WORK Medical Technology Group Ltd(WOK) - 2024 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section details the company's Cayman Islands holding structure, its control over PRC subsidiaries, and significant operational and legal risks, including CSRC regulatory uncertainties and potential HFCA Act delisting - The company operates through a holding structure where investors own shares in WORK Medical Technology Group LTD, a Cayman Islands holding company, which in turn owns the operating subsidiaries in the PRC Investors do not directly hold equity in the Chinese operating entities[26][27] - As a domestic company indirectly listed overseas, the company was required to complete filing procedures with the China Securities Regulatory Commission (CSRC) for its IPO, which was completed on December 21, 2023 Future offerings will also require CSRC filings[30][153][163] - The company transferred net IPO proceeds of $7,373,839 to its PRC subsidiaries Cash transfers from the Cayman holding company to PRC subsidiaries are subject to PRC laws on loans and direct investment Dividends from PRC subsidiaries are restricted, requiring allocation to a statutory reserve fund (at least 10% of after-tax profits until the reserve reaches 50% of registered capital)[39][40] - The company's auditor, WWC, P.C., is based in the U.S. and subject to PCAOB inspection, with the latest inspection completed in 2023 However, the company acknowledges the risk of delisting under the Holding Foreign Companies Accountable Act (HFCA Act) if the PCAOB is unable to inspect its auditors for two consecutive years in the future[37][211][217] D. Risk Factors This subsection outlines significant business, China operations, and securities risks, including reliance on historical growth, regulatory uncertainties, and internal control weaknesses - A material weakness in internal control over financial reporting was identified as of September 30, 2024, due to a lack of accounting staff with appropriate knowledge of U.S. GAAP and SEC reporting requirements This impairs the ability to produce accurate financial statements[246][247][767] - The company faces risks from PRC government actions, which could influence operations and subsequent securities offerings Uncertainties in the interpretation and enforcement of PRC laws, including new filing requirements for overseas listings, could hinder the ability to offer securities and cause their value to decline[157][158][163] - The company's Chief Operating Officer, Baiming Yu, and his spouse, Liwei Zhang, beneficially own an aggregate of 47.11% of outstanding Ordinary Shares, giving them substantial influence over corporate transactions and outcomes[232][233] Decline in Mask Revenue | Fiscal Year Ended | Net Revenue from Masks ($) | % of Total Net Revenue (%) | | :--- | :--- | :--- | | September 30, 2022 | $10,619,035 | 53.87% | | September 30, 2023 | $5,091,331 | 37.53% | | September 30, 2024 | $1,559,750 | 13.56% | - The company's PRC subsidiaries have several compliance issues, including failure to file an Environmental Impact Registration Form, obtain necessary fire protection and construction approvals for production lines, and address potential challenges to leased property rights due to lessor non-compliance These could result in fines and operational disruptions[116][117][120] ITEM 4. INFORMATION ON THE COMPANY This section details the company's corporate history, structure, and business operations, focusing on its PRC subsidiaries' R&D, manufacturing, and sale of Class I and II medical devices A. History and Development of the Company WORK Medical Technology Group LTD, a Cayman Islands holding company, operates through PRC subsidiaries consolidated via a May 2022 reorganization, with a multi-layered structure from Cayman to China - The company's corporate structure is a multi-layered holding model: Work Cayman (Cayman Islands) wholly owns Work BVI (British Virgin Islands), which wholly owns Work Medical Technology (Hong Kong) Work Medical Technology wholly owns WFOE (PRC), which in turn wholly owns the main operating entity, Work Hangzhou, and its subsidiaries[262][274] - A corporate reorganization was completed on May 6, 2022, to prepare for the IPO This reorganization consolidated the PRC operating entities under the Cayman Islands holding company structure and has been accounted for retroactively as a combination of entities under common control[821][822] B. Business Overview The company's PRC subsidiaries specialize in R&D, manufacturing, and sale of Class I and II medical devices, generating revenue through a wide domestic and international distribution network Revenue by Sales Channel (FY2022-2024) | Channel | FY2024 Revenue ($) | FY2023 Revenue ($) | FY2022 Revenue ($) | | :--- | :--- | :--- | :--- | | Domestic Distributor | $9,756,622 (85%) | $11,990,599 (90%) | $17,150,575 (87%) | | Domestic Direct End-User | $66,526 (1%) | $607,662 (4%) | $1,140,952 (6%) | | Overseas Distributor | $1,683,292 (15%) | $967,690 (6%) | $1,419,763 (7%) | Product Sales Mix (% of Total Sales) | Product Category | FY2024 (%) | FY2023 (%) | FY2022 (%) | | :--- | :--- | :--- | :--- | | Medical Face Masks | 12.47% | 16.9% | 36.45% | | Artery Compression Tourniquets | 29.03% | 20.27% | 16.03% | | Disposable Breathing Circuits | 17.32% | 12.9% | 9.77% | | Endotracheal Tubes | 14.59% | 7.41% | 5.70% | | Laryngeal Mask Airways | 7.27% | 6.18% | 5.32% | | KN95 Masks | 1.72% | 20.8% | 14.26% | - The company's PRC subsidiaries have a wide distribution network with 953 domestic and 29 export distributors in FY2024, selling products across 34 provincial regions in China and over 30 countries internationally[289][319] R&D Expenses (FY2022-2024) | Fiscal Year Ended | R&D Expenses ($) | % of Total Revenue (%) | | :--- | :--- | :--- | | September 30, 2024 | $302,511 | 2.63% | | September 30, 2023 | $301,644 | 2.22% | | September 30, 2022 | $183,900 | 0.93% | - The company holds 30 registered patents, 16 trademarks, and one copyright in mainland China It actively acquires patents from third parties, such as universities and hospitals, to support new product development, including a visualized prostatic dilatation catheter[351][388][389] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes the company's financial performance, highlighting significant revenue decline and a net loss in FY2024 due to decreased mask sales, alongside liquidity and capital resources A. Operating Results Operating results show significant revenue decline in FY2023 and FY2024, primarily due to plummeting mask sales, leading to a contracted gross profit margin and a net loss in FY2024 Consolidated Income Statement Summary (FY2022-2024) | Metric | FY 2024 ($) | FY 2023 ($) | FY 2022 ($) | | :--- | :--- | :--- | :--- | | Net Revenue | $11,506,440 | $13,565,951 | $19,711,290 | | YoY Change | -15.2% | -31.2% | N/A | | Gross Profit | $2,868,386 | $4,142,984 | $4,418,792 | | Gross Margin | 24.9% | 30.5% | 22.4% | | (Loss) Income from Operations | ($4,045,185) | $412,227 | $638,328 | | Net (Loss) Income | ($3,540,409) | $63,383 | $944,126 | - Revenue from masks plummeted by 69.4% in FY2024 to $1.56 million, down from $5.09 million in FY2023, due to decreased demand and a strategic shift in marketing focus Conversely, sales of medical devices other than masks grew by 17.7% to $9.41 million in FY2024[526][528] - General and administrative expenses increased by 144.8% to $4.56 million in FY2024, primarily due to higher professional consulting fees incurred after becoming a public company[539] B. Liquidity and Capital Resources The company's liquidity is primarily from operations, bank loans, and shareholder contributions, with $6.6 million cash and $0.6 million working capital as of September 30, 2024, deemed adequate for the next 12 months Summary of Cash Flows (FY2022-2024) | Cash Flow Activity | FY 2024 ($) | FY 2023 ($) | FY 2022 ($) | | :--- | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($2,228,087) | $2,209,736 | ($2,258,948) | | Net cash used in investing activities | ($9,064,079) | ($583,304) | ($1,347,165) | | Net cash provided by (used in) financing activities | $15,657,024 | ($728,719) | $3,566,223 | - As of September 30, 2024, the company held $6,557,605 in cash and had a total working capital of $647,030[549] - Capital expenditures increased significantly to $9,258,407 in FY2024, up from $583,304 in FY2023, primarily for purchasing property, buildings, and machinery[564] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's leadership, board structure, and employee base, highlighting executive backgrounds, compensation, board committees, and significant share ownership by the COO and his spouse - The board of directors consists of five members: Shuang Wu (CEO, Chairman), Baiming Yu (COO), and three independent directors (Xiaoyang Li, Zhenguo Wu, Robert Johnson)[579][594] - COO Baiming Yu beneficially owns 42.83% of the company's outstanding Ordinary Shares Together with his spouse, Liwei Zhang (4.28%), they control 47.11% of the company, giving them substantial influence over corporate matters[232][620] - The company has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee, each composed of the three independent directors[594][595][596] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details major shareholders and extensive related party transactions, including loans, advances, and sales, with significant balances highlighting interconnectedness with management's interests - The company engages in significant related party transactions, including loans, advances, and sales with entities controlled by or related to its executive officers, particularly COO Baiming Yu and CEO Shuang Wu[626][935] Key Related Party Balances (as of Sept 30) | Balance Sheet Item | 2024 ($) | 2023 ($) | | :--- | :--- | :--- | | Due from related parties | $2,707,136 | $4,237,682 | | Shuang Wu | $1,424,989 | $795,243 | | Hangzhou Qingniu | $855,618 | $1,294,296 | | Due to related parties | $1,217,442 | $159,612 | | Huiyu Chuanggu | $1,064,916 | $0 | - In FY2024, sales to related party Hangzhou Qingniu (owned by an immediate family member of Baiming Yu) were $577,370, representing approximately 5% of total net revenue[133][627] ITEM 8. FINANCIAL INFORMATION This section covers consolidated financial statements, legal proceedings, and dividend policy, noting no material legal proceedings, no past cash dividends, and PRC restrictions on future distributions - The company has never declared or paid cash dividends on its Ordinary Shares and currently intends to retain all available funds and future earnings to operate and grow the business[645] - Dividend payments from PRC subsidiaries are restricted by PRC law Subsidiaries must allocate at least 10% of after-tax profits to a statutory reserve until it reaches 50% of registered capital These reserves are not distributable as cash dividends[646] ITEM 10. ADDITIONAL INFORMATION This section details the company's Cayman Islands corporate governance and legal framework, including Ordinary Share rights, Board duties, and PRC, Hong Kong, and U.S. federal income tax considerations - The company is an exempted company incorporated in the Cayman Islands, and its corporate affairs are governed by its memorandum and articles of association and the Cayman Companies Act[657] - Dividends paid by the PRC subsidiaries to the Hong Kong subsidiary may be subject to a 10% PRC withholding tax This rate may be reduced to 5% under the China-Hong Kong double tax treaty if certain conditions are met[717] - The company does not believe it is currently a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, but its status is determined annually and could change The company does not intend to provide the information necessary for U.S. holders to make a QEF election[241][733][736] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risks, primarily foreign exchange risk due to RMB operations, credit risk from accounts receivable, and interest rate risk - The company's primary market risk is foreign exchange risk, as a substantial majority of its operating activities and assets are denominated in RMB, which is subject to PRC government controls and is not freely convertible[747] - Credit risk is concentrated in accounts receivable The company manages this by conducting credit evaluations of customers but generally does not require collateral[748] ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS This section details the use of proceeds from the company's August 26, 2024 IPO, which generated $8.4 million gross and $7.4 million net, with funds allocated for an escrow account and general business purposes - The company completed its IPO on August 26, 2024, raising gross proceeds of $8,367,768 and net proceeds of approximately $7,373,839 after expenses[760][762] ITEM 15. CONTROLS AND PROCEDURES This section reports that as of September 30, 2024, disclosure controls and internal control over financial reporting were ineffective due to a material weakness in accounting staff expertise, with a remediation plan outlined - Management concluded that as of September 30, 2024, the company's disclosure controls and procedures were ineffective[764] - A material weakness in internal control over financial reporting was identified as of September 30, 2024, relating to a lack of accounting staff with appropriate knowledge of U.S. GAAP and SEC compliance Consequently, management concluded that internal control over financial reporting was not effective[767][768] - To remediate the material weakness, the company plans to recruit qualified accounting personnel and implement regular U.S. GAAP training programs[769][771] ITEM 16. CORPORATE GOVERNANCE AND OTHER MATTERS This section covers corporate governance, including the audit committee financial expert, adopted policies like a code of ethics and insider trading, principal accountant fees, and cybersecurity risk management Principal Accountant Fees (WWC, P.C.) | Fiscal Year Ended | Audit Fees ($) | | :--- | :--- | | September 30, 2024 | $240,000 | | September 30, 2023 | $190,000 | - The company has adopted insider trading policies, a compensation recovery policy, and a code of business conduct and ethics[615][617][785] PART III ITEM 18. FINANCIAL STATEMENTS This section presents the audited consolidated financial statements for fiscal years ended September 30, 2024, 2023, and 2022, prepared under U.S. GAAP, including balance sheets, income statements, and cash flows Consolidated Balance Sheet Highlights (as of Sept 30) | Metric | 2024 ($) | 2023 ($) | | :--- | :--- | :--- | | Total Current Assets | $20,827,220 | $22,152,678 | | Cash and cash equivalents | $6,557,605 | $1,596,096 | | Accounts receivable, net | $1,648,797 | $3,332,322 | | Total Assets | $36,250,563 | $29,958,901 | | Total Current Liabilities | $20,180,190 | $18,922,856 | | Short-term bank borrowings | $13,323,643 | $8,840,461 | | Total Liabilities | $20,180,190 | $18,972,986 | | Total Equity | $16,070,373 | $10,985,915 | Consolidated Statement of Income (Loss) Highlights (for year ended Sept 30) | Metric | 2024 ($) | 2023 ($) | 2022 ($) | | :--- | :--- | :--- | :--- | | Net Revenue | $11,506,440 | $13,565,951 | $19,711,290 | | Gross Profit | $2,868,386 | $4,142,984 | $4,418,792 | | Total Operating Expenses | ($6,913,571) | ($3,730,757) | ($3,780,464) | | Net (Loss) Income | ($3,540,409) | $63,383 | $944,126 | | Basic and Diluted (Loss) Earnings Per Share | ($0.27) | $0.01 | $0.07 | - Subsequent to the fiscal year-end, in December 2024, the company repaid a $5.98 million borrowing from China Citic Bank and authorized a new offering of up to 2.5 million units In February 2025, shareholders approved an increase in authorized share capital and a re-classification into Class A and Class B ordinary shares[968]