EPWK Holdings Begins U.S. IPO Process (Pending:EPWK)

A Quick Take On EPWK Holdings Ltd.

EPWK Holdings Ltd. (EPWK) has filed to raise $30 million in an IPO of its Class A ordinary shares, according to an F-1 registration statement.

The firm operates an online marketplace connecting freelance service providers with businesses and individuals seeking services in various categories.

EPWK is a small company in a larger ecommerce ecosystem that is dominated by giants.

I’ll provide an update when we learn more about the IPO from management.

EPWK Overview

Xiamen City, China-based EPWK Holdings Ltd. was founded to develop an online freelancer service marketplace in China.

Management is headed by founder, Chairman and CEO Guohua Huang, who has been with the firm since its inception in March 2011 and was previously the founder of Haishang Bus TV Group and Mobile Phone Animation Group.

The company’s primary offerings include the following service provider categories:

• Design

• Software

• Marketing

• Business writing

• Interior decoration

• Life services

• Business services

As of June 30, 2022, EPWK has booked fair market value investment of $11.1 million from investors including HGH Holdings (Founder Guohua Huang).

EPWK – Customer/User Acquisition

The firm markets its service online and through various other means, including word-of-mouth referrals.

The company says it operates the second largest freelance contract labor service of its kind in China, with a total GMV of $804 million generated over 2.23 billion projects for the three years 2019 to 2021.

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

Selling	Expenses vs. Revenue
Period	Percentage
FYE June 30, 2022	33.6%
FYE June 30, 2021	23.6%

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, was 0.3x in the most recent reporting period. (Source – SEC)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

EPWK’s most recent calculation was negative (17%) as of June 30, 2022, so the firm has performed poorly in this regard, per the table below:

Rule of 40	Calculation
Recent Rev. Growth %	13%
EBITDA %	-30%
Total	-17%

Click to enlarge

(Source – SEC)

EPWK’s Market & Competition

According to a 2021 market research report by GlobalData, the Chinese market for ecommerce was an estimated $2.1 trillion in 2021 and is forecast to reach $3.3 trillion in 2025.

This represents a forecast CAGR of 11.6% from 2021 to 2025.

The main drivers for this expected growth are increasing penetration of internet and smartphone technologies, growing consumer confidence in online sourcing and the maturation of major online platforms.

Also, the COVID-19 pandemic also brought forward the demand for online product and service sourcing which is expected to continue growing, although to a lesser degree than during the pandemic.

Major competitive or other industry participants include the following:

• Zhubajie

• Project Easy

• Time Wealth

• Mission China

• Zhicheng

• Creative.com

• China Reward Writer

EPWK Holdings Ltd. Financial Performance

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

• Growing topline revenue

• Increasing gross profit but slightly decreasing gross margin

• Higher operating losses

• A swing to cash used in operations

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

Total Revenue
Period	Total Revenue	% Variance vs. Prior
FYE June 30, 2022	$ 12,811,143	12.7%
FYE June 30, 2021	$ 11,366,317
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
FYE June 30, 2022	$ 5,314,679	12.0%
FYE June 30, 2021	$ 4,746,594
Gross Margin
Period	Gross Margin
FYE June 30, 2022	41.48%
FYE June 30, 2021	41.76%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
FYE June 30, 2022	$ (3,849,723)	-30.0%
FYE June 30, 2021	$ (948,445)	-8.3%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
FYE June 30, 2022	$ (3,405,919)	-26.6%
FYE June 30, 2021	$ 623,836	4.9%
Cash Flow From Operations
Period	Cash Flow From Operations
FYE June 30, 2022	$ (3,664,165)
FYE June 30, 2021	$ 1,152,690
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

As of June 30, 2022, EPWK had $713,649 in cash and $13.0 million in total liabilities.

Free cash flow during the twelve months ending June 30, 2022, was negative ($4.0 million).

EPWK Holdings Ltd. IPO Details

EPWK intends to raise $30 million in gross proceeds from an IPO of its Class A ordinary shares, although the final figure may differ.

Class A ordinary shareholders will be entitled to one vote per share while Class B shareholder founder and Chairman Huang will have fifteen votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

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

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

for business development and marketing. To explore new service categories besides software development and design, buildup flagship brand store system of high-quality service providers, and increase users and the market share through brand-marketing and flow-growth.

for research and development, including developing Software as a Service [SAAS] series tools for our sellers and buyers, upgrading our personalized task recommendation engine and providing online digital business solutions.

for exploration of new product and service offerings like NFT project, original copyright content platform and the construction of creative fund for high-quality service providers investment, so as to promote the service quality and efficiency.

for general corporate purposes and working capital including the repayment of the company’s revolving loan of US$3-4 million.

(Source – SEC)

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

Regarding outstanding legal proceedings, management said there are no legal proceedings against the company that would have a material adverse effect on its financial condition or operations.

The sole listed bookrunner of the IPO is Revere Securities.

Commentary About EPWK’s IPO

EPWK is seeking U.S. public capital market investment to fund its general corporate growth plans and working capital requirements.

The firm’s financials have shown increasing topline revenue, growing gross profit but slightly lower gross margin, increased operating losses and a swing to cash used in operations.

Free cash flow for the twelve months ending June 30, 2022, was negative ($4.0 million).

Selling expenses as a percentage of total revenue have risen as revenue has increased; its Selling efficiency multiple was 0.3x in the most recent period, an unimpressive result.

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

EPWK’s CapEx Ratio indicates it has spent moderately on capital expenditures despite its operating cash use.

The company’s Rule of 40 results have been poor, with revenue growth offset by significant operating losses contributing to a negative figure for this metric.

The market opportunity for freelancer marketplaces is likely large but in an early stage of development.

Like other Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

Additionally, the Chinese government’s crackdown on IPO company candidates combined with added reporting requirements from the U.S. side has put a serious damper on Chinese IPOs and their post-IPO performance.

A 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 for three years by the PCAOB.

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

Revere Securities is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (48.0%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

Risks to the company’s outlook as a public company include being relatively small in size when compared to major ecommerce platforms which can easily add marketplace services to their menu of options.

When we learn more information about the IPO, I’ll provide a final opinion.

Expected IPO Pricing Date: To be announced.