F-1 1 ff12019_zhongchaoinc.htm REGISTRATION STATEMENT

As filed with the Securities and Exchange Commission on November 21, 2019

 

Registration No. 333-[●]

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM F-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

 

ZHONGCHAO INC.

(Exact Name of Registrant as Specified in its Charter)

 

Cayman Islands   8200   Not applicable
 (State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

Nanxi Creative Center, Suite 218

841 Yan’An Middle Road

Jing’An District, Shanghai, China 200040

Tel: 021-32205987

(Address, including zip code, and telephone number, including area code, of principal executive offices)

 

Copies to:

 

Arila Zhou, Esq.

Hunter Taubman Fischer & Li LLC

1450 Broadway, 26th Floor

New York, NY 10018

Tel: 212-530-2232

Fang Liu, Esq.

VCL Law LLP

8300 Boone Boulevard, Suite 500

Vienna, VA 22182

Tel: 703-919-7285

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☒

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

 

Emerging growth company ☒

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act  ☐

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

 

 

CALCULATION OF REGISTRATION FEE
Title of Class of Securities to be Registered  Amount to Be Registered (1)    Proposed Maximum Offering Price
per Share (2)
   Proposed
Maximum
Aggregate
Offering
Price (2)(3)
   Amount of 
Registration Fee
 
Class A Ordinary Shares, par value $0.0001 per share sold by the Registrant   [●]    [●]    [●]    [●] 
Underwriters’ compensation warrants (4)   [●]    [●]    [●]    [●] 
Class A Ordinary Shares underlying underwriter’s warrants   [●]    [●]    [●]    [●] 
Total   [●]    [●]    

15,000,000

    

1,947

 

 

(1) Includes [●] Class A Ordinary Shares, par value $0.0001 per share (each, a “Share”, collectively, “Shares”) subject to the underwriter’s option to purchase additional shares.
   
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
   
(3) Includes the offering price of any additional Shares that the underwriter has the option to purchase.
   
(4) We have agreed to issue upon the closing of this Offering, compensation warrants to Network 1 Financial Securities Inc. (“Network 1”), as representatives of the underwriters, entitling them to purchase up to [●]% of the aggregate Shares being sold in this Offering. The exercise price of the compensation warrants is equal to [●]% of the offering price of the Shares offered hereby. Assuming an exercise price of $[●] per Share, we would receive, in the aggregate, $[●] upon exercise of the compensation warrants, of which there can be no guarantee.  The compensation warrants are exercisable commencing six (6) months after the closing date of the offering and will terminate five years after the date of effectiveness. An underwriting discount or spread equal to [●]% of the aggregate offering price will also be provided to underwriters. The Registration Statement of which this prospectus is a part also covers the Shares issuable upon the exercise thereof. For additional information regarding our arrangement with the underwriters, please see “Underwriting” beginning on page 164.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 

  

 

 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement is filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 21, 2019

 

  

 

ZHONGCHAO INC.

 

[●] Class A Ordinary Shares

 

This is the initial public offering (the “Offering”) of ZHONGCHAO INC., a Cayman Islands exempted company with limited liability whose principal place of business is in Shanghai, China. We are offering [●] Class A ordinary shares, par value $0.0001 per share (each, a “Class A Ordinary Share”, collectively, “Class A Ordinary Shares”) on a firm commitment basis. We expect that the initial public offering price will be between $[●] and $[●] per share.

 

As the date hereof, our authorized share capital is 500,000,000 ordinary shares consisting of 450,000,000 Class A Ordinary Shares and 50,000,000 Class B ordinary shares, par value $0.0001 per share (each, a “Class B Ordinary Share”; collectively, “Class B Ordinary Shares”). As of the date hereof, we have 14,752,352 Class A Ordinary Shares and 5,497,715 Class B Ordinary Shares, issued and outstanding, respectively. Holders of Class A Ordinary Shares and Class B Class A Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A Ordinary Share will be entitled to 1 vote and each Class B Ordinary Share will be entitled to 15 votes. The Class A Ordinary Shares are not convertible into shares of any other class. The Class B Ordinary Shares are convertible into Class A Ordinary Shares at any time after issuance at the option of the holder on a one to one basis.

 

No public market currently exists for our Class A Ordinary Shares or Class B Ordinary Shares. We have applied for approval for quotation on the NASDAQ Capital Market under the symbol “ZCMD” for the Class A Ordinary Shares we are offering. We believe that upon the completion of the offering contemplated by this prospectus, we will meet the standards for listing on the NASDAQ Capital Market.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Act of 2012, as amended, and, as such, will be subject to reduced public company reporting requirements.

  

We anticipate that following the completion of this Offering, our Chief Executive Officer and Chairman of the Board of the Directors, Weiguang Yang, will beneficially own aggregate [●]% voting power of the Company given the effect of 1 vote power of each Class A Ordinary Shares and 15 votes of each Class B Ordinary Share. While under NASDAQ Marketplace Rules 5615(c), we may be deemed a “controlled company,” we do not intend to avail ourselves of the corporate governance exemptions afforded to a “controlled company” under the NASDAQ Marketplace Rules.

 

An investment in our securities is highly speculative, involves a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. See “Risk Factors” beginning on page 24 of this prospectus.  

 

Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. 

 

 

 

 

This prospectus does not constitute, and there will not be, an offering of securities to the public in the Cayman Islands. 

 

    Per
Ordinary Share
    Total  
Assumed initial public offering price   $           [●]     $           [●]  
Underwriting discount and commissions   $ [●]     $ [●]  
Assumed proceeds to us, before expenses (1)   $ [●]     $ [●]  

  

(1)We have agreed to provide Network 1 Financial Securities, Inc. (the “Underwriter”) a discount of [●]% of the Offering Price for the Class A Ordinary Shares and a non-accountable fee equal to [●]% of the gross proceeds of the Offering. We have also agreed to grant to the Underwriter warrants equal to 9% of the aggregate number of Class A Ordinary Shares sold in the offering. See “Underwriting” in this prospectus for more information regarding our arrangements with the Underwriter.

 

(2)The total estimated expenses related to this offering are set forth in the section entitled “Underwriting - Discounts, Commissions and Expenses.”

 

The underwriters are selling [●] Class A Ordinary Shares in this Offering on a firm commitment basis.

  

In addition to the underwriting discounts listed above and the expense allowance described in the footnote, we have agreed to issue upon the closing of this Offering, compensation warrants to Network 1 Financial Securities Inc. (“Network 1”), as representatives of the underwriters, entitling them to purchase up to [●]% of the total number of Class A Ordinary Shares being sold in this Offering. The exercise price of the compensation warrants is equal to [●]% of the Offering Price of the Class A Ordinary Shares offered hereby. The compensation warrants are exercisable commencing 6 months after the date of effectiveness of the Registration Statement of which this prospectus forms a part and will terminate 3 years after the date of effectiveness. An underwriting discount or spread equal to [●]% of the Offering Price will also be provided to underwriters. The Registration Statement of which this prospectus is a part also covers the Class A Ordinary Shares issuable upon the exercise thereof. For additional information regarding our arrangement with the underwriters, please see “Underwriting” beginning on page 164.

 

We have granted the representative an option, exercisable for 45 days from the date of this prospectus, to purchase up to an additional [●]% of the Class A Ordinary shares on the same terms as the other shares being purchased by the underwriters from us.

 

The underwriter expects to deliver the Class A Ordinary Shares to purchasers in the Offering on or about [●], 2019.

 

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

Network 1 Financial Securities Inc.

 

 

The date of this prospectus is November 21, 2019

  

 

 

 

TABLE OF CONTENTS

 

Forward-Looking Statements iii
Prospectus Summary 1
Risk Factors 24
Use of Proceeds 60
Dividend Policy 62
Exchange Rate Information 63
Capitalization 65
Dilution 66
Selected Historical Financial and Operating Data 63
Post-Offering Ownership 66
Management’s Discussion and Analysis of Financial Condition and Results of Operations 67
Our Business 82

Management

127
Related Party Transactions 138
Principal Shareholders 139
Description of Share Capital 142
Shares Eligible for Future Sale 152

Taxation

155
Enforceability of Civil Liabilities 163
Underwriting 164
Legal Matters 174
Experts 174
Where You Can Find More Information 174
Financial Statements F-1

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we, nor the underwriters have authorized anyone to provide you with different information. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus, or any free writing prospectus, as the case may be, or any sale of shares in the Company.

 

For investors outside the United States: Neither we, nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the Class A Ordinary Shares and the distribution of this prospectus outside the United States.

 

This prospectus includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, you are cautioned not to give undue weight to this information.

 

All references in this prospectus to “$,” “U.S.$,” “U.S. dollars,” “dollars” and “USD” mean U.S. dollars and all references to “RMB” mean Renminbi, unless otherwise noted. All references to “PRC” or “China” in this prospectus refer to the People’s Republic of China.

 

i

 

 

COMMONLY USED DEFINED TERMS

 

  “AIC” refers to Administration for Industry and Commerce in China;

 

  “Controlling Shareholder” refers to Mr. Weiguang Yang;

 

  “China” and “PRC” refer to the People’s Republic of China, excluding, for the purposes of this prospectus only, Macau, Taiwan and Hong Kong;

 

“Class A Ordinary Shares” refers to our Class A ordinary shares, $0.0001 par value per share;

 

“Class B Ordinary Shares” refers to our Class B ordinary shares, $0.0001 par value per share;

 

Depending on the context, the terms “we,” “us,” “our company,” “our”, “Zhongchao” and “Zhongchao Cayman” refer to Zhongchao Inc., a Cayman Islands company, and its subsidiaries and affiliated companies;

 

  “Horgos Zhongchao Medical” refers to Horgos Zhongchao Medical Technology Co., Ltd., a PRC company.

 

“Horgos Zhongchao Zhongxing” refers to Horgos Zhongchao Zhongxing Medical Technology Co., Ltd., a PRC company.

 

  “mobile MAUs” are the number of unique IP address that various mobile devices having access to our MDMOOC mobile app or Sunshine Health Forums from mobile end at least once during a month. The numbers of our mobile MAUs are calculated using internal company data that has not been independently verified, and we treat each distinguishable device IP address as a separate user for purposes of calculating mobile MAUs, although inaccuracy may result from the possibility that one mobile device may have more than one IP addresses;

 

  “monthly UVs” of MDMOOC website, MDMOOC.org, or the website of our Sunshine Health Forums, ygjkclass.com, are to the number of unique IP address that various internet browsers apply to access our websites, from either PC end or mobile end, at least once during a month. The numbers of our monthly UVs of our websites are calculated using internal company data that has not been independently verified, and we treat each distinguishable IP address as a separate user for purposes of calculating monthly UVs, although inaccuracy may result from the possibility that some individuals may have more than one IP address and/or share the same IP address with other individuals to access our platform.

 

  “Shanghai Huijing” refers to Shanghai Huijing Information Technology Co., Ltd., a PRC company.

 

  “Shanghai Jingyi” refers to Shanghai Jingyi Medical Technology Co., Ltd., a PRC company.

 

  “Shanghai Maidemu” refers to Shanghai Maidemu Cultural Communication Corp., a PRC company.

 

  “Shanghai Xingzhong” refers to Shanghai Xingzhong Investment Management LP, a PRC company.

 

  “Shanghai Zhongxun” refers to Shanghai Zhongxun Medical Technology Co., Ltd., a PRC company.

 

  “Zhongchao BVI” refers to Zhongchao Group Inc., a British Virgin Island company.

 

  “Zhongchao HK” refers to Zhongchao Group Limited, a Hong Kong company.

 

  “Zhongchao Shanghai” refers to Zhongchao Medical Technology (Shanghai) Co., Ltd., a PRC company.

 

“Zhongchao WFOE” refers to Beijing Zhongchao Zhongxing Technology Limited, a PRC company.

 

  All references to “RMB,” “yuan” and “Renminbi” are to the legal currency of China, all references to “HKD” is to the legal currency of Hong Kong, and all references to “USD,” and “U.S. dollars” are to the legal currency of the United States.

 

ii

 

 

FORWARD-LOOKING STATEMENTS

 

We have made statements in this prospectus, including under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and elsewhere that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

Examples of forward-looking statements include:

 

the timing of the development of future services;

 

projections of revenue, earnings, capital structure and other financial items;

 

the development of future company-owned branches;

 

statements regarding the capabilities of our business operations;

 

statements of expected future economic performance;

 

statements regarding competition in our market; and

 

assumptions underlying statements regarding us or our business.

 

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under the heading “Risk Factors” above. Many factors could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

iii

 

PROSPECTUS SUMMARY

 

This summary highlights information that we present more fully in the rest of this prospectus. This summary does not contain all of the information you should consider before buying Class A Ordinary Shares in this offering. This summary contains forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could,” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and the notes to those statements. Unless otherwise stated, all references to “us,” “our,” “Zhongchao,” “we,” the “company” and similar designations refer to Zhongchao Inc., a Cayman Islands Company, and its consolidated subsidiaries. See Note 1 to our consolidated financial statements as of and for the years ended December 31, 2018 and 2017 included elsewhere in this prospectus.

 

Our Company

 

We are a provider of healthcare information, education, and training services to healthcare professionals and the public in China. We offer a wide range of online and onsite health information services, healthcare education programs, and healthcare training products, consisting primarily of clinical practice training, open classes of popular medical topics, interactive case studies, academic conference and workshops, continuing education courses, and articles and short videos with educational healthcare content to healthcare professionals as well as the public. The services, programs, and products that we provide:

 

make it easier for healthcare professionals to access healthcare reference sources, stay abreast of the latest medical information, learn about new treatment options, earn continuing medical education credits and communicate with peers; and

 

enable the public to obtain health information on a particular disease or condition, offer content on topics of individual interest, improve public health consciousness, and promote people’s lifestyle.

 

We provide our healthcare information, education, and training services to the healthcare professionals under our “MDMOOC” brand, which we believe is one of the leading consumer brands in China’s healthcare training and education sector, as evidenced by the 2017 Research Report on Chinese National Equities Exchange and Quotations (NEEQ) by Beijing Wutong Ideal Capital Management Co., Ltd., a Chinese NEEQ research company, where we are considered as one of the main and typical medical teaching video provider with doctor interactive and online training platform. We provide our healthcare educational content to the public via our “Sunshine Health Forums”, which, based on the amount of the registered users and daily review volume, we believe is one of the largest platform in China, for general healthcare knowledge and information to the public. Please see “Our Business - Competition” beginning on page 94.

 

We commenced our operation, through Zhongchao Shanghai, in August 2012 with a vision to offer a wide range of accessible and immediate healthcare information and continuous learning and training opportunities for Chinese healthcare professionals. Since our inception, we have focused on developing our information, education, and training programs to address the needs in the healthcare industry in China; and developing online platforms and onsite activities to deliver our information services, education programs and training products.

1

 

MDMOOC-Healthcare Information, Education and Training for Professionals

 

Online Platforms

 

We launched our first online platform in a form of website, www.mdmooc.org, under our “MDMOOC” brand in 2013 to provide information, education, and training services to physicians and allied healthcare professionals, such as pharmacists and nurses primarily located in China, via Internet-Plus solutions. Internet Plus refers to the applications of the internet and other information technology in conventional industries, such as manufacturing, education and healthcare. It is an incomplete equation where various internet (mobile, cloud computing, big data or Internet of Things) can be added to other traditional fields. We further launched our MDMOOC Wechat subscription account and MDMOOC mobile App in 2015 and 2016, respectively (together with the website, the “MDMOOC online platform”). Healthcare professionals in China can apply for registration with their healthcare qualification to get access to our MDMOOC online platform.

 

The programs available on our MDMOOC online platform enable our users to timely obtain extension knowledge of precedents, treatments, and first-hand experiences of various disease and other healthcare related matters. In addition, our MDMOOC online platform offers these professional users what we believe is one of the largest online libraries of continuing medical education programs in China that are produced in association with entities accredited by the National Health Commission of the PRC, such as Chinese Medical Association and Chinese Journal of Continuing Medical Education. From the convenience of their home or office computer and mobile App, our professional users can access a variety of accredited editorial resources and programs including online journal articles, medical conferences, and open classes and obtain continuing medical education credits which are required for the healthcare qualification of doctors, nurses, and pharmacists.

 

We believe MDMOOC online platform helps healthcare professionals improve their clinical knowledge and practice of medicine. Since launching in 2013, we have been continuously developing our MDMOOC online platform with new forms of Internet-based education solutions. There are currently approximately 1,429 education and training programs available on our MDMOOC online platform and free to our registered users. About 95% of all our programs are self-developed by our research and development team. The original content of these programs, including daily medical thesis, commentary, conference coverage, expert columns, and activities are written by our research and development team and authors from widely respected academic institutions, and edited and managed by our in-house editorial staff. The remaining 5% of programs are created under the purchase orders of our corporate or institution customers, where we develop customized programs with designated healthcare topics. Such 5% of programs are only available to certain registered users with program passcodes provided by our corporate or institution customers. Our revenues are mainly sourced from these 5% of programs.

 

We currently provide our proprietary interactive programs via Practice Improvement (PI), a problem-based and case-based form of healthcare course, which integrates state-of-the-art treatment information and clinical cases for particular diseases into interactive practice modules; Community of Practice Share (COPS), an online and live clinical experience sharing platform that creates the most effective discussion in a particular healthcare domain or medical area due to the common interests of the users; Continuing Professional Development (CPD), a section of our platform that provides discussions and articles focusing on the future development and the differences between Continuing Medical Education (CME) and Continuing Professional Development (CPD), and other general information of physician competency framework and Meta-analysis. Our original, exclusive and proprietary content includes innovative features such as after-class quiz, key point summary and highlight during the courses, and peer-review and comments. For additional information regarding our online platforms, please see “Our Business - Our Business Model - Our Online Platform” beginning on page 98.

 

We believe that our ability to create, source, edit and organize online healthcare-related content, interactive education services, and training programs has made MDMOOC online platform one of the leading health destinations and most recognized information platform in healthcare sector in China. As of the date of this prospectus, our MDMOOC online platform has more than 300,000 registered users and a database of more than 2 million healthcare experts including over 700,000 physicians, and 1,300,000 allied healthcare professionals in medical academics, associations, and leading hospitals who constantly collaborate with us to develop training programs on needed basis.

2

 

Onsite Education Activities

 

In addition to healthcare information, education, and training via Internet-Plus, we organize onsite healthcare and medical training sessions and academic conferences from time to time under our “MDMOOC” brand. For instance, in January 2019, we launched EWMA-certified (defined as below) wound-management collaboration training programs, covering the topics including but not limited to basic concepts of acute and chronic wounds, management of different levels of surgical and non-surgical wounds, the construction of different levels of wound centers, and medical staff collaboration in the process of wound management. Please see “Our Business - Onsite Education Activities” beginning on page 83 for more information about our onsite program and our collaboration with EWMA.

 

We believe the combination of online and onsite services would provide our end-users the greatest convenience. With more choices of the forms of healthcare education, we enrich the learning experience of our end-users.

 

Sunshine Health Forums-Healthcare Information and Education for the Public

 

Our goal is not only provide continuing education and training to healthcare professionals but to promote healthy lifestyle and provide healthcare knowledge to the public. In order to achieve that, we develop and operate the Sunshine Health Forums, online education-for-all platforms that disseminate articles and features related to healthcare and wellness education, medical behavior intervention, and newly developed health technology and application. We launched our Sunshine Health Forums in a form of website, www.ygjkclass.com, in May 2016 followed by WeChat subscription account in August 2016, and mobile App in 2017. We establish one forum for each category of diseases for the convenience of the public. We cooperate with certain well-known we-media platforms in China, including but not limited Toutiao.com, Yidianzixun.com, Douyin.com, CN-Healthcare.com, iQiyi, Youku, and Huoshan.com to streamline our articles co-produced by healthcare professionals and us.

 

Recent Developments

 

Commencing from the fourth quarter of 2018, in addition to providing trainings and education through our platforms, we have been engaged by certain customers on project basis to establish individual websites to provide training and knowledge of certain drug treatment, most of which are cancer-related treatment, to healthcare professionals and patients. Such websites are established to facilitate qualified patients to obtain free drug treatment from NFPs till the free drugs are completely delivered and distributed as planned. For each website, we also plug in features to manage the project including reviewing patients’ applications, tracking their usage of drugs and collecting related information. Those customers are and existing customers of us. They provide those drugs sponsored by pharmaceutical companies without charge to qualified patients and we charge those customers on our services in connection with the website and related training and management.

 

Our Customers and End Users

 

MDMOOC’s Customers and End Users

 

MDMOOC’s customers are enterprises, NFPs, and medical journals, primarily located in China. MDMOOC’s end users are healthcare professionals, nurses, doctors and other healthcare workers.

3

 

Our enterprise customers are pharmaceutical enterprises, healthcare enterprises engaged in researches and develops pharmaceuticals, vaccines, and consumer healthcare products, pharmaceutical enterprises that engages in drug innovation, manufacturing, and marketing, and medical journals.

 

Our NFP customers, most of whom are sponsored by pharmaceutical enterprises to produce training courses for specific healthcare topics, are charity organizations, national public foundations, and nonprofit non-governmental association, that are governed by provincial and regional government agencies and commissions. Government agencies include the National Health and Family Planning Commission (NHFPC) and Ministry of Civil Affairs.

 

We maintain good relationship with our customers and some of them have long term relationship with us. We generate our revenue on a case-by-case or project-by-project basis and by providing our customers with healthcare information, education, and training services, including the production of online medical training materials, the arrangement of onsite training programs or academic conferences, and the development of medical education software to their targeted end users.

 

For the fiscal year ended December 31, 2017, we generated revenue from a total of 70 customers, of which 14 customers were NFP and 56 customers were pharmaceutical enterprises. For the fiscal year ended December 31, 2018, we generated revenue from a total of 71 customers, of which 15 were NFP and 56 were pharmaceutical enterprises. For the six months ended June 30, 2019, we generated revenue from a total of 50 customers, of which 16 customers were NFP and 34 customers were pharmaceutical enterprises. 

 

We generate our revenues from a relatively small number of customers. For the fiscal years ended December 31, 2018 and 2017, our pharmaceutical enterprise customers accounted for 60.1% and 80.7% of our total revenues, respectively. For the fiscal years ended December 31, 2018 and 2017, our NFP customers accounted for 39.9% and 19.3% of our total revenues, respectively. For the six months ended June 30, 2019 and 2018, our pharmaceutical enterprise customers accounted for 33.6% and 78.2% of our total revenues, respectively. For the six months ended June 30, 2019 and 2018, our NFP customers accounted for 66.4% and 21.8% of our total revenues, respectively. The sharp decrease of revenues generated by pharmaceutical enterprises customers as a percentage of total revenue was mainly because the pharmaceutical enterprises placed more orders through NFP to attract more medical experts and professionals in the name of NFP.

 

Sunshine Health Forums’ Users

 

Unlike MDMOOC online platform where we require our users to register with their healthcare qualification and some of our programs are limited to certain registered users of the platform, our Sunshine Health Forums is accessible to the public without limitation. As of the date of this prospectus, we have established nearly 150 forums, with more than an aggregate of 4.95 million subscriptions and an aggregate of 1.25 billion click-through.

 

Source of Revenues

 

We currently derive our revenues from 2 sources: (1) revenue generated from the information, education, and training programs, services, and products under our “MDMOOC” brand, including but not limited to (a) revenue from designing and producing healthcare training products as requested by our customers; (b) revenue from our onsite education, including organizing medical training sessions and academic conferences; and (c) revenue from the healthcare consulting services we provide to our customers; and (2) revenue generated from disseminating general healthcare knowledge and information and the book selling via our Sunshine Health Forums. We do not charge user fees for access to our MDMOOC online platform or attend some of our onsite conferences. The MDMOOC online platform and onsite education activities enable customers to reach, educate and inform target audiences of healthcare professionals. We work closely with our customers to develop programs to reach specific groups of healthcare professionals and give them placement on the most relevant areas on our MDMOOC online platform.

4

 

For the fiscal years ended December 31, 2018 and 2017, our revenues were US$12,865,870 and US$9,816,312, respectively, and our net income were US$3,001,489 and US$1,494,928, respectively. For the six months ended June 30, 2019 and 2018, our revenues were US$6,987,623 and US$5,232,210, respectively, and our net income were US$1,708,888 and US$551,205, respectively. We currently generate most of our revenues from MDMOOC. The revenue from Sunshine Health Forums was immaterial for the fiscal years ended December 31, 2018 and 2017 and for the six months ended June 30, 2019 and 2018. We plan to focus our development on Sunshine Health Forums and expand more information sharing services in this platform.

 

Research and Development

 

Research and Development (“R&D”) is an integral part of our continued growth. Our R&D consists of product development and technology support. As of the date of this prospectus, we have 25 researchers in our product development team and 13 developers in our technology support team. Most of our R&D members have no less than 5 years of working experience and 30% R&D staff have master or doctor degree.

 

Our product development team is focused on market research and product development. We develop and update our products and services based on market conditions and government policies. Our product development team closely monitors the market to adjust and upgrade our existing educational products, and designs new products based on customers’ requests. We analysis the information about concepts and forms of medical education by searching medical articles from medical journals, and attending medical conferences such as Global Alliance for Medical Education, or GAME, annual meeting, and integrate the information into our programs. Also, we work with healthcare professionals to develop our programs. When starting to create any programs, we make face to face or telephone surveys and get the learning needs from healthcare professionals, such as medical knowledge, clinical skills, case sharing, and the desire to communicate with peers. We incorporate such needs into our program design. When developing our course module, the healthcare professionals, after review and test, may give us advice on the module to match the learning and thinking habits of physicians and allied healthcare professionals. After we complete the course production, we invite these professionals to do final review on the content to assure its correctness.

 

Our technology team are experienced in the development, design, operation and maintenance of platform products, servers and mobile apps. They are responsible for monitoring the performance of our online platform, updating and exploring new and advanced technologies and integrating them into our existing and new services.

 

During fiscal years 2018 and 2017, our R&D expenses were approximately $1,447,949 and $943,253, respectively, representing 11.3% and 9.6% of our total revenues for fiscal years 2018 and 2017, respectively.

 

Intellectual Property

 

We regard our trademarks, copyrights, patents, domain names, know-how, proprietary technologies, and similar intellectual property as critical to our success, and we rely on copyright, trademark and patent law in the PRC, as well as confidentiality procedures and contractual provisions with our employees, contractors and others to protect our proprietary rights.

 

As of December 31, 2018, we own 11 registered trademarks, copyrights to 37 software programs developed by us relating to various aspects of our operations, and 33 registered domain names. As of the date of this prospectus, we own 16 registered trademarks, copyrights to 37 software programs developed by us relating to various aspects of our operations, and 31 registered domain names, including mdmooc.com.

 

Our intellectual property is subject to risks of theft and other unauthorized use, and our ability to protect our intellectual property from unauthorized use is limited. In addition, we may be subject to claims that we have infringed the intellectual property rights of others. See “Risk Factors—Risks Relating to Our Business— We may not be able to prevent others from unauthorized use of our intellectual property, which could cause a loss of customers, reduce our revenues and harm our competitive position.”

5

 

Market Opportunities and Competition

 

China has the largest group of healthcare professionals in the whole world, providing a solid foundation for the development of the healthcare education market. According to the 2018 Statistical Bulletin on the Development of China’s Health and Wellness Industry, China currently has more than 12 million healthcare professionals, including more than 3.6 million doctors, reflecting a huge demand on knowledge learning and professional training.

 

While we see the need for the long-term stability of the traditional form of onsite training, with long working hours and heavy workloads, more and more healthcare professionals in China turn to use online platforms for academic conferences or training sessions. Continuing changes in the healthcare industry, including the increasing adoption of managed care plans and the need to keep informed about rapidly emerging medical and pharmaceutical therapies are also placing increasing pressures on healthcare professionals’ time. Healthcare professionals must keep abreast of the latest developments within their medical specialty to provide their patients with the best possible care and to meet continuing medical education requirements. There is a vast flow of information from many sources, including traditional medical journals, medical textbooks, academic conferences and other training literature. The sheer volume of medical information and the time constraints that physicians face make it extremely difficult for them to stay current and to quickly and efficiently access the information most relevant to their practice. We believe online healthcare professionals education services will provide them another option to find and manage the information they are seeking.

 

Internet plus training model emerged with the growth of technologies, internet and the needs for convenient and reliable source of information. Specifically, Internet plus will optimize the traditional mode of education and training for healthcare professionals with real-time services anytime, anywhere, based on users’ demands. Through the Internet, the latest medical information and online training courses can be obtained from the mobile terminal and healthcare professionals can make full use of their spare time to get the information most related to them. Gradually, the Internet plus education model has been accepted by healthcare professionals. A Chinese Internet Doctors Insights Report (DIR) released by United States Medical Scientific in November 2018 provides that more than 90% of doctors in China obtained medical information through professional online platform, 46.7% of doctors in China obtained medical information through offline meetings, and 58.5% of doctors in China obtained information of pharmaceutical enterprises and drugs through professional websites.

 

In 2019, Internet plus healthcare education has become the education model guided and supported by the Chinese government. The Opinion Concerning the Promotion of the Development of Internet Plus Medical and Health promulgated and implemented on April 25, 2018 by the General Office of the State Council (the “Opinion”), states its plan to enhance the Internet plus medical education model. The Opinion encourages the establishment of healthcare education training cloud platform that provides a diverse range of medical online courses and healthcare information. The Opinion also encourages the establishment of a networked, digital, personalized, and lifelong medical education and training system for the healthcare professionals to carry out researches and discussions on incurable diseases and major diseases, and eventually improve their healthcare quality. The Opinion further includes the implementation plan of the “Continuous Medical Education + Appropriate Technology Promotion” policy, focusing on the needs of healthcare and poverty reduction, targeting the grass-root levels and deprived areas of the country, to popularize practical and appropriate healthcare technologies via distance education. The Opinions further indicates to establish an Internet-based science platform to provide accurate and up-to-date information on healthcare science knowledge and healthy lifestyles. The Opinion aims to improve residents’ health management ability and health literacy.

 

Healthcare education is a large sector of the Chinese market with outstanding development prospects. According to the report released on December 24, 2018 by TrendForce (“TrendForce Report”), a global provider of market intelligence on the technology industries, driven by the large amount of new drugs joining the market and the continuous increase in the use of new drug products, the 2018 market size of global pharmaceutical is approximately USD 1.2 trillion, with a 3.8% annual growth rate. TrendForce Report indicates that the expected global drug market will reach USD1.55 trillion in 2023 with a compound annual growth rate of 5.1% from 2018 to 2023. According to a 2018 report by The Economic Observer, sales expenses in Chinese pharmaceutical industry account for more than 40% of the total revenue and the costs of market promotion is a key part of sales expenses. We believe the need for Internet-based healthcare education will continue to grow, driven by the increasing demand for healthcare services by Chinese people, the implementation of China’s grading diagnosis and treatment policy, and the establishment of doctors’ multi-point practice system.

6

 

We face competition from providers of traditional healthcare education programs and training services as well as the increasing competition from existing competitors and new market entrants in the online healthcare education market including the following:

 

Chinese online education companies and institutions that also offer continuing healthcare education and other online courses and training programs. Examples of our competitors include 91huayi, a Chinese medical education website dedicated to improving medical service providers professional skills and public’s healthcare knowledge; bbs.iivi.com, a Chinese medical bulletin board system allowing medical professionals in different specialties to share their views regarding their medical practice, career development and medical examinations; and www.ccmtv.cn, a Chinese website providing surgery education videos to medical professionals in different specialties.

 

Healthcare education companies or institutions organizing onsite healthcare workshop, academic conference, and other healthcare communication activities. This segment is the most significant competitor to our onsite education programs. Examples of our competition in this segment include Medcon, MEDLINK, and Beijing Medical Group 3 AD Ltd., all of which are Chinese company dedicated to promoting medical information and health knowledge via onsite activities.

 

China-based digital service provider in the healthcare industry that also offer information sharing services and data accumulation and management in China. Examples of our competitors include DXY (丁香园), a Chinese medical knowledge sharing website, which is built as an academic article retrieving database. DXY has developed more functions to enrich the services it provides to healthcare professionals and the public, including but not limited to establishing online forum for physicians, launching a series of mobile applications such as Drug Assistant and Dingxiang Doctor, and opening its wholly-owned offline Family Clinics.

 

Education companies that targets the public and patients. This segment is the most significant competitor to our Sunshine Healthcare Forum. Examples of our competitors include CN-Healthcare, an internet-based healthcare education platform targeting patients. CN- Healthcare organizes content-partners, including healthcare professionals and medical associations to generate health-related news and information. CN-Healthcare currently has 1773 individual content-partners, 751 association partners, and 1.3 million subscribers.

 

Our Competitive Strengths and Strategies

 

We believe that the principal competitive factors in our markets are industry expertise, breadth and depth of service offerings, quality of the services offered, reputation and track record, marketing, scalability of infrastructure and price. The combination of our large user base, professional database and high quality education content position us to be a leading provider of healthcare information, education, and training services to meet the needs of healthcare organizations and professionals and will continue to contribute to our growth and success.

7

 

  Acknowledged by leading pharmaceutical enterprises: our customers include leading pharmaceutical enterprises who position our MDMOOC as preeminent branded sources of consumer-oriented health and wellness information on the Internet. Almost all leading pharmaceutical enterprises have their own vendor lists regarding different types of service they request. It is an industry norm that it usually takes three to four years for a service provider to be accepted by the leading pharmaceutical enterprises to be included in the vendor list. We are one of the prominent service providers in the category of course production services on the vendor lists of a few well-known pharmaceutical enterprises. Pursuant to the consultant agreements we entered into with the pharmaceutical enterprises regarding the course production services, we will create online training courses of specific medical topics and then post them on our MDMOOC platforms. The users need to obtain the passwords from the pharmaceutical enterprises or from us to get free access to the series of online courses. We also entered into framework agreements with certain pharmaceutical enterprises. The terms of the agreements are usually one (1) years. Pursuant to the framework agreements, when our customers have a need for medical course production, they will reach out to us by sending over formal purchase orders.

 

  Reliable Professional Content Production. We use reliable, highly relevant, interactive and multi-media content to satisfy the requirements of our customers, including the NPO and pharmaceutical enterprises, and our end-users. We maintain good long-term working relationship with many well-known healthcare professionals. With our self-generated resource library of healthcare professionals, we can easily reach out to the healthcare experts in certain medical fields when we receive purchase orders from our customers to generate relevant medical courses. We also have one of the most comprehensive online content library in China for different type of diseases and medical information which makes it easier for us to customize the content under different needs of our customers for online medical education. We also have a large pool of experienced in-house editors who incubate original medical information and present them in visually appealing formats. They also collaborate with healthcare professionals throughout the content generating process. Our content is interactive and largely in the form of videos, articles, and photographs, covering a full spectrum of the latest medical information.

 

High-Quality, Timely and Original Medical Information: We provide high-quality, timely and original content on important healthcare trends and disease topics. Using the real-time publishing capabilities of the Internet, we can deliver this content to our audience faster and more cost effectively than traditional print media and on-site training session, which is limited by publication schedules and physical distribution. Many of our articles are written by industry-leading medical experts and are peer-reviewed by other physicians to insure they meet the high standards of medical integrity. Our experienced editorial staff has strong medical background, most of whom graduated from well-known medical universities and have more than ten-year work experience in relevant areas. Our medical specialty areas are carefully designed and their features are regularly updated by our editorial and quality control staff.

 

Well Organized and Easy-To-Use Websites and Apps: We design our websites and mobile Apps to meet the needs of our users in a personalized and easy-to-use manner. We organize our training products on MDMOOC online platform by healthcare specialty areas. We also provide functions of Practice Improvement (PI), Community of Practice Share (COPS), and Continuing Professional Development (CPD) to satisfy different needs of the healthcare professionals. We create different Sunshine Health Forums for different categories of diseases and healthcare matters. Currently, we have more than 150 forums, covering healthcare topics such as the kidney disease, the liver disease, and diabetes. In addition to high-quality medical content, our consumer sites provide community features and interactive programs to encourage academic discussion and communication as well as information and experience sharing.

 

  Cost-Effective Access to Our Audience: Our users registration profiles give us the ability to segment our audience based on their medical specialty or healthcare interest. In addition, our proprietary users’ profile and traffic database enables us to provide advertising and sponsored content. MDMOOC online platform also offers online programs that complement many of the pharmaceutical enterprises’ offline promotional and educational efforts. For example, we expand the audience of sponsored medical conferences by making next-day summaries of the proceedings available to users who were unable to attend. In addition, we believe Sunshine Health Forums create an attractive e-commerce environment for health-related products, i.e., educational healthcare books, due to the size of the audience and the focus on relevant healthcare topics.

8

 

High-Level and Small-Class Teaching Onsite Training Courses. Along with online training courses and education programs, we also organize onsite education and training sessions. To ensure the quality and results of the onsite training programs, we usually limit the size of our training session to a relatively small one and build up certain criteria for the applicants. Also, the good long-term working relationship with well-known healthcare professionals enable us to generate outstanding training content and create high-quality education experience. For Example, in the EWMA-certified wound-management collaboration training program, we work with healthcare experts and institutions to do the lecturing. Our lecturers include Dr. Yixin Zhang, professor and doctoral supervisor of Shanghai Jiaotong University and vice president of Asian Pacific Federation of Societies for Reconstructive Microsurgery, Guozhong Lv, Dr. Yan Liu, vice president of Burn Injury Department of Chinese Medical Association, and Dr. Chunmeng Shi, professor and doctoral supervisor of Army Medical University. We plan to hold an aggregate of six (6) training programs. Each one of them will accept no more than twenty (20) applicants who shall hold academic credential above undergraduate. We also require all applicants to have more than six-year working experience in the field of wound repair.

 

Our objective is to become the premier healthcare destination platforms in China where physicians, allied healthcare professionals and the public visitors can find reliable and comprehensive information that enables them to make better and more informed medical and health decisions. We intend to achieve this objective by pursuing the following strategies:

 

Strengthening Our Brands. We intend to build up MDMOOC as the leading single brand for healthcare information, education, and training for professionals and Sunshine Health Forums as the leading brand for online healthcare information forums. We believe that strengthening our brand awareness is critical to attracting and retaining users, advertisers, sponsors and strategic partners. We plan to pursue a brand development strategy through online and offline advertising, promotions, media coverage and word-of-mouth support. We believe our brand visibility will significantly benefit from promotion on leading we-media and medical associations, such as China Association of Health Promotion and Education, Beijing Medical and Health Foundation, and China Primary Health Care Foundation.

 

Improving and Enhancing Our Products. We intend to expand the content on both our healthcare programs for professionals and the public by adding new medical specialty areas, enlarging our editorial staff and utilizing our extensive relationships with leading medical experts. We intend to enhance the users’ experience by adding general health and wellness information, community features and interactive programs that take advantage of our credibility with medical professionals and our existing professional medical specialty content.

 

Growing User Community. Except for the online training programs, we also share the latest news and healthcare information in the medical industry on MDMOOC online platform. We intend to build our medical professional community via Practice Improvement (PI), a problem-based and case-based form of healthcare course, which integrates state-of-the-art treatment information and clinical cases for particular diseases into interactive practice modules, and Community of Practice Share (COPS), an online and live clinical experience sharing platform that creates the most effective discussion in a particular healthcare domain or medical area due to the common interests of the users, and increase the frequency and length of their visits to our site. By continuing to offer compelling content, providing interactive programs and services, and building relationships with relevant healthcare organizations to increase user loyalty, repeat usage and time spent on our site, we believe MDMOOC online platform will become an integral part of the medical professional’s daily work flow.

 

  Developing Multiple Revenue Sources. We believe our attractive audience demographics and high-quality content offerings provide us with significant opportunities to develop multiple sources of revenue. In addition to advertising and sponsorships, we plan to generate e-commerce revenues by building Sunshine Health Forums as a full-service online healthcare platform with functions of book-selling and drug-selling. We also plan develop other research products that we expect will complement pharmaceutical enterprises’ product detailing efforts. In addition, we plan to introduce products and services that appeal directly to our international and allied healthcare users.

9

 

Risks and Challenges

 

Our prospects should be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by similar companies. Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, including, among others, the following:

 

  our inability to effectively manage our rapid growth, which could place significant strain on our management personnel, systems and resources;

 

  adverse changes in the economic environment either in China or globally;

 

  intense competition from onshore and offshore healthcare information, education, and training services companies;

  

  our reliance on a relatively small number of major customers, including a customer accounted for 38% and 55% of our total revenue for fiscal years 2018 and 2017, respectively;

 

  our ability to anticipate and develop new services and enhance existing services to keep pace with rapid changes in technology;

  

  our ability to attract new customers for our services and/or growing revenues from existing customers;

 

  risks associated with having a long selling and implementation cycle for our services that require us to make significant resource commitments prior to realizing revenues for those services;

 

  increases in wages for professionals in China;

 

  the international nature of our business;
     
  risks related to unauthorized disclosure of sensitive and confidential information;

 

  risks related to intellectual property infringement claims;

 

  risks related to material weakness in our internal control over financial reporting such that if we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud;

 

  business interruptions resulting from occurrence of natural disasters, health epidemics and other outbreaks or events;

 

  fluctuation in the value of the Renminbi and other currencies;

 

  disruptions in disruptive technologies or significant failure in our technology platform that could harm our service;

 

  vulnerabilities to security risks that could disrupt our services and adversely affect our operations; and

 

  possibilities to expose us to malpractice liability and other liability inherent in healthcare delivery.

 

In addition, we face other risks and uncertainties that may materially affect our business prospect, financial condition, and operations. You should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in our Class A Ordinary Shares.

10

 

Our Securities

 

Our authorized share capital is divided into Class A Ordinary Shares and Class B Ordinary Shares prior to the completion of this Offering. Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A Ordinary Share will be entitled to 1 vote and each Class B Ordinary Share will be entitled to 15 votes. Due to the Class B Ordinary Share’s voting power, the holders of Class B Ordinary Shares currently and may continue to have a concentration of voting power, which limits the holders of Class A Ordinary Shares’ ability to influence corporate matters. (See “Risk Factors - Our Class B Ordinary Shares have stronger voting power than our Class A Ordinary Shares and certain existing shareholders have substantial influence over our Company and their interests may not be aligned with the interests of our other shareholders.”) Each Class B Ordinary Share is convertible into one Class A Ordinary Share at any time by the holder thereof. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances. (See “Description of Share Capital”)

 

Unless the context requires otherwise, all references to the number of shares of Class A and Class B Ordinary Shares to be outstanding after our initial public offering is based on 14,752,352 Class A Ordinary Shares and 5,497,715 Class B Ordinary Shares outstanding as of date of this prospectus, and excludes [●] Class A Ordinary Shares reserved for issuance under our 2019 Share Option Plan (the “Option Plan”), which was adopted on [●], 2019.

 

Unless otherwise indicated, all information in this prospectus assumes a price to the public in this Offering of $[●] per share.

 

Corporate Information

  

Our principal executive office is located at Nanxi Creative Center, Suite 218, 841 Yan’An Middle Road, Jing’An District, Shanghai, China 200040. Our telephone number is 021-32205987. Our website is as follows http://www.mdmooc.org/. The information on our website is not part of this prospectus.

 

Our Corporate History and Structure

  

We are a holding company incorporated on April 16, 2019, under the laws of the Cayman Islands, or Zhongchao Cayman. We have no substantive operations other than holding all of the issued and outstanding shares of Zhongchao Group Inc., or Zhongchao BVI, established under the laws of the British Virgin Islands on April 23, 2019.

 

Zhongchao BVI is also a holding company holding all of the outstanding equity of Zhongchao Group Limited, or Zhongchao HK, which was established in Hong Kong on May 14, 2019. Zhongchao HK is also a holding company holding all of the outstanding equity of Beijing Zhongchao Zhongxing Technology Limited, or Zhongchao WFOE, which was established on May 29, 2019 under the laws of the PRC.

 

We conduct our business through our variable interest entity, or VIE, Zhongchao Medical Technology (Shanghai) Corp., or Zhongchao Shanghai, a PRC company, and through its wholly owned subsidiaries, including Shanghai Maidemu Cultural Communication Corp., or Shanghai Maidemu, Horgos Zhongchao Medical Technology Co., Ltd., or Horgos Zhongchao Medical, and Shanghai Zhongxun Medical Technology Co., Ltd., or Shanghai Zhongxun, Horgos Zhongchao Zhongxing Medical Technology Co., Ltd., or Horgos Zhongchao Zhongxing, each a PRC company. We commenced our operations under the name Zhongchao Medical Consulting (Shanghai) Limited, or Shanghai Zhongchao Limited, a limited liability company established under the laws of the PRC, to provide medical online and offline training services. Zhongchao Shanghai was incorporated on August 17, 2012 by Juru Guo and Baorong Xue, who held 60% and 40% equity interests in Zhongchao Shanghai respectively. On May 25, 2015, the two shareholders transferred all equity interests to Weiguang Yang who held 100% equity interests in Zhongchao Shanghai after the transfer. On January 15, 2016, the name was changed to Zhongchao Medical Technology (Shanghai) Co., Ltd. On February 5, 2016, the management completed its registration with the State Administration for Industry and Commerce, or SAIC, to convert Shanghai Zhongchao Limited into a company limited by shares, or Zhongchao Shanghai. Through direct ownership, Zhongchao Shanghai has established subsidiaries and branch offices in various cities in PRC, including Beijing, Shanghai, and Horgos.

 

11

 

On June 27, 2016, Zhongchao Shanghai was listed on the National Equities Exchange and Quotations Co., Ltd., or the NEEQ. At the time of listing, Weiguang Yang directly held 54.60% equity interests in Zhongchao Shanghai and Shanghai Xingzhong Investment Management LP. Ltd., a limited partnership incorporated under the PRC laws (“Shanghai Xingzhong”), directly held 17.90% equity interests in Zhongchao Shanghai. Shanghai Xingzhong was incorporated on September 22, 2015 by management of Zhongchao Shanghai as a platform for certain officers and employees holding founder shares. Pursuant to its partner agreement, Weiguan Yang is the general partner of Shanghai Xingzhong; and manages and operates Shanghai Xingzhong. He has the right, among others, to possess, manage, maintain and dispose the assets of Shanghai Xingzhong including its equity interest in Zhongchao Shanghai. As a result, Weiguang Yang controlled 72.50% equity interests in Zhongchao Shanghai upon listing on NEEQ.

 

To facilitate our initial public offering in the United States, Zhongchao Shanghai was delisted from NEEQ in February 2019. At the time of delisting, Weiguang Yang controlled 57.29% equity interests in Zhongchao Shanghai (43.41% of which was directly held and 13.88% of which was controlled through Shanghai Xingzhong). After the delisting, a minority shareholder of Zhongchao Shanghai transferred his shares to Mr. Yang. At the time of our restructure in August 2019, Mr. Yang controlled 58.78% equity interests in Zhongchao Shanghai (44.90% of which was directly held and 13.88% of which was controlled through Shanghai Xingzhong). To conclude, Zhongchao Shanghai has been under the control of Weiguan Yang since its initial listing on NEEQ in June 2016.

 

On June 24, 2019, Zhongchao Shanghai changed its name to Zhongchao Medical Technology (Shanghai) Limited. Zhongchao Shanghai engages in technology development, technology transfer, and technical services in the field of medical technology, technical consulting in the field of network technology, and medical information consulting.

 

On March 12, 2015, Zhongchao Shanghai established its wholly owned subsidiary, Shanghai Maidemu. Shanghai Maidemu engages in planning for cultural and artistic exchanges, designing, producing, acting for and publishing various kinds of advertisements, and medical consultation.

 

On May 27, 2017, Zhongchao Shanghai established its wholly owned subsidiary, Shanghai Zhongxun. Shanghai Zhongxun engages in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

 

On September 12, 2017, Zhongchao Shanghai established its wholly owned subsidiary, Horgos Zhongchao Medical Technology Limited Company (“Horgos Zhongchao Medical”). Horgos Zhongchao Medical engages in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

 

On September 28, 2016, Shanghai Maidemu formed a joint venture with Ms. Hongxia Zhang and Ms. Shuhua Gao, contributing a 55% equity interest in Shanghai Huijing Information Technology Co., Ltd., or Shanghai Huijing, a PRC company. On January 21, 2019, Shanghai Huijing was 100% owned by Shanghai Maidemu. Shanghai Huijing engages in technology development, transfer, service and consulting in the fields of computer technology, graphic designing, website page designing, planning cultural and artistic exchanges.

 

On April 16, 2019, Zhongchao Cayman was incorporated in the Cayman Islands and issued 5,497,715 Class B Ordinary Shares at 0.0001 par value as founder shares to More Healthy Holding Limited, representing 84.83% of total voting power of the Company, on converted basis, given that each Class B Ordinary Share is entitled to 15 votes and each Class A Ordinary Share is entitled to 1 vote. More Healthy Holding Limited is a BVI company 100% owned by Weiguang Yang (“More Healthy”).

  

On July 29, 2019, Zhongchao Shanghai established its wholly owned subsidiary, Horgos Zhongchao Zhongxing. Horgos Zhongchao Zhongxing engages in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

 

On August 14, 2019, Zhongchao Cayman completed a reorganization of entities under common control of Weiguang Yang, who owned a majority of the voting power of Zhongchao Cayman prior to the reorganization. Zhongchao Cayman, Zhongchao BVI, and Zhongchao HK were established as the holding companies of Zhongchao WFOE. Zhongchao WFOE is the primary beneficiary of Zhongchao Shanghai and its subsidiaries, and all of these entities included in Zhongchao Cayman are under common control which results in the consolidation of Zhongchao Shanghai and subsidiaries which have been accounted for as a reorganization of entities under common control at carrying value. The consolidated financial statements are prepared on the basis as if the reorganization became effective as of the beginning of the first period presented in the consolidated financial statements. 

 

On August 15, 2019, HF Capital Management Delta, Inc. (“HF Capital”), a 6.25 % shareholder of Zhongchao Shanghai planned to withdraw its equity interest in Zhongchao Shanghai (which represents 1,350,068 shares in Zhongchao Shanghai, among which 675,068 shares were issued by Zhongchao Shanghai and the remaining 675,000 shares were purchased from two existing shareholders), and to contribute the same amount of capital to Zhongchao Cayman directly. The Company and HF Capital entered into a certain warrant agreement to purchase ordinary shares of the Company, pursuant to which the Company granted a warrant to HF Capital, who expects to exercise the warrant and receive the ordinary shares of the Company before the effective date and closing of the offering because these conditions are considered to be administrative procedures and there is no uncertainties of going through them. The warrant entitled HF Capital to purchase 1,350,068 Class A Ordinary Shares, or 6.25% economic beneficial interest, or 1.37% of the voting ownership interest of the Company, from the Company, if the following conditions are met:

 

1)All PRC governmental consent and approval required for HF Capital to exercise the warrant and payment of the capital contribution have been obtained, including without limitation, any approval or filing with respect to HF Capital’s investment into the Company, and payment by HF Capital of the capital contribution to the Company, and reasonable evidence thereof shall have been provided to the Company;
2)HF Capital has fully paid the capital contribution to Zhongchao Cayman; and
3)The Company released the paid-in capital of HF Capital from Zhongchao Shanghai.

12

 

The following charts summarize our corporate legal structure and identify our subsidiaries, our VIE and its subsidiaries upon completion of this Offering based on a proposed maximum number of [●] Class A Ordinary Shares being offered, as compared to the structure immediately prior to the Closing of the Offering. For more details on our corporate history, please refer to “Business — Our Corporate History and Structure”.

 

 

Notes: All percentages reflect the voting ownership interests instead of the equity interests held by each one of the shareholder of the Company given that each Class B Ordinary Share will be entitled to 15 votes as compared to Class A Ordinary Share, each one of which will be entitled to 1 vote.

 

(1)Represents 5,497,715 Class B Ordinary Shares held by Mr. Weiguang Yang, the 100% owner of More Healthy Holding Limited, as of the date of this prospectus.
(2)Represents an aggregate of 14,752,352 Class A Ordinary Shares held by 12 shareholders of Company, each one of which holds less than 5% voting ownership interests of the Company, as of the date of this prospectus.
(3)In order to directly hold equity interest in the Company, HF Capital Management Delta, Inc. (“HF Capital”), one of the shareholders of the Company, has to complete certain registration and obtain approval with local governmental authority in PRC. As a part of reorganization and due to the aforementioned factor, HF Capital was granted a warrant to purchase 1,350,068 Class A Ordinary Shares of the Company at a price $0.0001 per share or such other amount agreed by the Company and HF Capital at a grant price of RMB 20,000,000 (approximately USD$2.7 million) conditioned upon (i) HF Capital completes necessary registration and obtains approval with local governmental authority in PRC for its direct investment in the Company and (ii) Zhongchao Shanghai shall have paid HF Capital RMB 20,000,000 as returned capital contribution in Zhongchao Shanghai. The above chart assumes that HF Capital has not exercised such warrant.

13

 

(4)Represents RMB 2.74 million (approximately USD$0.4 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus.
(5)Represents RMB 9.70 million (approximately USD$1.4 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus.
(6)Represents RMB 1.35 million (approximately USD$0.2 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus.
(7)Represents RMB 3.00 million (approximately USD$0.4 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus. Shanghai Xingzhong Investment Management LP. Ltd., a limited partnership incorporated under the PRC laws (“Shanghai Xingzhong”), the general partner of which is Weiguang Yang. As the general partner of Shanghai Xingzhong, Weiguang Yang exercises the voting rights with respect to the shares held by Shanghai Xingzhong.
(8)Represents RMB 1.35 million (approximately USD$0.2 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus.

 

For details of each shareholder’s ownership, please refer to the beneficial ownership table in the section captioned “Principle Shareholders.”

 

Name   Background   Ownership
Zhongchao BVI  


A BVI company

Incorporated on April 23, 2019

A holding company

  100% owned by Zhongchao Cayman
Zhongchao HK  

A Hong Kong company

Incorporated on May 14, 2019

A holding company

  100% owned by Zhongchao BVI
Zhongchao WFOE  



A PRC company and deemed a wholly foreign owned enterprise

Incorporated on May 29, 2019

Registered capital of $10 million

A holding company

  100% owned by Zhongchao HK
Zhongchao Shanghai  

 

A PRC limited liability company

Incorporated on August 17, 2012

Registered capital of $3,265,581 (RMB 21,600,135) with registered capital fully paid-up

Engaged in technology development, technology transfer, and technical services in the field of medical technology, technical consulting in the field of network technology, and medical information consulting

  VIE of Beijing Zhongchao Zhongxing Technology Limited

14

 

 

Name   Background   Ownership
Shanghai Maidemu  

●     A PRC limited liability company

●     Incorporated on March 12, 2015

●     Registered capital of $1,597,087 (RMB 10 million) with registered capital fully paid-up

●     Planning for cultural and artistic exchanges, designing, producing, acting for and publishing various kinds of advertisements, and medical consultation (no medical diagnosis and treatment activities allowed).

  100% owned by Zhongchao Shanghai
Shanghai Zhongxun  

●     A PRC limited liability company

●     Incorporated on May 27, 2017

●     Registered capital of $1,021,525 (RMB 7 million) with registered capital fully paid-up

●     Engaged in technology development, transfer, service and consulting in the fields of medical technology and computer technology (no medical diagnosis and treatment activities allowed).

  100% owned by Zhongchao Shanghai

Horgos Zhongchao Medical 

 

 

●     A PRC limited liability company

●     Incorporated on September 12, 2017

●     Registered capital of $153,060 (RMB 1 million) with registered capital of $153,060 to be funded

●     Engaged in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

  100% owned by Zhongchao Shanghai
Horgos Zhongchao Zhongxing  

●     A PRC limited liability company

●     Incorporated on July 29, 2019

●     Registered capital of $145,081 (RMB 1 million) with registered capital of $145,081 to be funded

●     Engaged in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

  100% owned by Zhongchao Shanghai

Shanghai Jingyi

 

 

●     A PRC limited liability company

●     Incorporated on October 10, 2018

●     Registered capital of $144,459 (RMB 1 million) with registered capital of $107,622 to be funded

●     Engaged in technology development, transfer, service and consulting in the fields of medical technology and computer technology, market information consulting and investigating.

  51% owned by Zhongchao Shanghai

Shanghai Huijing

 

 

●     A PRC limited liability company

●     Incorporated on September 28, 2016

●     Registered capital of $149,948 (RMB 1 million) with registered capital of $74,974 to be funded

●     Engaged in technology development, transfer, service and consulting in the fields of computer technology, graphic designing, website page designing, planning cultural and artistic exchanges.

  100% owned by Shanghai Maidemu

15

 

VIE Arrangements

 

Due to the restrictions imposed by PRC laws and regulations on foreign ownership of companies engaged in value-added telecommunication services and certain other businesses, we operate our businesses in which foreign investment is restricted or prohibited in the PRC through certain PRC domestic companies. As such, Zhongchao Shanghai is controlled through VIE Arrangements in lieu of direct equity ownership by us or any of our subsidiaries. Such VIE Arrangements consist of a series of six agreements (collectively, the “VIE Arrangements”), which were signed on August 14, 2019. For more details and risks related to our variable interest entity structure, please see “Our Corporate History and Structure—VIE Arrangements” and “Risk Factors—Risks Related to Our Corporate Structure”.

 

The significant terms of the VIE Arrangements by and among our wholly-owned subsidiary, Zhongchao WFOE, our consolidated variable interest entity, Zhongchao Shanghai, and the shareholders of Zhongchao Shanghai are as follows:

 

Agreements that Provide Us Effective Control over Zhongchao Shanghai

 

Our PRC Wholly Foreign Owned Entity, Zhongchao WFOE, has entered into the following agreements with Zhongchao Shanghai and its shareholders.

 

Equity Interest Pledge Agreement.

 

Pursuant to the equity interest pledge agreement dated August 14, 2019, each shareholder of Zhongchao Shanghai has pledged all of its equity interest in Zhongchao Shanghai to guarantee the shareholder’s and Zhongchao Shanghai’s performance of their obligations under the master exclusive service agreement, business cooperation agreement, exclusive option agreement and proxy agreement and power of attorney. If Zhongchao Shanghai or any of its shareholders breaches their contractual obligations under these agreements, Zhongchao WFOE, as pledgee, will be entitled to dispose the pledged equity interest entirely or partially. Each of the shareholders of Zhongchao Shanghai agrees that, during the term of the equity interest pledge agreement, it will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests without the prior written consent of Zhongchao WFOE. In addition, Zhongchao WFOE has the right to collect dividends generated by the pledged equity interest during the term of the pledge. The term of the initial equity interest pledge agreement is 20 years. After the expiration of the term of initial pledge registration, Zhongchao WFOE may at its sole discretion require the Shareholders to extend the term of the equity interest registration.

 

Proxy Agreement and Power of Attorney.

 

Pursuant to the proxy agreement and power of attorney dated August 14, 2019, each shareholder of Zhongchao Shanghai has irrevocably appointed Zhongchao WFOE to act as such shareholder’s exclusive attorney-in-fact to exercise all shareholder rights, including, but not limited to, voting on all matters of Zhongchao Shanghai requiring shareholder approval, disposing of all or part of the shareholder’s equity interest in Zhongchao Shanghai, oversee and review Zhongchao Shanghai’s operation and financial information. Zhongchao WFOE is entitled to designate any person to act as such shareholder’s exclusive attorney-in-fact without notifying or the approval of such shareholder, and if required by PRC law, Zhongchao WFOE shall designate a PRC citizen to exercise such right. Each proxy agreement power of attorney will remain in force for so long as the Zhongchao Shanghai exists. The shareholders of Zhongchao Shanghai do not have the right to terminate this agreement or revoke the appointment of the Attorney-in-Fact without the prior written consent of Zhongchao WFOE.

 

Spouse Consent Letters. 

 

Pursuant to the Spouse Consent Letters dated August 14, 2019, the spouse of each married shareholder of Zhongchao Shanghai, unconditionally and irrevocably agreed not to assert any rights over the equity interest in Zhongchao Shanghai held by and registered in the name of their spouse. In addition, each of them agreed to be bound by the VIE Arrangements described here if the spouse obtains any equity interest in Zhongchao Shanghai for any reason.

16

 

Agreement that allows us to Receive Economic Benefits from Zhongchao Shanghai

 

Master Exclusive Service Agreement.

 

Under the master exclusive service agreement between Zhongchao WFOE and Zhongchao Shanghai dated August 14, 2019, Zhongchao WFOE has the exclusive right to provide Zhongchao Shanghai with technical support, consulting services and other services. Zhongchao WFOE has the right to designate and appoint, at its sole discretion, any entities affiliated with the Zhongchao WFOE to provide any and all services. The service fees are calculated and paid on a yearly basis and at the amount that equals to 100% of the consolidated net profits of Zhongchao Shanghai. Zhongchao WFOE may adjust the service fee at its discretion after taking into account multiple factors, such as the difficulty of the services provided, the time consumed, the content and commercial value of services provided and the market price of comparable services. Zhongchao WFOE owns the intellectual property rights arising out of the performance of this agreements. Zhongchao Shanghai shall seek approval from Zhongchao WFOE prior to entering into any contracts obtaining the same or similar services as provided under the Master Exclusive Service Agreement. This agreement will remain effective as long as Zhongchao Shanghai exists, unless Zhongchao WFOE advance written notice to Zhongchao Shanghai and its shareholders or upon the transfer of all the equity interest held by Zhongchao Shanghai’s shareholders to Zhongchao WFOE and/or a third party designated by Zhongchao WFOE.

 

Business Cooperation Agreement

 

Under the business cooperation agreement dated August 14, 2019, without Zhongchao WFOE’s prior written consent, Zhongchao Shanghai agrees not to engage in any transaction which may materially affect its asset, obligation, right or operation, including but not limited to: any activities not within its normal business scope, merger and acquisition, offering any loan to any third party and incurring any debt from any third party. Zhongchao Shanghai shall seek approval from Zhongchao WFOE prior to entering into any material contract, except the contracts executed in the ordinary course of business. Zhongchao Shanghai shall cause the persons designated by Zhongchao WFOE to be the directors and executive officers of Zhongchao Shanghai. This agreement will remain effective as long as Zhongchao Shanghai exists, unless Zhongchao WFOE advance written notice to Zhongchao Shanghai and its shareholders or upon the transfer of all the equity interest held by Zhongchao Shanghai’s shareholders to Zhongchao WFOE and/or a third party designated by Zhongchao WFOE.

 

Agreements that Provide Us with the Option to Purchase the Equity Interest in Zhongchao Shanghai

 

Exclusive Option Agreement.

 

Pursuant to the exclusive option agreement dated August 14, 2019, each shareholder of Zhongchao Shanghai has irrevocably granted Zhongchao WFOE an exclusive option to purchase, or have its designated person or persons to purchase, at its discretion, to the extent permitted under PRC law, all or part of the shareholder’s equity interests in Zhongchao Shanghai. The purchase price is equal to the lowest price allowable under PRC laws and regulations at the time of the transfer. Zhongchao Shanghai has agreed that without Zhongchao WFOE’s prior written consent, Zhongchao Shanghai shall cause the persons designated by Zhongchao WFOE to be the directors and executive officers of Zhongchao Shanghai, not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any loans to any third parties, enter into any material contract, except the contracts executed in the ordinary course of business, merge with or acquire any other persons or make any investments, or distribute dividends to the shareholders. The shareholders of Zhongchao Shanghai have agreed that, without Zhongchao WFOE’s prior written consent, they will not dispose of their equity interests in Zhongchao Shanghai or create or allow any encumbrance on their equity interests. Moreover, without Zhongchao WFOE’s prior written consent, no dividend will be distributed to Zhongchao Shanghai’s shareholders, and if any of the shareholders receives any profit, interest, dividend or proceeds of share transfer or liquidation, the shareholder must give such profit, interest, dividend and proceeds to Zhongchao WFOE. These agreements will remain effective as long as Zhongchao Shanghai exists unless Zhongchao WFOE advance written notice to Zhongchao Shanghai and the shareholders or upon the transfer of all the equity interest held by the shareholders to Zhongchao WFOE and/or its designee.

17

 

Controlled Company

 

Upon the completion of this offering, our outstanding shares will consist of Class A Ordinary Shares and Class B Ordinary Shares, and we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Weiguang Yang, our founder, chairman of the board of directors and chief executive officer, will beneficially own all of our then issued Class B ordinary shares and will be able to exercise [●]% of the total voting power of our issued and outstanding shares. Holders of Class A Ordinary Shares and Class B Ordinary Shares have the same rights except for voting and conversion rights. Each Class A Ordinary Share is entitled to one vote, and each Class B Ordinary Share is entitled to fifteen votes and is convertible into one Class A Ordinary Share at any time by the holders thereof. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances.

 

Upon the completion of this offering, our directors, executive officers and principal shareholders will continue to have substantial control over our company. Our affiliates will be able to exercise [●]% of the total voting power of our issued and outstanding shares.

 

As long as our officers and directors, either individually or in the aggregate, own at least 50% of the voting power of our Company, we are a “controlled company” as defined under NASDAQ Marketplace Rules.

 

For so as we are a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including:

 

an exemption from the rule that a majority of our board of directors must be independent directors;

 

an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and

 

an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.

 

As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

 

Although we do not intend to rely on the “controlled company” exemption under the NASDAQ listing rules, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. (See – Risk Factor “As a “controlled company” under the rules of the NASDAQ Capital Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.”)

 

Compliance with Foreign Investment

 

All limited liability companies formed and operating in the PRC are governed by the Company Law of the People’s Republic of China, or the Company Law, which was amended and promulgated by the Standing Committee of the National People’s Congress on October 26, 2018 and came into effect on the same day. Foreign invested enterprises must also comply with the Company Law, with exceptions as specified in the relevant foreign investment laws. Under our corporate structure as of the date of this prospectus, 100% of the equity interests of Zhongchao Shanghai are entirely and indirectly held by our company through Beijing Zhongchao Zhongxing Technology Limited. Therefore, Beijing Zhongchao Zhongxing Technology Limited, a wholly foreign-owned enterprise (“Zhongchao WFOE”) of Zhongchao BVI which is a wholly-owned subsidiary of Zhongchao Cayman, should be regarded as a foreign-invested enterprise and comply with both the Company Law and other applicable foreign investment laws.

18

 

With respect to the establishment and operation of Zhongchao WFOE, the Ministry of Commerce of the People’s Republic of China (the “MOFCOM”), and the National Development and Reform Commission (the “NDRC”) promulgated the Catalogue of Industries for Guiding Foreign Investment, or the Catalogue (2017 Version), as amended on June 28, 2017, which came into effect on August 28, 2017. The Catalogue divides industries for foreign investment into three categories: encouraged, restricted and prohibited. Those industries not set out in the Catalogue shall be classified as industries permitted for foreign investment. The Catalogue serves as the main basis for management and guidance for the MOFCOM to manage and supervise foreign investments to PRC. In addition, in June 30, 2019, MOFCOM and NDRC promulgated the Special Management Measures (Negative List) for the Access of Foreign Investment, or the Negative List, effective July 30, 2019. The Negative List expands the scope of permitted industries by foreign investment by reducing the number of industries that fall within the Negative List where restrictions on the shareholding percentage or requirements on the composition of board or senior management still exists. According to the Catalogue and the Negative List, the permitted foreign investment in value-added telecommunications service providers may not be more than 50%, except for electronic commerce, domestic multi-party communication, storage and forwarding and call centers.

 

Emerging Growth Company Status

 

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012, and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our SEC filings;

 

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

reduced disclosure obligations regarding executive compensation in periodic reports, proxy statements and registration statements; and

 

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended. However, if certain events occur before the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.00 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company before the end of such five-year period.

 

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We have elected to take advantage of the extended transition period for complying with new or revised accounting standards and acknowledge such election is irrevocable pursuant to Section 107 of the JOBS Act. 

19

 

Foreign Private Issuer Status

 

We are incorporated in the Cayman Islands, and more than 50 percent of our outstanding voting securities are not directly or indirectly held by residents of the United States. Therefore, we are a “foreign private issuer,” as defined in Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act. As a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

 

Notes on Prospectus Presentation

 

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them. Certain market data and other statistical information contained in this prospectus are based on information from independent industry organizations, publications, surveys and forecasts. Some market data and statistical information contained in this prospectus are also based on management’s estimates and calculations, which are derived from our review and interpretation of the independent sources listed above, our internal research and our knowledge of the PRC information technology industry. While we believe such information is reliable, we have not independently verified any third-party information and our internal data has not been verified by any independent source.

  

For the sake of clarity, this prospectus follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English.

 

Unless otherwise noted, all currency figures in this filing are in U.S. dollars. Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

  

Our reporting currency is U.S. dollar and our functional currency is Renminbi. This prospectus contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Other than in accordance with relevant accounting rules and as otherwise stated, all translations of Renminbi into U.S. dollars in this prospectus were made at the rate of RMB6.8755 to USD1.00, the buying rate on December 31, 2018, as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. Where we make period-on-period comparisons of operational metrics, such calculations are based on the Renminbi amount and not the translated U.S. dollar equivalent. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.

20

 

The Offering

 

Issuer:   Zhongchao Inc.
     
Securities being Offered:   [●] Class A Ordinary Shares, par value $0.0001 per share, on a firm commitment basis.
     
Over-Allotment:  

We have granted to the underwriters the option, exercisable for 45 days from the date of this prospectus, to purchase up to [●] additional Class A Ordinary Shares.

     
Price per Share:   [●]
     
Class A Ordinary Shares Outstanding before the Offering   14,752,352
     
Class A Ordinary Shares  Outstanding following the consummation of the Offering:   [●] Class A Ordinary Shares
     
Symbol:   We plan to apply to list our Class A Ordinary Shares on the NASDAQ Capital Market under the symbol “ZCMD”
     
Transfer Agent:   Transhare Corporation

21

 

Use of Proceeds   We estimate that we will receive net proceeds from this Offering of $[●]million, based on an assumed price to the public in this Offering of $[●], the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses and assuming no exercise of the overallotment. We currently intend to allocate the net proceeds as follows: 30% for development of the online course content; 20% for platform technology upgrade and system integration; [●]% reserved for strategic alliances and acquisitions and 50% for business expansion, i.e., to expand our existing locations to develop new customers by hiring more qualified personnel, and marketing effort. See “Use of Proceeds” for additional information.
     
Risk Factors   Investing in our Class A Ordinary Shares involves a high degree of risk and purchasers of our Class A Ordinary Shares may lose part or all of their investment. See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our beginning on page 24.
     
Lock-Up  

We, our directors, executive officers, and substantially all of our existing shareholders are expected to enter into a lock-up agreement with the underwriters not to sell, transfer or dispose of any Class A Ordinary Shares for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sales” and “Underwriting.”

     
Dividend Policy:  

We have no present plans to declare dividends and plan to retain our earnings to continue to grow our business.

 

Voting Rights  

Shares of Class A Ordinary Share are entitled to 1 vote per share.

 

Shares of Class B Ordinary Share are entitled to 15 votes per share.

 

Holders of our Class A Ordinary Share and Class B Ordinary Share will generally vote together as a single class, unless otherwise required by law. Mr. Weiguang Yang, who after our initial public offering will control more than [●]% of the voting power of our outstanding ordinary share, will have the ability to control the outcome of matters submitted to our shareholders for approval, including the election of our directors. See “Description of Share Capital.”

22

 

Summary Financial Data

 

The following summary consolidated statements of income for the years ended December 31, 2018 and 2017 and six months ended June 30, 2019 and 2018 and the summary consolidated balance sheet data as of December 31, 2018 and 2017 and June 30, 2019 have been derived from our consolidated financial statements included elsewhere in this prospectus.

 

Our management believes that the assumptions underlying our financial statements and the above allocations are reasonable. Our financial statements, however, may not necessarily reflect our results of operations, financial position and cash flows as if we had operated as a separate, stand-alone company during the periods presented. You should not view our historical results as an indicator of our future performance.

 

The following table presents our summary consolidated statements of income and comprehensive income for the fiscal years ended December 31, 2018 and 2017 and for the six months ended June 30, 2019 and 2018.

 

Selected Consolidated Statement of Income and Comprehensive Income

(In U.S. dollars, except number of shares)

 

   For the years ended
December 31,
   For the Six Months Ended
June 30,
 
   2018   2017   2019   2018 
                 
Revenues  $12,865,870   $9,816,312   $6,987,623   $5,232,210 
Cost of revenues   (4,456,353)   (3,970,068)   (2,237,277)   (1,736,783)
Gross profit   8,409,517    5,846,244    4,750,346    3,495,427 
                     
Operating expenses:                    
Selling and marketing expenses   (2,261,258)   (2,715,201)   (1,303,740)   (1,456,105)
General and administrative expenses   (1,425,663)   (1,139,165)   (1,633,056)   (886,932)
Research and development expenses   (1,447,949)   (943,253)   (553,282)   (624,343)
Total operating expenses   (5,134,870)   (4,797,619)   (3,490,078)   (2,967,380)
Income from operations   3,274,647    1,048,625    1,260,268    528,047 
Interest income, net   191,609    17,331    118,943    81,380 
Other income, net   37,364    275,019    535,587    25,966 
                     
Income before income tax   3,503,620    1,340,975    1,914,798    635,393 
Income tax (expenses) benefits   (502,131)   153,953    (205,910)   (84,188)
Net income   3,001,489    1,494,928    1,708,888    551,205 
Net loss (income) attributable to non-controlling interests   17,834    34,352    21,641    (7,681)
Net Income Attributable to Zhongchao Inc.’s shareholders  $3,019,323   $1,529,280   $1,730,529   $543,524 
                     
Other comprehensive (loss) income                    
Foreign currency translation adjustment  $(379,520)  $228,786   $(2,947)  $(110,037)
                     
Other comprehensive (loss) income  $(379,520)  $228,786   $(2,947  $(110,037)
                     
Comprehensive income attributable to                    
Zhongchao Inc.’s shareholders  $2,639,803   $1,758,066   $1,727,582   $433,487 
Non-controlling interests  $17,834   $34,352   $21,641   $(7,681)
                     
Basic and diluted earnings per ordinary share*  $0.15   $0.08   $0.08   $0.03 
Weighted average number of ordinary share outstanding – basic and diluted   20,764,245    19,562,121    21,600,135    20,250,135 

 

*The number of shares are presented on a retroactive basis to reflect the reorganization and the stock dividend announced on November 21, 2017.

 

The following table presents our summary consolidated balance sheet data as of December 31, 2018 and 2017 and June 30, 2019.

 

   As of
December 31,
2018
   As of
December 31,
2017
   As of
June 30,
2019,
 
           (unaudited) 
             
Cash and cash equivalents  $7,918,675   $2,978,515   $6,558,332 
Total current assets  $12,561,357   $6,409,472   $13,367,362 
Total assets  $14,046,124   $6,976,003   $15,675,558 
Total liabilities  $2,660,758   $1,778,383   $2,541,340 
Total Zhongchao Inc.’s shareholders’ equity  $11,413,202   $5,207,622   $13,156,305 
Non-controlling Interests  $(27,836)  $(10,002)  $(22,087)
Total shareholders’ equity  $11,385,366   $5,197,620   $13,134,218 
Total liabilities and shareholders’ equity  $14,046,124   $6,976,003   $15,675,558 

 

23

 

 

RISK FACTORS

 

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in this offering unless you can afford to lose your entire investment.

 

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

 

We may be unable to effectively manage our rapid growth, which could place significant strain on our management personnel, systems and resources. We may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

 

We have significantly grown and expanded our business recently. Our revenues grew from $9,816,312 in fiscal 2017 to $12,865,870 in fiscal 2018. As of the date of this prospectus, we maintain 3 subsidiaries and 2 branches, of which are located in China (Beijing and Shanghai) to serve different customers in various geographic locations. The number of our total employees grew from 57 in fiscal 2017 to 58 in fiscal 2018. As of the date of this prospectus, we have 83 full-time employees. We are actively looking for additional locations to establish new offices and expand our current offices and sales and delivery centers. We intend to continue our expansion in the foreseeable future to pursue existing and potential market opportunities. Our growth has placed and will continue to place significant demands on our management and our administrative, operational and financial infrastructure. Continued expansion increases the challenges we face in:

 

recruiting, training, developing and retaining sufficient IT talents and management personnel;

 

  creating and capitalizing upon economies of scale;

 

  managing a larger number of customers in a greater number locations;

 

  maintaining effective oversight of personnel and offices;

 

  coordinating work among offices and project teams and maintaining high resource utilization rates;

 

  integrating new management personnel and expanded operations while preserving our culture and core values;

 

  developing and improving our internal administrative infrastructure, particularly our financial, operational, human resources, communications and other internal systems, procedures and controls; and

 

  adhering to and further improving our high quality and process execution standards and maintaining high levels of client satisfaction.

 

Moreover, as we introduce new services or enter into new markets, we may face new market, technological and operational risks and challenges with which we are unfamiliar, and it may require substantial management efforts and skills to mitigate these risks and challenges. As a result of any of these problems associated with expansion, our business, results of operations and financial condition could be materially and adversely affected. Furthermore, we may not be able to achieve anticipated growth, which could materially and adversely affect our business and prospects.

 

24

 

 

We depend on the healthcare industry for a significant portion of our revenues.

 

Our revenues could seriously decrease if there were adverse developments in the healthcare industry. Our near-term and long-term prospects depend upon selling our services to the healthcare industry. In 2018, 60.1% of our revenues were derived from services provided to pharmaceutical enterprises. Accordingly, our success is highly dependent on the sales and marketing expenditures of pharmaceutical enterprises and our ability to attract these expenditures. Some of the adverse developments in the healthcare industry that could affect our revenues would be:

 

- a reduction in sales and marketing expenditures of pharmaceutical enterprises;

 

- public or private market initiatives or reforms designed to regulate the manner in which pharmaceutical enterprises promote their products;

 

- regulatory or legislative developments that discourage or prohibit pharmaceutical enterprises’ promotional activities;

 

- a decrease in the number of new drugs being developed; or

 

- the adoption of current legislative and regulatory proposals to control drug costs for patients.

 

We face intense competition from onshore and offshore healthcare information, education, and training services companies, and, if we are unable to compete effectively, we may lose customers and our revenues may decline.

 

The market for healthcare information, education, and training services is highly competitive and we expect competition to persist and intensify. We believe that the principal competitive factors in our markets are industry expertise, breadth and depth of service offerings, quality of the services offered, reputation and track record, marketing and selling skills, scalability of infrastructure and price. In addition, the trend towards offshore outsourcing, international expansion by foreign and domestic competitors and continuing technological changes will result in new and different competitors entering our markets. Our ability to compete also depends in part on a number of factors beyond our control, including the ability of our competitors to recruit, train, develop and retain highly skilled professionals, the price at which our competitors offer comparable services and our competitors’ responsiveness to client needs. Therefore, we cannot assure you that we will be able to retain our customers while competing against such competitors. Increased competition, our inability to compete successfully against competitors, pricing pressures or loss of market share could harm our business, financial condition and results of operations.

 

Our success depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.

 

Our future success heavily depends upon the continued services of our senior executives and other key employees. If one or more of our senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt our business operations, and we may not be able to replace them easily or at all. In addition, competition for senior executives and key personnel in our industry is intense, and we may be unable to retain our senior executives and key personnel or attract and retain new senior executive and key personnel in the future, in which case our business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected. If any of our senior executives or key personnel joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and key professionals and staff members to them. Also, if any of our business development managers, who generally keep a close relationship with our customers, joins a competitor or forms a competing company, we may lose customers, and our revenues may be materially and adversely affected. Additionally, there could be unauthorized disclosure or use of our technical knowledge, practices or procedures by such personnel. Most of our executives and key personnel have entered into employment agreements with us that contain non-competition provisions, non-solicitation and nondisclosure covenants. However, if any dispute arises between our executive officers and key personnel and us, such non-competition, non-solicitation and non-disclosure provisions might not provide effective protection to us, especially in China, where most of these executive officers and key employees reside, in light of the uncertainties with China’s legal system.

 

25

 

 

We may be unable to maintain our existing relationships with our content providers or to build new relationships with other content providers.

 

Our success depends significantly on our ability to maintain our existing relationships with the third parties who provide healthcare information, education, and training content for our library and courses and our ability to build new relationships with other content partners. Most of our agreements with content providers are on a case-by-case basis. We generate our resource library of content providers, most of whom are healthcare experts working in leading Chinese hospital or well-known universities. Every time we have a need for content production, we will search in our resource library and reach out to the relevant experts for content production. Upon the completion of the content production, we will send over a standard form of service order to the experts evidencing such completion and ask for their best ways for the service payment. Our content partners usually receive their service payment within one week days after we receive the signed copies of the service orders. If a significant number of our content providers refuse to cooperate with us, it could result in a reduction in the number of courses we are able to produce and decreased revenues. Most of our agreements with our content partners are also non-exclusive, and our competitors offer, or could offer, healthcare information, education, and training content that is similar to or the same as ours. If our current content partners offer information to users or our competitors on more favorable terms than those offered to us or increase our service fees, our competitive position and our profit margins and prospects could be harmed. In addition, the failure by our content partners to deliver high-quality content and to continuously upgrade their content in response to user demand and evolving healthcare advances and trends could result in user dissatisfaction and inhibit our ability to attract users.

 

If we fail to provide high-quality and reliable content in a cost-effective manner, we may not be able to attract and retain users to remain competitive.

 

Our success depends on our ability to maintain and grow user engagement on our platform. To attract and retain users and compete against our competitors, we must continue to offer high-quality and reliable content to provide our users with a superior healthcare information, education, and training service experience. To this end, we must continue to produce original content and source new professional and user-generated content in a cost effective manner. Given that we operate in a rapidly evolving industry, we need to anticipate industry changes and respond to such changes timely and effectively. If we fail to continue to offer high-quality and reliable content to our users, we may suffer from reduced user traffic and engagement, and our business, financial condition and results of operations may be materially and adversely affected.

 

In addition to content generated by our users and content partners, we rely on our in-house team to create original content and to edit, manage, and supervise the original content origination and production process, and we intend to continue to invest resources in content production. We face competition for qualified personnel in a limited pool of high-quality creative talent. If we are not able to compete effectively for talents or attract and retain top talents at reasonable costs, our original content production capabilities would be negatively impacted. Any deterioration in our in-house content production capability, inability to attract creative talents at reasonable costs or losses in personnel may materially and adversely affect our business and operating results.

 

We generate a significant portion of our revenues from a relatively small number of major customers and loss of business from these customers could reduce our revenues and significantly harm our business.

 

We believe that in the foreseeable future we will continue to derive a significant portion of our revenues from a small number of major customers.   For the years ended December 31, 2018 and 2017, a customer accounted for 38% and 55% of the Company’s total revenues, respectively. Our ability to maintain close relationships with these and other major customers is essential to the growth and profitability of our business. However, the volume of work performed for a specific client is likely to vary from year to year, especially when we are not our customers’ exclusive healthcare information, education, and training services provider and we do not have long-term commitments from any of our customers to purchase our services. A major client in one year may not provide the same level of revenues for us in any subsequent year. The healthcare information, education, and training services we provide to our customers, and the revenues and income from those services, may decline or vary as the type and quantity of healthcare information, education, and training services we provide changes over time. In addition, our reliance on any individual client for a significant portion of our revenues may give that client a certain degree of pricing leverage against us when negotiating contracts and terms of service. In addition, a number of factors other than our performance could cause the loss of or reduction in business or revenues from a client, and these factors are not predictable. These factors may include corporate restructuring, pricing pressure, changes to its outsourcing strategy, switching to another services provider or returning work in-house. In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. The loss of any of our major customers could adversely affect our financial condition and results of operations.

 

26

 

 

We expect competition to increase significantly in the future which could reduce our revenues, potential profits and overall market share.

 

The market for traditional and online healthcare information, education, and training services is competitive. Barriers to entry on the Internet are relatively low, and we expect competition to increase significantly in the future. We face competitive pressures from certain actual and potential competitors, both online and onsite, many of which have longer operating histories, greater brand name recognition, larger user bases and significantly greater financial, technical and marketing resources than we do. We cannot assure you that healthcare information, education, and training education services maintained by our existing and potential competitors will not be perceived by the healthcare community as being superior to ours.

 

We may be unable to adequately develop our systems, processes and support in a manner that will enable us to meet the demand for our services.

 

We have initiated our online operations in the recent 7 years and are developing our ability to provide our courses and education systems on a transactional basis over the Internet. Our future success will depend on our ability to develop the infrastructure effectively, including additional hardware and software, and implement the services, including customer support, necessary to meet the demand for our services. In the event we are not successful in developing the necessary systems and implementing the necessary services on a timely basis, our revenues could be adversely affected, which would have a material adverse effect on our financial condition.

 

We may lose business if we are unable to keep up with rapid technological or other changes.

 

If we are unable to keep up with changing technology and other factors related to our market, we may be unable to attract and retain users and advertisers, which would reduce our revenues. The markets in which we compete are characterized by rapidly changing technology, evolving technological standards in the industry, frequent new service and product announcements and changing consumer demands. Our future success will depend on our ability to adapt to these changes and to continuously improve the performance, features and reliability of our service in response to competitive services and product offerings and the evolving demands of the marketplace. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our services or infrastructure, which might impact our ability to become or remain profitable.

 

If we are unable to collect our receivables from our customers, our results of operations and cash flows could be adversely affected.

 

Our business depends on our ability to successfully obtain payment from our customers of the amounts they owe us for work performed. As of December 31, 2018 and 2017, our accounts receivable balance amounted to approximately $1,993,237 and $1,301,810, respectively. As of December 31, 2018 and 2017, we had no doubtful allowance on accounts receivable. Since we generally do not require collateral or other security from our customers, we establish an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific customers. However, actual losses on client receivables balance could differ from those that we anticipate and as a result we might need to adjust our allowance. There is no guarantee that we will accurately assess the creditworthiness of our customers. Macroeconomic conditions, including related turmoil in the global financial system, could also result in financial difficulties for our customers, including limited access to the credit markets, insolvency or bankruptcy, and as a result could cause customers to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. As a result, an extended delay or default in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. If we are unable to collect our receivables from our customers in accordance with the contracts with our customers, our results of operations and cash flows could be adversely affected.

 

27

 

 

The growth and success of our business depends on our ability to anticipate and develop new services and enhance existing services in order to keep pace with rapid changes in technology and in the industries we focus on.

 

The market for our services is characterized by rapid technological change, evolving industry standards, changing client preferences and new product and service introductions. Our future growth and success depend significantly on our ability to anticipate developments in healthcare information, education, and training services, and develop and offer new product and service lines to meet our customers’ and end-users’ evolving needs. We may not be successful in anticipating or responding to these developments in a timely manner, or if we do respond, the services or technologies we develop may not be successful in the marketplace. The development of some of the services and technologies may involve significant upfront investments and the failure of these services and technologies may result in our being unable to recover these investments, in part or in full. Further, services or technologies that are developed by our competitors may render our services uncompetitive or obsolete. In addition, new technologies may be developed that allow our customers to more cost-effectively perform the services that we provide, thereby reducing demand for our services. Should we fail to adapt to the rapidly changing healthcare information, education, and training services market or if we fail to develop suitable services to meet the evolving and increasingly sophisticated requirements of our customers in a timely manner, our business and results of operations could be materially and adversely affected.

  

If we do not succeed in attracting new customers for our services or growing revenues from existing customers, we may not achieve our revenue growth goals.

 

We plan to significantly expand the number of customers we serve to diversify our client base and grow our revenues. Revenues from a new client often rise quickly over the first several years following our initial engagement as we expand the services that we provide to that client. Therefore, obtaining new customers is important for us to achieve rapid revenue growth. We also plan to grow revenues from our existing customers by identifying and selling additional services to them. Our ability to attract new customers, as well as our ability to grow revenues from existing customers, depends on a number of factors, including our ability to offer high quality services at competitive prices, the strength of our competitors and the capabilities of our sales and marketing teams. If we are not able to continue to attract new customers or to grow revenues from our existing customers in the future, we may not be able to grow our revenues as quickly as we anticipate or at all.

  

As a result of our significant recent growth, evaluating our business and prospects may be difficult and our past results may not be indicative of our future performance.

 

Our future success depends on our ability to significantly increase revenue and maintain profitability from our operations. Our business has grown and evolved significantly in recent years. Our growth in recent years makes it difficult to evaluate our historical performance and make a period-to-period comparison of our historical operating results less meaningful. We may not be able to achieve a similar growth rate or maintain profitability in future periods. Therefore, you should not rely on our past results or our historic rate of growth as an indication of our future performance. You should consider our future prospects in light of the risks and challenges encountered by a company seeking to grow and expand in a competitive industry that is characterized by rapid technological change, evolving industry standards, changing client preferences and new product and service introductions. These risks and challenges include, among others:

 

the uncertainties associated with our ability to continue our growth and maintain profitability;

 

  preserving our competitive position in the healthcare information, education, and training services industry in China;

 

28

 

 

  offering consistent and high-quality services to retain and attract customers;

 

  implementing our strategy and modifying it from time to time to respond effectively to competition and changes in client preferences;

 

  managing our expanding operations and successfully expanding our solution and service offerings;

 

  responding in a timely manner to technological or other changes in the healthcare information, education, and training services industry;

 

  managing risks associated with intellectual property; and

 

  recruiting, training, developing and retaining qualified managerial and other personnel.

 

If we are unsuccessful in addressing any of these risks or challenges, our business may be materially and adversely affected.

 

Our profitability will suffer if we are not able to maintain our resource utilization levels or continue to improve our productivity levels.

 

Our gross margin and profitability are significantly impacted by our utilization of human resources as well as other resources, such as computers, IT infrastructure and office space, and our ability to increase our productivity levels. We have expanded our operations significantly in recent years through organic growth, which has resulted in a significant increase in our headcount and fixed overhead costs. We may face difficulties maintaining high levels of utilization, especially for our newly established businesses and resources. The framework agreements with some of our customers typically do not impose a minimum or maximum purchase amount and allow our customers to place service orders from time to time at their discretion. Customers demand is varied and it may fall to zero or surge to a level that we cannot cost-effectively satisfy. Although we try to use all commercially reasonable efforts to accurately estimate service orders and resource requirements from our customers, we may overestimate or underestimate, which may result in unexpected cost and strain or redundancy of our human capital and adversely effects on our utilization ability. Our ability to continually increase our productivity levels depends significantly on our ability to recruit, train, develop and retain high-performing professionals, staff projects appropriately and optimize our mix of services and delivery methods. If we experience a slowdown or stoppage of work for any client or on any project for which we have dedicated professionals or facilities, we may not be able to efficiently reallocate these professionals and facilities to other customers and projects to keep their high utilization and productivity levels. If we are not able to maintain high resource utilization levels without corresponding cost reductions or price increases, our profitability will suffer.

 

Increases in wages for professionals in China could prevent us from sustaining our competitive advantage and could reduce our profit margins.

 

Part of our most significant costs are the salaries and other compensation expenses for our medical professionals and other employees. Wage costs for professionals in China are lower than those in more developed countries and India. However, because of rapid economic growth, increased productivity levels, and increased competition for skilled employees and consultants in China, wages for highly skilled employees in China, in particular middle- and senior-level managers, are increasing at a faster rate than in the past. We may need to increase the levels of employee and consultant compensation more rapidly than in the past to remain competitive in retaining the quality and attracting number of employees that our business requires. Increases in the wages and other compensation we pay our employees and consultants in China could reduce our competitive advantage unless we are able to increase the efficiency and productivity of our professionals as well as the prices we can charge for our services. In addition, any appreciation in the value of the Renminbi relative to U.S. dollar and other foreign currencies will cause an increase in the relative wage levels in China, which could further reduce our competitive advantage and adversely impact our profit margin.

 

29

 

 

We must continue to upgrade our technology infrastructure, or we will be unable to effectively meet demand for our services.

 

We must continue to add hardware and enhance software to accommodate the increasing content in our library and increasing use of our websites, mobile apps, and Wechat accounts. In order to make timely decisions about hardware and software enhancements, we must be able to accurately forecast the growth in demand for our services. This growth in demand for our services could be difficult to forecast and the potential audience of our services is large. If we are unable to increase the data storage and processing capacity of our systems at least as fast as the growth in demand, our systems may become unstable and may fail to operate for unknown periods of time. Unscheduled downtime could harm our business and also could discourage current and potential end users and reduce future revenues.

 

Our data and web server systems may stop working or work improperly due to natural disasters, failure of third-party services and other unexpected problems.

 

An unexpected event like a power or telecommunications outage, fire, flood or earthquake at our on-site data facility or at our Internet service providers’ facilities could cause the loss of critical data and prevent us from offering our services. Currently we don’t have any business interruption insurance to compensate us for losses that may occur. In addition, we rely on third parties to securely store our archived data, house our Web server and network systems and connect us to the Internet. The failure by any of these third parties to provide these services satisfactorily and our inability to find suitable replacements would impair our ability to access archives and operate our systems.

 

Our computer networks may be vulnerable to security risks that could disrupt our services and adversely affect our results of operations.

 

Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems caused by unauthorized access to, or improper use of, systems by third parties or employees. A hacker who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. Although we intend to continue to implement security measures, computer attacks or disruptions may jeopardize the security of information stored in and transmitted through our computer systems. Actual or perceived concerns that our systems may be vulnerable to such attacks or disruptions may deter our customers from using our platforms or services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches.

 

Data networks are also vulnerable to attacks, unauthorized access and disruptions. For example, in a number of public networks, hackers have bypassed firewalls and misappropriated confidential information. It is possible that, despite existing safeguards, an employee could misappropriate our customers’ proprietary information or data, exposing us to a risk of loss or litigation and possible liability. Losses or liabilities that are incurred as a result of any of the foregoing could have a material adverse effect on our business.

 

We may lose users and lose revenues if our cyber security measures fail.

 

If the security measures that we use to protect personal information are ineffective, we may lose users of our services, which could reduce our revenues. We rely on security and authentication technology licensed from third parties. We cannot predict whether these security measures could be circumvented by new technological developments. In addition, our software, databases and servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to spend significant resources to protect against security breaches or to alleviate problems caused by any breaches. We cannot assure you that we can prevent all cyber security breaches.

 

30

 

 

We depend significantly on the strength of our brand and reputation. Any failure to maintain and enhance, or any damage to, our brand image or reputation could materially and adversely affect our business, results of operations, financial condition and prospects.

 

Our reputation and brand recognition, which depend on cultivating awareness, trust and confidence among our current or potential users, is critical to the success of our business. We believe a well-recognized brand is crucial to increasing our user base and, in turn, facilitating our effort to monetize our services and enhancing our attractiveness to our users and service providers. Our reputation and brand are vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate. Regulatory inquiries or investigations, lawsuits and other claims in the ordinary course of our business, perceptions of conflicts of interest and rumors, including complaints made by our competitors, among other things, could substantially damage our reputation, even if they are baseless or satisfactorily addressed.

 

In addition, any perception that the quality of our healthcare information, education, and training services may not be the same as or better than that of other healthcare information, education, and training service platforms can damage our reputation. Any negative media publicity about any of the services available on our platform or product or service quality problems at other healthcare training service platforms, including at our competitors, may also negatively impact our reputation and brand. Negative perceptions of healthcare information, education, and training solutions and services, or the industry in general, may reduce the number of users coming to our platform and the number of transactions conducted through our platform, which would adversely impact our revenues and liquidity position.

 

We may not be able to prevent others from unauthorized use of our intellectual property, which could cause a loss of customers, reduce our revenues and harm our competitive position.

 

We rely on a combination of copyright, trademark, software registration, anti-unfair competition and trade secret laws, as well as confidentiality agreements and other methods to protect our intellectual property rights. To protect our trade secrets and other proprietary information, employees, customers, subcontractors, consultants, advisors and collaborators are required to enter into confidentiality agreements. These agreements might not provide effective protection for the trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Implementation of intellectual property-related laws in China has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as those in the United States or other developed countries, and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of our proprietary technology. Unauthorized copying, other misappropriation, or negligent or accidental leakage of our proprietary technologies could enable third parties to benefit from our technologies without obtaining our consent or paying us for doing so, which could harm our business and competitive position. Though we are not currently involved in any litigation with respect to intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.

 

31

 

  

We may face intellectual property infringement claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such claims, we may lose significant intellectual property rights and may be unable to continue providing our existing services.

 

Our success largely depends on our ability to use and develop our technology and services without infringing the intellectual property rights of third parties, including copyrights, trade secrets and trademarks. We may be subject to risk related to potential infringement claims of the copyrights, as the copyrights of our some medical education courses developed by us belong to our customers or share with our customers based on agreements. For example, pursuant to the Copyright Law of the PRC, providing the public with works by wired or wireless means, so as to make the public able to respectively obtain the works at the individually selected time and place, without permission from the owner of the copyrights therein shall constitute infringements of copyrights. The infringer shall, according to the circumstances of the case, undertake to cease the infringement, take remedial action, and offer an apology, pay damages, etc. We may be subject to litigation involving claims of violation of other intellectual property rights of third parties. We may be unaware of intellectual property registrations or applications relating to our services that may give rise to potential infringement claims against us. There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by third parties which may damage our ability to rely on such technologies. We are subject to additional risks as a result of our hiring of new employees who may misappropriate intellectual property from their former employers. Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology involving the allegedly infringing intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. A successful infringement claim against us, whether with or without merit, could, among others things, require us to pay substantial damages, develop non-infringing technology, or re-brand our name or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and cease making, licensing or using products that have infringed a third party’s intellectual property rights. Protracted litigation could also result in existing or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation, or could require us to indemnify our customers against infringement claims in certain instances. Any intellectual property claim or litigation in this area, whether we ultimately win or lose, could damage our reputation and have a material adverse effect on our business, results of operations or financial condition.

 

Disruptions in telecommunications or significant failure in our IT systems could harm our service model, which could result in a reduction of our revenue.

 

A significant element of our business strategy is to continue to leverage and expand our branches strategically located in China. We believe that the use of a strategically located network of branches will provide us with cost advantages, the ability to attract highly skilled personnel in various regions of the country and the world, and the ability to serve customers on a regional and global basis. Part of our service model is to maintain active voice and data communications, financial control, accounting, customer service and other data processing systems between our main offices in Shanghai, our customers’ locations, and our other branches and support facilities. Our business activities may be materially disrupted in the event of a partial or complete failure of any of these IT or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks, conversion errors due to system upgrading, damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry or other events beyond our control. Loss of all or part of the systems for a period of time could hinder our performance or our ability to complete client projects on time which, in turn, could lead to a reduction of our revenue or otherwise have a material adverse effect on our business and business reputation. We may also be liable to our customers for breach of contract for interruptions in service.

 

We may be liable to third parties for content that is available from our online library.

 

We may be liable to third parties for the content in our online library if the text, graphics, software or other content in our library violates copyright, trademark, or other intellectual property rights, our content partners violate their contractual obligations to others by providing content to our library or the content does not conform to accepted standards of care in the healthcare profession. We may also be liable for anything that is accessible from our Website through links to other Websites. We attempt to minimize these types of liabilities by requiring representations and warranties relating to our content partners’ ownership of, the rights to distribute as well as the accuracy of their content. We also take necessary measures to review this content ourselves. Although our agreements with our content partners contain provisions providing for indemnification by the content providers in the event of inaccurate content, we cannot assure you that our content partners will have the financial resources to meet this obligation. Alleged liability could harm our business by damaging our reputation, requiring us to incur legal costs in defense, exposing us to awards of damages and costs and diverting management’s attention away from our business. See “Business -- Intellectual Property Rights” for a more complete discussion of the potential effects of this liability on our business.

 

32

 

 

Any reduction in the regulation of continuing education and training in the healthcare industry may adversely affect our business.

 

Our business model is dependent in part on required training and continuing education for healthcare professionals and other healthcare workers resulting from regulations of Chinese Health Department. Any change in these regulations which reduce the demands for continuing education and training for the healthcare industry could harm our business.

 

We may need additional capital and any failure by us to raise additional capital on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our service offerings to respond to market demand or competitive challenges.

 

We believe that our current cash, cash flow from operations and the proceeds from this offering should be sufficient to meet our anticipated cash needs for at least the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financing covenants that would restrict our operations. Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

 

investors’ perception of, and demand for, securities of technology services outsourcing companies;

 

  conditions of the U.S. and other capital markets in which we may seek to raise funds;

 

  our future results of operations and financial condition;

 

  PRC government regulation of foreign investment in China;

 

  economic, political and other conditions in China; and

 

  PRC government policies relating to the borrowing and remittance outside China of foreign currency.

 

Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to grow our business and develop or enhance our product and service offerings to respond to market demand or competitive challenges.

  

We may incur losses resulting from business interruptions resulting from occurrence of natural disasters, health epidemics and other outbreaks or events.

 

Our operational facilities may be damaged in natural disasters such as earthquakes, floods, heavy rains, sand storms, tsunamis and cyclones, or other events such as fires. Such natural disasters or other events may lead to disruption of information systems and telephone service for sustained periods. Damage or destruction that interrupts our provision of outsourcing services could damage our relationships with our customers and may cause us to incur substantial additional expenses to repair or replace damaged equipment or facilities. We may also be liable to our customers for disruption in service resulting from such damage or destruction. Prolonged disruption of our services as a result of natural disasters or other events may also entitle our customers to terminate their contracts with us. We currently do not have insurance against business interruptions.

 

33

 

 

Fluctuation in the value of the Renminbi and other currencies may have a material adverse effect on the value of your investment.

 

Our financial statements are expressed in U.S. dollars. However, a majority of our revenues and expenses are denominated in Renminbi (RMB). Our exposure to foreign exchange risk primarily relates to the limited cash denominated in currencies other than the functional currencies of each entity. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. However, the value of your investment in our Class A Ordinary Shares will be affected by the foreign exchange rate between U.S. dollars and RMB because the primary value of our business is effectively denominated in RMB, while the Class A Ordinary Shares will be traded in U.S. dollars.

 

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rate and achieve certain exchange rate targets, and through such intervention kept the U.S. dollar-RMB exchange rate relatively stable.

 

As we may rely on dividends paid to us by our PRC subsidiaries and branches, any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of any dividends payable on our Class A Ordinary Shares in foreign currency terms. For example, to the extent that we need to convert U.S. dollars we receive from this offering into for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our common share or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Furthermore, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign exchange losses in the future. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert into foreign currencies.

 

Fluctuations in exchange rates could adversely affect our business and the value of our securities.

  

Changes in the value of the RMB against the U.S. dollar, euro and other foreign currencies are affected by, among other things, changes in China political and economic conditions. Any significant revaluation of the RMB may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on our shares in the U.S. dollar terms. For example, to the extent that we need to convert U.S. dollar we receive from our offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollar for the purpose of paying dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

 

Since July 2005, the RMB is no longer pegged to the U.S. dollar, although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

 

Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

 

34

 

 

We have identified material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

 

In connection with audits of our financial statements for the fiscal years ended December 31, 2018 and 2017, our management identified a material weakness in the design and operation of our internal controls because:

 

The Company lacked of the key monitoring mechanisms such as internal control department to oversee and monitor Company’s risk management, business strategies and financial reporting procedures, also we did not have adequately designed and documented management review controls to properly detect and prevent certain accounting errors and omitted disclosures in the footnotes to the consolidated financial statements;

 

The Company lacked of sufficient resources and expertise with US GAAP and the SEC reporting experiences in the accounting department to provide accurate information on a timely manner.

 

As defined under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

 

In addition, in order to address the material weakness in internal control over financial reporting of the Company, we have: (a) hired an experienced outside consultant with adequate experience with US GAAP and the SEC reporting and compliance requirements. (b) continued our efforts to provide ongoing training courses in US GAAP to existing personnel, including our Chief Financial Officer; (c) continued our efforts to set up the internal audit department, and enhance the effectiveness of the internal control system; and (d) continued our efforts to implement necessary review and controls at related levels and all important documents and contracts will be submitted to the office of its chief executive officer for retention.

 

All internal control systems, no matter how well designed, have inherent limitations including the possibility of human error and the circumvention or overriding of controls. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

We cannot be certain that these measures will successfully remediate the material weakness or that other material weaknesses will not be discovered in the future. If our efforts are not successful or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately on a timely basis or help prevent fraud, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the market price of our ordinary shares to decline. In addition, it could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our securities. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods. Because of our status as an emerging growth company, you will not be able to depend on any attestation from our independent registered public accountants as to our internal control over financial reporting for the foreseeable future.

 

If major mobile application distribution channels change their standard terms and conditions in a manner that is detrimental to us, or suspend or terminate their existing relationship with us, our business, financial condition and results of operations may be materially and adversely affected.

 

We currently cooperate with Apple’s app store and major PRC-based Android app stores to distribute our MDMOOC and Sunshine Health Forum mobile application to users. As such, the promotion, distribution and operation of our application are subject to such distribution platforms’ standard terms and policies for application developers, which are subject to the interpretation of, and frequent changes by, these distribution channels. If these third-party distribution platforms change their terms and conditions in a manner that is detrimental to us, or refuse to distribute our application, or if any other major distribution channel with which we would like to seek collaboration refuses to collaborate with us in the future on commercially favorable terms, our business, financial condition and results of operations may be materially and adversely affected.

 

35

 

 

Our activities may expose us to malpractice liability and other liability inherent in healthcare delivery.

 

We may be exposed to malpractice or other liability against which we may not be adequately insured, resulting in a decline in our financial results. A court or government agency may take the position that our delivery of health information directly, including through licensed physicians, or information delivered by a third-party site that a consumer accesses through our Website, exposes us to malpractice or other personal injury liability for wrongful delivery of healthcare services or erroneous health information. The amount of insurance we maintain with insurance carriers may not be sufficient to cover all of the losses we might incur from these claims and legal actions. In addition, insurance for some risks is difficult, impossible or too costly to obtain, and as a result, we may not be able to purchase insurance for some types of risks.

 

Healthcare reforms and the cost of regulatory compliance could negatively affect our business.

 

The healthcare industry is heavily regulated in China. Various laws, regulations and guidelines promulgated by government, industry and professional associations affect, among other matters, the provision, licensing, labeling, marketing, promotion and reimbursement of healthcare services and products, including pharmaceutical products. Our failure or our customers’ failure to comply with any applicable regulatory requirements or industry guidelines could:

 

- limit or prohibit business activities;

 

- subject us or our customers to adverse publicity; or

 

- increase the costs of regulatory compliance or subject us or our customers to monetary fines or other penalties.

 

Some of PRC laws have been applied to the marketing and promotional practices of pharmaceutical manufacturers, to payments to physicians for services and to other benefits to physicians, and could constrain our relationships, including financial, marketing and continuing medical education relationships, with our sponsors and advertisers and with physicians, including any physicians who perform services for us. It is possible that additional or changed laws, regulations or guidelines could be adopted in the future.

 

In addition, implementation of government healthcare reform may adversely affect promotional and marketing expenditures by pharmaceutical enterprises, which could decrease the business opportunities available to us.

 

The Internet is subject to many legal uncertainties and potential government regulations that may decrease demand for our services, increase our cost of doing business or otherwise have a material adverse effect on our financial results or prospects.

 

Any new law or regulation pertaining to the Internet or online publication, or the application or interpretation of existing laws, could decrease demand for our services, increase our cost of doing business or otherwise have a material adverse effect on our financial results and prospects.

 

New laws and regulations or the application or interpretation of existing laws and regulations pertaining to the Internet or online publication may be adopted by PRC regulatory authorities in the future that address Internet-related issues, including online content, user privacy, pricing and quality of products and services. For example, due to the ambiguity of the definition of “online publishing service,” the online distribution of content, including our online services, the courseware or audio-visual contents uploaded by the users in MDMOOC platforms, through our website or mobile apps, may be regarded as “online publishing service” and therefore we may be required to obtain an Online Publishing License in the future.

 

36

 

 

The United States or foreign nations may adopt legislation aimed at protecting Internet users’ privacy. This legislation could increase our cost of doing business and negatively affect our financial results. Moreover, it may take years to determine the extent to which existing laws governing issues like property ownership, libel, negligence and personal privacy are applicable to the Internet. Currently, U.S. privacy law consists of disparate state and federal statutes regulating specific industries that collect personal data. Most of them predate and therefore do not specifically address online activities. In addition, a number of comprehensive legislative and regulatory privacy proposals are now under consideration by federal, state and local governments in the United States.

 

Our future growth depends on the further acceptance of the Internet and particularly the mobile Internet as an effective platform for assessing healthcare training services and content.

 

While the Internet and the mobile Internet have gained increased popularity in China as platforms for online healthcare training and information sharing in recent years, many users have limited experience in accessing healthcare training services or healthcare information online. For example, users may not consider online content to be reliable sources of healthcare information. If we fail to educate users about the value of our content, our platform and our services, our growth may be limited and our business, financial performance and prospects may be materially and adversely affected. The further acceptance of the internet and the mobile internet as an effective and efficient platform for healthcare information sharing and training content is also affected by factors beyond our control, including negative publicity around online healthcare training or information sharing services and potential restrictive regulatory measures taken by the PRC government. If online and mobile networks do not achieve adequate acceptance in the market, our growth prospects, results of operations and financial condition could be harmed.

 

PRC laws that protect individual information may limit our plans to collect, use and disclose that information.

 

If we fail to comply with current or future laws or regulations governing the collection, dissemination, use and confidentiality of users’ health information, this failure could have a material adverse effect on our business, operating results and financial condition.

 

End users sometimes enter private health information about themselves or their family members when using our services. Also, our systems record use patterns when End users access our databases that may reveal health-related information or other private information about the users. Certain PRC laws and regulations govern collection, dissemination, use and confidentiality of users’ private information. For example, General Provisions of the Civil Law of the PRC which stipulates that the personal information of a natural person shall be protected by laws, any organization or individual that needs to obtain the personal information of others shall obtain such information pursuant to the law and ensure information security, and may neither illegally collect, use, transmit the personal information of others, nor illegally trade, provide or disclose the personal information of others.

 

The PRC government has been considering proposed legislation that would establish a new standard for protection and use of health information. In addition, the laws of other countries also govern the use of and disclosure of health information. Our systems for safeguarding users’ health information from unauthorized disclosure or use may not preclude successful claims against us for violation of applicable law. Other third-party sites that users access through our site also may not maintain systems to safeguard this health information. In some cases, we may place our content on computers that are under the physical control of others, which may increase the risk of an inappropriate disclosure of health information. For example, we may contract out the hosting of our Website to a third party. In addition, future laws or changes in current laws may necessitate costly adaptations to our systems.

 

We intend to develop medical information systems and market research services that we will use to collect, analyze and report aggregate medical care, medical research, outcomes and financial data pertaining to items such as prescribing patterns and usage habits. Because this area of the law is rapidly changing, our collection, analysis and reporting of aggregate healthcare data maintained in our database may not at all times and in all respects comply with laws or regulations governing the ownership, collection and use of this data. Future laws or changes in current laws governing the ownership, collection and use of aggregate healthcare data may necessitate costly adaptations to our systems or limit our ability to use this data.

 

37

 

 

RISKS RELATED TO OUR CORPORATE STRUCTURE

 

We will likely not pay dividends in the foreseeable future.

 

Dividend policy is subject to the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements and other factors. There is no assurance that our Board of Directors will declare dividends even if we are profitable. The payment of dividends by entities organized in China is subject to limitations as described herein. Under Cayman Islands law, we may only pay dividends from profits of the Company, or credits standing in the Company’s share premium account, and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our Company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. Pursuant to the Chinese enterprise income tax law, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of 10%. Similarly, dividends payable by a foreign investment entity to its Hong Kong investor who owns 25% or more of the equity of the foreign investment entity is subject to a withholding tax of 5%. The payment of dividends by entities organized in China is subject to limitations, procedures and formalities. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. The transfer to this reserve must be made before distribution of any dividend to shareholders.

 

The dual class structure of our ordinary shares has the effect of concentrating voting control with our CEO, directors and their affiliates.

 

Our Class B Ordinary Share has 15 votes per share, and our Class A Ordinary Share, which is the share we are offering in our initial public offering, has 1 vote per share. The shareholder who holds shares of Class B Ordinary Shares will hold approximately [●]% of the voting power of our outstanding ordinary shares following our initial public offering. Because of the fifteen-to-one voting ratio between our Class B and Class A Ordinary Shares, the holder of our Class B Ordinary Shares will continue to control a majority of the combined voting power of our ordinary share and therefore be able to control all matters submitted to our shareholders for approval so long as the shares of Class B Ordinary Shares represent at least [●]% of all outstanding shares of our Class A and Class B Ordinary Shares. This concentrated control will limit your ability to influence corporate matters for the foreseeable future.

 

Future transfers by the holder of Class B Ordinary Shares will generally result in those shares converting to Class A Ordinary Shares, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B Ordinary Shares to Class A Ordinary Shares will have the effect, over time, of increasing the relative voting power of those holders of Class B Ordinary Shares who retain their shares in the long term. If, for example, Mr. Weiguang Yang retains a significant portion of his holdings of Class B Ordinary Share for an extended period of time, he could, in the future, continue to control a majority of the combined voting power of our Class A Ordinary Shares and Class B Ordinary Shares. For a description of the dual class structure, see “Description of Capital Stock—Anti-Takeover Provisions.”

 

Our CEO has control over key decision making as a result of his control of a majority of our voting shares.

 

Our Founder, CEO, and our Chairman of the Board, Mr. Weiguang Yang, and his affiliates which he deemed to have control and/or have substantial influence will be able to exercise full voting rights with respect to an aggregate of 5,497,715 Class B Ordinary Shares and 4,203,385 Class A Ordinary Shares, representing a majority of the voting power of our outstanding ordinary shares following our initial public offering. As a result, Mr. Yang has the ability to control the outcome of matters submitted to our shareholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr. Yang has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors. Additionally, in the event that Mr. Yang controls our company at the time of his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer, Mr. Yang owes a fiduciary duty to our shareholders and must act in good faith in a manner he reasonably believes to be in the best interests of our shareholders. As a shareholder, even a controlling shareholder, Mr. Yang is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our shareholders generally. For a description of the voting rights, see “Description of Share Capital—Voting Rights.”

 

38

 

 

As a “controlled company” under the rules of the NASDAQ Capital Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.

 

Prior to the completion of this Offering, our directors and officers beneficially own a majority of the voting power of our outstanding Class A Ordinary Shares. Even if we raise the maximum offering amount, we may continue to be a “controlled company.” Under the Rule 4350(c) of the NASDAQ Capital Market, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors be independent, as defined in the NASDAQ Capital Market Rules, and the requirement that our compensation and nominating and corporate governance committees consist entirely of independent directors. Although we do not intend to rely on the “controlled company” exemption under the Nasdaq listing rules, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, during any time while we remain a controlled company relying on the exemption and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the NASDAQ Capital Market corporate governance requirements. Our status as a controlled company could cause our Class A Ordinary Share to look less attractive to certain investors or otherwise harm our trading price.

 

We depend upon the VIE Arrangements in conducting our business in China, which may not be as effective as direct ownership.

 

Our affiliation with Zhongchao Shanghai is managed through the VIE Arrangements, which agreements may not be as effective in providing us with control over Zhongchao Shanghai as direct ownership. The VIE Arrangements are governed by and would be interpreted in accordance with the laws of the People’s Republic of China, or the PRC. If Zhongchao Shanghai fails to perform the obligations under the VIE Arrangements, we may have to rely on legal remedies under the laws of the PRC, including seeking specific performance or injunctive relief, and claiming damages. There is a risk that we may be unable to obtain any of these remedies. The legal environment in the PRC is not as developed as in other jurisdictions. As a result, uncertainties in the PRC legal system could limit our ability to enforce the VIE Arrangements, or could affect the validity of the VIE Arrangements.

 

We may not be able to consolidate the financial results of some of our affiliated companies or such consolidation could materially adversely affect our operating results and financial condition.

 

All of our business is conducted through Zhongchao Shanghai, which is considered a VIE for accounting purposes, and we, through Zhongchao WFOE, are considered the primary beneficiary, thus enabling us to consolidate our financial results in our consolidated financial statements. In the event that in the future a company we hold as a VIE no longer meets the definition of a VIE under applicable accounting rules, or we are deemed not to be the primary beneficiary, we would not be able to consolidate line by line that entity’s financial results in our consolidated financial statements for reporting purposes. Also, if in the future an affiliate company becomes a VIE and we become the primary beneficiary, we would be required to consolidate that entity’s financial results in our consolidated financial statements for accounting purposes. If such entity’s financial results were negative, this would have a corresponding negative impact on our operating results for reporting purposes.

 

39

 

 

Because we rely on the VIE Arrangements for our revenue, the termination of these agreements would severely and detrimentally affect our continuing business viability under our current corporate structure.

 

We are a holding company and all of our business operations are conducted through the VIE Arrangements. Zhongchao Shanghai may terminate the VIE Arrangements for any or no reason at all. Because neither we, nor our subsidiaries, own equity interests of Zhongchao Shanghai, the termination of the VIE Arrangements would sever our ability to receive payments from Zhongchao Shanghai under our current holding company structure. While we are currently not aware of any event or reason that may cause the VIE Arrangements to terminate, we cannot assure you that such an event or reason will not occur in the future. In the event that the VIE Arrangements are terminated, this would have a severe and detrimental effect on our continuing business viability under our current corporate structure, which, in turn, may affect the value of your investment.

 

VIE Arrangements in relation to our VIE may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIE owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE Arrangements were not entered into on an arm’s-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIE in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIE for PRC tax purposes, which could in turn increase its tax liabilities without reducing our subsidiary’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIE for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our VIE’s tax liabilities increase or if it is required to pay late payment fees and other penalties.  

 

We conduct our business through Zhongchao Shanghai by means of VIE Arrangements. If the PRC courts or administrative authorities determine that these VIE Arrangements do not comply with applicable regulations, we could be subject to severe penalties and our business could be adversely affected. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

 

There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including the laws, rules and regulations governing the validity and enforcement of the VIE Arrangements between Zhongchao WFOE and Zhongchao Shanghai. We have been advised by our PRC counsel, Zong Heng Law Firm,   based on their understanding of the current PRC laws, rules and regulations, that (i) the structure for operating our business in China (including our corporate structure and VIE Arrangements with Zhongchao Shanghai, Zhongchao Shanghai and their shareholders) will not result in any violation of PRC laws or regulations currently in effect; and (ii) the VIE Arrangements among Zhongchao WFOE and Zhongchao Shanghai and their shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect, except that the pledge of equity interest in Zhongchao Shanghai is still pending for registration with the local branch of the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce), before completion of which, the pledge over the equity interests in Zhongchao Shanghai would not be deemed validly created. However, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations concerning foreign investment in the PRC, and their application to and effect on the legality, binding effect and enforceability of the VIE Arrangements. In particular, we cannot rule out the possibility that PRC regulatory authorities, courts or arbitral tribunals may in the future adopt a different or contrary interpretation or take a view that is inconsistent with the opinion of our PRC legal counsel.

 

40

 

 

If any of our PRC entities or their ownership structure or the VIE Arrangements are determined to be in violation of any existing or future PRC laws, rules or regulations, or any of our PRC entities fail to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

 

revoking the business and operating licenses;

 

discontinuing or restricting the operations;

 

imposing conditions or requirements with which the PRC entities may not be able to comply;

 

requiring us and our PRC entities to restructure the relevant ownership structure or operations;

 

restricting or prohibiting our use of the proceeds from this offering to finance our business and operations in China; or

 

imposing fines.

 

The imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our financial condition, results of operations and prospects.

 

The shareholders of our VIE may have actual or potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The shareholders of our VIE may have actual or potential conflicts of interest with us. These shareholders may refuse to sign or breach, or cause our VIE to breach, or refuse to renew, the existing VIE Arrangements we have with them and our VIE, which would have a material and adverse effect on our ability to effectively control our VIE and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with our VIE to be performed in a manner adverse to us by, among other things, failing to remit payments due under the VIE Arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.

 

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which will take effect on January 1, 2020. Since it is relatively new, uncertainties exist in relation to its interpretation and its implementation rules that are yet to be issued. The Foreign Investment Law does not explicitly classify whether variable interest entities that are controlled through VIE Arrangements would be deemed as foreign-invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore it still leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for VIE Arrangements as a form of foreign investment. Therefore, there can be no assurance that our control over our consolidated VIE through VIE Arrangements will not be deemed as foreign investment in the future.

 

41

 

   

The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in a “negative list” that is yet to be published. It is unclear whether the “negative list” to be published will differ from the current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities. If our control over our consolidated VIE through VIE Arrangements are deemed as foreign investment in the future, and any business of our consolidated VIE is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the VIE Arrangements that allow us to have control over our consolidated VIE may be deemed as invalid and illegal, and we may be required to unwind such VIE Arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operation.

 

Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing VIE Arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

 

If any of our affiliated entities becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy assets held by such entity, which could materially and adversely affect our business, financial condition and results of operations.

 

We currently conduct our operations in China through our VIE Arrangements. As part of these arrangements, substantially all of our assets that are significant to the operation of our business are held by our affiliated entities. If any of these entities becomes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. In addition, if any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business, our ability to generate revenue and the market price of our ordinary shares.

 

The approval of the China Securities Regulatory Commission may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot assure you that we will be able to obtain such approval.

 

On August 8, 2006, six Chinese regulatory agencies, including the MOFCOM, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rule”). The M&A Rule contains provisions that require that an offshore special purpose vehicle (“SPV”) formed for listing purposes and controlled directly or indirectly by Chinese companies or individuals shall obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published procedures specifying documents and materials required to be submitted to it by an SPV seeking CSRC approval of overseas listings. However, the application of the M&A Rule remains unclear with no consensus currently existing among leading Chinese law firms regarding the scope and applicability of the CSRC approval requirement. The CSRC has not issued any such definitive rule or interpretation, and we have not chosen to voluntarily request approval under the M&A Rule. If the CSRC requires that we obtain its approval prior to the completion of this offering, the offering will be delayed until we obtain CSRC approval, which may take several months. There is also the possibility that we may not be able to obtain such approval. If prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other Chinese regulatory authorities. These authorities may impose fines and penalties upon our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China, or take other actions that could have a material adverse effect upon our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our Class A Ordinary Shares. The CSRC or other Chinese regulatory agencies may also take actions requiring us, or making it advisable for us, to terminate this offering prior to closing.

 

42

 

 

If we fail to maintain continuing compliance with the PRC state regulatory rules, policies and procedures applicable to our industry, we may risk losing certain preferential tax and other treatments which may adversely affect the viability of our current corporate structure, corporate governance and business operations.

 

The State Council has promulgated several notices since 2000 to launch favorable policies for IT services, such as preferential tax treatments and credit support. Under rules and regulations promulgated by various Chinese government agencies, enterprises that have met specified criteria and are recognized as software enterprises by the relevant government authorities in China are entitled to preferential treatment, including financing support, preferential tax rates, export incentives, discretion and flexibility in determining employees’ welfare benefits and remuneration. Software enterprise qualifications are subject to annual examination. Enterprises that fail to meet the annual examination standards will lose the favorable enterprise income tax treatment. Enterprises exporting software or producing software products that are registered with the relevant government authorities are also entitled to preferential treatment including governmental financial support, preferential import, export policies and preferential tax rates. Companies in China engaging in systems integration are required to obtain qualification certificates from the Ministry of Industry and Information Technology. Companies planning to set up computer information systems may only retain systems integration companies with appropriate qualification certificates. Currently the Company does not engage in information system integration business, therefore the Company is not required to have such qualification certificates. The qualification certificate is subject to review every two years and is renewable every four years. In 2003, the Ministry of Industry and Information Technology promulgated the Amended Appraisal Condition for Qualification Grade of Systems Integration of Computer Information to elaborate the conditions for appraising each of the four qualification grades of systems integration companies. Companies applying for qualification are graded depending on the scale of the work they undertake. The grades range from Grade 1 (highest) to Grade 4 (lowest) in the scale of the work the respective companies can undertake. Companies with Grade 3 qualification can independently undertake projects at the medium-scale and small-scale enterprise level and undertake projects at the large-scale enterprise level in cooperation with other entities. If and to the extent we fail to maintain compliance with such applicable rules and regulations, our operations and financial results may be adversely affected.

 

RISKS RELATED TO DOING BUSINESS IN CHINA

 

Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.

 

The majority of our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between the Renminbi and foreign currencies, and regulate the growth of the general or specific market. While the Chinese economy has experienced significant growth in the past 40 years, growth has been uneven, both geographically and among various sectors of the economy. As the PRC economy has become increasingly linked with the global economy, China is affected in various respects by downturns and recessions of major economies around the world. The various economic and policy measures enacted by the PRC government to forestall economic downturns or bolster China’s economic growth could materially affect our business. Any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China could have a material adverse effect on the overall economic growth of China and market demand for our outsourcing services. Such developments could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our competitive position.

 

43

 

 

Uncertainties with respect to the PRC legal system could have a material adverse effect on us.

 

The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late 1970s, the PRC government has been building a comprehensive system of laws and regulations governing economic matters in general. The overall effect has been to significantly enhance the protections afforded to various forms of foreign investments in China. We conduct our business primarily through our subsidiaries established in China. These subsidiaries are generally subject to laws and regulations applicable to foreign investment in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical, or in some circumstances impossible. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, customers and suppliers. In addition, such uncertainties, including any inability to enforce our contracts, together with any development or interpretation of PRC law that is adverse to us, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other more developed countries. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.

  

We may face risks and uncertainties with respect to the licensing requirement for internet audio-visual programs.

 

On December 20, 2007, the State Administration of Press, Publication, Radio, Film and Television (“SAPPRFT”) and the Ministry of Industry and Information Technology (“MIIT”), jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program Provisions, which became effective on January 31, 2008 and was last amended on August 28, 2015. Among other things, the Audio-Visual Program Provisions stipulated that no entities or individuals may provide internet audio-visual program services without a License for Online Transmission of Audio-Visual Programs issued by SAPPRFT or its local bureaus or completing the relevant registration procedures with SAPPRFT or its local bureaus, and only state-owned or state-controlled entities are eligible to apply for a License for Online Transmission of Audio-Visual Programs. On March 17, 2010, SAPPRFT promulgated the Tentative Categories of Internet Audio-Visual Program Services, or the Categories, clarifying the scope of internet audio-visual programs services, which was amended on March 10, 2017. The making and editing of certain specialized audio-visual programs concerning, among other things, educational content, and broadcasting such content to the general public online is covered in the Categories. However, there are still significant uncertainties relating to the interpretation and implementation of the Audio-Visual Program Provisions, in particular, the scope of “internet audio-visual programs.”

 

We offer short audio clips and the live course on our mobile apps or website for users to listen and learn, which can be repeatedly played by the users. We believe the audio clips we offer and the live courses we transmit distinguish us from general providers of internet audio-visual program services. However, we cannot assure you that the competent PRC government authorities will not take a view contrary to our opinion.

 

The Categories describe “internet audio-visual program services” in a very broad, vague manner and are unclear as to whether the contents we offer or are available on our platforms fall into the definition of “internet audio-visual programs.” The PRC government may find that our activities mentioned above or any other content offered on our mobile apps or website fall within the definition of “internet audio-visual programs” and thus are subject to the licensing requirement for internet audio-visual programs. We currently do not hold a License for Online Transmission of Audio-Visual Programs. If the PRC government determines that our content should be considered as “internet audio-visual programs” for the purpose of the Audio-Visual Program Provisions, we may be required to obtain a License for Online Transmission of Audio-Visual Programs. We are, however, not eligible to apply for such license since we are not a state-owned or state-controlled entity. If this were to occur, we may be subject to penalties, fines, legal sanctions or an order to suspend the provision of our relevant content.

 

44

 

 

We face risks associated with uncertainties surrounding the PRC laws and regulations governing the education industry in general, and the online for-profit private training in particular.

 

The principal regulations governing private education in China primarily consist of the PRC Education Law, the Law for Promoting Private Education, or Private Education Law, the Implementation Rules for Private Education Law and the Implementation Rules on the Supervision and Administration of For-profit Private Schools, or the Implementation Rules, as amended from time to time. These PRC laws and regulations on private education generally apply to the establishment and operation of all private schools, including schools and other education institutions, and provide that, among others, (i) the establishment of a for-profit private school shall be approved by the education authorities or the authorities in charge of labor and social welfare, (ii) such for-profit private schools should be registered with the competent branch of the State Administration for Industry and Commerce (“SAIC”, currently known as the State Administration for Market Regulation), and (iii) a duly approved private school will be granted a private school operating permit. The Implementation Rules further provide that the provisions contained therein should be applicable to “for-profit private training institutions” in an analogous manner. Shanghai, has accordingly promulgated specific local regulations to clarify the requirements and procedures for establishing and operating private schools in December 2017, however, it expressly provided that management measures and regulations applicable to private training institutions that only provide online courses would be promulgated separately. As of the date of this prospectus, no explicit local rules or guideline on regulation of online private training institutions have been promulgated in Shanghai, where our operating entity of our online platform and our VIE, Zhongchao Shanghai, was incorporated.

 

We operate online platform that provides online training programs through the internet, and our PRC subsidiaries and our operating entity of our online platform are registered with local counterparts of the competent PRC government authorities as for-profit enterprises. As there lacks clear and consistent statutory interpretation regarding the implementation of the above laws and regulations, it is unclear how these regulatory requirements shall be applied to us. During our previous consultation with relevant governmental authorities, we were informed that we are not required to obtain a private school operating permit or other approval from education authorities or the authorities in charge of labor and social welfare for our operation of online education platform. However, we cannot assure you that the government authorities will not take a different view in the future. We may be required to obtain the above-mentioned, or any other approvals, licenses, permits or filings, or otherwise comply with additional regulatory requirements in the future, due to clarification or change in interpretation or implementation of laws and regulations in education industry, or promulgation of new regulations or guidelines regulating online education institutions.

 

In August 2018, the Ministry of Justice of the People’s Republic of China published the Draft Amendment for the Implementation Rules for Private Education Law, for public review and comments, which is still subject to discussion, potential revision and adoption by the State Council before it becomes effective. Accordingly, the Draft Amendment for the Implementation Rules for Private Education Law clarifies that the scope of “private school” includes private training education institutions engaging in non-degree education, which could potentially include us. According to the Draft Amendment for the Implementation Rules for Private Education Law, a for-profit private institution that provides online training education or an online platform that facilitates such training education services, which does not engage in (i) cultural education related to school curriculums or tutoring services for kindergarten, primary or second school examinations or entrance requirements for primary, secondary or high school, or (ii) education that leads to a degree, would require a filing with (but not approval by) education or human resources and social security authorities. If enacted into law in its current form, the Draft Amendment for the Implementation Rules for Private Education Law would represent a major change to the laws and regulations relating to private schools, including, among others, (i) the required composition of the board of directors of private schools, (ii) that related party transactions to which a private school is a party would be required to be conducted on a fair and just basis without impediment to the interests of the state, the school, the teachers and the students and any director who is interested in any related party transactions of such private school should abstain from voting to approve any such transactions, and (iii) that, for a for-profit private school, 25% of its net profit per annum should be reserved for its development. If the Draft Amendment for the Implementation Rules for Private Education Law is enacted in its current form, we may be required to change our corporate governance practices and our compliance costs could increase. The Draft Amendment for the Implementation Rules for Private Education Law also expressly provides that any investor controlled by a foreign entity is prohibited from establishing, participating in the establishment of, or exercising de facto control over compulsory education schools. As we do not provide compulsory education services, we believe such prohibition, even if enacted in its current form, would not apply to us.

 

45

 

 

If we fail to comply with any regulatory requirements, including obtaining any required licenses, approvals, permits or filings in a timely manner or at all, our continued business operations may be disrupted and we may be subject to various penalties or be unable to continue our operations, all of which will materially and adversely affect our business, financial condition and results of operations.

 

Our failure to obtain, maintain or renew other licenses, approvals, permits, registrations or filings necessary to conduct our operations in China could have a material adverse impact on our business, financial conditions and results of operations.

 

A number of PRC regulatory authorities oversee different aspects of our business operations, and we are required to obtain a wide range of licenses, approvals, permits, registrations and filings required for conducting our business in China, which we cannot assure you that we have obtained all of them or will continue to maintain or renew all of them.

 

We may be deemed as providing certain restricted services or conduct certain restricted activities and thus be subject to certain licenses, approvals, permits, registrations and filings due to lack official interpretations on certain terms under internet related PRC regulations and laws. For example, certain content posted on our website or mobile apps, including our course materials, the courseware or audio-visual content uploaded by users in MDMOOC online platform, may be deemed as “internet cultural products,” and our use of those contents may be regarded as “internet cultural activities,” thus we may be required to obtain an Internet Culture Business Operating License for provision of those contents. Also, due to the ambiguity of the definition of “online publishing service,” the online distribution of content, including our course materials, the courseware or audio-visual contents uploaded by the users MDMOOC online platform may be regarded as “online publishing service” and therefore we may be required to obtain an Online Publishing License. In addition, we deliver certain courses in live-streaming format on our MDMOOC online platform which the relevant authorities may regard us as a live-streaming platform and may thus subject us to the requirement of making necessary filings as a live-streaming platform. We currently have not obtained any of the above licenses or have made any such filings. Under current PRC laws and regulations, an information service provider that reposts news for internet publication shall first obtain license from Cyberspace Administration of China (“CAC”) or its local counterpart. Certain learning materials we provide on our platform are partly from foreign media. Due to the ambiguity of the definition of “news” under the current PRC laws and regulations, we cannot assure you that our provision of such materials will not be deemed by the relevant PRC government authorities as reposting “news” without proper license, which will subject us to various penalties, including fines and suspension of such provision. Although we do not think we are subject to any of these licenses or filing requirements, and as of the date of this prospectus, we have not been subject to any fines or other form of regulatory or administrative penalties or sanctions due to the lack of any the licenses, approvals, permits, registrations and filings, we cannot assure you that the PRC government authorities will not take a different view or will not require us to obtain any additional licenses, approvals, permits, registrations and filings in the future. If we fail to do so, we may be subject to various penalties, such as confiscation of illegal revenues, fines and discontinuation or restriction of business operations, which may materially and adversely affect our business, financial condition and results of operations.

 

46

 

 

In addition, there can be no assurance that we will be able to maintain our existing licenses, approvals, registrations or permits necessary to provide our current online services in China, renew any of them when their current term expires, or update existing licenses or obtain additional licenses, approvals, permits, registrations or filings necessary for our business expansion from time to time. If we fail to do so, our business, financial conditions and operational results may be materially and adversely affected.

 

We must remit the offering proceeds to China before they may be used to benefit our business in China, and we cannot assure that we can finish all necessary governmental registration processes in a timely manner.

 

The proceeds of this offering must be sent back to China, and the process for sending such proceeds back to China may take several months after the closing of this offering. In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC subsidiary, we may make loans to our PRC subsidiary, or we may make additional capital contributions to our PRC subsidiary. Any shareholder loan or additional capital contribution are subject to PRC regulations. For example, loans by us or making additional capital contribution to our subsidiaries in China, which are foreign invested entities (the “FIEs”), to finance their activities cannot exceed statutory limits, while the shareholder loan must be also registered with the China’s State Administration of Foreign Exchange (“SAFE”). The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by MOFCOM or its local counterpart and the amount of registered capital of such foreign-invested company.

 

To remit the proceeds of the offering, we must take the steps legally required under the PRC laws.

 

In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or PRC consolidated VIE or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity, our ability to fund and expand our business and our ordinary shares.

 

47

 

 

U.S. regulators’ ability to conduct investigations or enforce rules in China is limited.

 

The majority of our operations conducted outside of the U.S. As a result, it may not be possible for the U.S. regulators to conduct investigations or inspections, or to effect service of process within the U.S. or elsewhere outside China on us, our subsidiaries, officers, directors and shareholders, and others, including with respect to matters arising under U.S. federal or state securities laws. China does not have treaties providing for reciprocal recognition and enforcement of judgments of courts with the U.S. and many other countries. As a result, recognition and enforcement in China of these judgments in relation to any matter, including U.S. securities laws and the laws of the Cayman Islands, may be difficult.

 

We face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of the stock of our operating company.

 

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the PRC State Administration of Taxation on December 10, 2009, or Circular 698, where a foreign investor transfers the equity interests of a PRC resident enterprise indirectly by way of the sale of equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the foreign investor should report such Indirect Transfer to the competent tax authority of the PRC resident enterprise. The PRC tax authority will examine the true nature of the Indirect Transfer, and if the tax authority considers that the foreign investor has adopted an abusive arrangement in order to avoid PRC tax, they will disregard the existence of the overseas holding company and re-characterize the Indirect Transfer and as a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at the rate of up to 10%. In addition, the PRC resident enterprise is supposed to provide necessary assistance to support the enforcement of Circular 698. At present, the PRC tax authorities will neither confirm nor deny that they would enforce Circular 698, in conjunction with other tax collection and tax withholding rules, to make claims against our PRC subsidiary as being indirectly liable for unpaid taxes, if any, arising from Indirect Transfers by shareholders who did not obtain their shares in the public offering of our shares.

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiary ability to distribute profits to us, or otherwise materially and adversely affect us.

 

In July 2014, SAFE has promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.

 

Under SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose vehicles, or SPVs, will be required to register such investments with the SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiaries of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiaries of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contribution into its subsidiary in China. On February 28, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investment and outbound overseas direct investment, including those required under the SAFE Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of the SAFE.

 

48

 

 

We have requested our shareholders that we know are PRC residents and hold direct or indirect interests in us to make the necessary applications, filings and amendments as required under SAFE Circular 37 and other related rules. However, we cannot guarantee that all or any of those shareholders will complete the 37 registration before the closing of this Offering. In addition, we may not at all times be fully aware or informed of the identities of all our beneficial owners who are PRC residents, and we may not always be able to compel our beneficial owners to comply with the SAFE Circular 37 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents will at all times comply with, or in the future make or obtain any applicable registrations or approvals required by, SAFE Circular 37 or other related regulations. Failure by any such shareholders or beneficial owners to comply with SAFE Circular 37 could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

 

Furthermore, as the interpretation and implementation of foreign exchange regulations has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant governmental authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

  

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this Offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

In utilizing the proceeds from this public offering or any future offerings, as an offshore holding company of our PRC subsidiary, we may make loans to our PRC subsidiary and controlled PRC affiliate, or we may make additional capital contributions to our PRC subsidiary. Any loans to our PRC subsidiary or controlled PRC affiliate are subject to PRC regulations and approvals. For example, loans by us to our PRC subsidiary in China, each of which is a foreign-invested enterprise, to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local counterpart.

 

We may also decide to finance our PRC subsidiary through capital contributions. These capital contributions must be approved by the MOFCOM or its local counterpart. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or capital contributions by us to our subsidiaries or any of their respective subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds of this Offering and to capitalize our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.

 

In 2015, SAFE promulgated Circular 19, a notice regulating the conversion by a foreign-invested enterprise of foreign currency into Renminbi by restricting how the converted Renminbi may be used. Circular 19 requires that Renminbi converted from the foreign currency-denominated capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise in its business scope. In addition, SAFE strengthened its oversight of the flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested enterprise. The use of such Renminbi may not be changed without approval from SAFE and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes within the foreign-invested enterprise’s approved business scope.

 

49

 

 

We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we receive from this Offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.

 

Governmental control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiaries to obtain financing.

 

The PRC government imposes control on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a majority of our revenues in Renminbi, which currently is not a freely convertible currency. Restrictions on currency conversion imposed by the PRC government may limit our ability to use revenues generated in Renminbi to fund our expenditures denominated in foreign currencies or our business activities outside China. Under China’s existing foreign exchange regulations, Renminbi may be freely converted into foreign currency for payments relating to current account transactions, which include among other things dividend payments and payments for the import of goods and services, by complying with certain procedural requirements. Our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, by complying with certain procedural requirements. Our PRC subsidiaries may also retain foreign currency in their respective current account bank accounts for use in payment of international current account transactions. However, we cannot assure you that the PRC government will not take measures in the future to restrict access to foreign currencies for current account transactions.

 

Conversion of Renminbi into foreign currencies, and of foreign currencies into Renminbi, for payments relating to capital account transactions, which principally includes investments and loans, generally requires the approval of SAFE and other relevant PRC governmental authorities. Restrictions on the convertibility of the Renminbi for capital account transactions could affect the ability of our PRC subsidiaries to make investments overseas or to obtain foreign currency through debt or equity financing, including by means of loans or capital contributions from us. We cannot assure you that the registration process will not delay or prevent our conversion of Renminbi for use outside of China.

 

We may be classified as a “resident enterprise” for PRC enterprise income tax purposes; such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

 

The Enterprise Income Tax Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered PRC tax resident enterprises and will generally be subject to the uniform 25% PRC enterprise income tax rate on their global income. In addition, a tax circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises established outside of China as resident enterprises clarified that dividends and other income paid by such resident enterprises will be considered to be PRC source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This circular also subjects such resident enterprises to various reporting requirements with the PRC tax authorities. Under the implementation rules to the Enterprise Income Tax Law, a de facto management body is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and other assets of an enterprise. In addition, the tax circular mentioned above details that certain Chinese-invested enterprises will be classified as resident enterprises if the following are located or resident in China: senior management personnel and departments that are responsible for daily production, operation and management; financial and personnel decision making bodies; key properties, accounting books, company seal, and minutes of board meetings and shareholders’ meetings; and half or more of the senior management or directors having voting rights.

 

50

 

 

Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining de facto management bodies which are applicable to our company or our overseas subsidiaries. We do not believe that Zhongchao meets all of the conditions required for PRC resident enterprise. The Company is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with ours.

 

However, if the PRC tax authorities determine that Zhongchao is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises. Such 10% tax rate could be reduced by applicable tax treaties or similar arrangements between China and the jurisdiction of our shareholders. For example, for shareholders eligible for the benefits of the tax treaty between China and Hong Kong, the tax rate is reduced to 5% for dividends if relevant conditions are met. In addition, non-resident enterprise shareholders may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC shareholders of the Company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that the Company is treated as a PRC resident enterprise.

 

Provided that our Cayman Islands holding company, Zhongchao, is not deemed to be a PRC resident enterprise, our shareholders who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares. However, under the Circular on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Circular 7, where a non-resident enterprise conducts an “indirect transfer” by transferring taxable assets, including, in particular, equity interests in a PRC resident enterprise, indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, or the transferee or the PRC entity which directly owned such taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee would be obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. We and our non-PRC resident investors may be at risk of being required to file a return and being taxed under Circular 7, and we may be required to expend valuable resources to comply with the Circular on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 37, or to establish that we should not be taxed under Circular 7 and Bulletin 37.

 

In addition to the uncertainty in how the new resident enterprise classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. If we are required under the Enterprise Income Tax law to withhold PRC income tax on our dividends payable to our foreign shareholders, or if you are required to pay PRC income tax on the transfer of our shares under the circumstances mentioned above, the value of your investment in our shares may be materially and adversely affected. These rates may be reduced by an applicable tax treaty, but it is unclear whether, if we are considered a PRC resident enterprise, holders of our shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. Any such tax may reduce the returns on your investment in our shares.

 

51

 

 

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in August 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. The application of the M&A Rules remains unclear. These M&A Rules and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the Ministry of Culture (“MOC”, currently known as the Ministry of Culture and Tourism) be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who are granted options or other awards under the equity incentive plan will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.

 

52

 

 

Failure to make adequate contributions to various mandatory social security plans as required by PRC regulations may subject us to penalties.

 

PRC laws and regulations require us to pay several statutory social welfare benefits for our employees, including pensions, medical insurance, work-related injury insurance, unemployment insurance, maternity insurance and housing provident fund contributions. Local governments usually implement localized requirements as to mandatory social security plans considering differences in economic development in different regions. Our failure in making contributions to various mandatory social security plans and in complying with applicable PRC labor-related laws may subject us to late payment penalties. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

 

Our current employment practices may be restricted under the PRC Labor Contract Law and our labor costs may increase as a result.

 

The PRC Labor Contract Law and its implementing rules impose requirements concerning contracts entered into between an employer and its employees and establish time limits for probationary periods and for how long an employee can be placed in a fixed-term labor contract. Because the Labor Contract Law and its implementing rules have not been in effect very long and because there is lack of clarity with respect to their implementation and potential penalties and fines, it is uncertain how it will impact our current employment policies and practices. We cannot assure you that our employment policies and practices do not, or will not, violate the Labor Contract Law or its implementing rules and that we will not be subject to related penalties, fines or legal fees. If we are subject to large penalties or fees related to the Labor Contract Law or its implementing rules, our business, financial condition and results of operations may be materially and adversely affected. In addition, according to the Labor Contract Law and its implementing rules, if we intend to enforce the non-compete provision with an employee in a labor contract or non-competition agreement, we have to compensate the employee on a monthly basis during the term of the restriction period after the termination or ending of the labor contract, which may cause extra expenses to us. Furthermore, the Labor Contract Law and its implementation rules require certain terminations to be based upon seniority rather than merit, which significantly affects the cost of reducing workforce for employers. In the event we decide to significantly change or decrease our workforce in the PRC, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our circumstances or in a timely and cost effective manner, thus our results of operations could be adversely affected.

 

If the chops of our PRC company and branches are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

 

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC subsidiary are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

 

53

 

 

RISKS RELATED TO THIS OFFERING

 

There has been no public market for our Class A Ordinary Shares prior to this offering, and you may not be able to resell our Class A Ordinary Shares at or above the price you paid, or at all.

 

Prior to this initial public offering, there has been no public market for our shares. We intend to list our Class A Ordinary Shares on the NASDAQ Capital Market. If an active trading market for our Class A Ordinary Shares does not develop after this offering, the market price and liquidity of our Class A Ordinary Shares will be materially and adversely affected. Negotiations with the underwriters will determine the initial public offering price for our Class A Ordinary Shares which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our Class A Ordinary Shares will develop or that the market price of our Class A Ordinary Shares will not decline below the initial public offering price.

 

The price of the Class A Ordinary Shares and other terms of this Offering have been determined by us along with our underwriters.

 

If you purchase our Class A Ordinary Shares in this Offering, you will pay a price that was not established in a competitive market. Rather, you will pay a price that was determined by us along with our underwriters. The offering price for our Class A Ordinary Shares may bear no relationship to our assets, book value, historical results of operations or any other established criterion of value. The trading price, if any, of the Class A Ordinary Shares that may prevail in any market that may develop in the future, for which there can be no assurance, may be higher or lower than the price you paid for our Class A Ordinary Shares.

 

Shares eligible for future sale may adversely affect the market price of our Class A Ordinary Shares if the shares are successfully listed on NASDAQ or other stock markets, as the future sale of a substantial amount of outstanding Class A Ordinary Shares in the public marketplace could reduce the price of our Class A Ordinary Shares.

 

The market price of our Class A Ordinary Shares could decline as a result of sales of substantial amounts of our Class A Ordinary Shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Class A Ordinary Shares. An aggregate of 14,752,352 Class A Ordinary Shares are outstanding before the consummation of this Offering. All of the Class A Ordinary Shares sold in the Offering will be freely transferable without restriction or further registration under the Securities Act. The remaining Class A Ordinary Shares will be “restricted securities” as defined in Rule 144. These Class A Ordinary Shares may be sold without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

 

A sale or perceived sale of a substantial number of our Ordinary Shares may cause the price of our Class A Ordinary Shares to decline.

 

All of our executive officers and directors and almost all of our shareholders have agreed not to sell our Class A Ordinary Shares for a period of six months following this Offering, subject to extension under specified circumstances. Class A Ordinary shares subject to these lock-up agreements will become eligible for sale in the public market upon expiration of these lock-up agreements, subject to limitations imposed by Rule 144 under the Securities Act of 1933, as amended. If our shareholders sell substantial amounts of our Class A Ordinary Shares in the public market, the market price of our Class A Ordinary Shares could fall. Moreover, the perceived risk of this potential dilution could cause shareholders to attempt to sell their shares and investors to short our Class A Ordinary Shares. These sales also may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.

 

 

54

 

 

If we are listed on the NASDAQ Capital Market and our financial condition deteriorates, we may not meet continued listing standards on the NASDAQ Capital Market.

 

The NASDAQ Capital Market also requires companies to fulfill specific requirements in order for their shares to continue to be listed. If our shares are listed on the NASDAQ Capital Market but are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our shares. In addition, if our Class A Ordinary Shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our Class A Ordinary Shares quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our Class A Ordinary Shares are not so listed or are delisted at some later date, our Class A Ordinary Shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our Class A Ordinary Shares might decline. If our Class A Ordinary Shares are not so listed or are delisted from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it difficult to sell their shares.

 

If a limited number of participants in this offering purchase a significant percentage of the offering, the effective public float may be smaller than anticipated and the price of our Class A Ordinary Shares may be volatile.

  

As a company conducting a relatively modest public offering, we are subject to the risk that a small number of investors will purchase a high percentage of the offering. If this were to happen, investors could find our shares to be more volatile than they might otherwise anticipate. Companies that experience such volatility in their stock price may be more likely to be the subject of securities litigation. In addition, if a large portion of our public float were to be held by a few investors, smaller investors may find it more difficult to sell their shares.

  

The market price for our shares may be volatile.

 

The trading prices of our Class A Ordinary Shares are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of internet or other companies based in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial decline in their trading prices. The trading performances of other Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our Class A Ordinary Shares, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material adverse effect on the market price of our shares. In addition to the above factors, the price and trading volume of our Class A Ordinary Shares may be highly volatile due to multiple factors, including the following:

 

regulatory developments affecting us, our users, or our industry;

 

regulatory uncertainties with regard to our variable interest entity arrangements;

 

announcements of studies and reports relating to our service offerings or those of our competitors;

 

actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

changes in financial estimates by securities research analysts;

 

55

 

 

announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments;

 

additions to or departures of our senior management;

 

detrimental negative publicity about us, our management or our industry;

 

fluctuations of exchange rates between the RMB and the U.S. dollar;

 

release or expiry of lock-up or other transfer restrictions on our outstanding Class A Ordinary Shares; and

 

sales or perceived potential sales of additional Class A Ordinary Shares.

  

Our Class B Ordinary Shares have stronger voting power than our Class A Ordinary Shares and certain existing shareholders have substantial influence over our Company and their interests may not be aligned with the interests of our other shareholders.

 

We have a dual-class voting structure consisting of Class A Ordinary Shares and Class B Ordinary Shares. Under this structure, holders of Class A Ordinary Shares are entitled to 1 vote per share, and holders of Class B Ordinary Shares are entitled to 15 votes per share, which can cause the holders of Class B Ordinary Shares to have an unbalanced, higher concentration of voting power. Immediately prior to the Offering, Mr. Weiguang Yang, the sole shareholder of Class B Ordinary Shares, directly own 5,497,715 Class B Ordinary Shares and beneficially owns 4,203,385 Class A Ordinary Shares, representing over 89.15% voting power. As a result, until such time as his collective voting power is below 50%, Mr. Yang as the controlling shareholder has substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. He may take actions that are not in the best interests of us or our other shareholders. These corporate actions may be taken even if they are opposed by our other shareholders. Further, concentration of ownership of our Class B Ordinary Shares may discourage, prevent or delay the consummation of change of control transactions that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. Future issuances of Class B Ordinary Shares may also be dilutive to the holders of Class A Ordinary Shares. As a result, the market price of our Class A Ordinary Shares could be adversely affected.

 

The sole shareholder who holds shares of Class B Ordinary Shares will hold approximately [●]% of the voting power of our outstanding ordinary shares following this Offering. Because of the fifteen-to-one voting ratio between our Class B and Class A Ordinary Shares, the sole holder of our Class B Ordinary Shares will continue to control a majority of the combined voting power of our Ordinary Shares and therefore be able to control all matters submitted to our shareholders for approval, so long as the Class B Ordinary Shares represent at least [●]% of all outstanding shares of our Ordinary Shares.

 

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime. As a foreign private issuer, we will also be exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we will still be subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

56

 

 

Shares eligible for future sale may adversely affect the market price of our Class A Ordinary Shares, as the future sale of a substantial amount of outstanding Class A Ordinary Shares in the public marketplace could reduce the price of our Class A Ordinary Shares.

 

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our Class A Ordinary Shares. An aggregate of 14,752,352 Class A Ordinary Shares is outstanding before the consummation of this offering and [●] Class A Ordinary Shares will be outstanding immediately after this offering. All of the Class A Ordinary Shares sold in the Offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These Class A Ordinary Shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

 

Investors in this Offering will experience immediate and substantial dilution.

 

The Offering Price of our shares is expected to be substantially higher than the pro forma net tangible book value per share of our Class A Ordinary Shares. Assuming the completion of the Offering and an Offering Price of $[●] per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, if you purchase shares in this Offering, you will incur immediate dilution of approximately $[●] or approximately [●]% in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this Offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

 

We have not finally determined the use of the proceeds from this offering, and we may use the proceeds in ways with which you may not agree.

 

While we have identified the priorities to which we expect to put the proceeds of this offering, our management will have considerable discretion in the application of the net proceeds received by us. Specifically, we intend to use the net proceeds from this offering for development of our online content, platform technology upgrade and system integration, and business expansion, including expansion of our existing locations to develop new customers by hiring more qualified personnel, and increase in our marketing efforts. We have reserved the right to re-allocate funds currently allocated to that purpose to our general working capital. If that were to happen, then our management would have discretion over even more of the net proceeds to be received by our company in this offering. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve profitability or increase our stock price. The net proceeds from this offering may be placed in investments that do not produce profit or increase value. See “Use of Proceeds.”

 

We will incur increased costs as a result of being a publicly-traded company.

 

As a company with publicly-traded securities, we will incur additional legal, accounting and other expenses not presently incurred. In addition, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as rules promulgated by the SEC and the national securities exchange on which we list, requires us to adopt corporate governance practices applicable to U.S. public companies. These rules and regulations will increase our legal and financial compliance costs. We estimate that during the first year of our listing, we may incur approximately $500,000 to $800,000 additional expenses being a public company which may vary depending on numerous factors such as the legal, accounting and marketing needs associated with the development of the Company.

 

57

 

 

If we fail to implement and maintain an effective system of internal control, we may be unable to accurately report our operating results, meet our reporting obligations or prevent fraud.

 

Prior to this Offering, we were a company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting.

 

Upon completion of this Offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2019. In addition, once we cease to be an “emerging growth company” as such term is defined under the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

 

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Generally, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, and harm our results of operations. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

 

As an “emerging growth company” under the Jumpstart Our Business Startups Act, or JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.

 

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. We are an emerging growth company until the earliest of:

 

the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more;

 

the last day of the fiscal year following the fifth anniversary of this offering;

 

the date on which we have, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or

 

the date on which we are deemed a “large accelerated issuer” as defined under the federal securities laws.

 

58

 

 

For so long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act for up to five fiscal years after the date of this offering. We cannot predict if investors will find our Class A Ordinary Shares less attractive because we may rely on these exemptions. If some investors find our Class A Ordinary Shares less attractive as a result, there may be a less active trading market for our Class A Ordinary Shares and the trading price of our Class A Ordinary Shares may be more volatile. In addition, our costs of operating as a public company may increase when we cease to be an emerging growth company.

 

We are an emerging growth company and may take advantage of certain reduced reporting requirements.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

 

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We do not plan to “opt out” of such exemptions afforded to an emerging growth company. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective data.

 

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our Class A Ordinary Shares.

 

Based on the anticipated market price of our Class A Ordinary Shares in this offering and expected price of our Class A Ordinary Shares following this offering, and the composition of our income, assets and operations, we do not expect to be treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for the current taxable year or in the foreseeable future. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you the U.S. Internal Revenue Service will not take a contrary position. Furthermore, this is a factual determination that must be made annually after the close of each taxable year. If we are a PFIC for any taxable year during which a U.S. holder holds our Class A Ordinary Shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our Class A Ordinary Shares and trading volume could decline.

 

The trading market for our Class A Ordinary Shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who cover us downgrade our Class A Ordinary Shares or publish inaccurate or unfavorable research about our business, the market price for our Class A Ordinary Shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our Class A Ordinary Shares to decline.

 

59

 

 

USE OF PROCEEDS

 

We estimate that we will receive net proceeds from the sale of the Shares of approximately $[●], based upon an assumed initial public offering price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses

 

Each $0.25 increase (decrease) in the assumed initial public offering price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $[●], assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.

 

We intend to use the net proceeds of this offering as follows after we complete the remittance process:

 

Approximately $[●] or 30% for development of the online course content;

 

Approximately $[●] or 20% for platform technology upgrade and system integration;

 

Approximately $[●] or 50% for business expansion, i.e., to expand our existing locations to develop new customers by hiring more qualified personnel, and marketing effort.

 

The precise amounts and percentage of proceeds we would devote to particular categories of activity will depend on prevailing market and business conditions as well as particular opportunities that may arise from time to time. This expected use of our net proceeds from this Offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including any unforeseen cash needs. Similarly, the priority of our prospective uses of proceeds will depend on business and market conditions are they develop. Accordingly, our management will have significant flexibility and broad discretion in applying the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this Offering differently than as described in this prospectus. 

 

In utilizing the proceeds of this Offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiary and branches only through loans or capital contributions. None of the proceeds of this Offering can be loaned or contributed to our PRC subsidiary without additional government registration or approval. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans or make additional capital contributions to our PRC subsidiary and branches to fund its capital expenditures or working capital. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiary. This is because there are no statutory limits on the amount of registered capital for our PRC subsidiary, and we are allowed to make capital contributions to our PRC subsidiary by subscribing for its initial registered capital and increased registered capital, provided that the PRC subsidiary completes the relevant necessary filing and registration procedures in accordance with the applicable laws and regulations. With respect to loans to the PRC subsidiary by us, (i) if the relevant PRC subsidiary determines to adopt the traditional foreign exchange administration mechanism, or the current foreign debt mechanism, the outstanding amount of the loans shall not exceed the difference between the total investment and the registered capital of the PRC subsidiary and there is, in effect, no statutory limits on the amount of loans that we can make to our PRC subsidiary under this circumstance since we can increase the registered capital of our PRC subsidiary by making capital contributions to them, subject to the completion of relevant registrations, and the difference between the total investment and the registered capital will increase accordingly; and (ii) if the relevant PRC subsidiary determines to adopt the foreign exchange administration mechanism as provided in the Notice of the People’s Bank of China (“PBOC”) on Full-coverage Macro-prudent Management of Cross-border Financing (the “PBOC Notice No. 9”), the risk-weighted outstanding amount of the loans, which shall be calculated based on the formula provided in the PBOC Notice No. 9, shall not exceed 200% of the net asset of the relevant PRC subsidiary. According to the PBOC Notice No. 9, after a transition period of one year since the promulgation of the PBOC Notice No. 9, the PBOC and SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of the PBOC Notice No. 9. As of the date hereof, neither PBOC nor SAFE has promulgated and made public any further rules, regulations, notices or circulars in this regard. It is uncertain which mechanism will be adopted by PBOC and SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiary.

 

60

 

 

According to the relevant PRC laws and regulations, in terms of capital contributions, it typically takes about eight weeks to complete the relevant filings and registrations. In terms of loans, the SAFE registration process typically takes about four weeks or longer to complete, provided that all the necessary procedures could be successfully consummated by the relevant PRC subsidiary or consolidated VIE, as case may be, and/or our company. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions to our PRC subsidiary and loans to our PRC subsidiary or to our consolidated VIE, we cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China—We cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we receive from this Offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business”, and “Risk Factors—Risks Related to Doing Business in China—However, we cannot assure you that the PRC government will not take measures in the future to restrict access to foreign currencies for current account transactions.” It is likely that we will need to convert some of our net proceeds in U.S. dollars into Renminbi in order to use as proceeds as contemplated in this section. For details of PRC regulations governing foreign currency conversion, see “Government Regulation—Regulation of Foreign Currency Exchange and Dividend Distribution.” 

 

Pending remitting the Offering proceeds to the PRC, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations. 

 

Although we may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments. We cannot assure you that we will make any acquisitions or investments in the future. 

 

61

 

 

DIVIDEND POLICY

 

The holders of our Class A Ordinary Shares are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries may, from time to time, be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our Class A Ordinary Shares are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors.  

 

Under Cayman Islands law, dividends may be declared and paid only out of funds legally available therefor, namely out of either profit or our share premium account, and provided further that a dividend may not be paid if this would result in our Company being unable to pay its debts as they fall due in the ordinary course of business. 

 

If we determine to pay dividends on any of our Class A Ordinary Shares in the future, as a holding company, we will be dependent on receipt of funds from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. 

 

Current PRC regulations permit our indirect PRC subsidiary to pay dividends to Zhongchao WFOE only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, our subsidiary in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve funds until the accumulative amount of such funds reaches 50% of its registered capital. Each of such entity in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of such entity. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. 

 

The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiary and affiliates in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments. If we or our subsidiaries are unable to receive all of the revenues from our operations, we may be unable to pay dividends on our Class A Ordinary Shares. 

 

Cash dividends, if any, on our Class A Ordinary Shares will be paid in U.S. dollars. Zhongchao WFOE may be considered a non-resident enterprise for tax purposes, so that any dividends Zhongchao Shanghai pay to Zhongchao WFOE may be regarded as China-sourced income and as a result may be subject to PRC withholding tax at a rate of up to 10.0%. 

 

Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, the 10% withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of the PRC enterprise. However, pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong enterprise must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise; and (b) the Hong Kong enterprise must have directly owned no less than 25% equity interests in the PRC resident enterprise during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong enterprise must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate. As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiary to its immediate holding company, Zhongchao HK. As of the date of this prospectus, we have not applied for the tax resident certificate from the relevant Hong Kong tax authority. Zhongchao HK intends to apply for the tax resident certificate when Zhongchao Shanghai plans to declare and pay dividends to Zhongchao HK. 

 

62

 

 

EXCHANGE RATE INFORMATION

 

Our business is conducted in China and all of our revenues are denominated in RMB. Capital accounts of our financial statements are translated into U.S. dollars from RMB at their historical exchange rates when the capital transactions occurred. RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at the rates used in translation. The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. Assets and liabilities are translated at the exchange rates as of the balance sheet date. 

 

Balance sheet items, except for equity accounts  December 31,
2018
   December 31,
2017
   December 31,
2016
 
USD:RMB   6.8755    6.5063    6.9430 

 

Items in the statements of operations and comprehensive loss, and statements cash flows are translated at the average exchange rate of the period.

 

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

 

The following table presents our selected historical financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statement and notes thereto included elsewhere in this prospectus.

 

63

 

 

The following table presents our summary consolidated statements of income and comprehensive income for the fiscal years ended December 31, 2018 and 2017 and the six months ended June 30, 2019 and 2018.

 

Selected Consolidated Statement of Income and Comprehensive Income

(In U.S. dollars, except number of shares)

 

   For the years ended
December 31,
   For the Six Months Ended
June 30,
 
   2018   2017   2019   2018 
                 
Revenues  $12,865,870   $9,816,312   $6,987,623   $5,232,210 
Cost of revenues   (4,456,353)   (3,970,068)   (2,237,277)   (1,736,783)
Gross profit   8,409,517    5,846,244    4,750,346    3,495,427 
                     
Operating expenses:                    
Selling and marketing expenses   (2,261,258)   (2,715,201)   (1,303,740)   (1,456,105)
General and administrative expenses   (1,425,663)   (1,139,165)   (1,633,056)   (886,932)
Research and development expenses   (1,447,949)   (943,253)   (553,282)   (624,343)
Total operating expenses   (5,134,870)   (4,797,619)   (3,490,078)   (2,967,380)
Income from operations   3,274,647    1,048,625    1,260,268    528,047 
Interest income, net   191,609    17,331    118,943    81,380 
Other income, net   37,364    275,019    535,587    25,966 
                     
Income before income tax   3,503,620    1,340,975    1,914,798    635,393 
Income tax (expenses) benefits   (502,131)   153,953    (205,910)   (84,188)
Net income   3,001,489    1,494,928    1,708,888    551,205 
Net loss (income)  attributable to non-controlling interests   17,834    34,352    21,641    (7,681)
Net Income Attributable to Zhongchao Inc.’s shareholders  $3,019,323   $1,529,280   $1,730,529   $543,524 
                     
Other comprehensive (loss) income                    
Foreign currency translation adjustment  $(379,520)  $228,786   $(2,947)  $(110,037)
                     
Other comprehensive (loss) income  $(379,520)  $228,786   $(2,947)  $(110,037)
                     
Comprehensive income attributable to                    
Zhongchao Inc.’s shareholders  $2,639,803   $1,758,066    $1,727,582   $433,487 
Non-controlling interests  $17,834   $34,352    $21,641   $(7,681)
                     
Basic and diluted earnings per ordinary share*  $0.15   $0.08    $0.08   $0.03 
Weighted average number of ordinary share outstanding – basic and diluted   20,764,245    19,562,121    21,600,135    20,250,135 

    

* The number of shares are presented on a retroactive basis to reflect the reorganization and the stock dividend announced on November 21, 2017.

 

The  following table presents our summary consolidated balance sheet data as of December 31, 2018 and 2017 and June 30, 2019.

 

   As of December 31, 2018   As of December 31, 2017   As of
June 30, 2019
 
           (unaudited) 
             
Cash and cash equivalents  $7,918,675   $2,978,515   $6,558,332 
Total current assets  $12,561,357   $6,409,472   $13,367,362 
Total assets  $14,046,124   $6,976,003   $15,675,558 
Total liabilities  $2,660,758   $1,778,383   $2,541,340 
Total Zhongchao Inc.’s shareholders’ equity  $11,413,202   $5,207,622   $13,156,305 
Non-controlling Interests  $(27,836)  $(10,002)  $(22,087)
Total shareholders’ equity  $11,385,366   $5,197,620   $13,134,218 
Total liabilities and shareholders’ equity  $14,046,124   $6,976,003   $15,675,558 

  

64

 

 

CAPITALIZATION

 

The following table sets forth our capitalization as of December 31, 2018:

 

On an actual basis; and

 

On a pro forma basis to give effect to the sale of [●] Class A Ordinary Shares (issuable upon conversion of the Class B Ordinary Shares – See “Related Party Transaction”) by us in this offering at the assumed initial public offering price of $[●] per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting the estimated underwriting commissions and estimated offering expenses.

 

You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.” You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

 

As of December 31, 2018

 

    As Reported     Pro Forma
Adjusted
for IPO
 
Ordinary Shares            
Class A Ordinary Shares     16,102,420       [●]  
Class B Ordinary Shares     5,497,715       [●]  
Par Value Amount of Ordinary Shares   $ 2,160     $ [●]  
Additional Paid-In Capital   $ 11,945,979     $ [●]  
Statutory Reserves   $ 20,539     $ [●]  
Retained Earnings   $ (384,309 )   $ [●]  
Accumulated Other Comprehensive Income   $ (171,167 )   $ [●]  
Total equity attributable to Zhongchao Inc.’s shareholders   $ 11,413,202     $ [●]  

  

65

 

 

DILUTION

 

If you invest in our shares, your interest will be diluted to the extent of the difference between the initial public offering price per common share and the pro forma net tangible book value per common share after the offering. Our pro forma net tangible book value as of [●] was $[●], or $[●] per share. Our pro forma net tangible book value per share set forth below represents our total tangible assets less total liabilities, divided by the number of shares of our share stock outstanding.

 

Dilution results from the fact that the per common share offering price is substantially in excess of the book value per common share attributable to the existing shareholders for our presently outstanding Class A Ordinary Shares. After giving effect to our issuance and sale of [●] Class A Ordinary Shares (upon conversion of the Class B Ordinary Shares) in this offering at an assumed initial public offering price of $[●] per share, after deducting the estimated underwriting discounts and offering expenses payable by us, the pro forma as adjusted net tangible book value as of [●] would have been $[●], or $[●] per share. This represents an immediate increase in net tangible book value to existing shareholders of $[●] per share. The public offering price per share will significantly exceed the net tangible book value per share. Accordingly, new investors who purchase shares in this offering will suffer an immediate dilution of their investment of $[●] per share. The following table illustrates this per share dilution to the new investors purchasing shares in this offering: 

 

    Offering    
Assumed offering price per common share   $ [●]  
Net tangible book value per common share as of [●]   $ [●]  
Increase per common share attributable to this offering   $ [●]  
Pro forma net tangible book value per common share after the offering   $ [●]  
Dilution per common share to new investors   $ [●]  

 

A $1.00 increase (decrease) in the assumed public offering price of $[●] per share would increase (decrease) the pro forma net tangible book value by $[●], the pro forma net tangible book value per share after this offering by $[●] per share and the dilution in pro forma net tangible book value per share to investors in this offering by $[●] per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

 

POST-OFFERING OWNERSHIP

 

The following charts illustrate our pro forma proportionate ownership, upon completion of this offering by present shareholders and investors in this offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this offering at the assumed offering price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering.

   

    Shares Purchased     Total Consideration     Average Price  
    Amount (#)     Percent (%)     Amount ($)     Percent (%)     Per Share ($)  
Existing shareholders     [●]       [●] %     [●]       [●] %   $ [●]  
New investors     [●]       [●] %     [●]       [●] %   $ [●]  
Total     [●]       100.0 %     [●]       100.0 %   $ [●]  

 

66

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following management’s discussion and analysis of financial condition and results of operations contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. We assume no obligation to update forward-looking statements or the risk factors. You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

Overview

 

Our Business

 

We are a provider of healthcare information, education, and training services to healthcare professionals and the public in China. We offer a wide range of online and onsite health information services, healthcare education programs, and healthcare training products, consisting primarily of clinical practice training, open classes of popular medical topics, interactive case studies, academic conference and workshops, continuing education courses, and articles and short videos with educational healthcare content to healthcare professionals as well as the public.

 

We commenced our operation, through Zhongchao Shanghai, in August 2012 with a vision to offer a wide range of accessible and immediate healthcare information and continuous learning and training opportunities for Chinese healthcare professionals. Since our inception, we have focused on developing our information, education, and training programs to address the needs in the healthcare industry in China; and developing online platforms and onsite activities to deliver our information services, education programs and training products.

 

MDMOOC

 

We provide our healthcare information, education, and training services to the healthcare professionals under our “MDMOOC” brand, which we believe is one of the leading consumer brands in China’s healthcare training and education sector, as evidenced by the 2017 Research Report on Chinese National Equities Exchange and Quotations (NEEQ) by Beijing Wutong Ideal Capital Management Co., Ltd., a Chinese NEEQ research company, where we are considered as one of the main and typical medical teaching video provider with doctor interactive and online training platform.

 

We launched our first online platform in a form of website, www.mdmooc.org, under our “MDMOOC” brand in 2013 to provide information, education, and training services to physicians and allied healthcare professionals, such as pharmacists and nurses primarily located in China, via Internet-Plus solutions. We further launched our MDMOOC Wechat subscription account and MDMOOC mobile App in 2015 and 2016, respectively (together with the website, the “MDMOOC online platform”). Healthcare professionals in China can apply for registration with their healthcare qualification to get access to our MDMOOC online platform.

 

As of the date of this prospectus, our MDMOOC online platform has more than 300,000 registered users and a database of more than 2 million healthcare experts including over 700,000 physicians, and 1,300,000 allied healthcare professionals in medical academics, associations, and leading hospitals who constantly collaborate with us to develop training programs on needed basis.

 

Since launching in 2013, we have been continuously developing our MDMOOC online platform with new forms of Internet-based education solutions. There are currently approximately 1,429 education and training programs available on our MDMOOC online platform and free to our registered users. About 95% of all our programs are self-developed by our research and development team. The original content of these programs, including daily medical thesis, commentary, conference coverage, expert columns, and activities are written by our research and development team and authors from widely respected academic institutions, and edited and managed by our in-house editorial staff. The remaining 5% of programs are created under the purchase orders of our corporate or institution customers, where we develop customized programs with designated healthcare topics. Such 5% of programs are only available to certain registered users with program passcodes provided by our corporate or institution customers. Our revenues are mainly sourced from these 5% of programs.

 

Our original, exclusive and proprietary content includes innovative features such as after-class quiz, key point summary and highlight during the courses, and peer-review and comments.

 

67

 

 

In addition to healthcare information, education, and training via Internet-Plus, we organize onsite healthcare and medical training sessions and academic conferences from time to time under our “MDMOOC” brand.

 

As of the date of this prospectus, we have successfully held the first short-term training program for Essential Course for Wound Care Management in Fujian, China from March 28, 2019 to April 4, 2019 and our first training program for Advanced Course for Surgical Wound Treatment from June 23, 2019 to June 29, 2019 in Jiangsu, China. We plan to hold our future training programs in the 3rd and 4th quarters of 2019 in Zhejiang and Hebei.

 

Sunshine Health Forums

 

We provide our healthcare educational content to the public via our “Sunshine Health Forums”, which, based on the amount of the registered users and daily review volume, we believe is one of the largest platform in China, for general healthcare knowledge and information to the public.

 

In addition to MDMOOC, we develop and operate the Sunshine Health Forums, online education-for-all platforms that disseminate articles and features related to healthcare and wellness education, medical behavior intervention, and newly developed health technology and application. We launched our Sunshine Health Forums in a form of website, www.ygjkclass.com, in May 2016 followed by WeChat subscription account in August 2016, and mobile App in 2017. We establish one forum for each category of diseases for the convenience of the public. We cooperate with certain well-known we-media platforms in China, including but not limited Toutiao.com, Yidianzixun.com, Douyin.com, CN-Healthcare.com, iQiyi, Youku, and Huoshan.com to streamline our articles co-produced by healthcare professionals and us.

 

As of the date of this prospectus, we have established nearly 150 forums, with more than an aggregate of 4.95 million subscriptions and an aggregate of 1.25 billion click-through.

 

Recent Development

 

Commencing from the fourth quarter of 2018, in addition to providing trainings and education through our platforms, we have been engaged by certain customers on project basis to establish individual websites to provide training and knowledge of certain drugs, most of which are cancer-related treatment, to healthcare professionals and patients. Such websites are established to facilitate qualified patients to obtain free drug treatment from NFPs till the free drugs are completely delivered and distributed as planned. For each website, we also plug in features to manage the project including reviewing patients’ applications, tracking their usage of drugs and collecting related information. Those customers are existing customers of us. They provide those drugs sponsored by pharmaceutical companies without charge to qualified patients. We charge those customers on our services in connection with the websites and related training and management.

 

As of the date of this prospectus, we have assisted our customers to establish 8 websites and we expect that we continue to generate revenue from this type of arrangements. 

 

Our Customers and End Users

 

MDMOOC’s customers are enterprises, non-for-profit organizations (“NFP”), and medical journals, primarily located in China. MDMOOC’s end users are healthcare professionals, nurses, doctors and other healthcare workers.

 

Our enterprise customers are pharmaceutical enterprises, healthcare enterprises engaged in researches and develops pharmaceuticals, vaccines, and consumer healthcare products, pharmaceutical enterprises that engages in drug innovation, manufacturing, and marketing, and medical journals.

 

Our NFP customers, most of whom are sponsored by pharmaceutical enterprises to produce training courses for specific healthcare topics, are charity organizations, national public foundations, and nonprofit non-governmental association, that are governed by provincial and regional government agencies and commissions. Government agencies include the National Health and Family Planning Commission (NHFPC) and Ministry of Civil Affairs.

 

We maintain good relationship with our customers and some of them have long term relationship with us. We generate our revenue on a case-by-case or project-by-project basis and by providing our customers with healthcare information, education, and training services, including the production of online medical training materials, the arrangement of onsite training programs or academic conferences, and the development of medical education software to their targeted end users.

 

68

 

 

For the fiscal year ended December 31, 2017, we generated revenue from a total of 70 customers, of which 14 customers were NFP and 56 customers were pharmaceutical enterprises. For the fiscal year ended December 31, 2018, we generated revenue from a total of 71 customers, of which 15 were NFP and 56 were pharmaceutical enterprises. For the six months ended June 30, 2019, we generated revenue from a total of 50 customers, of which 16 customers were NFP and 34 customers were pharmaceutical enterprises. 

 

We generate our revenues from a relatively small number of customers. For the fiscal years ended December 31, 2018 and 2017, our pharmaceutical enterprise customers accounted for 60.1% and 80.7% of our total revenues, respectively. For the fiscal years ended December 31, 2018 and 2017, our NFP customers accounted for 39.9% and 19.3% of our total revenues, respectively. For the six months ended June 30, 2019 and 2018, our pharmaceutical enterprise customers accounted for 33.6% and 78.2% of our total revenues, respectively. For the six months ended June 30, 2019 and 2018, our NFP customers accounted for 66.4% and 21.8% of our total revenues, respectively. The sharp decrease of revenues generated by pharmaceutical enterprises customers as a percentage of total revenue was mainly because the pharmaceutical enterprises placed more orders through NFP to attract more medical experts and professionals in the name of NFP.

 

Our Sunshine Health Forums is accessible to the public without limitation. As of the date of this prospectus, we have established nearly 150 forums, with more than an aggregate of 4.95 million subscriptions and an aggregate of 1.25 billion click-through.

 

Our Revenue Streams

 

We currently derive our revenues from 2 sources: (1) revenue generated from the information, education, and training programs, services, and products under our “MDMOOC” brand, including but not limited to (a) revenue from designing and producing healthcare training products as requested by our customers; (b) revenue from our onsite education, including organizing medical training sessions and academic conferences; and (c) revenue from the healthcare consulting services we provide to our customers; and (2) revenue generated from disseminating general healthcare knowledge and information and the book selling via our Sunshine Health Forums. We do not charge user fees for access to our MDMOOC online platform or attend some of our onsite conferences. The MDMOOC online platform and onsite education activities enable customers to reach, educate and inform target audiences of healthcare professionals. We work closely with our customers to develop programs to reach specific groups of healthcare professionals and give them placement on the most relevant areas on our MDMOOC online platform.

 

For the fiscal years ended December 31, 2018 and 2017, our revenues were US$12,865,870 and US$9,816,312, respectively, and our net income were US$3,001,489 and US$1,494,928, respectively. For the six months ended June 30, 2019 and 2018, our revenues were US$6,987,623 and US$5,232,210, respectively, and our net income were US$1,708,888 and US$551,205, respectively. We currently generate most of our revenues from MDMOOC. The revenue from Sunshine Health Forums was immaterial for the fiscal years ended December 31, 2018 and 2017 and for the six months ended June 30, 2019 and 2018.  We plan to focus our development on Sunshine Health Forums and expand more information sharing services in this platform. 

 

69

 

 

Key Factors that Affect Operating Results

 

We believe that the principal competitive factors in our markets are industry expertise, breadth and depth of service offerings, quality of the services offered, reputation and track record, marketing, scalability of infrastructure and price. The combination of our large user base, professional database and high quality education content position us to be a leading provider of healthcare information, education, and training services to meet the needs of healthcare organizations and professionals and will continue to contribute to our growth and success.

 

We believe the following factors drive our success:

 

Acknowledged by leading pharmaceutical enterprises

 

We believe that in the foreseeable future we will continue to derive a significant portion of our revenues from a small number of major customers. Our ability to maintain close relationships with these and other major customers is essential to the growth and profitability of our business. However, the volume of work performed for a specific client is likely to vary from year to year, especially when we are not our customers’ exclusive healthcare information, education, and training services provider and we do not have long-term commitments from any of our customers to purchase our services. A major client in one year may not provide the same level of revenues for us in any subsequent year. The healthcare information, education, and training services we provide to our customers, and the revenues and income from those services, may decline or vary as the type and quantity of healthcare information, education, and training services we provide changes over time. In addition, our reliance on any individual client for a significant portion of our revenues may give that client a certain degree of pricing leverage against us when negotiating contracts and terms of service. In addition, a number of factors other than our performance could cause the loss of or reduction in business or revenues from a client, and these factors are not predictable. These factors may include corporate restructuring, pricing pressure, changes to its outsourcing strategy, switching to another services provider or returning work in-house. In the future, a small number of customers may continue to represent a significant portion of our total revenues in any given period. The loss of any of our major customers could adversely affect our financial condition and results of operations.

 

Reliable Professional Content Production

 

Our success depends on our ability to maintain and grow user engagement on our platform. To attract and retain users and compete against our competitors, we must continue to offer high-quality and reliable content to provide our users with a superior healthcare information, education, and training service experience. To this end, we must continue to produce original content and source new professional and user-generated content in a cost effective manner. Given that we operate in a rapidly evolving industry, we need to anticipate industry changes and respond to such changes timely and effectively. If we fail to continue to offer high-quality and reliable content to our users, we may suffer from reduced user traffic and engagement, and our business, financial condition and results of operations may be materially and adversely affected.

 

Well Organized and Easy-To-Use Websites and Apps

 

We have initiated our online operations in the recent 7 years and are developing our ability to provide our courses and education systems on a transactional basis over the Internet. Our future success will depend on our ability to develop the infrastructure effectively, including additional hardware and software, and implement the services, including customer support, necessary to meet the demand for our services. In the event we are not successful in developing the necessary systems and implementing the necessary services on a timely basis, our revenues could be adversely affected, which would have a material adverse effect on our financial condition.

 

70

 

 

Results of Operations

 

For the twelve months ended December 31, 2018 and 2017

 

The following table sets forth a summary of our consolidated results of operations for the fiscal years ended December 31, 2018 and 2017. This information should be read together with our consolidated financial statements and related notes included elsewhere in this Form F-1. The results of operations in any period are not necessarily indicative of our future trends.

 

  

For the fiscal years ended

December 31,

   Changes 
   2018   2017   Amount   % 
                 
Revenues  $12,865,870   $9,816,312   $3,049,558    31%
Cost of revenues   (4,456,353)   (3,970,068)   (486,285)   12%
Gross Profit   8,409,517    5,846,244    2,563,273    44%
                     
Operating Expenses                    
Selling and marketing expenses   (2,261,258)   (2,715,201)   453,943    -17%
General and administrative expenses   (1,425,663)   (1,139,165)   (286,498)   25%
Research and development expenses   (1,447,949)   (943,253)   (504,696)   54%
Total Operating Expenses   (5,134,870)   (4,797,619)   (337,251)   7%
                     
Income from Operations   3,274,647    1,048,625    2,226,022    212%
                     
Interest income, net   191,609    17,331    174,278    1006%
Other income, net   37,364    275,019    (237,655)   -86%
Income Before Income Taxes   3,503,620    1,340,975    2,162,645    161%
                     
Income tax (expenses) benefits   (502,131)   153,953    (656,084)   -426%
Net Income  $3,001,489   $1,494,928   $1,506,561    101%

  

Revenues

 

We generate revenues for pharmaceutical enterprise customers and NFP from design and production of online medical courses, organizing offline medical training services, and other consulting and academic support services.

 

Revenues increased by $3,049,558, or 31% from $9,816,312 for the fiscal year ended December 31, 2017 to $12,865,870 for the fiscal year ended December 31, 2018. The increase was caused by increasing orders from our existing customers with our increasing acknowledgement among the pharmaceutical enterprises customers and NFP customers.

 

For the fiscal year ended December 31, 2018 and 2017, we earned a high gross profit margin of 65% and 60%, respectively. The high gross profit margin was attributable to our reputation acknowledgement among leading pharmaceutical enterprises with our capability to design and produce of high-quality professional content. The Company expected to maintain the high profit margin in the future.

 

71

 

 

Cost of revenues

 

Cost of revenues was comprised of direct related costs incurred by both online and offline seminars, including expenses of travelling and accommodation, seminar site-rental, video production and backdrop production, professional service fees charged by experts who provide offline seminars, and salary and welfare expenses incurred by the key members of the editorial, design and production team. The travelling and accommodation expenses, including but not limited to the air-ticket expenses and hotel accommodation expenses, represented the costs arising from lecturers’ attendance and participation of the offline seminars. Other travelling expenses were incurred by the Company’s medical department for videos production, live streaming of the offline seminars, and materials collection to create online courses. These travelling and accommodation expenses are well budgeted before any agreements entered into by the Company and the customers. Therefore, such expenses are well covered by the customers under those agreements. The Company is not reimbursed by the customers separately.

 

Cost of revenues increased by $486,285, or 12%, from $3,970,068 for the fiscal year ended December 31, 2017 to $4,456,353 for the fiscal year ended December 31, 2018. The increase was mainly attributable to an increase of $325,732 in professional service fees with an increase of charge rates of outsourced experts, and an increase of $127,525 in travelling expenses as increased number of end users including healthcare professionals, nurses and doctors were invited to our offline seminars.

 

Selling and marketing expenses

 

Selling and marketing expenses decreased by $453,943, or 17%, from $2,715,201 for the fiscal year ended December 31, 2017 to $2,261,258 for the fiscal year ended December 31, 2018. The decrease was mainly attributable to a decrease of $446,839 in advertising expenses, as the Company decreased its expenditures in certain cities where it gained expected reputation in medical healthcare industry.

 

General and administrative expenses

 

General and administrative expenses increased by $286,498, or 25%, from $1,139,165 for the fiscal year ended December 31, 2017 to $1,425,663 for the fiscal year ended December 31, 2018. The increase was mainly attributable to an increase of $186,400 in salary and welfare expenses as a result of combining effects of an increase of around 6 headcounts in supporting functions and increase in package of employees, an increase of $40,768 in entertainment expenses which is in line with the business expansion, and an increase in office rental expenses of $23,539 as the Company entered into a new lease contract for its Beijing office in May 2017.

 

Research and development expenses

 

Research and development expenses increased by $504,696, or 54%, from $943,253 for the fiscal year ended December 31, 2017 to $1,447,949 for the fiscal year ended December 31, 2018. The increase was mainly attributable to an increase of $237,710 in salary and welfare expenses as a result of combining effects of an increase of around 8 headcounts in IT department and increase in package of employees, and an increase of $266,986 in software and related intellectual property expenses which was used to develop an extensive library of licensed content and medical database.

 

Other income, net

 

Other income, net was primarily consisted of government subsidies, netting off against donations made to NFPs. The other income, net decreased by 237,655, or 86%, from $275,019 for the fiscal year ended December 31, 2017 to $37,364 for the fiscal year ended December 31, 2018. The decrease was caused by the Company’s recognition of government grants of $221,995 as a reward for its successful IPO listing on the National Equities Exchange and Quotations Co., Ltd. (“NEEQ”) upon receipt of cash during the fiscal year ended December 31, 2017.

 

Income tax (expenses) benefits

 

We had income tax expenses of $502,131 for the fiscal year ended December 31, 2018, as compared to income tax benefits of $153,953 for the fiscal year ended December 31, 2017.

 

Current income tax expenses increased by $441,156 from $nil for the fiscal year ended December 31, 2017 to $441,156 for the fiscal year ended December 31, 2018. The increase was caused by increase of $137,802 in current income tax expenses incurred by Zhongchao Shanghai, who was subject to an income tax rate of 12.5% for the fiscal year ended December 31, 2018 while 0% for the fiscal year ended December 31, 2017, and an increase of $303,354 in current income tax expenses incurred by Zhongxun Shanghai and Shanghai Maidemu, both of which made net income for the fiscal year ended December 31, 2018 while incurred net loss for the fiscal year ended December 31, 2017.

 

72

 

  

Deferred income tax expenses changed from deferred tax benefits of $153,953 for the fiscal year ended December 31, 2017 to deferred tax expenses of $60,975 for the fiscal year ended December 31, 2018. The change was mainly caused by a decrease of $284,263 in deferred tax benefit from advertising expenses, as the Company launched online medical course business in the end of the year ended December 31, 2016 and incurred significant investments in promotion of its online platform since the fiscal year ended December 31, 2017, netting off against a decrease of $119,472 in deferred tax expenses from net operating losses, as the Company utilized more net operating losses brought forwards in the fiscal year ended December 31, 2017 than in the fiscal year ended December 31, 2018.

 

Net income

 

As a result of the foregoing, our net income increased from $1,494,928 for the fiscal year ended December 31, 2017 to $3,001,489 for the fiscal year ended December 31, 2018. 

 

For the six months ended June 30, 2019 and 2018

 

The following table sets forth a summary of our consolidated results of operations for the six months ended June 30, 2019 and 2018. This information should be read together with our consolidated financial statements and related notes included elsewhere in this Form F-1. The results of operations in any period are not necessarily indicative of our future trends.

 

  

For the Six Months ended

June 30,

   Changes 
   2019   2018   Amount   % 
                 
Revenues  $6,987,623   $5,232,210   $1,755,413    34%
Cost of revenues   (2,237,277)   (1,736,783)   (500,494)   29%
Gross Profit   4,750,346    3,495,427    1,254,919    36%
                     
Operating Expenses                    
Selling and marketing expenses   (1,303,740)   (1,456,105)   152,365    -10%
General and administrative expenses   (1,633,056)   (886,932)   (746,124)   84%
Research and development expenses   (553,282)   (624,343)   71,061    -11%
Total Operating Expenses   (3,490,078)   (2,967,380)   (522,698)   18%
                     
Income from Operations   1,260,268    528,047    732,221    139%
                     
Interest income, net   118,943    81,380    37,563    46%
Other income, net   535,587    25,966    509,621    1,963%
Income Before Income Taxes   1,914,798    635,393    1,279,405    201%
                     
Income tax expenses   (205,910)   (84,188)   (121,722)   145%
Net Income  $1,708,888   $551,205   $1,157,683    210%

  

Revenues

 

We generate revenues from NFPs and pharmaceutical enterprise customers for design and production of online medical courses, organizing offline medical training services, and other consulting and academic support services.

 

Revenues increased by $1,755,413, or 34% from $5,232,210 for the six months ended June 30, 2018 to $6,987,623 for the six months ended June 30, 2019. The increase was caused by increasing orders from our existing customers with our increasing acknowledgement among the pharmaceutical enterprises customers and NFP customers.

 

For the six months ended June 30, 2019 and 2018, we earned a high gross profit margin of 68% and 67%, respectively. The high gross profit margin was attributable to our reputation acknowledgement among leading pharmaceutical enterprises with our capability to design and produce of high-quality professional content. The Company expected to maintain the high profit margin in the future.

  

73

 

  

Cost of revenues

 

Cost of revenues was comprised of direct related costs incurred by both online and offline seminars, including expenses of travelling and accommodation, seminar site-rental, video production and backdrop production, professional service fees charged by experts who provide offline seminars, and salary and welfare expenses incurred by the key members of the editorial, design and production team. The travelling and accommodation expenses, including but not limited to the air-ticket expenses and hotel accommodation expenses, represented the costs arising from lecturers’ attendance and participation of the offline seminars. Other travelling expenses were incurred by the Company’s medical department for videos production, live streaming of the offline seminars, and materials collection to create online courses. These travelling and accommodation expenses are well budgeted before any agreements entered into by the Company and the customers. Therefore, such expenses are well covered by the customers under those agreements. The Company is not reimbursed by the customers separately.

 

Cost of revenues increased by $500,494, or 29%, from $1,736,783 for the six months ended June 30, 2018 to $2,237,277 for the six months ended June 30, 2019. The increase of cost of revenues was in line with the increase of revenues.

 

Selling and marketing expenses

 

Selling and marketing expenses decreased by $152,365, or 10%, from $1,456,105 for the six months ended June 30, 2018 to $1,303,740 for the six months ended June 30, 2019. The decrease was mainly attributable to a decrease of $202,743 in advertising expenses, as the Company decreased its expenditures in certain cities where it gained expected reputation in medical healthcare industry.

 

General and administrative expenses

 

General and administrative expenses increased by $746,124, or 84%, from $886,932 for the six months ended June 30, 2018 to $1,633,056 for the six months ended June 30, 2019. The increase was mainly attributable to increase of $440,764 in service fees, $173,679 in audit fees for preparation of initial public offerings, and $76,244 in office rental expenses as the Company entered into two new lease contract for its Beijing offices in February 2019.

 

Research and development expenses

 

Research and development expenses decreased by $71,061, or 11%, from $624,343 for the six months ended June 30, 2018 to $553,282 for the six months ended June 30, 2019. The decrease was mainly attributable to the combined impact of an increase of $80,559 in salary and welfare expenses as a result of combining effects of an increase of around 8 headcounts in IT department and increase in package of employees, an increase of $126,765 in consulting service fees for development of medical courses, against a decrease of $282,583 in software and related intellectual property expenses which was incurred for the six months ended June 30, 2018 to develop an extensive library of licensed content and medical database.

 

Other income, net

 

Other income, net was primarily consisted of government subsidies, netting off against donations made to NFPs. The other income, net increased by $509,621 from $25,966 for the six months ended June 30, 2018 to $535,587 for the six months ended June 30, 2019. The increase was caused by the Company’s recognition of government grants of $515,950 in connection with the Company’s development of medical database and online medical lectures sharing application and cloud. The government grants were recognized as other income upon the Company passing the quality check.

 

74

 

 

Income tax expenses

 

We had income tax expenses of $205,910 for the six months ended June 30, 2019, as compared to $84,188 for the six months ended June 30, 2018.

 

Current income tax expenses increased by $85,257 from $162,943 for the six months ended June 30, 2018 to $248,200 for the six months ended June 30, 2019. The increase was caused by increase of $207,809 in current income tax expenses incurred by Zhongchao Shanghai, as a result of increased profit before tax, netting off against a decrease of $138,846 in current income tax expenses incurred by Shanghai Maidemu as a result of reduced profit before tax.

 

Deferred income tax benefits decreased from $78,755 for the six months ended June 30, 2018 to $42,290 for the six months ended June 30, 2019. The decrease was mainly caused by 1) a decrease of $80,311 in deferred tax benefit from excess advertising expenses. Pursuant to tax laws of China, the deductible advertising expenses are limited to 15% of revenue of the year, with excess advertising expenses deductible in future years. As compared with the six months ended June 30, 2018, the Company generated higher revenue and incurred less advertising expenses for the six months ended June 30, 2019, leading to decreased excess advertising expenses and deferred tax benefits; and 2) a change of $39,667 from deferred tax expense of $32,966 for the six months ended June 30, 2018 to deferred tax benefit of $6,701 for the six months ended June 30, 2019 from net operating losses, as a result of combined impacts of a) some of the operating entities incurred net operating losses for the six months ended June 30, 2019 and b) some of the operating entities fully utilized net operating losses carryforwards during the six months ended June 30, 2018.

 

Net income

 

As a result of the foregoing, our net income increased from $551,205 for the six months ended June 30, 2018 to $1,708,888 for the six months ended June 30, 2019. 

 

Liquidity and Capital Resources

 

In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. To date, we have financed our operations primarily through cash flows from operations, bank borrowings and equity financing.

 

During the fiscal years ended December 31, 2018, we generated net income of $3,001,489, and raised funds of $756,544 and $3,580,260 from bank borrowings and equity financing, respectively. During the fiscal year ended December 31, 2017, we generated net income of $1,494,928, and raised funds of $2,732,081 from equity financing. During the six months ended June 30, 2019 and 2018, the Company generated net income of $1,708,888 and $551,205, but did not raise funds from financing institutions.

 

As of June 30, 2019 and December 31, 2018, we had cash and cash equivalents of $6,558,332 and $7,918,675, and working capital of $10,826,022 and $10,227,848, respectively. We intend to continue to use these funds to grow our business primarily by:

 

  Strengthen our brand awareness of MDMOOC and Sunshine Health School

 

  Expand and enhancement of medical course content

 

  Grow medical professional user community

 

  Recruit more experienced editorial staff, and

 

  Development of multiple revenues streams such as online bookstore

 

Although we consolidate the results of our VIE and its subsidiaries, we only have access to cash balances or future earnings of our VIE and its subsidiaries through our VIE Arrangements with our VIE.

 

Current foreign exchange and other regulations in the PRC may restrict our PRC entities in their ability to transfer their net assets to the Company and its subsidiaries in Cayman Islands, and Hong Kong. However, these restrictions have no impact on the ability of these PRC entities to transfer funds to us as we have no present plans to declare dividend which we plan to retain our retained earnings to continue to grow our business. In addition, these restrictions have no impact on the ability for us to meet our cash obligations as all of our current cash obligations are due within the PRC.

 

To utilize the proceeds we expect to receive from this offering, we may make additional capital contributions to our PRC subsidiary, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or make loans to the PRC subsidiaries. However, most of these uses are subject to PRC regulations. Foreign direct investment and loans must be approved by and/or registered in accordance with the Foreign Exchange Administration Regulations (1996), as amended in 2008. The total amount of loans we can make to our PRC subsidiary cannot exceed statutory limits and must be registered with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company.

 

75

 

 

We are permitted under PRC laws and regulations to provide funding to our PRC subsidiary only through loans or capital contributions, and to our consolidated VIE only through loans, and only if we satisfy the applicable government registration and approval requirements. The relevant filing and registration processes for capital contributions to our PRC subsidiary typically take approximately eight weeks to complete. The filing and registration processes for loans either to our PRC subsidiary or to our consolidated VIE typically take approximately four weeks or longer to complete. While we currently see no material obstacles to completing the filing and registration procedures with respect to future capital contributions to our PRC subsidiary and loans to our PRC subsidiary or our consolidated VIE, we cannot assure you that we will be able to complete these filings and registrations on a timely basis, or at all. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans and direct investment by offshore holding enterprises to PRC entities may delay or prevent us from using the proceeds of this Offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.’’ Additionally, while there is no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries, loans provided to our PRC subsidiary and consolidated VIE in the PRC are subject to certain statutory limits. With respect to our PRC subsidiaries, the maximum amount of the loans that they can acquire in aggregate from outside China as of June 30, 2019 and December 31, 2018 is approximately RMB 156.6 million (US$22.8 million) under the net asset approach (subject to the uncertainty whether the competent SAFE local branch would accept the net assets amount of the WFOE which is consolidated from our VIE at the time of the use of the proceed). We are able to use all of the net proceeds from this offering for investment in our PRC operations by funding our PRC subsidiary through capital contributions which is not subject to any statutory limit on the amount under PRC laws and regulations. We expect the net proceeds from this offering to be used in the PRC will be in the form of RMB and, therefore, our PRC subsidiary and consolidated VIE will need to convert any capital contributions or loans from U.S. dollars into Renminbi in accordance with applicable PRC laws and regulations.

  

Cash Flows

 

The following table sets forth a summary of our cash flows for the fiscal years ended December 31, 2018 and 2017, and for the six months ended June 30, 2019 and 2018. 

 

  

For the fiscal years ended

December 31,

  

For the Six Months ended

June 30,

 
   2018   2017   2019   2018 
                 
Net Cash Provided by (Used in) Operating Activities  $1,312,647   $(537,654)  $(1,290,429)  $1,821,810 
Net Cash (Used in) Provided by Investing Activities   (504,048)   (1,835,459)   (98,358)   145,932 
Net Cash Provided by Financing Activities   4,336,804    2,732,081    -    - 
Effect of exchange rate changes on cash and cash equivalents   (205,243)   195,860    28,444    (124,691)
Net increase (decrease) in cash and cash equivalents  $4,940,160   $554,828   $(1,360,343)  $1,843,051 

 

Operating activities

 

Fiscal Years Ended December 31, 2018 and 2017

 

Net cash provided by operating activities was $1,312,647 for the fiscal year ended December 31, 2018, a change of $1,850,301 from net cash used in operating activities of $537,654 for the fiscal year ended December 31, 2017. We made a net income of $3,001,489 for the fiscal year ended December 31, 2018, an increase of $1,506,561 from the fiscal year ended December 31, 2017, during which we made a net income of $1,494,928. In addition to the change in profitability, the decrease in net cash used in operating activities was the result of several factors, including:

 

An increase in changes in deferred income of $345,081. The increase was mainly caused by increased government grants received in connection with the Company’s development of medical database and online medical lectures sharing application and cloud. For the fiscal year ended December 31, 2018 and 2017, the Company received government grants of $552,277 and $207,196, respectively;

 

A decrease in changes in prepayments to suppliers of $589,965. The decrease was mainly caused by prepayments in December 2018 of $341,353 and $158,672 to a filming production vendor and a travel agency, respectively; and

 

An increase in changes in accrued expenses and other liabilities of $684,763. The increase was mainly caused by improvements in payment process in the fiscal year ended December 31, 2017.

 

76

 

 

Six Months Ended June 30, 2019 and 2018

 

Net cash used in operating activities was $1,290,429 for the six months ended June 30, 2019, a change of $3,112,239 from net cash provided by operating activities of $1,821,810 for the six months ended June 30, 2018. We made a net income of $1,708,888 for the six months ended June 30, 2019, an increase of $1,157,683 from the six months ended June 30, 2018, during which we made a net income of $551,205. In addition to the change in net income, the change of net cash used in operating activities from net cash provided by operating activities was the result of several factors, including:

 

  An increase of $3,169,533 in accounts receivable for the six months ended June 30, 2019, as compared with an increase of $104,780 for the same period ended June 30, 2018. The change was mainly caused by an increase of revenue recognized in the three months ended June 30, 2019 as compared with the same period ended June 30, 2018, and the Company generally provide credit term ranging between one and three months for customers. In addition, Zhongchao Shanghai changed its official name in June 30, 2019, which delayed payments from some customers who had to update vendor information in their payment system; and

 

  A decrease of $412,760 in deferred income for the six months ended June 30, 2019, as compared with an increase of $573,404 for the same period ended June 30, 2018. The change was mainly caused by  government grants of  $nil and $573,404 received during the six months ended June 30, 2019 and 2018, respectively, in connection with the Company’s development of medical database and online medical lectures sharing application and cloud system, and recognition of government grants of $515,950 and $nil over the periods, respectively; and

 

  A decrease in changes in accrued expenses and other liabilities of $410,001. The decrease was mainly caused by more frequent and timely payments over the years.

 

Investing activities

 

Fiscal Years Ended December 31, 2018 and 2017

 

For the fiscal year ended December 31, 2018, we had net cash used in investing activities of $504,048 which was primarily attributable to purchase of property and equipment of $668,067, payment for land use rights of $418,520 and net release from short-term investments of $582,539.

 

For the fiscal year ended December 31, 2017, we had net cash used in investing activities of $1,835,459 which was primarily attributable to net investments in short-term investments of $1,753,763.

 

Six Months Ended June 30, 2019 and 2018

 

For the six months ended June 30, 2019, we had net cash used in investing activities of $98,358 which was primarily attributable to payment for construction of the staff dormitory, purchase of property and equipment of $835,430, deducted by net release from short-term investments of $737,072.

 

For the six months ended June 30, 2018, we had net cash provided investing activities of $145,932 which was primarily attributable to net release from short-term investments of $447,726, deducted by purchase of land use rights of $298,484.

 

Financing activities

 

Fiscal Years Ended December 31, 2018 and 2017

 

For the fiscal year ended December 31, 2018, we had net cash provided by financing activities of $4,336,804 which was primarily attributable to proceeds of $3,580,260 raised in an equity financing with one strategic investor, and proceeds from bank borrowings of $756,544.

 

For the fiscal year ended December 31, 2017, we had net cash provided by financing activities of $2,732,081 which was primarily attributable to proceeds of $2,732,081 raised in equity financings with three strategic investors.

  

Six Months Ended June 30, 2019 and 2018

 

For the six months ended June 30, 2019 and 2018, we generated no cash flows from financing activities.

 

Research and Development, Patents, and Licenses, etc.

 

Research and development expenses consist primarily of salary and welfare expenses for IT department employees who work for development of the Company’s platform and database, and software and related intellectual property expenses which was used to develop an extensive library of licensed content and medical database.

 

77

 

  

Our research and development expenses were $1,447,949 and $943,253 for the fiscal years ended December 31, 2018 and 2017, respectively.  Our research and development expenses were $553,282 and $624,343 for the six months ended June 30, 2019 and 2018, respectively. 

 

We are continued to commit to work on the development and maintenance in our platform and database as we intend to provide professionals and consumers with Internet-based access to our courses and education software and enhance the consumer experience.

 

Trend Information

 

Other than as disclosed elsewhere in this Form F-1, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

 

Tabular Disclosure of Contractual Obligations

 

Commitments and Contingencies

 

From time to time, the Company may be subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although the outcomes of these legal proceedings cannot be predicted, the Company does not believe these actions, in the aggregate, will have a material adverse impact on its financial position, results of operations or liquidity.

 

Operating Lease

 

As of December 31, 2018, the Company had two office lease agreements with two lessors. The lease term of the two lease agreements expire in January and May 2019, respectively. In January 2019, the Company extended one of the lease agreements for one year. For the six months ended June 30, 2019, the Company entered into two new office lease agreements with one lessor. As of June 30, 2019, the Company had three office lease agreements with two lessors, and the lease term will expire in February 2020 through March 2021. Future minimum lease payment under non-cancelable operating leases are as follows:

 

As of June 30, 2019  Minimum
lease
payments
 
Six months ending December 31, 2019  $123,665 
Twelve months ending December 31, 2020   233,968 
Twelve months ending December 31, 2021 and thereafter   37,690 
Total  $395,323 

 

Contractual commitment for construction of the Company’s office campus

 

During the year ended December 31, 2018, the Company obtained two pieces of land use rights, on which it commenced construction of the office campus and facilities. The construction is expected to complete in December 2019. Future minimum capital commitment under construction contract as of June 30, 2019 are as follows:

 

As of June 30, 2019  Minimum
capital
payments
 
Six months ending December 31, 2019  $474,865 
Total  $474,865 

 

Bank borrowings

 

On August 30, 2018 and December 21, 2018, the Company borrowed $290,888 and $436,332 from Shanghai Pudong Development Bank, with interest rates of 5.09%. The borrowings are due on August 29, 2019 and December 20, respectively. For the years ended December 31, 2018 and 2017, the interest expenses charged for the bank borrowings were $5,840 and $nil, respectively. For the six months ended June 30, 2019 and 2018, the interest expenses charged for the short term bank borrowings was $18,967 and $nil, respectively. The following table sets forth our contractual obligations as of June 30, 2019.

 

   Total  

For the
six months ending December 31,

2019

  

For the
twelve months ending December 31,

2020

  

For the
twelve months
ending December 31, 2021 and

thereafter

 
                     
Bank borrowings  $728,332   $728,332   $-   $- 

 

78

 

 

Off-Balance Sheet Arrangements

 

We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us. 

 

Critical Accounting Policies

 

We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. The use of estimates is an integral component of the financial reporting process, though actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on the judgment of our management.

 

Basis of presentation

 

The accompanying audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Principal of consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly and majority owned subsidiaries, and consolidated VIE and its subsidiaries for which the Company is the primary beneficiary.

 

All transactions and balances among the Company, its subsidiaries and consolidated VIE have been eliminated upon consolidation.

 

Revenue recognition

 

The Company early adopted ASC 606, Revenue from Contracts with Customers (“ASC 606”) on January 1, 2017, using the modified retrospective approach. ASC 606 establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The Company has assessed the impact of the guidance by reviewing its existing customer contracts and current accounting policies and practices to identify differences that will result from applying the new requirements, including the evaluation of its performance obligations, transaction price, customer payments, transfer of control and principal versus agent considerations. Based on the assessment, the Company concluded that there was no change to the timing and pattern of revenue recognition for its current revenue streams in scope of ASC 605 and therefore there was no material changes.

 

79

 

 

In according with ASC 606, revenues are recognized when control of the promised services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

 

The Company identified each distinct service, or each series of distinct services that are that are substantially the same and that have the same pattern of transfer to the customer, as a performance obligation. Transaction price is allocated among different performance obligations identified in one contract, by using expected cost plus margin approach, if the standalone selling price of each performance obligation is not observable.

 

Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represents amounts invoiced and revenue recognized prior to invoicing when the Company has satisfied its performance obligation and has the unconditional right to payment. The balance of accounts receivable was $1,993,237 and $1,301,810 as of December 31, 2018 and 2017, respectively.

 

Advances from customers consists of payments received related to unsatisfied performance obligations at the end of the period. As of December 31, 2017, the Company’s total advance from customers was $712,671, all of which was recognized as revenue for the year ended December 31, 2018. The Company’s total advance from customers was $553,409 as of December 31, 2018.

 

The Company applied a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. The Company has no material incremental costs of obtaining contracts with customers that the Company expects the benefit of those costs to be longer than one year which need to be recognized as assets.

 

Medical training and education services

 

The Company designs and provides both online and offline medical training and education courses to physicians and allied healthcare professionals (the “training and education services”). The Company identifies a single performance obligation from contracts for both offline and online medical training and education services. The Company recognizes revenue at the point of provision of services.

 

Offline medical training and education services courses – though customers can benefit from each service commitment, including design, production and presentation of medical courses, together with other readily available resources. The promises in the contracts with customers is integration of all of these service commitments.   The Company concludes that these service commitments are highly dependent with each other, in the context of the contract term. Thus these service commitments are not distinct from each other, and the Company combines all service commitments performed as a single performance obligation. In cases where the Company engages third party experts to provide presentation in medical courses, as the Company determines the contents and the participants, it has the ability to direct these experts to provide medical training services for the Company. Therefore the Company is primarily responsible for fulfilling the promise to provide the medial courses and has the discretion in establishing the transaction price. The Company is a principal in the provision of services and recognizes revenues on a gross basis.

 

Online medical training and education services courses – the promises in the contracts with customers consist of provision of online courses and presentation of the courses online for users to access for a period of time. The performance obligation of presentation of the courses online for users for a period of time is immaterial in the context of the contract because presentation of each course incurred no significant additional cost, nor will it occupy any significant resources of the Company, except for little digital space on the Company’s server, which is inconsequential. Therefore, the Company combines all service commitments performed as a single performance obligation.

 

The fees are collected either in advance to provision of services or after the services. In cases where fees are collected in advance, the fees are recorded as “advance from customers” in the consolidated balance sheets. Advance from customers is recognized as revenue when the Company delivers the courses to its customers. The fees are non-refundable. In cases where fees are collected after the sales, revenue and accounts receivable are recognized upon delivery of medical training and education courses to the Company. The fees are fixed and determinable at the inception of the services.

 

Assistance in operation of patient-aid projects

 

The Company is engaged by not-for-profit organizations (“NFP”) to assist in operation of patient aid projects with a purpose to facilitate qualified patients to obtain free drug treatment from NFPs. The Company is responsible to provide doctors with access to training courses or training materials in connection with the drug treatment, review the completeness of application documents from patients, and other ad-hoc works. The arrangements are structured as fixed price contracts. The price is determined as stated in contracts and does not include any variable consideration. The Company identifies a single performance obligation from contracts and recognizes revenue over a period of time during which the Company provides the assistance to the NFPs till the free drugs are completely delivered. The Company uses an input-based method to measure the progress, by reference to the cost incurred in performing the obligation.

 

The fees are fixed at the inception of the services and are collected either in advance to provision of services or after the services are provided.

 

Other consulting services

 

The Company also provides consulting services to its customers, including drafting research papers and other academic supports. The consulting services are accounted for as a single performance obligation and was recognized as revenue when the Company delivers services to the customers. Fees are generally collected after provision of services. For the years ended December 31, 2018 and 2017, the Company generated minimal amount from other consulting services.

 

Income taxes

 

The Company accounts for income taxes in accordance with the U.S. GAAP for income taxes. Under the asset and liability method as required by this accounting standard, the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.

 

The charge for taxation is based on the results for the year as adjusted for items which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

 

80

 

 

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis. Deferred tax assets are recognized to the extent that it is probable that taxable income to be utilized with prior net operating loss carried forwards. Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

 

An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. As of June 30, 2019, income tax returns for the tax years ended December 31, 2014 through December 31, 2018 remain open for statutory examination.

 

Quantitative and Qualitative Disclosures about Market Risks

 

The Company is also exposed to liquidity risk which is risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and business needs. Liquidity risk is controlled by the application of financial position analysis and monitoring procedures. When necessary, the Company will turn to other financial institutions and the shareholders to obtain short-term funding to meet the liquidity shortage.

 

Inflation risk

 

Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 31, 2018 and 2017 were increases of 2.1% and 1.8%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

 

Interest rate risk

 

Our exposure to interest rate risk primarily relates to the interest rate that our deposited cash can earn, on the other hand. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase, however, may raise the cost of any debt we incur in the future.

 

Foreign currency translation and transaction

 

Substantially all of the Company’s operating activities and the Company’s assets and liabilities are denominated in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either through the Peoples’ Bank of China (“PBOC”) or other authorized financial institutions at exchange rates quoted by PBOC. Approval of foreign currency payments by the PBOC or other regulatory institutions requires submitting a payment application form together with suppliers’ invoices and signed contracts. The value of RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market.

 

Recently Issued Accounting Standards

 

A list of recently issued accounting pronouncements that are relevant to us is included in Note 2(bb) to our consolidated financial statements included elsewhere in this prospectus. 

 

81

 

  

OUR BUSINESS

 

Overview

 

Our Company

 

We are a provider of healthcare information, education, and training services to healthcare professionals and the public in China. We offer a wide range of online and onsite health information services, healthcare education programs, and healthcare training products, consisting primarily of clinical practice training, open classes of popular medical topics, interactive case studies, academic conference and workshops, continuing education courses, and articles and short videos with educational healthcare content to healthcare professionals as well as the public. The services, programs, and products that we provide:

 

make it easier for healthcare professionals to access healthcare reference sources, stay abreast of the latest medical information, learn about new treatment options, earn continuing medical education credits and communicate with peers; and

 

enable the public to obtain health information on a particular disease or condition, offer content on topics of individual interest, improve public health consciousness, and promote people’s lifestyle.

 

We provide our healthcare information, education, and training services to the healthcare professionals under our “MDMOOC” brand, which we believe is one of the leading consumer brands in China’s healthcare training and education sector, as evidenced by the 2017 Research Report on Chinese National Equities Exchange and Quotations (NEEQ) by Beijing Wutong Ideal Capital Management Co., Ltd., a Chinese NEEQ research company, where we are considered as one of the main and typical medical teaching video provider with doctor interactive and online training platform. We provide our healthcare educational content to the public via our “Sunshine Health Forums”, which, based on the amount of the registered users and daily review volume, we believe is one of the largest platform in China, for general healthcare knowledge and information to the public.

 

We commenced our operation, through Zhongchao Shanghai, in August 2012 with a vision to offer a wide range of accessible and immediate healthcare information and continuous learning and training opportunities for Chinese healthcare professionals. Since our inception, we have focused on developing our information, education, and training programs to address the needs in the healthcare industry in China; and developing online platforms and onsite activities to deliver our information services, education programs and training products.

 

MDMOOC-Healthcare Information, Education, and Training for Professionals

 

Online Platforms

 

We launched our first online platform in a form of website, www.mdmooc.org, under our “MDMOOC” brand in 2013 to provide information, education, and training services to physicians and allied healthcare professionals, such as pharmacists and nurses primarily located in China, via Internet-Plus solutions. Internet Plus refers to the applications of the internet and other information technology in conventional industries, such as manufacturing, education and healthcare. It is an incomplete equation where various internet (mobile, cloud computing, big data or Internet of Things) can be added to other traditional fields. We further launched our MDMOOC Wechat subscription account and MDMOOC mobile App in 2015 and 2016, respectively (together with the website, the “MDMOOC online platform”). Healthcare professionals in China can apply for registration with their healthcare qualification to get access to our MDMOOC online platform.

 

82

 

 

The programs available on our MDMOOC online platform enable our users to timely obtain extension knowledge of precedents, treatments, and first-hand experiences of various disease and other healthcare related matters. In addition, our MDMOOC online platform offers these professional users what we believe is one of the largest online libraries of continuing medical education programs in China that are produced in association with entities accredited by the National Health Commission of the PRC, such as Chinese Medical Association and Chinese Journal of Continuing Medical Education. From the convenience of their home or office computer and mobile App, our professional users can access a variety of accredited editorial resources and programs including online journal articles, medical conferences, and open classes and obtain continuing medical education credits which are required for the healthcare qualification of doctors, nurses, and pharmacists.

 

We believe MDMOOC online platform helps healthcare professionals improve their clinical knowledge and practice of medicine. Since launching in 2013, we have been continuously developing our MDMOOC online platform with new forms of Internet-based education solutions. There are currently approximately 1,429 education and training programs available on our MDMOOC online platform and free to our registered users. About 95% of all our programs are self-developed by our research and development team. The original content of these programs, including daily medical thesis, commentary, conference coverage, expert columns, and activities are written by our research and development team and authors from widely respected academic institutions, and edited and managed by our in-house editorial staff. The remaining 5% of programs are created under the purchase orders of our corporate or institution customers, where we develop customized programs with designated healthcare topics. Such 5% of programs are only available to certain registered users with program passcodes provided by our corporate or institution customers. Our revenues are mainly sourced from these 5% of programs.

 

We currently provide our proprietary interactive programs via Practice Improvement (PI), a problem-based and case-based form of healthcare course, which integrates state-of-the-art treatment information and clinical cases for particular diseases into interactive practice modules; Community of Practice Share (COPS), an online and live clinical experience sharing platform that creates the most effective discussion in a particular healthcare domain or medical area due to the common interests of the users; Continuing Professional Development (CPD), a section of our platform that provides discussions and articles focusing on the future development and the differences between Continuing Medical Education (CME) and Continuing Professional Development (CPD), and other general information of physician competency framework and Meta-analysis. Our original, exclusive and proprietary content includes innovative features such as after-class quiz, key point summary and highlight during the courses, and peer-review and comments.

 

We believe that our ability to create, source, edit and organize online healthcare-related content, interactive education services, and training programs has made MDMOOC online platform one of the leading health destinations and most recognized information platform in healthcare sector in China. As of the date of this prospectus, our MDMOOC online platform has more than 300,000 registered users and a database of more than 2 million healthcare experts including over 700,000 physicians, and 1,300,000 allied healthcare professionals in medical academics, associations, and leading hospitals who constantly collaborate with us to develop training programs on needed basis.

 

Onsite Education Activities

 

In addition to healthcare information, education, and training via Internet-Plus, we organize onsite healthcare and medical training sessions and academic conferences from time to time under our “MDMOOC” brand. For instance, in January 2019, we launched EWMA-certified (defined as below) wound-management collaboration training programs, covering the topics including but not limited to basic concepts of acute and chronic wounds, management of different levels of surgical and non-surgical wounds, the construction of different levels of wound centers, and medical staff collaboration in the process of wound management.

 

We cooperate with Beijing Chronic Disease Prevention and Health Education Research Association and Professor Yixin Zhang from the Ninth People’s Hospital of Shanghai Jiao Tong University School of Medicine to create courses titled “Essential Course for Wound Care Management” and “Advanced Course for Surgical Wound Treatment”. These courses have been certified and authorized by the European Wound Management Association (EWMA), a European not-for-profit umbrella organization, linking national wound management organizations, individuals and groups with interest in wound care. We plan to hold four (4) training programs for Essential Course for Wound Care Management and two (2) training programs for Advanced Course for Surgical Wound Treatment. Each program will accept no more than twenty (20) applicants who shall hold academic credential above undergraduate. We also require all applicants to have more than six-year working experience in the field of wound repair. We will issue a certificate to each of the applicant upon completion of the training as their proof of achievement and ability in the wound management and treatment

 

83

 

 

As of the date of this prospectus, we have successfully held the first short-term training program for Essential Course for Wound Care Management in Fujian, China from March 28, 2019 to April 4, 2019 and our first training program for Advanced Course for Surgical Wound Treatment from June 23, 2019 to June 29, 2019 in Jiangsu, China. We plan to hold our future training programs in the 3rd and 4th quarters of 2019 in Zhejiang and Hebei.

 

We believe the combination of online and onsite services would provide our end-users the greatest convenience. With more choices of the forms of healthcare education, we enrich the learning experience of our end-users.

 

Sunshine Health Forums-Healthcare Information and Education for the Public

 

Our goal is not only provide continuing education and training to healthcare professionals but to promote healthy lifestyle and provide healthcare knowledge to the public. In order to achieve that, we develop and operate the Sunshine Health Forums, online education-for-all platforms that disseminate articles and features related to healthcare and wellness education, medical behavior intervention, and newly developed health technology and application. We launched our Sunshine Health Forums in a form of website, www.ygjkclass.com, in May 2016 followed by WeChat subscription account in August 2016, and mobile App in 2017. We establish one forum for each category of diseases for the convenience of the public. We cooperate with certain well-known we-media platforms in China, including but not limited Toutiao.com, Yidianzixun.com, Douyin.com, CN-Healthcare.com, iQiyi, Youku, and Huoshan.com to streamline our articles co-produced by healthcare professionals and us.

 

Recent Developments

 

Commencing from the fourth quarter of 2018, in addition to providing trainings and education through our platforms, we have been engaged by certain customers on project basis to establish individual websites to provide training and knowledge of certain drug treatment, most of which are cancer-related treatment, to healthcare professionals and patients. Such websites are established to facilitate qualified patients to obtain free drug treatment from NFPs till the free drugs are completely delivered and distributed as planned. For each website, we also plug in features to manage the project including reviewing patients’ applications, tracking their usage of drugs and collecting related information. Those customers are existing customers of us. They provide those drugs sponsored by pharmaceutical companies without charge to qualified patients and we charge those customers on our services in connection with the website and related training and management.

 

Our Customers and End Users

 

MDMOOC’s Customers and End Users

 

Our customers are enterprises, non-for-profit organizations (“NFP”), and medical journals, primarily located in China. Our terminal customers and end-users are healthcare professionals, nurses, doctors and other healthcare workers.

 

Our enterprise customers are pharmaceutical enterprises, healthcare enterprises engaged in researches and develops pharmaceuticals, vaccines, and consumer healthcare products, pharmaceutical enterprises that engages in drug innovation, manufacturing, and marketing, and medical journals.

 

Our NFP customers, most of whom are sponsored by pharmaceutical enterprises to produce training courses for specific healthcare topics, are charity organizations, national public foundations, and nonprofit non-governmental association, that are governed by provincial and regional government agencies and commissions. Government agencies include the National Health and Family Planning Commission (NHFPC) and Ministry of Civil Affairs.

 

We maintain good relationship with our customers and some of them have long term relationship with us.  We generate our revenue on a case-by-case or project-by-project basis and by providing our customers with healthcare information, education, and training services, including the production of online medical training materials, the arrangement of onsite training programs or academic conferences, and the development of medical education software to their targeted end users.

 

For the fiscal year ended December 31, 2017, we generated revenue from a total of 70 customers, of which 14 customers were NFP and 56 customers were pharmaceutical enterprises. For the fiscal year ended December 31, 2018, we generated revenue from a total of 71 customers, of which 15 were NFP and 56 were pharmaceutical enterprises. For the six months ended June 30, 2019, we generated revenue from a total of 50 customers, of which 16 customers were NFP and 34 customers were pharmaceutical enterprises.

 

We generate our revenues from a relatively small number of customers. For the fiscal years ended December 31, 2018 and 2017, our pharmaceutical enterprise customers accounted for 60.1% and 80.7% of our total revenues, respectively. For the fiscal years ended December 31, 2018 and 2017, our NFP customers accounted for 39.9% and 19.3% of our total revenues, respectively. For the six months ended June 30, 2019 and 2018, our pharmaceutical enterprise customers accounted for 33.6% and 78.2% of our total revenues, respectively. For the six months ended June 30, 2019 and 2018, our NFP customers accounted for 66.4% and 21.8% of our total revenues, respectively. The sharp decrease of revenues generated by pharmaceutical enterprises customers as a percentage of total revenue was mainly because the pharmaceutical enterprises placed more orders through NFP to attract more medical experts and professionals in the name of NFP.

 

Sunshine Health Forums’ Users

 

Unlike MDMOOC online platform where we require our users to register with their healthcare qualification and some of our programs are limited to certain registered users of the platform, our Sunshine Health Forums is accessible to the public without limitation. As of the date of this prospectus, we have established nearly 150 forums, with more than an aggregate of 4.95 million subscriptions and an aggregate of 1.25 billion click-through.

 

84

 

  

Source of Revenues

 

We currently derive our revenues from 2 sources: (1) revenue generated from the information, education, and training programs, services, and products under our “MDMOOC” brand, including but not limited to (a) revenue from designing and producing healthcare training products as requested by our customers; (b) revenue from our onsite education, including organizing medical training sessions and academic conferences; and (c) revenue from the healthcare consulting services we provide to our customers; and (2) revenue generated from disseminating general healthcare knowledge and information and the book selling via our Sunshine Health Forums. We do not charge user fees for access to our MDMOOC online platform or attend some of our onsite conferences. The MDMOOC online platform and onsite education activities enable customers to reach, educate and inform target audiences of healthcare professionals. We work closely with our customers to develop programs to reach specific groups of healthcare professionals and give them placement on the most relevant areas on our MDMOOC online platform.

 

For the fiscal years ended December 31, 2018 and 2017, our revenues were US$12,865,870 and US$9,816,312, respectively, and our net income were US$3,001,489 and US$1,529,280, respectively. For the six months ended June 30, 2019 and 2018, our revenues were US$6,987,623 and US$5,232,210, respectively, and our net income were US$1,708,888 and US$551,205, respectively. We currently generate most of our revenues from MDMOOC. The revenue from Sunshine Health Forums was immaterial for the fiscal years ended December 31, 2018 and 2017 and for the six months ended June 30, 2019 and 2018. We plan to focus our development on Sunshine Health Forums and expand more information sharing services in this platform. 

 

Our Corporate History and Structure

  

We are a holding company incorporated on April 16, 2019, under the laws of the Cayman Islands, or Zhongchao Cayman. We have no substantive operations other than holding all of the issued and outstanding shares of Zhongchao Group Inc., or Zhongchao BVI, established under the laws of the British Virgin Islands on April 23, 2019.

 

Zhongchao BVI is also a holding company holding all of the outstanding equity of Zhongchao Group Limited, or Zhongchao HK, which was established in Hong Kong on May 14, 2019. Zhongchao HK is also a holding company holding all of the outstanding equity of Beijing Zhongchao Zhongxing Technology Limited, or Zhongchao WFOE, which was established on May 29, 2019 under the laws of the PRC.

 

We conduct our business through our variable interest entity, or VIE, Zhongchao Medical Technology (Shanghai) Corp., or Zhongchao Shanghai, a PRC company, and through its wholly owned subsidiaries, including Shanghai Maidemu Cultural Communication Corp., or Shanghai Maidemu, Horgos Zhongchao Medical Technology Co., Ltd., or Horgos Zhongchao Medical, and Shanghai Zhongxun Medical Technology Co., Ltd., or Shanghai Zhongxun, Horgos Zhongchao Zhongxing Medical Technology Co., Ltd., or Horgos Zhongchao Zhongxing, each a PRC company. We commenced our operations under the name Zhongchao Medical Consulting (Shanghai) Limited, or Shanghai Zhongchao Limited, a limited liability company established under the laws of the PRC, to provide medical online and offline training services. Zhongchao Shanghai was incorporated on August 17, 2012 by Juru Guo and Baorong Xue, who held 60% and 40% equity interests in Zhongchao Shanghai respectively. On May 25, 2015, the two shareholders transferred all equity interests to Weiguang Yang who held 100% equity interests in Zhongchao Shanghai after the transfer. On January 15, 2016, the name was changed to Zhongchao Medical Technology (Shanghai) Co., Ltd. On February 5, 2016, the management completed its registration with the State Administration for Industry and Commerce, or SAIC, to convert Shanghai Zhongchao Limited into a company limited by shares, or Zhongchao Shanghai. Through direct ownership, Zhongchao Shanghai has established subsidiaries and branch offices in various cities in PRC, including Beijing, Shanghai, and Horgos.

 

On June 27, 2016, Shanghai Zhongchao was listed on the National Equities Exchange and Quotations Co., Ltd., or the NEEQ. At the time of listing, Weiguang Yang directly held 54.60% equity interests in Zhongchao Shanghai and Shanghai Xingzhong Investment Management LP. Ltd., a limited partnership incorporated under the PRC laws (“Shanghai Xingzhong”), directly held 17.90% equity interests in Zhongchao Shanghai. Shanghai Xingzhong was incorporated on September 22, 2015 by management of Zhongchao Shanghai as a platform for certain officers and employees holding founder shares. Pursuant to its partner agreement, Weiguan Yang is the general partner of Shanghai Xingzhong; and manages and operates Shanghai Xingzhong. He has the right, among others, to possess, manage, maintain and dispose the assets of Shanghai Xingzhong including its equity interest in Zhongchao Shanghai. As a result, Weiguang Yang controlled 72.50% equity interests in Zhongchao Shanghai upon listing on NEEQ.

 

To facilitate our initial public offering in the United States, Zhongchao Shanghai was delisted from NEEQ in February 2019. At the time of delisting, Weiguang Yang controlled 57.29% equity interests in Zhongchao Shanghai (43.41% of which was directly held and 13.88% of which was controlled through Shanghai Xingzhong). After the delisting, a minority shareholder of Zhongchao Shanghai transferred his shares to Mr. Yang. At the time of our restructure in August 2019, Mr. Yang controlled 58.78% equity interests in Zhongchao Shanghai (44.90% of which was directly held and 13.88% of which was controlled through Shanghai Xingzhong). To conclude, Zhongchao Shanghai has been under the control of Weiguan Yang since its initial listing on NEEQ in June 2016.

 

85

 

  

On June 24, 2019, Zhongchao Shanghai changed its name to Zhongchao Medical Technology (Shanghai) Limited. Zhongchao Shanghai engages in technology development, technology transfer, and technical services in the field of medical technology, technical consulting in the field of network technology, and medical information consulting.

 

On March 12, 2015, Zhongchao Shanghai established its wholly owned subsidiary, Shanghai Maidemu. Shanghai Maidemu engages in planning for cultural and artistic exchanges, designing, producing, acting for and publishing various kinds of advertisements, and medical consultation.

 

On May 27, 2017, Zhongchao Shanghai established its wholly owned subsidiary, Shanghai Zhongxun. Shanghai Zhongxun engages in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

 

On September 12, 2017, Zhongchao Shanghai established its wholly owned subsidiary, Horgos Zhongchao Medical Technology Limited Company (“Horgos Zhongchao Medical”). Horgos Zhongchao Medical engages in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

 

On September 28, 2016, Shanghai Maidemu formed a joint venture with Ms. Hongxia Zhang and Ms. Shuhua Gao, contributing a 55% equity interest in Shanghai Huijing Information Technology Co., Ltd., or Shanghai Huijing, a PRC company. On January 21, 2019, Shanghai Huijing was 100% owned by Shanghai Maidemu. Shanghai Huijing engages in technology development, transfer, service and consulting in the fields of computer technology, graphic designing, website page designing, planning cultural and artistic exchanges.

 

On April 16, 2019, Zhongchao Cayman was incorporated in the Cayman Islands and issued 5,497,715 Class B Ordinary Shares at 0.0001 par value as founder shares to More Healthy Holding Limited, representing 84.83% of total voting power of the Company, on converted basis, given that each Class B Ordinary Share is entitled to 15 votes and each Class A Ordinary Share is entitled to 1 vote. More Healthy Holding Limited is a BVI company 100% owned by Weiguang Yang (“More Healthy”).

 

On July 29, 2019, Zhongchao Shanghai established its wholly owned subsidiary, Horgos Zhongchao Zhongxing. Horgos Zhongchao Zhongxing engages in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

 

On August 14, 2019, Zhongchao Cayman completed a reorganization of entities under common control of Weiguang Yang, who owned a majority of the voting power of Zhongchao Cayman prior to the reorganization. Zhongchao Cayman, Zhongchao BVI, and Zhongchao HK were established as the holding companies of Zhongchao WFOE. Zhongchao WFOE is the primary beneficiary of Zhongchao Shanghai and its subsidiaries, and all of these entities included in Zhongchao Cayman are under common control which results in the consolidation of Zhongchao Shanghai and subsidiaries which have been accounted for as a reorganization of entities under common control at carrying value. The consolidated financial statements are prepared on the basis as if the reorganization became effective as of the beginning of the first period presented in the consolidated financial statements.

 

On August 15, 2019, HF Capital Management Delta, Inc. (“HF Capital”), a 6.25 % shareholder of Zhongchao Shanghai planned to withdraw its equity interest in Zhongchao Shanghai (which represents 1,350,068 shares in Zhongchao Shanghai, among which 675,068 shares were issued by Zhongchao Shanghai and the remaining 675,000 shares were purchased from two existing shareholders), and to contribute the same amount of capital to Zhongchao Cayman directly. The Company and HF Capital entered into a certain warrant agreement to purchase ordinary shares of the Company, pursuant to which the Company granted a warrant to HF Capital, who expects to exercise the warrant and receive the ordinary shares of the Company before the effective date and closing of the offering because these conditions are considered to be administrative procedures and there is no uncertainties of going through them. The warrant entitled HF Capital to purchase 1,350,068 Class A Ordinary Shares, or 6.25% economic beneficial interest, or 1.37% of the voting ownership interest of the Company, from the Company, if the following conditions are met:

 

 

  1) All PRC governmental consent and approval required for HF Capital to exercise the warrant and payment of the capital contribution have been obtained, including without limitation, any approval or filing with respect to HF Capital’s investment into the Company, and payment by HF Capital of the capital contribution to the Company, and reasonable evidence thereof shall have been provided to the Company;

  2) HF Capital has fully paid the capital contribution to Zhongchao Cayman; and

  3) The Company released the paid-in capital of HF Capital from Zhongchao Shanghai.

 

86

 

 

The following diagram summarizes our corporate identify our subsidiaries, our VIE and its subsidiaries upon completion of this Offering based on a proposed maximum number of [●] Class A Ordinary Shares being offered, as compared to the structure immediately prior to the Closing of the Offering.

 

  

Notes: All percentages reflect the voting ownership interests instead of the equity interests held by each one of the shareholder of the Company given that each Class B Ordinary Share will be entitled to 15 votes as compared to Class A Ordinary Share, each one of which will be entitled to 1 vote.

 

(1)Represents 5,497,715 Class B Ordinary Shares held by Mr. Weiguang Yang, the 100% owner of More Healthy Holding Limited, as of the date of this prospectus.
(2)Represents an aggregate of 14,752,352 Class A Ordinary Shares held by 12 shareholders of Company, each one of which holds less than 5% voting ownership interests of the Company, as of the date of this prospectus.
(3)In order to directly hold equity interest in the Company, HF Capital Management Delta, Inc. (“HF Capital”), one of the shareholders of the Company, has to complete certain registration and obtain approval with local governmental authority in PRC. As a part of reorganization and due to the aforementioned factor, HF Capital was granted a warrant to purchase 1,350,068 Class A Ordinary Shares of the Company at a price $0.0001 per share or such other amount agreed by the Company and HF Capital at a grant price of RMB 20,000,000 (approximately $2.7 million) conditioned upon (i) HF Capital completes necessary registration and obtains approval with local governmental authority in PRC for its direct investment in the Company and (ii) Zhongchao Shanghai shall have paid HF Capital RMB 20,000,000 as returned capital contribution in Zhongchao Shanghai. The above chart assumes that HF Capital has not exercised such warrant.
(4)

Represents RMB 2.74 million (approximately USD$0.4 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus.

(5)Represents RMB 9.70 million (approximately USD$1.4 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus.
(6)

Represents RMB 1.35 million (approximately USD$0.2 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus.

(7)Represents RMB 3.00 million (approximately USD$0.4 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus. Shanghai Xingzhong Investment Management LP. Ltd., a limited partnership incorporated under the PRC laws (“Shanghai Xingzhong”), the general partner of which is Weiguang Yang. As the general partner of Shanghai Xingzhong, Weiguang Yang exercises the voting rights with respect to the shares held by Shanghai Xingzhong.
(8)Represents RMB 1.35 million (approximately USD$0.2 million) subscribed capital contribution to Zhongchao Shanghai, as of the date of this prospectus.

 

87

 

 

For details of each shareholder’s ownership, please refer to the beneficial ownership table in the section captioned “Principle Shareholders.”

 

Name   Background   Ownership
Zhongchao BVI  

●     A BVI company

●     Incorporated on April 23, 2019

●     A holding company

  100% owned by Zhongchao Cayman
Zhongchao HK  

●     A Hong Kong company

●     Incorporated on May 14, 2019

●     A holding company

  100% owned by Zhongchao BVI
Zhongchao WFOE  

●     A PRC company and deemed a wholly foreign owned enterprise

●     Incorporated on May 29, 2019

●     Registered capital of $10 million

●     A holding company

  100% owned by Zhongchao HK
Zhongchao Shanghai  

●     A PRC limited liability company

●     Incorporated on August 17, 2012

●     Registered capital of $3,265,581 (RMB 21,600,135) with registered capital fully paid-up

●     Engaged in technology development, technology transfer, and technical services in the field of medical technology, technical consulting in the field of network technology, and medical information consulting

  VIE of Beijing Zhongchao Zhongxing Technology Limited
Shanghai Maidemu  

●     A PRC limited liability company

●     Incorporated on March 12, 2015

●     Registered capital of $1,597,087 (RMB 10 million) with registered capital fully paid-up

●     Planning for cultural and artistic exchanges, designing, producing, acting for and publishing various kinds of advertisements, and medical consultation (no medical diagnosis and treatment activities allowed).

  100% owned by Zhongchao Shanghai
Shanghai Zhongxun  

●     A PRC limited liability company

●     Incorporated on May 27, 2017

●     Registered capital of $1,021,525 (RMB 7 million) with registered capital fully paid-up

●     Engaged in technology development, transfer, service and consulting in the fields of medical technology and computer technology (no medical diagnosis and treatment activities allowed).

  100% owned by Zhongchao Shanghai
Horgos Zhongchao Medical  

●     A PRC limited liability company

●     Incorporated on September 12, 2017

●     Registered capital of $153,060 (RMB 1 million) with registered capital of $153,060 to be funded

●     Engaged in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

  100% owned by Zhongchao Shanghai
Horgos Zhongchao Zhongxing  

●     A PRC limited liability company

●     Incorporated on July 29, 2019

●     Registered capital of $145,081 (RMB 1 million) with registered capital of $145,081 to be funded

●     Engaged in technology development, transfer, service and consulting in the fields of medical technology and computer technology.

  100% owned by Zhongchao Shanghai

Shanghai Jingyi

 

●     A PRC limited liability company

●     Incorporated on October 10, 2018

●     Registered capital of $144,459 (RMB 1 million) with registered capital of $107,622 to be funded

●     Engaged in technology development, transfer, service and consulting in the fields of medical technology and computer technology, market information consulting and investigating.

  51% owned by Zhongchao Shanghai

Shanghai Huijing

 

●     A PRC limited liability company

●     Incorporated on September 28, 2016

●     Registered capital of $149,948 (RMB 1 million) with registered capital of $74,974 to be funded

●     Engaged in technology development, transfer, service and consulting in the fields of computer technology, graphic designing, website page designing, planning cultural and artistic exchanges.

  100% owned by Shanghai Maidemu

 

88

 

  

VIE Arrangements 

 

Due to the restrictions imposed by PRC laws and regulations on foreign ownership of companies engaged in value-added telecommunication services and certain other businesses, we operate our businesses in which foreign investment is restricted or prohibited in the PRC through certain PRC domestic companies. As such, Zhongchao Shanghai is controlled through VIE Arrangements in lieu of direct equity ownership by us or any of our subsidiaries. Such VIE Arrangements consist of a series of six agreements (collectively, the “VIE Arrangements”), which were signed on August 14, 2019. For more details and risks related to our variable interest entity structure, please see “Our Corporate History and Structure—VIE Arrangements” and “Risk Factors—Risks Related to Our Corporate Structure”.

 

The significant terms of the VIE Arrangements by and among our wholly-owned subsidiary, Zhongchao WFOE, our consolidated variable interest entity, Zhongchao Shanghai, and the shareholders of Zhongchao Shanghai are as follows:

 

Agreements that Provide Us Effective Control over Zhongchao Shanghai

 

Our PRC Wholly Foreign Owned Entity, Zhongchao WFOE, has entered into the following agreements with Zhongchao Shanghai and its shareholders.

 

Equity Interest Pledge Agreement.

 

Pursuant to the equity interest pledge agreement dated August 14, 2019, each shareholder of Zhongchao Shanghai has pledged all of its equity interest in Zhongchao Shanghai to guarantee the shareholder’s and Zhongchao Shanghai’s performance of their obligations under the master exclusive service agreement, business cooperation agreement, exclusive option agreement and proxy agreement and power of attorney. If Zhongchao Shanghai or any of its shareholders breaches their contractual obligations under these agreements, Zhongchao WFOE, as pledgee, will be entitled to dispose the pledged equity interest entirely or partially. Each of the shareholders of Zhongchao Shanghai agrees that, during the term of the equity interest pledge agreement, it will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests without the prior written consent of Zhongchao WFOE. In addition, Zhongchao WFOE has the right to collect dividends generated by the pledged equity interest during the term of the pledge. The term of the initial equity interest pledge agreement is 20 years. After the expiration of the term of initial pledge registration, Zhongchao WFOE may at its sole discretion require the Shareholders to extend the term of the equity interest registration.

 

Proxy Agreement and Power of Attorney.

 

Pursuant to the proxy agreement and power of attorney dated August 14, 2019, each shareholder of Zhongchao Shanghai has irrevocably appointed Zhongchao WFOE to act as such shareholder’s exclusive attorney-in-fact to exercise all shareholder rights, including, but not limited to, voting on all matters of Zhongchao Shanghai requiring shareholder approval, disposing of all or part of the shareholder’s equity interest in Zhongchao Shanghai, oversee and review Zhongchao Shanghai’s operation and financial information. Zhongchao WFOE is entitled to designate any person to act as such shareholder’s exclusive attorney-in-fact without notifying or the approval of such shareholder, and if required by PRC law, Zhongchao WFOE shall designate a PRC citizen to exercise such right. Each proxy agreement power of attorney will remain in force for so long as the Zhongchao Shanghai exists. The shareholders of Zhongchao Shanghai do not have the right to terminate this agreement or revoke the appointment of the Attorney-in-Fact without the prior written consent of Zhongchao WFOE.

 

89

 

 

Spouse Consent Letters. 

 

Pursuant to the Spouse Consent Letters dated August 14, 2019, the spouse of each married shareholder of Zhongchao Shanghai, unconditionally and irrevocably agreed not to assert any rights over the equity interest in Zhongchao Shanghai held by and registered in the name of their spouse. In addition, each of them agreed to be bound by the VIE Arrangements described here if the spouse obtains any equity interest in Zhongchao Shanghai for any reason.

 

Agreement that allows us to Receive Economic Benefits from Zhongchao Shanghai

 

Master Exclusive Service Agreement.

 

Under the master exclusive service agreement between Zhongchao WFOE and Zhongchao Shanghai dated August 14, 2019, Zhongchao WFOE has the exclusive right to provide Zhongchao Shanghai with technical support, consulting services and other services. Zhongchao WFOE has the right to designate and appoint, at its sole discretion, any entities affiliated with the Zhongchao WFOE to provide any and all services. The service fees are calculated and paid on a yearly basis and at the amount that equals to 100% of the consolidated net profits of Zhongchao Shanghai. Zhongchao WFOE may adjust the service fee at its discretion after taking into account multiple factors, such as the difficulty of the services provided, the time consumed, the content and commercial value of services provided and the market price of comparable services. Zhongchao WFOE owns the intellectual property rights arising out of the performance of this agreements. Zhongchao Shanghai shall seek approval from Zhongchao WFOE prior to entering into any contracts obtaining the same or similar services as provided under the Master Exclusive Service Agreement. This agreement will remain effective as long as Zhongchao Shanghai exists, unless Zhongchao WFOE advance written notice to Zhongchao Shanghai and its shareholders or upon the transfer of all the equity interest held by Zhongchao Shanghai’s shareholders to Zhongchao WFOE and/or a third party designated by Zhongchao WFOE.

 

Business Cooperation Agreement

 

Under the business cooperation agreement dated August 14, 2019, without Zhongchao WFOE’s prior written consent, Zhongchao Shanghai agrees not to engage in any transaction which may materially affect its asset, obligation, right or operation, including but not limited to: any activities not within its normal business scope, merger and acquisition, offering any loan to any third party and incurring any debt from any third party. Zhongchao Shanghai shall seek approval from Zhongchao WFOE prior to entering into any material contract, except the contracts executed in the ordinary course of business. Zhongchao Shanghai shall cause the persons designated by Zhongchao WFOE to be the directors and executive officers of Zhongchao Shanghai. This agreement will remain effective as long as Zhongchao Shanghai exists, unless Zhongchao WFOE advance written notice to Zhongchao Shanghai and its shareholders or upon the transfer of all the equity interest held by Zhongchao Shanghai’s shareholders to Zhongchao WFOE and/or a third party designated by Zhongchao WFOE.

 

90

 

 

Agreements that Provide Us with the Option to Purchase the Equity Interest in Zhongchao Shanghai

 

Exclusive Option Agreement.

 

Pursuant to the exclusive option agreement dated August 14, 2019, each shareholder of Zhongchao Shanghai has irrevocably granted Zhongchao WFOE an exclusive option to purchase, or have its designated person or persons to purchase, at its discretion, to the extent permitted under PRC law, all or part of the shareholder’s equity interests in Zhongchao Shanghai. The purchase price is equal to the lowest price allowable under PRC laws and regulations at the time of the transfer. Zhongchao Shanghai has agreed that without Zhongchao WFOE’s prior written consent, Zhongchao Shanghai shall cause the persons designated by Zhongchao WFOE to be the directors and executive officers of Zhongchao Shanghai, not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any loans to any third parties, enter into any material contract, except the contracts executed in the ordinary course of business, merge with or acquire any other persons or make any investments, or distribute dividends to the shareholders. The shareholders of Zhongchao Shanghai have agreed that, without Zhongchao WFOE’s prior written consent, they will not dispose of their equity interests in Zhongchao Shanghai or create or allow any encumbrance on their equity interests. Moreover, without Zhongchao WFOE’s prior written consent, no dividend will be distributed to Zhongchao Shanghai’s shareholders, and if any of the shareholders receives any profit, interest, dividend or proceeds of share transfer or liquidation, the shareholder must give such profit, interest, dividend and proceeds to Zhongchao WFOE. These agreements will remain effective as long as Zhongchao Shanghai exists unless Zhongchao WFOE advance written notice to Zhongchao Shanghai and the shareholders or upon the transfer of all the equity interest held by the shareholders to Zhongchao WFOE and/or its designee.

 

Controlled Company

 

Upon the completion of this offering, our outstanding shares will consist of Class A Ordinary Shares and Class B Ordinary Shares, and we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Weiguang Yang, our founder, chairman of the board of directors and chief executive officer, will beneficially own all of our then issued Class B ordinary shares and will be able to exercise [●]% of the total voting power of our issued and outstanding shares. Each Class A Ordinary Share is entitled to one vote, and each Class B Ordinary Share is entitled to fifteen votes and is convertible into one Class A Ordinary Share at any time by the holders thereof. Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances.

 

Upon the completion of this offering, our directors, executive officers and principal shareholders will continue to have substantial control over our company. Our affiliates will be able to exercise [●]% of the total voting power of our issued and outstanding shares.

 

As long as our officers and directors, either individually or in the aggregate, own at least 50% of the voting power of our Company, we are a “controlled company” as defined under NASDAQ Marketplace Rules.

 

For so long as we are a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules, including:

 

an exemption from the rule that a majority of our board of directors must be independent directors;

 

an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and

 

an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.

 

As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

 

Although we do not intend to rely on the “controlled company” exemption under the NASDAQ listing rules, we could elect to rely on this exemption in the future. If we elect to rely on the “controlled company” exemption, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. (See – Risk Factor “As a “controlled company” under the rules of the NASDAQ Capital Market, we may choose to exempt our company from certain corporate governance requirements that could have an adverse effect on our public shareholders.”)

 

91

 

 

Industry and Market Background

 

The Internet

 

The Internet has emerged as a global medium for communications, news, information and commerce. China Internet Network Information Center (CNNIC) released the 43rd “Statistical Report on China’s Internet Development Status” report, indicating that as of December 2018, the number of Chinese netizens was 829 million, an increase of 3.8% from the end of 2017. In 2018, the average weekly online time spent by Chinese netizens is 27.6 hours, which is 0.6 hours higher than the same period in 2017. A number of factors drive the Internet’s continued growth, including the large and growing installed base of personal computers, a rapidly expanding and improving Internet delivery infrastructure and an explosion of content and commerce offerings on the Web.

 

The Internet allows content delivery in a manner not possible through traditional broadcast and print media. These traditional media can have large audiences but generally are limited to a specific geographic area, can deliver only limited content and are not effective for distributing detailed information quickly. The Internet is distinct from traditional media in that it offers immediate access to dynamic and interactive content and enables instantaneous communication among users. As a result, the Internet has become an important alternative to traditional media, enabling users to seek current information and to communicate with one another. These characteristics, combined with the fast growth of the Internet, have created a powerful, rapidly expanding direct marketing and sales channel. Advertisers can target very specific demographic groups, measure the effectiveness of advertising campaigns and quickly revise them in response to the prompt feedback allowed by the Internet’s technology.

 

As users hardly don’t rely on the Internet for their information needs, they have sought more detailed content on a wide variety of specific subjects. Utilizing subject-specific sites, users can find information on selected topics quickly, easily and cost effectively, making these sites a very attractive resource for users. In addition to offering detailed and comprehensive content, many of these subject-specific sites have developed online communities that allow users to communicate with each other and to engage in other interactive activities. We believe these community features are attractive to users who want to express themselves and who seek to interact with other users who have similar interests.

 

Relevant Dynamics In The Healthcare Industry

 

Healthcare is the largest sector of the Chinese economy. The 2018 Statistical Bulletin on the Development of China’s Health and Wellness Industry shows that the total health expenditure of China in 2018 is expected to reach RMB5,799.83 billion, among which, the government health expenditure was RMB1,639.07 billion, representing 28.3% of the total health expenditure; social health expenditure was RMB2,494.47 billion representing 43.0%; personal health expenditure was RMB1,66.29 billion, representing 28.7%. The total health expenditure per capita is RMB4148.1. The total health expenditure took up 6.4% of China’s GDP in 2018.

 

The need of healthcare in China is still on the rise. According to 2018 Statistical Bulletin on the Development of China’s Health and Wellness Industry, by the end of 2018, there are 997,434 healthcare institutions in China, with an increase of 10,785 over the previous year. In 2018, the total number of healthcare services is 8.3 billion with an increase of 130 million over 2017.

 

The healthcare industry is continuing to change. According to the China Big Health Industry Development Report 2018, there are three trends in the development of China’s healthcare industry: (1) the need for integrated services for the prevention and treatment of chronic diseases and the need to maintain people’s health in all aspects and full cycles; (2) the total amount of medical and health resources is insufficient, the structure of the industry is unreasonable, the basic service capacity is still a prominent weak link, and the technical level needs to be improved; (3) with the change of disease spectrum of Chinese residents, the number of patients with chronic non-communicable diseases is increasing year by year, which has become the primary problem that threatens the health of our residents. Healthcare services will shift from treatment-centered to health-promoting centered mode.

 

92

 

 

Government is guiding an active and healthy lifestyle for the public. According to the Healthy China Action (2019-2030), by 2030, the health awareness of the general public will be greatly improved, healthy lifestyles will be broadly adopted, the main factors having impact on people’s health will be effectively controlled, and the average healthy life expectancy will be greatly increased. Also, the level of population’s main health indicators will enter the ranks of high-income countries.

 

The healthcare industry in China will continue to develop. According to a report from Prospective Industry Research Institute, in 2019, the scale of China’s healthcare industry will reach RMB 8.78 trillion, and by 2020 the scale of China’s healthcare industry will exceed RMB 10 trillion. The annual compound annual growth rate in the next five years (2019-2023) is about 12.55%, and the scale of china’s healthcare industry can be expected to reach RMB 14.09 trillion in 2023.

 

Convergence Of The Internet And The Healthcare Industry

 

China has the largest group of healthcare professionals in the whole world, providing a solid foundation for the development of the healthcare education market. According to the 2018 Statistical Bulletin on the Development of China’s Health and Wellness Industry, China currently has more than 12 million healthcare professionals, including more than 3.6 million doctors, reflecting a huge demand on knowledge learning and professional training.

 

With long working hours and heavy workloads, it is very difficult for healthcare professionals in China to spare time and energy to participate in offline academic conferences or training sessions. Continuing changes in the healthcare industry, including the increasing adoption of managed care plans and the need to keep informed about rapidly emerging medical and pharmaceutical therapies are also placing increasing pressures on healthcare professionals’ time. Healthcare professionals must keep abreast of the latest developments within their medical specialty to provide their patients with the best possible care and to meet continuing medical education requirements. There is a vast flow of information from many sources, including traditional medical journals, medical textbooks, academic conferences and other training literature. The sheer volume of medical information and the time constraints that physicians face make it extremely difficult for them to stay current and to quickly and efficiently access the information most relevant to their practice. We believe online healthcare professionals education services will allow them to easily find and manage the information they are seeking.

 

Internet Plus training model emerged with the growth of technologies, internet and the needs for convenient and reliable source of information. Specifically, Internet plus will optimize the traditional mode of education and training for healthcare professionals with real-time services anytime, anywhere, based on users’ demands. Through the Internet, the latest medical information and online training courses can be obtained from the mobile terminal and healthcare professionals can make full use of their spare time to get the information most related to them. Gradually, the Internet plus education model has been accepted by healthcare professionals. A Chinese Internet Doctors Insights Report (DIR) released by United States Medical Scientific in November 2018 provides that more than 90% of doctors in China obtained medical information through professional online platform, 46.7% of doctors in China obtained medical information through offline meetings, and 58.5% of doctors in China obtained information of pharmaceutical enterprises and drugs through professional websites.

 

In 2019, Internet plus healthcare education has become the education model guided and supported by the Chinese government. The Opinion Concerning the Promotion of the Development of Internet Plus Medical and Health promulgated and implemented on April 25, 2018 by the General Office of the State Council (the “Opinion”), states its plan to enhance the Internet plus medical education model. The Opinion encourages the establishment of healthcare education training cloud platform that provides a diverse range of medical online courses and healthcare information. The Opinion also encourages the establishment of a networked, digital, personalized, and lifelong medical education and training system for the healthcare professionals to carry out researches and discussions on incurable diseases and major diseases, and eventually improve their healthcare quality. The Opinion further includes the implementation plan of the “Continuous Medical Education + Appropriate Technology Promotion” policy, focusing on the needs of healthcare and poverty reduction, targeting the grass-root levels and deprived areas of the country, to popularize practical and appropriate healthcare technologies via distance education. The Opinions further indicates to establish an Internet-based science platform to provide accurate and up-to-date information on healthcare science knowledge and healthy lifestyles. The Opinion aims to improve residents’ health management ability and health literacy.

 

93

 

 

Healthcare education is a large sector of the Chinese market with outstanding development prospects. According to the report released on December 24, 2018 by TrendForce (“TrendForce Report”), a global provider of market intelligence on the technology industries, driven by the large amount of new drugs joining the market and the continuous increase in the use of new drug products, the 2018 market size of global pharmaceutical is approximately USD 1.2 trillion, with a 3.8% annual growth rate. TrendForce Report indicates that the expected global drug market will reach USD1.55 trillion in 2023 with a compound annual growth rate of 5.1% from 2018 to 2023. According to a 2018 report by The Economic Observer, sales expenses in Chinese pharmaceutical industry account for more than 40% of the total revenue and the costs of market promotion is a key part of sales expenses. We believe the need for Internet-based healthcare education will continue to grow, driven by the increasing demand for healthcare services by Chinese people, the implementation of China’s grading diagnosis and treatment policy, and the establishment of doctors’ multi-point practice system.

 

Competition

 

We face competition from providers of traditional healthcare education programs and training services as well as the increasing competition from existing competitors and new market entrants in the online healthcare education market, including the following:

 

Chinese online education companies and institutions that also offer continuing healthcare education and other online courses and training programs. Examples of our competitors include 91huayi, a Chinese medical education website dedicated to improving medical service providers professional skills and public’s healthcare knowledge; bbs.iivi.com, a Chinese medical bulletin board system allowing medical professionals in different specialties to share their views regarding their medical practice, career development and medical examinations; and www.ccmtv.cn, a Chinese website providing surgery education videos to medical professionals in different specialties.

 

Healthcare education companies or institutions organizing onsite healthcare workshop, academic conference, and other healthcare communication activities. This segment is the most significant competitor to our onsite education programs. Examples of our competition in this segment include Medcon, MEDLINK, and Beijing Medical Group 3 AD Ltd., all of which are Chinese company dedicated to promoting medical information and health knowledge via onsite activities.

 

China-based digital service provider in the healthcare industry that also offer information sharing services and data accumulation and management in China. Examples of our competitors include DXY (丁香园), a Chinese medical knowledge sharing website, which is built as an academic article retrieving database. DXY has developed more functions to enrich the services it provides to healthcare professionals and the public, including but not limited to establishing online forum for physicians, launching a series of mobile applications such as Drug Assistant and Dingxiang Doctor, and opening its wholly-owned offline Family Clinics.

 

Education companies that targets the public and patients. This segment is the most significant competitor to our Sunshine Healthcare Forum. Examples of our competitors include CN-Healthcare, an internet-based healthcare education platform targeting patients. CN- Healthcare organizes content-partners, including healthcare professionals and medical associations to generate health-related news and information. CN-Healthcare currently has 1773 individual content-partners, 751 association partners, and 1.3 million subscribers.

 

94

 

 

Our Growth Strategy

 

Our objective is to operate the premier healthcare destination Websites where physicians, allied healthcare professionals and consumers can find reliable and comprehensive information that enables them to make better and more informed medical and health decisions. We believe we are positioned to become a preferred online advertising medium, academic communication platform, and e-commerce partner in the PRC healthcare sector. We intend to achieve this objective by pursuing the following strategies:

 

Strengthening Our Brands. We intend to build up MDMOOC as the leading single brand for healthcare information, education, and training for professionals and Sunshine Health Forums as the leading brand for online healthcare information forums. We believe that strengthening our brand awareness is critical to attracting and retaining users, advertisers, sponsors and strategic partners. We plan to pursue a brand development strategy through online and offline advertising, promotions, media coverage and word-of-mouth support. We believe our brand visibility will significantly benefit from promotion on leading we-media and medical associations, such as China Association of Health Promotion and Education, Beijing Medical and Health Foundation, and China Primary Health Care Foundation.

 

Improving and Enhancing Our Products. We intend to expand the content on both our healthcare programs for professionals and the public by adding new medical specialty areas, enlarging our editorial staff and utilizing our extensive relationships with leading medical experts. We intend to enhance the users’ experience by adding general health and wellness information, community features and interactive programs that take advantage of our credibility with medical professionals and our existing professional medical specialty content.

 

Growing User Community. Except for the online training programs, we also share the latest news and healthcare information in the medical industry on MDMOOC online platform. We intend to build our medical professional community via Practice Improvement (PI), a problem-based and case-based form of healthcare course, which integrates state-of-the-art treatment information and clinical cases for particular diseases into interactive practice modules, and Community of Practice Share (COPS), an online and live clinical experience sharing platform that creates the most effective discussion in a particular healthcare domain or medical area due to the common interests of the users, and increase the frequency and length of their visits to our site. By continuing to offer compelling content, providing interactive programs and services, and building relationships with relevant healthcare organizations to increase user loyalty, repeat usage and time spent on our site, we believe MDMOOC online platform will become an integral part of the medical professional’s daily work flow.

 

  Developing Multiple Revenue Sources. We believe our attractive audience demographics and high-quality content offerings provide us with significant opportunities to develop multiple sources of revenue. In addition to advertising and sponsorships, we plan to generate e-commerce revenues by building Sunshine Health Forums as a full-service online healthcare platform with functions of book selling and drug selling. We also plan develop other research products that we expect will complement pharmaceutical enterprises’ product detailing efforts. In addition, we plan to introduce products and services that appeal directly to our international and allied healthcare users.

 

Our Competitive Strengths

  

MDMOOC is a healthcare destination site that provides medical professionals with comprehensive, authoritative and timely medical information, interactive programs, and training courses. We believe MDMOOC is positioned to help users expand their healthcare knowledge, improve their professional skills, and change the way people access information and communicate about healthcare.

 

95

 

 

We believe that the principal competitive factors in our markets are industry expertise, breadth and depth of service offerings, quality of the services offered, reputation and track record, marketing and selling skills, scalability of infrastructure and price.

 

We believe that there are several key strengths that prevail us from our competitors and will continue to contribute to our growth and success. We believe that the combination of our large user base and high quality education content position us to be a leading provider of Internet-based solutions to meet the needs of healthcare organizations and professionals.

 

We believe the following factors drive our success:

 

  Acknowledged by leading pharmaceutical enterprises: our customers include leading pharmaceutical enterprises who position our MDMOOC as preeminent branded sources of consumer-oriented health and wellness information on the Internet. Almost all leading pharmaceutical enterprises have their own vendor lists regarding different types of service they request. It is an industry norm that it usually takes three to four years for a service provider to be accepted by the leading pharmaceutical enterprises to be included in the vendor list. We are one of the prominent service providers in the category of course production services on the vendor lists of a few well-known pharmaceutical enterprises. Pursuant to the consultant agreements we entered into with the pharmaceutical enterprises regarding the course production services, we will create online training courses of specific medical topics and then post them on our MDMOOC platforms. The users need to obtain the passwords from the pharmaceutical enterprises or from us to get free access to the series of online courses. We also entered into framework agreements with certain pharmaceutical enterprises. The terms of the agreements are usually one (1) years. Pursuant to the framework agreements, when our customers have a need for medical course production, they will reach out to us by sending over formal purchase order.

 

  Reliable Professional Content Production. We use reliable, highly relevant, interactive and multi-media content to satisfy the requirements of our customers, including the NPO and pharmaceutical enterprises, and our end-users. We maintain good long-term working relationship with many well-known healthcare professionals. With our self-generated resource library of healthcare professionals, we can easily reach out to the healthcare experts in certain medical fields when we receive purchase orders from our customers to generate relevant medical courses. We also have one of the most comprehensive online content library in China for different type of diseases and medical information which makes it easier for us to customize the content under different needs of our customers for online medical education. We also have a large pool of experienced in-house editors who incubate original medical information and present them in visually appealing formats. They also collaborate with healthcare professionals throughout the content generating process. Our content is interactive and largely in the form of videos, articles, and photographs, covering a full spectrum of the latest medical information.

 

High-Quality, Timely and Original Medical Information: We provide high-quality, timely and original content on important healthcare trends and disease topics. Using the real-time publishing capabilities of the Internet, we can deliver this content to our audience faster and more cost effectively than traditional print media and on-site training session, which is limited by publication schedules and physical distribution. Many of our articles are written by industry-leading medical experts and are peer-reviewed by other physicians to insure they meet the high standards of medical integrity. Our experienced editorial staff has strong medical background, most of whom graduated from well-known medical universities and have more than ten-year work experience in relevant areas. Our medical specialty areas are carefully designed and their features are regularly updated by our editorial and quality control staff.

 

96

 

 

Well Organized and Easy-To-Use Websites and Apps: We design our websites and mobile Apps to meet the needs of our users in a personalized and easy-to-use manner. We organize our training products on MDMOOC online platform by healthcare specialty area. We also provide functions of Practice Improvement (PI), Community of Practice Share (COPS), and Continuing Professional Development (CPD) to satisfy different needs of the healthcare professionals. We create different Sunshine Health Forums for different categories of diseases and healthcare matters. Currently, we have more than 150 forums, covering healthcare topics such as the kidney disease, the liver disease, and diabetes. In addition to high-quality medical content, our consumer sites provide community features and interactive programs to encourage academic discussion and communication as well as information and experience sharing.

 

  Cost-Effective Access to Our Audience: Our users registration profiles give us the ability to segment our audience based on their medical specialty or healthcare interest. In addition, our proprietary users’ profile and traffic database enables us to provide advertising and sponsored content. MDMOOC online platform also offers online programs that complement many of the pharmaceutical enterprises’ offline promotional and educational efforts. For example, we expand the audience of sponsored medical conferences by making next-day summaries of the proceedings available to users who were unable to attend. In addition, we believe Sunshine Health Forums create an attractive e-commerce environment for health-related products, i.e., educational healthcare books, due to the size of the audience and the focus on relevant healthcare topics.

 

High-Level and Small-Class Teaching Onsite Training Courses. Along with online training courses and education programs, we also organize onsite education and training sessions. To ensure the quality and results of the onsite training programs, we usually limit the size of our training session to a relatively small one and build up certain criteria for the applicants. Also, the good long-term working relationship with well-known healthcare professionals enable us to generate outstanding training content and create high-quality education experience. For Example, in the EWMA-certified wound-management collaboration training programs, we work with healthcare experts and institutions to do the lecturing. Our lecturers include Dr. Yixin Zhang, professor and doctoral supervisor of Shanghai Jiaotong University and vice president of Asian Pacific Federation of Societies for Reconstructive Microsurgery, Guozhong Lv, Dr. Yan Liu, vice president of Burn Injury Department of Chinese Medical Association, and Dr. Chunmeng Shi, professor and doctoral supervisor of Army Medical University. We plan to hold an aggregate of six (6) training programs. Each one of them will accept no more than twenty (20) applicants who shall hold academic credential above undergraduate. We also require all applicants to have more than six-year working experience in the field of wound repair.

 

Risks and Challenges

 

Our prospects should be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by similar companies. Our ability to realize our business objectives and execute our strategies is subject to risks and uncertainties, including, among others, the following:

 

our inability to effectively manage our rapid growth, which could place significant strain on our management personnel, systems and resources;

 

adverse changes in the economic environment either in China or globally;

 

intense competition from onshore and offshore healthcare information, education, and training services companies;

  

  our reliance on a relatively small number of major customers, including a customer accounted for 38% and 55% of our total revenue for fiscal years 2018 and 2017, respectively;

 

our ability to anticipate and develop new services and enhance existing services to keep pace with rapid changes in technology;

  

our ability to attract new customers for our services and/or growing revenues from existing customers;

 

97

 

 

risks associated with having a long selling and implementation cycle for our services that require us to make significant resource commitments prior to realizing revenues for those services;

 

increases in wages for professionals in China;

 

the international nature of our business;

 

risks related to unauthorized disclosure of sensitive and confidential information;

 

risks related to intellectual property infringement claims;

 

risks related to material weakness in our internal control over financial reporting such that if we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud;

 

business interruptions resulting from occurrence of natural disasters, health epidemics and other outbreaks or events;

 

fluctuation in the value of the Renminbi and other currencies;

 

disruptions in disruptive technologies or significant failure in our technology platform that could harm our service;

 

vulnerabilities to security risks that could disrupt our services and adversely affect our operations; and

 

possibilities to expose us to malpractice liability and other liability inherent in healthcare delivery.

 

In addition, we face other risks and uncertainties that may materially affect our business prospect, financial condition, and operations. You should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in our Class A Ordinary Shares.

 

Our Business Model

 

We provide healthcare information, education, and training services to the healthcare professionals under our “MDMOOC” brand via MDMOOC website, mobile Apps, and Wechat subscription account (together, the “MDMOOC online platform”), and onsite education activities. We also offer healthcare educational content to the public via our online “Sunshine Health Forums”. Our MDMOOC online platform serves as an interactive and reliable healthcare information, education, and training community and offers online interactive function that enables our end-users to both discover reliable content and share their own healthcare study insights by uploading their own courseware or study notes to our platform, which incentivizes more visits and views. Certain open courses on MDMOOC online platform provide the quiz function for our end-users to see if they obtain correct understanding to the key point of such courses. We also highlight the knowledge points that are important but would be ignored by our end-users. Thus, the end-users could have a relatively complete learning process.

 

Our business model has unique value propositions for its constituents. With reliable content and the function of Community of Practice Share (COPS) on our platform, users seeking medical precedents or information can obtain comprehensive medical information on the medical area most related to them by interacting among one another through our community functions. Also, once they complete certain online courses study, our platform will issue them MDMOOC certificates with verified continuing professional credits if they are taking one of the courses provided by our Continuing Professional Development (CPD) function. In addition, after end-users complete their online training, our online platform encourages them to share their study experience through our Course Uploading, rating, and review systems. This further enriches our content and drives more interaction within our community.

 

98

 

 

Our pharmaceutical enterprises customers and NFPs customers with demands of course production and training organization benefit from our business model when more end-users are drawn to our MDMOOC online platform because of our reliable self-developed content offered in rich media formats and our reputation among healthcare professionals who are seeking healthcare service improvements. The original content in our platform, as well as the ratings and reviews on the content, can effectively and efficiently incentivize our content production to offer high-quality training programs. Our in-house editorial staff and research and development team responsible for content generation and management can further increase their ability to create better courses in the most suitable forms to the healthcare professionals working in different fields. Our online Community of Practice Share (COPS) function, in return, provides data insights on current user landscape and learning trends that allow our customers to get a better understanding to the healthcare industry in the practical aspect.

 

As corporate and NFP customers, end-users, and course production teams and providers are inexorably connected through our content, Community of Practice Share (COPS), and online course uploading function, our business model forms an overall virtuous cycle that fuels its continued growth and expansion. In essence, end-users are attracted to our platform by our content and services offered on our platform, while corporate customers and NFP customers are attracted to our platform by the access to the largest online healthcare professionals’ community and the high-quality online programs and courses. As the number of end-users grows, more corporate customers and NFP customers will want to join and get access to our platform. More corporate customers and NFP customers will then lead to more tailored content production, as well as more targeted content, and ultimately attract more end-users.

 

MDMOOC-Healthcare Information, Education, and Training for Professionals

 

Our MDMOOC Online Platform

 

Our MDMOOC online platform is realized through various products, including MDMOOC mobile App, MOOC Medical Wechat subscription account, and MDMOOC website, where users can access our rich media content and engaging Community of Practice Share (COPS).

 

In 2017 and 2018, our monthly UVs of MDMOOC website reached 16,500 and 22,300. Our mobile MAUs reached 32,000 and 64,000 in 2017 and 2018, respectively.

 

MOOC Mobile App

 

Our MOOC Medical mobile app serves as a one-stop destination where we offer users relevant healthcare knowledge and study insights, assist them along their journey to obtain the knowledge and information they are searching for in a supportive community, and allow them to review and test their understanding of courses by participating in the Practice Improvement (PI) system. We designed the interface of our platform in simple white and sky blue, signaling health and learning respectively, and creating a soft and welcoming texture to our platform.

 

When users open our MOOC Medical mobile app, they will immediately see our featured banners that display academic courses, open classes, case library, and continuing professional development channel. As users scroll down, courses that are most popular among the healthcare professionals, courses recommended by our medical editors, and the latest healthcare news appear. Users can also explore various medical courses by medical specialty and subject areas if they click “courses” at the bottom of the interface.

 

99

 

 

Below are screenshots of our mobile app main entrance interface:

 

 

Community of Practice Share, or COPS, an online and live clinical experience sharing platform that creates the most effective discussion in a particular healthcare domain or medical area due to the common interests of the users, is where users communicate with other peers and get detailed information written by users who have taken or generated healthcare courses and featured informational articles by practicing medical professionals on the platform.

 

The screenshots below illustrate the content in COPS:

 

 

Opening Course is a collection of video courses of various medical fields and topics. The courses are often presented by medical experts. Most of the courses are free to users.

 

100

 

 

The screenshots below illustrate the content in the Opening Course:

 

 

MDMOOC Wechat Subscription Account

 

Wechat Subscription Account provides a new means to propagate information for the media and individuals, building better communication with readers with a better management. It also facilitates discovery and consumption of services and products. It is useful for discovery and quick actions, and complements full-function native apps by increasing their traffic.

 

Our MDMOOC Wechat subscription account features similar interfaces and functions as our mobile app. It serves as additional access points to our platform.

 

MDMOOC Website

 

Users can access online healthcare information, education and training content and our services through our website MDMOOC.org. In 2018, MDMOOC website recorded an aggregate of 2 million users’ visits. As more internet users shift to mobile ends, our website mainly serves a comprehensive knowledge base targeting users who are in the process of researching for specific medical courses, articles, or news.

 

101

 

 

Below are screenshots of MDMOOC.org website:

 

 

We designed our professional website to meet the needs of our users in a personalized and easy-to-use manner. We currently organize our professional information by the following medical specialty and subject areas, including but not limited to:

 

Internal Medicine Department: cardiology, respiratory medicine, nephrology, neurology, gastroenterology, hematology, endocrinology

 

Surgery Department: general surgical, neurosurgery, breast surgery, urology, hepatobiliary surgery, cardiothoracic surgery, plastic surgery

 

Oncology Department: general oncology, surgical radiotherapy, oncology

 

Gynaecology Department: Gynecologic endocrine

 

Pediatrics Department: respiratory medicine, nephrology, neurology, gastroenterology, hematology, endocrinology

 

Oral Cavity Department: oral and maxillofacial surgery, Restorative Dentistry, orthodontics

 

Skin Beauty Department: Pharmacology, aesthetic health care

 

Mental Psychology Department: depression, sensory disturbance, schizophrenia

 

We plan to expand into new medical specialty areas that appeal to our current users base and attract new users. Our objective is to be the category leader in each of our medical specialty areas by delivering the highest quality specialty-based content and selectively acquiring other high-quality medical specialty Websites. As part of this strategy, we will (1) work with more medical associations to produce programs and courses to meet the need of healthcare professionals; (2) expand our R&D team and provide more support to our self-developed courses; (3) cooperate with international continuing medical education providers to improve the quality and diversity of our courses.

102

 

 

Our MDMOOC Onsite Activities

 

In addition to our online presence, we also hold onsite activities to provide healthcare information and education services from time to time under our “MDMOOC” brand. Our onsite activities not only provide our healthcare professionals with medical knowledge and clinical skills but also another career path which enhance their professional competitiveness. Also, many of our onsite activities were accompanied with live steaming, which will be uploaded to our MDMOOC online platform.

 

For instance, in January 2019, we launched EWMA-certified (defined as below) wound-management collaboration training programs, covering the topics including but not limited to basic concepts of acute and chronic wounds, management of different levels of surgical and non-surgical wounds, the construction of different levels of wound centers, and medical staff collaboration in the process of wound management.

 

We cooperate with Beijing Chronic Disease Prevention and Health Education Research Association and Professor Yixin Zhang from the Ninth People’s Hospital of Shanghai Jiao Tong University School of Medicine to create courses titled “Essential Course for Wound Care Management” and “Advanced Course for Surgical Wound Treatment”. These courses have been certified and authorized by the European Wound Management Association (EWMA), a European not-for-profit umbrella organization, linking national wound management organizations, individuals and groups with interest in wound care. We plan to hold four (4) training programs for Essential Course for Wound Care Management and two (2) training programs for Advanced Course for Surgical Wound Treatment. Each program will accept no more than twenty (20) applicants who shall hold academic credential above undergraduate. We also require all applicants to have more than six-year working experience in the field of wound repair. We will issue a certificate to each of the applicant upon completion of the training as their proof of achievement and ability in the wound management and treatment. We believe that after attending these programs, our participants would acquire the basic capacity to lead a would-management department in a hospital.

 

Sunshine Health Forums-Healthcare Information and Education for the Public

 

We developed Sunshine Health Forum, a Wechat subscription account, Sunshine Health Forum mobile app, and Sunshine Health Forum.org, the official website providing links to download the mobile app for Android and IOS system and portals to leading we-media we have strategic relationships to improve the efficiency and effectiveness of the information acquisition for our users. The official website and mobile app are organized by different types of medical disease. We establish one school for each disease to make it easier for the public to obtain information they would like to know. As of the date of this prospectus, we have opened nearly 150 forums, with more than an aggregate of 4.95 million subscriptions and an aggregate of 1.25 billion click-through. We have established our partnership with the following we-media platforms, including but not limited Toutiao.com, WeChat official accounts platforms, Yidianzixun.com, Douyin.com, CN-Healthcare.com, iQiyi, Youku, and Huoshan.com.

 

Recent Development

 

Commencing from the fourth quarter of 2018, in addition to providing trainings and education through our platforms, we have been engaged by certain customers on project basis to establish individual websites to provide training and knowledge of certain drug treatment, most of which are cancer-related treatment, to healthcare professionals and patients. Such websites are established to facilitate qualified patients to obtain free drug treatment from NFPs till the free drugs are completely delivered and distributed as planned. For each website, we also plug in features to manage the project including reviewing patients’ applications, tracking their usage of drugs and collecting related information. Those customers are existing customers of us. They provide those drugs sponsored by pharmaceutical companies without charge to qualified patients and we charge those customers on our services in connection with the websites and related training and management.

 

103

 

 

Our Content

 

We strive to provide our users with the broad range of high-quality and engaging original content on different healthcare areas. We believe that reliable and well-crafted content provides the necessary information that users seek on our platform and improve the medical professional community. Our content is available in a variety of rich media formats on our online platform, generated by users of all levels of experience and medical professionals, including short-form videos, and featured articles.

 

Short-form Videos -- We believe we have established a proven approach to producing popular, original, short-form videos and have continually released popular original titles and series, covering different popular healthcare topics, such as Standardized Diagnosis and Treatment of Skin Infections in Primary Practice, Emergency Experience Anti-infection Treatment, and Knee Osteoarthritis Treatment. Our experienced and large pool of in-house editors incubate original ideas and present them in video format and collaborate closely with medical professionals in the content creation process.

  

Featured Articles -- Our in-house content team and resources of well-known healthcare professionals bring our assessment and analysis of the latest medical theories and information to our users through featured articles. We closely work with healthcare professionals to ensure our high-quality science content. With our self-generated resource library of healthcare professionals, we can easily re