PART I ITEM 3. KEY INFORMATION This section details the significant risks confronting Waton Financial Limited, categorized into three main areas: risks associated with operating in Hong Kong under PRC influence, risks inherent to the company's specific business and industry, and risks related to the ownership of its Ordinary Shares Risk Factors This subsection elaborates on specific risks including geopolitical risks from PRC government intervention, business and industry risks like revenue volatility and customer/supplier concentration, and shareholder risks such as controlling shareholder influence and foreign private issuer status - The company identifies significant risk from potential PRC government intervention in its Hong Kong operations, despite currently having no operations in Mainland China, which could materially change operations and share value2223 - Compliance with evolving PRC laws on cybersecurity and data privacy poses significant uncertainty, as their applicability to Hong Kong operations is unclear and could lead to sanctions if deemed non-compliant313336 Financial Performance Fluctuation | Fiscal Year Ended March 31 | Total Revenues (US$ million) | YoY Growth | Net Income/(Loss) (US$ million) | | :--- | :--- | :--- | :--- | | 2023 | 5.7 | - | 3.1 | | 2024 | 10.1 | 75.2% | 2.5 | | 2025 | 7.4 | -25.9% | (12.0) | - The company has a significant customer concentration risk, with the top five customers accounting for 88.2%, 89.7%, and 97.6% of total revenues for fiscal years 2025, 2024, and 2023, respectively61 - A substantial portion of revenue is derived from a single related party, Wealth Guardian Investment Limited (WGI), which accounted for 64.2%, 39.5%, and 81.5% of total revenues in fiscal years 2025, 2024, and 2023, respectively, with an anticipated acquisition of WGI by a third party potentially altering this commercial relationship63 - The company is dependent on a single related-party supplier, Shenzhen Jinhui Technology Co., Ltd., controlled by Chairman Mr. Zhou Kai, for trading platform APP development, and an anticipated acquisition of this supplier could disrupt services and increase costs6667 - As of the report date, Chairman Mr. Zhou Kai beneficially owns approximately 84.95% of the company's outstanding shares, giving him substantial influence over corporate decisions169 - The company is a 'foreign private issuer' and a 'controlled company', allowing it to rely on exemptions from certain Nasdaq corporate governance standards, which may offer less protection to shareholders compared to domestic U.S. issuers170180 - The company's auditor, UHY LLP, is a U.S.-based firm regularly inspected by the PCAOB, but the report notes the risk that if the PCAOB is unable to inspect auditors of foreign companies for two consecutive years under the HFCAA, the company's shares could be delisted189190193 ITEM 4. INFORMATION ON THE COMPANY This section provides a comprehensive overview of Waton Financial Limited, detailing its corporate history, structure, and its initial public offering in April 2025, along with its business model, competitive strengths, and regulatory landscape History and Development of the Company This subsection covers the company's incorporation in the British Virgin Islands, its corporate structure consisting of subsidiaries in Hong Kong, the Cayman Islands, and the BVI, and confirms it does not operate through VIEs, also detailing the completion of its Initial Public Offering (IPO) on the Nasdaq Capital Market in April 2025 - The company was incorporated in the British Virgin Islands on June 25, 2010, and changed its name to Waton Financial Limited on July 5, 2023, operating through subsidiaries in Hong Kong, the Cayman Islands, and the BVI, with no subsidiaries or VIE structures in Mainland China216 - On April 2, 2025, the company closed its IPO on the Nasdaq Capital Market under the ticker 'WTF', issuing 4,375,000 Ordinary Shares at $4.00 per share, raising total gross proceeds of approximately $20.075 million including the full exercise of the over-allotment option218 Business Overview The company operates as a provider of securities brokerage and financial technology services through its Hong Kong subsidiaries, WSI and WTI, with key services including securities brokerage, margin financing, bond distribution, and software licensing, and a growth strategy focusing on customer expansion, service enhancement, asset management, and a global AI initiative Revenue Breakdown by Service Type (FY2023-2025) | Service Category | FY2025 Revenue (US$ million) | FY2024 Revenue (US$ million) | FY2023 Revenue (US$ million) | | :--- | :--- | :--- | :--- | | Brokerage, Commission & Margin Financing | 5.5 | 9.4 | 2.3 | | Software Licensing & Related Support | 1.8 | 1.4 | 3.5 | - As of March 31, 2025, WSI had over 6,700 securities brokerage customers, including 69 corporate accounts and three introducing broker omnibus accounts, with approximately 1,000 active customers with assets in their accounts226256 - The company has launched a global AI strategy to transition its business model to support AI-driven entities, with key initiatives including developing an application for users to train their own AI trading agents and enabling these agents to be marketed and exchanged like NFTs/RWAs240241 - The company's subsidiary WSI holds Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on futures contracts), and Type 9 (asset management) licenses from the Hong Kong HKSFC226243 - The company has begun developing its asset management business, having launched one segregated portfolio, GRAND FULL SP I, which had received total subscriptions of US$4 million as of the report date235285286 Operating and Financial Review and Prospects This section provides management's analysis of the company's financial performance for the fiscal years ended March 31, 2023, 2024, and 2025, detailing a revenue decrease of 25.9% in FY2025 to $7.4 million, resulting in a net loss of $12.0 million, primarily driven by a significant increase in share-based compensation expenses, also covering liquidity, capital resources, cash flow analysis, and critical accounting policies Consolidated Results of Operations Summary (FY2023-2025) | Metric (US$ million) | FY2025 | FY2024 | FY2023 | | :--- | :--- | :--- | :--- | | Total Revenues | 7.4 | 10.1 | 5.7 | | Total Operating Costs and Expenses | 18.1 | 7.1 | 2.7 | | Share-based compensation expenses | 8.8 | 0 | 0.4 | | Operating (Loss) Income | (10.7) | 2.9 | 3.1 | | Net (Loss) Income | (12.0) | 2.5 | 3.1 | - Total revenues decreased by 25.9% in FY2025, primarily due to a 47.0% drop in brokerage and commission income, which was impacted by lower bond distribution services income389390 - Operating expenses increased by 153.5% in FY2025 to $18.1 million, largely due to $8.8 million in share-based compensation expenses related to the adoption of the 2024 Global Equity Incentive Plan prior to the IPO393398 Cash Flow Summary (FY2023-2025) | Cash Flow (US$ million) | FY2025 | FY2024 | FY2023 | | :--- | :--- | :--- | :--- | | Net cash from/(used in) operating activities | 0.4 | (1.8) | 12.0 | | Net cash used in investing activities | (0.01) | (8.2) | (0.005) | | Net cash from/(used in) financing activities | 2.8 | (8.3) | 13.0 | - As of March 31, 2025, the company had cash and cash equivalents of approximately $7.7 million, compared to $4.9 million as of March 31, 2024423 Directors, Senior Management, and Employees This section provides details on the company's leadership, compensation, and governance structure, introducing the board of directors and executive officers, outlining compensation for FY2025 and the 2024 Global Equity Incentive Plan, detailing the board structure and committee compositions, and presenting the share ownership structure, highlighting Chairman Zhou Kai's substantial beneficial ownership Board of Directors and Executive Officers | Name | Position(s) | | :--- | :--- | | ZHOU Kai | Director, Chairman of the Board, and Chief Technology Officer | | CHU Chun On Franco | Director and Chief Executive Officer | | James Beeland Rogers Jr. | Director and Senior Advisor | | WEN Huaxin | Chief Financial Officer | | FUNG Chi Kin | Independent Director | | DU Haibo | Independent Director | | JIANG Wen | Independent Director | - In fiscal year 2025, the aggregate compensation paid to directors and executive officers was approximately US$5.04 million477 - The company adopted the 2024 Global Equity Incentive Plan in November 2024, authorizing up to 10,245,000 Ordinary Shares for equity awards, with 4,884,030 Restricted Share Units (RSUs) granted under this plan as of the report date479480489 - As of the report date, Mr. Zhou Kai, the Chairman, Director, and CTO, beneficially owns approximately 84.95% of the company's issued and outstanding Ordinary Shares through entities he controls509514 Major Shareholders and Related Party Transactions This section details the company's significant related party relationships and transactions, primarily with Chairman Zhou Kai, Shenzhen Jinhui (a company he controls), and Wealth Guardian Investment Limited (WGI), over which the company exercises significant influence, summarizing financial balances and revenues associated with these related parties Revenue from Related Party WGI (FY2023-2025) | Revenue Type (US$) | 2025 | 2024 | 2023 | | :--- | :--- | :--- | :--- | | Brokerage commission and handling charge | 2,539,260 | 1,757,731 | 1,707,334 | | Interest income | 1,040,634 | 1,016,179 | 181,550 | | Software licensing and related support services | 1,200,000 | 1,197,551 | 2,786,105 | | Total | 4,779,894 | 3,971,461 | 4,674,989 | - The company outsources software development to Shenzhen Jinhui, a company controlled by Chairman Zhou Kai, purchasing approximately $1.0 million, $0.7 million, and $0.6 million in services from Shenzhen Jinhui in FY2025, FY2024, and FY2023, respectively531 - The company has outstanding balances due to related parties, primarily borrowings from Chairman Zhou Kai and unpaid service fees to Shenzhen Jinhui, with the total amount due to related parties approximately $1.8 million as of March 31, 2025526 Financial Information This section confirms the inclusion of the company's consolidated financial statements and discusses legal proceedings and dividend policy, stating the company is not currently party to any material legal proceedings and has no present plan to declare or pay cash dividends, intending to retain earnings for business growth and development - The company has never declared or paid any cash dividends on its Ordinary Shares and has no present plan to do so in the foreseeable future532 - The company intends to retain most, if not all, of its available funds and any future earnings to support operations and finance the growth and development of its subsidiaries' business530532 Additional Information This section provides supplementary corporate information, including details on the company's memorandum and articles of association, material contracts, and exchange controls, with a significant portion dedicated to a detailed analysis of the tax implications for the company and its shareholders in the British Virgin Islands, Hong Kong, the Cayman Islands, and the United States, notably discussing the potential classification of the company as a Passive Foreign Investment Company (PFIC) and its consequences for U.S. holders - The company is not subject to income, capital gains, or withholding taxes in its jurisdiction of incorporation, the British Virgin Islands543544 - In Hong Kong, the company's subsidiaries are subject to a two-tiered profits tax regime: 8.25% on the first HK$2 million of assessable profits and 16.5% on profits thereafter, with capital gains from the sale of shares not taxed372545 - The company does not expect to be treated as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for the current taxable year, though its status is determined annually and depends on factors like the market price of its shares and the composition of its assets and income555 - If the company were classified as a PFIC, U.S. holders of its shares would be subject to adverse U.S. tax rules, including ordinary income tax rates and an interest charge on gains and 'excess distributions', unless a timely 'mark-to-market' election is made556558 Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to various market risks, primarily identifying concentration and credit risk stemming from heavy reliance on a single major customer (WGI) and a single major supplier (Shenzhen Jinhui), also discussing foreign currency exchange risk, which is considered insignificant due to the HKD-USD peg, as well as interest rate and inflation risks, which are currently deemed not material - The company faces significant concentration risk, with related party WGI accounting for 64.2% of total revenues in FY2025 and 61.0% of total receivables as of March 31, 2025579581 - There is a major supplier concentration risk, with related party Shenzhen Jinhui accounting for 5.4%, 11.3%, and 21.1% of total expenses for fiscal years 2025, 2024, and 2023, respectively580 - Foreign currency exchange risk is considered insignificant for transactions between HKD and USD due to the Hong Kong dollar's peg to the U.S. dollar583 PART II Material Modifications to the Rights of Security Holders and Use of Proceeds This section details the use of proceeds from the company's Initial Public Offering (IPO) in April 2025, which raised gross proceeds of approximately $20.1 million, resulting in net proceeds of approximately $17.5 million after deducting expenses, with $15.8 million of the net proceeds remaining unused as of the report date - The company completed its IPO in April 2025, raising approximately $17.5 million in net proceeds after deducting underwriter discounts and other expenses of about $2.7 million595597 - As of the report date, the company has used a portion of the IPO proceeds for enhancing its trading platform, developing its asset management business, expanding investment offerings, and for general working capital, with approximately $15.8 million of the net proceeds remaining unused597 Controls and Procedures This section addresses the company's disclosure controls and internal control over financial reporting, concluding that as of March 31, 2025, disclosure controls were ineffective due to identified material weaknesses related to a lack of structured financial closing processes, ineffective IT general controls, and inadequate cybersecurity risk assessment and disaster recovery planning, with outlined remediation measures - Management concluded that disclosure controls and procedures were ineffective as of March 31, 2025598 - Material weaknesses were identified in internal control over financial reporting, including: 1) lack of structured period-end financial closing processes, 2) ineffective IT general controls (user access, change management), and 3) inadequate cybersecurity risk assessment and disaster recovery planning598 - The company has implemented remediation measures, including formalizing accounting policies, hiring an external consultant, and enhancing the design of IT general controls599 Corporate Governance This section explains the company's corporate governance practices in the context of its status as a 'foreign private issuer' and a 'controlled company' under Nasdaq listing rules, allowing it to follow certain British Virgin Islands home country practices instead of Nasdaq requirements, such as not needing a majority of independent directors, and potentially electing exemptions from certain governance standards due to Chairman Zhou Kai holding over 50% of voting power - As a 'foreign private issuer', the company follows its home country (British Virgin Islands) practices in lieu of certain Nasdaq rules, including the requirement for a majority of independent directors on the board614 - The company qualifies as a 'controlled company' because Chairman Mr. Zhou Kai controls more than 50% of the voting power, allowing for exemptions from certain Nasdaq corporate governance requirements616 - Despite exemptions, the company must still comply with Nasdaq's audit committee requirements, which mandate at least three independent directors, with a phase-in period post-listing619 PART III Financial Statements This section presents the audited consolidated financial statements of Waton Financial Limited for the three-year period ended March 31, 2025, prepared in accordance with U.S. GAAP, including the independent auditor's report, consolidated balance sheets, statements of operations, changes in shareholders' equity, and cash flows, with notes providing detailed information on significant accounting policies, financial items, related party transactions, and regulatory capital requirements Consolidated Balance Sheet Summary | (US$ million) | As of March 31, 2025 | As of March 31, 2024 | | :--- | :--- | :--- | | Total Assets | 30.7 | 32.7 | | Cash and cash equivalents | 7.7 | 4.9 | | Receivables from clients (incl. related party) | 6.6 | 13.1 | | Total Liabilities | 18.0 | 21.9 | | Payables to clients (incl. related party) | 7.6 | 15.4 | | Total Shareholders' Equity | 12.8 | 10.7 | Consolidated Statement of Operations | (US$ million) | FY2025 | FY2024 | FY2023 | | :--- | :--- | :--- | :--- | | Total Revenues | 7.4 | 10.1 | 5.7 | | Brokerage and commission income | 4.4 | 8.2 | 2.1 | | Interest income | 1.2 | 1.2 | 0.2 | | Software licensing & support services | 1.8 | 1.4 | 3.5 | | Total operating costs and expenses | 18.1 | 7.1 | 2.7 | | Net (Loss) Income | (12.0) | 2.5 | 3.1 | - The company recognizes revenue from brokerage commissions at a point in time when trades are completed, while revenue from software licenses is recognized at a point in time when the software is made available, and revenue from maintenance, support, and SaaS services is recognized ratably over the contract term696706713 - The company's Hong Kong subsidiary, WSI, is subject to a minimum liquid capital requirement of approximately $385,609 (HK$3.0 million) and was in compliance as of March 31, 2025802
Waton Financial Limited(WTF) - 2025 Q4 - Annual Report