Zhongchao(ZCMD) - 2023 Q4 - Annual Report

PART I This section provides an overview of the company's corporate structure, key risks, business operations, and financial performance Item 3. Key Information This section details the company's VIE corporate structure, associated risks, PRC regulatory requirements, and condensed financial data for its entities - Zhongchao Inc. is a Cayman Islands holding company with no material operations, consolidating PRC operating entities (Zhongchao Shanghai and its subsidiaries) through a Variable Interest Entity (VIE) structure due to PRC foreign ownership restrictions[18] - The company faces significant risks from its VIE structure, as contractual arrangements may not be as effective as direct ownership and could be deemed non-compliant with PRC laws, potentially leading to severe penalties or operational inability[19][45] - The company is subject to new PRC regulations effective March 31, 2023, requiring CSRC filings for overseas listings and refinancing, introducing uncertainty for future refinancing activities[20][213] - For the year ended December 31, 2023, Zhongchao Cayman transferred $0.1 million to its US subsidiary, with no dividends or distributions made from PRC operating entities to the holding company or U.S. investors in 2023 and 2022[24] - Dividend distributions from PRC subsidiaries are restricted, requiring at least 10% of accumulated profits to be set aside for a statutory reserve fund until it reaches 50% of registered capital, with currency conversion and remittance also subject to government controls[26][27] Financial Information Related to the VIE This subsection presents condensed consolidated financial data, including balance sheets, statements of operations, and cash flows, for the parent, subsidiaries, and VIE Condensed Consolidated Balance Sheet as of December 31, 2023 (in USD) | Category | Parent | Subsidiaries | VIE and Its Subsidiaries | Total Consolidated | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $19,239,682 | $4,310,649 | $14,571,038 | $24,416,643 | | Total Liabilities | $0 | $6,887,513 | $3,939,736 | $3,378,473 | | Total Equity (Deficit) | $19,239,682 | $(2,576,864) | $10,631,302 | $21,038,170 | Condensed Consolidated Statement of Operations for the Year Ended December 31, 2023 (in USD) | Category | Parent | Subsidiaries | VIE and Its Subsidiaries | Total Consolidated | | :--- | :--- | :--- | :--- | :--- | | Revenues | $0 | $0 | $19,433,945 | $19,433,945 | | Net Loss | $(11,335,911) | $(631,262) | $(10,780,772) | $(11,307,239) | Condensed Consolidated Cash Flows for the Year Ended December 31, 2023 (in USD) | Category | Parent | Subsidiaries | VIE and Its Subsidiaries | Total Consolidated | | :--- | :--- | :--- | :--- | :--- | | Net cash from operating activities | $(193,778) | $(2,351,918) | $1,124,613 | $54,229 | | Net cash used in investing activities | $(3,766,367) | $1,530,264 | $(43,240) | $(3,754,655) | | Net cash from financing activities | $0 | $0 | $0 | $0 | Risk Factors This subsection details material business, corporate structure, and China-specific risks, including VIE arrangement challenges and regulatory uncertainties - A significant portion of revenue is dependent on the healthcare industry, particularly pharmaceutical enterprises, which accounted for 52.5% of revenues in 2023, up from 33.1% in 2022[62] - The company faces concentration risk, with one customer accounting for 13.7% of total revenue in 2023 and another single customer accounting for 15.9% in 2022[74] - The dual-class share structure concentrates 96.54% of voting power with the CEO, Mr. Weiguang Yang, through his holdings of Class B Ordinary Shares, which have 100 votes per share compared to 1 vote for Class A shares[150][156] - The company has identified material weaknesses in its internal controls over financial reporting, including a lack of key monitoring mechanisms and insufficient resources with U.S. GAAP and SEC reporting experience[123] - The company faces significant regulatory risks in China, including uncertainties regarding the legality of its VIE structure, cybersecurity reviews (as its MDMOOC platform has over 253,133 registered users), and evolving laws governing the online education and healthcare industries[168][188][237] - While the PCAOB regained inspection access in mainland China and Hong Kong in December 2022, the ability to continue inspections is uncertain, and the Consolidated Appropriations Act of 2023 reduced the non-inspection period triggering delisting from three years to two, heightening the risk if access is lost again[54][227][233] Item 4. Information on the Company This section provides a comprehensive overview of the company's corporate history, business operations, organizational structure, and physical properties A. History and Development of the Company This subsection outlines the company's history, its Cayman Islands holding structure, VIE operations, and recent share consolidation for Nasdaq compliance - The company is a holding company incorporated in the Cayman Islands in 2019, with no substantive operations of its own, conducting business through a VIE, Zhongchao Medical Technology (Shanghai) Corp., established in 2012[305][306][307] - On February 29, 2024, the company executed a 1-for-10 share consolidation to address non-compliance with Nasdaq's minimum bid price requirement, regaining compliance on March 15, 2024[5][154][312] B. Business Overview This subsection describes the company's platform-based internet technology business, focusing on healthcare information, professional training, patient management, and pharmaceutical retail - The company's business is conducted through PRC operating entities, offering services to patients with oncology and other major diseases, including healthcare information and training (MDMOOC), patient management (Zhongxin Health), and pharmaceutical services (Xinjiang Pharmaceutical)[315] - The MDMOOC platform, delivered via mobile app, WeChat, and website, provides professional medical training and education, with its case library containing over 28,000 clinical cases as of the report date[318][347] - The Zhongxin Health patient management service has participated in approximately 19 projects for 10 different medications, serving about 108,500 patients, generating 19.3% of revenue in FY2023, down from 44.4% in FY2022[351] - The Xinjiang Pharmaceutical drug retail service, which began in H2 2022, grew rapidly, generating approximately $9.03 million in revenue in FY2023, a significant increase from $1.22 million in FY2022[362] R&D Expenses as a Percentage of Total Revenue | Fiscal Year | R&D Expenses (USD) | % of Total Revenue | | :--- | :--- | :--- | | 2023 | $514,411 | 2.6% | | 2022 | $411,524 | 2.9% | | 2021 | $758,878 | 4.7% | - The company holds a significant intellectual property portfolio, including 36 registered trademarks, 40 domain names, and 37 approved copyrights[395][401] D. Property, Plants and Equipment This subsection details the company's primary leased and owned properties, including its Shanghai headquarters and offices in other cities, along with annual rent expenses Annual Rent Expenses (in USD) | Year Ended Dec 31 | Rent Expense | | :--- | :--- | | 2023 | $412,891 | | 2022 | $498,166 | | 2021 | $426,152 | - The company's main office is a leased space of 286.8 square meters in Shanghai, with additional leased offices in 8 other cities and owned properties in Japan, Beijing, Tangshan, and New York to support operations and talent recruitment[522][524] Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting revenue growth, increased net loss due to impairments, and liquidity management A. Operating results This subsection details the company's operating results, including revenue growth driven by drug sales, a widened net loss due to impairments, and changes in gross profit margins Consolidated Results of Operations (in USD) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenues | $19,433,945 | $14,151,516 | $16,296,770 | | Gross Profit | $8,512,192 | $6,356,664 | $9,438,826 | | Loss from Operations | $(13,283,798) | $(2,954,462) | $(320,741) | | Net (Loss) Income | $(11,307,239) | $(2,822,319) | $238,665 | - Revenue increased by 37.3% in FY2023, driven by a $7.8 million increase in drug sales, partially offset by a $2.3 million decrease in revenue from patient-aid projects due to the discontinuation of some low-margin projects[534] - The net loss for FY2023 included significant one-time charges: $5.6 million for goodwill impairment, $0.5 million for intangible asset impairment (both related to the West Angel acquisition), and a $1.7 million loss from the disposal of property and equipment[541][542][543] - Selling and marketing expenses increased by $4.6 million in FY2023, primarily due to a $3.2 million increase in advertising and a $1.0 million increase in sales commissions to support the expansion of the patented drug business[539] B. Liquidity and Capital Resources This subsection analyzes the company's liquidity, cash and working capital positions, cash flow activities, and the impact of PRC regulations on capital access Key Liquidity Metrics (in USD) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $7,548,694 | $11,520,453 | | Working capital | $16,032,685 | $18,539,125 | Summary of Cash Flows (in USD) | Category | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $54,229 | $(661,740) | $2,861,848 | | Net cash used in investing activities | $(3,754,655) | $(3,346,658) | $(4,017,284) | | Net cash from financing activities | $0 | $1,850,744 | $0 | - The company's ability to pay dividends and fund non-PRC operations depends on receiving distributions from its PRC subsidiary and VIE, which is restricted by PRC laws requiring appropriations to statutory reserves and controls on foreign currency exchange[584][983] Item 6. Directors, Senior Management and Employees This section details the company's leadership team, board composition, executive compensation, committee structures, and employee base - The company is led by founder Weiguang Yang (CEO) and Pei Xu (CFO), with a Board of Directors consisting of five members, including three independent directors: John C. General, Kevin Dean Vassily, and Dan Li[599][601][602] Executive Compensation for Fiscal Year 2023 (in USD) | Name | Position | Salary | | :--- | :--- | :--- | | Weiguang Yang | CEO | $123,945 | | Pei Xu | CFO | $45,634 | | Xuejun Chen | Chief Medical Officer | $102,211 | | Baoqian Tian | Chief Sales Officer | $91,642 | | Shuang Wu | Chief Operating Officer | $32,113 | - The Board has three committees (Audit, Compensation, Nominating), each composed entirely of the three independent directors, with John C. General designated as the audit committee financial expert[643][648] - As of the report date, the company had 142 full-time employees, with 88 in technical and customer services, 29 in sales and marketing, 18 in general administration, and 7 in R&D[657] Item 7. Major Shareholders and Related Party Transactions This section outlines the company's ownership structure, with the CEO holding a controlling interest, and details related party transactions including purchases and a repaid loan - CEO Weiguang Yang controls 96.54% of the company's total voting power through his beneficial ownership of all 549,772 outstanding Class B Ordinary Shares[666] - As of December 31, 2022, the company had a balance of $226,178 due from CEO Weiguang Yang, which was fully repaid in 2023[673][975][976] - The company engaged in transactions with Beijing Ougaini Trading Co., Ltd, a company controlled by an immediate family member of the CEO, for purchases of products for employee welfare and marketing[672][973] Item 8. Financial Information This section presents the company's audited consolidated financial statements, confirms no material legal proceedings, and states its dividend policy - The company's audited consolidated financial statements are included in the report[676] - The company has never declared a dividend and does not plan to in the foreseeable future, intending to reinvest earnings into the business[679] Item 10. Additional Information This section provides supplementary details on share capital, articles of association, material contracts, and the regulatory environment, including exchange controls and taxation - The Cayman Islands does not levy taxes on corporate profits, income, or gains, and there are no exchange controls[686] - The company faces a risk of being classified as a PRC 'resident enterprise' for tax purposes if its 'de facto management' is deemed to be in China, which would subject its global income to a 25% PRC income tax and could result in a 10% withholding tax on dividends paid to non-PRC shareholders[688][690] - For U.S. Holders, there is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which would result in adverse U.S. federal income tax consequences for shareholders regarding distributions and dispositions of shares[707][708] Item 11. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, including minimal interest rate risk, significant foreign currency risk, and managed credit risk - The company's primary market risk is foreign currency risk, as the majority of its assets, liabilities, revenues, and costs are denominated in RMB, which is not freely convertible and its exchange rate fluctuates against the USD[730][731] - Credit risk is concentrated in cash and accounts receivable; as of December 31, 2023, the company held $7.5 million in cash and cash equivalents, with deposits spread across institutions in China, the U.S., and Japan, with varying levels of government insurance[733] PART II This part details material modifications to security holder rights, the use of IPO proceeds, internal controls, and corporate governance matters Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds This section details the allocation of approximately $9.97 million in net proceeds from the company's initial public offering across content, technology, and business expansion - The company raised net proceeds of approximately $9.97 million from its IPO[738] - Use of IPO proceeds was allocated as follows: ~$2.99M for online course content development, ~$1.99M for technology upgrades, and ~$4.99M for business expansion[739] Item 15. Controls and Procedures This section reports management's conclusion that disclosure controls were ineffective due to material weaknesses in internal control over financial reporting, outlining identified issues and remediation efforts - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[741] - Two material weaknesses were identified in internal control over financial reporting: 1) Lack of key monitoring mechanisms like an internal control department 2) Lack of sufficient resources and expertise with U.S. GAAP and SEC reporting in the accounting department[742][745] - Remediation efforts include hiring an experienced outside consultant, providing ongoing U.S. GAAP training to personnel, and working to establish an internal audit department[746] Item 16. Corporate Governance and Other Matters This section covers corporate governance, including the audit committee financial expert, principal accountant fees, insider trading policy, and cybersecurity risk management strategy - The Board of Directors has determined that John C. General qualifies as an audit committee financial expert[750] Principal Accountant Fees (in USD) | Fee Type | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | $375,000 | $430,000 | | Audit Related Fees | $35,000 | $100,000 | | Total Fees | $410,000 | $530,000 | - The company has adopted a formal insider trading policy that prohibits trading on material nonpublic information and establishes specific trading windows and blackout periods for insiders[758] - The company has established processes for managing cybersecurity risks, including quarterly and monthly risk assessments conducted by its IT and information security teams, with governance oversight provided by the Audit Committee and the Board of Directors[759][760][761] PART III This part contains the company's audited consolidated financial statements for the fiscal years 2021, 2022, and 2023 Item 18. Financial Statements This section presents the audited consolidated financial statements for Zhongchao Inc. and its subsidiaries for 2021-2023, prepared under U.S. GAAP Consolidated Balance Sheet Highlights (in USD) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $18,711,046 | $22,704,160 | | Total Assets | $24,416,643 | $38,614,345 | | Total Current Liabilities | $2,678,361 | $4,165,035 | | Total Liabilities | $3,378,473 | $5,595,080 | | Total Equity | $21,038,170 | $33,019,265 | Consolidated Statement of Operations Highlights (in USD) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Revenues | $19,433,945 | $14,151,516 | $16,296,770 | | Gross Profit | $8,512,192 | $6,356,664 | $9,438,826 | | Total Operating Expenses | $(21,795,990) | $(9,311,126) | $(9,759,567) | | Net (Loss) Income | $(11,307,239) | $(2,822,319) | $238,665 | | (Loss) Earnings Per Share | $(4.354) | $(1.131) | $0.096 | Consolidated Statement of Cash Flows Highlights (in USD) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $54,229 | $(661,740) | $2,861,848 | | Net Cash from Investing Activities | $(3,754,655) | $(3,346,658) | $(4,017,284) | | Net Cash from Financing Activities | $0 | $1,850,744 | $0 | | Net Decrease in Cash | $(3,971,759) | $(2,394,529) | $(1,157,965) |