ATA Creativity Global

Greetings. Welcome to the ATA Creativity Global's third quarter 2021 financial results conference. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. If you would like to ask a question, please press star one on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Caroline Sohn. 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 third quarter ended September 30th, 2021 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 ACU'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 contain 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, could, estimate, expect, forecast, future, intent, look forward to, outlook, plan, should, will, and similar terms 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 growth strategy, anticipated growth prospects and subsequent business activities, market demand for and market acceptance and competitiveness of ACG's portfolio training programs and other education services, the impact of the COVID-19 pandemic and the opinion on ACG and its operations, and ACG's plan and anticipated benefits of the measures implemented in response to the COVID-19 pandemic. 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 ECG 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 third quarter ended September 30th, 2021 are converted from RMB using exchange rate of 6.4434 RMB to one U.S. dollar. The new and buying rate as of September 30th, 2021. 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. 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 CFO, Ms. Amy Tung, will provide a brief overview of operating and financial highlights for the third quarter of 2021. Chairman and CEO, Mr. Kevin Ma, and President, Mr. Jun Zhang, will follow with an update on the company's outlook and 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. We are pleased to have achieved strong top line growth while improving gross margins year over year during the third quarter of 2021. This was primarily contributed by increased services delivered during the period across all major line of business, mainly the portfolio training programs and research-based learning services. This growth was also supported by stable overall enrollment in the variety of programs we offer. Specifically, we saw increasingly positive reception and interest in our research-based learning offerings. Our primary offering, the portfolio training program, enrolled 625 students during the period, which remained steady from the same period last year. We delivered 44,640 credit hours for portfolio training programs, which is a slight increase from Q3 2020. We were pleased to see project-based program credit hours increase over 29% year-over-year during the third quarter, a result of our conscious effort to shift our portfolio training mix toward project-based programs versus time-based programs, which has increased operational efficiencies that have translated into revenues and margin improvements. We continue to explore ways in which we can better serve our students by investing in the development of new offerings and our IT platform, which we believe will serve as a foundation for future growth. Our revenues generated from the research-based learning services business saw a notable increase from the prior year period, and we anticipate the demand for these types of experimental learning opportunities will continue to grow. This summer, we offered themed domestic tours, internships, academic projects, as well as various online boot camps and on-site workshop programs in partnership with our overseas institution partners, as well as certain industry partners. And we look forward to making these types of offerings available throughout the year. With that, let's move to financials for the third quarter and first nine months of the year. Total net revenues for the third quarter of 2021 increased 31% to RMB 55.3 million from RMB 42.2 million in the third quarter of 2020. This was primarily driven by increased contributions from portfolio training and research-based learning services for which we delivered more services when compared with the prior year period when more restrictions on service delivery were in place due to the COVID-19 pandemic. gross margin improved to 51.4% during the 2021 third quarter, up from 37.4% in the prior year period. The improvement was primarily driven by the increased revenues and operating efficiency gained from the ongoing shift of ACG's portfolio training program, mixed with project-based programs and related cost optimization efforts. Net loss attributable to ACG was RMB 26.2 million, which compared to net loss attributable to ACG of RMB 14.9 million in the prior year period. This was primarily a result of increased operating expenses related to the final RMB 10 million to fund ACG's research project with the Research Institute of Future Education and Assessment of Tsinghua University this year. which was deferred from the prior sequential quarter, as well as increased selling expenses related to higher sales performance bonuses and increased legal and professional expenses. Turning to the first nine months of 2021, net revenue was RMB 129.6 million, up 28% from RMB 101.3 million in the same period of 2020. Gross margin improved to 45.7% from 33.7% in the prior year period. Net loss attributable to ACG improved to RMB 31.1 million compared to net loss of RMB 67.4 million. Moving to the balance sheet, we continue to be in a solid financial position with US$11.7 million in cash and cash equivalents. working capital deficits with US$31.3 million and total shareholders' equity with US$30.1 million at September 30, 2021, compared to working capital deficits of US$23.6 million and shareholders' equity of US$30.5 million, respectively, at December 31, 2020. With that, I would now like to turn it over to Kevin, who will expand upon our outlook and growth strategy.

Thank you, Amy. We are pleased to see our elements remain stable during a period of uncertainty and a change in China's education industry. The global pandemic has had a significant impact on several companies that were unable to continue operating and the challenging circumstances were occasional restrictions and shortages were implemented in China. This was then accepted by the new opinion released by the government in late July, which focused on companies providing up-to-school academic course tutorial service for students receiving compulsory education. APG was able to successfully navigate and write about the handle presented by the COVID-19 and we don't anticipate advice material of the recently announced opinion. Despite ongoing concerns with regard to the pandemic, we delivered a strong quarter of performance in the third quarter of 2021, highlighted by over 30% growth on the top line and year-over-year improvement in growth margins. As Amy noted earlier, we are seeing increased demand for our research-based learning services, which tend to be short-term programs that provide project-based hands-on learning experience, and we are exploring different options for expanding our offerings within this service line. We believe we are well-positioned to grow our existing line of business program offerings, but are being mindful of the changing education landscape and how they need our students and the potential future students are involving as well. While the public health situation in China has remained relatively stable, we remain vigilant and continue to monitor any health concerns closely as we enter the full season Despite the uncertainties within the education industry, we intend to continue investing in our business and establish partnerships within the industry, which will serve as a foundation for future growth. Jim will make his remarks in Mandarin, which will be followed by English translation. Jim, please go ahead.

Thank you, Kevin. We are very happy that this year, a series of courses that can be provided in the summer have been warmly reflected. Although we still cannot provide international study projects this summer, we see that students still maintain a strong desire to learn and experience new things. In the past summer, we continued to explore the location of the opening of domestic themed study projects. For example, in Xi Xi, Anhui Province, we also launched a series of new products in cooperation with new partners in the domestic and foreign art industries. For example, we launched a series of OpenHack projects in cooperation with business partners in different fields, allowing students to have the opportunity to go to some companies' real work sites. For example, design, fashion design workshop for practical learning. At the same time, these students will participate in the project completion stage of the work exhibition competition. And some of the students who are excellent at the work will be able to apply to enter these companies in the future. Work or internship opportunities. These projects have received good reviews from our students. We see the opportunity to expand the research and service business from the demand for temporary suppression. and pay attention to the number of contracts of these projects. Since the summer, it has remained strong. As Kevin mentioned, the education pattern is changing. We are not only expanding our course projects, but also trying to adjust the project structure to meet the needs of students more flexibly. Despite the impact of the epidemic, some companies have been forced to close, while some other companies are still struggling. We have gone too far. Thank you, Kevin. We were pleased with the resounding favorable response to our alternative programs this summer.

Despite not being able to offer our usual international study abroad programs this past summer, we saw that students remained eager to learn and experience new things. We continue to explore various sites for themed domestic travel programs during the past summer, such as Xixi in the province of Anhui. We also cooperate with new partners within the arts-related industry, both domestic and overseas, in launching new offerings. For example, we partnered with different businesses to launch the Open Hack series program. which gave students hands-on learning opportunities on-site at various enterprises, such as certainly famous car design and fashion design workshops. These students participated in a workpiece showcase competition held at the close of the program, and certain students who demonstrated excellent workmanship were invited to apply for future work or internship positions within these enterprises. These programs were very well received by our students. We see an opportunity here to expand our research-based learning services business due to current pent-up demand and are seeing that enrollment in these programs has remained strong beyond the summer months. As Kevin mentioned, the education landscape is changing, and we are working to not only expand our course offerings, but the way in which we structure our programs to offer students more flexibility to meet their needs. While some companies have been forced to close their doors and several others remaining continue to struggle as a result of the pandemic, we have turned a corner and believe we are well-positioned to serve these students who wish to pursue an education in the creative arts. With over 20 campus locations nationwide and a proven track record of our students going on to well-known creative institutions around the world, we remain confident in ACG's ability to stand out from our competitors. With that, I'll turn it back to Kevin.

Thanks, Judy and Karen. In closing, ACG has proven its ability to overcome challenging circumstances and emerge strong on the outside. We continue to navigate the changing environment, particularly from a regulatory perspective, but remain confident that we will be able to execute on our growth initiatives despite the uncertainties surrounding the education industry in China today. We continue to strive towards becoming the leading international provider of creative arts education in China by putting our students first. We look forward to bringing our students new experience and learning opportunities in their route to enhance their education. Everyone, please stay safe and healthy. With that all praise, let's open it up for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. There are no questions at this time. We have reached the end of the question and answer session, and I will now turn the floor back over 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.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.