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.

to the various types of students in China. While the public health situation in China has improved dramatically over the course of the past few weeks, in-person teaching remains unavailable in many areas as the pandemic continues to impact several countries around the world. SAG is now for its one-on-one portfolio training programs and the individualized attention our students receive as highlighted in recent reviews on banking, which is essentially like a year in China. Although the majority of our teachers are unable to interact with students face-to-face, we continue to strive to deliver the quality instruction and the personal support for which we have gained recognition over these past several years. I'm pleased to see that many of our students have continued to pursue their studies in one form or another and have been happy with the level of attentiveness they have been receiving. With traveling abroad no longer being a viable option given a pandemic environment, students are choosing to pursue language studies or other types of foundational education to better prepare themselves for when that opportunity presents itself. and many are even finding those types of courses to be quite well suited to being taught online. SH continues to be in a solid financial position as we continue to navigate the challenges presented by the global pandemic, whether that means leveraging our operating flexibility all providing students with alternatives to our regular summer study abroad programs. We continue to put the health and safety of our students and employees first, and we continue providing students with the support they need to succeed via online platform, phone, email, WeChat, and so on, as we monitor how the ongoing situation unfolds globally. I'd now like to hand the floor over to Jun Zhang, ACG's president, to provide an update on our current growth initiatives. Jun will make his remarks in Mandarin, which will be followed by an English translation.

Thank you, Kevin. Just like Kevin and Amy mentioned, ACG is working hard to deal with the impact of the global pandemic. We are happy to see that from the first to the second quarter, There is an increase in the number of classes and we continue to encourage our students to study through the online platform. Our sales channel continues to improve because almost all the sales and market people in Beijing offices have returned to Hong Kong. We can better invest in marketing work. In addition, we have started to use multi-layered online platforms such as Douyin as one of the marketing tools. Let potential students decide where to sign up and experience our art and creative education in person. Even if we can have face-to-face classes again, we believe that the impact of the epidemic still exists. It reinvents the key role of technology in education and the overall performance of the transmission method. Although we believe that nothing can replace face-to-face classes, many students also like flexible and effective online classes. So we continue to provide traditional works and offline training courses We are also planning to turn some offline courses into online courses Especially some courses focused on basic knowledge Often have more standardized course content They are more suitable for online education As for study abroad, we are very happy to be able to provide some overseas famous art schools and institutions with some short-term online courses and master training courses and others to replace our previous tourism courses and projects. Most online schools and some master training and training projects will be held in July and August, which will have a positive impact on our income in the third quarter. More importantly, we have always been concerned about our students. For those students who have registered before the epidemic, while we provide creative art education for them, we are also ensuring the safety of them and our受课老师. Tim and Joey, Kevin.

Thank you, Kevin. As both Kevin and Amy mentioned, ACG has worked to adapt to the situation we've been presented with the global pandemic. We are pleased to see incremental improvement in portfolio training enrollment and credit hours from Q1 to Q2 and continue to encourage students to pursue their coursework via remote learning platform. Our sales pipeline continues to improve as nearly all our sales and marketing personnel in Beijing have returned to the office and are able to operate at optimal productivity. Additionally, we have begun utilizing diversified online platforms such as Douyin, also known as TikTok in the States, as a marketing tool enabling potential students to experience firsthand what our art and creative education offerings are like before making a decision on where to enroll. Even after in-person classes can be conducted once again, we believe the effects of the pandemic will remain. It has reaffirmed the crucial role technology plays in education as well as the overall efficacy of the delivery method. While we believe nothing quite replaces meeting in person, many students are enjoying the flexibility and added efficiency of being able to take certain courses online. As a result, we are planning to convert some offline classes for portfolio training, particularly those at the introductory level that tend to have a more standardized curriculum to online, but we'll still make traditional offline delivery an option. With regards to educational travel, we are pleased to be offering some alternatives to our usual travel tours and programs. Working closely with a few well-known overseas art schools and institutions, we have been offering some short-term online summer school programs, which offer certifications upon the completion of the program, as well as boot camps led by teachers from these overseas institutions whom we have invited to cooperate with ACT's own teachers. Most of the summer school program offerings and certain master boot camps will have taken place in July and August, which will have a positive impact on our top line in Q3. Most importantly, we are focused on our students and providing them with the creative education they signed up to receive before the pandemic began, while ensuring their and our staff's safety. With that, I'll turn it back to Kevin.

Thanks, Jean and Akari. To conclude it, ACG continues to be well positioned financially and operationally. We have worked tirelessly to adapt to the evolving situation and continue to do so while moving forward with our strategic growth initiatives. I believe ACG has risen to a challenge and while our business has certainly felt the impact of those unusual circumstances, It has proven resilient and we are optimistic about the future growth potential of our company. There is a great deal of uncertainty in the world today, but we remain focused on continuing to serve our students and prioritizing the well-being of all our stakeholders. I would like to thank all of our employees, associates, family, and friends for their ongoing support, and I hope everyone continues to stay safe and healthy. With that operate, let's open it up for questions.

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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 from 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 very much everyone. That concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.