Zhongchao Inc. — 2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; the filing text does not provide clear standalone Q4 financial results. Financial statements are audited and prepared under U.S. GAAP. Unless otherwise stated, amounts are U.S. dollars.
Business context
Zhongchao provides online and onsite healthcare information, education, and training in China through its MDMOOC platform and Sunshine Health Forums. Most revenue comes from customized medical courses, training, and related services sold to pharmaceutical companies and not-for-profit organizations (NFPs). The company operates primarily through a PRC variable interest entity (VIE), rather than direct equity ownership of its operating business.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $14.88 million | $12.87 million |
| Gross profit / margin | $10.23 million / 69% | $8.41 million / 65% |
| Operating income | $3.64 million | $3.27 million |
| Net income | $4.00 million | $3.00 million |
| Net income attributable to Zhongchao shareholders | $4.05 million | $3.02 million |
| Basic and diluted EPS | $0.187 | $0.145 |
| Operating cash flow | $1.41 million | $1.31 million |
| Cash and cash equivalents | $7.83 million | $7.92 million |
| Total assets | $17.74 million | $14.05 million |
| Total liabilities | $2.40 million | $2.66 million |
| Shareholders’ equity | $15.34 million | $11.39 million |
- Revenue increased 16% year over year; management attributed the increase mainly to patient-aid project services launched in late 2018. Gross margin improved from 65% to 69%, which the company attributed to lower outsourced costs on these projects.
- Operating expenses rose to $6.58 million from $5.13 million. Selling and marketing increased 41%, largely from advertising, while general and administrative expenses increased 77%, including IPO audit fees. R&D expenses fell 40% to $864,320.
- Other income increased to $534,020, principally reflecting recognition of $506,652 in government grants. This was a notable contributor to 2019 pretax income.
- Accounts receivable rose to $5.08 million from $1.99 million; no doubtful-account allowance was recorded. Management cited year-end revenue growth and customer credit terms of one to six months.
- Working capital was $12.15 million, up from $10.23 million. The company had no short-term borrowings at year-end, compared with $727,220 in 2018; 2019 financing cash outflow included repayment of borrowings and IPO-related costs.
- Net cash decreased by $86,123 during 2019. Investing cash outflow was $203,074, including $1.31 million of property and equipment purchases, partly offset by releases of short-term investments.
Material developments and outlook
- Customer concentration remained significant: three customers generated approximately 25.5%, 15.1%, and 14.1% of 2019 revenue. Pharmaceutical enterprises accounted for 27.6% of revenue, versus 60.1% in 2018; NFP customers accounted for 72.4%, versus 39.9%. The company said pharmaceutical customers increasingly placed orders through NFPs.
- In February 2020, Zhongchao completed its IPO and a partial over-allotment exercise, raising approximately $13.26 million gross in total. It reported approximately $9.97 million net proceeds from the base offering. It stated that proceeds were earmarked for course content, technology upgrades, and business expansion.
- Management expected more than $1.5 million in revenue from its COVID-19 curriculum in the six months ended June 30, 2020. This is a forward-looking estimate, not a reported result. Management also expected patient-aid project growth to support high margins and projected expansion of patient coverage; outcomes were uncertain.
- COVID-19 caused delays to some onsite projects and postponed planned training programs. The company reported that it shifted some programs online and continued servicing customers with limited interruption, while cautioning that the broader effect on customers, operations, and financial results was uncertain and could be adverse.
- Other disclosed developments include the planned dissolution of Horgos Zhongchao Medical, approved in March 2020, with its business expected to transfer to another subsidiary after completion of the process.
Risks, contingencies, and unusual items
- VIE and China regulatory risk: Operations depend on contractual VIE arrangements governed by PRC law. Their enforceability and the effect of the Foreign Investment Law and licensing rules are uncertain. The company disclosed that it did not hold certain potentially applicable online audio-visual, internet culture, or online publishing licenses and filings.
- Internal controls: Management concluded disclosure controls were not effective as of December 31, 2019 and identified a material weakness involving insufficient dedicated accounting and financial-reporting resources and U.S. GAAP/SEC reporting expertise. Remediation efforts were underway; auditor attestation on internal controls was not provided.
- Revenue and credit exposure: A small number of customers contributed substantial revenue, and receivables grew sharply with no allowance for doubtful accounts. A few customers also represented large portions of year-end receivables.
- Ownership and governance: Class B shares carry 15 votes per share versus one vote for Class A. The CEO’s controlled holdings represented approximately 80.94% of voting power, assuming the HF Warrant exercise. The company does not anticipate dividends in the foreseeable future.
- Currency and liquidity constraints: Most operations and cash flows are RMB-denominated; currency conversion and remittances are subject to PRC controls. The company said current cash and expected operating cash flow were expected to cover anticipated needs for at least 12 months, but access to VIE cash and offshore transfers is constrained.
- Other notable items: The company recognized government grants in 2019; reported $154,530 of construction commitments at year-end, with the project completed in January 2020; and disclosed no material pending legal proceedings. The financial-statement audit opinion was unqualified, but the auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether the $5.08 million receivable balance was collected after year-end, and whether subsequent experience supports the decision to record no doubtful-account allowance.
- Whether major-customer concentration and the shift in revenue routed through NFPs continued, and how recurring or project-based the patient-aid revenue and margins are.
- Whether the projected COVID-19 curriculum revenue and patient coverage targets were achieved; the filing provides estimates, not realized results.
- Whether the identified internal-control material weakness was remediated and whether reporting controls improved in subsequent filings.
- Whether the VIE arrangements and required PRC licenses, approvals, and filings remain valid and sufficient, and whether HF Capital completed the steps required to exercise its warrant.
- How IPO proceeds were ultimately used, and whether PRC currency restrictions affect the availability of cash for the parent company.