Skillful Craftsman Education Technology Limited (NASDAQ: EDTK) — FY2020 Form 20-F
Reporting period: Fiscal year ended March 31, 2020. Although the request identifies 2019 Q4, this filing is an annual report and does not provide standalone quarterly financial results.
Business context
The company provides online education and technology services in China, primarily vocational training and virtual simulation courses. Online education generated 99.3% of FY2020 revenue. The company operates its China business through Wuxi Wangdao, a variable interest entity (VIE) controlled through contractual arrangements; the VIE accounted for all consolidated revenue, assets and liabilities in FY2020.
Key financial metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $28.60 million | $24.67 million | +16% |
| Gross profit | $16.80 million | $15.21 million | +10% |
| Income from operations | $13.24 million | $11.48 million | +15% |
| Net income | $9.98 million | $8.68 million | +15% |
| Operating cash flow | $11.48 million | $20.29 million | −43% |
| Cash and cash equivalents at year-end | $11.93 million | $10.36 million | +$1.57 million |
| Total assets | $45.69 million | $43.54 million | +$2.15 million |
| Total liabilities | $17.81 million | $24.52 million | −$6.71 million |
| Shareholders’ equity | $27.88 million | $19.02 million | +$8.86 million |
Gross margin was approximately 58.7%, compared with 61.7% in FY2019; operating margin was 46.3%, compared with 46.5%; net margin was 34.9%, compared with 35.2%. Current assets were $13.97 million and current liabilities $17.76 million, giving a current ratio of approximately 0.79. Liabilities included $16.79 million of deferred revenue, largely advance membership fees. The filing reports no material interest-bearing debt.
Investing activities used $10.40 million, including $1.67 million for property and equipment and $8.73 million for intangible assets. Financing cash flow was zero. The decline in operating cash flow reflected, among other things, the prior-year “pay one year, get two years” promotion that had accelerated cash receipts, as well as course-resource and virtual-simulation payments.
Changes versus FY2019
- Revenue rose 16%, while fee-paying members increased 35% to 3.09 million; registered members reached 68.5 million. Management said about 4.5% of registered members were fee-paying.
- Online VIP membership revenue increased to $22.32 million from $19.27 million; SVIP revenue rose to $6.09 million from $5.05 million. Technology-services revenue declined to $0.19 million from $0.34 million.
- Cost of revenue increased 25% to $11.80 million, faster than revenue, primarily due to higher server depreciation and newly incurred virtual-simulation fees. Operating expenses declined 5% to $3.56 million, as lower marketing costs more than offset higher general and administrative costs.
- Net income grew 15%, below the prior year’s 44% growth. Revenue growth also slowed from 65% in FY2019 to 16% in FY2020.
- Deferred revenue fell to $16.79 million from $23.98 million, mainly as prior advance membership receipts were recognized over their service periods.
Outlook, risks and unusual items
- Outlook: Management said cash and operating cash flow should cover operating needs and expansion plans for at least 12 months. It gave no formal numerical revenue or earnings guidance. It expected no lasting COVID-19 impact on FY2021 performance, while acknowledging that the longer-term effect remained uncertain.
- COVID-19 promotion: Courseware was offered free during February 2020 and paying memberships were extended one month. Management reported approximately 2.2 million new registered members that month, but the promotion temporarily reduced February revenue. Revenue and business activity had returned to FY2019 pre-pandemic levels by July 31, 2020, according to management.
- IPO after year-end: On July 27, 2020, the company completed an IPO of 3 million shares at $5 each, receiving approximately $13.36 million in net proceeds. This occurred after the March 31 reporting date.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2020 because of a material weakness involving SEC reporting knowledge, financial-reporting documentation and corporate governance. Management described preliminary remediation steps, including training and additional accounting staff. The auditor did not express an opinion on internal-control effectiveness.
- Audit firm: Thayer O’Neal audited FY2020 and issued an unqualified opinion on the financial statements. The company dismissed BDO and appointed Thayer in July 2020; the filing reports no disagreements or reportable events with BDO.
- Principal structural and regulatory risks: Foreign investors do not directly own the VIE; contractual control may be challenged or prove difficult to enforce. PRC licensing, internet-content, foreign-exchange, dividend-repatriation and regulatory uncertainties could affect operations or access to cash. All cash was held in China, where deposits were not federally insured.
- The company reported no material pending litigation, no material off-balance-sheet arrangements and no material long-term lease obligations. It has never paid dividends and does not expect to do so in the foreseeable future.
Investor verification checklist
- Review the material weakness, planned remediation, and whether subsequent filings show effective controls and consistent financial reporting.
- Assess the VIE agreements, the VIE’s licensing status, and the practical ability to transfer cash and profits from China to the Cayman holding company.
- Reconcile reported member counts, fee-paying conversion and membership revenue recognition, including the impact of free promotions and prior multi-year offers.
- Examine why operating cash flow declined despite higher earnings, and the expected returns and useful lives of significant courseware, software and server investments.
- Confirm post-IPO cash deployment, subsequent operating performance, and whether COVID-related member growth converted into sustained paid enrollments and revenue.