Skillful Craftsman Education Technology Limited (NASDAQ: EDTK) — Form 20-F
Reporting period: Fiscal year ended March 31, 2021. This is an annual report, not a standalone 2020 fourth-quarter filing. Financial figures below are in U.S. dollars and prepared under U.S. GAAP unless noted otherwise.
Business context
The company provides online vocational education and technology services in China. Online education generated approximately 99.3% of fiscal 2021 revenue. Its China operations are conducted primarily through Wuxi Wangdao, a variable interest entity (VIE) controlled through contractual arrangements rather than direct equity ownership. The company reported 83.4 million registered platform members and 1.62 million fee-paying members at March 31, 2021.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $29.17 million | $28.60 million | +2% |
| Gross profit | $14.46 million | $16.80 million | -14% |
| Operating income | $8.99 million | $13.24 million | -32% |
| Net income | $3.50 million | $9.98 million | -65% |
| Operating cash flow | $10.75 million | $11.48 million | Down $0.73 million |
- Gross margin was approximately 49.6%, versus 58.7% in FY2020; operating margin was 30.8%, versus 46.3%; net margin was 12.0%, versus 34.9%.
- Cost of revenue rose 25% to $14.71 million. Operating expenses increased 53% to $5.46 million, including a 79% increase in general and administrative expenses to $3.65 million.
- Other items included a $2.44 million investment loss and a $0.37 million government grant. Income tax expense was $3.48 million.
- Cash and cash equivalents were $17.45 million, up from $11.93 million. Current assets were $25.04 million and current liabilities $13.33 million, giving a current ratio of approximately 1.88, compared with 0.79 a year earlier.
- Total assets were $59.21 million; total liabilities were $13.64 million; shareholders’ equity was $45.57 million. The balance sheet reports no borrowings; liabilities were primarily deferred revenue. Deferred revenue totaled $11.77 million.
- Investing cash outflow was $20.86 million, including $5.09 million for property and equipment, $7.77 million for intangible assets and an $8.0 million fund investment. IPO proceeds net of expenses provided $13.24 million in financing cash flow. Cash increased by $5.52 million overall.
Material changes versus the prior year
- Fee-paying members fell 47%, from 3.09 million to 1.62 million, principally as two-year promotional memberships begun in 2018 expired from July 2020. The filing states that only about 2% of registered members were fee-paying.
- Revenue rose slightly despite the membership decline. VIP membership revenue increased to $23.99 million from $22.32 million, while SVIP revenue declined to $4.97 million from $6.09 million. Technology-services revenue was $0.21 million.
- Higher content, platform and infrastructure costs—particularly depreciation, virtual-simulation fees and platform maintenance—compressed gross margin. Higher employee compensation and public-company-related costs contributed to increased operating expenses.
- The company invested $8.0 million in a Level 3 private fund and recognized a $2.44 million loss on redemption. It reported that the remaining $5.56 million redemption receivable was received by July 12, 2021.
- IPO issuance increased shares outstanding from 9 million to 12 million during the fiscal year. Basic and diluted earnings per share declined to $0.32 from $1.11.
Outlook, risks and unusual items
- Management said cash and operating cash flow should meet anticipated operating and expansion needs for at least 12 months. No quantified revenue or earnings guidance was provided.
- Plans include developing courses aligned with China’s “1+X” vocational-certification policy, expanding virtual-simulation programs, and developing mobile and career-advice platforms. Management described opportunities from online learning adoption but also cautioned that post-pandemic normalization could slow industry growth.
- A May 25, 2021 agreement provides for acquiring 100% of Jisen Information, a financial education and services provider, for 2.9 million newly issued shares; closing was expected in August 2021. This was subsequent to the reporting period.
- Key risks include uncertainty over PRC education, internet, cybersecurity and data rules; the enforceability and regulatory treatment of the VIE arrangements; restrictions on moving cash out of China; and dependence on strategic partners and fee-paying member conversion. COVID-19’s longer-term effect remained uncertain.
- The company disclosed a material weakness in internal control over financial reporting concerning SEC reporting requirements and documentation of the financial reporting process. Disclosure controls were assessed as ineffective at year-end; management outlined training, staffing and control-remediation steps. The auditor did not attest to internal-control effectiveness.
- The FY2021 financial statements received an unqualified audit opinion. The company changed auditors effective April 18, 2021 following the prior auditor’s planned deregistration; it reported no disagreements or reportable events with the former auditor.
- The company reported no material litigation, no off-balance-sheet arrangements, no dividends paid or expected in the foreseeable future, and no business insurance apart from auto insurance.
Important facts for investors to verify
- Whether fee-paying membership and renewals recover after the expiration of promotional memberships, and how member counts translate into recognized revenue and cash collections.
- Whether the $5.56 million fund-redemption receivable was collected in full, and the final realized return and fees on the investment.
- Progress and evidence of remediation of the disclosed material weakness, including any later auditor or management assessment.
- Completion terms, dilution and financial contribution of the proposed Jisen Information acquisition.
- Current regulatory and licensing status of the VIE structure and the practical ability to transfer cash from PRC operations to the holding company.
- The filing contains inconsistent references to selected-data dates in its narrative; the audited statements and operating review identify the relevant fiscal years as ended March 31, 2021 and March 31, 2020.