Zhongchao Inc. — FY2021 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter report. Financial statements are audited and prepared under U.S. GAAP; amounts below are U.S. dollars unless noted.
Business context
Zhongchao is a Cayman Islands holding company that conducts its China operations through contractual arrangements with Zhongchao Shanghai and its subsidiaries (the VIE). The business provides healthcare information, education and training, principally through the MDMOOC platform, Sunshine Health Forums and patient-aid and patient-management services. The company does not directly own the VIE’s equity.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $16.30 million | $17.99 million |
| Gross profit | $9.44 million | $11.87 million |
| Gross margin | 57.9% | 66.0% |
| Operating income (loss) | ($0.32 million) | $4.49 million |
| Net income | $0.24 million | $4.46 million |
| Operating cash flow | $2.86 million | ($1.04 million) |
| Cash and cash equivalents at year-end | $13.91 million | $15.07 million |
| Working capital | $23.67 million | $26.61 million |
| Total assets / total liabilities | $36.27 million / $3.70 million | $34.82 million / $2.98 million |
Revenue comprised $8.75 million from medical training and education services, $7.34 million from patient-aid projects and $0.20 million from other consulting services. Net cash used in investing was $4.02 million, including property and equipment purchases, equity investments and loans; financing cash flow was nil. The filing reports no bank borrowings at year-end. Current assets were $27.25 million against current liabilities of $3.59 million.
Material changes and unusual items
- Revenue declined 9.4% year over year, primarily because of lower medical training and education orders from NFP customers amid government restrictions on centralized purchases of medical-related products.
- Gross margin fell from 66.0% to 57.9%. Cost of revenue rose 12.1%, including higher outsourced labor and payroll costs associated with patient-aid projects and the end of temporary social-insurance contribution relief.
- General and administrative expenses increased 87.7% to $5.86 million. The company cited higher receivable write-offs, payroll, professional fees, depreciation and rent. It wrote off $1.45 million of receivables in 2021 versus $0.34 million in 2020, while reporting no year-end doubtful-account allowance.
- Accounts receivable was $9.22 million at year-end, down from $10.32 million. Three customers contributed 23.4%, 21.9% and 10.7% of 2021 revenue; four customers represented 54.3% of receivables.
- Cash declined by $1.16 million despite positive operating cash flow, largely reflecting investing outflows. Year-end loans receivable were $2.66 million; the company says these were non-interest-bearing working-capital loans. It also reported a $0.39 million related-party receivable from an equity-method investee, repaid after year-end.
- Income-tax benefits of $0.35 million included $1.35 million of deferred tax benefits, partly offset by $1.00 million of current tax expense. The filing reported $1.47 million of unrecognized tax benefits at year-end, expected to decrease significantly within 12 months.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided. Management said it expected to maintain high gross margins and did not expect COVID-related restrictions to have a significant long-term impact, while acknowledging continuing uncertainty. Planned priorities include expanding content and user communities, strengthening brands, recruiting editorial staff and developing additional revenue sources. The filing also describes expansion of patient-management services and a target of covering approximately 120,000 patients in aid projects by the end of 2022.
- China and VIE exposure: The company depends on contractual arrangements that have not been tested in court. Changes in PRC rules or adverse interpretations could undermine the structure, restrict operations or affect the listing. Draft overseas-listing rules were published for comment in December 2021.
- Regulation and data: The filing identifies uncertainty around online education, audiovisual, publishing and live-streaming licenses, as well as cybersecurity and personal-information rules. It notes that the platform had over 732,000 registered users and a database of more than 2 million healthcare experts; applicability of review requirements was uncertain.
- Audit and controls: Management concluded disclosure controls and internal control over financial reporting were not effective at December 31, 2021, citing insufficient monitoring, review controls and U.S. GAAP/SEC reporting expertise. Management described remediation efforts; the auditor did not provide an internal-control attestation.
- Listing risk: The filing discusses HFCA Act/PCAOB inspection-related delisting risks. The named auditor was headquartered in New York, but the company noted uncertainty about access to audit working papers located in China.
- Capital and cash movement: Cash and earnings are concentrated in China and VIE entities. Currency conversion, remittance, dividend and capital-contribution rules may limit access to funds; the company said it did not anticipate dividends in the foreseeable future.
- COVID-19 and legal matter: The report describes 2022 Shanghai and Beijing restrictions and uncertainty around their duration. A complaint concerning alleged unauthorized occupation of a Beijing property was pending preliminary mediation as of the report date; management did not identify other proceedings expected to have a material effect.
- Share issuance: The December 2021 ATM shelf permits sales of up to $10.4 million. After year-end, 1.06 million shares were sold at $1.80 each for $1.91 million gross proceeds, creating dilution.
Important facts for investors to verify
- Confirm the drivers and expected persistence of lower revenue, gross margin and profitability, and the scale and recoverability of receivables and customer concentration.
- Review the nature, terms, counterparties, repayment status and credit support for the $2.66 million of year-end loans, including related-party balances and subsequent advances.
- Track remediation of the disclosed material weaknesses and whether future filings show improved controls and reporting reliability.
- Monitor developments in PRC VIE, overseas-listing, licensing, cybersecurity and data-protection requirements, including any approvals or filings that may become necessary.
- Check subsequent share issuance under the ATM, the HF Warrant’s status and resulting dilution, and confirm the filing’s share-count presentation.
- Reconcile the filing’s cash-flow comparison table: its MD&A heading lists 2020, 2019 and 2018, while the figures appear to correspond to 2021, 2020 and 2019.