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Fast forward to EMPLOYMENT Medical Technology Group LTD
WORK Medical Technologies Group Ltd (WOK) has filed to raise $10 million in an IPO of its common stock, according to an F-1 registration statement.
The company supplies medical supplies to customers in China, but its revenue has fallen sharply.
I will give a final opinion when we learn more details about the IPO from management.
JOB Medical examination
Based in Hangzhou, China, WORK Medical Technology Group LTD was established to distribute a range of medical products and consumables in the PRC.
Management is headed by Chairman and CEO Shuang Wu, who has been with the firm since March 2022 and was previously COO of EZGO Technologies (EZGO), a lithium battery and electric bicycle company.
The company’s main offerings include the following:
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Medical face masks
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Compression of an artery tourniquets to control bleeding
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Disposable breathing circuits for oxygen and anesthetic gases
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Laryngeal mask airway
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Endotracheal tubes.
As of September 30, 2022, WORK Medical has recorded a fair market value investment of $7.78 million in equity and debt from investors including LWY GROUP LTD, HJZ GROUP LTD and others.
JOB Medical – Customer/Distributor Acquisition
The company sells its products primarily through a network of domestic and export distributors.
Exporters cover a number of major foreign markets, including the United States, Germany, Brazil, Saudi Arabia and other countries.
Cost of sales as a percentage of total revenue increased as revenue decreased, as shown in the figures below:
|
Sale |
Expenses vs. Income |
|
Period |
Percentage |
|
FYE 30 September 2022 |
5.2% |
|
FYE 30 September 2021 |
3.5% |
(Source – SEC.)
The sales performance multiple, defined as how many dollars of additional new revenue is generated from each dollar of sales spend, fell sharply to negative (25.3x) in the most recent reporting period. (Source – SEC.)
JOB Medical market and competition
According to a 2023 market research report by GlobalData, China’s medical device market was around $42.6 billion in 2022 and is expected to reach $49.3 million by 2025.
This represents a projected growth of at least 5% from 2023 to 2025.
The main drivers for this expected growth are rising consumer demand for healthcare services in China, rising income levels and increasing technological capabilities as Chinese companies develop products or import/license technologies.
In addition, China’s economy is undergoing significant changes due to the slowdown in macroeconomic growth, and many citizens have heavy co-payments for healthcare products and services, both of which reduce future demand growth.
Major competitive or other industry participants include the following:
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Henan Tuoren Medical Device Co., Ltd.
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Guangzhou Weili Medical Device Co., Ltd.
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Zhejiang Sujia Medical Device Co., Ltd.
WORK Medical Technology Group LTD Financial Results
The company’s recent financial results can be summarized as follows:
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Sharply declining top line revenue
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Decreased gross profit but increased gross margin
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Reduced operating loss but higher negative operating margin
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Reduced cash used in operations.
Below are the relevant financial results extracted from the company’s registration statement:
|
total income |
||
|
Period |
total income |
% deviation from previous |
|
FYE 30 September 2022 |
$19,711,290 |
-57.0% |
|
FYE 30 September 2021 |
$45,863,363 |
|
|
Gross profit (loss) |
||
|
Period |
Gross profit (loss) |
% deviation from previous |
|
FYE 30 September 2022 |
$4,418,792 |
-48.9% |
|
FYE 30 September 2021 |
$8,639,170 |
|
|
Gross profit |
||
|
Period |
Gross profit |
% deviation from previous |
|
FYE 30 September 2022 |
22.42% |
19.0% |
|
FYE 30 September 2021 |
18.84% |
|
|
Operating profit (loss) |
||
|
Period |
Operating profit (loss) |
Operating margin |
|
FYE 30 September 2022 |
$(3,780,464) |
-19.2% |
|
FYE 30 September 2021 |
$ (4,671,772) |
-10.2% |
|
Net income (loss) |
||
|
Period |
Net income (loss) |
Net margin |
|
FYE 30 September 2022 |
$(39,255) |
-0.2% |
|
FYE 30 September 2021 |
$6,307,380 |
32.0% |
|
Cash flow from operations |
||
|
Period |
Cash flow from operations |
|
|
FYE 30 September 2022 |
$(2,258,948) |
|
|
FYE 30 September 2021 |
$ (7,178,445) |
|
|
(Glossary of terms.) |
(Source – SEC.)
As of September 30, 2022, WORK Medical had $731,178 in cash and $14.4 million in total liabilities.
Free cash flow for the twelve months ended September 30, 2022 was negative ($3.7 million).
WORK Medical Technology Group LTD IPO Details
WORK Medical intends to raise $10 million in gross proceeds from the IPO of its common stock, although the final figure may differ.
No existing shareholder has expressed interest in purchasing shares at the IPO price.
As a foreign private issuer, the company may elect to benefit from reduced, delayed or exempted financial and senior officer disclosure requirements relative to those that domestic US firms are required to follow.
Additionally, the firm is an “emerging growth company” as defined by the 2012 JOBS Act and may benefit from reduced reporting requirements for public companies; future shareholders will receive less information about the IPO and in the future as a public company within the requirements of the law.
Management says it will use the net proceeds from the IPO as follows:
20% to modernize production equipment and increase production capacity,
30% for the development of masks, other medical supplies and medical devices,
10% for patent purchases,
10% for product marketing and
30% for working capital and other general corporate purposes.
(Source – SEC.)
The company’s roadshow management presentation is not available.
Regarding pending legal proceedings, management says that the company is not subject to any legal proceedings that would have a material adverse effect on its financial condition or operations.
The sole registered bookrunner of the IPO is Univest Securities.
Commentary on WORK Medical’s IPO
WOK is seeking investment in the US public capital market for its overall growth and working capital requirements.
The company’s financial statements show sharply reduced primary revenue, reduced gross profit but increased gross margin, reduced operating loss but higher negative operating margin and lower cash used in operations.
Free cash flow for the twelve months ended September 30, 2022 was negative ($3.7 million).
Selling expenses as a percentage of total revenue have risen even as revenue has declined; its sales performance ratio was negative (25.3x) over the past year.
The firm currently plans to pay no dividends and retain any future earnings to reinvest back into the company’s growth and working capital requirements.
WORK Medical is subject to a set of regulations in the PRC and the British Virgin Islands regarding the conditions under which it may pay dividends.
The firm’s recent capital expenditure history shows that it has continued to spend on capital expenditure despite negative operating cash flow.
The market opportunity for medical devices in China is expected to grow moderately in the coming years as the population continues to age and demand better healthcare and treatment options.
Like other companies with Chinese operations seeking to enter US markets, the firm operates under a WFOE, or Wholly Foreign Enterprise, structure. US investors would only be interested in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. In addition, there may be restrictions on the transfer of funds between subsidiaries in China.
The Chinese government’s crackdown on certain IPO candidate companies, combined with additional reporting and disclosure requirements from the US, have severely hampered Chinese or related IPOs, resulting in generally poor post-IPO performance.
Also, a potentially significant risk to the company’s prospects is the uncertain future status of the Chinese company’s stock in relation to the US HFCA law, which requires delisting if the company’s auditors do not provide their working papers for an audit by the PCAOB.
Prospective investors would be well advised to consider the potential consequences of specific laws regarding the repatriation of profits and changing or unpredictable Chinese regulatory decisions that may affect such companies and US stock listings.
Additionally, post-IPO communications from management of smaller Chinese companies that have gone public in the US have been patchy and superficial, indicating a lack of interest in communicating with shareholders, providing only the bare minimum required by the SEC, and a generally inadequate approach to informing shareholders of management’s priorities.
Univest Securities is the sole underwriter, and the IPOs led by the firm over the past 12 months have generated an average return of 125.2% since their IPO. This is the highest level of performance for all major insurers over the period, but is also subject to high volatility.
Given the firm’s plummeting top-line revenue, shift in net loss and risks associated with its PRC operations, WORK Medical Technology Group LTD’s IPO may face challenges.
When we learn more details about the IPO from the management of WORK Medical Technology Group LTD, I will give a final opinion.
Expected IPO Pricing Date: To be announced.