Skillful Craftsman(EDTK) - 2024 Q4 - Annual Report

PART I Item 1. Identity of Directors, Senior Management and Advisers This section is not applicable as per the report - The report states that this item is not applicable[8] Item 2. Offer Statistics and Expected Timetable This section is not applicable as per the report - The report states that this item is not applicable[8] Item 3. Key Information This section details the company's high-risk investment profile, focusing on its VIE structure, China operations, and HFCA Act implications Corporate Structure and VIE Arrangements The company operates in China through a Variable Interest Entity (VIE) due to foreign investment restrictions, posing significant regulatory risks - Skillful Craftsman is a Cayman Islands holding company operating in China through a VIE structure due to PRC laws restricting foreign investment in online education services[10] - The VIE structure is subject to substantial uncertainty, as PRC authorities could deem contractual arrangements non-compliant, potentially leading to severe penalties and a total loss of securities' value[10] - Cash is transferred from the VIE to the Wholly-Owned Foreign Enterprise (WOFE) as service fees, and then from the WOFE to the parent company as dividends, subject to PRC regulations[14][15][17] Intercompany Cash Flows (Fiscal Years 2022-2024) | Cash Flow Description | FY 2022 (US$) | FY 2023 (US$) | FY 2024 (US$) | | :--- | :--- | :--- | :--- | | Cash paid by VIE to WOFE | 2,341 | — | 12,173 | | Cash paid by WOFE to VIE | 503,252 | 509,335 | 2,488 | | Cash paid by Cayman parent to VIE | 464,240 | — | — | | Cash paid by Cayman parent to Hong Kong subsidiary | 2,520,000 | 645,000 | — | | Cash paid by Hong Kong subsidiary to VIE | 2,510,000 | — | — | | Cash paid by Hong Kong subsidiary to WOFE | — | 640,000 | — | Financial Information Related to the VIE and Parent The VIE, Wuxi Wangdao, is central to the company's financials, contributing 100% of FY2024 consolidated revenue and most assets and liabilities VIE's Contribution to Consolidated Financials | Metric | FY 2022 | FY 2023 | FY 2024 | | :--- | :--- | :--- | :--- | | Revenue Contribution | 97.2% | 91.0% | 100% | | Asset Contribution (Year-End) | 86% | 82% | 94% | | Liability Contribution (Year-End) | 90% | 92% | 98% | Selected Consolidated Statement of Operations (FY 2024) | Item | Amount (US$) | | :--- | :--- | | Revenue | 1,999,056 | | Gross Profit | 169,387 | | Loss from Operations | (2,016,803) | | Net Loss | (4,722,146) | Selected Consolidated Balance Sheet (As of March 31, 2024) | Item | Amount (US$) | | :--- | :--- | | Total Assets | 36,323,083 | | Total Liabilities | 14,824,526 | | Total Shareholders' Equity | 21,498,557 | Risk Factors This section outlines significant risks including business competition, China's regulatory environment, VIE structure legality, and share-related issues - Business & Industry Risks: The company faces challenges in attracting and converting non-paying members to fee-paying members (only 0.19% as of March 31, 2024), alongside intense competition from other online education providers and government platforms[29][33] - Doing Business in China Risks: The PRC government may intervene in operations at any time, and the company is subject to complex rules for overseas listings (New Overseas Listing Rules effective March 31, 2023), cybersecurity reviews, and anti-monopoly regulations, creating significant uncertainty[58][37][60] - Corporate Structure Risks: The VIE contractual arrangements have not been tested in a PRC court and could be deemed non-compliant, leading to severe penalties, loss of control over the VIE, and the shares becoming worthless, with substantial uncertainties regarding the interpretation of the PRC Foreign Investment Law[92][94][95] - Risks Related to Ordinary Shares: The company believes it was classified as a Passive Foreign Investment Company (PFIC) for the taxable year ended March 31, 2024, which could result in adverse U.S. federal income tax consequences for U.S. shareholders, and the share price may be volatile and classified as a 'penny stock'[106][103] Item 4. Information on the Company This section provides a comprehensive overview of the company's history, business operations, organizational structure, and properties History and Development of the Company The company, a Cayman Islands holding entity, details its 2019 incorporation, 2020 IPO, and strategic acquisitions in China - The company was incorporated in the Cayman Islands on June 14, 2019, and conducts its business in China through subsidiaries and its VIE, Wuxi Wangdao, which was formed in 2013[112][114] - Closed its initial public offering on July 27, 2020, with net proceeds of approximately US$13.36 million[114] - Acquired 100% of Jisen Information in June 2021 and amended its acquisition of Wuxi Talent Home to a 35% equity investment in July 2023[114][298] Business Overview The company provides online vocational education and technology services in China, operating multiple platforms with declining fee-paying members due to competition - The company's primary business is online vocational education, offering 642 vocational training courses and 12 virtual simulation experimental programs[117][118] - It operates three main platforms: Lifelong Education Public Service Platform (free), Vocational Training Platform (paid), and Virtual Simulation Experimental Training Platform (paid)[118][122] Fee-Paying Member Trend | As of | Number of Fee-Paying Members | | :--- | :--- | | March 31, 2020 | 3.1 million | | March 31, 2022 | 1.2 million | | March 31, 2023 | 0.3 million | | March 31, 2024 | 37,904 | Revenue Breakdown by Source (FY 2022-2024) | Revenue Source | FY 2022 (%) | FY 2023 (%) | FY 2024 (%) | | :--- | :--- | :--- | :--- | | Online Education Services | 96.5% | 93.6% | 98.8% | | Technology & Other Services | 3.5% | 6.4% | 1.2% | Organizational Structure The company operates through a complex VIE structure in China, controlling its online education business via contractual agreements due to foreign ownership restrictions - The company uses a VIE structure to operate its online education business in China due to foreign ownership restrictions[187] - Key contractual arrangements that grant control over the VIE include: - Exclusive Business Cooperation Agreement: Grants the WOFE exclusive rights to provide services to the VIE for a fee (not less than 90% of the VIE's income)[188] - Exclusive Purchasing Right Agreement: Gives the WOFE the option to purchase all equity in the VIE at the lowest price permitted by law[189] - Equity Interest Pledge Agreement: The VIE's shareholders pledge their equity to the WOFE as security for their contractual obligations[190] - Authorization Agreement: VIE shareholders irrevocably authorize the WOFE to exercise their shareholder rights[191] Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting revenue decline, net loss trends, and liquidity challenges amid intense market competition Operating Results The company's operating results show significant revenue decline and net losses over three fiscal years, driven by reduced fee-paying members and intense competition Key Performance Indicators (FY2022-FY2024) | Metric | FY 2022 | FY 2023 | FY 2024 | | :--- | :--- | :--- | :--- | | Number of Fee-Paying Members | 1,233,832 | 245,941 | 37,904 | | Revenue (US$) | 23,050,619 | 11,323,744 | 1,999,056 | | Net Loss (US$) | (1,400,292) | (20,906,985) | (4,722,146) | - FY2024 vs. FY2023: Revenue decreased by 82% to US$2.0 million, primarily due to a decrease in online VIP membership revenue[217][218] - Net loss decreased by 77% to US$4.7 million, driven by a 93% reduction in cost of revenue and a 47% decrease in operating expenses[219][220] - FY2023 vs. FY2022: Revenue decreased by 51% to US$11.3 million[222] - Net loss increased by 1393% to US$20.9 million, primarily due to the revenue decline, a 54% increase in cost of revenue (including significant impairment charges), and higher interest expenses[223][224] Liquidity and Capital Resources The company's liquidity has weakened, with cash decreasing and operating activities resulting in outflows, compounded by PRC cash transfer restrictions Cash and Cash Equivalents | As of | Amount (US$) | | :--- | :--- | | March 31, 2022 | 23.8 million | | March 31, 2023 | 21.0 million | | March 31, 2024 | 17.8 million | Consolidated Statement of Cash Flows Summary | Cash Flow (US$) | FY 2022 | FY 2023 | FY 2024 | | :--- | :--- | :--- | :--- | | From Operating Activities | 4,828,933 | (2,558,438) | (2,660,100) | | From Investing Activities | (13,595,605) | (300,631) | 4,788 | | From Financing Activities | 14,809,302 | 1,000,000 | — | - The company faces restrictions on moving cash out of the PRC due to government controls on currency conversion and regulations on dividend payments, which require setting aside statutory reserves[230] Item 6. Directors, Senior Management and Employees This section details the company's leadership, compensation, board structure, employee count, and concentrated share ownership - Key leadership includes Bin Fu as Chairman and CEO, and Dawei Chen as CFO[248][249] - For the fiscal year ended March 31, 2024, the aggregate cash compensation paid to all directors and senior management was US$230,093[252] - As of the report date, the company had 71 full-time employees, with the largest groups in Research and Development (33) and Marketing (16)[260][262] - As of August 12, 2024, executive officers, directors, and principal shareholders beneficially owned approximately 50.3% of the company's outstanding ordinary shares[106] Item 7. Major Shareholders and Related Party Transactions This section details financial transactions with related parties, including executives and a joint venture, emphasizing the critical VIE structure - The company has engaged in financial transactions with related parties, including loan advances to and from executives like Bin Fu and its joint venture, Medical Star[268] - The contractual arrangements with the VIE (Wuxi Wangdao) and its shareholders are the most significant related-party transactions, as they are fundamental to the company's ability to control its PRC operations and consolidate financial results[269] Item 8. Financial Information This section confirms the inclusion of consolidated financial statements, absence of material legal proceedings, and the company's no-dividend policy - The company has never declared or paid dividends and does not plan to in the foreseeable future, retaining earnings for business financing and expansion[273] - There are no current or recent material legal or administrative proceedings against the company[272] Item 9. The Offer and Listing This section provides information about the company's ordinary shares, listed on the NASDAQ Capital Market under 'EDTK' since July 2020 - The company's ordinary shares are listed on the NASDAQ Capital Market under the symbol 'EDTK'[275] Item 10. Additional Information This section covers corporate governance, material contracts, exchange controls, and taxation, including the company's PFIC status - The company's authorized share capital is 500,000,000 ordinary shares and 1,000,000 preference shares[276] - As of the report date, 15,929,451 ordinary shares were outstanding[276] - Material contracts include a March 2023 convertible note for US$1 million (subsequently converted to shares), warrants issued in March 2022, and agreements related to the acquisitions of Jisen Information and Wuxi Talent Home[295][297][298][299] - The company is subject to PRC exchange controls, which regulate the conversion of RMB and the remittance of currency out of China[305] - Capital account transactions, such as direct investments, require approval from the State Administration of Foreign Exchange (SAFE)[305] - The company believes it was classified as a Passive Foreign Investment Company (PFIC) for the taxable year ended March 31, 2024, which has significant U.S. federal income tax implications for U.S. Holders[321] Item 11. Quantitative and Qualitative Disclosures about Market Risk This section discusses the company's exposure to market risks, including foreign exchange, credit, and inflation risks - Foreign Exchange Risk: The company's functional currency is the RMB, but financial statements are presented in USD, so fluctuations in the RMB/USD exchange rate can materially affect reported financial results[330] - Credit Risk: Cash of US$17.8 million as of March 31, 2024, is held in financial institutions in the PRC and the U.S. where deposits may not be insured, and accounts receivable are unsecured, exposing the company to customer credit risk[332] - Inflation Risk: Rising costs for products and overhead due to inflation could adversely affect operating results if the company cannot increase its service prices accordingly[333] Item 12. Description of Securities other than Equity Securities This section is not applicable as per the report - The report states that this item is not applicable[333] PART II Item 13. Defaults, Dividend Arrearages and Delinquencies This section is not applicable as per the report - The report states that this item is not applicable[334] Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds This section confirms no material modifications to security holder rights and details the full utilization of IPO proceeds for business development and investments - The company has used all of the approximately US$13.36 million in net proceeds from its 2020 IPO[335] - Use of proceeds included approximately US$3.05 million for course/platform development and general purposes, US$8 million for a temporary investment in a private fund, and approximately US$2.03 million for investments in Medical Star and Wuxi Talent Home[335] Item 15. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2024, due to a material weakness in financial reporting - Management concluded that disclosure controls and procedures were not effective as of March 31, 2024[336] - A material weakness was identified in internal control over financial reporting due to deficiencies in applying SEC disclosure requirements and documenting the financial reporting process[339] - The company's remediation plan includes engaging a third-party consultant with U.S. GAAP and SEC reporting experience, reassessing control design, and increasing staff expertise[342] Item 16. Other Information This section covers corporate governance, audit fees, Nasdaq compliance exemptions, and cybersecurity risk management - The board has determined that Steven Yuan Ning Sim is the 'audit committee financial expert'[344] Principal Accountant Fees | Fee Type | FY 2024 (US$) | FY 2023 (US$) | | :--- | :--- | :--- | | Audit Fees | 250,000 | 250,000 | - The company follows Cayman Islands home country practice, exempting it from certain Nasdaq rules, including shareholder approval for specific equity issuances and the timing of annual meetings[347] - A comprehensive cybersecurity risk management framework is in place, and no material cybersecurity incidents occurred during the fiscal year ended March 31, 2024[350] PART III Item 18. Financial Statements This section contains the company's audited consolidated financial statements for fiscal years 2022-2024, prepared under U.S. GAAP Consolidated Balance Sheet Summary (as of March 31) | Account | 2024 (US$) | 2023 (US$) | |---|---|---| | Total Assets | 36,323,083 | 43,642,638 | | Cash and cash equivalents | 17,832,991 | 20,998,786 | | Long-term investment | 17,393,830 | 14,296,824 | | Total Liabilities | 14,824,526 | 16,688,396 | | Long-term loans | 13,250,516 | 13,681,099 | | Total Shareholders' Equity | 21,498,557 | 26,954,242 | Consolidated Statement of Operations Summary (for the year ended March 31) | Account | 2024 (US$) | 2023 (US$) | 2022 (US$) | |---|---|---|---| | Revenue | 1,999,056 | 11,323,744 | 23,050,619 | | Gross (loss) / profit | 169,387 | (15,977,146) | 5,377,420 | | Net Loss | (4,722,146) | (20,906,985) | (1,400,292) | | Net loss per share (Basic and diluted) | (0.31) | (1.40) | (0.10) | Item 19. Exhibits This section lists all exhibits filed with the annual report, including corporate documents, VIE agreements, and material contracts - The exhibits include foundational corporate documents, all contractual arrangements underpinning the VIE structure, and other material contracts related to acquisitions, financing, and operations[353][354]