Skillful Craftsman(EDTK) - 2023 Q4 - Annual Report

PART I Key Information The company outlines its VIE corporate structure, key financial data showing declining performance, and significant operational risks - Skillful Craftsman is a Cayman Islands holding company, not a Chinese operating company; its operations are conducted through a Variable Interest Entity (VIE) due to PRC restrictions on foreign investment in online education[18] - The company's access to cash from the VIE is through contractual arrangements and is subject to PRC regulations on profit distribution and foreign exchange controls[23][29][30] - The VIE contributed 94% of consolidated revenue in FY2023 and represented 86% of consolidated assets and 88% of consolidated liabilities as of March 31, 2023[33] Selected Condensed Consolidated Financial Data (Fiscal Years 2021-2023) | Financial Metric | FY 2023 (USD) | FY 2022 (USD) | FY 2021 (USD) | | :--- | :--- | :--- | :--- | | Revenue | 11,323,744 | 23,050,619 | 29,168,546 | | Gross (Loss) / Profit | (15,977,146) | 5,377,420 | 14,456,135 | | Net (Loss) / Profit | (20,906,985) | (1,400,292) | 3,498,005 | | Total Assets | 43,642,638 | 73,092,885 | 59,205,893 | | Total Liabilities | 16,688,396 | 22,829,600 | 13,640,721 | Risk Factors The company faces substantial risks from its business model, VIE structure, PRC regulations, and shareholder status - Revenue generation is at risk as only 2% of registered members were fee-paying as of March 31, 2023, highlighting a critical challenge in converting users[52] - Intense competition in the PRC online education market has contributed to a decrease in fee-paying members[63][64] - The VIE structure faces significant uncertainty; if PRC authorities deem it non-compliant, penalties could render the company's shares worthless[191][197] - The company believes it was classified as a Passive Foreign Investment Company (PFIC) for FY2023, which has adverse U.S. tax consequences for U.S. shareholders[243] - New PRC regulations require CSRC filings for future overseas offerings, and non-compliance could result in significant penalties[125] Information on the Company The company details its business operations in China, user metrics, technology platforms, and strategic expansions - All business is conducted in China through PRC subsidiaries and the VIE, which contributed 94.0% of consolidated revenue in FY2023[265][269] - The company has expanded into financial education and flexible employment services and established a Singapore subsidiary for global development[270][271][273] - Its proprietary cloud computing system and development of a "Meta-Factory" platform are considered key technological advantages[300][301] User Membership Trends (as of March 31) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Registered Members | 115.1 million | 99.3 million | 83.4 million | | Fee-Paying Members | 0.3 million | 1.2 million | 1.6 million | Operating and Financial Review and Prospects The company analyzes its significant financial decline in FY2023, driven by falling revenue and rising costs - The number of fee-paying members decreased by 80% in FY2023, a primary driver for the 51% revenue decline[415][416] - Cost of revenue increased by 54% in FY2023, mainly due to significant impairments of intangible assets and property[423] - As of March 31, 2023, cash and cash equivalents were $21.0 million, down from $23.8 million, with net cash used in operations reversing from the prior year[439][447] Fiscal Year 2023 vs. 2022 Performance | Metric | FY 2023 (USD) | FY 2022 (USD) | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | 11,323,744 | 23,050,619 | (51)% | | Cost of Revenue | (27,300,890) | (17,673,199) | (54)% | | Gross (Loss)/Profit | (15,977,146) | 5,377,420 | (397)% | | Net Loss | (20,906,985) | (1,400,292) | 1,393% | Directors, Senior Management and Employees This section profiles the company's leadership, compensation, board structure, and employee base - Executive officers and directors as a group beneficially owned approximately 30.9% of outstanding ordinary shares as of August 11, 2023[500] - For FY2023, the aggregate cash compensation paid to all directors and senior management was $989,847[482] - The company has 71 full-time employees, with the largest group (33 employees) dedicated to Research and Development[495][496] - The Board of Directors consists of five members and currently has no members who self-identify as female, an underrepresented minority, or LGBTQ+[489][494] Major Shareholders and Related Party Transactions The company discloses its key related party transactions, including with executives and its VIE - In FY2023, the company engaged in loan transactions with executives, with a total amount of $42,946 due to related parties as of March 31, 2023[504][505] - The company extended loan advances of $61,120 to its minority-owned joint venture, Medical Star, and provided it with courseware services[505] - The contractual arrangements with the VIE are fundamental related party transactions essential for operational control and financial consolidation[505] Financial Information This section confirms the location of financial statements and outlines dividend policy and legal proceedings - The company's full consolidated financial statements are located at the end of the Form 20-F report, starting on page F-1[507] - The company has never paid dividends and does not plan to in the foreseeable future, retaining all earnings for operations[509] - The company is not currently a party to any material legal or administrative proceedings[508] The Offer and Listing This section provides details on the public trading of the company's ordinary shares - The company's ordinary shares are listed on the NASDAQ Capital Market under the ticker symbol "EDTK" since July 23, 2020[512] Additional Information This section covers corporate structure, material contracts, exchange controls, and taxation details - The company's authorized share capital consists of 500,000,000 ordinary shares, with 15,449,451 outstanding as of the report date[515] - On March 2, 2023, the company entered into a US$1 million convertible note agreement which was mandatorily converted on March 31, 2023[562][563] - As a Cayman Islands exempted company, its corporate law differs significantly from U.S. law regarding shareholder rights and director duties[524][535][550] - The company is subject to a 25% Enterprise Income Tax rate for its PRC entities and faces risks of being classified as a PRC resident enterprise[584][586] Quantitative and Qualitative Disclosures about Market Risk The company discusses its primary market risk exposures, including foreign exchange, credit, and inflation - The company faces foreign exchange risk as its functional currency is the RMB while reporting is in USD[619] - Credit risk exists from cash balances of $21.0 million held in PRC financial institutions, where deposits are not insured[621] - Inflationary factors could adversely affect operating results by increasing costs and potentially impacting gross profit margins[622] Description of Securities other than Equity Securities This section is not applicable as the company has no other relevant securities to describe PART II Defaults, Dividend Arrearages and Delinquencies This section is not applicable as the company reports no such events Material Modifications to the Rights of Security Holders and Use of Proceeds The company provides an update on the use of its 2020 IPO proceeds - From its $13.36 million net IPO proceeds, the company has used approximately $3.05 million for development and $2.03 million for investments[628] - The company intends to use the remaining IPO proceeds for developing online courses, virtual simulation programs, and a mobile application[628] Controls and Procedures Management concludes that internal controls were not effective due to a material weakness in financial reporting - Management concluded that the company's disclosure controls and procedures were not effective as of March 31, 2023[629] - A material weakness was identified in internal control over financial reporting due to a lack of sufficient personnel with U.S. GAAP and SEC reporting expertise[633][634][635] - The company is implementing a remediation plan that includes engaging a third-party consultant and increasing staffing levels to address the weakness[638][639] Other Information This section covers corporate governance matters, including the audit committee, accountant fees, and code of ethics - The Audit Committee consists of three independent directors, with Steven Yuan Ning Sim designated as the financial expert[641] - The company has adopted a code of ethics, which is publicly available on its website[642] - As a foreign private issuer, the company follows Cayman Islands home country practice in lieu of the Nasdaq rule requiring an annual shareholder meeting[648] Principal Accountant Fees | Fee Type | FY 2023 (USD) | FY 2022 (USD) | | :--- | :--- | :--- | | Audit Fees | 210,000 | 432,100 | PART III Financial Statements This section is not applicable as financial statements are provided under Item 18 Financial Statements This section contains the company's audited consolidated financial statements for the past three fiscal years - The consolidated financial statements and the report of the independent registered public accounting firm are included starting on page F-1[507][664] Exhibits This section lists all exhibits filed with the annual report, including corporate and contractual documents - A comprehensive list of exhibits is provided, including foundational corporate documents, all VIE-related contractual agreements, and other material contracts[653][659]