ATA Creativity Global

Welcome to ATA Creativity Global's fourth quarter and year-end 2021 financial results. 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 join the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Please note this conference is being recorded. I will now turn the conference over to your host, Alice Zhang 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 Globals, or ACGs, results for the first quarter year ended December 31, 2021, is available at the IRF section of the company's website at www.atai.net.cf. As part of this conference call, the company has an accompanying slide presentation available on its website. A replay of this broadcast would 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, could, estimate, expect, forecast, future, intent, look forward to, outlook, plan, should, will, and similar terms that 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 event for and market acceptance and competitiveness of ACG's portfolio training programs and other education services, the impact of the COVID-19 pandemic on ACG and its operations, and ACG's planned 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 rates associated with investing in ACG is included in its drawings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The company does not assume any obligations to update any forelooking 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 before the quarter of the year ended December 31, 2021, are converted from RMB using an exchange rate of 6.37 to fixed RMB to one U.S. dollar. The noon buying rate ends on December 31, 2021. All historical conversions are accurate as of the time reported, unless otherwise noted. The company reports its financial results under the 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 the company PowerPoint presentation, there is an overview of the company in slide three. In addition, we're 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, Mrs. Amy Tong, will provide a brief overview of operating and financial highlights for the fourth quarter and year end 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, Mrs. Amy Tong. Please go ahead, Amy.

Thank you, Alice, and welcome, everyone. Good evening to those in America. We appreciate everyone's time. We are pleased with the solid 24.7% growth in revenues and substantial improvement in gross margin we achieved during the full year 2021. This was primarily driven by the increase in services provided during the year as we were able to scale our operations more effectively, significantly reducing the company's losses from the prior year. 2021 revenue growth was primarily supported by increased contributions from portfolio training as we delivered more services as the effects of the COVID-19 pandemic gradually subsided, particularly during the second half of the year. Our research-based learning services also contributed to top-line growth as many of these programs were developed in response to the pandemic. These experimental learning opportunities have been well-received by our students and continue to be in high demand. Our core portfolio training program enrolled 569 students during the fourth quarter of 2021, compared to 636 students in the prior year period. Enrollments tend to be an indicator of future credit hours delivered, and the decrease from the prior year period is a reflection of the increasingly fierce competition we are seeing within the market. We have been proactive in addressing the increased competition, particularly during the second half of 2021, by closely monitoring and enhancing our marketing and promotional strategies. We plan to allocate a larger portion of our marketing resources in 2022 to popular social media platforms in China, such as Douyin, which is similar to TikTok in the U.S., Jihu, which is similar to Quora in the U.S., and Damping with a goal of developing a private pool of leads for our brand. These newer platforms have proven to resonate more with young people, generating leads that have higher potential conversion rates to sales. During the fourth quarter of 2021, we delivered 53,538 credit hours for our portfolio training programs. notable increases in both time-based program and project-based program. Credit hours delivered resulted in a 17.8% increase from the fourth quarter of 2020. While it is less apparent in this reporting period, we have continued to make a conscious effort to shift our portfolio training mix in favor of project-based programs versus time-based programs. This shift was translated into increased revenues and improved margins due to greater operational efficiencies. We have also continued to explore ways in which ACG can better serve a greater population of students from diverse programs. We recently announced the opening of our International Arts Foundation Program Center in Beijing and the Shuren ACG Arts Center. both of which opened the doors in September 2021 and are expecting our offerings to include authorized qualifications and accredited classes to students that may have different needs and desires that traditional programs do not fulfill. With that, let's move to financials for the fourth quarter and through year 2021. Total net revenues for the fourth quarter of 2021 increased 19.3% to 1%. RMB $72.6 million from RMB $60.8 million in the fourth quarter of 2020. This was primarily driven by increased contributions from portfolio training services delivered either in person through ACG's nationwide training center network or through online platform, which represented nearly 75% of total net revenues during the period. Worth margin increased to 62.8% during the 2021 fourth quarter, up from 48.5% in the prior year period. The improvement was driven by the increased revenues and reduced cost of revenues primarily contributed by improved operating efficiencies from the ongoing shift of ACG's portfolio training program mix to project-based programs and related cost optimization efforts. Net loss attributable to ACG improved to RMB 2.5 million compared to net loss attributable to ACG of RMB 24.8 million in the prior year period. This notable improvement was primarily a result of an RMB 16 million increase in gross margin as well as significantly decreased operating expenses. While we continued to invest in our R&D, we were able to reduce G&A expenses by approximately RMB 6.2 million. The decrease in the operating expenses was also a result of an RMB 3.1 million decrease in impairment loss of intangible and other non-current assets and RMB 5.9 million provision for loan receivable and other receivables. Turning to the full year 2021 results, net revenue was RMB 202.2 million up 24.7% from RMB 162.2 million in 2020. This increase was driven primarily by growth in portfolio training, as well as research-based learning services. Gross margin improved to 51.8% from 39.2% in the prior year period. Net loss attributable to ACG improved to RMB 33.6 million, compared to net loss of RMB 92.2 million. This improvement was primarily driven by an investment gain of RMB 33.5 million from the disposal of ACG's K-12 education assessment business during the second half of 2021, and an RMB 41.1 million improvement in lost-term operations. Moving to the balance sheet, we continued to be in a solid financial position with U.S. dollar 11.2 million in cash and cash equivalents. Working capital deficits was U.S. dollar 30.2 million, and total shareholders' equity was U.S. dollar 30 million at December 31, 2021, compared to working capital deficits of U.S. dollar 23.6 million and shareholders' equity of U.S. dollar 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. Kevin.

Thank you, Amy. We are pleased to deliver solid top-line growth in fiscal year 2021, which along with our ability to increasingly scale our business and realize efficiency in our company to significantly narrow loss compared to the previous year. In 2021, studying abroad continued to be a challenge for our students due to certain travel restrictions related to the ongoing global pandemic. Our elements remained as stable during the fourth quarter despite increased competition in the creative arts education market in the second half of 2021. There was also some uncertainty related to regulatory changes for companies involved in the China education industry. The new opinion released by the government in late July has led to many up-school academy tutoring companies either closing their doors or changing their business focus. Due to the nature of Our business ACG was not directly impacted by the opinion, but we did see a need to continue different ACG from our competitors. As Amy noted earlier, we are seeing increased demand for our research-based learning services, which tend to be short programs that provide a project-based hands-on learning experience. You may recall that we developed a research-based learning service in response to the pandemic and are pleased to see this business potential for future growth. At the same time, we continue to explore different ways to expand our offerings. We believe we are well positioned to grow our existing lines of business with our current portfolio of program offerings. while we are mindful of the fair competition within their markets. We remain focused on serving our students and addressing their evolving needs. We are optimistic about the opportunities ahead of us in 2022. and look forward to maintaining our leading position in creative arts education as we continue to drive positive outcomes for all our students. And on that related note, I am sorry to report that of the applications submitted in 2021, ACG students who participated in the portfolio training programs and overseas study counseling programs have received a number of offers of admission and a scholarship for 2022. These schools include the likes of Carriage Mellon University and New York University, as well as prestigious art colleges such as Rhode Island School of Design, Parsons School of Design, School of the Art Institute of Chicago, Bright Institute, and Art Center College of Design. We are extremely proud of our students and intend to continue investing in our business and establishing partnerships within the industry, which will serve as a foundation for our future growth. I'd now like to hand, therefore, over to Jun Zhang, as he is present, to provide an update on our current growth initiatives. Jun will make his remarks in Mandarin, which will be followed by English translations. Jun, please go ahead.

Thank you, Kevin. After the pandemic, we quickly made decisions and were able to respond. For the success of ACG, it is extremely important. Due to some of the effects of the pandemic, it has continued to exist throughout 2021. Considering the health of students and teachers, we have continued to develop various short-term projects, including online training camps. Thank you. We are very proud to be able to provide overseas art courses for students who plan to apply for overseas art courses at the ACG International Arts Center for the first time in a year. After a full-time international art course and related entrance courses, We also provide service to those children who are not qualified to go to public high schools in Beijing but are interested in studying at the Art and Design Center of Shuren Art and Design Center to provide service. We have already obtained the qualifications approved by Perkins. For example, BTECH international level 3 and level 4 qualifications and A-level art and design qualifications may need more time to decide to provide extra flexibility to students who study abroad. Through close cooperation between art schools, universities, and international art high schools, we expect to provide services to students who have different needs in terms of learning and professional pursuit. We also see the opportunity to expand our research service business from the needs that have been suppressed 我们不仅计划继续扩大我们提供的课程种类, 还继续扩展我们的项目结构, 让学生可灵活地满足他们的需求。 虽然一些公司被迫关门, 而另外一些公司则被迫在2021年彻底改变他们的商业模式, 但ACG仍能够驾驭市场不确定性。 我们相信这种反映ACG强大的运营基础, 该基础建立在我们为学生提供最优质的教育服务, Thank you, Kevin.

Our ability to make decisions and evolve quickly has been critical to ACG's success both during and following the pandemic. As some of the effects of the pandemic continue to linger throughout 2021, we continue to develop additional short-term programs with our students' and teachers' health in mind, including online boot camps, internships, domestic travel, and certain themed research-based learning programs. For example, we partner with the RGS Guilford Nanjing School on the Nanjing Intangible Cultural Heritage Program, The RGS Guilford Nanjing School is the first Chinese international school of prestigious British school, Royal Grammar School Guilford, where they educate students from grades 1 through 12. This program introduces students to designing and crafting handmade silver and gold products, which are extremely beautiful and delicate. This program was well received by the participating students. In addition, we have developed new offerings to expand the student population research. The recent opening of ACG's International Arts Foundation Program Center and the Shuren ACG Arts Center paved the way for ACG to serve high school students who may not otherwise have had the opportunity to pursue study abroad experiences at overseas art colleges. We're proud to be providing one year accredited full-time international arts and relevant introductory curriculum to students planning to apply for overseas undergraduate art programs at the ACG International Arts Foundation Program Center. We are also serving as a bridge for those families whose children are not eligible to attend public high school in Beijing, but are interested in pursuing a creative arts education through our programs at the Shuren ACG Art Center. The qualifications for which we have received approval from Pearson, such as the PTEC International Level 3 and Level 4 qualifications, and the A-Level Art and Design qualifications. provide additional flexibility for students who may need more time to decide whether they wish to pursue studies abroad. By working closely with international education providers, including art colleges and universities and international high schools, we look forward to serving a growing population of students with diverse needs in our academic and professional pursuits. We also see an opportunity to expand our research-based learning services business due to the current pent-up demand and a continuously strong enrollment. in this program. We are prepared not only to continue expanding 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 others have been forced to completely change their business model in 2021, ACG was able to navigate the uncertainties of the market. We believe this is a reflection of ACG's strong operational foundation. which is built upon providing the highest quality education to our students and supported by our more than 20 campus locations nationwide. Our experienced teachers, we've proven track records in helping students realizing their further study dreams, as well as our deep relationship with renowned partners. Taking all of the strengths into account, we remain confident in ACG's ability to stand out from our competitors. With that, I'll turn it back over to Kevin.

Thanks, June and Alice. In closing, we are optimistic about the opportunities ahead of us in 2022 and look forward to maintaining our leading position in creative arts education as we continue to drive positive outcomes for all our students. We continue to strive towards becoming the leading international provider of creative arts education in China by putting our students first and assessing new master opportunities. We look forward to bring our students new experience and learning opportunities as they look to enhance their education. With that operate, let's open it up for questions.

Thank you. 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. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the 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 one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. There are no questions at this time. I will now turn the call 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 X Group. We are always available to speak to investors and look forward to speaking with you all during our next quarterly call. Thank you.

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