WORK Medical Technology Group Begins U.S. IPO Effort (WOK)

A Quick Take On WORK Medical Technology Group LTD

WORK Medical Technology Group LTD (WOK) has filed to raise $10 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm provides medical supplies to customers in China, but its top line revenue has dropped sharply.

I’ll provide a final opinion when we learn more IPO details from management.

WORK Medical Overview

Hangzhou City, China-based WORK Medical Technology Group LTD was founded to distribute an array of medical devices and supplies 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 primary offerings include the following:

• Medical face masks

• Artery compression tourniquets for bleeding control

• Disposable breathing circuits for oxygen and anesthetic gasses

• Laryngeal mask airways

• Endotracheal tubes.

As of September 30, 2022, WORK Medical has booked fair market value investment of $7.78 million in equity and debt from investors including LWY GROUP LTD, HJZ GROUP LTD and others.

WORK Medical – Customer/Distributor Acquisition

The company sells its products primarily through a network of domestic and export distributors.

Exporters cover a number of large foreign markets, including the United States, Germany, Brazil, Saudi Arabia and other countries.

Selling expenses as a percentage of total revenue have risen as revenues have decreased, as the figures below indicate:

Click to enlarge

(Source – SEC.)

The Selling efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling expense, fell sharply to negative (25.3x) in the most recent reporting period. (Source – SEC.)

WORK Medical’s Market & Competition

According to a 2023 market research report by GlobalData, the Chinese market for medical devices was an estimated $42.6 billion in 2022 and is forecast to reach $49.3 million by 2025.

This represents a forecast growth of at least 5% from 2023 to 2025.

The main drivers for this expected growth are increasing demand from healthcare consumers in China, rising income levels and growing technological options as Chinese companies develop products or import/license technologies.

Also, the Chinese economy is undergoing significant changes due to slowing macroeconomic growth and many citizens have onerous co-payment for healthcare products and services, both of which reduce demand growth in the future.

Major competitive or other industry participants include the following:

• Henan Tuoren Medical Device Co., Ltd.

• Guangzhou Weili Medical Device Co., Ltd.

• Zhejiang Sujia Medical Device Co., Ltd.

WORK Medical Technology Group LTD Financial Performance

The company’s recent financial results can be summarized as follows:

• Sharply declining top line revenue

• Reduced gross profit but increased gross margin

• Lowered operating loss but higher negative operating margin

• Reduced cash used in operations.

Below are relevant financial results derived from the firm’s registration statement:

Click to enlarge

(Source – SEC.)

As of September 30, 2022, WORK Medical had $731,178 in cash and $14.4 million in total liabilities.

Free cash flow during the twelve months ending 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 an IPO of its ordinary shares, although the final figure may differ.

No existing shareholders have indicated an interest in purchasing shares at the IPO price.

As a foreign private issuer, the company can choose to take advantage of reduced, delayed or exempted financial and senior officer disclosure requirements versus those that domestic U.S. firms are required to follow.

Also, the firm is an ‘emerging growth company’ as defined by the 2012 JOBS Act and may take advantage of reduced public company reporting requirements; prospective shareholders will receive less information for the IPO and in the future as a publicly-held company within the requirements of the Act.

Management says it will use the net proceeds from the IPO as follows:

20% for upgrading production equipment and increasing production capacity,

30% for developing masks, other medical consumables and medical devices,

10% for patent purchases,

10% for product marketing, and

30% for working capital and other general corporate purposes.

(Source – SEC.)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says the firm is not subject to any legal proceedings that would have a material adverse effect on its financial condition or operations.

The sole listed bookrunner of the IPO is Univest Securities.

Commentary About WORK Medical’s IPO

WOK is seeking U.S. public capital market investment for its general growth and working capital requirements.

The company’s financials have shown sharply reduced top-line revenue, lowered 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 ending September 30, 2022, was negative ($3.7 million).

Selling expenses as a percentage of total revenue have risen even as revenue has decreased; its Selling efficiency multiple was negative (25.3x) in the most recent year.

The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into the company’s growth and working capital requirements.

WORK Medical is subject to an array of regulations within the PRC and the British Virgin Islands regarding conditions under which it may pay dividends.

The firm’s recent capital spending history indicates it has continued to spend on capital expenditures 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 options and treatments.

Like other companies with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.

The Chinese government’s crackdown on certain IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance.

Also, a potentially significant risk to the company’s outlook is the uncertain future status of Chinese company stocks in relation to the U.S. HFCA act, which requires delisting if the firm’s auditors do not make their working papers available for audit by the PCAOB.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings.

Additionally, post-IPO communications from the management of smaller Chinese companies that have become public in the U.S. has been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and a generally inadequate approach to keeping shareholders up-to-date about management’s priorities.

Univest Securities is the sole underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of 125.2% since their IPO. This is a top-tier performance for all major underwriters during the period but is also subject to high volatility.

Given the firm’s sharply dropping top line revenue, swing to net loss and risks associated with its PRC operations, the WORK Medical Technology Group LTD IPO may face challenges.

When we learn more IPO details from WORK Medical Technology Group LTD management, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.