ATA Creativity Global ADR(AACG) - 2023 Q2 - Quarterly Report

Report Overview Q2 2023 and H1 2023 Highlights ATA Creativity Global (ACG) achieved revenue growth, narrowed net loss, and maintained healthy cash reserves in Q2 and H1 2023, with increased student enrollment (excluding divested businesses) and credit hours delivered Q2 2023 and H1 2023 Key Metrics | Metric | Q2 2023 | YoY Change | H1 2023 | YoY Change | | :--- | :--- | :--- | :--- | :--- | | Student Enrollment (Excluding Divested Businesses) | 928 | +7.5% | - | - | | Credit Hours Delivered | 28,698 | +13.0% | - | - | | Net Revenues | RMB 36.2 million (US$5.0 million) | +6.5% | RMB 78.6 million (US$10.8 million) | +3.1% | | Net Loss Attributable to ACG | RMB 17.2 million (US$2.4 million) | Loss narrowed | RMB 35.0 million (US$4.8 million) | Loss narrowed | | Cash and Cash Equivalents (as of June 30) | RMB 56.8 million (US$7.8 million) | - | - | - | Management Commentary CEO Kevin Ma noted positive enrollment trends in Q2 due to improved post-pandemic market conditions, with increased contributions from portfolio training and overseas study consulting offsetting declines in other education services - Student enrollment continued to improve in cities with better post-pandemic market conditions, with portfolio training credit hours increasing by 13.0% year-over-year and 3.9% quarter-over-quarter[3] - Revenues remained stable, primarily driven by increased contributions from portfolio training programs and overseas study consulting services[3] - The company once again offered unique experiences for students participating in overseas summer programs, primarily at renowned institutions in the UK and Europe[3] Outlook President Jun Zhang observed positive trends in student enrollment and credit hours as pandemic restrictions eased, with plans to expand course offerings to include master classes, internships, boot camps, and domestic study programs related to Chinese cultural heritage - A positive trend of students starting or resuming creative learning emerged after the relaxation of pandemic restrictions[4] - Plans include expanding course offerings to include master classes, internships, boot camps, and overseas summer programs[4] - Domestic study programs related to China's diverse cultural heritage will be launched, covering skills such as photography, filmmaking, ethnic minority cultures, mineral painting, and painted sculpture[4] Operating Performance Enrollment and Credit Hours In Q2 2023, ACG's total student enrollment was 928, with 540 in portfolio training programs, and 28,698 credit hours delivered, showing a significant 24.5% increase in project-based credit hours - Total student enrollment in Q2 2023 was 928, with 540 participating in portfolio training programs[5] - A total of 28,698 credit hours were delivered for portfolio training programs, representing a 13.0% year-over-year increase[2][6] Q2 2023 Portfolio Training Program Credit Hours Delivered | Project Type | Q2 2023 Credit Hours | Q2 2022 Credit Hours | % Change | | :--- | :--- | :--- | :--- | | Time-based Projects | 10,428 | 10,710 | (2.6%) | | Project-based Programs | 18,270 | 14,677 | 24.5% | | Total | 28,698 | 25,387 | 13.0% | GAAP Financial Results Second Quarter 2023 GAAP Results In Q2 2023, ACG's net revenues grew by 6.5%, gross profit increased by 18.0%, and gross margin improved to 39.5%, while operating expenses decreased, leading to a narrowed operating loss and net loss attributable to ACG Q2 2023 Key Financial Data | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | 36.2 million | 34.0 million | +6.5% | | Gross Profit | 14.3 million | 12.1 million | +18.0% | | Gross Margin | 39.5% | 35.6% | +3.9 percentage points | | Operating Expenses | 35.7 million | 38.6 million | -7.6% | | Operating Loss | (21.4) million | (26.4) million | Loss narrowed | | Net Loss Attributable to ACG | (17.2) million | (22.1) million | Loss narrowed | | Basic and Diluted Loss Per Share | (0.27) | (0.35) | Loss narrowed | | Basic and Diluted Loss Per ADS | (0.54) | (0.70) | Loss narrowed | - Operating expenses decreased primarily due to a RMB 1.1 million reduction in R&D expenses (new service management platform development costs mainly incurred in 2022) and a RMB 1.2 million reduction in G&A expenses[8] First Half 2023 GAAP Results In H1 2023, ACG's net revenues grew by 3.1%, gross profit increased by 5.3%, and gross margin improved to 42.1%, with slightly reduced operating expenses and a narrowed net loss attributable to ACG H1 2023 Key Financial Data | Metric | H1 2023 (RMB) | H1 2022 (RMB) | YoY Change | | :--- | :--- | :--- | :--- | | Net Revenues | 78.6 million | 76.2 million | +3.1% | | Gross Profit | 33.1 million | 31.4 million | +5.3% | | Gross Margin | 42.1% | 41.2% | +0.9 percentage points | | Operating Expenses | 75.8 million | 76.6 million | -1.0% | | Operating Loss | (42.7) million | (45.2) million | Loss narrowed | | Net Loss Attributable to ACG | (35.0) million | (37.9) million | Loss narrowed | | Basic and Diluted Loss Per Share | (0.56) | (0.60) | Loss narrowed | | Basic and Diluted Loss Per ADS | (1.12) | (1.20) | Loss narrowed | - Operating expenses decreased primarily due to a RMB 1.7 million reduction in R&D expenses and a RMB 2.3 million reduction in G&A expenses, partially offset by a RMB 3.2 million increase in sales expenses (performance bonuses related to sales growth)[11] Non-GAAP Financial Measures Adjusted Net Loss and EPS In Q2 2023, ACG's adjusted net loss attributable to ACG, excluding share-based compensation and foreign exchange gains/losses (non-GAAP), narrowed to RMB 16.6 million compared to the prior year Q2 2023 Non-GAAP Adjusted Net Loss | Metric | Q2 2023 (RMB) | Q2 2022 (RMB) | | :--- | :--- | :--- | | GAAP Net Loss Attributable to ACG | (17,212,969) | (22,070,027) | | Share-based Compensation Expenses | 657,611 | 504,444 | | Foreign Currency Exchange Gains (Losses), Net | 330 | (8,702) | | Non-GAAP Net Loss Attributable to ACG | (16,555,028) | (21,574,285) | | Non-GAAP Basic and Diluted Loss Per Share | (0.26) | (0.34) | | Non-GAAP Basic and Diluted Loss Per ADS | (0.52) | (0.68) | Balance Sheet Key Balance Sheet Figures As of June 30, 2023, ACG's cash and cash equivalents were RMB 56.8 million, a slight increase from year-end 2022, but working capital deficit and total shareholders' equity decreased Key Balance Sheet Data | Metric | June 30, 2023 (RMB) | December 31, 2022 (RMB) | | :--- | :--- | :--- | | Cash and Cash Equivalents | 56.8 million (US$7.8 million) | 55.0 million | | Working Capital Deficit | 260.6 million (US$35.9 million) | 227.3 million | | Total Shareholders' Equity | 110.2 million (US$15.2 million) | 14