other operating income, net
Loss from continuing operations
Other income (loss):
Gain (loss) on disposal of subsidiaries and others
Impairment loss of long-term investments
Interest income, net of interest expenses
Foreign currency exchange gains (losses), net
Total other income (loss), net
Loss from continuing operations before income taxes
Income tax benefit
Loss from continuing operations, net of income taxes
Discontinued operations:
Gain from disposal of discontinued operations, net of income taxes
Income from discontinued operations, net of income taxes
Net loss
Net loss attributable to redeemable non-controlling interests from
continuing operations
Net loss attributable to non-redeemable non-controlling interests from
continuing operations
Net loss attributable to ATA Creativity Global
Net loss from continuing operations attributable to ATA
Creativity Global
Net income from discontinued operations attributable to ATA
Creativity Global
Other comprehensive income (loss):
Foreign currency translation adjustment, net of nil income tax
Total other comprehensive income (loss)
Comprehensive loss
Comprehensive loss attributable to redeemable non-controlling
interests from continuing operations
Comprehensive loss attributable to non-redeemable non-controlling
interests from continuing operations
Comprehensive loss attributable to ATA Creativity Global
Basic and diluted losses per common share
attributable to ATA Creativity Global
Basic and diluted losses from continuing operations per common
share attributable to ATA Creativity Global
Basic and diluted earnings from discontinued operations per common
share attributable to ATA Creativity Global
ATA CREATIVITY GLOBAL
Consolidated Statements of Comprehensive Income (Loss)
Note
(13)
(9)
(5)
(6)
(14)
(24)
2019
RMB
97,770,167
61,914,502
35,855,665
11,817,255
34,112,212
81,923,516
8,932,439
17,430,825
154,216,247
588,147
(117,772,435)
(7,850)
(26,814,507)
3,281,701
51,476
(23,489,180)
(141,261,615)
(7,149,119)
(134,112,496)
4,894,197
4,894,197
(129,218,299)
162,167,547
98,521,027
63,646,520
8,832,488
53,500,051
100,097,849
3,120,425
5,904,305
171,455,118
330,224
(107,478,374)
(1,767,800)
(1,726,391)
1,171,837
(1,052,856)
(3,375,210)
(110,853,584)
(10,268,836)
(100,584,748)
—
—
(100,584,748)
(15)
(2,820,682)
(2,582,632)
(4,143,628)
(122,253,989)
(5,804,084)
(92,198,032)
(127,148,186)
(92,198,032)
4,894,197
—
810,197
810,197
(128,408,102)
53,445
53,445
(100,531,303)
(15)
(2,820,682)
(2,582,632)
(4,143,628)
(121,443,792)
(5,804,084)
(92,144,587)
(23)
(23)
(23)
(2.52)
(2.62)
0.10
(1.57)
(1.57)
—
See accompanying notes to consolidated financial statements.
F-5
202,209,465
97,413,915
104,795,550
11,801,545
66,149,460
93,256,046
—
—
171,207,051
22,018
(66,389,483)
33,542,154
(6,000,000)
1,110,681
(213,046)
28,439,789
(37,949,694)
(1,539,577)
(36,410,117)
—
—
(36,410,117)
(714,121)
(2,046,403)
(33,649,593)
(33,649,593)
—
(135,125)
(135,125)
(36,545,242)
(714,121)
(2,046,403)
(33,784,718)
(0.57)
(0.57)
—
31,731,078
15,286,369
16,444,709
1,851,920
10,380,294
14,633,909
—
—
26,866,123
3,455
(10,417,959)
5,263,496
(941,531)
174,290
(33,432)
4,462,823
(5,955,136)
(241,593)
(5,713,543)
—
—
(5,713,543)
(112,061)
(321,125)
(5,280,357)
(5,280,357)
—
(21,204)
(21,204)
(5,734,747)
(112,061)
(321,125)
(5,301,561)
(0.09)
(0.09)
—
ATA CREATIVITY GLOBAL
Consolidated Statements of Changes in Equity
Common shares
Number of
Outstanding
shares
Amount
RMB
Treasury
Shares
RMB
Additional
paid-in
capital
RMB
45,796,886
—
3,534,871
—
(27,737,073 )
—
410,195,990
—
Accumulated other
comprehensive
income (loss)
Retained earnings
(accumulated
deficit)
Total
shareholders’
equity attributable
to ATA Creativity
Global
RMB
(38,288,364 )
—
RMB
(71,888,585 )
(122,253,989 )
RMB
275,816,839
(122,253,989 )
Non- redeemable
non-controlling
interests
RMB
Total
shareholders’
equity
RMB
367,398
(4,143,628 )
276,184,237
(126,397,617)
—
—
—
—
1,537,558
103,697
9,360,000
656,997
—
5,662,634
—
396,747
—
—
—
—
—
—
—
—
—
—
62,357,078
—
4,692,312
—
(27,737,073 )
—
—
—
—
—
—
—
—
—
343,924
—
24,363
—
—
(4,003,530)
—
—
—
—
—
—
—
—
—
—
4,809,454
(230,420 )
76,211,666
—
69,827,376
—
—
560,814,066
—
—
1,776,783
(58,170 )
—
—
(1,145,497 )
810,197
—
—
—
—
—
—
—
(37,478,167 )
—
53,445
—
—
—
—
—
—
—
—
—
52,838
—
—
—
—
—
—
—
3,472
—
—
—
—
—
—
—
—
—
—
—
—
—
1,039,972
(118,201)
232,245
—
(35,785)
—
(135,125)
—
—
—
—
—
—
—
—
—
—
(6,008,491)
—
810,197
4,809,454
(126,723 )
76,868,663
(6,008,491 )
70,224,123
—
—
—
—
—
—
810,197
4,809,454
(126,723)
76,868,663
(6,008,491 )
70,224,123
—
—
6,771,349
6,771,349
—
(200,151,065 )
(92,198,032)
—
—
—
—
—
300,140,073
(92,198,032)
53,445
1,776,783
(33,807)
(4,003,530)
(6,184,572)
(6,184,572)
—
—
(1,145,497)
—
—
198,404,863
—
—
—
—
(135,125)
1,039,972
(114,729)
232,245
(2,283,089)
(2,283,089)
—
24,310,333
(35,785)
24,310,333
—
187,769,092
29,465,068
2,500,000
5,495,119
(5,804,084)
2,500,000
305,635,192
(98,002,116)
—
—
—
—
—
1,145,497
6,469
53,445
1,776,783
(33,807)
(4,003,530)
(6,184,572)
—
6,469
—
843,001
—
199,247,864
—
—
—
—
—
(89,215)
4,423,059
—
3,130,442
491,235
(135,125)
1,039,972
(114,729)
232,245
(2,283,089)
(125,000)
28,733,392
—
190,899,534
29,956,303
—
62,701,002
—
4,716,675
20,114,679
(11,625,924)
(20,114,679 )
541,272,503
—
(37,424,722)
—
(298,533,669)
—
—
(33,649,593)
(33,649,593)
(2,046,403)
(35,695,996)
Balance as of December 31, 2018
Net loss
Foreign currency translation adjustment, net of
nil income tax
Share-based compensation
Issuance of common shares with net-settlement of
employee individual income tax
Issuance of common shares for acquisition of
Huanqiuyimeng (Note 3)
Redeemable non-controlling interests redemption value
accretion (Note 15)
Issuance of common shares upon private placement
Non-redeemable non-controlling interests resulting
from acquisition of Huanqiuyimeng (Note 3)
Capital contributed by non-redeemable non-controlling
interests (Note 15)
Balance as of December 31, 2019
Net loss
Foreign currency translation adjustment, net of nil
income tax
Share-based compensation
Issuance of common shares with net-settlement of
employee individual income tax
Repurchase of common shares (Note 18)
Redeemable non-controlling interests redemption value
accretion (Note 15)
Acquisition of non-redeemable non-controlling
interests
Disposal of subsidiaries
Settlement of vested share options and vested shares
using treasury shares
Balance as of December 31, 2020
Net loss
Foreign currency translation adjustment, net of nil
income tax
Share-based compensation
Issuance of common shares with net-settlement of
employee individual income tax
Exercise of share options
Redeemable non-controlling interests redemption value
accretion (Note 15)
Acquisition of non-redeemable non-controlling
interests
Disposal of subsidiaries
Settlement of vested share options and vested shares
using treasury shares
Balance as of December 31, 2021
—
62,753,840
—
4,720,147
1,807,170
(9,818,754)
(1,807,170)
540,583,564
—
(37,559,847)
—
(310,156,018)
Balance as of December 31, 2021-USD
740,694
(1,540,777)
84,829,358
(5,893,960)
(48,670,247)
See accompanying notes to consolidated financial statements.
F-6
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain from disposal of discontinued operations
Depreciation and amortization
Loss from disposal of property and equipment
Share-based compensation
Deferred income tax benefit
Loss (gain) on disposal of subsidiaries and others
Impairment loss of long-term investments
Provision for loan receivable and other receivables
Impairment loss of intangible assets and other non-current assets
Foreign currency exchange loss (gain)
Changes in operating assets and liabilities, net of effect of
acquisition and disposal:
Accounts receivable
Prepaid expenses and other current assets
Other non-current assets
Income tax payable
Accrued expenses and other payables
Deferred revenues
Net cash used in operating activities
Cash flows from investing activities:
Cash paid for property and equipment
Cash receipt from property and equipment disposal
Payment for acquisition of a subsidiary, less cash acquired (Note 3)
Proceeds from acquisition of a subsidiary, less cash paid
Cash paid for long-term investments (Note 6)
Proceeds from disposal of subsidiaries and others, less cash
disposed
Proceeds from disposal of discontinued operations (Note 24)
Cash paid for acquisition of non-redeemable non-controlling interests
Net cash used in investing activities
Cash flows from financing activities:
Cash paid for employee individual income tax for net- settlement of
vested shares
Cash contributed by non-controlling interest holder of Muhua
Shangce (Note 15)
Cash received from short-term loans (Note 11)
Repayment of short-term loans (Note 11)
Cash received upon repayment of loan to a nominee shareholder of
ATA Intelligent Learning (Note 1)
Cash paid for issuance loan to a nominee shareholder of ATA
Intelligent Learning (Note 1)
Cash received upon private placement (Note 18)
Cash paid for repurchase of common shares (Note 18)
Cash received for exercise of share options
Net cash provided by financing activities
ATA CREATIVITY GLOBAL
Consolidated Statements of Cash Flows
2019
RMB
2020
RMB
2021
RMB
2021
USD
Year Ended December 31,
(129,218,299)
(100,584,748)
(36,410,117)
(5,713,543)
(4,894,197)
17,545,060
—
4,809,454
(8,054,197)
7,850
26,814,507
17,430,825
8,932,439
(56,630)
225,192
(3,615,775)
(10,066,863)
679,961
14,737,959
6,846,155
(57,876,559)
(1,284,816)
—
(34,554,702)
—
(6,000,000)
—
4,894,197
—
(36,945,321)
—
29,913,815
87,991
1,776,783
(10,283,238)
1,767,800
1,726,391
5,904,305
3,120,425
1,050,043
(2,030,603)
12,866,352
(6,552,514)
(571,474)
1,678,155
32,257,157
(27,873,360)
(4,910,407)
37,441
(15,000,000)
287,801
—
494,737
—
—
(19,090,428)
(126,723)
(33,807)
5,000,000
—
(9,000,000)
—
19,618,000
(17,808,000)
—
5,000,000
—
61,693,192
—
—
57,566,469
(5,000,000)
8,530,931
(4,003,530)
—
6,303,594
—
23,025,480
24,380
1,039,972
(1,562,358)
(33,542,154)
6,000,000
—
—
213,741
1,245,142
675,236
(3,788,762)
(85,707)
4,532,885
6,798,577
(31,833,685)
(4,451,589)
22,490
(4,642,082)
—
—
(832,811)
—
(125,000)
(10,028,992)
(114,729)
—
2,710,000
(2,000,000)
—
—
—
—
232,245
827,516
—
3,613,200
3,826
163,194
(245,168)
(5,263,496)
941,531
—
—
33,541
195,390
105,959
(594,539)
(13,449)
711,309
1,066,845
(4,995,400)
(698,551)
3,529
(728,444)
—
—
(130,686)
—
(19,615)
(1,573,767)
(18,003)
—
425,258
(313,844)
—
—
—
—
36,444
129,855
See accompanying notes to consolidated financial statements.
F-7
Effect of foreign exchange rate changes on cash
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Cash paid for income tax
Cash refunded for income tax
Cash paid for interest expenses
Non-cash investing and financing activities:
Issuance of common shares as the consideration of
Huanqiuyimeng Acquisition
Acquisition of non-redeemable non-controlling interests
Consideration payable for business acquisition
Disposal of net liabilities of Muhua Shangce, excluding cash
ATA CREATIVITY GLOBAL
Consolidated Statements of Cash Flows (Continued)
2019
RMB
2020
RMB
2021
RMB
2021
USD
Year Ended December 31,
866,827
(36,388,584)
190,586,342
154,197,758
209,697
—
231,722
76,868,663
—
19,642,082
—
(814,131)
(41,474,325)
154,197,758
112,723,433
114,003
(2,869,042)
208,220
—
1,145,497
—
—
(348,911)
(41,384,072)
112,723,433
71,339,361
154,379
(5,316)
25,278
—
—
—
13,041,021
(54,752)
(6,494,064)
17,688,766
11,194,702
24,225
(834)
3,967
—
—
—
2,046,421
See accompanying notes to consolidated financial statements.
F-8
(1)
DESCRIPTION OF BUSINESS, ORGANIZATION AND SIGNIFICANT CONCENTRATIONS AND RISKS
Description of Business and Organization
ATA CREATIVITY GLOBAL
Notes to the Consolidated Financial Statements
ATA Creativity Global (the “Company” or “ACG”, formerly known as ATA Inc.), through its subsidiaries, variable interest entity (“VIE”) and VIE’s subsidiary
(collectively referred to as the “Group”), offers a range of educational services consisting primarily of portfolio training service, research-based learning service, overseas
study counselling service and other educational services primarily to individual students through its training center network in the People’s Republic of China.
The Company acquired 100% equity interests of Beijing Huanqiuyimeng Education Consultation Corp. (“Huanqiuyimeng”), a leading provider of educational services
for students in China who are interested in applying for overseas art study in the year of 2019 (“Huanqiuyimeng Acquisition”). The Company obtained control of
Huanqiuyimeng and its subsidiaries on August 6, 2019 (the “Acquisition Date”). See Note 3.
VIE Agreements
PRC regulations prohibit direct foreign ownership of business entities that engage in internet content provision (“ICP’’) services in the PRC. The Company and its
subsidiaries are foreign owned business entities under the PRC law and accordingly are prohibited from providing ICP services in the PRC, including having ownership
of entities engaged in providing such services. ATA Intelligent Learning (Beijing) Technology Limited (“ATA Intelligent Learning” or “VIE”) is engaged to provide, but
not limited to, ICP services, such as providing online trainings and platforms in PRC. The Company has no legal ownership interest in ATA Intelligent Learning. The
legal ownership interests of ATA Intelligent Learning are 90% owned by Mr. Xiaofeng Ma, the chairman of the board and chief executive officer of the Company, and
10% owned by Mr. Haichang Xiong, general counsel of the Company prior to August 12, 2020 and by Mr. Jun Zhang, president and director of the Company effective
from August 12, 2020. Mr. Ma, Mr. Xiong and Mr. Zhang are PRC citizens. All individuals are nominee shareholders of ATA Intelligent Learning and holding their
equity interests on behalf of the Company. Through a series of contractual agreements, including loan agreements, a call option and cooperation agreement, an equity
interest pledge agreement, an exclusive technical consulting and services agreement and a power of attorney (collectively, the “VIE Agreements”) among ATA Education
Technology (Beijing) Limited (“ATA Education”), ATA Intelligent Learning, and their nominee shareholders, the nominee shareholders of ATA Intelligent Learning
have granted all their legal rights including voting rights and disposition rights of their equity interests in ATA Intelligent Learning to ATA Education. The nominee
shareholders of ATA Intelligent Learning do not participate significantly in income and loss and do not have the power to direct the activities of ATA Intelligent Learning
that most significantly impact its economic performance. Accordingly, ATA Intelligent Learning is considered a variable interest entity. The Company entered into the
VIE Agreements to preserve the flexibility to operate, invest in or hold businesses that are restricted from receiving foreign investments.
Although the Company does not have an equity investment in ATA Intelligent Learning, the Company has other variable interests in ATA Intelligent Learning through
its wholly-owned subsidiary, ATA Education, including (i)ATA Education’s subordinated loans to Mr. Xiaofeng Ma, Mr. Haichang Xiong and Mr. Jun Zhang (used by
them to finance their equity investment in ATA Intelligent Learning) and other subordinated loans to ATA Intelligent Learning, (ii) ATA Education’s right, under the loan
agreement, to receive all the dividends declared by ATA Intelligent Learning through its nominee shareholders, (iii) ATA Education’s exclusive purchase option, under
the call option and cooperation agreement, to acquire (or to have ATA Education’s designee acquire) 100% of the equity interest or assets in ATA Intelligent Learning for
a consideration equal to the loans provided by ATA Education to Mr. Xiaofeng Ma, Mr. Haichang Xiong and Mr. Jun Zhang, to the extent permitted under PRC law and
(iv) ATA Education, under the call option and cooperation agreement, is obligated to provide financial support to ATA Intelligent Learning’s operation to which ATA
Education has no recourse right if ATA Intelligent Learning cannot repay such financing due to its losses.
In accordance with Accounting Standards Codification (“ASC”) 810-10-25-38A, the Company has a controlling financial interest in ATA Intelligent Learning through its
wholly-owned subsidiary, ATA Education, because the Company (i) has the power to direct activities of ATA Intelligent Learning that most significantly impact the
economic performance of ATA Intelligent Learning; and (ii) the obligation to absorb the losses and the right to receive benefits of ATA Intelligent Learning that could
potentially be significant to ATA Intelligent Learning. Thus, the Company is the primary beneficiary of ATA Intelligent Learning.
Accordingly, the financial statements of ATA Intelligent Learning are consolidated in the Company’s consolidated financial statements. Under the terms of the VIE
Agreements, ATA Intelligent Learning’s nominee shareholders have no rights to the net assets nor have the obligations to fund the deficit, and such rights and obligations
have been vested to the Company. All of the equity (net assets) and net incomes or losses of ATA Intelligent Learning are attributed to the Company.
F-9
The key terms of these VIE Agreements are as follows:
Loan agreements: ATA Education lent to ATA Intelligent Learning’s nominee shareholders, Mr. Xiaofeng Ma, Mr. Haichang Xiong and Mr. Jun Zhang, interest free
loans in the amount of RMB 10.0 million, out of which RMB 1.0 million and RMB 9.0 million were stipulated to lend on March 15, 2018 and December 28, 2018,
respectively, for the sole purpose of investing in ATA Intelligent Learning as ATA Intelligent Learning’s registered capital. The nominee shareholders of ATA Intelligent
Learning can only repay the loans by transferring all of their legal ownership interest in ATA Intelligent Learning to ATA Education or to a party designated by ATA
Education. The nominee shareholders of ATA Intelligent Learning are required to pay to ATA Education all dividends received from ATA Intelligent Learning. In the
event that the nominee shareholders of ATA Intelligent Learning transfer their equity interests to the ATA Education or its designee at a price equivalent to or less than
the principal amount of the loans, the loans will be interest free. If the price is higher than the principal amount of the loan, the excess amount will be paid to ATA
Education as loan interest. The initial terms of the loans are ten years, which may be extended upon the written agreement of ATA Education and ATA Intelligent
Learning’s nominee shareholders. The approval of ATA Intelligent Learning is not required for the renewal of the loan agreements nor can ATA Intelligent Learning
terminate the loan agreement during the contract term. On March 19, 2019 and April 20, 2019, ATA Education, ATA Intelligent Learning and each of the nominee
equity shareholders of ATA Intelligent Learning entered into two supplementary agreements to the VIE agreements, pursuant to which the aggregate amount of loans
made by ATA Education to the nominee shareholders of ATA Intelligent Learning for the capitalization of ATA Intelligent Learning was increased from RMB 10.0
million to RMB 50.0 million with all other terms and conditions under the VIE Agreements remain unchanged. According to the supplementary agreements, ATA
Education lent additional RMB 40.0 million to the nominee shareholders in 2019 for the sole purpose of investing in ATA Intelligent Learning as ATA Intelligent
Learning’s registered capital. On August 12, 2020, the loan agreement entered by Mr. Haichang Xiong with ATA Education, and the rights and obligations of Mr.
Haichang Xiong under the two supplementary agreements terminated as a result of the equity interest in ATA Intelligent Learning transferred by Mr. Haichang Xiong to
Mr. Jun Zhang, and Mr. Haichang Xiong repaid his borrowing of RMB 5.0 million under such agreements to ATA Education on August 17, 2020. On August 12, 2020,
Mr. Jun Zhang, as the new shareholder of ATA Intelligent Learning, entered into a new loan agreement with ATA Education on the same terms as the loan agreement and
the two supplementary agreements previously entered by Mr. Haichang Xiong and borrowed RMB 5.0 million from ATA Education on August 17, 2020 pursuant to
aforementioned loan agreement.
Exclusive technical consulting and services agreement: ATA Education has the sole and exclusive right to provide specified technical and consulting services to ATA
Intelligent Learning. The Parties agree that the intellectual property rights created by ATA Education in the course of performing this agreement, including without
limitation any copyrights, trademarks or logos registered or not, patents and proprietary technology, shall belong to ATA Education. The consulting fee payable by ATA
Intelligent Learning to ATA Education shall be confirmed by ATA Education in writing and be calculated based on the actual time spent by ATA Education in providing
services to ATA Intelligent Learning on a quarterly basis. The consulting fee shall be settled on a quarterly basis, and at the end of each year, ATA Education shall
confirm the total consulting and other fees incurred for the year in writing and ATA Intelligent Learning shall settle any outstanding fees on a timely basis. This
agreement was entered in on March 15, 2018 and shall continue for a period of 30 years and shall be automatically extended for another 10 years unless ATA Education
gives written notice terminating this agreement 3 months before the expiration.
Call option and cooperation agreement: Pursuant to the call option and cooperation agreement entered into among ATA Education, ATA Intelligent Learning and its
nominee shareholders, when permitted by applicable laws, ATA Education (or any eligible party designated by ATA Education) shall have the right to acquire, at any
time, all of ATA Intelligent Learning’s assets or its share equity owned by the nominee shareholders of ATA Intelligent Learning, at a price equal to the sum of the
principal amounts of the loans from ATA Education to the nominee shareholders of ATA Intelligent Learning. If ATA Education elects to purchase a portion of ATA
Intelligent Learning’s share equity or assets, the exercise price for such purpose shall be adjusted accordingly based on the percentage of such share equity or assets to be
purchased relative to the total share equity or assets. Without the prior written consent of ATA Education, ATA Intelligent Learning may not sell or otherwise dispose its
assets or beneficial interests, create or allow any encumbrance on its assets or other beneficial interests, enter into any material contracts (except those contracts entered
into in the ordinary course of business), or distribute dividends to the nominee shareholders. ATA Education is also obligated to provide financial support to ATA
Intelligent Learning’s operation to which ATA Education has no recourse right if ATA Intelligent Learning cannot repay such financing due to its losses. This agreement
shall be effective upon the execution date and remain effective thereafter. This agreement can only be terminated with the unanimous consent of all parties, except that
ATA Education may terminate this agreement with 30 days prior notice to the other parties.
F-10
Equity interest pledge agreement: To secure the payment obligations of ATA Intelligent Learning, ATA Intelligent Learning’s nominee shareholders have pledged to
ATA Education their entire equity ownership interests in ATA Intelligent Learning to guarantee his and ATA Intelligent Learning’s performance of obligations under,
where applicable, the exclusive technical consulting and services agreement and the call option and cooperation agreement. If ATA Intelligent Learning or the nominee
shareholders of ATA Intelligent Learning breach their contractual obligations under these agreements, ATA Education, as pledgee, will have the right to acquire the
pledged equity interests. The nominee shareholders of ATA Intelligent Learning agree that, during the term of the equity interest pledge agreements, they will not dispose
the pledged equity interests or create or allow any encumbrance on the pledged equity interests, and they also agree that ATA Education’s rights relating to the equity
pledge shall not be suspended or hampered by the nominee shareholders, their successors or their designates. During the term of the equity interest pledge agreements,
ATA Education has the right to receive all of the dividends and profits distributed on the pledged equity. The term of the equity interest pledge agreement shall
commence on March 15, 2018 and shall expire on the earlier of (a) the date on which all outstanding secured obligations are paid in full or otherwise satisfied (as
applicable); (b) ATA Education enforces the equity interest pledge agreement pursuant to the terms and conditions, to satisfy its rights under the secured obligations and
pledged collateral in full, or (c) the nominee shareholders of ATA Intelligent Learning complete their transfer of the equity interest to another party (individual or legal
entity) pursuant to the Call Option and Cooperation Agreement and no longer holds any equity interest in ATA Intelligent Learning. ATA Intelligent Learning has
registered these equity interest pledge agreements with the competent State Administration for Market Regulation (SAMR, previously known as State Administration for
Industry and Commerce, or SAIC) on April 27, 2018. The registration of the equity pledge enables ATA Education to enforce the equity pledge against third parties who
acquire the equity interests of ATA Intelligent Learning in good faith. According to the equity transfer agreement entered into by Mr. Haichang Xiong and Mr. Jun Zhang,
on August 12, 2020, Mr. Haichang Xiong transferred all his equity interest in ATA Intelligent Learning to Mr. Jun Zhang, as well as his obligations and rights under the
equity interest pledge agreement entered into by himself. On the same day, Mr. Jun Zhang, as the new shareholder of ATA Intelligent Learning, entered into a new equity
interest pledge agreement with ATA Education and ATA Intelligent Learning on the same terms as the equity pledge agreement previously entered by Mr. Haichang
Xiong. The term of the equity interest pledge agreements entered by Mr. Jun Zhang shall commence on the date of August 12, 2020 and shall expire on the earlier of the
Expiration Conditions. ATA Intelligent Learning has registered the equity interest pledge agreement entered by Mr. Jun Zhang with SAMR, on February 26, 2021.
Power of attorney: Pursuant to the irrevocable powers of attorney, each of the nominee shareholders of ATA Intelligent Learning, who signed the power of attorney on
March 15, 2018, appointed ATA Education or any eligible person designated by ATA Education as his attorney-in-fact to exercise all voting rights and other nominee
shareholders rights of ATA Intelligent Learning, including but not limited to appointing or electing on their directors and executive officers. The person designated by
ATA Education is entitled to sign the transfer documents necessary for the fulfilment of the exclusive technical consulting and services agreement and the call option and
cooperation agreement, and to join the liquidation group and participate in the liquidation of ATA Intelligent Learning. The term of the powers of attorney shall be
consistent with the term of the equity interest pledge agreements and call option and cooperation agreement and shall be extended along with the equity interest pledge
agreements and call option and cooperation agreement.
The Company relies on the VIE Agreements to operate and control ATA Intelligent Learning. However, these contractual arrangements may not be as effective as direct
equity ownership in providing the Company with control over ATA Intelligent Learning. Any failure by ATA Intelligent Learning or its nominee shareholders to perform
their obligations under the VIE Agreements would have a material adverse effect on the financial position and financial performance of the Company. All the VIE
Agreements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in
accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as some other
jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit the Company’s ability to enforce these contractual arrangements. In
addition, if the legal structure and the VIE Agreements were found to be in violation of any existing or future PRC laws and regulations, the Company may be subject to
fines or other legal or administrative sanctions.
In the opinion of management, based on the legal opinion of Jincheng Tongda & Neal Law Firm, the Company’s PRC legal counsel, the above contractual arrangements
are legally binding and enforceable and do not violate current PRC laws and regulations. However, there are uncertainties regarding the interpretation and application of
existing and future PRC laws and regulations. The Company cannot assure that the PRC regulatory authorities will not ultimately take a contrary view to its opinion. If
the current ownership structure of the Company and the contractual arrangements with ATA Intelligent Learning are found to be in violation of any existing or future
PRC laws and regulations, the PRC government could:
•
•
•
revoke the Company’s business and operating licenses;
levy fines on the Company;
confiscate any of the Company’s income that they deem to be obtained through illegal operations;
F-11
•
•
•
•
•
shut down a portion or all of the Company’s servers or block a portion or all of the Company’s website;
discontinue or restrict the Company’s operations in PRC;
impose conditions or requirements with which the Company may not be able to comply;
require the Company to restructure its corporate and contractual structure;
take other regulatory or enforcement actions that could be harmful to the Company’s business.
If the imposition of any of these government actions, or any inability to enforce the contractual arrangements upon a breach, causes the Company to lose its ability to
direct the activities of ATA Intelligent Learning or receive substantially all the economic benefits and residual returns from ATA Intelligent Learning and the Company is
not able to restructure its ownership structure and operations in a satisfactory manner, the Company would no longer be able to consolidate the financial results of ATA
Intelligent Learning in the Company’s consolidated financial statements. Total assets, total liabilities, equity, revenues, net income and cash flows of the Company would
be significantly less than the reported amount in the consolidated financial statements of the Company. In the opinion of management, the likelihood of deconsolidation
of ATA Intelligent Learning is remote based on current facts and circumstances.
The equity interests of ATA Intelligent Learning are legally held by Mr. Ma, Mr. Xiong and Mr. Zhang as nominee shareholders on behalf of ACG. Mr. Ma is chairman
of the board and director of ACG, Mr. Xiong is general counsel of ACG and Mr. Zhang is president and director of ACG. Mr. Ma holds approximately 40% of the total
ordinary shares of the Company issued and outstanding as of December 31, 2020 and 2021. The Company cannot assure that when conflicts of interest arise, either the
nominee shareholders will act in the best interests of the Company or such conflicts will be resolved in the Company’s favour. Currently, the Company does not have any
arrangements to address potential conflicts of interest between the nominee shareholders and the Company, except that ATA Education could exercise the purchase option
under the exclusive option agreement with the nominee shareholders to request them to transfer all of their equity ownership in ATA Intelligent Learning to a PRC entity
or individual designated by ATA Education. The Company relies on the nominee shareholders, who are ACG’s director and general counsel, who owe fiduciary duties to
ACG, to comply with the terms and conditions of the contractual arrangements. Such fiduciary duty requires the nominee shareholders to act in good faith and in the best
interests of ACG and not to use their positions for personal gains. If the Company cannot resolve any conflict of interest or dispute between the Company and the
nominee shareholders of ATA Intelligent Learning, the Company would have to rely on legal proceedings, which could result in disruption of the Company’s business
and subject the Company to substantial uncertainty as to the outcome of any such legal proceedings.
The nominee shareholder of ATA Intelligent Learning was changed from Mr. Haichang Xiong to Mr. Jun Zhang on August 12, 2020. There are no substantive changes
on terms of the VIE agreements.
ATA Intelligent Learning holds 70% equity interests of Beijing Zhenwu Technology Development Co., Ltd., or Beijing Zhenwu, a PRC company newly established in
August 2021. Beijing Zhenwu is mainly engaged in conducting some of our short-term project-based art learning services.
The Company’s involvement with ATA Intelligent Learning and its subsidiary, or the consolidated VIE, under the VIE Agreements affected the Company’s consolidated
financial position, results of operations and cash flows as presented below.
The following assets and liabilities information of the Group’s consolidated VIE as of December 31, 2020 and 2021, and net revenues, net loss and cash flows for the
years ended December 31, 2019, 2020 and 2021, were included in the accompanying consolidated financial statements of the Company.
Cash
Prepaid expenses and other current assets
Total current assets
Long-term investments (i)
Property and equipment, net
Other non-current assets
Total assets
Accrued expenses and other payables
Payable for business acquisition
Amounts due to related parties (ii)
Total current liabilities
Total liabilities
F-12
December 31,
2020
RMB
December 31,
2021
RMB
91,118
84,180
175,298
75,764,719
6,167
2,590
75,948,774
71,562
4,642,082
57,122,000
61,835,644
61,835,644
191,046
16,041
207,087
62,722,195
488
2,590
62,932,360
124,089
—
62,767,353
62,891,442
62,891,442
Net revenues
Net loss
Net cash used in operating activities
Net cash used in investing activities
Net cash received from financing activities (iii)
Year ended December 31,
2019
RMB
2020
RMB
—
—
(14,456,886)
(14,304,202)
Year ended December 31,
2019
RMB
(1,441,360)
(77,492,873)
54,000,000
2020
RMB
(466,004)
(15,000,000)
15,122,000
2021
RMB
—
(14,072,212)
2021
RMB
(903,343)
(4,642,082)
5,645,353
(i)
(ii)
(iii)
Long-term investments as of December 31, 2020 and 2021 include investment cost and share of losses derived from the 30.96% equity interests investment in
Huanqiuyimeng in the amount of RMB69,764,719 and RMB62,722,195, respectively, which is eliminated on consolidation.
Amounts due to related parties represent the amounts due to the Company’s subsidiaries, which are eliminated on consolidation.
RMB 54,000,000, RMB 15,122,000 and RMB 5,645,353 of net cash received from financing activities for the years ended December 31, 2019, 2020 and
2021 respectively were related to the transactions with the Company’s subsidiaries, which are eliminated on consolidation.
In accordance with the VIE Agreements, the Company has the power to direct the activities of the consolidated VIE and can have assets transferred out of the
consolidated VIE. Therefore, the Company considers that there are no assets in the consolidated VIE that can be used only to settle obligations of the consolidated VIE,
except for the registered capital amounting RMB 50.0 million as of December 31, 2021. None of the assets of the consolidated VIE has been pledged or collateralized.
The creditors of the consolidated VIE do not have recourse to the general credit of ATA Education or the Company.
Significant Concentrations and Risks
The Group is subject to the following significant concentration and risks:
Concentration of cash and cash equivalents balances held at financial institutions
Cash and cash equivalents consist of cash on hand and cash at bank. Cash at bank are deposited in financial institutions at below locations:
Financial institutions in the mainland of the PRC
— Denominated in Renminbi (“RMB”)
— Denominated in U.S. Dollar (“USD”)
Total cash balances held at mainland PRC financial institutions
Financial institutions in Hong Kong Special Administrative Region (“HKSAR”) of the PRC
— Denominated in Hong Kong Dollar (“HKD”)
— Denominated in USD
— Denominated in Great Britain Pound
Total cash and cash equivalents balances held at HKSAR financial institutions
Total cash and cash equivalents balances held at financial institutions
December 31,
2020
RMB
December 31,
2021
RMB
85,103,159
12,807,586
97,910,745
1,498,135
13,314,551
2
14,812,688
112,723,433
59,679,748
132
59,679,880
199,418
11,460,063
—
11,659,481
71,339,361
The bank deposits with financial institutions in the PRC are insured by the government authority up to RMB 500,000. The bank deposits with financial institutions in the
HKSAR are insured by the government authority up to HKD 500,000. To limit exposure to credit risk, the Company primarily places bank deposits with large financial
institutions in the PRC and HKSAR with acceptable credit rating.
F-13
Coronavirus Impact
Due to the outbreak and global spreading of the Coronavirus (“COVID-19”) since January 2020, the Group’s sales have been and expected to continue being
negatively impacted primarily due to the restrictions on international travels and temporary closures of overseas schools for safety considerations.
In particular, the Company’s training centers were mostly closed down from February 2020 to May 2020 as required by local regulatory authorities. After COVID-19
became gradually under control and following the directives of local governments, training centers have progressively resumed operation since June 2020. However, the
COVID-19 pandemic continues to evolve, and restrictions have been re-imposed from time to time thereafter in certain cities to combat local sporadic outbreaks. The
Company have experienced and expect to continue to experience temporary close-down of our training centers in one or more cities from time to time in response to such
local sporadic outbreaks. Students with any on-campus training have been given the option to take their classes online since the COVID-19 outbreak, although some of
them prefer the traditional classroom format and have postponed their training, which have adverse impact on the Company’s net revenues to be recognized from
portfolio training services. Enrollment from offline training centers have also been adversely affected due to the aforementioned temporary closure of training centers
mainly for the first half of the year of 2020. The Group is relying on online sales channels and referrals to recruit new customers during this time and expects to enhance
student enrollment from offline training centers as the COVID-19 pandemic gradually becomes under control. Such impact was progressively mitigated after the
COVID-19 pandemic was gradually under control in the second half year of 2020 as well as the year of 2021. In addition, the Company’s traditional overseas educational
travel services were materially affected by delays and cancellations of tours due to COVID-19 in the year of 2020 and 2021.
The Company is closely monitoring the development of the COVID-19 pandemic and continuously evaluating any further potential impact on its business, results of
operations and financial condition, which the Company believes will depend on the duration and degree of the pandemic. If the outbreak persists or escalates without
being effectively controlled in the future, the Company’s business operations and financial performance may be materially and adversely affected as a result of various
factors, such as changes in general economic outlook, slowdowns in economic growth and negative business sentiment, and measures taken by government authorities,
which may restrict our operations in China and abroad.
Geographic concentration
A substantial portion of the Company’s net revenues were generated from educational services in China. The regulatory regime for educational services industry in China
continues to rapidly evolve and the relevant laws, regulations or interpretations may change in the future. Any changes that adversely affect the Company’s business in
China will have a material adverse effect on the Company’s financial condition and results of operations.
(2)
(a)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries, in which ACG, directly or indirectly, has a controlling
financial interest and its variable interest entity and its subsidiary, or the consolidated VIE for which the Company is the primary beneficiary. All significant
intercompany balances and transactions have been eliminated upon consolidation.
Non-redeemable non-controlling interests are separately presented as a component of equity in the consolidated financial statements.
(b)
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”).
Due to the ATA Online Sale Transaction, which represented a strategic shift and had a major effect on the Group’s result of operations, revenues, costs of revenues and
expenses related to ATA Online Business have been reclassified in the accompanying consolidated financial statements as discontinued operations for all the periods
presented. See note 24.
F-14
(c)
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management of the Group to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Such estimates include the fair value determinations of identifiable assets acquired and liabilities assumed, the fair values of share-
based payments and other equity investments, the collectability of loan receivable and other receivables, the realizability of deferred income tax assets, the estimate for
useful lives and residual values of long-lived assets, the recoverability of long-lived assets, goodwill and long-term investments, determination of estimated stand-alone
selling prices of performance obligations, variable consideration and measurement of progress towards completion in revenue recognition. Actual results could differ
from those estimates. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
(d)
Foreign currency
The accompanying consolidated financial statements have been expressed in RMB, the Company’s reporting currency.
The Company, ATA Testing Authority (Holdings) Limited (“ATA BVI”), Xing Wei Institute (Hong Kong) Limited (“Xing Wei”) and ACG International Group Limited
(“ACGIGL”)’s functional currency is USD. The functional currency of the Company’s PRC subsidiaries, VIE and VIE’s subsidiary is RMB.
Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the applicable exchange rates at the balance
sheet dates. The resulting foreign exchange gains and losses are included in the consolidated statements of comprehensive income (loss) in the line item “Foreign
currency exchange gains (losses), net.”
Assets and liabilities of the Company, ATA BVI, Xing Wei and ACGIGL are translated into RMB using the applicable exchange rate at each balance sheet date.
Revenues and expenses are translated into RMB at average rates prevailing during the year. Equity accounts other than retained earnings (accumulated deficit) generated
in the current period are translated into RMB using the appropriate historical rates. The resulting foreign currency translation adjustments are recognized as a separate
component of accumulated other comprehensive income (loss) within equity. Since RMB is not a fully convertible currency, all foreign exchange transactions involving
RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates
adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC.
For the convenience of the readers, the 2021 RMB amounts included in the accompanying consolidated financial statements have been translated into USD at the rate of
USD 1.00 = RMB 6.3726, the noon buying rate in New York cable transfers of RMB per USD as set forth in the H.10 weekly statistical release of Federal Reserve Board,
as of December 31, 2021. No representation is made that the RMB amounts could have been, or could be, converted into USD at that rate or at any other rate on
December 31, 2021.
(e)
Commitments and contingencies
In the normal course of business, the Group is subject to contingencies, such as legal proceedings and claims that cover a wide range of matters. Liabilities for such
contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. If a potential material loss
contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range
of possible loss if determinable and material, is disclosed.
(f)
Fair value measurements
The Group utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Group
determines fair value based on assumptions that market participants would use in pricing an asset or liability in an orderly transaction and principal or most advantageous
market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and
unobservable inputs, which are categorized in one of the following levels:
•
•
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially
the full term of the asset or liability.
F-15
•
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing
for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value
measurement in its entirety. In situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects
management’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by management
based on the best information available in the circumstances.
(g)
Revenue recognition
The Group’s revenue is primarily generated from portfolio training services, research-based learning services, overseas study counselling services and other educational
services through its network in China and abroad as a result of Huanqiuyimeng Acquisition on August 6, 2019. See Note 3.
The Group’s revenue is recognized net of Value Added Tax (“VAT”). VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the
consolidated balance sheets until paid to the tax authorities.
Since the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018, the Group recognizes
revenues upon the satisfaction of its performance obligation (upon transfer of control of promised goods or services to customers) in an amount that reflects the
consideration to which the Group expects to be entitled to in exchange for those goods or services, excluding amounts collected on behalf of third parties (for example,
value added taxes).
The transaction price includes variable consideration where the Company’s performance may result in full or partial return of the service fees based on the final outcome
of the performance targets. The Company estimates the transaction price at contract inception based on expected value method, which the Company believes to be better
predict with the amount of consideration to which it will be entitled in the contract. In making the estimate of variable consideration, the Company applies judgments
which are inherently subjective. This includes the assessment of the final outcome of the performance targets and its historical experience and performance. The amount
of estimated variable consideration included in the transaction price is limited only to the extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the variable condition is subsequently resolved. Management reviews these estimates on a regular
basis. Any changes in these factors which affect the estimated variable consideration and revenue recognized are applied prospectively.
For each performance obligation satisfied over time, the Group recognizes revenue over time by measuring the progress toward complete satisfaction of that performance
obligation. If the Group does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.
The Group’s contracts with customers also include promises to transfer multiple services. For these contracts, the Group accounts for individual performance obligations
separately if they are capable of being distinct and distinct within the context of the contract. Determining whether products and services are distinct performance
obligations may require significant judgment. Judgment is also required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation. In
instances where SSP is not directly observable, such as when the Group does not sell the product or service separately, the Group determines the SSP using information
that may include market conditions and other observable inputs. For these contracts with variable consideration, the Group determines that variable consideration is
allocated according to the method as described above, because variable consideration is attributable to all of the performance obligations in a contract.
i)
Portfolio training services
Portfolio training services primarily consist of one-on-one or small-group training at the training centers or online platform in which the teachers provide
guidance to students to practice observational drawing or other forms of art work and finally compile the selected pieces to form a portfolio.
F-16
Individual students select to enroll either in time-based program in which they can take a pre-determined number of hours of training or in a project-based
program in which they are guided to complete a portfolio that usually consists of three to five art projects. Revenue is recognized over a period of time based on
the number of training hours expended and total hours of training under the contract with the student since the individual student simultaneously receives and
consumes the benefits of the portfolio training services as the Group performs. Under project-based programs, the number of hours of training required to
complete a project is not pre-determined and varies depending on the background and requirements of individual student. The Group reassesses the total hours of
training pursuant to each contract of project-based program with individual student on a quarterly basis. Any adjustments arising from the changes of estimated
training hours are applied prospectively.
ii)
Research-based learning services (formerly known as the educational travel services)
The Group provides educational travel services for individual students to bring them art-related experience by providing integration of both travel and study
activities in each educational service contract according to the background of individual students. While the educational travel services have been significantly
impacted by the coronavirus disease (“COVID-19”) during the year 2020, the Group introduced new services under the “research-based learning services”,
which mainly consist of domestic educational travel services, academic educational learning services, workshop experience services and transferrable credit
courses. Revenue is recognized when control of the promised services is transferred to customers in an amount of consideration which the Group expects to be
entitled to in exchange for those services.
iii)
Overseas study counselling services
The Group provides overseas study counselling services to students who intend to study abroad on the following aspects, including but not limited to, customized
timetable for applicants, university and program selection, developing paperwork for applications, interview simulation and enrollment documents preparation.
The Group provides integration and customization of the promised services in each overseas study counselling service contract depending on the background and
requirements of the students and aims to deliver a combined output for counselling service to cover both academic and practical aspects during the entire process
of application. The promised services are highly interdependent and interrelated and are accounted as one performance obligation, as the promised services in a
contract are not distinct within the context of the contract. Since the students simultaneously receive and consume the benefits of these services throughout the
service period as the Group performs, the Group recognizes revenue over the counselling service period on the basis of costs incurred to-date to the total estimated
costs.
iv)
Other educational services
Other educational services mainly consist of language training services, junior art education services and in-school classes. Revenue is recognized when control
of promised services is transferred to the customers in an amount of consideration to which the Group expects to be entitled to in exchange for those services.
v)
K-12 education assessment and other services
The Group derives revenues by providing the assessment reports for the test takers to customers. Revenues from education assessment services are recognized
when the Group delivers the reports to customers, which is when the control over the report has been transferred to customers. Fees received in advance are
recorded as deferred revenue when the Group has an obligation to transfer goods or services to a customer for which the Group has received consideration.
The Group derives content development revenue by designing test model and providing the developed content to customers. Revenues from content development
are recognized when the Group delivers the developed content to customers, which is when the control over the content has been transferred to customers.
Revenues under this category were mainly contributed by the legacy business from our prior subsidiary of Muhua Shangce Learning
Data & Technology (Beijing) Limited (“Muhua Shangce”), whose equity interests was fully disposed on June 2, 2021 in order to focus on our core business of
international education. See note 15.
F-17
(h)
Contract cost
Sales commissions to sales personnel and third-party agents, and incentives to existing students for referred customers are accounted for as incremental cost of obtaining
sales contracts from customers and are initially recognized as an amortizable asset in other non-current assets. Contract cost assets are amortized on the basis consistent
with the pattern of the transfer of services to which the assets relate and are included in “sales and marketing expenses” in the consolidated statements of comprehensive
income (loss). The amortization expenses of contract cost assets were RMB1,448,471, RMB7,820,269, and RMB14,244,301 for the years ended December 31, 2019,
2020 and 2021, respectively.
(i)
Cost of revenues
Prior to the Huanqiuyimeng Acquisition, cost of revenues consists primarily of content development costs, amortized expenses of education assessment caseware, payroll
compensation, and other related costs, which are directly attributable to the rendering of various services. As a result of the Huanqiuyimeng Acquisition, cost of revenues
primarily consist of (1) teaching fees, payroll compensation for teaching support and administrative staff from the training centers, performance-linked bonuses paid to
teachers, rental payments for training centers, as well as costs of course materials and teaching aids for portfolio training services, (2) payroll compensation, outsourcing
service costs, lodging and transportation expenses, overseas expenses, and other related costs which are directly attributable to the provision of research-based learning
services and overseas study counselling services, and (3) teaching fees, payroll compensation, content development costs, and other related costs, which are directly
attributable to the rendering of other educational services and K-12 education assessment and other services.
(j)
Research and development costs
Research and development costs primarily consist of the costs of equipment used in research and development activities, salaries and benefits, traveling expenses and
share-based compensation expenses for the Group’s research and development personnel, the costs of outsourcing services and other costs relating to the design,
development, testing and enhancement of the technology systems in support for the rendering of the Group’s products and services. Research and development costs are
expensed as incurred. Research and development cost incurred over software developed for internal use and software developed for sale are treated as follows.
i)
Software developed for internal use
The Group expenses all costs that are incurred in connection with the planning and implementation phases of the development of software. Costs incurred in the
development phase are capitalized and amortized over the estimated product life. No costs were capitalized for any of the periods presented.
ii)
Software developed for sale
Costs incurred internally in researching and developing a computer software product are charged to expense as research and development costs prior to
technological feasibility being established for the product. Once technological feasibility is established, all computer software costs are capitalized until the
product is available for general release to customers. Technological feasibility is established upon completion of all the activities that are necessary to substantiate
that the computer software product can be produced in accordance with its design specifications, including functions, features, and technical performance
requirements.
(k)
Lease
The Group is a lessee in a number of non-cancellable operating leases, primarily for training center and office spaces.
From January 1, 2019, the Group accounts for leases in accordance with ASC Topic 842, Leases (see Note 10) The Group determines if an arrangement is or contains a
lease at contract inception. The Group recognizes a right-of-use (ROU) asset and a lease liability at the lease commencement date.
For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.
Key estimates and judgments include how the Group determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) lease term and (3)
lease payments.
F-18
•
•
ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its
incremental borrowing rate. Generally, the Group cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s
estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Group generally uses its incremental borrowing rate as the
discount rate for the lease. The Group’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an
amount equal to the lease payments under similar terms. Because the Group does not generally borrow on a collateralized basis, it uses the interest rate it pays
on its non-collateralized borrowings as an input to deriving an appropriate incremental borrowing rate, adjusted for the amount of the lease payments, the
lease term and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.
Lease payments included in the measurement of the lease liability are comprised of fixed payments, including in-substance fixed payments, owed over the
lease term, which includes termination.
The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease
commencement date, plus any initial direct costs incurred less any lease incentives received. The leases entered into within the Group do not incur initial direct costs or
lease incentives. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct
costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease cost is recognized on a straight-line basis over
the lease term.
Variable lease payments associated with the Group’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are
assessed occurs. Variable lease payments are presented as operating expense in the Group’s consolidated statements of comprehensive income (loss) in the same line item
as expense arising from fixed lease payments for operating leases.
ROU assets for operating lease are periodically reduced by impairment losses. The Group uses the long-lived assets impairment guidance in ASC Subtopic 360-10,
Property, Plant, and Equipment – Overall, to determine whether a ROU asset is impaired, and if so, the amount of the impairment loss to recognize.
The Group monitors for events or changes in circumstances that require reassessment of its leases. When a reassessment results in the re-measurement of a lease liability,
a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an
amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.
Operating lease ROU assets are presented as operating lease right of use assets on the consolidated balance sheet. The current portion of operating lease liabilities is
included in lease liabilities-current and the long-term portion is presented separately as other non-current liabilities on the consolidated balance sheet.
The Group has elected not to recognize ROU assets and lease liabilities for short-term leases of training centers and offices that have a lease term of 12 months or less.
The Group recognizes the lease payments associated with its short-term training centers and offices leases as an expense on a straight-line basis over the lease term.
As of December 31, 2020 and 2021, the Company did not have any finance leases.
The Company adopted the new lease accounting standard since January 1, 2019, and elected to apply the transition provisions of the standard on the date of adoption.
Accordingly, the Company didn’t restate prior year comparative periods for the impact of the new lease accounting standard. The Company also elected the package of
practical expedients permitted under the transition guidance within the new lease accounting standard, including: (1) the Group didn’t reassess whether any expired or
existing contracts are or contain leases; (2) the Group combined lease and non-lease components for facilities leases, which primarily relate to ancillary expenses such as
common area maintenance charges and management fees of its operating leases. In addition, for leases with a term of 12 months or less, an election was made not to
recognize lease assets and lease liabilities.
Upon the adoption of the new lease accounting standard ASC 842, the Company recognized right-of-use assets and lease liabilities of approximately RMB 3.5 million and
RMB 3.0 million, respectively, at January 1, 2019, consisting primarily of operating leases relating to office space.
F-19
(l)
Income taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss carry
forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or tax status is recognized in income in
the period that includes the enactment date or the date of change in tax status. A valuation allowance is provided to reduce the amount of deferred income tax assets if it is
considered more likely than not that some portion or all of the deferred income tax assets will not be realized.
A deferred tax liability is not recognized for the excess of the Company’s financial statement carrying amount over the tax basis of its investment in a foreign subsidiary,
if there exists specific plans for reinvestment of undistributed earnings of a subsidiary which demonstrates that remittance of the earnings will be postponed indefinitely.
The Group recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination,
based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Group’s accounting policy is to accrue interest and
penalties related to unrecognized tax benefits, if and when required, as interest expense and a component of general and administrative expenses, respectively in the
consolidated statements of comprehensive income (loss).
(m)
Share-based payment
The Group measures the cost of employee share options and non-vested shares based on the grant date fair value of the award and recognizes that cost over the period
during which an employee is required to provide services in exchange for the award, which generally is the vesting period. For the graded vesting share options and non-
vested shares, the Company recognizes the compensation cost over the requisite service period for each separately vesting portion of the award as if the award is, in
substance, multiple awards. When no future services are required to be performed by the employee in exchange for an award of equity instruments, and if such award
does not contain a performance or market condition, the cost of the award is expensed on the grant date. Awards granted to employees with performance conditions are
measured at fair value on the grant date and are recognized as compensation expenses in the period and thereafter when the performance goal becomes probable to
achieve.
When there is a modification of the terms and conditions of an award of equity instruments, the Group calculates the incremental compensation cost of a modification as
the excess of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the share price
and other pertinent factors at the modification date. For vested options, the Group recognizes incremental compensation cost in the period the modification occurred. For
unvested options, the Group recognizes, over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized
compensation cost for the original award on the modification date. Cancellations in the vesting period are treated as an acceleration of vesting, and recognized
immediately for the amount that would otherwise be recognized for services over the vesting period.
When there is a change in the grantee status from an employee to a non-employee, if grantee retains the awards on a change in status and continues to provide substantive
services to the Group, the change in status results in a new measurement date for the unvested awards with compensation costs measured as if the awards were newly
issued to the grantee on the date of the change in status. If grantee retains the awards on a change in status and is not required to provide substantive services to the grantor
subsequent to that change in status, the change in status is, in substance, an acceleration of the vesting of the arrangement.
(n)
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, cash in banks and highly liquid investments with original maturity less than three months and readily convertible to
known amount of cash.
(o)
Accounts receivable and loan receivable
Accounts receivable are recognized at invoiced amounts, less an allowance for uncollectible accounts, if any.
Prior to January 1, 2020, the allowance for doubtful accounts was the management’s best estimate of the amount of probable credit losses resulting from the inability of
the Group’s customers to make required payments. The allowance for doubtful accounts was based on a review of specifically identified accounts, aging data and
historical collection pattern. Account balances were charged off against the allowance after all means of collection had been exhausted and the potential for recovery is
considered remote. The Group did not have any off-balance-sheet credit exposure related to its customers.
F-20
In connection with the adoption of ASC 326 Financial Instruments-Credit Losses (the “ASC 326”) on January 1, 2020, the new accounting standard replaced the incurred
loss impairment methodology for recognizing credit losses with a new methodology that requires recognition of lifetime expected credit losses when a financial asset is
originated or purchased, even if the risk of loss is remote, which results in losses being recognized earlier. The new methodology (referred to as the current expected
credit losses model, or "CECL") applies to most financial assets measured at amortized cost, including accounts receivables and loan receivable, and requires
consideration of a broader range of reasonable and supportable information to estimate expected credit losses. The Company adopted the new accounting standard as of
January 1, 2020 using a modified retrospective transition approach and did not make any opening balance sheet adjustments due to the immaterial amounts. The adoption
did not have a material impact on the Company's consolidated financial statements and related disclosures.
(p)
Long-term investments
Equity method investments
The Group applies the equity method to account for an equity interest in an investee over which the Group has significant influence but does not own a majority equity
interest or otherwise control.
Under the equity method of accounting, the Group’s share of the investee’s results of operations is reported as investment income (losses) in the consolidated statements
of comprehensive income (loss).
The Group recognizes an impairment loss when there is a decline in value below the carrying value of the equity method investment that is considered to be other than
temporary. The process of assessing and determining whether impairment on an investment is other than temporary requires a significant amount of judgment. To
determine whether an impairment is other than temporary, management considers whether it has the ability and intent to hold the investment until recovery and whether
evidence indicating the carrying value of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons
for the impairment, the severity and duration of the decline in value, any change in value subsequent to the period end, and forecasted performance of the investee.
Other equity investments
In connection with the adoption of ASC321 Investment—Equity securities as of January 1, 2018, the Group have elected to apply the measurement alternative to measure
the equity investments that do not have readily determinable fair values at cost, adjusted for changes resulting from impairments and observable price changes in orderly
transactions for identical or similar securities of the same issuer. The Group considers information in periodic financial statements and other documentation provided by
the investees to determine whether observable price changes have occurred.
The Group makes a qualitative assessment considering impairment indicators to evaluate whether the equity investments without a readily determinable fair value is
impaired at each reporting period, and write down to its fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment
is less than its carrying value. If an equity security without a readily determinable fair value is impaired, the Group includes an impairment loss in net income equal to the
difference between the fair value of the investment and its carrying amount.
(q)
Property and equipment, net
Property and equipment is stated at historical cost.
Depreciation is recognized over the following useful lives in straight-line method, taking into consideration the assets’ estimated salvage value:
Building
Computer equipment
Furniture, fixtures and office equipment
Software
Motor vehicles
Leasehold improvements
30 years
3 to 5 years
3 to 5 years
3 to 10 years
5 years
The shorter of lease terms and estimated useful lives
Ordinary maintenance and repairs are charged to expenses as incurred, while replacements and betterments are capitalized. When items are retired or otherwise disposed
of, income is charged or credited for the difference between net book value of the item disposed and proceeds realized thereon.
F-21
(r)
Intangible assets
Intangible assets mainly consist of externally purchased text content and software platform and acquired intangible assets resulting from the acquisitions of entities and
accounted for using the acquisition method of accounting, which are estimated by management based on the fair value of assets acquired at the acquisition date. Intangible
assets are amortized on a straight-line basis over their respective estimated useful lives, which range from 1.4 to 10 years.
The Group has no intangible assets with indefinite useful lives.
(s)
Impairment of long-lived assets, excluding goodwill
Long-lived assets, including property and equipment, intangible assets, other non-current assets subject to amortization and right-of-use assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset
or asset group be tested for possible impairment, the Group first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying
value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the
carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and
third-party independent appraisals, as considered necessary.
(t)
Goodwill
Periods prior to January 1, 2020
Goodwill represents the excess purchase price over the estimated fair value of net assets acquired in a business combination. Goodwill is reviewed for impairment at least
annually based on the Group’s reporting units, which are defined as operating segments or one level below the operating segments (also known as components). The
Group performs a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, prior to
performing the two-step goodwill impairment test. If this is the case, the two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a
reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
If the two-step goodwill impairment test is required, first, the fair value of the reporting unit is compared with its carrying amount (including goodwill). If the fair value of
the reporting unit is less than its carrying amount, an indication of goodwill impairment exists for the reporting unit and the entity must perform step two of the
impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied
fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price
allocation and the residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill. Fair value of the reporting unit is determined using a
discounted cash flow analysis. If the fair value of the reporting unit exceeds its carrying amount, step two does not need to be performed.
The Group performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a reporting unit
likely exceeds its fair value.
Periods commencing January 1, 2020
In connection with the adoption of ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment as of January 1, 2020, the
goodwill impairment test was simplified by comparing the fair value of a reporting unit with its carrying amount and an impairment charge is measured as the amount by
which the carrying amount exceeds the reporting unit's fair value. Goodwill is not amortized, but tested annually for impairment on a qualitative or quantitative basis for
the reporting unit as of December 31, or more frequently when events or circumstances indicate an impairment may exist at the reporting unit level. In the qualitative
assessment, the Company considers primary factors such as industry and market considerations, the overall financial performance of the reporting unit, and other specific
information related to the operations. When performing the annual impairment test, the Company has the option of first performing a qualitative assessment to determine
the existence of events and circumstances that would lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. If such a conclusion is reached, the Company would then be required to perform a quantitative impairment assessment of goodwill. However, if the assessment
leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then no further assessments are required. A
quantitative assessment for the determination of impairment is made by comparing the carrying amount of the reporting unit with its fair value, which is generally
calculated using the discounted cash flow method. The Company adopted ASU 2017-04 on January 1, 2020. The adoption did not have a material impact on the
Company’s consolidated financial statements.
F-22
(u)
Employee benefit plans
As stipulated by the regulations of the PRC, the Company’s PRC subsidiaries are required to contribute to various defined contribution plans, organized by municipal and
provincial governments on behalf of their employees. The contributions to these plans are based on certain percentages of the employee’s standard salary base as
determined by the local Social Security Bureau. The Group has no other obligation for the payment of employee benefits associated with these plans beyond the annual
contributions described above.
Employee benefit expenses recognized under these plans for the years ended December 31, 2019, 2020 and 2021 are allocated to the following expense items.
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total expense due to employee benefit plans
(v)
Earnings (Losses) per share
Year Ended December 31,
2019
RMB
2,363,553
2,468,898
2,077,128
3,301,256
10,210,835
2020
RMB
3,022,423
962,709
1,881,648
2,576,853
8,443,633
2021
RMB
5,989,994
1,294,439
3,775,110
3,810,984
14,870,527
Basic earnings (losses) per share is computed by dividing net income (losses), considering the accretions to redemption value of the redeemable non-controlling interests,
by the weighted average number of common shares outstanding during the year using the two-class method. Under the two-class method, any net income (losses) is
allocated between common shares and other participating securities based on their participating rights in undistributed earnings (losses). Net losses are not allocated to
participating securities when the participating securities does not have contractual obligation to share losses. The Company’s certain non-vested shares relating to the
share-based awards under the share incentive plan were considered participating securities since the holders of these securities have non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid). The non-vested shares do not have a contractual obligation to fund or otherwise absorb the Group’s losses. Accordingly,
any net income is allocated on a pro rata basis to the common shares and the non-vested shares that were considered participating securities, whereas net loss is allocated
to common shares only.
Diluted earnings (losses) per share is calculated by dividing net income (losses) adjusted for the effect of dilutive common equivalent shares, if any, by the weighted
average number of common and dilutive common equivalent shares outstanding during the year. Common equivalent shares consist of common shares issuable upon
vesting of the non-vested shares or exercise of outstanding share options (using the treasury stock method). Common equivalent shares are not included in the
denominator of the diluted earnings (losses) per share computation when inclusion of such shares would be anti-dilutive.
The Group uses loss from continuing operations as the control number in determining whether the potential common shares are dilutive or anti-dilutive.
(w)
Segment reporting
The Group’s chief operating decision maker has been identified as the Chief Executive Officer who reviews financial information of operating segments based on US
GAAP amounts when making decisions about allocating resources and assessing performance of the Group. The Group uses the management approach in determining
operating segments. The management approach considers the internal reporting used by the chief operating decision maker for making operating decisions about the
allocation of resources and the assessment of performance in determining the Group’s operating segments. As a result of the Huanqiuyimeng Acquisition as described in
Note 1, the Group classified the operating segments for the years ended December 31, 2019, 2020 and 2021 into (i) Overseas art study services (ii) Other educational
services and (iii) K-12 education assessment and other services. Substantially all of the Group’s operations, customers and long-lived assets are located in the PRC.
Consequently, no geographic information is presented.
(x)
Discontinued operations
When a component of the Group’s business is sold or expected to be sold during the year, the Group considers whether the criteria of ASC 205-20, Discontinued
Operations, has been met, which includes evaluating if the disposal of a component represents a strategic shift that has, or will have, a major effect on the Group.
When a discontinued operation is disposed of before being classified as held for sale, the Company presents the assets and liabilities of the discontinued operation
separately from other assets and liabilities on the consolidated balance sheet before the period that includes the disposal.
F-23
(y)
Business combination
Business combinations are recorded using the acquisition method of accounting in accordance with ASC topic 805 (“ASC 805”): Business Combinations. The acquisition
method of accounting requires an acquirer to determine the identifiable acquired assets, the liabilities assumed and any non-controlling interest in the acquiree at the
acquisition date, measured at their fair values as of that date. The consideration transferred for an acquisition is measured as the aggregate of the fair values at the date of
exchange of the assets given, liabilities assumed, equity instruments issued as well as the contingent considerations as of the acquisition date. The costs directly
attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair
value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total cost of the acquisition, fair value of the non-
controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the
acquiree, is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in
earnings.
(z)
Recently issued accounting standards
In December 2019, the FASB issued ASU 2019-12, Income Tax (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 removes
certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds
guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group. The Company
adopted the disclosure requirements of ASU 2019-12 on the Company's consolidated financial statements on January 1, 2021. There was no material impact on the
Company's consolidated financial statements.
(3)
BUSINESS ACQUISITION
Acquisition of Huanqiuyimeng
In 2019, the Company entered into share purchase agreements with all of the selling shareholders of Huanqiuyimeng to acquire 100% equity interests of Huanqiuyimeng
in exchange for 9,360,000 ordinary shares of the Company and RMB 91.1 million consideration in cash.
The Group obtained the control of Huanqiuyimeng business on August 6, 2019 and paid cash consideration of RMB 71,483,973 and RMB 15,000,000 for the years ended
December 31, 2019 and 2020, respectively. The Company paid the remaining consideration of RMB 4,642,082 in March 2021.
The Company accounted for the acquisition of Huanqiuyimeng under the acquisition method of accounting in accordance with ASC 805, Business Combinations. The
Group determined the fair values of assets acquired and liabilities assumed for this acquisition with assistance of an independent appraiser. The goodwill resulting from
the acquisition is primarily attributable to the assembled workforce and established network of training centers around China and abroad. The acquired goodwill is not
deductible for tax purposes. A summary of identifiable assets acquired and liabilities assumed in connection with the acquisition is as follows:
RMB
Purchase consideration:
Cash
Fair value of 9,360,000 ordinary shares
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash
Prepaid expenses and other current assets
Long-term investments
Property and equipment, net
Intangible assets
Trademark
Non-compete arrangements
Order backlogs
Other non-current assets
Right-of-use assets
Deferred revenues
Short-term loan
Lease liabilities-current
F-24
91,126,055
76,868,663
167,994,718
36,785,802
26,333,563
157,850
8,505,683
79,000,000
56,000,000
4,000,000
881,926
32,089,416
(163,400,000)
(13,991,000)
(18,728,346)
Deferred income tax liabilities
Accrued expense and other payables
Lease liabilities-non-current
Total identifiable assets acquired and liabilities assumed
Fair value of non-redeemable non-controlling interests in Huanqiuyimeng
Goodwill
(45,659,880)
(14,326,672)
(13,361,070)
(25,712,728)
(6,771,349)
200,478,795
The intangible assets consist of trademark, non-compete arrangements and order backlogs. The fair values of trademark of RMB 79,000,000, non-competition
arrangements of RMB 56,000,000 and order backlogs of RMB 4,000,000 are amortized over 10 years, 6 years and 1.4 years, respectively on a straight-line basis.
The Company adopted relief from royalty method to estimate the fair value of trademark as at August 6, 2019. This approach is based on the assumption that, if an
intangible asset has to be licensed from a third-party owner, a royalty rate on turnover will be charged for the privilege of using the asset. The significant inputs for the
valuation model include, but not limited to, projected revenue, remaining useful life and discount rates.
The Company adopted with and without method to estimate the fair value of non-compete arrangements as at August 6, 2019. The fair value of non-compete
arrangements were derived by comparing the discounted cash flow models under the income approach for the two scenarios – one is based on the scenario where the non-
compete arrangements are in place and the other is where it is not in place. The significant inputs for the valuation model include, but not limited to, remaining useful life,
financial forecasts for the scenario without non-compete arrangements in place, discount rate and probability of competition.
The Company adopted discounted cash flow method to estimate the fair value of deferred revenues as at August 6, 2019.The fair value of the deferred revenues was
estimated based on the costs of fulfilling the obligations plus a normal profit margin. The significant inputs for the valuation model include, but not limited to, projected
direct cost, savings on selling effort, profit margin and discount rate.
The Company adopted price-to-sales method to estimate fair value of the non-controlling interests as at August 6, 2019. The price-to-sales multiple is referred to the
purchase consideration and the revenue of Huanqiuyimeng. Considering the comparability of each entity with non-controlling interests, the Company adopted such
multiple in deriving the non-controlling interests.
As of the acquisition date, the goodwill acquired in the business combination was assigned to the overseas art study services reporting unit of RMB 176,046,647 and to the
other educational services reporting unit of RMB 24,432,148 based on the excess of the fair value of each acquired reporting unit over the fair value of individual assets
acquired and liabilities assumed that are assigned to each reporting unit.
The amounts of net revenues and net loss of the acquiree since the acquisition date included in the consolidated statement of comprehensive income (loss) for the year
ended December 31, 2019 was RMB 91,422,138 and RMB 24,291,035, respectively.
(4)
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
VAT-input deductible
Income tax refundable
Advances to employees
Other current assets
Total prepaid expenses and other current assets
December 31,
2020
RMB
December 31,
2021
RMB
1,340,830
29,529
253,608
4,347,006
5,970,973
19,317
131,078
14,396
2,964,809
3,129,600
Other current assets primarily consist of advances to suppliers for deposits, prepaid rent expenses, advertising fee and prepaid cost for research-based learning services.
F-25
(5)
LOAN RECEIVABLE, NET
On March 26, 2018, the Company entered into a framework agreement with the selling shareholders of Beijing Biztour International Travel Service Co., Ltd. (“Beijing
Biztour”) in order to acquire Beijing Biztour. Pursuant to the framework agreement, the Company provided a one-year loan of US$2.0 million at an annual interest rate of
8.0% to Beijing Biztour.
The Company had also advanced RMB 7.5 million from August 2018 to February 2019 to fund the operation of Beijing Biztour. On March 6, 2019, The Company
terminated the acquisition of Beijing Biztour because Beijing Biztour and the selling shareholders of Beijing Biztour did not satisfy certain closing conditions for such
acquisition.
The loan receivable became overdue on April 6, 2019. On April 30, 2019, the due dates of loan receivable and other receivables due from Beijing Biztour were extended
to September 30, 2019. The controlling shareholder of Beijing Biztour made a personal guarantee and agreed with certain real estate property mortgage. The loan
receivable and other receivables due from Beijing Biztour became overdue again since October 1, 2019. Management assessed the collectability of loan receivable and
other receivables due from Beijing Biztour and used the fair value of real estate adjusted by the estimated costs to sell to measure impairment and recorded a provision of
RMB 17.4 million for the year ended December 31, 2019. Management deems the likelihood of collecting the outstanding balance of loan receivable and other
receivables remote and recorded an impairment of RMB 5.9 million for the year ended December 31, 2020. The Company is currently in the legal process of recovering
the loan receivable balance.
(6)
LONG-TERM INVESTMENTS
EEO Group
Beijing Xiaozhi Education & Technology Co., Ltd.
Total other equity investments
December 31,
2020
RMB
38,000,000
6,000,000
44,000,000
December 31,
2021
RMB
38,000,000
—
38,000,000
The Group accounts for its equity investments that do not have readily determinable fair value in accordance with ASC321 Investment—Equity securities effective
on January 1, 2018, and elected to measure these investments without readily determinable fair value at cost adjusted for changes resulting from impairments, if any, and
observable price changes in orderly transactions for the identical or similar securities of the same issuer.
Prior to January 1, 2019, the Group acquired 7.95% equity interests of ApplySquare Education & Technology Co., Ltd (“ApplySquare”) in exchange for USD
3,000,000 (equivalent to RMB 19,721,700) in cash. As of January 1, 2019, the carrying amount of the investment in ApplySquare was RMB 22,471,700. As of December
31, 2019, ACG made a qualitative assessment and identified that Applysquare failed to meet the expected milestones and operation forecasts and encountered shortage of
working capital resulted from continuous negative operating cash flows, which indicates that impairment exists. With the assistance of an independent appraiser, the
Company evaluated the fair value of the investment in Applysquare as of December 31, 2019 and recorded an impairment loss of RMB 20,895,309 based on the valuation
result. Due to the severe shortage of working capital and negative market impact on its business in the third quarter of 2020, the Group recognized an impairment loss of
RMB 1,576,391 to reduce the investment to zero.
Prior to January 1, 2019, the Group acquired 6.8345% equity interests of Beijing GlobalWisdom Information Technology Co., Ltd. (“GlobalWisdom”) in exchange for
RMB 12,300,000 in cash, and recorded an impairment of RMB 6,380,802. On June 28, 2019, GlobalWisdom entered into a financing agreement with new investors.
After GlobalWisdom’s new financing, ACG’s equity shares decreased to 6.7525%. Due to the fact that the securities issued during this new financing are not identical or
similar securities in terms of rights and obligations to the equity securities held by the Company, the Company did not adjust the carrying amount of the long-term
investments in GlobalWisdom. Due to the severe shortage of working capital and negative market impact on its business in the third quarter of 2019, the Group
recognized an impairment loss of RMB 5,919,198 to reduce the investment to zero.
Prior to January 1, 2019, the Group acquired 20% equity interests of Beijing Xiaozhi Education Technology Co., Ltd. (“Xiaozhi”) in exchange for RMB 6,000,000 in
cash. According to the shares purchase agreement, ACG has the right to appoint one director. The Company paid RMB 6,000,000 in cash to Xiaozhi in January 2019. The
investment is not in-substance common stock due to the liquidation preference feature. In the third quarter of 2021, ACG made a qualitative assessment and identified
that Xiaozhi failed to meet the expected milestones and operation forecasts and encountered shortage of working capital resulted from continuous negative operating cash
flows, which indicated that impairment exists. The Group recognized an impairment loss of RMB 6,000,000 to reduce the investment to zero.
F-26
Long-term investment in Beijing Futou Technology Co., Ltd (“Futou Technology”) was acquired in connection with the acquisition of Huanqiuyimeng, which held 15%
equity interests in Futou Technology. Due to the severe shortage of working capital and negative market impact on its business in the fourth quarter of 2020, the Group
recognized an impairment loss of RMB 150,000 to reduce the investment to zero.
Prior to January 1, 2019, the Group acquired 8.33% equity interests of Beijing Empower Education Online Co., Ltd. (“EEO”) in exchange for RMB 38,000,000 in cash.
In July 2020, EEO underwent an internal reorganization pursuant to which the Company exchanged its equity interest in EEO to EEO Group, a newly established holding
company incorporated in Cayman Islands. The equity interests in EEO Group are substantially equivalent to the exchanged equity interests in EEO. EEO Group also
entered into two rounds of financing agreements with certain new investors in July and November 2020, respectively. After the internal reorganization and new financings
in 2020, ACG’s equity interest in EEO Group decreased from 8.33% to 4.822%. Since the securities issued during new financing arrangements are not identical or similar
in terms of rights and obligations to the equity securities held by the Company, the Company did not adjust the carrying amount of the long-term investments in EEO
Group.
On March 30, 2021, EEO Group entered into a financing agreement with a group of new investors. After EEO Group’s new financing, ACG’s equity shares decreased
from 4.822% to 4.433%. Since the securities issued during this new financing arrangements are not identical or similar in terms of rights and obligations to the equity
securities held by the Company, the Company did not adjust the carrying amount of the long-term investments in EEO Group.
(7)
FAIR VALUE MEASUREMENT
The other equity investments without readily determinable fair value are recorded at fair value only if an impairment or observable price adjustment is recognized in the
current period. If an impairment or observable price adjustment is recognized on the equity securities during the period, the Company will classify these assets as Level 3
within the fair value hierarchy based on the nature of the fair value inputs.
To estimate the fair value of investment in Applysquare as of December 31, 2020, the Group used Discounted Cash Flow Model (“DCF Model”), which is based on the
fair value of the entire invested capital of Applysquare using an income approach. The significant inputs for the valuation model were future cash flows, discount rate, and
the comparable selection set of companies operating in similar businesses. The Group recorded an impairment loss of RMB 1,576,391 for the year ended December 31,
2020 to reduce the investment book value to zero.
To estimate the fair value of investment in Futou Technology as of December 31, 2020, the Group used DCF Model, which is based on the fair value of the entire
invested capital of Futou Technology using an income approach. The significant inputs for the valuation model include, but not limited to, future cash flows, discount
rate, and the comparable selection set of companies operating in similar businesses. The Group recorded an impairment loss of RMB 150,000 for the year ended
December 31, 2020 to reduce the investment book value to zero.
To estimate the fair value of investment in Xiaozhi as of September 30, 2021, the Group used DCF Model, which is based on the fair value of the entire invested capital of
Xiaozhi using an income approach. The significant inputs for the valuation model include, but not limited to, future cash flows, discount rate, and the comparable
selection set of companies operating in similar businesses. The Group recorded impairment loss of RMB 6,000,000 for the year ended December 31, 2021 to reduce the
investment book value to zero.
The Group did not have any non-financial assets and liabilities that are measured at fair value on a non-recurring basis as of December 31, 2020 and 2021, respectively.
The Group’s financial instruments consist of cash and cash equivalents, accounts receivable, advances to third parties, employees and suppliers, which are included in the
prepaid expenses and other current assets, loan receivable, net, accrued expenses and other payables and short-term loans, all of which have a carrying amount that
approximate fair value because of the short maturity of these instruments.
F-27
(8)
PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
Building
Computer equipment
Furniture, fixtures and office equipment
Motor vehicles
Software
Leasehold improvements
Less: accumulated depreciation and amortization
Property and equipment, net
December 31,
2020
RMB
December 31,
2021
RMB
53,049,213
3,954,697
1,769,409
1,986,506
1,729,921
17,840,533
80,330,279
(42,211,063)
38,119,216
53,049,213
2,993,047
1,604,816
1,469,021
1,701,584
8,611,042
69,428,723
(32,924,739)
36,503,984
2021
RMB
397,905
448,414
7,984
4,937,844
—
5,792,147
Total depreciation expense recognized for the years ended December 31, 2019, 2020 and 2021 is allocated to the following expense items:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Other operating income, net
Total depreciation expense
(9)
GOODWILL AND INTANGIBLE ASSETS, NET
(a)
Goodwill
2019
RMB
Year ended December 31,
2020
RMB
28,389
226,173
35,343
4,491,492
369,048
5,150,445
214,133
240,603
9,597
7,158,056
398,192
8,020,581
The goodwill balance as of December 31, 2020 and 2021 is resulted from the acquisition of Huanqiuyimeng, which is primarily attributable to the assembled workforce
and established network of training centers around China and abroad.
ACG acquired 100% equity interests of Huanqiuyimeng and its subsidiaries in the year of 2019. This acquisition was accounted for under the acquisition method of
accounting and the excess of fair values of the consideration and non-controlling interests over the fair value of the identifiable net assets of Huanqiuyimeng is recorded as
goodwill of RMB 200,478,795.
In May and August 2020, the Group has disposed three campuses in relation to the junior art education service to third parties. A decrease in goodwill of RMB 5,723,832
allocated to these campuses within the junior art education service was recognized based on the relative fair values of the campuses being disposed of and the portion of
the reporting unit retained.
The change in the carrying amount of goodwill by reporting unit is as follows:
Balance as of December 31, 2019
Less: Disposal of campuses in relation to junior art education service
Balance as of December 31,2020 and 2021
Overseas art study
services
RMB
176,046,647
—
176,046,647
Other Educational
Services
RMB
24,432,148
(5,723,832)
18,708,316
Consolidate
RMB
200,478,795
(5,723,832)
194,754,963
The Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a reporting
unit likely exceeds its fair value. This involves estimating the fair value of the reporting units using discounted cash flow models and the key assumptions used in the
valuation models include forecasted revenue growth rates, forecasted operating margins and the discount rates. No impairment was identified and recorded for fiscal years
ended December 31, 2020 and 2021.
F-28
(b)
Intangible assets
The following table summarizes the Company’s intangible assets, as of December 31, 2020 and 2021.
Education assessment caseware (i)
Trademark (ii)
Non-compete arrangements (ii)
Total intangible assets
Trademark (ii)
Non-compete arrangements (ii)
Total intangible assets
December 31, 2020
Gross
carrying
amount
RMB
9,251,887
79,000,000
56,000,000
144,251,887
Accumulated
amortization
/deduction
RMB
(6,131,462)
(11,191,667)
(13,222,222)
(30,545,351)
Impairment
RMB
(3,120,425)
—
—
(3,120,425)
December 31, 2021
Gross
carrying
amount
Accumulated
amortization
/deduction
RMB
79,000,000
56,000,000
135,000,000
RMB
(19,091,667)
(22,555,555)
(41,647,222)
Impairment
RMB
—
—
—
Weighted
average
amortization
period
Years
5
10
6
Net
carrying
amount
RMB
—
67,808,333
42,777,778
110,586,111
Weighted
average
amortization
period
Years
10
6
Net
carrying
amount
RMB
59,908,333
33,444,445
93,352,778
Total amortization expense recognized for the years ended December 31, 2019, 2020 and 2021 is allocated to the following expense items:
Cost of revenues
Sales and marketing
General and administrative
Total amortization expense
2019
RMB
Year ended December 31,
2020
RMB
2,031,478
1,992,105
8,371,032
12,394,615
1,850,377
—
20,042,857
21,893,234
2021
RMB
—
—
17,233,333
17,233,333
(i)
Education assessment caseware is the test content purchased for the Company’s strategic K-12 academic assessment business, which includes three subjects of
Literature, Mathematics and English over six grades of junior and senior high school. The Company conducted impairment test and identified that no cash inflows
were anticipated from the intangible assets relating to the education assessment caseware as of December 31, 2020. As a result, RMB 3,120,425 of impairment loss
relating to the intangible asset was recognized for the year ended December 31, 2020.
Software platform of Project Shuang Chuang is the software platform purchased from a third party for providing vocational assessment and training services that focuses
on the innovation related competencies of college students. The Company conducted impairment tests and identified that no cash inflows nor feasibility use was
anticipated from the intangible assets and other non-current assets recorded relating to the software platform developed under Project Shuang Chuang as of December 31,
2019. As a result, RMB 8,932,439 of impairment loss relating to intangible assets of RMB 8,128,194 and other non-current assets of RMB 804,245 for software platform
of Project Shuang Chuang were recognized for the year ended December 31, 2019.
F-29
(ii)
Trademark and Non-compete arrangements were recorded as a result of Huanqiuyimeng Acquisition. See note 3 for details.
As of December 31, 2021, the estimated amortization expense for the next five years is as follows:
2022
2023
2024
2025
2026
(10)
LEASES
December 31
RMB
17,233,333
17,233,333
17,233,333
13,344,444
7,900,000
The primary leases that the Group entered into were for training centers and office spaces.
Information as of and for the years ended December 31, 2019, 2020 and 2021:
As of December 31, 2019, the Company has 61 operating leases for training center and office spaces with remaining terms expiring from 2 through 39 months and a
weighted average remaining lease term of 1.67 years. Weighted average discount rates used in the calculation of the lease liability is 5.88%. As of December 31, 2020,
the Company has 40 operating leases for training center and office spaces with remaining terms expiring from 1 through 61 months and a weighted average remaining
lease term of 3.40 years. Weighted average discount rates used in the calculation of the lease liability is 6.60%. As of December 31, 2021, the Company has 33 operating
leases for training center and office spaces with remaining terms expiring from 1 through 55 months and a weighted average remaining lease term of 3.08 years.
Weighted average discount rates used in the calculation of the lease liability is 6.63%. The discount rates reflect the estimated incremental borrowing rate, which includes
an assessment of the credit rating to determine the rate that the Company would have to pay to borrow, on a collateralized basis for a similar term, an amount equal to the
lease payments in a similar economic environment.
Rent expense for the years ended December 31, 2019, 2020 and 2021 were RMB 13,903,991, RMB 29,111,428 and RMB 24,848,222 respectively. There were no
variable lease costs or sublease income for leased assets for the years ended December 31, 2019, 2020 and 2021.
The impact of ASC 842 on the consolidated balance sheets as of December 31, 2019, 2020 and 2021 was as follows:
Operating leases:
Right-of-use assets
Lease liabilities-current
Lease liabilities-non-current
F-30
December 31,
2020
RMB
December 31,
2021
RMB
41,779,086
16,972,187
24,005,765
42,417,409
17,351,427
23,365,840
Other information related to leases is presented below:
Supplemental cash flow information:
Cash paid for amounts included in measurement of operating leases liabilities
Lease liability arising from obtaining Right-of-use assets
Right-of-use assets acquired in connection with Huanqiuyimeng Acquisition
Maturities of lease liabilities under non-cancellable leases as of December 31, 2021 are as follows:
Year ended December 31,
2019
RMB
2020
RMB
2021
RMB
12,850,734
8,696,875
32,089,416
20,376,826
33,360,187
—
21,478,066
16,132,735
—
2022
2023
2024
2025
2026
Thereafter
Total undiscounted lease payments
Less: Imputed interest
Total lease liabilities
Amounts due within 12 months
Non-current lease liability
Operating leases
RMB
17,906,850
12,613,075
7,999,320
5,725,631
776,818
—
45,021,694
(4,304,427)
40,717,267
17,351,427
23,365,840
Short-term lease expense, with a lease term of 12 months or less, for the years ended December 31, 2019, 2020 and 2021 was RMB2,125,616, RMB 6,112,893 and RMB
3,248,285. short-term lease commitments as of December 31, 2021 are RMB 1,519,946.
(11)
SHORT-TERM LOANS
Bank borrowings
The Group assumed several bank borrowings with short-term loan balance of RMB 13,991,000 in connection with Huanqiuyimeng Acquisition, among which RMB
9,000,000 was repaid during the period from August 6, 2019 to December 31, 2019. Interest expense of RMB 164,930 accrued from these bank borrowings was
recognized for the same period in 2019.
The Company entered into several short-term bank borrowings in total amount of RMB13,327,000 in 2020 to support operations of Huanqiuyimeng during the COVID-
19 outbreak. RMB16,318,000, which includes the outstanding short-term loan balance of RMB 4,991,000 as of December 31, 2019, was repaid during the year of 2020.
The Company recognized interest expenses of RMB 207,697 and RMB 22,244 relating to these bank borrowings in 2020 and 2021, respectively. The outstanding short-
term loan balance in bank borrowings was RMB 2,000,000 as of December 31, 2020, which was fully repaid on March 31, 2021.
Other borrowings
During the year of 2020, to support its daily operations among COVID–19, Muhua Shangce, the majority owned subsidiary of the Group obtained short-term
borrowings from several parties, including: i) the Group’s CEO and Director, Mr. Xiaofeng Ma, in the amount of RMB 631,000 with no interest; ii) a third-party
company, in the amount of RMB 3.0 million at an annual interest rate of 4.35% , which Mr. Xiaofeng Ma has provided a joint liability guarantee; iii) the CEO of Muhua
Shangce in the amount of RMB 1,260,000, among which RMB 500,000 at an annual interest rate of 2.00% and RMB 760,000 with no interest ; iv) a company controlled
by Mr. Xiaofeng Ma in the amount of RMB 500,000 with no interest; v) three third party companies in the amount of RMB 900,000 with no interest. Muhua Shangce
has repaid the CEO of Muhua Shangce and three third party companies in total amount of RMB1,490,000 in 2020.
F-31
During 2021 and prior to the disposal of Muhua Shangce, a partnership controlled by the Group’s CEO and Director, Mr. Xiaofeng Ma provided a fourteen-month
interest-free loan in the amount of RMB 700,000 to Muhua Shangce. Muhua Shangce also borrowed from its CEO for another RMB1,210,000, among which RMB
150,000 at an annual interest rate of 6.12% and RMB 1,060,000 with no interest. In addition, Muhua Shangce borrowed from three third party companies in the amount
of RMB 800,000 with no interest.
As of the selling date of Muhua Shangce in June 2021, the outstanding balance of the above borrowings of RMB 7,511,000 remained unpaid and has been disposed
together with the other assets and liabilities of Muhua Shangce. See note 15 for details.
As of December 31, 2020 and 2021, the outstanding short-term loan balance in other borrowings was RMB 4,801,000 and RMB nil, respectively.
(12)
ACCRUED EXPENSES AND OTHER PAYABLES
Accrued expenses and other payables consist of the following:
Refund liability*
Accrued payroll and welfare
Accrued test monitoring fees
Accrued professional services expenses
Income taxes payable
Other current liabilities
Total accrued expenses and other payables
December 31,
2020
RMB
December 31,
2021
RMB
13,411,410
18,987,415
2,432,153
2,291,866
108,488
9,788,850
47,020,182
16,126,030
19,664,360
2,432,153
2,658,861
22,781
7,269,910
48,174,095
Other current liabilities as of December 31, 2020 and 2021 mainly include lessees’ rental deposits, accrued traveling, meeting, outsourcing, advertising, value-added tax
and other taxes payable, and other operating expenses payable.
*Refund liability represents the estimated amount of refund if a student decides to withdraw from the Group’s programs or services and is estimated based on historical
experience.
(13)
NET REVENUES
The components of net revenues for the years ended December 31, 2019, 2020 and 2021, are as follows:
Portfolio training services
Research-based learning services
Overseas study counselling services
Other educational services
K-12 education assessment and other services
Net Revenues
2019
RMB
Year ended December 31,
2020
RMB
63,828,907
10,456,269
8,091,551
9,045,411
6,348,029
97,770,167
113,191,386
4,452,915
21,059,645
20,025,679
3,437,922
162,167,547
2021
RMB
151,433,831
5,977,438
23,623,998
21,174,198
—
202,209,465
K-12 education assessment and other services revenues primarily include K-12 education assessment services and content development services. The Company no longer
provided these services along with the disposal of Muhua Shangce since June 2, 2021.
Deferred revenue is recorded when the Group has an obligation to transfer goods or services to a customer for which the Group has received consideration from the
customer in advance. Part of the balance as of January 1, 2019 was recognized as revenues during the year ended December 31, 2019. In addition, changes in the deferred
revenue balances during the year ended December 31, 2019 included RMB 163,400,000 of deferred revenue acquired in connection with the Huanqiuyimeng Acquisition.
See Note 3.
F-32
Changes in the deferred revenue balances during the year ended December 31, 2020 and 2021 are as follows:
Balance at of the beginning of the period
Cash received in advance, net of VAT
Revenue recognized from opening balance of deferred revenue
Fiscal year ended December 31,
2021
2020
RMB
RMB
199,448,112
171,880,131
210,709,401
197,007,588
(92,221,808)
(106,900,106)
Revenue recognized from deferred revenue arising during the year
(68,036,452)
(94,296,098)
Disposal of subsidiaries and campuses in relation to junior art education services
Disposal of Equity Interests in Muhua Shangce
Change of refund liabilities
Balance at of the end of the period
(4,689,176)
—
(4,492,171)
199,448,112
—
(3,793,597)
(2,714,620)
202,453,092
(14)
INCOME TAXES
Cayman Islands and British Virgin Islands
Under the current laws of the Cayman Islands and the British Virgin Islands, the Group is not subject to any income tax in these jurisdictions.
Hong Kong
Xing Wei did not derive any income that is subject to Hong Kong profits tax for the taxable years ended December 31, 2019, 2020 and 2021. Accordingly, no provision
for Hong Kong profits tax was required.
People’s Republic of China
The Company’s consolidated PRC entities file separate income tax returns.
Under the Enterprise Income Tax Law (“EIT Law”), the statutory income tax rate is 25% effective from January 1, 2008. Entities that qualify as “high-and-new
technology enterprises eligible for key support from the State” (“HNTE”) are entitled to a preferential income tax rate of 15%. If an HNTE enterprise no longer satisfies
the related accreditation criteria, its certificate will be cancelled and it will cease to be entitled to the related tax incentives.
The Company’s PRC entities are subject to income tax at 25%, unless otherwise specified.
In December 2008, ATA Education received approval from the tax authority that it qualified as an HNTE. The certificate entitled ATA Education to the preferential
income tax rate of 15% effective retroactively from January 1, 2008 to December 31, 2010. In October 2011, ATA Education received approval from the tax authority on
its renewal as an HNTE which entitled it to the preferential income tax rate of 15% effective retroactively from January 1, 2011 to December 31, 2013. In October 2014,
ATA Education received approval from the tax authority on its renewal as an HNTE which entitled it to the preferential income tax rate of 15% effective retroactively
from January 1, 2014 to December 31, 2016. In October 2017, ATA Education received approval from the tax authority on its renewal as an HNTE which entitled it to
the preferential income tax rate of 15% effective retroactively from January 1, 2017 to December 31, 2019. In December 2020, ATA Education received approval from
the tax authority on its renewal as an HNTE which entitled it to the preferential income tax rate of 15% effective retroactively from January 1, 2020 to December 31,
2022.
In December 2009, Muhua Shangce received approval from the tax authority that it qualified as an HNTE. The certificate entitled it to the preferential income tax rate of
15% effective retroactively from January 1, 2009 to December 31, 2011. In July 2012, Muhua Shangce received approval from the tax authority on its renewal as an
HNTE which entitled it to the preferential income tax rate of 15% effective retroactively from January 1, 2012 to December 31, 2014. In November 2015, Muhua
Shangce received approval from the tax authority on its renewal as an HNTE which entitled it to the preferential income tax rate of 15% effective retroactively from
January 1, 2015 to December 31, 2017. In October 2018, Muhua Shangce received approval from the tax authority on its renewal as an HNTE which entitled it to the
preferential income tax rate of 15% effective retroactively from January 1, 2018 to December 31, 2020. Muhua Shangce was no longer consolidated into the Group after
the disposal of its entire equity interests on June 2, 2021. See note 15.
F-33
The EIT Law and its relevant regulations impose a withholding tax at 10% for earnings generated beginning January 1, 2008, unless reduced by a tax treaty or agreement,
for dividends distributed by a PRC-resident enterprise to its immediate holding company outside the PRC. Undistributed earnings generated prior to January 1, 2008 are
exempt from withholding tax. As of December 31, 2020 and 2021, the Company has not provided for income taxes on earnings of RMB 2,270,928 and RMB 2,820,818
respectively, generated by its PRC consolidated entities, as the Company plans to reinvest these earnings indefinitely in the PRC. The unrecognized deferred income tax
liability related to these earnings was RMB 227,093 and RMB 282,082, respectively as of December 31, 2020 and 2021.
Loss from continuing operations before income taxes were generated in the following jurisdictions:
Cayman Islands and British Virgin Islands
PRC
Hong Kong
Loss before continuing operations before income taxes
Year Ended December 31,
2019
RMB
(23,094,955)
(118,145,074)
(21,586)
(141,261,615)
2020
RMB
(15,482,426)
(95,351,791)
(19,367)
(110,853,584)
2021
RMB
(18,488,181)
(19,442,469)
(19,044)
(37,949,694)
Income tax expense (benefit) recognized in the consolidated statements of comprehensive income (loss) consists of the following:
PRC
Current income tax expense
Deferred income tax benefit
Total income tax benefit
Year Ended December 31,
2019
RMB
2020
RMB
2021
RMB
905,078
(8,054,197)
(7,149,119)
14,402
(10,283,238)
(10,268,836)
22,781
(1,562,358)
(1,539,577)
The actual income tax expense (benefit) reported in the consolidated statements of comprehensive income (loss) differs from the respective amount computed by
applying the PRC statutory income tax rate of 25% for each of the years ended December 31, 2019, 2020 and 2021 to earnings before income taxes due to the following:
Computed “expected” income tax expenses (benefit)
Increase in valuation allowance
Entities not subject to income tax
Non-deductible expenses
Entertainment
Share-based compensation
Other non-deductible expenses
Additional deduction of research and development costs
Disposal of Equity Interests in Muhua Shangce
Other
Actual income tax benefit
Year Ended December 31,
2019
RMB
(35,315,404)
23,171,671
4,576,771
394,380
1,202,364
306,314
(240,404)
—
(1,244,811)
(7,149,119)
2020
RMB
(27,713,394)
11,770,037
3,445,048
226,312
444,196
1,634,539
(288,502)
—
212,928
(10,268,836)
2021
RMB
(9,487,423)
10,531,372
1,691,406
280,436
259,993
3,927,212
(120,598)
(8,385,539)
(236,436)
(1,539,577)
The applicable PRC statutory income tax rate is used since the Group’s taxable income is generated in the PRC.
F-34
The tax effects of the Group’s temporary differences that give rise to significant portions of the deferred income tax assets and liabilities are as follows:
December 31,
2020
RMB
December 31,
2021
RMB
Deferred income tax assets:
Tax loss carry forwards
Impairment loss of long-term investments
Lease liability
Impairment loss of intangible assets and other non-current assets
Provision for loan receivable and other receivables
Accrued expenses and other payables
Property and equipment, net
Donation
Total gross deferred income tax assets
Less: valuation allowance
Total deferred income tax assets, net
Deferred income tax liabilities:
Intangible assets
Right-of-use assets
Deferred revenues
Contract cost assets
Total gross deferred income tax liabilities
Net deferred income tax assets
Net deferred income tax liabilities
The movements of the valuation allowance are as follows:
Balance at the beginning of the period
Additions
Reduction as a result of disposal of subsidiaries
Balance at the end of the period
37,387,150
9,023,946
10,244,488
3,013,216
1,887,015
4,010,281
890,374
5,268,750
71,725,220
(56,172,945)
15,552,275
27,646,528
9,891,733
1,090,988
3,416,705
42,045,954
2,491,792
28,985,472
2019
RMB
Year Ended December 31,
2020
RMB
21,275,591
23,437,979
—
44,713,570
44,713,570
11,770,037
(310,662)
56,172,945
27,926,708
10,523,946
10,179,317
945,446
1,887,015
2,818,170
81,512
7,500,000
61,862,114
(48,897,848)
12,964,266
23,338,194
9,838,270
—
4,719,124
37,895,588
—
24,931,322
2021
RMB
56,172,945
10,531,372
(17,806,469)
48,897,848
As of December 31, 2021, the valuation allowance of RMB 48,897,848 was related to the deferred income tax assets of PRC entities which were in loss position.
As of December 31, 2021, the Group had tax loss carry forwards for PRC income tax purpose of RMB 111,706,832 of which RMB 13,047, RMB 4,158,531, RMB
10,189,769, RMB 6,212,547, RMB 3,692,800, RMB 18,959,483, nil , RMB 28,305,140, RMB 23,594,429, and RMB 16,581,086 will expire if unused by December 31,
2022, 2023, 2024, 2025, 2026, 2027, 2028, 2029, 2030 and 2031, respectively.
For the years ended December 31, 2019, 2020 and 2021, the Group had no unrecognized tax benefits, and thus no related interest and penalties were recorded. Also, the
Group does not expect that the amount of unrecognized tax benefits will significantly increase within the next twelve months.
According to the PRC Tax Administration and Collection Law, the statute of limitation is three years if the underpayment of taxes is due to computational errors made by
the taxpayer or the withholding agent. The statute of limitation is extended to five years under special circumstances where the underpayment of taxes is more than RMB
100,000. In the case of transfer pricing issues, the statute of limitation is ten years. There is no statute of limitation in the case of tax evasion. The income tax return of
each of the Company’s PRC consolidated entities is subject to examination by the relevant tax authorities for the calendar tax years beginning 2017.
F-35
(15)
NON-CONTROLLING INTERESTS
(a)
Redeemable non-controlling interests
In February 2017, two third-party investors (“the investors”) acquired 20% of the equity interest of Muhua Shangce at a consideration of RMB 34,000,000. The investors
have the right to ask Muhua Shangce to purchase back part or all of the equity interest if Muhua Shangce does not achieve a qualified IPO within 6 years, as defined by
the investment agreement, at the redemption price of RMB 34,000,000 plus 8% of interest for the period from February 2017 to the date of redemption. The redeemable
non-controlling interest was recorded outside permanent equity as mezzanine equity- redeemable non-controlling interests in the consolidated balance sheets and initially
recorded at the carrying value of RMB 34,000,000. The amount presented in redeemable non-controlling interest should be the greater of the non-controlling interest
balance after attribution of net income or loss of the subsidiary and related dividends to the non-controlling interest or the amount of redemption value.
On September 26, 2019, Muhua Shangce entered into a new financing agreement with its redeemable non-controlling interests holder, Muhua Investment, and received
cash of RMB 5,000,000 on September 29, 2019. After Muhua Shangce’s new financing, ACG’s equity shares decreased from 56% to 54.6% and ACG still has control of
Muhua Shangce.
The investor who made this new investment, has the right to ask Muhua Shangce to purchase back up to 50% of the new equity interests if Muhua Shangce does not
achieve a qualified IPO within 5 years, as defined by the investment agreement, at the redemption price of RMB 2,500,000 plus 8% of interest for the period from
September 2019 to the date of redemption. The redeemable non-controlling interest was recorded outside permanent equity as mezzanine equity- redeemable non-
controlling interests in the consolidated balance sheets and initially recorded at the carrying value of RMB 2,500,000. The amount presented in redeemable non-
controlling interest should be the greater of the non-controlling interest balance after attribution of net income or loss of the subsidiary and related dividends to the non-
controlling interest or the amount of redemption value.
On June 2, 2021, ATA Education sold all its 54.6% equity interests in Muhua Shangce to CEO of Muhua Shangce and certain other non-controlling shareholders at nil
consideration. On the same day, the registration for change of shareholders has been completed in local industrial and commercial administration authority.
As a result of the above transaction, the Company deconsolidated Muhua Shangce as of June 2, 2021 when the Company no longer has a controlling financial interest in
Muhua Shangce, by removing its net assets and recognizing a gain or loss in net income per ASC810-10. In addition, previously recorded adjustments of RMB
24,310,333 to the carrying amount of redeemable non-controlling interests from the application of Section 480-10-S99 are eliminated in the same manner as which they
were initially recognized.
The following table presents balance of the Mezzanine Equity as of December 31, 2019 and 2020 and as of the period-end prior to its disposal in the year of 2021.
Balance as of December 31, 2018
Add: Capital contribution
Less: Comprehensive loss attributable to redeemable non-controlling interests during the year
Accretion of redeemable non-controlling interests
Balance as of December 31, 2019
Less: Comprehensive loss attributable to redeemable non-controlling interests during the year
Accretion of redeemable non-controlling interests
Balance as of December 31, 2020
Less: Comprehensive loss attributable to redeemable non-controlling interests during the period
Accretion of redeemable non-controlling interests
Balance as of June 2, 2021
(b)
Non-redeemable non-controlling interests
RMB
39,208,619
2,500,000
(2,820,682)
6,008,491
44,896,428
(2,582,632)
6,184,572
48,498,368
(714,121)
2,283,089
50,067,336
On October 26, 2018, Board of Directors approved that 24% of the equity shares of Muhua Shangce was transferred to a limited partnership named Ningbo Meishan
Bonded Port Area Zunming Investment Management Center (Limited Partnership) (“Limited Partnership”) from ATA Education at a consideration of RMB 1,500,000.
The consideration has been fully paid to ATA Education by the Limited Partnership on December 26, 2018.
F-36
As a result of the new investment made in 2019 to Muhua Shangce as stated above, 50% of the new investment, amounting to RMB 2,500,000, which does not represent
redeemable non-controlling interests, was recorded under non-redeemable non-controlling interests. The relevant non-controlling interests retained was disposed along
with the sale of equity interests in Muhua Shangce.
Muhua Shangce generated pretax losses of RMB 13,942,238, RMB 12,446,417, and RMB 3,441,545 for the years ended December 31, 2019, 2020 and the period before
its disposal in 2021, respectively, of which RMB 7,747,482, RMB 6,795,744, and RMB 1,879,084 were attributed to the Company.
Upon the disposal of Muhua Shangce, the Company recorded a gain amounting to RMB33,542,154. The calculation of the Company’s disposal gain is included in the
following.
Cash consideration received from the disposal of Muhua Shangce
Add: Carrying value of redeemable non-controlling interests in Muhua Shangce
Add: Carrying value of non-redeemable non-controlling interests of Muhua Shangce
Subtotal
Less: Carrying value of net liabilities before disposal
Gain from the disposal of Muhua Shangce
(16)
SEGMENT INFORMATION
RMB
—
25,757,003
(4,423,059)
21,333,944
(12,208,210)
33,542,154
The Group’s chief operating decision maker has been identified as the Chief Executive Officer who reviews consolidated results when making decisions about allocating
resources and assessing performance of the Group. The Group uses the management approach to determine the operating segments. The management approach considers
the internal organization and reporting used by the Group’s chief operating decision maker for making decisions, allocating resources and assessing the performance.
There are no inter-segment revenue transactions and, therefore, revenues are only generated from external customers. The accounting policies of the segments are the
same as those used by the Group.
Prior to the Huanqiuyimeng Acquisition on August 6, 2019, the Group’s operations were organized into one operating segment. As a result of the Huanqiuyimeng
Acquisition as described in Note 1, the Group classified the operating segments for the year ended December 31, 2019 into (i) Overseas art study services (ii) Other
educational services and (iii) K-12 education assessment and other services.
Overseas art study services and Other educational services have been identified as two separate reportable segments, as the two operating segments have met the
quantitative threshold of 10 percent to be considered reportable respectively. The K-12 education assessment and other services are reported as others because revenue
from reportable segments of Overseas art study services and Other educational services exceeds 75 percent of the total consolidated net revenues and management
determines that no further reportable segments need to be identified and disclosed.
Furthermore, the Group’s chief operating decision maker evaluates performance based on each reporting segment’s net revenue, operating cost and expenses, and income
(loss) from operations. There are no separate segment assets and segment liabilities information provided to the Group’s Chief Executive Officer, as he does not use this
information to allocate resources or evaluate the performance of the segments.
The following table presents selected financial information relating to the Group’s segments:
For the year ended December 31, 2021:
Net revenues
Operating cost and expenses:
Cost of revenues
Research and development
Selling and marketing
Unallocated corporate expenses*
Total operating cost and expenses
Other operating income, net
Income (Loss) from continuing operations
Other income, net
Loss from continuing operations before income taxes
Overseas art study
services
RMB
181,035,267
81,964,815
4,176,398
60,436,932
—
146,578,145
—
34,457,122
F-37
Other educational
services
RMB
21,174,198
Others
RMB
Consolidated
RMB
202,209,465
—
14,154,713
3,148,402
5,598,532
—
22,901,647
—
(1,727,449)
1,294,387
4,476,745
113,996
—
5,885,128
22,018
(5,863,110)
97,413,915
11,801,545
66,149,460
93,256,046
268,620,966
22,018
(66,389,483)
28,439,789
(37,949,694)
For the year ended December 31, 2020:
Net revenues
Operating cost and expenses:
Cost of revenues
Research and development
Selling and marketing
Unallocated corporate expenses*
Impairment loss of intangible assets and other non-
current assets
Provision for loan receivable and other receivables
Total operating cost and expenses
Other operating income, net
Income (Loss)from continuing operations
Other loss, net
Loss from continuing operations before income taxes
For the year ended December 31, 2019:
Net revenues
Operating cost and expenses:
Cost of revenues
Research and development
Selling and marketing
Unallocated corporate expenses*
Impairment loss of intangible assets and other non-
current assets
Provision for loan receivable and other receivables
Total operating cost and expenses
Other operating income, net
Income (Loss) from continuing operations
Other loss, net
Loss from continuing operations before income taxes
Overseas art study
services
RMB
Other educational
services
RMB
Others
RMB
138,703,946
20,025,679
3,437,922
Consolidated
RMB
162,167,547
4,593,836
6,847,269
429,566
—
98,521,027
8,832,488
53,500,051
100,097,849
83,972,820
1,834,597
49,804,055
—
—
—
135,611,472
167,016
3,259,490
9,954,371
150,622
3,266,430
—
—
—
13,371,423
94,340
6,748,596
3,120,425
5,904,305
20,895,401
68,868
(17,388,611)
Overseas art study
services
RMB
Other educational
services
RMB
Others
RMB
82,376,727
9,045,411
6,348,029
50,365,985
—
27,859,200
—
—
—
78,225,185
—
4,151,542
5,729,940
—
1,217,014
—
—
—
6,946,954
—
2,098,457
5,818,577
11,817,255
5,035,998
—
8,932,439
17,430,825
49,035,094
588,147
(42,098,918)
3,120,425
5,904,305
269,976,145
330,224
(107,478,374)
(3,375,210)
(110,853,584)
Consolidated
RMB
97,770,167
61,914,502
11,817,255
34,112,212
81,923,516
8,932,439
17,430,825
216,130,749
588,147
(117,772,435)
(23,489,180)
(141,261,615)
*Unallocated corporate expenses represent the general and administrative expenses for the years ended December 31, 2019, 2020 and 2021.
Majority of the Group’s operations, customers and long-lived assets are located in the PRC. Consequently, no geographic information is presented.
(17)
SHARE-BASED COMPENSATION
2005 Share incentive plan
In April 2005, the Company adopted a share incentive plan (the “2005 Plan”), pursuant to which the Company is authorized to issue options to officers, employees,
directors and consultants of the Group to purchase up to 2,894,000 of its common shares. In October 2007, the Company’s board of directors approved an increase in the
number of shares reserved for issuance under the 2005 Plan to 3,310,300 shares. The 2005 Plan expired in April 2015. Options awards provide for accelerated vesting if
there is a change in control (as defined in the 2005 Plan).
F-38
2008 Share incentive plan
On January 7, 2008, the Company adopted a share incentive plan (the “2008 Plan”), pursuant to which the Company is authorized to issue options and other share-based
awards to officers, employees, directors and consultants of the Group to purchase up to 336,307 of its common shares, plus, unless the board of directors determines a
lesser amount, an annual increase on January 1 of each calendar year beginning in 2009 equal to the lesser of 1) one percent of the number of shares issued and
outstanding on December 31 of the immediately preceding calendar year, and 2) 336,307 shares (the “replenish terms”). The 2008 Plan expires in ten years. Options
awards provide for accelerated vesting if there is a change in control (as defined in the 2008 Plan). On December 30, 2016, the Company amended the 2008 Plan to
increase the number of Common Shares of the Company reserved for issuance to 5,726,763 shares and extend the plan together with the replenish terms for ten years
from December 30, 2016 (the “Amendment and Restatement of 2008 Plan”). On October 26, 2018, the Company amended and restated the Amendment and Restatement
of 2008 Plan to increase the number of Common Shares the Company reserved for issuance to 6,965,846 shares, extend its terms to last till October 25, 2028 and change
the number of common shares automatically added to the option pool on each calendar year during its term to an amount equal to the lesser of (i) one percent of the total
number of common shares issued and outstanding on December 31 of the immediately preceding calendar year, or (ii) such number of common shares as may be
established by the board of directors (the “Second Amendment and Restatement of 2008 Plan”). As of December 31, 2021, 8,674,396 shares were reserved for issuance
under the Second Amendment and Restatement of 2008 Plan.
Under both the 2005 Plan and 2008 Plan (including the original and both versions of the Amendment and Restatement), share options are generally granted with 25%
vesting on the first anniversary of the grant date and the remaining 75% vesting ratably over the following 36 months, unless a shorter or longer duration is established at
the time of the option grant. Share options are granted at an exercise price equal to or as an average over a certain number of trading days of the fair market value of the
Company’s share at the date of grant and expire 10 years from the grant date, unless a shorter or longer expiration period is specified.
Under the 2008 Plan (including the original and both versions of the Amendment and Restatement), non-vested shares are generally granted with a graded vesting as to
25% at the end of each year from the grant date over 4 years, or with certain percentage vesting on the grant date or first anniversary of the grant date and the remaining
portion vesting ratably over the following 36 months, unless a shorter or longer duration is established at the time of the grant.
For the graded vesting share options and non-vested shares, the Company recognizes the compensation cost over the requisite service period for each separately vesting
portion of the award as if the award is, in substance, multiple awards.
In January 2017, 2,700,000 non-vested shares were granted to employees and officers with a graded vesting as to 25% at the end of each year from the grant date over 4
years and 900,000 share options were granted to Company’s employees and officers, 25% of the options vest on the first anniversary of the grant date with the remaining
75% vesting evenly over the following 36 months. The exercise price of these options is USD 1.705 per common share.
In August 2017, 50,000 share options were granted to an employee, 25% of the options vest on the first anniversary of the grant date with the remaining 75% vesting
evenly over the following 36 months. The exercise price of these options is USD 2.35 per common share.
In July 2018, 129,168 share options and 1,262,250 non-vested shares were cancelled in connection with the ATA Online Sale Transaction. RMB 6,753,771 compensation
costs were accelerated and recognized for the year ended December 31, 2018.
In November 2018, 1,772,584 share options, including 1,215,114 vested share options and 557,470 non-vested share options were cancelled in accordance with the board
of directors resolutions. RMB 877,321 of compensation costs were accelerated and recognized for the year ended December 31, 2018.
In November 2018, 1,452,600 share options were issued to certain employees and officers with 4 years’ service condition and annual performance targets for the year
2018, 2019, 2020 and 2021, among which 363,150 share options were granted in November 2018 and the remaining portion will be granted when the employee knows
the specific performance target. As the performance condition for the year 2018 was not achieved, no compensation cost was recognized for these share options. In
addition, 690,000 share options were granted to employees and officers, with 25% vesting on the first anniversary of the grant date and the remaining 75% vesting ratably
over the following 36 months. The exercise price of these options is USD 0.578 per common share. In addition, 800,000 non-vested shares were granted to directors, with
25% vesting on the first anniversary of the grant date and the remaining 75% vesting ratably over the following 36 months.
In December 2018, 1,772,584 shares were granted to employees and officers, among which 1,412,336 shares vested immediately on the grant date and the remaining
shares vested for a period from January 1, 2019 to September 1, 2021.
F-39
In January and March 2019, 50,000 and 20,000 share options were granted to employees and officers, with 25% vesting on the first anniversary of the grant date and the
remaining 75% vesting ratably over the following 36 months. The exercise prices of these two tranches options are USD 0.4868 and USD 0.532 per common share
respectively.
In 2019, 1,698,790 share options with exercise price at USD 1.2611 per common share were issued to certain officer with service condition and specific performance
target, among which 424,698 share options (the “First Tranche”) were granted on March 25, 2020 and vested on April 1, 2022. The remaining shall vest with a graded
vesting as to 1/3 on each anniversary of April 1, 2022 for 3 years on the condition that specific performance target is achieved.
In November 2020, 842,000 share options with exercise price at USD 0.5697 per common share were issued to certain employees with service condition and specific
performance target, among which 181,750 share options (the “First Tranche-A”) were granted on April 15, 2021 and the remaining portion will be granted when the
specific performance target is established and there is mutual understanding of the terms of the award. As of the annual report date, 46,050 share options among the First
Tranche-A has met the performance condition set forth in the grant agreements and shall vest on June 30, 2022.
In November 2020, 310,000 restricted shares were issued to certain employees with service condition and specific performance target, among which 77,500 shares (the
“First Tranche-B”) were granted on April 15, 2021 and the remaining portion will be granted when the specific performance target is established and there is mutual
understanding of the terms of the award. As of the annual report date, 16,000 shares among the First Tranche-B has met the performance condition set forth in the grant
agreements and shall vest on June 30, 2022.
Other than the restricted shares issued in November 2020, the restricted shares were awarded with non-forfeitable dividend rights before vesting.
A summary of the share options activities for years ended December 31, 2019, 2020 and 2021:
Number of
shares
Weighted
average
exercise
USD
Weighted
remaining
contractual
years
Aggregate
Intrinsic
Value
USD
Outstanding as of December 31, 2018
Granted
Exercised
Forfeited
Cancelled
Expired
Outstanding as of December 31, 2019
Granted
Exercised
Forfeited
Cancelled
Expired
Outstanding as of December 31, 2020
Granted
Exercised
Forfeited
Cancelled
Expired
Outstanding as of December 31, 2021
Vested and expected to vest as of December 31, 2021
Exercisable as of December 31, 2021
1,142,212
70,000
—
(809,712)
—
—
402,500
424,698
—
—
—
—
827,198
181,750
(62,416)
(135,700)
—
—
810,832
810,832
260,500
0.67
0.50
—
0.61
—
—
0.75
1.26
—
—
—
—
1.01
0.57
0.58
0.57
—
—
1.02
1.02
0.85
7.23
6.44
58
38
The aggregate intrinsic value of options outstanding and exercisable at December 31, 2021, was determined based on the closing price of the Company’s common shares
on December 31, 2021.
F-40
Information relating to options outstanding and exercisable as of December 31, 2021 is as follows:
Number of
Shares
Options outstanding as of December 31, 2021
Exercise
Price
per Share
USD
Remaining
Contractual
Life
Years
Number
of Shares
Options exercisable as of December 31, 2021
Exercise
Price
per Share
USD
Remaining
Contractual
Life
Years
62,500
259,584
18,000
424,698
46,050
810,832
1.71
0.58
0.53
1.26
0.57
1.02
5.05
6.85
7.21
7.60
9.01
7.23
62,500
186,250
11,750
—
—
260,500
1.71
0.58
0.53
—
—
0.85
5.05
6.85
7.21
—
—
6.44
The Company calculated the fair value of the share options on the grant date, for the years ended December 31, 2019, 2020 and 2021, using the Black-Scholes-Merton
pricing valuation model. The assumptions used in the valuation model are summarized as follows:
Expected dividend yield
Expected volatility
Expected term
Risk-free interest rate (per annum)
Year Ended December 31,
2019
2020
2021
0%
55%/54%
6.08
2.53%/2.45%
0%
57%
6.04
0.67%
0%
70%
5.40
0.90%
The expected volatility was based on the historical volatilities of the Company. The expected term was related to the period of time the options are expected to be
outstanding. The risk-free rate for periods within the contractual life of the option is based on the United States treasury yield curve in effect at the time of grant.
Compensation expense recognized for non-vested share options for the year ended December 31, 2019, 2020 and 2021 is allocated to the following expense items:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total share-based compensation expense
Year Ended December 31,
2019
RMB
2020
RMB
—
68,016
—
345,991
414,007
—
—
—
316,815
316,815
2021
RMB
62,224
6,944
6,806
476,435
552,409
As of December 31, 2021, RMB 168,295 of total unrecognized compensation expense related to non-vested share options is expected to be recognized over a weighted
average period of approximately 0.56 years.
F-41
Non-vested shares
A summary of the non-vested shares activities for the year ended December 31, 2019, 2020 and 2021 is presented below:
Outstanding at December 31, 2018
Granted
Vested
Forfeited
Cancelled
Outstanding at December 31, 2019
Granted
Vested
Forfeited
Cancelled
Outstanding at December 31, 2020
Granted
Vested
Forfeited
Cancelled
Outstanding at December 31, 2021
Number
of shares
Weighted
average
grant date
fair value
USD
0.951
—
0.885
—
—
0.933
—
1.043
0.907
—
0.955
1.545
1.112
1.545
—
0.671
1,795,498
—
(693,362)
—
—
1,102,136
—
(484,678)
(14,370)
—
603,088
77,500
(419,752)
(61,500)
—
199,336
The total fair value of shares vested during the years ended December 31, 2019, 2020 and 2021 was USD 461,309, USD 318,038 and USD 422,516 respectively.
Upon vesting of the non-vested shares, the Company withholds shares issued to the employees to meet the relevant minimum tax withholding requirements. For the years
ended December 31, 2019, 2020 and 2021, the Company withheld 28,456, 12,292 and 13,464 vested shares upon vesting of the non-vested shares to satisfy the minimum
tax withholding obligation. Compensation expense recognized for non-vested shares for the years ended December 31, 2019, 2020 and 2021 is allocated to the following
expense items:
Cost of revenues
Research and development
Sales and marketing
General and administrative
Total share-based compensation expense
2019
RMB
Year Ended December 31,
2020
RMB
—
367,313
—
4,028,134
4,395,447
—
74,861
—
1,385,107
1,459,968
2021
RMB
27,806
3,692
11,741
444,324
487,563
As of December 31, 2021, RMB 156,924 of total unrecognized compensation expense related to non-vested shares is expected to be recognized over a weighted average
period of approximately 0.74 years.
(18)
COMMON SHARES
In connection with the Huanqiuyimeng Acquisition, the Company issued 9,360,000 common shares during the fiscal year ended December 31, 2019, refer to note 3 for
details.
On December 18, 2019, the Company entered into a subscription agreement with CL-TCC, a company focusing on investments in culture and education industry, in
connection with a private placement for the Company’s common shares. ACG completed this private placement with CL-TCC on December 24, 2019, under which it
issued 5,662,634 common shares of the Company for gross proceeds of approximately $10.0 million. As of December 31, 2019, ACG has received cash consideration of
$8.8 million (RMB 61.7 million) in accordance with the payment terms of the subscription agreement. The rest of the proceeds of $1.2 million (RMB 8.5 million) was
received on April 10, 2020.
F-42
In May 2020, ACG’s Board of Directors approved a share repurchase plan authorizing the Company to repurchase up to US$1.0 million of its issued and outstanding
ADSs from the open market and through privately negotiated transactions, effective through December 31, 2020. By December 31, 2020, the Company had repurchased
450,337 ADSs at an average stock price of US$1.2631 for a total cash consideration of $0.6 million (RMB 4.0 million). This share repurchase plan expired on December
31, 2020. The Company has cumulatively used 749,253 ADSs and 957,186 ADSs purchased from the open market for settlement of vested share options and restricted
shares vesting as of December 31, 2020 and 2021 respectively.
(19)
STATUTORY RESERVES
In accordance with the relevant laws and regulations of the PRC, the Company’s PRC consolidated entities are required to transfer 10% of their respective after-tax profit,
as determined in accordance with PRC accounting standards and regulations to a general reserve fund until the balance of the fund reaches 50% of the registered capital of
the respective entity. The transfer to this general reserve fund must be made before any distribution of dividends. As of December 31, 2020 and 2021, the PRC
consolidated entities had accumulated statutory reserve balances of RMB 25,698,704 and RMB 25,698,704 , respectively, which is restricted for distribution to the
Company.
(20)
RELATED PARTY TRANSACTIONS
Purchase of IT System Consulting Service, Office Sharing Service and System Development and Data Services from an Affiliate Company
Huanqiuyimeng has purchased consulting services relating to IT system from an affiliate company, ApplySquare Education & Technology Co., Ltd. (“Applysquare”) in
October 2021. The expense recorded for the year ended December 31, 2021 was RMB 50,913.
In October 2021, Huanqiuyimeng entered into an agreement for utilizing certain office space of ApplySquare in launching a co-operation project with ApplySquare to
explore solution for potential common customers with a term from October 16, 2021 to October 15, 2022. Expenses of RMB 275,967 was recorded for the year ended
December 31, 2021 in accordance with the agreement term.
In January 2022, Huanqiuyimeng entered into an agreement with Applysquare, pursuant to which ApplySquare shall develop system platforms and provide related data
services to support Huanqiuyimeng’s operations and service delivery. The total amount of the agreement was RMB 6.5 million, which includes a one-year charge of data
and system maintenance services.
Purchase of Online Education Platform Services from an Affiliate Company
Huanqiuyimeng has subscribed services of online educational platform provided by an affiliate company, EEO Empower Education Online Co., Ltd. (“EEO”), to support
its online delivery of credit hours and other relevant services from January to June 2020. Cost of revenues in the amount of RMB 115,968 was recognized for the services
purchased during the period.
Amounts Due to a Related Party
The CEO, director and shareholder of the Company, Mr. Xiaofeng Ma has offered interest-free personal funding support of RMB 431,000 and RMB 200,000 on March 5
and March 30, 2020 respectively to Muhua Shangce, a then majority owned subsidiary of the Company, to support its operational cash needs during COVID-19, which
became due in September 2020 and was extended for one year to September 2021. The outstanding balance was RMB 631,000 as of December 31, 2020. Muhua Shangce
was disposed of in June 2021 and the related balance was derecognized from the Company’s consolidated financial statements .
F-43
Joint Liability Guarantee provided by a Related Party
Muhua Shangce has borrowed RMB 3.0 million from a third-party company at an annual interest rate of 4.35% in April 2020, for which the Company’s CEO and
Director, Mr. Xiaofeng Ma, has provided a joint liability guarantee. Muhua Shangce was disposed of in June 2021 and the related balance was derecognized from the
Company’s consolidated financial statements.
Amounts Due to a Company Controlled by a Related Party
In November 2020 and May 2021, a partnership controlled by the Company’s CEO and Director, Mr. Xiaofeng Ma provided a ten-month interest-free loan of RMB
500,000 and a fourteen-month interest free loan of RMB 700,000 to Muhua Shangce respectively. The outstanding balance was RMB500,000 as of December 31, 2020.
Muhua Shangce was disposed of in June 2021 and the related balance of RMB1,200,000 before the disposal was derecognized from the Company’s consolidated financial
statements.
Expenses paid to a Related Company on behalf of Huanqiuyimeng
From January 1, 2020 to May 14, 2020, before Shanghai Aixue Culture Communication Co., Ltd. (“Shanghai Aixue”) became a wholly owned subsidiary of the
Company, Huanqiuyimeng prepaid RMB 672,254 to Shanghai Aixue, a company previously owned by president Mr. Jun Zhang and one of the employees, and Shanghai
Aixue paid a total of RMB 483,902 of Huanqiuyimeng’s operating expenses on behalf of Huanqiuyimeng.
From the acquisition date of Huanqiuyimeng to December 31, 2019, Huanqiuyimeng prepaid RMB 1,038,494 to Shanghai Aixue, and Shanghai Aixue paid a total of
RMB 1,037,126 of Huanqiuyimeng’s operating expenses on behalf of Huanqiuyimeng. As of December 31, 2019, the outstanding balance was RMB 1,368 due from
Shanghai Aixue, which is unsecured, interest free and repayable on demand.
(21)
COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In March 2020, two of the Company’s shareholders, Alpha Advantage Global Limited (“Alpha”) and Dynamic Fame Limited (“Dynamic”) filed separate lawsuits with
the Beijing Intermediate Court against the Company and Mr. Xiaofeng Ma, the chairman and chief executive officer of the Company relating to ATA Online Sale
Transaction. The lawsuits claimed that the board of the directors of the Company did not have the right to approve ATA Online Sale Transaction, because the approval by
unrelated shareholders was required, and that the ATA Online Business was worth more than the total consideration of US$200.0 million. As a result, the sale has resulted
in loss to the plaintiffs.
The plaintiffs requested the overturn of all board resolutions of the Company regarding ATA Online Sale Transaction, Mr. Xiaofeng Ma to compensate RMB 95.0
million and RMB 5.0 million, respectively for the loss incurred by Alpha and Dynamic as a result of ATA Online Sale Transaction, and the Company and Mr. Xiaofeng
Ma jointly bear the attorney’s fees of RMB 1.5 million and RMB 0.5 million respectively for Alpha and Dynamic, and other litigation costs incurred. The Company filed
an application for jurisdiction objection for each of the foregoing two cases, which was not supported. As a result, these two cases will be heard by the Beijing
Intermediate Court.
In addition, Alpha and Dynamic jointly filed a lawsuit with Ningbo Intermediate Court against Mr. Xiaofeng Ma, certain entities controlled by management members of
ATA Online which were members of the buyer group, New Beauty Holdings Limited, a director of the Company, ChineseAll Digital Publishing Group Co., Ltd. and
ATA Learning in connection with ATA Online Sale Transaction, and listed the Company and ATA Online as interested third parties. The plaintiffs requested the overturn
of all related party transactions between the defendants and the Company relating to ATA Online Sale Transaction, and Mr. Xiaofeng Ma, the entities controlled by
management members of ATA Online and ChineseAll Digital Publishing Group Co., Ltd. to return the equity interest of ATA Online and ATA Learning they acquired to
ATA Learning and ATA BVI, as the case may be, and all defendants and the Company to jointly bear the attorney’s fees of the plaintiffs in the amount of RMB 15.0
million and other litigation cost. The case was transferred by the Ningbo Intermediate Court to the Beijing Intermediate Court for further proceeding. As of the date of
statement, this case has not yet been heard.
While it is premature at this stage of the litigations to evaluate the likelihood of favorable or unfavorable outcomes and the Company believes that the plaintiffs’ claims
are without any merits in their claims, the Company is actively preparing for the foregoing suits and shall defend itself against those allegations vigorously. The amount
of unfavorable outcomes, if any, cannot be reasonably estimated. In accordance with ASC Topic 450, no accrual of loss contingency was accrued as of December 31,
2021.
F-44
(22)
OPERATING LEASES
The Group generates rental income by leasing its own properties. Rental income under operating lease is recognized on a straight-line basis over the term of the lease,
including any periods of free rent, and is classified as “other operating income, net” after netting off relevant costs.
Property on Operating Lease
Building
Less: Accumulated depreciation
December 31,
2020
RMB
December 31,
2021
RMB
53,049,213
(20,497,038)
32,552,175
—
—
—
The operating lease entered into during the year ended December 31, 2021 has expired and there is no effective operating lease of properties as of December 31, 2021.
(23)
EARNINGS (LOSSES) PER COMMON SHARE
Basic and diluted earnings (losses) per common share are calculated as follows:
Numerator:
Net loss attributable to ATA Creativity Global
Redeemable non-controlling interest redemption value accretion
Net loss available to common shareholders
(122,253,989)
(6,008,491)
(128,262,480)
(92,198,032)
(6,184,572)
(98,382,604)
(33,649,593)
(2,283,089)
(35,932,682)
2019
RMB
Year ended December 31,
2020
RMB
2021
RMB
Denominator:
Denominator for basic loss per share:
Weighted average common shares outstanding
Denominator for diluted loss per share
Basic loss per common share from continuing operations
Diluted loss per common share from continuing operations
Basic earnings per common share from discontinued operations
Diluted earnings per common share from discontinued operations
Basic loss per common share attributable to ATA Creativity Global
Diluted loss per common share attributable to ATA Creativity Global
50,915,710
50,915,710
(2.62)
(2.62)
0.10
0.10
(2.52)
(2.52)
62,660,037
62,660,037
(1.57)
(1.57)
—
—
(1.57)
(1.57)
62,748,095
62,748,095
(0.57)
(0.57)
—
—
(0.57)
(0.57)
The following table summarizes potential common shares outstanding excluded from the calculation of diluted earnings (loss) per share for the year ended December 31,
2019, 2020 and 2021, because their effect is anti-dilutive:
Shares issuable under restricted shares and share options
402,500
827,198
810,832
2019
Year ended December 31,
2020
2021
(24)
DISCONTINUED OPERATIONS
In connection with the ATA Online Sale Transaction, a gain of RMB 4,894,197 from disposal of discontinued operations, net of income taxes, was recorded for the year
ended December 31, 2019, which was to account for the reimbursement of legal and consulting expenses from the buyer in relation to the sale of ATA Online business.
Cash inflow of RMB 4,894,197 was presented under cash received from investing activities in the consolidated statements of cash flows for the year ended December 31
2019 accordingly.
F-45
(25)
ATA CREATIVITY GLOBAL (“PARENT COMPANY”)
The following presents condensed financial information of the Parent Company only.
Condensed Balance Sheets
Cash and cash equivalents
Prepaid expenses and other current assets
Investments in subsidiaries
Total assets
Accrued expenses and other payables
Total liabilities
Common shares
Treasury shares
Additional paid in capital
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Comprehensive Income (Loss)
Cost of revenues
Operating expenses
Provision for loan receivable
Investment loss
Interest expense
Interest income
Foreign currency exchange gains (losses), net
Loss before income taxes
Income tax expense
Net loss
Other comprehensive income (loss)
Comprehensive loss
December 31,
2020
RMB
December 31,
2021
RMB
December 31,
2021
USD
2,486,636
3,983
198,028,805
200,519,424
2,114,561
2,114,561
4,716,675
(11,625,924)
541,272,503
(37,424,722)
(298,533,669)
198,404,863
200,519,424
2,235,730
3,892
187,780,984
190,020,606
2,251,514
2,251,514
4,720,147
(9,818,754)
540,583,564
(37,559,847)
(310,156,018)
187,769,092
190,020,606
Year ended December 31,
2021
RMB
2020
RMB
—
(10,748,782)
(3,943,902)
(83,753,528)
—
63,613
(5)
(98,382,604)
—
(98,382,604)
53,445
(98,329,159)
(90,029)
(6,412,398)
—
(5,120,016)
—
139
(45)
(11,622,349)
—
(11,622,349)
(135,125)
(11,757,474)
350,835
611
29,466,934
29,818,380
353,312
353,312
740,694
(1,540,777)
84,829,358
(5,893,960)
(48,670,247)
29,465,068
29,818,380
2021
USD
(14,128)
(1,006,245)
—
(803,442)
—
22
(7)
(1,823,800)
—
(1,823,800)
(21,204)
(1,845,004)
2019
RMB
—
(6,928,823)
(11,843,167)
(110,881,674)
—
1,391,183
1
(128,262,480)
—
(128,262,480)
810,197
(127,452,283)
F-46
Condensed Statements of Cash Flows
Net cash used in operating activities
Cash flows from investing activities:
Cash received from subsidiaries
Cash lent to subsidiaries
Proceeds from disposal of discontinued operations
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Cash received from Private placement
Cash received for exercise of share options
Repurchase of treasury shares
Net cash provided by (used in) financing activities
Effect of foreign exchange rate changes on cash
Net increase (decrease) in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2019
RMB
Year ended December 31,
2020
RMB
(4,797,830)
(10,150,979)
2021
RMB
(4,529,860)
2021
USD
(710,833)
—
—
4,894,197
4,894,197
3,804,240
(72,794,230)
—
(68,989,990)
61,693,192
—
—
61,693,192
810,196
62,599,755
15,396,381
77,996,136
8,530,931
—
(4,003,530)
4,527,401
(895,932)
(75,509,500)
77,996,136
2,486,636
4,113,412
(9,692)
—
4,103,720
—
232,245
—
232,245
(57,011)
(250,906)
2,486,636
2,235,730
645,484
(1,521)
—
643,963
—
36,444
—
36,444
(8,946)
(39,372)
390,207
350,835
F-47
DESCRIPTION OF SECURITIES
REGISTERED UNDER SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 2.4
The American Depositary Shares (“ADSs”), each representing two common shares of ATA Creativity Global (“we,” “our,” the “Company,” or “us”), are registered
under Section 12(b) of the Securities Exchange Act of 1934, as amended, and are listed and traded on the Nasdaq Global Market. This exhibit contains a description of the rights
of (i) the holders of our common shares and (ii) the holders of our ADSs. Our common shares underlying the ADSs are held by Citibank, N.A., as depositary, and holders of
our ADSs are not treated as holders of our common shares.
General
Our authorized share capital is US$5,000,000, divided into 500,000,000 common shares, par value US$0.01 per share. Our common shares may be certificated or
uncertificated, and ownership is not recognized until registered in our Register of Members. No shares shall be issued as bearer securities. Our common shares are not available
to the market; rather, our ADSs are traded on the Nasdaq Global Market.
We are an exempted company limited by shares, with limited liability incorporated under the Companies Act (as amended) of the Cayman Islands (the “Companies
Act”), on September 22, 2006. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their common shares. A Cayman Islands exempted
company:
•
•
•
•
•
is a company that conducts its business outside the Cayman Islands;
is exempted from certain requirements of the Companies Act, including the filing of an annual return of its shareholders with the Registrar of Companies
and holding an annual general meeting;
does not have to make its register of members open to inspection;
may obtain an undertaking against the imposition of any future taxation; and
may issue shares with no par value.
Our affairs are governed by our fourth amended and restated memorandum and articles of association, as amended (the “Memorandum and Articles of Association”)
and the Companies Act. The following summarizes the material terms of our Memorandum and Articles of Association and the Companies Act insofar as they relate to the
material terms of our common shares. This summary is not complete, and you should read our Memorandum and Articles of Association, which were filed with the U.S.
Securities and Exchange Commission (the “SEC”) and are incorporated by reference as an exhibit to the annual report of which this exhibit is a part.
The following discussion primarily addresses our common shares and the rights of holders of common shares. The holders of our ADSs are not to be treated as our
shareholders and will be required to surrender their ADSs for cancellation and withdrawal from the depositary facility in which the common shares are held in order to receive
the shares that their ADSs represent, and to exercise shareholders’ rights in respect of the common shares. However, the holders of ADSs generally have the right under the
deposit agreement to instruct the depositary bank to exercise the voting rights for the common shares represented by their ADSs. See “Description of American Depositary
Shares” below.
Meetings
Subject to the company’s regulatory requirements, an annual general meeting and any extraordinary general meeting shall be called by not less than ten clear days’
notice in writing. Notice of every general meeting will be given to all of our shareholders other than those that, under the provisions of our Memorandum and Articles of
Association or the terms of issue of the common shares they hold, are not entitled to receive such notices from us, and also to our principal external auditors. Extraordinary
general meetings may be called only by the chairman of our board of directors or a majority of our board of directors and may not be called by any other person.
1
A meeting called by shorter notice than that mentioned above, nevertheless, subject to the Companies Act, will be deemed to have been duly called, if it is so agreed
(1) in the case of a meeting called as an annual general meeting by all of our shareholders entitled to attend and vote at the meeting; (2) in the case of any other meeting, by a
majority in number of our shareholders having a right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the issued
common shares giving that right.
All general meetings (including an annual general meeting, any adjourned meeting or postponed meeting) may be held as a physical meeting, a hybrid meeting or an
electronic meeting, as may be determined by the person or persons calling the meeting or, in absence of such determination, as may be determined by our board of directors in
its absolute discretion. Two shareholders present in person or by proxy that represent not less than one-third in nominal value of our total issued and outstanding voting shares
will constitute a quorum. Any shareholder or any proxy attending and participating in an electronic meeting or a hybrid meeting by means of electronic facilities is deemed to be
present at and shall be counted in the quorum. No business other than the appointment of a chairman may be transacted at any general meeting unless a quorum is present at the
commencement of business. If present, the chairman of our board of directors shall be the chairman presiding at any shareholders meetings.
A corporation being a shareholder shall be deemed for the purpose of our Memorandum and Articles of Association to be present in person if represented by its duly
authorized representative being the person appointed by resolution of the directors or other governing body of such corporation to act as its representative at the relevant general
meeting or at any relevant general meeting of any class of our shareholders. Such duly authorized representative shall be entitled to exercise the same powers on behalf of the
corporation that he represents as that corporation could exercise if it were our individual shareholder.
The quorum for a separate general meeting of the holders of a separate class of shares is described in “—Modification of Rights” below.
Voting Rights Attaching to the Shares
Subject to any special rights or restrictions as to voting attached to any shares, in the case of a physical general meeting, on a show of hands every shareholder who is
present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) shall have one vote, and at any general meeting on a
poll every shareholder present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) shall have one vote for each fully
paid share of which such shareholder is the holder.
Under our Memorandum and Articles of Association, a resolution put to the vote of a meeting other than a physical meeting, shall be decided by way of a poll. A
resolution put to the vote of a physical meeting shall be decided on a show of hands unless voting by way of a poll is required by the rules of the Nasdaq Global Market, or a
poll is demanded by (i) the chairman of the meeting, (ii) at least three shareholders present in person or in the case of a shareholder being a corporation by its duly authorized
representative or by proxy for the time being entitled to vote at the meeting, (iii) any shareholder or shareholders present in person or in the case of a shareholder being a
corporation by its duly authorized representative or by proxy and representing not less than one-tenth of the total voting rights of all shareholders having the right to vote at the
meeting, (iv) by a shareholder or shareholders present in person or in the case of a shareholder being a corporation by its duly authorized representative or by proxy and holding
shares in the Company conferring a right to vote at a meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid on
all shares conferring that right, or (v) if required by the rules of the Nasdaq Global Market, by any director or directors of the Company who, individually or collectively, hold
proxies in respect of shares representing 5% or more of the total voting rights at such meeting.
No shareholder shall be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is duly registered as our shareholder at the
applicable record date for that meeting and all calls or installments due by such shareholder to us have been paid.
If a recognized clearing house (or its nominee(s)), being a corporation, is our shareholder, it may authorize such person or persons as it thinks fit to act as its
representative(s) at any meeting or at any meeting of any class of shareholders provided that, if more than one person is so authorized, the authorization shall specify the
number and class of shares in respect of which each such person is so authorized. A person
2
authorized pursuant to this provision is entitled to exercise the same powers on behalf of the recognized clearing house (or its nominee(s)) as if such person was the registered
holder of our shares held by that clearing house (or its nominee(s)) including the right to vote individually on a show of hands.
Protection of Minority Shareholders
The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one-fifth of our shares in issue, appoint an inspector to examine
our affairs and to report thereon in a manner as the Grand Court of the Cayman Islands shall direct.
Any shareholder may petition that the Grand Court of the Cayman Islands may make a winding up order, if the court is of the opinion that it is just and equitable that
we should be wound up.
Claims against us by our shareholders must, as a general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual
rights as shareholders as established by our Memorandum and Articles of Association.
The Cayman Islands courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative
action against, or derivative actions in our name to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a fraud against the minority and the
wrongdoers are themselves in control of us, and (3) an irregularity in the passing of a resolution which requires a qualified (or special) majority.
Pre-Emption Rights
There are no pre-emption rights applicable to the issue of new shares under either Cayman Islands law or our Memorandum and Articles of Association.
Liquidation Rights
Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes
of shares, (1) if we are wound up and the assets available for distribution among our shareholders are more than sufficient to repay the whole of the capital paid up at the
commencement of the winding up, the excess shall be distributed pari passu among those shareholders in proportion to the amount paid up at the commencement of the
winding up on the shares held by them, respectively; and (2) if we are wound up and the assets available for distribution among the shareholders as such are insufficient to repay
the whole of the paid-up capital, those assets shall be distributed so that, as nearly as may be, the losses shall be borne by the shareholders in proportion to the capital paid up at
the commencement of the winding up on the shares held by them, respectively.
If we are wound up, the liquidator may with the sanction of our special resolution and any other sanction required by the Companies Act, divide among our
shareholders in specie or kind the whole or any part of our assets (whether or not they shall consist of properties of the same kind) and may, for such purpose, set such value as
the liquidator deems fair upon any property to be divided and may determine how such division shall be carried out as between the shareholders or different classes of
shareholders. The liquidator may also vest any part of these assets in trustees upon such trusts for the benefit of the shareholders as the liquidator shall think fit, but so that no
shareholder will be compelled to accept any shares or other property upon which there is a liability.
Modification of Rights
Except with respect to share capital (as described below) and the location of the registered office, alterations to our Memorandum and Articles of Association may
only be made by special resolution, meaning a majority of not less than two-thirds of votes cast at a shareholders meeting.
Subject to the Companies Act and without prejudice to the provisions relating to share rights in our Memorandum and Articles of Association, all or any of the special
rights attached to shares of any class (unless otherwise provided for by the terms of issue of the shares of that class) may be varied, modified or abrogated with the sanction of a
special resolution passed at a separate general meeting of the holders of the shares of that class. The provisions of our Memorandum and Articles of Association relating to
general meetings shall apply similarly to every such separate general meeting, but so that the quorum for the purposes of any such separate general meeting or at its adjourned
meeting shall be a person or persons together holding
3
(or represented by proxy) on the date of the relevant meeting not less than one-third in nominal value of the issued shares of that class, that every holder of shares of the class
shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class present in person or by proxy may demand a poll.
The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of
such shares, be deemed to be varied, modified or abrogated by the creation or issue of further shares ranking pari passu therewith.
Alteration of Capital
We may from time to time by the vote of a majority of the shares entitled to vote thereon (an “ordinary resolution”):
•
•
•
•
•
increase our capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;
consolidate and divide all or any of our share capital into shares of larger amounts than our existing shares;
cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person, and diminish the amount of our
share capital by the amount of the shares so cancelled subject to the provisions of the Companies Act;
sub-divide our shares or any of them into shares of smaller amounts than is fixed by our fourth amended and restated memorandum of association, subject
nevertheless to the Companies Act, and so that the resolution whereby any share is sub-divided may determine that, as between the holders of the shares
resulting from such subdivision, one or more of the shares may have any such preferred, deferred or other rights, or be subject to any such restrictions as
compared with the others as we have power to attach to unissued or new shares; and
divide our shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares, attach to these
shares respectively any preferential, deferred, qualified or special rights, privileges, conditions or such restrictions that in the absence of any such
determination in general meeting may be determined by our directors.
We may, by the vote of two-thirds of the votes entitled to vote thereon (a “special resolution”), subject to any confirmation or consent required by the Companies
Act, reduce our share capital or any capital redemption or other undistributable reserve in any manner authorized by law.
Transfer of Shares
Subject to any applicable restrictions set forth in our Memorandum and Articles of Association, any of our shareholders may transfer all or any of his or her shares by
an instrument of transfer in the usual or common form or in a form prescribed by the Nasdaq Global Market or in any other form that our directors may approve.
Our directors may decline to register any transfer of any share which is not paid up or on which we have a lien. Our directors may also decline to register any transfer
of any share unless:
•
•
•
•
the instrument of transfer is lodged with us accompanied by the certificate for the shares to which it relates and such other evidence as our directors may
reasonably require to show the right of the transferor to make the transfer;
the instrument of transfer is in respect of only one class of share;
the instrument of transfer is properly stamped (in circumstances where stamping is required); and
a fee of such maximum sum as the Nasdaq Global Market may determine to be payable or such lesser sum as our directors may from time to time require is
paid to us in respect thereof.
If our directors refuse to register a transfer, they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor
and the transferee notice of such refusal.
4
The registration of transfers may, on notice being given by announcement or by electronic communication or by advertisement in such one or more newspapers or by
any other means in accordance with the requirements of the Nasdaq Global Market, be suspended and the register closed at such times and for such periods as our directors may
from time to time determine; provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our
directors may determine, unless the Members by ordinary resolution approve to extend the period of 30 days in respect of any year.
Share Repurchase
We are empowered by the Companies Act and our Memorandum and Articles of Association to purchase our own shares, subject to certain restrictions. Our directors
may only exercise this power on our behalf, subject to the Companies Act, our Memorandum and Articles of Association and to any applicable requirements imposed from time
to time by the Nasdaq Global Market, the SEC, or by any other recognized stock exchange on which our securities are listed.
Dividends
Subject to the Companies Act, our directors may declare dividends in any currency to be paid to our shareholders. Dividends may be declared and paid out of our
profits, realized or unrealized, or from any reserve set aside from profits which our directors determine is no longer needed. Our board of directors may also declare and pay
dividends out of the share premium account or any other fund or account that can be authorized for this purpose in accordance with the Companies Act.
Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provides, (1) all dividends shall be declared and paid according to the amounts
paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for this purpose as paid up on that share; and
(2) all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions of the period in respect of which the
dividend is paid.
Our directors may also pay any dividend that is payable on any shares semi-annually or on any other dates, whenever our financial position, in the opinion of our
directors, justifies such payment.
Our directors may deduct from any dividend or bonus payable to any shareholder all sums of money (if any) presently payable by such shareholder to us on account
of calls or otherwise.
No dividend or other money payable by us on or in respect of any share shall bear interest against us.
In respect of any dividend proposed to be paid or declared on our share capital, our directors may resolve and direct that (1) such dividend be satisfied wholly or in
part in the form of an allotment of shares credited as fully paid up, provided that our shareholders entitled thereto will be entitled to elect to receive such dividend (or part
thereof if our directors so determine) in cash in lieu of such allotment or (2) the shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares
credited as fully paid up in lieu of the whole or such part of the dividend as our directors may think fit. Our directors may also resolve in respect of any particular dividend that,
notwithstanding the foregoing, a dividend may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders to
elect to receive such dividend in cash in lieu of such allotment.
Any dividend, interest or other sum payable in cash to the holder of shares may be paid by check or dividend warrant sent by mail addressed to the holder at his
registered address, or addressed to such person and at such addresses as the holder may direct. Every check or dividend warrant shall, unless the holder or joint holders
otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the register in respect of such
shares, and shall be sent at his or their risk and payment of the check or dividend warrant by the bank on which it is drawn shall constitute a good discharge to us.
All dividends unclaimed for one year after having been declared may be invested or otherwise made use of by our board of directors for the benefit of our company
until claimed. Any dividend unclaimed after a period of six years from the date of declaration of such dividend shall be forfeited and shall revert to us.
Whenever our directors have resolved that a dividend be paid or declared, our directors may further resolve that such dividend be satisfied wholly or in part by the
distribution of specific assets of any kind, and
5
in particular of paid up shares, debentures or warrants to subscribe for our securities or securities of any other company. Where any difficulty arises with regard to such
distribution, our directors may settle it as they think expedient. In particular, our directors may issue fractional certificates, ignore fractions altogether or round the same up or
down, fix the value for distribution purposes of any such specific assets, determine that cash payments shall be made to any of our shareholders upon the footing of the value so
fixed in order to adjust the rights of the parties, vest any such specific assets in trustees as may seem expedient to our directors, and appoint any person to sign any requisite
instruments of transfer and other documents on behalf of the persons entitled to the dividend, which appointment shall be effective and binding on our shareholders.
Untraceable Shareholders
We are entitled to sell any shares of a shareholder who is untraceable, provided that:
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all checks or warrants in respect of dividends of such shares, being not less than three in total number, for any sums payable in cash to the holder of such
shares have remained un-cashed for a period of 12 years prior to the publication of the advertisement and during the three months referred to below;
we have not during that time received any indication of the existence of the shareholder or person entitled to such shares by death, bankruptcy or operation of
law; and
we have caused an advertisement to be published in newspapers in the manner stipulated by our Memorandum and Articles of Association, giving notice of
our intention to sell these shares, and a period of three months has elapsed since such advertisement and the Nasdaq Global Market has been notified of such
intention.
The net proceeds of any such sale shall belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal
to such net proceeds.
Differences in Corporate Law
The Companies Act is modeled after similar laws in England but does not follow recent changes in English laws. In addition, the Companies Act differs from laws
applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Act
applicable to us and the laws applicable to companies incorporated in the United States.
Mergers and Similar Arrangements. The Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands
companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent companies and the vesting of their undertaking,
property and liabilities in one of such companies as the surviving company and (b) a “consolidation” means the combination of two or more constituent companies into a
combined company and the vesting of the undertaking, property and liabilities of such companies in the consolidated company. In order to effect such a merger or
consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of
the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. The written
plan of merger or consolidation must be filed with the Registrar of Companies together with, among others, a declaration as to the solvency of the consolidated or surviving
company, a statement of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the
members and creditors of each constituent company and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Dissenting
shareholders have the right to be paid the fair value of their shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the
required procedures, subject to certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that
Cayman subsidiary if a copy of the plan of merger is given to every member of that Cayman subsidiary to be merged unless that member agrees otherwise. For this purpose a
company is a “parent” of a subsidiary if it holds issued shares that together represent at least ninety percent (90%) of the votes at a general meeting of the subsidiary.
6
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman
Islands.
Save in certain limited circumstances, a shareholder of a Cayman constituent company who dissents from the merger or consolidation is entitled to payment of the
fair value of his shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) upon dissenting to the merger or consolidation, provided
that the dissenting shareholder complies strictly with the procedures set out in the Companies Act. The exercise of dissenter rights will preclude the exercise by the dissenting
shareholder of any other rights to which he or she might otherwise be entitled by virtue of holding shares, save for the right to seek relief on the ground that the merger or
consolidation is void or unlawful.
Separate from the statutory provisions relating to mergers and consolidations, the Companies Act also contains statutory provisions that facilitate the reconstruction
and amalgamation of companies by way of schemes of arrangement, provided that the arrangement is approved by a majority in number of each class of shareholders or
creditors with whom the arrangement is to be made, and who must in addition represent seventy-five per cent in value of each such class of shareholders or creditors, as the case
may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the
arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction
ought not to be approved, the court can be expected to approve the arrangement if it determines that:
•
•
•
•
the statutory provisions as to the required majority vote have been met;
the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to
promote interests adverse to those of the class;
the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and
the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act.
The Companies Act also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of dissentient minority shareholder upon a
tender offer. When a tender offer is made and accepted by holders of 90.0% of the shares affected within four months, the offeror may, within a two-month period commencing
on the expiration of such four-month period, by notice in the prescribed manner require the holders of the remaining shares to transfer such shares to the offeror on the terms of
the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is
evidence of fraud.
If an arrangement and reconstruction by way of scheme of arrangement is thus approved and sanctioned, or if a tender offer is made and accepted, in accordance with
the foregoing statutory procedures, a dissenting shareholder would have no rights comparable to appraisal rights which would otherwise ordinarily be available to dissenting
shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholders’ Suits. In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company, and as a general rule a derivative action may
not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, the Cayman
Islands court can be expected to follow and apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) so that a non-
controlling shareholder may be permitted to commence a class action against or derivative actions in the name of the company to challenge actions where:
•
•
a company acts or proposes to act illegally or ultra vires;
the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and
7
•
those who control the company are perpetrating a “fraud on the minority.”
Corporate Governance. Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a fiduciary duty
to the companies for which they serve. Under our Memorandum and Articles of Association, subject to any separate requirement for audit committee approval under the
applicable rules of the Nasdaq Stock Market, Inc. or unless disqualified by the chairman of the relevant board meeting, so long as a director discloses the nature of his interest in
any contract or arrangement which he is interested in, such a director may vote in respect of any contract or proposed contract or arrangement in which such director is
interested and may be counted in the quorum at such meeting.
Indemnification of Directors and Executive Officers and Limitation of Liability. The ability of Cayman Islands companies to provide in their articles of association for
indemnification of officers and directors is limited, insofar as it is not permissible for the directors to contract out of the core fiduciary duties they owe to the company, nor
would any indemnity be effective if it were held by the Cayman Islands courts to be contrary to public policy, which would include any attempt to provide indemnification
against civil fraud or the consequences of committing a crime. Our Memorandum and Articles of Association provide that our directors and officers shall be indemnified
against all actions, costs, charges, losses, damages and expenses they shall or may incur or sustain by or by reason of any act done, concurred in or omitted in or about the
execution of their duty, or supposed duty, in their respective offices or trusts; and none of them shall be answerable for the acts, receipts, neglects or defaults of the other or
others of them or for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to the Company shall or
may be lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the Company shall be placed out on or
invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices, or in relation thereto; provided that such indemnity shall not
extend to any matter in respect of any fraud or dishonesty which may attach to any of our directors and officers. In addition, each shareholder agrees to waive any claim or right
of action he might have, whether individually or by or in the right of the Company, against any director on account of any action taken by such director, or the failure of such
director to take any action in the performance of his duties with or for the Company; provided that such waiver shall not extend to any matter in respect of any fraud or
dishonesty which may attach to such director.
Anti-Takeover Provisions in Our Memorandum and Articles of Association. Some provisions of our Memorandum and Articles of Association may discourage, delay
or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue
preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our
shareholders, and the fact that we have a classified board of directors, with three classes of directors, each of which stands for election in a given year to serve for a term of three
years, unless a director earlier resigns or is removed.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our Memorandum and Articles of Association, as
amended and restated from time to time, for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This
duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person
would exercise under similar circumstances. Under this duty, a director must inform himself of all material information reasonably available regarding a significant transaction.
The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests of the corporation and its stockholders. He or she must not
use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its
shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a
director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However,
this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director
must prove the procedural fairness of the transaction and that the transaction was of fair value to the corporation.
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As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore he owes duties
to the company including the following—a duty to act in good faith in the best interests of the company, a duty not to make a personal profit based on his or her position as
director (unless the company permits him to do so), a duty not to put himself in a position where the interests of the company conflict with his or her personal interest or his or
her duty to a third party and a duty to exercise powers for the purpose for which such powers were intended. A director of a Cayman Islands company owes to the company a
duty to act with diligence, skill and care. A director must exercise the skill and care of a reasonably diligent person having both – (a) the general knowledge, skill and
experience that may reasonably be expected of a person in the same position (an objective test), and (b) if greater, the general knowledge, skill and experience that that director
actually possesses (a subjective test).
Shareholder Proposals. Under the SEC’s rules and regulations, a shareholder has the right to put any proposal before the annual meeting of shareholders of a public
company, provided it complies with the notice provisions in the governing documents. The Delaware General Corporation Law does not provide shareholders an express right to
put any proposal before the annual meeting of shareholders, but in keeping with common law, Delaware corporations generally afford shareholders an opportunity to make
proposals and nominations provided that they comply with the notice provisions in the certificate of incorporation or bylaws. A special meeting may be called by the board of
directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
Cayman Islands law does not provide shareholders with any right to table resolutions at a general meeting. Our Memorandum and Articles of Association provide
that, an annual general meeting of the Company shall be held in each year other than the year of the Company's incorporation; each general meeting, other than an annual
general meeting, shall be called an extraordinary general meeting, which may be called only by the chairman of our board of directors or a majority of our board of directors
and may not be called by any other person. As an exempted Cayman Islands company, we are not obliged by law to hold shareholders’ annual general meetings under the
Companies Act.
Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of
incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the
minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such
director. Cayman Islands law does not prohibit cumulative voting, but our Memorandum and Articles of Association do not provide for cumulative voting. As a result, our
shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Appointment of Directors. The shareholders may by ordinary resolution elect any person to be a director to fill a casual vacancy, and by special resolution elect any
person to be a director as an addition to the existing board of directors. The directors may appoint any person as a director to fill a casual vacancy on the board of directors or as
an addition to the existing board of directors. Any director appointed by the board of directors to fill a casual vacancy shall, unless designated by the board of directors as a class
A director, a class B director or a class C director, hold office until the first general meeting after his appointment and be subject to re-election at such meeting, and
any director appointed by the board of directors as an addition to the existing board of directors shall hold office only until the next following annual general meeting of the
Company and shall then be eligible for re-election.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the
approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our Memorandum and Articles of Association,
directors may be removed at any time by special resolution of our shareholders notwithstanding any agreement between the Company and such director (but without prejudice
to any claim for damages under such agreement).
Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to Delaware public
corporations whereby, unless the corporation has specifically elected not to be governed by such statute in its certificate of incorporation or bylaws, it is prohibited from
engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested
shareholder generally
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is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock or who or which is an affiliate or associate of the corporation and
owned 15% or more of the corporation’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-
tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder
becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested
shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination
statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must
be entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be
approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple
majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in
connection with dissolutions initiated by the board.
Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its shareholders or, if the
company is unable to pay its debts as they fall due, by an ordinary resolution of its shareholders. The court has authority to order winding up in a number of specified
circumstances including where it is, in the opinion of the court, just and equitable to do so. Under the Companies Act and our Memorandum and Articles of Association, our
company may be dissolved, liquidated or wound up by a special resolution of our shareholders.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of
the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under our Memorandum and Articles of Association, subject to the Companies
Act and without prejudice to the provisions relating to share rights in our Memorandum and Articles of Association, we may only vary the rights attached to any class of shares
(subject to the terms of issue of the shares of that class) with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class.
Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended only if adopted and
declared advisable by the board of directors and approved by a majority of the outstanding shares entitled to vote and the bylaws may be amended with the approval of a
majority of the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors. Under the Companies
Act, our Memorandum and Articles of Association may only be amended by special resolution of our shareholders.
Rights of Non-Resident or Foreign Shareholders. There are no limitations imposed by our Memorandum and Articles of Association on the rights of non-resident or
foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our Memorandum and Articles of Association governing the
ownership threshold above which shareholder ownership must be disclosed.
Directors’ Power to Issue Shares. Under our Memorandum and Articles of Association, our board of directors is empowered to issue or allot shares or grant options
and warrants with or without preferred, deferred, qualified or other special rights or restrictions.
Issuance of Additional Common Shares or Preferred Shares
Our Memorandum and Articles of Association authorizes our board of directors to issue additional common shares from time to time as our board of directors shall
determine, to the extent of available authorized but unissued shares.
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Our Memorandum and Articles of Association authorize our board of directors to establish from time to time one or more series of preferred shares and to determine,
with respect to any series of preferred shares, the terms and rights of that series, including:
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•
•
•
the designation of the series;
the number of shares of the series;
the dividend rights, dividend rates, conversion rights, voting rights; and
the rights and terms of redemption and liquidation preferences.
Our board of directors may issue series of preferred shares without action by our shareholders to the extent of authorized but unissued shares. Accordingly, the
issuance of preferred shares may adversely affect the rights of the holders of the common shares. In addition, the issuance of preferred shares may be used as an anti-takeover
device without further action on the part of the shareholders. Issuance of preferred shares may dilute the voting power of holders of common shares.
Subject to applicable regulatory requirements, our board of directors may issue additional common shares without action by our shareholders to the extent of
available authorized but unissued shares. The issuance of additional common shares may be used as an anti-takeover device without further action on the part of the
shareholders. Such issuance may dilute the voting power of existing holders of common shares.
Inspection of Books and Records
Holders of our common shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records.
However, our Memorandum and Articles of Association provide that our register of members will be open to inspection for such times and on such days as our board of
directors shall determine. Our accounting and other records are not available for inspection (other than by the board of directors) unless otherwise provided by applicable law,
authorized by the board of the directors, or by the shareholders in a general meeting. However, we will provide our shareholders with annual audited financial statements.
DESCRIPTION OF AMERICAN DEPOSITARY SHARES
General
American Depositary Shares are frequently referred to as “ADSs” and represent ownership interests in securities that are on deposit with a depositary bank. ADSs
may be represented by certificates that are commonly known as “American Depositary Receipts” or “ADRs.”
Citibank, N.A. (the “depositary” or the “depositary bank”) has agreed to act as the depositary bank for the American Depositary Shares. Citibank, N.A.’s depositary
offices are located at 388 Greenwich Street, New York, New York 10013, U.S.A. A depositary bank typically appoints a custodian to safekeep the securities on deposit. In this
case, the custodian is Citibank Hong Kong (the “custodian”). We appointed Citibank, N.A. as depositary bank pursuant to a deposit agreement, which has been filed with the
SEC under cover of a Registration Statement on Form F-6 and is incorporated by reference as an exhibit to the annual report of which this exhibit is a part.
We are providing you with a summary description of the material terms of the ADSs and of your material rights as an owner of ADSs. Please remember that
summaries by their nature lack the precision of the information summarized and that a holder’s rights and obligations as an owner of ADSs will be determined by reference to
the terms of the deposit agreement and not by this summary. The portions of this summary description that are italicized describe matters that may be relevant to the ownership
of ADSs but that may not be contained in the deposit agreement. This summary is not complete, and you should read the entire deposit agreement.
Each ADS represents rights with regard to two common shares on deposit with the custodian, including the right to receive any other property received by the
depositary bank or the custodian on behalf of the owner of the ADS but that has not been distributed to the owners of ADSs because of legal restrictions or practical
considerations, and to instruct the depositary bank how you would like to vote the common shares which your ADSs represent. We and the depositary bank may agree to
change the ADS-to-common share ratio by amending the deposit agreement. This amendment may give rise to, or change, the depositary fees payable
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by ADS owners. The custodian, the depositary bank and their respective nominees will hold all deposited property for the benefit of the holders and beneficial owners of
ADSs. The deposited property does not constitute the proprietary assets of the depositary bank, the custodian or their nominees. Beneficial ownership in the deposited property
will under the terms of the deposit agreement be vested in the beneficial owners of the ADSs. The depositary bank, the custodian and their respective nominees will be the
record holders of the deposited property represented by the ADSs for the benefit of the holders and beneficial owners of the corresponding ADSs. A beneficial owner of ADSs
may or may not be the holder of ADSs. Beneficial owners of ADSs will be able to receive, and to exercise beneficial ownership interests in, the deposited property only through
the registered holders of the ADSs, the registered holders of the ADSs (on behalf of the applicable ADS owners) only through the depositary bank, and the depositary bank (on
behalf of the owners of the corresponding ADSs) directly, or indirectly, through the custodian or their respective nominees, in each case upon the terms of the deposit
agreement.
If you are an owner of ADSs, you are party to the deposit agreement and therefore will be bound to its terms and to the terms of the ADR that represents your ADSs.
The deposit agreement and the ADRs specify our rights and obligations as well as your rights and obligations as an owner of ADSs and those of the depositary bank. As a
holder of our ADSs, you appoint the depositary bank to act on your behalf in certain circumstances. The deposit agreement and the ADRs are governed by New York law.
However, our obligations to the holders of common shares will continue to be governed by the laws of the Cayman Islands, which may be different from the laws of the United
States.
In addition, applicable laws and regulations may require you to satisfy reporting requirements and obtain regulatory approvals in certain circumstances. You are
solely responsible for complying with such reporting requirements and obtaining such approvals. Neither the depositary bank, the custodian, us nor any of their or our respective
agents or affiliates shall be required to take any actions whatsoever on your behalf to satisfy such reporting requirements or obtain such regulatory approvals under applicable
laws and regulations.
As an owner of ADSs, we will not treat you as one of our shareholders and you will not have direct shareholder rights. The depositary bank will hold on your behalf
the shareholder rights attached to the common shares underlying your ADSs. As an owner of ADSs you will be able to exercise the shareholders rights for the common shares
represented by your ADSs through the depositary bank only to the extent contemplated in the deposit agreement. To exercise any shareholder rights not contemplated in the
deposit agreement you will, as an ADS owner, need to arrange for the cancellation of your ADSs and become a direct shareholder.
The manner in which you own the ADSs (e.g., in a brokerage account vs. as registered holder, or as holder of certificated vs. uncertificated ADSs) may affect your
rights and obligations, and the manner in which, and extent to which, the depositary bank’s services are made available to you. As an owner of ADSs, you may hold your ADSs
either by means of an ADR registered in your name, through a brokerage account, or through an account established by the depositary bank in your name reflecting the
registration of uncertificated ADSs directly on the books of the depositary bank (commonly referred to as the “direct registration system”). The direct registration system reflects
the uncertificated (book-entry) registration of ownership of ADSs by the depositary bank. Under the direct registration system, ownership of ADSs is evidenced by periodic
statements issued by the depositary bank to the holders of the ADSs. The direct registration system includes automated transfers between the depositary bank and The
Depository Trust Company (“DTC”), the central book-entry clearing and settlement system for equity securities in the United States. If you decide to hold your ADSs through
your brokerage or safekeeping account, you must rely on the procedures of your broker or bank to assert your rights as an ADS owner. Banks and brokers typically hold
securities such as ADSs through clearing and settlement systems such as DTC. The procedures of such clearing and settlement systems may limit your ability to exercise your
rights as an owner of ADSs. Please consult with your broker or bank if you have any questions concerning these limitations and procedures. All ADSs held through DTC will
be registered in the name of a nominee of DTC. No ADSs will be issued in bearer form. This summary description assumes you have opted to own the ADSs directly by means
of an ADR registered in your name and, as such, we will refer to you as the “holder.” When we refer to “you,” we assume the reader owns ADSs and will own ADSs at the
relevant time. If you hold your ADSs through a brokerage, please consult your broker for their own procedures regarding the topics discussed below.
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The registration of the common shares in the name of the depositary bank or the custodian shall, to the maximum extent permitted by applicable law, vest in the
depositary bank or the custodian the record ownership in the applicable common shares with the beneficial ownership rights and interests in such common shares being at all
times vested with the beneficial owners of the ADSs representing the common shares. The depositary bank or the custodian shall at all times be entitled to exercise the beneficial
ownership rights in all deposited property, in each case only on behalf of the holders and beneficial owners of the ADSs representing the deposited property.
Notices
The depositary bank shall arrange, at our request and expense, to provide copies thereof to all holders or make such notices, reports and other communications,
including proxy soliciting materials, available to all holders on a basis similar to that for holders of common shares or on such other basis as we may advise the depositary bank
or as may be required by any applicable law, regulation or stock exchange requirement.
On or before the first date on which we give notice, by publication or otherwise, of any meeting of holders of common shares or of any adjourned meeting or of the
taking of any action by such holders other than at a meeting, or of the taking of any action in respect of any cash or other distributions or the offering of any rights in respect of
our common shares, we will transmit to the depositary bank and the custodian a copy of the notice thereof in the English language but otherwise in the form given or to be given
to holders of our common shares. The Company shall also furnish to the custodian and the depositary bank a summary, in English, of any applicable provisions or proposed
provisions of the Memorandum and Articles of Association that may be relevant or pertain to such notice of meeting or be the subject of a vote thereat.
The depositary bank will, at our expense, make available a copy of any such notices, reports or communications issued by us and delivered to the depositary bank for
inspection by the holders of the ADSs at the depositary bank’s principal office, at the office of the custodian and at any other designated transfer office.
Dividends and Distributions
As a holder, you generally have the right to receive the distributions we make on the securities deposited with the custodian bank. Your receipt of these distributions
may be limited, however, by practical considerations and legal limitations. Holders will receive such distributions under the terms of the deposit agreement in proportion to the
number of ADSs held as of a specified record date.
Distributions of Cash
Whenever we make a cash distribution for the securities on deposit with the custodian, we will give prior notice thereof to the depositary bank and we will deposit the
funds with the custodian. Upon receipt of confirmation of the deposit of the requisite funds, the depositary bank will arrange, if necessary, for the funds to be converted into U.S.
dollars and for the distribution of the U.S. dollars to the holders, subject to the laws of the Cayman Islands and regulations.
The conversion into U.S. dollars will take place only if practicable and if the U.S. dollars are transferable to the United States. The amounts distributed to holders will
be net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. The depositary bank will apply the same method for
distributing the proceeds of the sale of any property (such as undistributed rights) held by the custodian in respect of securities on deposit.
The depositary bank will hold any cash amounts it is unable to distribute in a non-interest bearing account for the benefit of the applicable holders and beneficial
owners of ADSs until the distribution can be effected or the funds that the depositary bank holds must be escheated as unclaimed property in accordance with the laws of the
relevant states of the United States.
Distributions of Shares
Whenever we make a free distribution of common shares for the securities on deposit with the custodian, we will give prior notice thereof to the depositary bank. The
depositary bank will either distribute to holders new ADSs representing the common shares deposited or modify the ADS-to-common shares ratio, in which case each ADS you
hold will represent rights and interests in the additional common shares so
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deposited. Only whole new ADSs will be distributed. Fractional entitlements will be sold and the proceeds of such sale will be distributed as in the case of a cash distribution.
The distribution of new ADSs or the modification of the ADS-to-common shares ratio upon a distribution of common shares will be made net of the fees, expenses,
taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes or governmental charges, the depositary bank may sell
all or a portion of the new common shares so distributed.
No such distribution of new ADSs will be made if it would violate applicable law or if it is not operationally practicable. If the depositary bank does not distribute
new ADSs as described above, it may sell the common shares received upon the terms described in the deposit agreement and will distribute the proceeds of the sale as in the
case of a distribution of cash.
Distributions of Rights
Whenever we intend to distribute rights to purchase additional common shares, we will give prior notice to the depositary bank and we will assist the depositary bank
in determining whether it is lawful and reasonably practicable to distribute rights to purchase additional ADSs to holders.
The depositary bank will establish procedures to distribute rights to purchase additional ADSs to holders and to enable such holders to exercise such rights if it is
lawful and reasonably practicable to make the rights available to holders of ADSs, and if we provide all of the documentation contemplated in the deposit agreement (such as
opinions to address the lawfulness of the transaction). You may have to pay fees, expenses, taxes and other governmental charges to subscribe for the new ADSs upon the
exercise of your rights. The depositary bank is not obligated to establish procedures to facilitate the distribution and exercise by holders of rights to purchase new common
shares other than in the form of ADSs.
The depositary bank will not distribute the rights to you if:
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We do not timely request that the rights be distributed to you or we request that the rights not be distributed to you;
We fail to deliver satisfactory documents to the depositary bank; or
It is not reasonably practicable to distribute the rights.
The depositary bank will sell the rights that are not exercised or not distributed if such sale is lawful and reasonably practicable. The proceeds of such sale will be
distributed to holders as in the case of a cash distribution. If the depositary bank is unable to sell the rights, it will allow the rights to lapse.
Elective Distributions
Whenever we intend to distribute a dividend payable at the election of shareholders either in cash or in additional common shares, we will give prior notice thereof to
the depositary bank and will indicate whether we wish the elective distribution to be made available to you. In such case, we will assist the depositary bank in determining
whether such distribution is lawful and reasonably practicable.
The depositary bank will make the election available to you only if it is reasonably practical and if we have provided all of the documentation contemplated in the
deposit agreement. In such case, the depositary bank will establish procedures to enable you to elect to receive either cash or additional ADSs, in each case as described in the
deposit agreement.
If the election is not made available to you, you will receive either cash or additional ADSs, depending on what a shareholder would receive upon failing to make an
election, as more fully described in the deposit agreement.
Other Distributions
Whenever we intend to distribute property other than cash, common shares or rights to purchase additional common shares, we will notify the depositary bank in
advance and will indicate whether we wish such distribution to be made to you. If so, we will assist the depositary bank in determining whether such distribution to holders is
lawful and reasonably practicable.
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If it is reasonably practicable to distribute such property to you and if we provide all of the documentation contemplated in the deposit agreement, the depositary bank
will distribute the property to the holders in a manner it deems practicable.
The distribution will be made net of fees, expenses, taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such
taxes and governmental charges, the depositary bank may sell all or a portion of the property received.
The depositary bank will not distribute the property to you and will sell the property if:
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We do not request that the property be distributed to you or if we ask that the property not be distributed to you;
We do not deliver satisfactory documents to the depositary bank; or
The depositary bank determines that all or a portion of the distribution to you is not reasonably practicable.
The proceeds of such a sale will be distributed to holders as in the case of a cash distribution.
Redemptions
Whenever we decide to redeem any of the securities on deposit with the custodian, we will notify the depositary bank. If it is reasonably practicable and if we provide
all of the documentation contemplated in the deposit agreement, the depositary bank will provide a notice of the redemption to the holders.
The custodian will be instructed to surrender the common shares being redeemed against payment of the applicable redemption price. The depositary bank will
convert the redemption funds received into U.S. dollars upon the terms of the deposit agreement and will establish procedures to enable holders to receive the net proceeds from
the redemption upon surrender of their ADSs to the depositary bank. You may have to pay fees, expenses, taxes and other governmental charges upon the redemption of your
ADSs. If less than all ADSs are being redeemed, the ADSs to be retired will be selected by lot or on a pro rata basis, as the depositary bank may determine.
Changes Affecting Shares
The common shares held on deposit for your ADSs may change from time to time. For example, there may be a change in nominal or par value, a split-up,
cancellation, consolidation or reclassification of such common shares or a recapitalization, reorganization, merger, consolidation or sale of assets.
If any such change were to occur, your ADSs would, to the extent permitted by law and the deposit agreement, represent the right to receive the property received or
exchanged in respect of the common shares held on deposit. The depositary bank may in such circumstances deliver new ADSs to you, amend the deposit agreement, the ADRs
and the applicable Registration Statement(s) on Form F-6, or call for the exchange of your existing ADSs for new ADSs and take any other actions that are appropriate to reflect
as to the ADSs the change affecting the common shares. If the depositary bank may not lawfully distribute such property to you, the depositary bank may sell such property and
distribute the net proceeds to you as in the case of a cash distribution.
Issuance of ADSs upon Deposit of Common Shares
The depositary bank may create ADSs on your behalf if you or your broker deposit common shares with the custodian. The depositary bank will deliver these ADSs
to the person you indicate only after you pay any applicable issuance fees and any charges and taxes payable for the transfer of the common shares to the custodian. Your ability
to deposit common shares and receive ADSs may be limited by U.S. and Cayman Islands legal considerations applicable at the time of deposit.
The issuance of ADSs may be delayed until the depositary bank or the custodian receives confirmation that all required approvals have been given and that the
common shares have been duly transferred to the custodian. The depositary bank will only issue ADSs in whole numbers.
If you make a deposit of common shares, you will be responsible for transferring good and valid title to the depositary bank. As such, you will be deemed to represent
and warrant that:
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The common shares are duly authorized, validly issued, fully paid, non-assessable and legally obtained.
All preemptive (and similar) rights, if any, with respect to such common shares have been validly waived or exercised.
You are duly authorized to deposit the common shares.
The common shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and
the ADSs issuable upon such deposit will not be, “restricted securities” (as defined in the deposit agreement).
The common shares presented for deposit have not been stripped of any rights or entitlements.
If any of the representations or warranties are incorrect in any way, we and the depositary bank may, at your cost and expense, take any and all actions necessary to
correct the consequences of the misrepresentations.
Transfer, Combination and Split Up of ADRs
As an ADR holder, you will be entitled to transfer, combine or split up your ADRs and the ADSs evidenced thereby. For transfers of ADRs, you will have to
surrender the ADRs to be transferred to the depositary bank and also must:
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Ensure that the surrendered ADR is properly endorsed or otherwise in proper form for transfer;
Provide such proof of identity and genuineness of signatures as the depositary bank deems appropriate;
Provide any transfer stamps required by the State of New York or the United States; and
Pay all applicable fees, charges, expenses, taxes and other government charges payable by ADR holders pursuant to the terms of the deposit agreement, upon
the transfer of ADRs.
To have your ADRs either combined or split up, you must surrender the ADRs in question to the depositary bank with your request to have them combined or split
up, and you must pay all applicable fees, charges and expenses payable by ADR holders, pursuant to the terms of the deposit agreement, upon a combination or split up of
ADRs.
Withdrawal of Shares upon Cancellation of ADSs
As a holder, you will be entitled to present your ADSs to the depositary bank for cancellation and then receive the corresponding number of underlying common
shares at the custodian’s offices. Your ability to withdraw the common shares may be limited by U.S. and Cayman Islands legal considerations applicable at the time of
withdrawal. In order to withdraw the common shares represented by your ADSs, you will be required to pay to the depositary bank the fees for cancellation of ADSs and any
charges and taxes payable upon the transfer of the common shares being withdrawn. You assume the risk for delivery of all funds and securities upon withdrawal. Once
canceled, the ADSs will not have any rights under the deposit agreement.
If you hold ADSs registered in your name, the depositary bank may ask you to provide proof of identity and genuineness of any signature and such other documents
as the depositary bank may deem appropriate before it will cancel your ADSs. The withdrawal of the common shares represented by your ADSs may be delayed until the
depositary bank receives satisfactory evidence of compliance with all applicable laws and regulations. Please keep in mind that the depositary bank will only accept ADSs for
cancellation that represent a whole number of securities on deposit.
You will have the right to withdraw the securities represented by your ADSs at any time except for:
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Temporary delays that may arise because (i) the transfer books for the common shares or ADSs are closed, or (ii) common shares are immobilized on
account of a shareholders’ meeting or a payment of dividends.
Obligations to pay fees, taxes and similar charges.
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Restrictions imposed because of laws or regulations applicable to ADSs or the withdrawal of securities on deposit.
The deposit agreement may not be modified to impair your right to withdraw the securities represented by your ADSs except to comply with mandatory provisions of
law.
Voting Rights
As a holder, you generally have the right under the deposit agreement to instruct the depositary bank to exercise the voting rights for the common shares represented
by your ADSs. The voting rights of holders of common shares are described in “—Voting Rights Attaching to the Shares” above.
At our request, the depositary bank will distribute to you any notice of shareholders’ meeting received from us together with information explaining how to instruct
the depositary bank to exercise the voting rights of the securities represented by ADSs.
If the depositary bank timely receives voting instructions from a holder of ADSs, it will endeavor to vote the securities represented by the holder’s ADSs in
accordance with such voting instructions.
In the event of voting by a show of hands, each shareholder has one vote irrespective of the number of common shares held by such person and the depositary bank
shall vote or cause the custodian to vote all the common shares then on deposit in accordance with instructions received from a majority of holders giving voting instructions. In
the event of poll voting, each shareholder has an amount of votes equal to the number of common shares held as of record date for the meeting and the depositary bank shall
vote or cause the custodian to vote the common shares on deposit in respect of ADSs for which holder of ADSs have timely given voting instructions to the depositary bank.
If the depositary bank timely receives voting instructions from a holder of ADSs that fail to specify the manner in which the depositary bank is to vote the common
shares represented by that holder’s ADSs, the depositary bank will deem the holder to have voted in favor of the items set forth in the voting instructions. If the depositary bank
does not timely receive voting instructions from a holder of ADSs and we have timely provided the depositary bank with our notice of meeting and related materials, that holder
will be deemed, and the depositary bank will deem that holder to have instructed the depositary bank to give a discretionary proxy to a person designated by us to vote the
common shares represented by the ADSs at our discretion, unless:
•
•
•
•
•
we have failed to timely provide the depositary bank with our notice of meeting and related voting materials;
we have instructed the depositary bank that we do not wish a discretionary proxy to be given;
we have informed the depositary bank that there is substantial opposition as to a matter to be voted on at the meeting;
a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
voting at the meeting is made on a show of hands.
We have advised the depositary bank that under the Cayman Islands’ law as in effect as of the date of the deposit agreement, voting at any meeting of shareholders is
by show of hands unless a poll is demanded. The depositary bank will not join in demanding a poll, whether or not requested to do so by holders of ADSs. Please see above
under “—Voting Rights Attaching to the Shares.”
Please note that the ability of the depositary bank to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on
deposit. We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary bank in a timely manner.
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Fees and Charges
As an ADS holder, you will be required to pay the following fees under the terms of the deposit agreement:
(1) Issuance of ADSs upon deposit of Shares (excluding issuances as a result of distributions
Up to U.S. $5.00 per 100 ADSs (or fraction thereof) issued.
described in paragraph (4) below).
Service
Rate
(2) Delivery of Deposited Securities against surrender of ADSs.
Up to U.S. $5.00 per 100 ADSs (or fraction thereof) surrendered.
(3) Distribution of cash dividends or other cash distributions (i.e., sale of rights and other
Up to U.S. $2.00 per 100 ADSs (or fraction thereof) held.
entitlements).
(4) Distribution of ADSs pursuant to (i) stock dividends or other free stock distributions, or
Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held.
(ii) exercise of rights to purchase additional ADSs.
(5) Distribution of securities other than ADSs or rights to purchase additional ADSs (i.e.,
Up to U.S. $5.00 per 100 ADSs (or fraction thereof) held.
spin-off shares).
(6) Depositary Services.
(7) Transfer of ADRs.
Up to U.S. $2.00 per 100 ADSs (or fraction thereof) held.
U.S. $1.50 per certificate presented for transfer.
As an ADS holder you will also be responsible to pay certain charges such as:
•
•
•
•
•
•
taxes (including applicable interest and penalties) and other governmental charges;
registration fees as may from time to time be in effect for the registration of common shares or other Deposited Securities on the share register and applicable
to transfers of common shares or other Deposited Securities to or from the name of the Custodian, the Depositary or any nominees upon the making of
deposits and withdrawals, respectively;
cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person
depositing or withdrawing Common shares or Holders and Beneficial Owners of ADSs;
the expenses and charges incurred by the depositary bank in the conversion of foreign currency;
fees and expenses as are incurred by the depositary bank in connection with compliance with exchange control regulations and other regulatory requirements
applicable to common shares, Deposited Securities, ADSs and ADRs; and
the fees incurred by the depositary bank, the Custodian, or any nominee in connection with the servicing or delivery of Deposited Securities.
ADS fees and charges for (i) the issuance of ADSs, and (ii) the cancellation of ADSs are charged to the person for whom the ADSs are issued (in the case of ADS
issuances) and to the person for whom ADSs are cancelled (in the case of ADS cancellations). In the case of ADSs issued by the depositary bank into DTC, the ADS issuance
and cancellation fees and charges may be deducted from distributions made through DTC, and may be charged to the DTC participant(s) receiving the ADSs being issued or the
DTC participant(s) holding the ADSs being cancelled, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC participant(s) to the account of
the applicable beneficial owner(s) in accordance with
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the procedures and practices of the DTC participants as in effect at the time. ADS fees and charges in respect of distributions and the ADS service fee are charged to the holders
as of the applicable ADS record date. In the case of distributions of cash, the amount of the applicable ADS fees and charges is deducted from the funds being distributed. In
the case of (i) distributions other than cash and (ii) the ADS service fee, holders as of the ADS record date will be invoiced for the amount of the ADS fees and charges and such
ADS fees and charges may be deducted from distributions made to holders of ADSs. For ADSs held through DTC, the ADS fees and charges for distributions other than cash
and the ADS service fee may be deducted from distributions made through DTC, and may be charged to the DTC participants in accordance with the procedures and practices
prescribed by DTC and the DTC participants in turn charge the amount of such ADS fees and charges to the beneficial owners for whom they hold ADSs. In the case of (i)
registration of ADS transfers, the ADS transfer fee will be payable by the ADS Holder whose ADSs are being transferred or by the person to whom the ADSs are transferred,
and (ii) conversion of ADSs of one series for ADSs of another series, the ADS conversion fee will be payable by the Holder whose ADSs are converted or by the person to
whom the converted ADSs are delivered.
In the event of refusal to pay the depositary bank fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment
is received or may set off the amount of the depositary bank fees from any distribution to be made to the ADS holder. Certain depositary fees and charges (such as the ADS
services fee) may become payable shortly after the closing of the ADS offering. Note that the fees and charges you may be required to pay may vary over time and may be
changed by us and by the depositary bank. You will receive prior notice of such changes. The depositary bank may reimburse us for certain expenses incurred by us in respect
of the ADR program, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the
depositary bank agree from time to time.
Amendments and Termination
We may agree with the depositary bank to modify the deposit agreement at any time without your consent. We undertake to give holders 30 days’ prior notice of any
modifications that would materially prejudice any of their substantial rights under the deposit agreement. We will not consider to be materially prejudicial to your substantial
rights any modifications or supplements that are reasonably necessary for the ADSs to be registered under the Securities Act of 1933, as amended, or to be eligible for book-
entry settlement, in each case without imposing or increasing the fees and charges you are required to pay. In addition, we may not be able to provide you with prior notice of
any modifications or supplements that are required to accommodate compliance with applicable provisions of law.
You will be bound by the modifications to the deposit agreement if you continue to hold your ADSs after the modifications to the deposit agreement become
effective. The deposit agreement cannot be amended to prevent you from withdrawing the common shares represented by your ADSs (except to comply with mandatory
provisions of law).
We have the right to direct the depositary bank to terminate the deposit agreement. Similarly, the depositary bank may in certain circumstances on its own initiative
terminate the deposit agreement. In either case, the depositary bank must give notice to the holders at least 30 days before termination, which notice shall fix a date for
termination of the deposit agreement.
After the termination and prior to any sale of the deposited securities held on deposit, you will be able to request the cancellation of your ADSs and the withdrawal of
the common shares represented by your ADSs and the delivery of all other property held by the depositary bank in respect of those common shares on the same terms as prior to
the termination. During such period, the depositary bank will continue to collect all distributions received on the common shares on deposit (e.g., dividends) but will not
distribute any such property to you until you request the cancellation of your ADSs.
At any time after the date fixed for termination of the deposit agreement, the depositary bank may sell the securities held on deposit. The depositary bank will hold the
proceeds from such sale and any other funds then held for the holders of ADSs in a non-interest bearing account. At that point, the depositary bank will have no further
obligations to holders other than to account for the funds then held for the holders of ADSs still outstanding (after deduction of applicable fees, expenses and taxes).
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After termination, your obligations under the deposit agreement as an ADS holder will continue until your ADSs are presented to the depositary bank for cancellation.
Books of Depositary
The depositary bank will maintain ADS holder records at its depositary office. You may inspect such records at such office during regular business hours but solely
for the purpose of communicating with other holders in the interest of business matters relating to the ADSs and the deposit agreement.
The depositary bank will maintain in New York facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADRs. These facilities
may be closed from time to time, to the extent not prohibited by law.
Limitations on Obligations and Liabilities
The deposit agreement limits our obligations and the depositary bank’s obligations to you. Please note the following:
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•
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•
We and the depositary bank are obligated only to take the actions specifically stated in the deposit agreement without negligence or bad faith.
The depositary bank disclaims any liability for any failure to carry out voting instructions, for any manner in which a vote is cast or for the effect of any vote,
provided that it acts in good faith and in accordance with the terms of the deposit agreement.
The depositary bank disclaims any liability for any failure to determine the lawfulness or practicality of any action, for the content of any document
forwarded to you on our behalf or for the accuracy of any translation of such a document, for the investment risks associated with investing in common
shares, for the validity or worth of the common shares, for any tax consequences that result from the ownership of ADSs, for the credit-worthiness of any
third party, for allowing any rights to lapse under the terms of the deposit agreement, for the timeliness of any of our notices or for our failure to give notice.
We and the depositary bank will not be obligated to perform any act that is inconsistent with the terms of the deposit agreement.
We and the depositary bank disclaim any liability if we or the depositary bank are prevented or forbidden from or subject to any civil or criminal penalty or
restraint on account of, or delayed in, doing or performing any act or thing required by the terms of the deposit agreement, by reason of any provision,
present or future of any law or regulation, any provision of our Memorandum and Articles of Association, any provision of any securities on deposit or by
reason of any act of God or war or other circumstances beyond our control.
We and the depositary bank disclaim any liability by reason of any exercise of, or failure to exercise, any discretion provided for the deposit agreement or in
our Memorandum and Articles of Association or in any provisions of securities on deposit.
We and the depositary bank further disclaim any liability for any action or inaction in reliance on the advice or information received from legal counsel,
accountants, any person presenting common shares for deposit, any holder of ADSs or authorized representatives thereof, or any other person believed by
either of us in good faith to be competent to give such advice or information.
We and the depositary bank also disclaim liability for the inability by a holder to benefit from any distribution, offering, right or other benefit which is made
available to holders of common shares but is not, under the terms of the deposit agreement, made available to you.
We and the depositary bank may rely without any liability upon any written notice, request or other document believed to be genuine and to have been
signed or presented by the proper parties.
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•
•
•
We and the depositary bank also disclaim liability for any consequential or punitive damages for any breach of the terms of the deposit agreement. No
disclaimer of any Securities Act liability is intended by any provision of the deposit agreement.
Nothing in the deposit agreement gives rise to a partnership or joint venture, or establishes a fiduciary relationship, among us, the depositary bank and you as
ADS holder.
Nothing in the deposit agreement precludes Citibank (or its affiliates) from engaging in transactions in which parties adverse to us or the ADS owners have
interests, and nothing in the deposit agreement obligates Citibank to disclose those transactions, or any information obtained in the course of those
transactions, to us or to the ADS owners, or to account for any payment received as part of those transactions.
As the above limitations relate to our obligations and the depositary’s obligations to you under the deposit agreement, we believe that, as a matter of construction of
the clause, such limitations would likely to continue to apply to ADS holders who withdraw the common shares from the ADS facility with respect to obligations or liabilities
incurred under the deposit agreement before the cancellation of the ADSs and the withdrawal of the common shares, and such limitations would most likely not apply to ADS
holders who withdraw the common shares from the ADS facility with respect to obligations or liabilities incurred after the cancellation of the ADSs and the withdrawal of the
common shares and not under the deposit agreement.
In any event, you will not be deemed, by agreeing to the terms of the deposit agreement, to have waived our or the depositary’s compliance with U.S. federal
securities laws and the rules and regulations promulgated thereunder. In fact, you cannot waive our or the depositary’s compliance with U.S. federal securities laws and the
rules and regulations promulgated thereunder.
Taxes
You will be responsible for the taxes and other governmental charges payable on the ADSs and the securities represented by the ADSs. We, the depositary bank and
the custodian may deduct from any distribution the taxes and governmental charges payable by holders and may sell any and all property on deposit to pay the taxes and
governmental charges payable by holders. You will be liable for any deficiency if the sale proceeds do not cover the taxes that are due.
The depositary bank may refuse to issue ADSs, to deliver, transfer, split and combine ADRs or to release securities on deposit until all taxes and charges are paid by
the applicable holder. The depositary bank and the custodian may take reasonable administrative actions to obtain tax refunds and reduced tax withholding for any distributions
on your behalf. However, you may be required to provide to the depositary bank and to the custodian proof of taxpayer status and residence and such other information as the
depositary bank and the custodian may require to fulfill legal obligations. You are required to indemnify us, the depositary bank and the custodian for any claims with respect
to taxes based on any tax benefit obtained for you.
Foreign Currency Conversion
The depositary bank will arrange for the conversion of all foreign currency received into U.S. dollars if such conversion is practical, and it will distribute the U.S.
dollars in accordance with the terms of the deposit agreement. You may have to pay fees and expenses incurred in converting foreign currency, such as fees and expenses
incurred in complying with currency exchange controls and other governmental requirements.
If the conversion of foreign currency is not practical or lawful, or if any required approvals are denied or not obtainable at a reasonable cost or within a reasonable
period, the depositary bank may take the following actions in its discretion:
•
•
•
Convert the foreign currency to the extent practical and lawful and distribute the U.S. dollars to the holders for whom the conversion and distribution is
lawful and practical.
Distribute the foreign currency to holders for whom the distribution is lawful and practical.
Hold the foreign currency (without liability for interest) for the applicable holders.
Governing Law/Waiver of Jury Trial
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The deposit agreement, the ADRs and the ADSs will be interpreted in accordance with the laws of the State of New York. The rights of holders of common shares
(including common shares represented by ADSs) are governed by the laws of the Cayman Islands.
As an owner of ADSs, you irrevocably agree that any legal action arising out of the Deposit Agreement, the ADSs or the ADRs, involving the Company or the
Depositary bank, may only be instituted in a state or federal court in the city of New York.
AS A PARTY TO THE DEPOSIT AGREEMENT, YOU IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, YOUR
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF THE DEPOSIT AGREEMENT OR THE ADRs AGAINST US AND/OR THE
DEPOSITARY BANK.
The deposit agreement provides that, to the extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the
depositary bank arising out of or relating to our common shares, the ADSs or the deposit agreement, including any claim under U.S. federal securities laws. If we or the
depositary bank opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable in the facts and circumstances of that case in
accordance with applicable case law. However, you will not be deemed, by agreeing to the terms of the deposit agreement, to have waived our or the depositary’s compliance
with U.S. federal securities laws and the rules and regulations promulgated thereunder.
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List of Subsidiaries
Exhibit 8.1
Subsidiaries:
• ATA Testing Authority (Holdings) Limited, incorporated in the British Virgin Islands
• ATA Education Technology (Beijing) Limited (formerly known as “ATA Testing Authority (Beijing) Limited”), incorporated in the People’s Republic of
China
• Xing Wei Institute (Hong Kong) Limited, incorporated in Hong Kong
• ACG International Group Limited, incorporated in the British Virgin Islands
• Beijing Huanqiuyimeng Education Consultation Corp., incorporated in the People’s Republic of China
Consolidated Variable Interest Entity:
• ATA Intelligent Learning (Beijing) Technology Limited, incorporated in the People’s Republic of China
• Beijing Zhenwu Technology Development Co., Ltd., incorporated in the People’s Republic of China
Filing date: April 26, 2022
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.1
I, Xiaofeng Ma, certify that:
1. I have reviewed this annual report on Form 20-F of ATA Creativity Global (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and
the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
Date: April 26, 2022
By:
Name:
Title:
/s/ Xiaofeng Ma
Xiaofeng Ma
Chief Executive Officer
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.2
I, Amy Tung, certify that:
1. I have reviewed this annual report on Form 20-F of ATA Creativity Global (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the Company as of, and for, the periods presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and
the audit committee of the Company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the
Company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
Date: April 26, 2022
By:
Name:
Title:
/s/Amy Tung
Amy Tung
Chief Financial Officer
Certification by the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit_13.1
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Xiaofeng Ma, Chief Executive Officer of ATA Creativity
Global (the “Company”), hereby certify, to the best of my knowledge, that the Company’s annual report on Form 20-F for the year ended December 31, 2021 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company as of, and for the periods presented in the Report.
Date: April 26, 2022
By:
Name:
Title:
/s/Xiaofeng Ma
Xiaofeng Ma
Chief Executive Officer
Certification by the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit_13.2
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Amy Tung, Chief Financial Officer of ATA Creativity
Global (the “Company”), hereby certify, to the best of my knowledge, that the Company’s annual report on Form 20-F for the year ended December 31, 2021 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of operations of the Company as of, and for the periods presented in the Report.
Date: April 26, 2022
By:
Name:
Title:
/s/Amy Tung
Amy Tung
Chief Financial Officer
We consent to the incorporation by reference in the registration statements (No. 333-255430) on Form S-8 and (No. 333-255195) on Form F-3 of our report dated April 26,
2022, with respect to the consolidated financial statements of ATA Creativity Global.
Consent of Independent Registered Public Accounting Firm
Exhibit_15.1
/s/ KPMG Huazhen LLP
Beijing, China
April 26, 2022
Exhibit 15.2
JINCHENG TONGDA & NEAL
10th Floor, China World Tower A, No. 1 Jianguo Menwai Avenue,
Chaoyang District, Beijing, 100004, PRC
Tel: (8610) 5706 8585; Fax: (8610) 8515 0267
April 26, 2022
ATA Creativity Global
1/F East Gate, Bldg. No.2, Jian Wai Soho
No.39 Dong San Huan Zhong Road,
Chao Yang District, Beijing, 100022
Ladies and Gentlemen:
We have acted as legal advisors as to the laws of the People’s Republic of China to ATA Creativity Global (the “Company”), in connection with the filing by the Company with
the United States Securities and Exchange Commission of an annual report on Form 20-F for the fiscal year ended December 31, 2021.
We hereby consent to the use of our name under “Item 3. Key Information — Government Regulations and Permissions”, “Item 3. Key Information — D. Risk Factors”, “Item
4. Information on the Company — A. History and Development of the Company” and “Item 8. Financial Information — A. Consolidated statements and other financial
information” in the Company’s annual report on Form 20-F for the fiscal year ended December 31, 2021.
Yours sincerely,
/s/Peng Jun
Peng Jun
Partner
Jincheng Tongda & Neal
ATA Creativity Global
1/F East Gate, Bldg. No.2, Jian Wai Soho
No.39 Dong San Huan Zhong Road,
Chao Yang District, Beijing, 100022
Re: ATA Creativity Global
Dear Sirs,
Exhibit 15.3
April 26, 2022
We are qualified lawyers of the People’s Republic of China (the “PRC”, for the purpose of this legal opinion (the “Opinion”), excluding the Hong Kong Special Administrative
Region, Macao Special Administrative Region and Taiwan), and as such are qualified to issue legal opinions on the PRC laws, regulations or rules.
We are acting as the PRC counsel for ATA Creativity Global, an exempted company incorporated in the Cayman Islands with limited liability (the “ Company”), in connection
with the filing of its annual report on Form 20-F (the “Annual Report”) for the fiscal year ended December 31, 2021 with the U.S. Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended.
In rendering this Opinion, we have examined the originals or copies certified or otherwise identified to our satisfaction, of documents provided to us by the Company and such
other documents, corporate records, certificates issued by Governmental Agencies (as defined below) in the PRC, by officers of the Company, and/or by the Group Companies
(as defined below) and other instruments (the “Documents”) as we have considered necessary, advisable or desirable for the purpose of rendering this Opinion. Where certain
facts were not or may not be possible to be independently established by us, we have relied upon certificates or statements or representations issued or made by relevant
Governmental Agencies of the PRC and the appropriate representatives of the Company and/or the PRC Companies with the proper powers and functions.
In our examination of the Documents and for purpose of rendering this Opinion, we have assumed without further inquiry: (A) the genuineness of all signatures, seals and chops,
and the authenticity of all documents submitted to us as originals and the conformity with authentic original documents submitted to us as copies; (B) the Documents as
submitted to us remain in full force and effect up to the date of this Opinion, and have not been revoked, amended, revises, modified or supplemented except as otherwise
indicated in such Documents; (C) the truthfulness, accuracy, fairness and completeness of Documents as well as all factual statements in the Documents; (D) that all
information provided to us by the Company in response to our inquiries for the purpose of this Opinion is true, accurate, complete and not misleading and that the Company has
not withheld anything that, if disclosed to us, would reasonably cause us to alter this Opinion in whole or in part; (E) other than in relation to the Control Agreements (as
defined below), that all parties have the requisite power and authority to enter into, execute, deliver and perform the Documents to which they are parties; (F) other than in
relation to the Control Agreements, that all parties have duly executed, delivered, performed, and will duly perform their obligations under the Documents to which they are
parties; and (G) other than in relation to the Control Agreements, that all Documents are legal, valid, binding and enforceable under all such laws as govern or relate to them
other than PRC Laws (as defined below).
This Opinion is rendered on the basis of the PRC Laws effective as at the date hereof. We do not purport to be an expert on, generally familiar with, or qualified to express legal
opinions based on, any laws other than the PRC Laws. Accordingly, we express no opinion on the laws of any jurisdiction other than the PRC. Furthermore, there is no
guarantee that any such PRC Laws will not be changed, amended or replaced in the immediate future or in the longer term with or without retrospective effect.
The following terms as used in this Opinion are defined as follows:
“ATA Education”
“BVI Subsidiaries”
“Control Agreements”
“Group Companies”
means ATA Education Technology (Beijing) Limited (formerly named as ATA Testing Authority (Beijing) Limited), a
company incorporated under the PRC Laws of which 100% equity interest is indirectly owned by the Company.
means ATA Testing Authority (Holdings) Limited, a company incorporated under the laws of British Virgin Islands of
which 100% equity interest is directly owned by the Company; and ACG International Group Limited, a company
incorporated under the laws of British Virgin Islands of which 100% equity interest is directly owned by the Company.
means the agreements set forth in Item 4.A of the Annual Report headed “History and Development of the Company
— Contractual Arrangements with ATA Intelligent Learning” and as listed in Schedule I of this Opinion.
means the Company, BVI Subsidiaries, Xing Wei Institute (HongKong) Limited, the PRC Companies, Beijing
Huanqiuyimeng Education Consultation Corp. and any other entities that are controlled directly or indirectly by any of the
foregoing.
“Government Agency”
means any competent government authorities, courts, arbitration commissions or regulatory bodies of the PRC.
“Governmental Authorization”
“Material Adverse Effect”
means any approval, consent, permit, authorization, filing, registration, exemption, waiver, endorsement, annual
inspection, qualification and license required by the applicable PRC Laws to be obtained from any Government Agency.
means any event, circumstance, condition, occurrence or situation or any combination of the foregoing that has or could
be reasonably expected to have a material and adverse effect upon the conditions (financial or otherwise), business,
properties or results of operations or prospects of the Group Companies taken as a whole.
“Initial Public Offering”
means the initial public offering of American depositary shares representing the Company’s ordinary shares as described
in the prospectus for such offering dated January 28, 2008.
“PRC Laws”
“PRC Companies”
“PRC Subsidiary”
means any and all laws, regulations, statutes, rules, decrees, notices and supreme court’s judicial interpretations currently
in force and publicly available in the PRC as of the date hereof.
means the PRC Wholly Owned Subsidiary, and the PRC Subsidiary.
means ATA Intelligent Learning (Beijing) Technology Limited (ATA Intelligent Learning), a company incorporated
under the PRC Laws of which 90% of the equity interest is directly owned by Xiaofeng Ma and 10% of the equity interest
is directly owned by Jun Zhang.
“PRC Wholly Owned Subsidiary”
means ATA Education.
Based on the foregoing, after our due inquiry, we are of the opinion that:
(i)
(ii)
Corporate Structure. The descriptions of the corporate structure of the PRC Companies and the Control Agreements set forth in the “Risk Factors,” “History
and Development of the Company— Contractual Arrangements with ATA Intelligent Learning” and “Related Party Transactions” sections of the Annual
Report are correct and accurate in all material respects and nothing has been omitted from such descriptions which would make the same misleading in any
material respect.
We are of the opinion that, except as disclosed in the Annual Report, (A) the ownership structure of the PRC Companies as described in the Annual Report under
the headings “Risk Factors,” “History and Development of the Company— Contractual Arrangements with ATA Intelligent Learning” and “Related Party
Transactions” is and has been in compliance with all current PRC Laws; (B) each of the Control Agreements has been duly executed and delivered by each of the
parties thereto and constitutes its or his binding obligations; and (C) the contractual arrangements among ATA Education, the PRC Subsidiary and the
shareholders of the PRC Subsidiary, established by the Control Agreements, individually and as a whole, are valid, legally binding and enforceable, and will not
result in any violation of the PRC Laws currently in effect.
M&A Rules. On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration
Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (the
“CSRC”), and the State Administration of Foreign Exchange of the PRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors (the “M&A Rules”), which became effective on September 8, 2006 and were amended on June 22, 2009. The M&A
Rules purport, among other things, to require offshore special purpose vehicles (the “SPVs”) formed for overseas listing purposes through acquisitions of PRC
domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an
overseas stock exchange. On September 21, 2006, pursuant to the M&A Rules and other PRC Laws and regulations, the CSRC, on its official website,
promulgated relevant guidance with respect to the issues of listing and trading of PRC domestic enterprises’ securities on overseas stock exchanges, including
a list of application materials with respect to the listing on overseas stock exchanges by SPVs.
We are of the opinion that as of the date hereof, the Company was not and is not required under the M&A Rules and other relevant PRC Laws to obtain the
approval of the CSRC for the issuance and sale of the American depositary shares representing the Company’s common shares or the listing of the Company’s
American depositary shares on Nasdaq in connection with the Initial Public Offering, because (1) the Company established the PRC Wholly Owned Subsidiary as
a foreign-invested enterprise by means of direct investment and not through a merger or acquisition of the equity or assets of a “PRC domestic company” as such
term is defined under the M&A Rules, and (2) there is no provision in the M&A Rules that clearly classifies contractual arrangements described under “History
and Development of the Company— Contractual Arrangements with ATA Intelligent Learning” and “Related Party Transactions” sections of the Annual Report
as the type of merger and acquisition transaction falling under the M&A Rules.
This Opinion is rendered to you and is intended to be used in the context which is specifically referred to herein and solely for the benefit of the Company in connection with its
Annual Report filing and each paragraph should be looked at as a whole and no part should be extracted and referred to independently.
We hereby consent to the filling of this Opinion with the U.S. Securities and Exchange Commission as an exhibit to the Annual Report and to the use of and references to our
name and this Opinion and its contents under the sections headed “Risk Factors”, “Regulation”, “History and Development of the Company”, “Consolidated statements and
other financial information” and other sections of the Annual Report.
Yours faithfully,
/s/Jincheng Tongda & Neal Law Firm
Jincheng Tongda & Neal Law Firm
SCHEDULE I
List of Control Agreements
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Exclusive Technical Consulting and Services Agreement, dated as of March 15, 2018, among ATA Intelligent Learning (Beijing) Technology Limited and
ATA Testing Authority (Beijing) Limited (renamed as ATA Education Technology (Beijing) Limited).
Equity Interest Pledge Agreement, dated as of March 15, 2018, among ATA Testing Authority (Beijing) Limited (renamed as ATA Education Technology
(Beijing) Limited) and Xiaofeng Ma.
Equity Interest Pledge Agreement, dated as of August 12, 2020, among ATA Testing Authority (Beijing) Limited (renamed as ATA Education Technology
(Beijing) Limited) and Jun Zhang.
Loan Agreement, dated as of March 15, 2018, between ATA Testing Authority (Beijing) Limited (renamed as ATA Education Technology (Beijing)
Limited) and Xiaofeng Ma.
Loan Agreement, dated as of August 12, 2020, between ATA Testing Authority (Beijing) Limited (renamed as ATA Education Technology (Beijing)
Limited) and Jun Zhang.
Call Option and Cooperation Agreement, dated as of August 12, 2020, among ATA Testing Authority (Beijing) Limited (renamed as ATA Education
Technology (Beijing) Limited), Xiaofeng Ma, Jun Zhang, and ATA Intelligent Learning (Beijing) Technology Limited.
Power of Attorney, dated as of March 15, 2018, between Xiaofeng Ma and ATA Testing Authority (Beijing) Limited (renamed as ATA Education
Technology (Beijing) Limited).
Power of Attorney, dated as of August 12, 2020, between Jun Zhang and ATA Testing Authority (Beijing) Limited (renamed as ATA Education
Technology (Beijing) Limited).
Payment Instructions for the Loan Agreement, dated as of April 3, 2018, between Xiaofeng Ma and ATA Testing Authority (Beijing) Limited (renamed as
ATA Education Technology (Beijing) Limited).
Supplemental Agreement to ATA Intelligent Learning VIE Agreements, dated as of March 19, 2019, among ATA Education Technology (Beijing) Limited
(formerly named as ATA Testing Authority (Beijing) Limited), Xiaofeng Ma, Haichang Xiong, and ATA Intelligent Learning (Beijing) Technology
Limited.
Supplemental Agreement Ⅱ to ATA Intelligent Learning VIE Agreements, dated as of April 20, 2019, among ATA Education Technology (Beijing)
Limited (formerly named as ATA Testing Authority (Beijing) Limited), Xiaofeng Ma, Haichang Xiong, and ATA Intelligent Learning (Beijing)
Technology Limited.