ATA Creativity Global

Good day and welcome everyone to the ATA Creativity Global 2020 first quarter conference call hosted by Caroline So. My name is Greg and I'm the event manager for today's call. During the presentation, your lines will remain on listen only. If you require assistance at any time, please press star zero on your telephone and a coordinator will be happy to assist you. I would like to advise all parties that this conference is being recorded. Also, during the conference, you may ask a question. To do this, please press star 1 on your telephone. These questions will be answered at a later time during the conference. And now, I'd like to hand over to Carolyn. Please proceed.

Thank you, Greg, and hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global's or ACG's results for the first quarter and in March 31, 2020, is available at the IR section of the company's website at www.atai.net.cn. As part of this conference call, the company has an accompanying slide presentation available on its website. A replay of this broadcast will also be made available at ACG's website for the next 90 days. Before we get started, I would like to remind everyone that this conference call and any accompanying information discussed herein contains certain forward-looking statements within the meaning of the safe harbor provision of the Private Security Litigation Reform Act of 1995. These forward-looking statements can be identified by terms such as anticipate, believe, expect, future, plan, outlook, and will, and include, among other things, statements regarding ACG's future growth and results of operations, ACG's strategy of becoming a leading international education service provider, ACG's plans for mergers and acquisitions generally, the benefits of the Huanqiu Limeng acquisition, ACG's ability to operate efficiently and maintain continued financial strength under unusual circumstances, ACG's growth strategy and subsequent business activities, market demand for ACG's portfolio training programs and other education services, the impact of the COVID-19 outbreak on ACG and its operations, and ACG's plan and anticipated benefits of the measures implemented in response to the COVID-19 outbreak. Although the company believes that the expectations reflected in its forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected. There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in ACG is included in its filings within the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise. except as required by law. Regarding the disclaimer language, I would also like to refer you to slide two of the conference call presentation for further information. All US dollar amounts in this conference call relating to financial results for the first quarter ended March 31st, 2020 are converted from RMB using an exchange rate of 7.0808 RMB to one US dollar. The new and buying rate as of March 31st, 2020. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports its financial results under US GAAP and RMB, and all percentages calculated in the presentation are based on RMB unless otherwise noted. For those of you following along with the company PowerPoint presentation, there is an overview of the company on slide three. And management will be referring back to this deck throughout the prepared remarks. In addition, we are more than happy to take investor questions through our webcast portal or via email to the company. On today's call, the company's CFO, Ms. Amy Tung, will provide a brief overview of operating and financial highlights for the first quarter of 2020, and then ACG's Chairman and CEO, Mr. Kevin Ma and President Mr. Jun Zhang will conclude the remarks with a discussion of the company's outlook as well as its long-term growth strategy before opening the floor for questions. With that, I'll turn the call over to ACG's CFO, Ms. Amy Tung.

Please go ahead, Amy. Thank you, Caroline, and welcome everyone. Good evening to those in America. We appreciate everyone's time. Our results for the first quarter of 2020 were impacted by seasonality as a result of the spring festival holiday, as well as the effects of COVID-19. When we last spoke to investors at the end of March, businesses in China were beginning to open and, while cautious, were returning to normal operations following the impact of the pandemic. We made a conscious decision to transition all Huanchu Yimeng coursework to a completely online format beginning February 1st as a measure of prioritizing the health and safety of our students, faculty, staff, and employees during these times. At that time, we provided all of our students the option to fulfill their classes online. On the portfolio training site, several students were to continue with their studies, but some decided to postpone their coursework. Our educational travel services business was also impacted during the period as the majority of tours were canceled. As a result of these headwinds, we reported an 8.7% year-over-year decrease in credit hours delivered for our portfolio training programs from approximately 28% and Xiaofeng Ma. We provide a breakdown of these credit hours and additional operating metrics on the next slide. Later in the presentation, Kevin and Jun will provide an update on current operations and where they stand. As an overview, a credit hour is the standard unit measuring educational credit for our portfolio training program and translates into roughly one hour of time committed. When it comes to enrollment headcounts, a student may be considered choice in enrollment if he or she enrolls in both portfolio training and educational travel services in any given period. Student enrollment for the period was 681, out of which 404 were enrolled in the portfolio training program. The portfolio training program consists of time-based programs and project-based programs, and we provide a breakout of the credit hours delivered during the period compared to the prior year comparable period in our presentation. Revenue is recognized proportionately per credit hour delivered. However, as the total credit hours of project-based programs are not predetermined, the progress of a project-based program which is measured by credit hours delivered compared against the total credit hours expected to be delivered is re-evaluated at each quarterly and annual financial reporting date. As in partial quarter three and quarter four of 2019, we continued to observe the same trend of students increasingly opting for the project-based program versus the time-based program. We noted on the last earnings call that Each program has its benefits depending on the particular student's needs. A student that already possesses some basic skills and wishes to only complete a portfolio will tend to favor the project-based program, as it appears to be the less expensive option for completing a portfolio with a defined course. Meanwhile, the time-based program caters to students that may want additional guidance and opportunity to work with teachers for some basic foundation skills before beginning on their portfolio. With that, let's move to financials for the quarter. I wanted to remind everyone that for the results shown for this period, we have applied acquisition accounting and made purchase price allocation adjustments, PPA, to various assets acquired and liabilities assumed from the Huantu Yimeng acquisition. As a result, certain line items will include adjustments from amortization of the difference between the carrying value in Huantu Yimeng's book and the fair value assets from the PPA process applied to the Huantu Yimeng acquisition. I will highlight where we saw some impact on our financials due to this PPA adjustment for the 2021st quarter. Total net revenues for the first quarter of 2020 increased to 32.7 million RMB compared to 1.6 million RMB in the first quarter of 2019 as a result of revenue contributions from HAN to Yima, which consisted primarily of revenues from portfolio training programs. Net revenues for this quarter include a PPA adjustment decrease of 6 million RMB. Gross margin was 35.8% during the 2020 first quarter compared to gross margin of 25.3% in the prior year period when the company did not have substantial operations. Excluding the PPA adjustment to net revenues, gross margin for the 2020 first quarter would have been 45.8%. Net loss attributable to ACG was 20.5 million RMB for the period compared to a net loss of 12.9 million RMB in the prior year period as a result of increased operating expenses incurred related to the day-to-day operations of the quantum human business. Finally, we continued to be in a solid financial position with 21.6 million U.S. in cash and cash equivalents on the balance sheet. Working capital deficits was 13.3 million U.S. and total shareholders' equity was US$40 million at March 31, 2020, compared to working capital deficits of US$11.7 million and shareholders' equity of US$43.9 million respectively at December 31, 2019. With that, I would now like to turn it over to Kevin, who will expand upon our outlook and growth strategy. Kevin.

Thank you, Amy. These are unprecedented times. As Amy noted, we continue to operate our business in this new environment and are focused on continuing to provide quality art and creative instruction to our students, enabling them to continue working towards their goals even while much of the world remains under shelter in place. We are fortunate to be in a solid financial position that will allow us to navigate the challenges businesses all over the world are facing as a result of COVID-19. For the amount of time it will take for a circumstance to return to a new normal. ACG has a great deal of operating flexibility as our infrastructure allows us to scale to meet challenges in demand from our student base. We have been taking advantage of this operating flexibility to streamline course where it comes to teaching a very Availability and associated teaching cost arrangements. At the same time, we are able to almost immediately remap to satisfy an increasing demand with students that had decided to postpone their studies resume, their programs once again. With regard to educational travel, we do know that many of our partner institutions will not be holding There are regular summer programs which will have an impact on our business. We regret that our students will not be able to take advantage of our tours and programs this summer. But we want to emphasize that the public health and safety of our students and employees is of the utmost importance. We are in close contact with all our partners and will keep an eye on the global situation in the coming weeks and months. We are prepared to continue supporting our students via online platform and are looking into ways in which we can maximize the potential of online technologies to grow our business and best serve students. Additionally, we announced today that our Board of Directors approved a SHIRE repurchase program which will allow the company to repurchase up to US $1 million of its issued and outstanding ADS from time to time in the open market and provide the negotiated transactions. The plan is effective now through the end of the year. We are pleased that the board shied our confidence in the long-term growth potential of ACH's business and our commitment to building value for shareholders. I'd now like to hand the floor over to Jun Zhang, CEC's president, to provide an update on our current growth initiatives for 环球益盟. Jun will make his remarks in Mandarin, which will be followed by an English translation.

Thank you, Kevin. As you can see, due to the new coronavirus, our recent goals have been adjusted. Our technology has become a priority task because we see many students still want to continue their studies in the field of art and creativity. Our goal is to provide our students with a reliable channel that can reach the best lecturers in the country through a long-term learning platform. At the same time, we want to achieve success for them, provide the necessary academic and good communication support. In addition, we have begun to study how to serve and others. For example, we plan to provide online experience courses so that students can have a more intuitive feeling about the products of the Global Alliance and thus promote sales. We plan to continue to provide traditional offline training models for worksheets, but we are also exploring the possibility of converting some offline courses into online courses. For the entry-level courses with more standardized basic knowledge of content, Thank you for watching. In terms of study abroad, we have mentioned that most of the cooperating universities have cancelled their regular first-year courses. Therefore, we are trying to provide other options for students this summer, including projects and plans with some well-known overseas universities and institutions and some newly developed domestic art-themed study abroad projects. Now, almost all of our sales and market personnel in Beijing have returned to office. And our sales are also gradually recovering Other schools outside Beijing are not fully open yet But we expect these schools to be open in the next few weeks Under the challenges faced by companies all over the world We are still in a good position in finance and operations And pass the level of stability We will continue to promote the development goals with positive meaning Establish cooperation and partnership Thank you, Kevin. As you might imagine, our immediate goals have changed somewhat in light of the COVID-19 pandemic.

Improving our technologies has become a major priority as we are seeing that many students still wish to pursue their studies in art and creativity. We aim to provide reliable access to our best instructors around the country via remote learning platform while also providing the necessary academic and emotional support our students need to succeed. In addition, we have begun looking at how we can take advantage of online beyond a service delivery method. For example, we plan to offer online classes as trials that will allow students to get a first-hand sense of Quanqiu Yimeng's offerings to generate sales. We plan to continue offering the traditional offline mode for portfolio training but are exploring the possibility of converting some offline classes to online delivery. Introductory classes that focus on the fundamentals tend to have a more standardized curriculum which lends itself to online delivery. Doing so will offer students added flexibility while lowering costs. Online delivery also offers the potential for expanded academic offerings and access to internationally acclaimed instructors who can conduct classes remotely without the need for travel. With regards to educational travel, we mentioned earlier that most of our partner institutions have canceled their regular summer programs. We are working to develop alternative options for students this summer, including online summer school programs, partnering with certain well-known overseas art schools and institutions, and newly developed art-themed domestic travel programs. Our sales pipeline has begun to regain momentum now that nearly all of our sales and marketing personnel in Beijing are able to return to the office. Some of our local offices have not yet fully reopened, but we expect they will in the next couple of weeks. We are well positioned financially and operationally to weather the challenges businesses all over the world have been presented. We continue to push forward on our growth initiatives where it makes the most sense, forging partnerships, improving our technology, and growing enrollment. In doing so, we believe we will emerge as one of the largest providers of quality art and creativity education and study abroad experiences in China. With that, I'll turn it back to Kevin.

Thanks, Jun and Carrie. To conclude, ACG has a strong foundation leading to survival in the current situation. We continue to explore M&A opportunities, but it's a slow process in the current environment. We have a recommended strategy when it comes to evaluating potential opportunities internationally, which is somewhat challenging when site visits and in-person meetings are prohibited. Above all, we remain focused on serving students to the best of our ability and prioritizing well-being of all our stakeholders. I would once again like to extend my gratitude to all of our employees, associates, family and friends for their support during these times. ACG wouldn't be what it is today without you. With that operate, let's open it up for questions.

Certainly. Everyone, your question and answer session will now begin. So just to remind you, if you wish to ask a question, please press star 1 on your telephone. So that is star 1 on your telephone. All questions will be answered in the order received and you will be advised when to ask your question. All other lines remain on listen only. And as we do not have any questions that are coming in, I would like to turn it back to management for closing remarks.

Thanks again to all of you for joining us. If anyone has questions for us, please feel free to reach out directly to us or our investor relations firm, the Equity Group. We are always available to speak to investors and look forward to speaking with you all during our next quarterly call. Thank you.

Thank you. Everyone, that concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.