ATA Creativity Global

Greetings and welcome to ATA Creativity Global's fourth quarter and full year 2020 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you would like to queue up for questions now, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Carolyn So, of the Equity Group. Thank you. You may begin.

Thank you, operator, and hello, everyone. Thank you for joining us. The press release announcing ATA Creativity Global's or ACG's results for the fourth quarter and year ended December 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 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 plans for mergers and acquisitions generally, ACG's ability to operate efficiently and maintain continued financial strength under unusual circumstances, ACG's growth strategy, anticipated growth prospects 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 risk 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 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 U.S. dollar amounts in this conference call relating to financial results for fourth quarter and year ended December 31st, 2020 are converted from RMB using exchange rate of 6.525 RMB to one U.S. dollar, the noon buying rate as of December 31st, 2020. All historical conversions are accurate as of the time reported unless otherwise noted. The company reports its financial results under U.S. GAAP in RMB and all percentages calculated in the presentation are based on RMB unless otherwise noted. For those of you following along with a company PowerPoint presentation, there is an overview of the company on slide three. In addition, we are more than happy to take investor questions during today's Q&A session 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 fourth quarter and full year 2020. And then 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 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. In 2020, the global COVID-19 pandemic presented a series of challenges to people and businesses at a level that nobody could have predicted. The virus has had tragic consequences for so many. At ATA Creativity Global, we were very fortunate to have been in a position to navigate the changes created by the critical public health situation in China in the first half of 2020. Having closed on our acquisition of Guangzhou EMA in early August of 2019, our two companies had substantially assimilated by early 2020 when the significance of the pandemic is becoming increasingly apparent. displayed a key role in our successful decisioning of coursework to the online platform. We also worked to upgrade technology systems that support the daily operations of the combined company and leverage our leadership in finance, management and analysis. We are proud that the team here at ACG demonstrated a strength and resilience under these unprecedented circumstances. Putting the well-being of our students and staff first by transitioning all in-person coursework to online delivery in early February. And I would also like to applaud the students as well as the teachers and staff supporting them for their perseverance and dedication to the continued pursuit of their creative education. The public health situation in China improved as we headed toward the middle of the year. and nearly all of our training centers were able to resume traditional in-person delivery of coursework by late second quarter. We did see that some students continued to pursue their coursework online even when traditional delivery became available again, and we are pleased to continue offering online options for coursework, generally more introductory and lecture-style in nature. which lend itself to this delivery method and offer students increased flexibility. We have worked through enrollment deferrals and the more significant impact to our international educational tourists and study abroad offerings due to travel restrictions as a result of the pandemic by developing certain domestic art-themed travel programs and online bootcamp alternatives partnering with well-known overseas art schools and institutions. These programs that were newly developed during the 2020 year are part of our research-based learning business, formerly known as the educational travel business. We are pleased that our students have been able to continue their studies with a certain level of normalcy at ACT, especially during the busy fourth quarter term Many of them are working to complete their portfolios ahead of application deadlines. For the fourth quarter of 2020, credit hours delivered for our portfolio training programs decreased from the prior year period as with the preceding 2020 period. This was primarily a reflection of the continuing COVID-19 environment. However, there was a 2.8% sequential increase from the number of portfolio training credit hours delivered and reported in Q3. We provide a year-over-year quarterly breakdown of these credit hours and additional operating measures on the next slide. Student enrollment for the period was 1,122, out of which 636 were enrolled in the portfolio training program. The portfolio training program consists of time-based programs and project-based programs, and we provide a breakdown of the credit hours delivered during the period compared to the prior year comparable period in our presentation. Revenue is recognized proportionately per credit hours delivered. However, as the total credit hours of project-based programs are not to determine the progress of a project-based program, which is measured by credit hours delivered compared against the total credit hours expected to be delivered as we evaluated at each quarterly and annual financial reporting date. As I mentioned earlier, the fourth quarter tends to be the period in which we deliver the most credit hours as many students are working to complete their portfolios ahead of year-end application deadlines. And while we did see a year-over-year decrease in credit hours delivered, We are pleased to have achieved sequential increase in this metric since Q1 2020 when we began to see the initial effects of the COVID-19 pandemic take hold. 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 Huantiu Yimeng acquisition. As a result, certain line items will include adjustments from amortization of the difference between the carrying value in Huantiu Yimeng's book and the fair value assessed from the PPA process applied to the Huantiu Yimeng acquisition. I will highlight where we saw some impact on our financials due to this PPA adjustment for the fourth quarter and full year 2020. Total net revenues for the first quarter of 2020 increased 12.4% to RMB 60.8 million from RMB 54.1 million in the fourth quarter of 2019. Net revenues for this quarter include the PPA adjustment degrees of RMB 6 million. Growth margin was 48.5% during the 2024 quarter, A significant increase from 38.6% in the prior year period, excluding the PBA adjustment to net revenues, gross margin for the 2020 fourth quarter would have been 53.1%. Net loss attributable to the ACG increased to RMB 24.8 million for the period, compared to net loss of RMB 70.9 million in the prior year period. This was primarily the result of an RMB 30 million decrease in loss from operations and an RMB 20.7 million decrease in impairment loss of long-term investment. Moving to financial highlights for full year 2020. It is important to note that results for 2020 include the full year's worth of contributions from Quantio e-mails. while 2019 increased only about 5 months of contributions. Total net revenues for the annual period were RMB 162.2 million compared to RMB 97.8 million in the prior year. Total net revenues for the period include a PPA adjustment decrease of RMB 24 million. Gross margin improved to 39.2% for 2020 compared to 36.7% in the prior year. Excluding the PPA adjustment to net revenues, gross margin for 2020 would have been 47.1%. This was a direct result of our internal cost restructuring and expense savings initiatives to increase overall operational efficiencies to offset the impact of the COVID-19 pandemic has had on our business. and others. A net loss attributable to ACG was RMB 92.2 million in 2020 compared to net loss of RMB 122.3 million in the prior year. This improvement was primarily driven by a RMB 10.3 million decrease in loss from continuing operations and a RMB 25.1 million decrease in long-term investment impediments and provision charges from the prior year. We continue to be in a solid financial position with US$17.3 million in cash and cash equivalents on the balance sheet. Working capital deficits with US$23.6 million and total shareholders' equity with US$30.5 million at December 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. Last May, our Board of Directors authorized the repurchase of up to US$1 million of the company's issued and outstanding ADS from time to time in open markets and share privately negotiated transactions. As part of this share repurchase plan, the company repurchased 450,337 ADF at an average stock price of USD 1.2631 during the course of the year. The plan expires on December 31, 2020. With that, I would now like to turn it over to Jun, who will expand upon our outlook, growth strategy, and current initiatives before opening it up for Q&A. Kevin, unfortunately, had an urgent matter to attend to and was unable to join us today. Jun will make his remarks in Mandarin, which will be followed by an English translation. Jun, please go ahead.