Zhongchao(ZCMD) - 2024 Q4 - Annual Report

PART I Item 3. Key Information This section outlines the company's VIE structure, PRC regulatory risks, dividend policies, cash transfer restrictions, and presents condensed financial data Corporate Structure and VIE Arrangements The company operates as a Cayman Islands holding company, controlling PRC entities via a VIE structure due to foreign ownership restrictions - The company operates as a Cayman Islands holding company and consolidates its PRC operations through a VIE structure due to PRC restrictions on foreign ownership in the telecommunications sector[22] - The VIE structure subjects the company to unique risks, including the potential for the contractual arrangements to be ineffective in providing control and uncertainties regarding the interpretation and application of PRC laws[23] PRC Regulatory Permissions New CSRC rules require filings for future refinancing, though the current VIE structure is deemed compliant by PRC legal counsel - The CSRC's Trial Measures, effective March 31, 2023, require domestic companies seeking overseas listings to complete filing procedures. As an existing issuer, Zhongchao is not required to file immediately but must do so for future refinancing[24] - The company's PRC legal counsel, Han Kun Law Offices, has opined that the current corporate structure and VIE arrangements do not violate existing PRC laws[26] - The company acknowledges that it may need to obtain additional licenses or approvals in the future due to the uncertain interpretation of PRC laws, and failure to do so could result in penalties or suspension of operations[26] Dividend Distributions and Cash Transfers Cash transfers from parent to U.S. subsidiary totaled $4.4 million in 2024; no PRC dividends due to reinvestment and regulatory hurdles Cash Transfers from Zhongchao Cayman to Zhongchao USA | Year Ended December 31 | Amount Transferred (USD) | | :--- | :--- | | 2024 | $4.4 million | | 2023 | $0.1 million | | 2022 | $1.5 million | - No dividends or distributions have been made from any subsidiaries or the VIE to the parent company, Zhongchao Cayman, or to any U.S. investors for the years ended December 31, 2022, 2023, and 2024[27] - PRC regulations require subsidiaries in China to set aside at least 10% of after-tax profits into a statutory reserve until it reaches 50% of registered capital, which restricts funds available for distribution[29] - The PRC government imposes controls on currency conversion and remittance, which may create difficulties in paying dividends from profits generated in China[30] Financial Information Related to the VIE Condensed consolidated financial statements for 2024, 2023, and 2022 illustrate the financial separation and reliance on the VIE structure Condensed Consolidated Balance Sheet as of December 31, 2024 (in USD) | Account | Parent (USD) | Subsidiaries (USD) | WFOE (USD) | VIE and its Subsidiaries (USD) | Total Consolidated (USD) | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | 22,544,367 | 5,284,101 | 32,680 | 15,412,624 | 25,884,953 | | Total Liabilities | - | 11,072,304 | - | 2,201,474 | 1,733,900 | | Total Equity | 22,544,367 | (5,788,203) | 32,680 | 13,211,150 | 24,151,053 | Condensed Consolidated Statement of Operations for the Year Ended December 31, 2024 (in USD) | Account | Parent (USD) | Subsidiaries (USD) | WFOE (USD) | VIE and its Subsidiaries (USD) | Total Consolidated (USD) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | - | - | - | 15,864,773 | 15,864,773 | | Gross Profit | - | - | - | 8,912,213 | 8,912,213 | | Net (Loss) Income | (643,229) | (642,807) | 2,532,747 | 2,902,555 | (273,413) | Condensed Consolidated Cash Flows for the Year Ended December 31, 2024 (in USD) | Account | Parent (USD) | Subsidiaries (USD) | WFOE (USD) | VIE and its Subsidiaries (USD) | Total Consolidated (USD) | | :--- | :--- | :--- | :--- | :--- | :--- | | Net cash from operating activities | 198,117 | 878,538 | (1,382) | 1,528,919 | (1,473,243) | | Net cash from investing activities | (3,097,823) | (521,865) | - | (2,487,565) | (1,807,753) | | Net cash from financing activities | 3,838,200 | - | - | - | 3,838,200 | Risk Factors The company faces material risks from healthcare dependence, competition, VIE structure, dual-class shares, and significant PRC government influence - The company's business is exposed to risks from its dependence on the healthcare industry, increasing competition, and the potential for unauthorized use of its intellectual property[43] - Structural risks include reliance on VIE arrangements which may not be as effective as direct ownership, and a dual-class share structure that concentrates voting control with the CEO[43] - Operating in China presents risks from substantial government influence, vague and uncertain laws, currency conversion controls, and potential delisting from U.S. exchanges under the Holding Foreign Companies Accountable Act (HFCA Act)[44][45] Item 4. Information on the Company This section details the company's history, corporate structure, business operations, technology, intellectual property, and physical properties History and Development of the Company Incorporated in 2019, the company operates through a VIE structure, with a 1-for-10 share consolidation and $3.93 million raised in 2024 offerings - The company is a holding company incorporated in the Cayman Islands in 2019, conducting its business through a VIE, Zhongchao Shanghai, which was established in 2012[241][243][244] - In 2024, the company executed a 1-for-10 share consolidation, a registered direct offering of 3.094 million Class A shares raising approximately $0.93 million, and a private placement of 10 million Class A shares and warrants raising $3.0 million[248][324][325] - The company has recently streamlined its business structure by deregistering two subsidiaries, Shanghai Xinyuan and Liaoning Zhixun, in late 2024 and early 2025[327] Business Overview The company provides online healthcare information, professional training (MDMOOC), patient management (Zhongxin Health), and patented drug sales in China - The company provides online healthcare information, professional training, and patient management services focused on oncology and other major diseases in China[254] - Key service brands include "MDMOOC" for professional education, "Zhongxin Health" for patient management, and "Sunshine Health Forums" for public health information[255][282][285] - The company expanded into pharmaceutical sales through its subsidiary Xinjiang Pharmaceutical, which operates a B2B2C procurement platform[256][300] - The company's content is distributed through its proprietary platforms (mobile app, website) and major social media networks in China, creating monetization opportunities through embedded advertisements[286] Organizational Structure An organizational chart illustrates the multi-layered corporate legal structure, from the Cayman Islands holding company to the PRC VIE - The company's structure is a multi-layered holding company model with the ultimate parent in the Cayman Islands, intermediary holding companies, a WFOE in the PRC, and the operating business held within a VIE structure[459][460] Property, Plants and Equipment The company owns offices in Shanghai and Beijing, leases spaces in six other cities, and holds residential properties for talent recruitment - The company owns its main offices in Beijing and Shanghai and leases space in 6 other cities[462] - The company has purchased residential apartments in Japan, the U.S. (New York), and China (Beijing, Tangshan) as part of its talent recruitment and business expansion strategy[462][464] Rent Expenses | Year Ended December 31 | Amount (USD) | | :--- | :--- | | 2024 | $218,227 | | 2023 | $412,891 | | 2022 | $498,166 | Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance, including revenue decline, narrowed net loss, liquidity, capital resources, and critical accounting policies Operating Results FY2024 revenues decreased by 18.4% to $15.9 million due to lower drug sales, while net loss significantly narrowed to $0.3 million Consolidated Results of Operations (in USD) | | 2024 (USD) | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | :--- | | Total Revenues | 15,864,773 | 19,433,945 | 14,151,516 | | Service Revenue | 13,712,964 | 10,406,734 | 12,935,420 | | Product Revenue | 2,151,809 | 9,027,211 | 1,216,096 | | Gross Profit | 8,912,213 | 8,512,192 | 6,356,664 | | Loss from Operations | (341,267) | (13,283,798) | (2,954,462) | | Net Loss | (273,413) | (11,307,239) | (2,822,319) | - Revenue decreased by 18.4% in FY2024 primarily due to a $6.9 million decline in drug sales as demand normalized after a peak in 2023. This was partially offset by increased revenue from medical training and patient management services[475] - Net loss narrowed significantly to $0.3 million in FY2024 from $11.3 million in FY2023. The improvement was mainly due to the absence of large impairment charges on goodwill and intangible assets related to the West Angel acquisition that were recorded in 2023[484][490] Liquidity and Capital Resources The company's liquidity includes $7.8 million in cash and $17.2 million working capital, with PRC regulations restricting cash transfers from its entities Summary of Cash Flows (in USD) | | 2024 (USD) | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | (1,473,243) | 54,229 | (661,740) | | Net cash used in investing activities | (1,807,753) | (3,754,655) | (3,346,658) | | Net cash provided by financing activities | 3,838,200 | - | 1,850,744 | | Cash and cash equivalents at end of year | 7,841,306 | 7,548,694 | 11,520,453 | - As of December 31, 2024, the company had cash and cash equivalents of approximately $7.8 million and working capital of $17.2 million[525] - The company raised $3.8 million from financing activities in 2024 through the issuance of Class A ordinary shares[524][539] - The ability to transfer funds from PRC entities to the parent company is restricted by PRC foreign exchange regulations and statutory reserve requirements[527][542] Item 6. Directors, Senior Management and Employees This section details the company's five-member board, executive compensation, 2019 Equity Incentive Plan, and 111 full-time employees - The Board of Directors consists of five members: Weiguang Yang (Chairman & CEO), Pei Xu (CFO & Director), and three independent directors: John C. General, Kevin Dean Vassily, and Dan Li[565] 2024 Executive Compensation Summary | Name/Principal Position | Salary (USD) | | :--- | :--- | | Weiguang Yang / CEO | 66,707 | | Pei Xu / CFO | 45,839 | | Xuejun Chen / Chief Medical Officer | 63,371 | | Baoqian Tian / Chief Sales Officer | 83,438 | | Shuang Wu / Chief Operating Officer | 31,686 | - The company has adopted a 2019 Equity Incentive Plan for granting awards to key employees, directors, and consultants. The plan allows for the issuance of up to 97,088 Class A Ordinary Shares, plus an annual increase[595][597] - As of the report date, the company employed 111 full-time staff, with the majority in technical/customer services (74) and sales/marketing (19)[628] Item 7. Major Shareholders and Related Party Transactions CEO Weiguang Yang is the controlling shareholder with 69.0% voting power via Class B shares; related party transactions are audit committee reviewed - CEO Weiguang Yang is the controlling shareholder, holding 69.0% of the company's total voting power through his beneficial ownership of 549,772 Class B Ordinary Shares[637] - The company has a dual-class share structure where each Class A Ordinary Share has 1 vote and each Class B Ordinary Share has 100 votes[637] Item 8. Financial Information This section confirms audited financial statements, absence of material legal proceedings, and a policy of no dividends due to reinvestment plans - The company is not currently a party to any legal proceedings expected to have a material adverse effect on its business[644] - The company has never declared a dividend and does not anticipate declaring one in the foreseeable future, planning to reinvest earnings[645] Item 11. Quantitative and Qualitative Disclosures About Market Risk Primary market risks include foreign currency fluctuations due to RMB operations and USD reporting, and credit risk from concentrated cash and investments - The company's primary market risk is foreign currency risk, as most of its assets, liabilities, revenues, and costs are denominated in RMB, while its financial statements are presented in U.S. dollars[702][703] - Credit risk is concentrated in cash and cash equivalents, with significant balances held in financial institutions in China, the U.S., Japan, and Hong Kong that exceed government deposit insurance limits[705][709] - Interest rate risk is considered not material as exposure primarily relates to interest income from cash deposits[701] PART II Item 15. Controls and Procedures Management concluded disclosure controls were ineffective as of December 31, 2024, due to material weaknesses in monitoring and U.S. GAAP expertise - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024[716] - Two material weaknesses were identified: (1) lack of key monitoring mechanisms like an internal control department, and (2) insufficient resources and expertise with US GAAP and SEC reporting in the accounting department[717][720] - Remediation efforts include hiring an experienced outside consultant, providing ongoing US GAAP training, and working to establish an internal audit department[718][720] Item 16. Other Information This section covers governance, audit committee financial expert, accountant fees, cybersecurity risk management, and the absence of material incidents - The Board has designated John C. General as the audit committee financial expert[724] Principal Accountant Fees (USD) | | 2024 (USD) | 2023 (USD) | | :--- | :--- | :--- | | Audit Fees (Prager Metis) | 407,000 | 375,000 | | Predecessor auditor (Marcum Asia) | 58,000 | 35,000 | | Total Fees | 465,000 | 410,000 | - The company has established policies and processes for managing cybersecurity risks, integrated into its overall risk management system, and has designated a Security and Information Officer[739][744] - No material cybersecurity incidents were experienced during the fiscal year ended December 31, 2024[747] PART III Item 18. Financial Statements This section presents the complete audited consolidated financial statements for 2024, 2023, and 2022, including balance sheets, statements of operations, equity, and cash flows Consolidated Balance Sheet Highlights (in USD) | | Dec 31, 2024 (USD) | Dec 31, 2023 (USD) | | :--- | :--- | :--- | | Total Assets | 25,884,953 | 24,416,643 | | Total Current Assets | 18,707,217 | 18,711,046 | | Total Liabilities | 1,733,900 | 3,378,473 | | Total Current Liabilities | 1,530,430 | 2,678,361 | | Total Equity | 24,151,053 | 21,038,170 | Consolidated Statement of Operations Highlights (in USD) | | 2024 (USD) | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | :--- | | Total Revenues | 15,864,773 | 19,433,945 | 14,151,516 | | Gross Profit | 8,912,213 | 8,512,192 | 6,356,664 | | Loss from Operations | (341,267) | (13,283,798) | (2,954,462) | | Net Loss | (273,413) | (11,307,239) | (2,822,319) | - The company's revenue is disaggregated into two main segments: MDMOOC services (medical training and patient management) and sales of patented drugs[881][971] - The notes to the financial statements confirm the company's reliance on its VIE structure and provide a breakdown of the VIE's assets, liabilities, and operational results, which constitute the vast majority of the consolidated figures[894]