ATA Creativity Global

Good day and welcome everyone to the ATA Creativity Global 2020 second quarter and six-month financial results conference co-hosted by Caroline Sun. My name is Matthew and I'm your event manager. During the presentation, your lines remain on this end only. If you need assistance at any time, please press star zero on your telephone and our coordinator will be happy to assist you. If you have any questions throughout the call, please press star one. Please note that all questions will be answered towards the end of the session. I would also like to advise all parties that this call is being recorded. and with that, I would like to hand it over to your host, Caroline. Please proceed.

Thank you, Matthew. And hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global's or ACG's results for the three and six months ended June 30th, 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 Securities 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 Huangqiu Yimeng 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 with 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 marketing 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 U.S. dollar amounts in this conference call relating to financial results for the three and six months ended June 30, 2020 are converted from RMB using an exchange rate of 7.0651 RMB to one U.S. dollar. The new and buying rate as of June 30, 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 3. 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 financial highlights for the second quarter and first half 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. During the second quarter of 2020, we continued to deliver the majority of coursework to our students through online method, which we have done since February 1st. It was encouraging to see some local governments authorize the offline delivery of certain trainings late in the second quarter. and while we understand many students still prefer face time with their teachers and peers, we feel it is very important that we put the health and safety of our students, faculty, staff and employees first under these unprecedented conditions. As with quarter one, we continued to see several portfolio training students pursue their studies during quarter two, while others decided to postpone their coursework. Our educational travel services business continued to be impacted in Q2, as almost all tours were cancelled. But we are pleased to be partnering with a few select prestigious overseas art institutions in offering some short-term online summer school and master training bootcamp programs, which generated 1.3 million RMB in Q2 with increased contributions expected in Q3. Our results for the second quarter of 2020 were impacted by the ongoing pandemic environment as in-person teaching remains unavailable in certain areas. We are encouraging students to continue pursuing their studies remotely and we are also pleased that since we last spoke in late May, the public health situation in China has improved to where nearly all of our employees are able to report to work in the office. With our sales team being able to operate at capacity, our business pipeline is seeing a resurgence, which bodes well for future periods. For the second quarter of 2020, we reported a 7.4% year-over-year decrease in credit hours delivered for our portfolio training programs. Some approximately 30,200 credit hours in Q2 2019 to approximately 27,900 in Q2 2020. The decrease was primarily a reflection of the continuing COVID-19 environment. We provide a breakdown of these credit hours and additional operating matrix 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 a portfolio training program and translates into roughly one hour of time committed. When it comes to enrollment counts, a student may be counted twice 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 and Xiaofei. The portfolio training program consists of time-based programs and project-based programs, and we provide the breakout of the credit hours delivered during the period compared to the per-year comparable periods 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 revaluated at each quarterly and annual financial reporting date. As in previous quarters, we saw a year-over-year increase in students opting for the project-based program versus the time-based program. As previously discussed, 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 cost. Meanwhile, the time-based program caters to students that may want additional guidance and opportunity to work with teachers for some basic foundational skills before beginning on that portfolio. With that, let's move to the 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, or PPA, to various assets acquired and liabilities assumed from the financial email acquisition. As a result, certain line items will include adjustments from amortization of the difference between the carrying value in Huanzhou Yimeng's book and the fair value accessed from the PPA process applied to the Huanzhou Yimeng acquisition. I will highlight where we saw some impact on our financials due to this PPA adjustment for the 2022 quarter. The debt revenues for the second quarter of 2020 increased to 26.4 million RMB compared to 1.4 million RMB in the second quarter of 2019. as a result of revenue contributions from Huangqiu Yimeng, which consisted primarily of revenues from portfolio training programs. Net revenues for this quarter include a PPA adjustment decrease of 6 million RMB. I would also like to note the sequential decrease in total net revenues from 32.7 million RMB in Quarter 1 to 26.4 million RMB in Quarter 2. which is mainly a result of an $6.1 million during bid decrease in revenue contributions from overseas study counselling services. Quarter 1 is the quarter during which students receive the majority of their overseas study offers which results in high revenues from overseas study counselling services. Gross margin was 25.1% during the 2022nd quarter compared to gross margin of negative 1.8% in the prior year period when the company did not have substantive operations. Excluding the PPA adjustment to net revenues, gross margin for the 2020 second quarter would have been 39%. Net loss from continuing operations attributable to ACG was 32.1 million RMB for the period compared to a net loss of 18.2 million RMB in the prior year period as the result of increased operating expenses incurred related to the day-to-day operations of the Huante Yiman business Moving to financial highlights for the first half of 2020 Total net revenues for the year-to-date YTD period increased to 59.1 million RMB compared to 3 million RMB in the prior year period. Total net revenues for the period include a PPA adjustment decrease of 12 million RMB. Gross margin was 31.1% for the first half of 2020 compared to 12.9% in the prior year period. Excluding the PPA adjustment in net revenues, gross margin for the first half of 2020 would have been 42.7%. and that loss from continuing operations attributable to ACG was 52.5 million RMB in the first half of 2020 compared to net loss of 31.1 billion RMB in the prior year period, primarily due to increased operating expenses related to the point of email operations as mentioned earlier. Finally, we continue to be in a solid financial position with 16.9 million US dollars in cash and cash equivalents on the balance sheet. Working capital deficit was 16.9 billion US dollar and total shareholders equity was 35 billion US dollar at June 30th, 2020, compared to working capital deficits of 11.7 million US dollar and shareholders equity of 43.9 million US dollar respectively at December 31st, 2019. This past May, our board of directors authorized the repurchase of up to $1 million of the company's issued and outstanding ADS from time to time in open market and privately negotiated transactions. By August 1, 2020, the company had repurchased 450,337 ADS at an average stock price of $1.2631. Thank you, Amy. 2020 has forced many of us in education to re-evaluate how we provide accessible learning.