Zhongchao Inc. — FY2022 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone 2022 fourth-quarter filing. The company is a Cayman Islands holding company whose China-based healthcare information, education, patient-management and pharmaceutical operations are consolidated through contractual arrangements with a variable interest entity (VIE). Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $14.15 million | $16.30 million |
| Gross profit / margin | $6.36 million / 44.9% | $9.44 million / 57.9% |
| Operating income (loss) | $(2.95) million | $(0.32) million |
| Consolidated net income (loss) | $(2.82) million | $0.24 million |
| Net income (loss) attributable to Zhongchao shareholders | $(2.94) million | $0.24 million |
| Basic and diluted earnings (loss) per share | $(0.113) | $0.010 |
| Cash from (used in) operating activities | $(0.66) million | $2.86 million |
| Cash from (used in) investing activities | $(3.35) million | $(4.02) million |
| Cash from financing activities | $1.85 million | $0 |
| Cash and cash equivalents at year-end | $11.52 million | $13.91 million |
| Working capital at year-end | $18.54 million | $23.67 million |
| Total assets / total liabilities | $38.61 million / $5.60 million | $36.27 million / $3.70 million |
The filing reports no conventional borrowings in the balance sheet figures presented. Total liabilities include $1.70 million of operating lease liabilities and $2.29 million of income tax payable. The company also had $1.84 million of loans receivable at year-end; it says the remaining borrower balances were collected or settled after year-end.
Material changes and operating performance
- Revenue fell 13.2% year over year. Medical training and education revenue declined $2.15 million, and patient-management revenue declined about $1.05 million, partly offset by $1.22 million of new patented-drug sales.
- Gross margin contracted to 44.9% from 57.9%. Management attributed the decline to fewer NFP-related patient-aid service orders while labor costs remained stable, and to higher costs from onsite training and drug sales.
- The company moved from modest net income to a $2.82 million consolidated net loss. General and administrative expense rose 16.0%, including higher compensation and acquisition-related professional fees; lower selling and marketing and R&D expenses partly offset the increase.
- Operating cash flow changed from positive $2.86 million to negative $0.66 million. Year-end receivables were $6.77 million, down from $9.22 million; the company recorded a $207,269 doubtful-account allowance and reported $543,315 of receivables written off in 2022.
- Investing cash outflow included $3.06 million paid for an acquisition, $1.62 million of property and equipment purchases and loans to third parties, partly offset by property-sale proceeds and loan collections. The acquisition accounting added $5.77 million of goodwill.
Business, outlook, risks and unusual items
- Revenue came primarily from medical training and education ($6.60 million) and patient-management services ($6.29 million); patented-drug sales contributed $1.22 million. NFP customers generated 58.0% of revenue and pharmaceutical enterprises 33.1%. One customer represented 15.9% of FY2022 revenue.
- Management says available cash, operating cash flow and financing are expected to meet anticipated needs for at least 12 months from the report date. It expects service orders and margins to improve after China lifted restrictive COVID-19 measures, but provides no quantified revenue, profit or margin guidance.
- Management said 2022 lockdowns disrupted customers’ operations, delayed collections from NFP customers and reduced patient-aid projects. It did not expect a significant long-run operating impact based on the situation at the time of the report; future pandemic and market effects remain uncertain.
- Growth strategy extends the business from “Medical-Pharmaceutical” to “Medical-Pharmaceutical-Patient,” including patient management, internet hospital services and pharmaceutical distribution. The company acquired control of Beijing Yisuizhen and its West Angel subsidiary in 2022 and launched patented-drug sales. Execution, integration and profitability of these newer activities remain important uncertainties.
- Two material weaknesses were identified in internal control over financial reporting: insufficient monitoring and documented review controls, and inadequate U.S. GAAP/SEC-reporting expertise and resources. Management described remediation efforts, but concluded disclosure controls and internal controls were not effective at December 31, 2022. The auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- The VIE structure means investors do not own equity in the PRC operating entities. Its enforceability depends on PRC contractual arrangements that have not been tested in court. The filing also highlights China regulatory, licensing, data-privacy and overseas-listing risks. New CSRC overseas-listing filing rules took effect after year-end, on March 31, 2023; the company believed existing listed issuers need not file immediately but may face filing requirements for future financing.
- Class B shares carry 15 votes each versus one vote for Class A. CEO Weiguang Yang’s Class B holdings represented about 80.07% of voting power, assuming exercise of the HF Warrant. No dividends had been paid, and the company does not anticipate paying them in the foreseeable future.
- Other items to note: the company raised $1.85 million net through a 1.06 million-share shelf offering; currency translation reduced other comprehensive income by $1.72 million; and $115,989 was prepaid to a company controlled by an immediate family member of the CEO. The filing says the CEO repaid $226,178 of amounts due to the company by the report date.
Important facts for investors to verify
- Whether revenue, gross margin and operating cash flow stabilize, and whether new pharmaceutical and patient-management activities generate sustainable earnings.
- Receivables aging, subsequent collections, customer concentration and the adequacy of the doubtful-account allowance.
- Acquisition performance, goodwill recoverability and the financial contribution of West Angel and other recently added operations.
- Progress in remediating internal-control weaknesses and the accuracy and timeliness of future SEC reporting.
- VIE contractual enforceability, required PRC licenses and filings, data-security compliance, and any CSRC filing obligations for future financing.
- Cash availability across the parent, subsidiaries and VIE, given foreign-exchange controls, restricted PRC distributions and the absence of a dividend history.