Skillful Craftsman Education Technology Ltd annual report, Q4 FY2022

Business context and reporting period

Skillful Craftsman Education Technology Limited filed this annual report on Form 20-F for the fiscal year ended March 31, 2022. Despite the request metadata indicating “2021 Q4,” this filing reports full-year results, not a standalone quarter. The Cayman Islands holding company conducts its China operations through subsidiaries and a variable interest entity (VIE); its main business is online vocational education.

Education remained the core business. The company also expanded into financial education through Jisen Information and flexible employment services through Wuxi Talent Home. The filing says online education represented 96.5% of fiscal 2022 revenue.

Key financial metrics

Amounts are in U.S. dollars unless stated otherwise. Fiscal 2022 is compared with fiscal 2021.

Current assets were $27.52 million and current liabilities were $8.02 million at March 31, 2022, a current ratio of approximately 3.4. The five-year loan bears 6% annual interest, with principal due January 3, 2027. The company reported no dividends and no material off-balance-sheet arrangements.

Material changes versus the prior year

• Revenue fell 21%, while cost of revenue rose 20%; gross profit declined 63% and the company moved from net income to a net loss.
• Fee-paying platform members declined 24% to 1.23 million. Management attributed weaker enrollment and revenue mainly to intensified competition, including free online education resources offered by competitors and government platforms.
• Operating cash flow fell by about 55% to $4.83 million. Cash nevertheless increased by $6.38 million, supported in part by $14.81 million of new borrowing.
• The company invested $14.81 million in Fujian Pingtan Ocean Fishery Corporation and reported a separate $0.31 million investment in Medical Star. It also issued 2.9 million shares to acquire Jisen Information, increasing shares outstanding from 12.0 million to 14.9 million.
• Management reported a $2.75 million increase in website maintenance fees and higher depreciation and amortization as key cost pressures. General and administrative expense rose 13%.

Outlook, risks and unusual items

• Management said cash and expected operating cash flows should cover anticipated operating and expansion needs for at least 12 months, but warned that competition and lower paid enrollment could continue to pressure revenue and cash generation. No numerical revenue or earnings guidance is provided.
• The company reported a material weakness in internal control over financial reporting, citing SEC reporting and financial-statement documentation processes and the need for additional U.S. GAAP and SEC-reporting expertise. Disclosure controls were deemed ineffective; remediation efforts include hiring, training and control-process improvements. The auditor did not provide an internal-control attestation.
• The VIE structure is central to the business: the company does not own the VIE’s equity and relies on contractual arrangements whose enforceability under PRC law is uncertain. The VIE holds key operating licenses and assets, and the filing reports that it contributes most of the group’s assets and liabilities.
• PRC regulatory, cybersecurity, data privacy, foreign-exchange and overseas-listing requirements may change or be interpreted unpredictably. Restrictions on transferring cash out of China may limit the parent company’s access to operating funds. The company also identifies potential PCAOB-inspection and U.S. listing risks, although its auditor is U.S.-based.
• The company stated that it believed it was a passive foreign investment company (PFIC) for the fiscal year ended March 31, 2022; U.S. investors should assess related tax consequences with their tax advisers.
• Unusual items included a $2.44 million investment loss in FY2021, substantially reduced in FY2022, and a $0.25 million rental-fee waiver recorded as other income in FY2022. The new loan generated $0.22 million of interest expense.

Important facts for investors to verify

1. Confirm the reporting period: this is an annual report for the year ended March 31, 2022, not a quarterly filing.
2. Reconcile the filing’s VIE revenue disclosures: it states both that the VIE generated 100% of consolidated revenue in FY2022 and that it generated 97.2%.
3. Review the loan agreement, lender relationship, use of proceeds, interest payments and repayment terms for the $14.81 million borrowing.
4. Check the carrying value, valuation assumptions, governance rights and performance of the Fujian Fishery and Medical Star investments, and the completed acquisition terms for Wuxi Talent Home.
5. Track paid-member counts, course pricing, free-platform competition, gross margins and operating cash flow, as well as progress in remediating the disclosed material weakness.
6. Assess the ability to move cash from the PRC to the holding company and the continuing enforceability of VIE agreements and required operating licenses.