SEC Form 20-F filed by Zhongchao Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report for the transition period from ____________to ____________

Commission file number: 001-39229

ZHONGCHAO INC.

(Exact Name of Registrant as Specified in its Charter)

N/A

(Translation of Registrant’s Name into English)

Cayman Islands

(Jurisdiction of Incorporation or Organization)

Nanxi Creative Center, Suite 216
841 Yan’an Middle Road
Jing’An District, Shanghai, China 200040
Tel: 021-32205987

(Address of principal executive offices)

Weiguang Yang, Chief Executive Officer
Nanxi Creative Center, Suite 216
841 Yan’an Middle Road
Jing’An District, Shanghai, China 200040
Tel: 021-32205987

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

As of December 31, 2023, the issuer had 2,054,943 Class A Ordinary Shares (including 135,007 Class A Ordinary Shares to be issued upon exercise of the HF Warrant the Company issued to HF Capital. For more details of the HF Warrant, please see “Our Corporate History and Structure” on page 49) and 549,772 Class B Class A Ordinary Shares, giving effect to the 1-for-10 share consolidation effectuated on February 29, 2024.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 13(a) of the Exchange Act. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒

EXPLANATORY NOTE 

On February 29, 2024, Zhongchao Inc. effected a share consolidation at a ratio of 1-for-10 (the “2024 Share Consolidation”), where every ten (10) Class A ordinary shares with a par value of $0.0001 each were consolidated into one (1) Class A ordinary share with a par value of $0.001 each, and every ten (10) Class B ordinary shares with a par value of US$0.0001 each were consolidated into one (1) Class B ordinary share with a par value of US$0.001 each. No fractional shares were issued as a result of the 2024 Share Consolidation.

All share numbers, option numbers, warrant numbers, other derivative security numbers and exercise prices appearing in this Annual Report will be adjusted to give effect to the 2024 Share Consolidation, unless otherwise indicated or unless the context suggests otherwise.

TABLE OF CONTENTS 

INTRODUCTION

Unless otherwise indicated, numerical figures included in this Annual Report on Form 20-F (the “Annual Report”) 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.

For the sake of clarity, this Annual Report follows the English naming convention of first name followed by last name, regardless of whether an individual’s name is Chinese or English. Numerical figures included in this Annual Report 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 Annual Report are based on information from independent industry organizations, publications, surveys and forecasts. Some market data and statistical information contained in this Annual Report 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.

Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

This Annual Report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2023 and 2022.

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 the  functional currencies for the subsidiaries, the VIE and the VIE’s subsidiaries are Renminbi, Japanese yen and U.S. dollar. This Annual Report 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, and of Japan yen into U.S. dollar in this Annual Report were made at the rate of RMB 7.0999 to USD1.00 and JPY140.92 to USD1.00, respectively, the noon mid rates on December 29, 2023, 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 or Japan yen, and not the translated U.S. dollar equivalent. We make no representation that the Renminbi, Japan yen or U.S. dollar amounts referred to in this Annual Report could have been or could be converted into U.S. dollars or Renminbi or Japan yen, as the case may be, at any particular rate or at all.  

Part I

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

Item 3. KEY INFORMATION

Contractual Arrangements between the Zhongchao WFOE and Zhongchao Shanghai

Zhongchao Inc. (the “Company” or “Zhongchao Cayman”) is an offshore holding company incorporated in the Cayman Islands. As a holding company with no material operations of our own, we, through the contractual arrangements (the “Contractual Arrangements”), between Beijing Zhongchao Zhongxing Technology Limited (“Zhongchao WFOE”), a wholly subsidiary of Zhongchao Cayman incorporated in the PRC, and a variable interest entity (the “VIE”), Zhongchao Medical Technology (Shanghai) Co., Ltd. (“Zhongchao Shanghai”) and its subsidiaries or collectively “the PRC operating entities”, consolidate the financial results of the PRC operating entities. 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. Accordingly, the Contractual Arrangements are designed to allow Zhongchao Cayman to consolidate Zhongchao Shanghai’s operations and financial results in Zhongchao Cayman’s financial statements in accordance with U.S. GAAP as the primary beneficiary. Neither we nor our subsidiaries own any equity interests in the PRC operating entities.

As we chose such VIE structure, we are subject to certain unique risks and uncertainties that may not otherwise exist if we had direct equity ownership in the PRC operating entities. Because we do not directly hold equity interests in the VIE and its subsidiaries, our Contractual Arrangements may not be effective in providing control over Zhongchao Shanghai. Further, we are subject to risks due to uncertainty of the interpretation and the application of the PRC laws and regulations, including but not limited to limitations on foreign ownership and regulatory review of overseas listing of PRC companies through a special purpose vehicle, and the validity and enforcement of the Contractual Arrangements. We are also subject to the risks of uncertainty about any future actions of the PRC government in this regard that could disallow the VIE structure, which would likely result in a material change in our operations and cause the value of our Class A Ordinary Shares to decrease significantly or become worthless. However, as of the date of this Annual Report, the agreements under the Contractual Arrangements have not been tested in any courts of law. For a description of the VIE contractual arrangements, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure— We conduct our business through Zhongchao Shanghai and its subsidiaries 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” and “Item 3. Key Information—D. Risk Factors—Risks Related to Related to Doing Business in China — The Chinese government exerts substantial influence over the manner in which the PRC operating entities must conduct their business activities. We are currently not required to obtain approval from Chinese authorities to list or continue to list on U.S. exchanges nor for the execution of VIE agreements, however, if the VIE or the holding company were required to obtain approval and were denied permission from Chinese authorities to list or continue to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange or continue to offer securities to investors, which could materially affect the interest of the investors and cause the value of our Class A Ordinary Shares to significantly decline or be worthless.”

Permission Required from the PRC Authorities to Issue Our Securities to Foreign Investors

PRC laws and regulations governing our current business operations are sometimes vague and uncertain, and therefore, these risks may result in a material change in our operations, significant depreciation of the value of our Class A Ordinary Shares, or a complete hindrance of our ability to offer or continue to offer our securities to investors and cause the value of such securities to significantly decline or be worthless. The Chinese government may intervene or influence the operations of the PRC operating entities at any time and may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in the operations of the PRC operating entities and/or the value of our Class A Ordinary Shares. Further, any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over the use of variable interest entities for overseas listing, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. On February 17, 2023, the China Securities Regulatory Commission (the “CSRC”) promulgated the Trial Administrative Measures of the Overseas Securities Offering and Listing by Domestic Companies, or the Trial Measures, and five supporting guidelines, which became effective on March 31, 2023. According to the Trial Measures, among other requirements, (1) domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfil the filing procedures with the CSRC; if a domestic company fails to complete the filing procedure or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties; (2) if the issuer meets both of the following conditions, the overseas offering and listing shall be determined as an indirect overseas offering and listing by a domestic company: (i) any of the total assets, net assets, revenues or profits of the domestic operating entities of the issuer in the most recent accounting year accounts for more than 50% of the corresponding figure in the issuer’s audited consolidated financial statements for the same period; (ii) its major operational activities are carried out in China or its main places of business are located in China, or the senior managers in charge of operation and management of the issuer are mostly Chinese citizens or are domiciled in China; (3) where a domestic company seeks to indirectly offer and list securities in an overseas market, the issuer shall designate a major domestic operating entity responsible for all filing procedures with the CSRC, and such filings shall be submitted to the CSRC within three business days after the submission of the overseas offering and listing application; and (4) if the issuer issues securities in the same overseas market after the initial issuance and listing, it shall submit filings with the CSRC within three business days after the completion of the issuance. Further, at the press conference held for the Trial Measures on February 17, 2023, officials from the CSRC clarified that the PRC domestic companies that have already been listed overseas on or before the effective date of the Trial Measures, March 31, 2023, shall be deemed as existing issuers, or the Existing Issuers. Existing Issuers are not required to complete the filing procedures immediately but shall carry out filing procedures as required if they conduct refinancing or are involved in other circumstances that require filing with the CSRC. The officials from the CSRC have also confirmed that for the PRC domestic companies that seek to list overseas with VIE structure, the CSRC will solicit opinions from relevant regulatory authorities and complete the filing of the overseas listing of companies with VIE structure which meet the compliance requirements. As the Trial Measures were newly published, there are substantial uncertainties as to the implementation and interpretation, and how they will affect our current listing, and future offering or financing. If we are required by the Trial Measures for any future offering or any other financing activities to file with the CSRC, we cannot assure you that we will be able to complete such filings in a timely manner, or even at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to continue to offer our Class A Ordinary Shares, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our Class A Ordinary Shares to significantly decline in value or become worthless. See “Item 3. Key Information—D. Risk Factors— Risks Related to Doing Business in China—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” “— We may be liable for improper use or appropriation of personal information provided by our customers” “— New rules for China-based companies seeking for securities offerings in foreign stock markets was released by the CSRC recently. The Chinese government may exert more oversight and control over overseas public offerings conducted by China-based issuers, which could significantly limit or completely hinder our ability to offer or continue to offer our Class A Ordinary Shares to investors and could cause the value of our Class A Ordinary Shares to significantly decline or become worthless.” for more information.

Permission Required from the PRC Authorities for Our and PRC Operating Entities’ Operation in China.

As of the date of this Annual Report, except as disclosed in this Annual Report, we, or the PRC operating entities are not required to obtain any other permission or approval from the PRC authorities for our operation in China, nor have we, or the PRC operating entities, received any denial for our operation in China. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals in the future. If any of the PRC operating entities is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the requisite licenses and permits, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. In addition, if any of the PRC operating entities had inadvertently concluded that such licenses, permits, registrations or filings were not required, or if applicable laws, regulations or interpretations change in a way that requires any of the PRC operating entities to obtain such licenses, permits, registrations or filings in the future, the relevant PRC operating entities may be unable to obtain such necessary licenses, permits, registrations or filings in a timely manner, or at all, and such licenses, permits, registrations or filings may be rescinded even if obtained. Any such circumstance may subject the relevant PRC operating entities to fines and other regulatory, civil or criminal liabilities, and the relevant PRC operating entities may be ordered by the competent government authorities to suspend relevant operations, which will materially and adversely affect our business operations. See “Item 3. Key Information—D. Risk Factors— Risks Related to Doing Business in China—The PRC operating entities’ failure to obtain, maintain or renew other licenses, approvals, permits, registrations or filings necessary to conduct their operations in China could have a material adverse impact on our business, financial conditions and results of operations.”

We have been advised by our PRC legal counsel, Han Kun Law Offices, 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), as of the date of this Annual Report, do not result in any violation of PRC laws or regulations currently in effect; and (ii) the Contractual Arrangements among Zhongchao WFOE and Zhongchao Shanghai and their shareholders governed by PRC law are valid, binding and enforceable in accordance with the terms of each of the VIE Arrangements, and do not result in any violation of PRC laws or regulations currently in effect. 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 Contractual 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.

Dividend Distributions or Transfers of Cash among the Holding Company, Its Subsidiaries, and the Consolidated VIE

For the year ended December 31, 2023, Zhongchao Cayman made cash transfer of $0.1 million to Zhongchao USA. For the year ended December 31, 2022, Zhongchao Cayman made cash transfer of $1.5 million to Zhongchao USA. Except as otherwise disclosed above, for the years ended December 31, 2023 and 2022, no other cash transfer or transfer of other assets have occurred between Zhongchao Cayman, its subsidiaries, the consolidated VIE and the subsidiaries of the VIE. For the years ended December 31, 2023 and 2022, none of our subsidiaries, the consolidated VIE, or the subsidiaries of the VIE have made any dividends or distributions to Zhongchao Cayman. For the years ended December 31, 2023 and 2022, no dividends or distributions have been made to any U.S. investors.

We intend to keep any future earnings to re-invest in and finance the expansion of the business of the PRC operating entities, and we do not anticipate that any cash dividends will be paid in the foreseeable future. Under Cayman Islands law, a Cayman Islands company may pay a dividend on its shares out of either profit or share premium amount, provided that in no circumstances may a dividend be paid if this would result in the Company being unable to pay its debts 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 Hong Kong subsidiary, Zhongchao Group Limited (“Zhongchao HK”), unless we receive proceeds from future offerings.

Zhongchao WFOE’s ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our indirect PRC subsidiaries to pay dividends to the Company only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entity in China may also set aside a portion of its after-tax profits to fund an optional employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of shareholders. 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 subsidiaries 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 through the current Contractual Arrangements, 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. If we are considered a PRC tax resident enterprise for tax purposes, any dividends we pay to our overseas shareholders 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%.

In order for us to pay dividends to our shareholders, we will rely on payments made from Zhongchao Shanghai to Zhongchao WFOE, pursuant to the Contractual Arrangements between them, and the distribution of such payments to Zhongchao HK as dividends from Zhongchao WFOE. Certain payments from the VIE, Zhongchao Shanghai, to Zhongchao WFOE are subject to PRC taxes, including business taxes and value added tax.

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 a PRC project. However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong project must be the beneficial owner of the relevant dividends; and (b) the Hong Kong project must directly hold no less than 25% share ownership in the PRC project during the 12 consecutive months preceding its receipt of the dividends. In current practice, a Hong Kong project 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 Annual Report, we have not applied and have no plan to apply for the tax resident certificate from the relevant Hong Kong tax authority. See “Item 3. Key Information—D. Risk Factors— Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiaries to obtain financing.”

Further, any transfer of funds by us to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to PRC regulations. Capital contributions to our PRC subsidiaries are subject to the approval of or filing with the Ministry of Commerce of the People’s Republic of China, or the MOFCOM, in its local branches and registration with a local bank authorized by the China’s State Administration of Foreign Exchange, or the SAFE. Any foreign loan procured by our PRC subsidiaries is required to be registered or filed with the SAFE or its local branches or satisfy relevant requirements as provided by the SAFE. Any medium- or long-term loan to be provided by us to the VIEs must be registered with the National Development and Reform Commission, or the NDRC, and the SAFE or its local branches. We may not be able to obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of our financing activities and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. See “Item 3. Key Information—D. Risk Factors— Risks Related to Doing Business in China—PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of the initial public offering or any subsequent offerings 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.”

Financial Information Related to the VIE

The following tables present selected condensed consolidated statements of income and comprehensive income, and cash flows for the years ended December 31, 2023 and 2022, and the selected condensed consolidated balance sheets as of December 31, 2023 and 2022, which showing financial information for parent company, Zhongchao Cayman, its subsidiaries (Zhongchao Group Inc. (“Zhongchao BVI”), Zhongchao HK, Zhongchao USA, Zhongchao Japan and Zhongchao WFOE), the VIE and its subsidiaries, eliminating entries and consolidated information.

Selected Condensed Consolidated Balance Sheets Data

Selected Condensed Consolidated Statements of Operations Data

Selected Condensed Consolidated Cash Flows Data

A. [Reserved]

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

SUMMARY OF RISK FACTORS

You should carefully consider the following risk factors, together with all of the other information included in this Annual Report. 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 Annual Report 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.

Risks Related to the Business and Industry of the PRC Operating Entities

Risks and uncertainties related to the business and industry of the PRC operating entities include, but are not limited to, the following:

Risks Related to Our Corporate Structure

We are also subject to risks and uncertainties related to our corporate structure, including, but not limited to, the following:

Risks Related to Doing Business in China

Our WFOE and the PRC operating entities are based in China, and the PRC operating entities have all of their operations in China, and therefore, we face risks and uncertainties related to doing business in China in general, including, but not limited to, the following:

RISKS RELATED TO THE BUSINESS AND INDUSTRY OF THE PRC OPERATING ENTITIES

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

The PRC operating entities significantly expanded their business recently. In September 2022, Zhongchao announced its new strategic extension of the business model from “Medical-Pharmaceutical” to “Medical-Pharmaceutical-Patient” for patients with oncology and other major diseases to meet patients’ different medical health needs. In 2021, the PRC operating entities’ business and operation was impacted by the COVID-19 pandemic and local governmental restrictions in response to the pandemic and to the medical related products, so the revenues and net income decreased. For the fiscal years ended December 31, 2023, 2022 and 2021, our revenues were $19,433,945, $14,151,516, and $16,296,770, respectively, and our net (loss) income were $(11,307,239), $(2,822,319), and $238,665, respectively. As of the date of this Annual Report, Zhongchao Shanghai maintains 11 subsidiaries and 3 branches, of which are located in China (Beijing, Shanghai, Hainan, Liaoning and Chongqing) to serve different customers in various geographic locations.  

As of the date of this Annual Report, the PRC entities have 142 full-time employees and a few contractors from the third party. The PRC operating entities had been seeking business expansion countrywide, and, in consideration of cost, operation efficiency and business development need, established additional offices at shared workspace in 7 cities (Chongqing, Tianjin, Wuhan, Shenyang, Chengdu, Shijiazhuang and Baotou )] accommodating a total of 38 employees as of the date of this Annual Report. The rent for these offices at shared workspace is payable monthly or semi-annually, and the leases thereunder could be terminated with advanced notice. Zhongchao Shanghai and its subsidiaries are actively looking for additional locations to establish new offices and expand their current offices and sales and delivery centers. The PRC operating entities intend to continue their expansion in the foreseeable future to pursue existing and potential market opportunities. The PRC operating entities’ growth has placed and will continue to place significant demands on their management and administrative, operational and financial infrastructure. Continued expansion increases the challenges the PRC operating entities face in:

Moreover, as the PRC operating entities introduce new services or enter into new markets, the PRC operating entities may face new market, technological and operational risks and challenges with which they 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, the PRC operating entities’ business, results of operations and financial condition could be materially and adversely affected. Furthermore, the PRC operating entities may not be able to achieve anticipated growth, which could materially and adversely affect their business and prospects.

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 the PRC operating entities’ services to the healthcare industry. In 2023, 52.5% of our revenues were derived from services provided to pharmaceutical enterprises.  In 2022, 33.1% 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 The PRC operating entities’ ability to attract these expenditures. Some of the adverse developments in the healthcare industry that could affect our revenues would be:

The PRC operating entities face intense competition from onshore and offshore healthcare information, education, and training services companies, and, if the PRC operating entities are unable to compete effectively, the PRC operating entities may lose customers and our revenues may decline.

The market for healthcare information, education, and training services is highly competitive and the PRC operating entities expect competition to persist and intensify. We believe that the principal competitive factors in the PRC operating entities’ 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. the PRC operating entities’ ability to compete also depends in part on a number of factors beyond the PRC operating entities’ control, including the ability of the PRC operating entities’ competitors to recruit, train, develop and retain highly skilled professionals, the price at which the PRC operating entities’ competitors offer comparable services and the PRC operating entities’ competitors’ responsiveness to client needs. Therefore, we cannot assure you that the PRC operating entities will be able to retain their customers while competing against such competitors. Increased competition, the PRC operating entities’ inability to compete successfully against competitors, pricing pressures or loss of market share could harm the PRC operating entities’ business, financial condition and results of operations.

Our success depends substantially on the continuing efforts of the PRC operating entities’ senior executives and other key personnel, and the PRC operating entities’ business may be severely disrupted if they lose their services.

Our future success heavily depends upon the continued services of the PRC operating entities’ senior executives and other key employees. If one or more of the PRC operating entities’ senior executives or key employees are unable or unwilling to continue in their present positions, it could disrupt the PRC operating entities’ business operations, and the PRC operating entities 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 the PRC operating entities may be unable to retain their senior executives and key personnel or attract and retain new senior executive and key personnel in the future, in which case the PRC operating entities’ business may be severely disrupted, and our financial condition and results of operations may be materially and adversely affected. If any of the PRC operating entities’ senior executives or key personnel joins a competitor or forms a competing company, the PRC operating entities may lose customers, suppliers, know-how and key professionals and staff members to them. Also, if any of the PRC operating entities’ business development managers, who generally keep a close relationship with the PRC operating entities’ customers, joins a competitor or forms a competing company, the PRC operating entities may lose customers, and our revenues may be materially and adversely affected. Additionally, there could be unauthorized disclosure or use of the PRC operating entities’ technical knowledge, practices or procedures by such personnel. Most of the PRC operating entities’ 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 the PRC operating entities’ 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.

The PRC operating entities may be unable to maintain their existing relationships with their content providers or to build new relationships with other content providers.

Our success depends significantly on the PRC operating entities’ ability to maintain the PRC operating entities’ existing relationships with the third parties who provide healthcare information, education, and training content for the PRC operating entities’ library and courses and the PRC operating entities’ ability to build new relationships with other content partners. Most of the PRC operating entities’ agreements with content providers are on a case-by-case basis. The PRC operating entities generate their resource library of content providers, most of whom are healthcare experts working in leading Chinese hospital or well-known universities. Every time the PRC operating entities have a need for content production, they will search in their resource library and reach out to the relevant experts for content production. Upon the completion of the content production, they 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. The PRC operating entities’ content partners usually receive their service payment within one week after the PRC operating entities receive the signed copies of the service orders. If a significant number of the PRC operating entities’ content providers refuse to cooperate with us, it could result in a reduction in the number of courses the PRC operating entities are able to produce and decreased revenues. Most of the PRC operating entities’ agreements with the PRC operating entities’ content partners are also non-exclusive, and the PRC operating entities’ competitors offer, or could offer, healthcare information, education, and training content that is similar to or the same as the PRC operating entities. If the PRC operating entities’ current content partners offer information to users or the PRC operating entities’ competitors on more favorable terms than those offered to us or increase the PRC operating entities’ service fees, the PRC operating entities’ competitive position and our profit margins and prospects could be harmed. In addition, the failure by The PRC operating entities’ 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 the PRC operating entities’ ability to attract users.

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

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

In addition to content generated by the PRC operating entities’ users and content partners, the PRC operating entities rely on their in-house team to create original content and to edit, manage, and supervise the original content origination and production process, and the PRC operating entities intend to continue to invest resources in content production. The PRC operating entities face competition for qualified personnel in a limited pool of high-quality creative talent. If the PRC operating entities are not able to compete effectively for talents or attract and retain top talents at reasonable costs, their original content production capabilities would be negatively impacted. Any deterioration in the PRC operating entities’ in-house content production capability, inability to attract creative talents at reasonable costs or losses in personnel may materially and adversely affect the PRC operating entities’ 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 the PRC operating entities’ 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 year ended December 31, 2023, one customer accounted for approximately 13.7% of the total revenue. For the year ended December 31, 2022, one customer accounted for approximately 15.9% of the total revenue. For the year ended December 31, 2021, three customers accounted for approximately 23.4%, 21.9%, and 10.7% of the total revenue, respectively. The PRC operating entities’ ability to maintain close relationships with these and other major customers is essential to the growth and profitability of the PRC operating entities’ business. However, the volume of work performed for a specific client is likely to vary from year to year, especially when the PRC operating entities are not their customers’ exclusive healthcare information, education, and training services provider and the PRC operating entities do not have long-term commitments from any of their customers to purchase the PRC operating entities’ services. A major client in one year may not provide the same level of revenues for the PRC operating entities in any subsequent year. The healthcare information, education, and training services the PRC operating entities provide to their 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 the PRC operating entities provide changes over time. In addition, The PRC operating entities’ 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 The PRC operating entities’ 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 The PRC operating entities’ major customers could adversely affect our financial condition and results of operations.

We expect competition to increase significantly in the future which could reduce the PRC operating entities’ 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. The PRC operating entities 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 the PRC operating entities do. We cannot assure you that healthcare information, education, and training education services maintained by the PRC operating entities’ existing and potential competitors will not be perceived by the healthcare community as being superior to the PRC operating entities’.

The PRC operating entities may be unable to adequately develop their systems, processes and support in a manner that will enable them to meet the demand for the PRC operating entities’ services.

The PRC operating entities have initiated their online operations in the recent 12 years and are developing its ability to provide its courses and education systems on a transactional basis over the Internet. The PRC operating entities’ future success will depend on their ability to develop the infrastructure effectively, including additional hardware and software, and implement the services, including customer support, necessary to meet the demand for the PRC operating entities’ services. In the event the PRC operating entities 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.

The PRC operating entities may lose business if they are unable to keep up with rapid technological or other changes.

If the PRC operating entities are unable to keep up with changing technology and other factors related to their market, they may be unable to attract and retain users and advertisers, which would reduce our revenues. The markets in which the PRC operating entities compete are characterized by rapidly changing technology, evolving technological standards in the industry, frequent new service and product announcements and changing consumer demands. the PRC operating entities’ future success will depend on the PRC operating entities’ ability to adapt to these changes and to continuously improve the performance, features and reliability of the PRC operating entities’ 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 the PRC operating entities’ services or infrastructure, which might impact the PRC operating entities’ ability to become or remain profitable.

If the PRC operating entities are unable to collect their receivables from their customers, our results of operations and cash flows could be adversely affected.

The PRC operating entities’ business depends on their ability to successfully obtain payment from their customers of the amounts they owe us for work performed. As of December 31, 2023, 2022 and 2021, our accounts receivable balance amounted to approximately $2,552,738, $6,772,988 and $9,218,883, respectively. As of December 31, 2023, 2022 and 2021, we had doubtful allowance of $2,197, $207,269 and $nil against accounts receivable.  For the years ended December 31, 2023, 2022 and 2021, we wrote off $1,247,907, $543,315 and $1,449,827, respectively, against accounts receivable.  Since the PRC operating entities generally do not require collateral or other security from their customers, they 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 their allowance. There is no guarantee that we will accurately assess the creditworthiness of the PRC operating entities’ customers. Macroeconomic conditions, including related turmoil in the global financial system, could also result in financial difficulties for the PRC operating entities’ 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 the PRC operating entities are unable to collect their receivables from their customers in accordance with the contracts with the PRC operating entities’ customers, our results of operations and cash flows could be adversely affected.

The growth and success of the PRC operating entities’ business depends on their 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 they focus on.

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

If the PRC operating entities do not succeed in attracting new customers for their services or growing revenues from existing customers, they may not achieve our revenue growth goals.

The PRC operating entities plan to significantly expand the number of customers they serve to diversify their client base and grow our revenues. Revenues from a new client often rise quickly over the first several years following the PRC operating entities’ initial engagement as they expand the services that they provide to that client. Therefore, obtaining new customers is important for them to achieve rapid revenue growth. The PRC operating entities also plan to grow revenues from their existing customers by identifying and selling additional services to them. The PRC operating entities’ ability to attract new customers, as well as their ability to grow revenues from existing customers, depends on a number of factors, including the PRC operating entities’ ability to offer high quality services at competitive prices, the strength of the PRC operating entities’ competitors and the capabilities of the PRC operating entities’ sales and marketing teams. If the PRC operating entities are not able to continue to attract new customers or to grow revenues from their 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 the PRC operating entities’ significant recent growth, evaluating their business and prospects may be difficult and the PRC operating entities’ past results may not be indicative of its future performance.

Our future success depends on the PRC operating entities’ ability to significantly increase revenue and maintain profitability from the PRC operating entities’ operations. The PRC operating entities’ business has grown and evolved significantly in recent years. The PRC operating entities’ growth in recent years makes it difficult to evaluate their historical performance and make a period-to-period comparison of the PRC operating entities’ historical operating results less meaningful. The PRC operating entities 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 The PRC operating entities’ 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:

If the PRC operating entities are unsuccessful in addressing any of these risks or challenges, their business may be materially and adversely affected.

The PRC operating entities’ profitability will suffer if they are not able to maintain their resource utilization levels or continue to improve their productivity levels.

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

Increases in wages for professionals in China could prevent the PRC operating entities from sustaining their competitive advantage and could reduce our profit margins.

Part of the PRC operating entities’ most significant costs are the salaries and other compensation expenses for their 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. The PRC operating entities 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 the PRC operating entities’ business requires. Increases in the wages and other compensation the PRC operating entities pay their employees and consultants in China could reduce their competitive advantage unless they are able to increase the efficiency and productivity of their professionals as well as the prices the PRC operating entities can charge for their 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 the PRC operating entities’ competitive advantage and adversely impact their profit margin.

The PRC operating entities must continue to upgrade their technology infrastructure, or they will be unable to effectively meet demand for their services.

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

The PRC operating entities’ 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 the PRC operating entities’ on-site data facility or at their Internet service providers’ facilities could cause the loss of critical data and prevent us from offering their services. Currently the PRC operating entities don’t have any business interruption insurance to compensate us for losses that may occur. In addition, the PRC operating entities rely on third parties to securely store their archived data, house their Web server and network systems and connect them to the Internet. The failure by any of these third parties to provide these services satisfactorily and the PRC operating entities’ inability to find suitable replacements would impair the PRC operating entities’ ability to access archives and operate their systems.

The PRC operating entities’ computer networks may be vulnerable to security risks that could disrupt their services and adversely affect their results of operations.

The PRC operating entities’ 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 the PRC operating entities’ operations. Although the PRC operating entities intend to continue to implement security measures, computer attacks or disruptions may jeopardize the security of information stored in and transmitted through the PRC operating entities’ computer systems. Actual or perceived concerns that the PRC operating entities’ systems may be vulnerable to such attacks or disruptions may deter their customers from using their platforms or services. As a result, the PRC operating entities 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 the PRC operating entities’ 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 the PRC operating entities’ business.

The PRC operating entities may lose users and lose revenues if their cyber security measures fail.

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

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

The PRC operating entities’ reputation and brand recognition, which depend on cultivating awareness, trust and confidence among their current or potential users, is critical to the success of the PRC operating entities’ business. We believe a well-recognized brand is crucial to increasing the PRC operating entities’ user base and, in turn, facilitating the PRC operating entities’ effort to monetize their services and enhancing their attractiveness to their users and service providers. The PRC operating entities’ 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 the PRC operating entities’ business, perceptions of conflicts of interest and rumors, including complaints made by the PRC operating entities’ competitors, among other things, could substantially damage the PRC operating entities’ reputation, even if they are baseless or satisfactorily addressed.

In addition, any perception that the quality of the PRC operating entities’ 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 the PRC operating entities’ reputation. Any negative media publicity about any of the services available on the PRC operating entities’ platform or product or service quality problems at other healthcare training service platforms, including at the PRC operating entities’ competitors, may also negatively impact the PRC operating entities’ 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 the PRC operating entities’ platform and the number of transactions conducted through the PRC operating entities’ platform, which would adversely impact our revenues and liquidity position.

The PRC operating entities may not be able to prevent others from unauthorized use of the PRC operating entities’ intellectual property, which could cause a loss of customers, reduce the PRC operating entities’ revenues and harm their competitive position.

The PRC operating entities 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 their intellectual property rights. To protect the PRC operating entities’ 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 the PRC operating entities have taken may be inadequate to prevent the misappropriation of their proprietary technology. Unauthorized copying, other misappropriation, or negligent or accidental leakage of the PRC operating entities’ proprietary technologies could enable third parties to benefit from the PRC operating entities’ technologies without obtaining their consent or paying them for doing so, which could harm the PRC operating entities’ business and competitive position. Though the PRC operating entities are not currently involved in any litigation with respect to intellectual property, they may need to enforce their intellectual property rights through litigation. Litigation relating to the PRC operating entities’ intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.

The PRC operating entities may face intellectual property infringement claims that could be time-consuming and costly to defend. If the PRC operating entities fail to defend themselves against such claims, they may lose significant intellectual property rights and may be unable to continue providing their existing services.

The PRC operating entities’ success largely depends on their ability to use and develop their technology and services without infringing the intellectual property rights of third parties, including copyrights, trade secrets and trademarks. The PRC operating entities may be subject to risk related to potential infringement claims of the copyrights, as the copyrights of the PRC operating entities’ some medical education courses developed by us belong to their customers or share with their 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. The PRC operating entities may be subject to litigation involving claims of violation of other intellectual property rights of third parties. The PRC operating entities may be unaware of intellectual property registrations or applications relating to their 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 the PRC operating entities’ ability to rely on such technologies. The PRC operating entities are subject to additional risks as a result of their 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 their 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 the PRC operating entities’ 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 the PRC operating entities’ 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 the PRC operating entities’ products until resolution of such litigation, or could require us to indemnify their customers against infringement claims in certain instances. Any intellectual property claim or litigation in this area, whether they ultimately win or lose, could damage their reputation and have a material adverse effect on our business, results of operations or financial condition.

Disruptions in telecommunications or significant failure in the PRC operating entities’ IT systems could harm their service model, which could result in a reduction of our revenue.

A significant element of the PRC operating entities’ business strategy is to continue to leverage and expand their 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 the PRC operating entities’ service model is to maintain active voice and data communications, financial control, accounting, customer service and other data processing systems between the PRC operating entities’ main offices in Shanghai, locations of the PRC operating entities’ customers, and other branches and support facilities of the PRC operating entities. The PRC operating entities’ 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 their control. Loss of all or part of the systems for a period of time could hinder the PRC operating entities’ performance or their 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 the PRC operating entities’ business and business reputation. The PRC operating entities may also be liable to their customers for breach of contract for interruptions in service.

The PRC operating entities may be liable to third parties for content that is available from their online library.

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

Any reduction in the regulation of continuing education and training in the healthcare industry may adversely affect the PRC operating entities’ business.

The PRC operating entities’ 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 the PRC operating entities’ 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 the PRC operating entities’ ability to grow their business and develop or enhance their service offerings to respond to market demand or competitive challenges.

We believe that our current cash, cash flow from operations and the proceeds from our initial public 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:

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 the PRC operating entities’ ability to grow their business and develop or enhance their product and service offerings to respond to market demand or competitive challenges.

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 the PRC operating entities’ 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 our initial public 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 Class A Ordinary 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 initial public 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.

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, 2023 and 2022, our management identified below material weaknesses in the design and operation of our internal controls: 

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 setup 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 the submission of all important documents and contracts to the office of our 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, the PRC operating entities’ business, financial condition and results of operations may be materially and adversely affected.

The PRC operating entities currently cooperate with Apple’s app store and major PRC-based Android app stores to distribute their MDMOOC      mobile application to users. As such, the promotion, distribution and operation of the PRC operating entities’ 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 the PRC operating entities’ application, or if any other major distribution channel with which they would like to seek collaboration refuses to collaborate with us in the future on commercially favorable terms, the PRC operating entities’ business, financial condition and results of operations may be materially and adversely affected.

The PRC operating entities’ activities may expose them to malpractice liability and other liability inherent in healthcare delivery.

The PRC operating entities may be exposed to malpractice or other liability against which they may not be adequately insured, resulting in a decline in our financial results. A court or government agency may take the position that the PRC operating entities’ delivery of health information directly, including through licensed physicians, or information delivered by a third-party site that a consumer accesses through the PRC operating entities’ Website, exposes us to malpractice or other personal injury liability for wrongful delivery of healthcare services or erroneous health information. The amount of insurance the PRC operating entities maintain with insurance carriers may not be sufficient to cover all of the losses they 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, the PRC operating entities may not be able to purchase insurance for some types of risks.

Healthcare reforms and the cost of regulatory compliance could negatively affect the PRC operating entities’ 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. The PRC operating entities’ failure or their customers’ failure to comply with any applicable regulatory requirements or industry guidelines could:

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 the PRC operating entities’ relationships, including financial, marketing and continuing medical education relationships, with the PRC operating entities’ 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 the PRC operating entities’ services, increase the PRC operating entities’ 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 the PRC operating entities’ services, increase the PRC operating entities’ 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 the PRC operating entities’ online services, the courseware or audio-visual contents uploaded by the users in MDMOOC platforms, through the PRC operating entities’ website or mobile apps, may be regarded as “online publishing service” and therefore the PRC operating entities may be required to obtain an Online Publishing License in the future.

The United States or foreign nations may adopt legislation aimed at protecting Internet users’ privacy. This legislation could increase the PRC operating entities’ 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.

The PRC operating entities’ 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 the PRC operating entities fail to educate users about the value of the PRC operating entities’ content, platform and services, the PRC operating entities’ growth may be limited and their 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 the PRC operating entities’ 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, the PRC operating entities’ 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 the PRC operating entities 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 the PRC operating entities’ business, operating results and financial condition.

End users sometimes enter private health information about themselves or their family members when using the PRC operating entities’ services. Also, the PRC operating entities’ systems record use patterns when end users access the PRC operating entities’ 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. The PRC operating entities’ 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 the PRC operating entities’ site also may not maintain systems to safeguard this health information. In some cases, the PRC operating entities may place their 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, the PRC operating entities may contract out the hosting of their Website to a third party. In addition, future laws or changes in current laws may necessitate costly adaptations to the PRC operating entities’ systems.

The PRC operating entities intend to develop medical information systems and market research services that they 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, the PRC operating entities’ collection, analysis and reporting of aggregate healthcare data maintained in the PRC operating entities’ 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 the PRC operating entities’ systems or limit their ability to use this data.

If we are deemed to be an investment company under the United States Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which may make it difficult for us to complete a business transaction.

If we are deemed to be an investment company under the Investment Company Act of 1940, as amended, our activities may be restricted, including:

In addition, we may have imposed upon us burdensome requirements, including:

In order not to be regulated as an investment company under the Investment Company Act, unless we can qualify for an exclusion, we must ensure that we are engaged primarily in a business other than investing, reinvesting or trading of securities and that our activities do not include investing, reinvesting, owning, holding or trading “investment securities” constituting more than 40% of our assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We are a holding company no material operations of our own. All of our business is conducted through Zhongchao Shanghai, whose principle business is to provide healthcare information, education, and training services to healthcare professionals and the public in China. We do not plan to buy businesses or assets with a view to resale or profit from their resale. We do not plan to buy unrelated businesses or assets or to be a passive investor. We do not believe that the PRC operating entities’ anticipated principal activities will subject us to the Investment Company Act. To this end, the investment by the VIE’s subsidiary Shanghai Jingyi is only in a private equity fund particularly investing in a certain biotech company in China with a limited capital subscription and a limited investment period. By restricting the investment to such a certain instrument, we intend to avoid being deemed an “investment company” within the meaning of the Investment Compact Act.

An investment in our securities is not intended for persons who are seeking a return on investments in government securities or investment securities. Shanghai Jingyi is primarily engaged in technology development, transfer, service and consulting in the fields of medical technology and computer technology, market information consulting and investigating. If we continue to invest in other investment securities, we may be deemed to be subject to the Investment Company Act. If we were deemed to be subject to the Investment Company Act, compliance with these additional regulatory burdens would require additional expense for which we have not accounted.

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 100 votes per share, and our Class A Ordinary Share has 1 vote per share. The shareholder who holds shares of Class B Ordinary Shares holds approximately 96.54% of the voting power of our outstanding ordinary shares, assuming the exercise of the HF Warrant. Because of the one-hundred-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. 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.

If we are unable to comply with the Nasdaq continued listing requirements, our Class A Ordinary Shares could be delisted from Nasdaq, which may have a material adverse effect on our liquidity, the ability of shareholders to sell their Class A Ordinary Shares and our ability to obtain additional financing.

Our listing on Nasdaq is conditioned on our continued compliance with Nasdaq’s continued listing requirements, including maintaining a minimum bid price of $1.00 per ordinary share, pursuant to Nasdaq Listing Rule 5550(a)(2), or the Minimum Bid Requirement.

On December 29, 2023, the Company received written notice from Nasdaq notifying the Company that it is not in compliance with the Minimum Bid Price Requirement, as the closing bid price for the Company’s Class A ordinary shares had been below $1.00 per share for the preceding 30 consecutive business days. February 29, 2024, upon the shareholders’ approval, the Company effectuated a 1-for-10 share consolidation. On March 15, 2024, the Company received written notice from the Nasdaq informing the Company that it has regained compliance with Minimum Bid Price Requirement.

Even though we have regained compliance with the Minimum Bid Requirement, there can be no assurance that our share price will not again fail to satisfy the Minimum Bid Requirement or other Nasdaq continued listing requirements. If we are unable to maintain compliance with the Nasdaq continued listing requirements, Nasdaq could initiate delisting proceedings or delist our Class A Ordinary Shares from trading on its exchange which may have a material adverse effect on us and our shareholders, including reduced liquidity with respect to our Class A Ordinary Shares decrease our ability to issue additional securities or obtain additional financing in the future.

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 is able to exercise full voting rights with respect to an aggregate of 549,772 Class B Ordinary Shares, representing a majority of the voting power of our outstanding ordinary shares. 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.

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.

Our directors and officers beneficially own a majority of the voting power of our outstanding Class A Ordinary Shares. 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 consolidating the financial results of the PRC operating entities, 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 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 the PRC operating entities or such consolidation could materially adversely affect our operating results and financial condition.

We are not a Chinese operating company, but a holding company incorporated in Cayman Islands. As a holding company with no material operations of our own, 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 the financial results of Zhongchao Shanghai and its subsidiaries 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.

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 the PRC operating entities may be subject to scrutiny by the PRC tax authorities and they may determine that we, the VIE, or its subsidiaries 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 the VIE and its subsidiaries 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 the VIE and its subsidiaries 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 the VIE and its subsidiaries for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if the VIE’s or its subsidiaries’ tax liabilities increase or if it is required to pay late payment fees and other penalties.

We conduct our business through Zhongchao Shanghai and its subsidiaries 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 legal counsel, Han Kun Law Offices, based on their understanding of the current PRC laws, rules and regulations, that (i) as of the date of this Annual Report, the structure for operating our business in China (including our corporate structure and VIE Arrangements with Zhongchao Shanghai, Zhongchao Shanghai and their shareholders) do 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 in accordance with the terms of each of the VIE Arrangements, and do not result in any violation of PRC laws or regulations currently in effect. 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.

If any of our PRC entities or the PRC operating 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 or the PRC operating 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:

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

The shareholders of the 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 the VIE may have actual or potential conflicts of interest with us. These shareholders may refuse to sign or breach, or cause the VIE to breach, or refuse to renew, the existing VIE Arrangements we have with them and the VIE, which would have a material and adverse effect on our ability to consolidate the financial results of the VIE and its subsidiaries. For example, the shareholders may be able to cause our agreements with the 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 Foreign Investment Law.

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which became 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 whose financial results are consolidated 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 ability to consolidate the financial results of the VIE and its subsidiaries through VIE Arrangements will not be deemed as foreign investment in the future.

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 ability to consolidate the financial results of the VIE and its subsidiaries through VIE Arrangements are deemed as foreign investment in the future, and any business of the VIE and its subsidiaries 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 consolidate the financial results of the VIE and its subsidiaries 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.

If the PRC operating entities fail to maintain continuing compliance with the PRC state regulatory rules, policies and procedures applicable to their industry, the PRC operating entities 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 PRC operating entities do not engage in information system integration business, therefore the PRC operating entities are 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 the PRC operating entities’ business and our competitive position.

The majority of the PRC operating entities’ business are conducted in China. Accordingly, the business, financial condition, results of operations and prospects of the PRC operating entities are affected significantly by economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange, and allocation of resources. The PRC government exercises significant control over China’s economic growth through strategical allocation of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies. While the Chinese economy has experienced significant growth in the past decades, growth has been uneven, both geographically and among various sectors of the economy. The growth of the Chinese economy may not continue at a rate experienced in the past. Any prolonged slowdown in the Chinese economy may reduce the demand for our services and materially and adversely affect the PRC operating entities’ business and results of operations. Furthermore, 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 services. Such developments could adversely affect the PRC operating entities’ businesses, lead to reduction in demand for our services and adversely affect the competitive position.

Uncertainties regarding the enforcement of laws, and changes in policies, laws and regulations could materially and adversely affect us.

In 1979, the PRC began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. In particular, the PRC legal system is a civil law system based on written statutes. Unlike some other law systems, prior court decisions under the civil law system may be cited for reference but have limited precedential value. Our PRC subsidiaries, the PRC operating entities and their subsidiaries are subject to laws and regulations applicable to foreign-invested enterprises as well as various Chinese laws and regulations generally applicable to companies incorporated in China. 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 and the enforcement of these laws, regulations and rules involve uncertainties. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited by third parties through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us. Furthermore, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

The regulatory authorities have significant oversight over the business of the PRC operating entities and may influence our operations as the regulatory authorities deem appropriate to further regulatory, political and societal goals. The regulatory authorities have recently published new policies that affected our industry and our business, and we cannot rule out the possibility that it will in the future further release regulations or policies regarding our industry that could further adversely affect our business, financial condition and results of operations. Furthermore, the regulatory authorities have also recently published new regulations and guidance to exert more oversight and control over securities offerings and other capital markets activities that are conducted overseas and foreign investment in China-based companies like us. Any such action, once taken by the regulatory authorities, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or in extreme cases, become worthless. We cannot assure you that we or the PRC operating entities will be able to comply with these new laws and regulations in all respects, and we may be ordered to rectify, suspend or terminate any actions or services that are deemed illegal by the regulatory authorities and become subject to material penalties, which may materially harm our business, financial condition, results of operations and prospects.

The PRC operating entities may face risks and uncertainties with respect to the licensing requirement for internet audio-visual programs.

On December 20, 2007, the State Administration of Radio, Film and Television (“SARFT”) (currently known as the National Radio and Television Administration of China, or the NRTA), 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 SARFT or its local bureaus or completing the relevant registration procedures with SARFT 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, SARFT 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.”

The PRC operating entities offer short audio clips and the live course on their 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 the PRC operating entities offer or are available on their platforms fall into the definition of “internet audio-visual programs.” The PRC government may find that the PRC operating entities’ activities mentioned above or any other content offered on their 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. The PRC operating entities currently do not hold a License for Online Transmission of Audio-Visual Programs. If the PRC government determines that the PRC operating entities’ content should be considered as “internet audio-visual programs” for the purpose of the Audio-Visual Program Provisions, the PRC operating entities may be required to obtain a License for Online Transmission of Audio-Visual Programs. The PRC operating entities are, however, not eligible to apply for such license since they are not a state-owned or state-controlled entity. If this were to occur, the PRC operating entities may be subject to penalties, fines, legal sanctions or an order to suspend the provision of their relevant content.

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 Annual Report, no explicit local rules or guideline on regulation of online private training institutions related to our operation have been promulgated in Shanghai, where the operating entity of the online platform and the VIE, Zhongchao Shanghai, was incorporated. 

The PRC operating entities operate online platform that provides online training programs through the internet, and the PRC operating entities of the 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 the PRC operating entities’ previous consultation with relevant governmental authorities, they were informed that they 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 their operation of online education platform. However, we cannot assure you that the government authorities will not take a different view in the future. The PRC operating entities 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.

Pursuant to the amended Law for Promoting Private Education of the PRC (the “Amended Private Education Law”), private schools are required to obtain a private school operating permit. On April 7, 2021, the State Council officially promulgated the revised Regulations on the Implementation of the Law for Promoting Private Education of the PRC (the “2021 Revised Regulations”), which became effective on September 1, 2021. According to the 2021 Revised Regulations, private schools to carry out training and educational activities online using internet technology shall obtain the corresponding private school operating permits. The 2021 Revised Regulations further stipulates that, private schools that carry out training and educational activities online using internet technology shall establish and implement internet security management systems and technical measures for security protection as required by law, and shall, upon discovery of the release or transmission of any information prohibited by laws or administrative regulations from release or transmission, immediately have the transmission stopped and remove or otherwise dispose of the information to prevent its dissemination, retain related records, and report the case to relevant authorities. However, it remains unclear under the 2021 Revised Regulations as to whether and how a non-formal VET service provider like the PRC operating entities, especially in relation to the PRC operating entities’ online tutoring services, needs to comply with the operating permit requirement. Moreover, as the 2021 Revised Regulations were recently promulgated and became effective, there are still substantial uncertainties as to how it will be interpreted and enforced, and whether and how local governments would promulgate rules related to the filing or licensing requirement applicable to non-formal VET service providers like the PRC operating entities.

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

The Chinese government exerts substantial influence over the manner in which the PRC operating entities must conduct their  business activities. We are currently not required to obtain approval from Chinese authorities to list or continue to list on U.S. exchanges nor for the execution of VIE agreements, however, if the VIE or the holding company were required to obtain approval and were denied permission from Chinese authorities to list or continue to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange or continue to offer securities to investors, which could materially affect the interest of the investors and cause the value of our Class A Ordinary Shares to significantly decline or be worthless.

The Chinese government exerts substantial influence over the manner in which the PRC operating entities must conduct their business activities. China’s business operations are comprehensively regulated. The PRC operating entities could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-divisions. The PRC operating entities may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. In the event that the PRC operating entities are not able to substantially comply with any existing or newly adopted laws and regulations, the business operations of the PRC operating entities may be materially adversely affected and the value of our Ordinary Shares may significantly decrease or become worthless.

On February 17, 2023, the CSRC promulgated the Interim Administrative Measures on Overseas Securities Offering and Listing by Domestic Enterprises (CSRC Announcement [2022] No. 43) (“Trial Measures”), and five supporting guidelines, together with five supporting guidelines, which took effect on March 31, 2023. As the Trial Measures were newly published, there are substantial uncertainties as to the implementation and interpretation, and how they will affect our current listing, and future offering or financing. If we are required by the Trial Measures for any future offering or any other financing activities to file with the CSRC, we cannot assure you that we will be able to complete such filings in a timely manner, or even at all. Any failure of us or the PRC operating entities to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to continue to offer our Class A Ordinary Shares, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our Class A Ordinary Shares to significantly decline in value or become worthless.

Additionally, the PRC government authorities may strengthen oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers like us. Such actions taken by the PRC government authorities may intervene or influence the operations of the PRC operating entities at any time, which are beyond our control. Therefore, any such action may adversely affect the operations of the PRC operating entities and significantly limit or hinder our ability to offer or continue to offer securities to you and cause the value of such securities to significantly decline or be worthless.

The Chinese government may intervene or influence our operations at any time, which actions may impact our operations materially and adversely, significantly limit or completely hinder our ability to offer or continue to offer securities to investors, and cause the value of our Class A Ordinary Shares to significantly decline or be worthless.

The Chinese government has exercised, and continues to exercise, substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to online transmission of audio-visual program, internet live streaming services, online publishing, private education, internet information security, privacy protection and other matters. The central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.

The PRC operating entities’ business is subject to various government and regulatory interference. The PRC operating entities could be subject to regulation by various political and regulatory entities, including various local and municipal agencies and government sub-divisions. The PRC operating entities may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply. Our operations could be adversely affected, directly or indirectly, by existing or future laws and regulations relating to our business or industry, which could result in further material changes in our operations and could adversely impact the value of our Class A Ordinary Shares.

Furthermore, given recent statements by the Chinese government indicating an intent to exert more oversight and control over offerings that are conducted overseas, including but not limited to the newly promulgated Trial Measures, although we are currently not required to obtain permission from any of the PRC federal or local government, if we are required by the Trial Measures for any future offering or any other financing activities to file with the CSRC we cannot assure you that we will be able to complete such filings in a timely manner, or even at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to continue to offer our Class A Ordinary Shares, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations and cause our Class A Ordinary Shares to significantly decline in value or become worthless.

PRC laws and regulations governing our current business operations are sometimes vague and uncertain and any changes in such laws and regulations may be quick with little impair our ability to operate profitably.

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations governing our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a manner different from our understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. 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 the enforcement of these laws, regulations and rules involves uncertainties. 

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties.

Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could materially and adversely affect our business and impede our ability to continue our operations.

Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the “Opinions on Severely Cracking Down on Illegal Securities Activities According to Law,” or the Opinions, which was made available to the public on July 6, 2021. The Opinions emphasized the need to strengthen the administration over illegal securities activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Effective measures, such as promoting the construction of relevant regulatory systems will be taken to deal with the risks and incidents of China-concept overseas listed companies, and cybersecurity and data privacy protection requirements and similar matters. The Opinions and any related implementing rules to be enacted may subject us to compliance requirement in the future.

New rules for China-based companies seeking for securities offerings in foreign stock markets was released by the CSRC recently. The Chinese government may exert more oversight and control over overseas public offerings conducted by China-based issuers, which could significantly limit or completely hinder our ability to offer or continue to offer our Class A Ordinary Shares to investors and could cause the value of our Class A Ordinary Shares to significantly decline or become worthless.

On February 17, 2023, the CSRC promulgated the Trial Measures and five supporting guidelines, which became effective on March 31, 2023. According to the Trial Measures, among other requirements, (1) domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfil the filing procedures with the CSRC; if a domestic company fails to complete the filing procedure or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative penalties; (2) if the issuer meets both of the following conditions, the overseas offering and listing shall be determined as an indirect overseas offering and listing by a domestic company: (i) any of the total assets, net assets, revenues or profits of the domestic operating entities of the issuer in the most recent accounting year accounts for more than 50% of the corresponding figure in the issuer’s audited consolidated financial statements for the same period; (ii) its major operational activities are carried out in China or its main places of business are located in China, or the senior managers in charge of operation and management of the issuer are mostly Chinese citizens or are domiciled in China; (3) where a domestic company seeks to indirectly offer and list securities in an overseas market, the issuer shall designate a major domestic operating entity responsible for all filing procedures with the CSRC, and such filings shall be submitted to the CSRC within three business days after the submission of the overseas offering and listing application; and (4) if the issuer issues securities in the same overseas market after the initial issuance and listing, it shall submit filings with the CSRC within three business days after the completion of the issuance. Further, at the press conference held for the Trial Measures on February 17, 2023, officials from the CSRC clarified that the PRC domestic companies that have already been listed overseas on or before the effective date of the Trial Measures (i.e., March 31, 2023) shall be deemed as Existing Issuers. Existing Issuers are not required to complete the filing procedures immediately but shall carry out filing procedures as required if they conduct refinancing or are involved in other circumstances that require filing with the CSRC. The officials from the CSRC have also confirmed that for the PRC domestic companies that seek to list overseas with VIE structure, the CSRC will solicit opinions from relevant regulatory authorities and complete the filing of the overseas listing of companies with VIE structure which meet the compliance requirements.

On February 24, 2023, the CSRC, Ministry of Finance of the PRC, National Administration of State Secrets Protection and National Archives Administration of China promulgated the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering and Listing by Domestic Enterprises, or the Archives Rules, which took effect on March 31, 2023. Pursuant to the Archives Rules, domestic companies that seek for overseas offering and listing shall strictly abide by applicable laws and regulations of the PRC and the Archives Rules, enhance legal awareness of keeping state secrets and strengthening archives administration, institute a sound confidentiality and archives administration system, and take necessary measures to fulfill confidentiality and archives administration obligations. Such domestic companies shall not leak any state secret and working secret of government agencies, or harm national security and public interest. Furthermore, a domestic company that plans to, either directly or through its overseas listed entity, publicly disclose or provide to relevant individuals or entities including securities companies, securities service providers and overseas regulators, any document and materials that contain state secrets or working secrets of government agencies, shall first obtain approval from competent authorities according to law, and file with the secrecy administrative department at the same level. Moreover, a domestic company that plans to, either directly or through its overseas listed entity, publicly disclose or provide to relevant individuals and entities including securities companies, securities service providers and overseas regulators, any other documents and materials that, if leaked, will be detrimental to national security or public interest, shall strictly fulfill relevant procedures stipulated by applicable national regulations. The Archives Rules also stipulate that a domestic company that provides accounting archives or copies of accounting archives to any entities including securities companies, securities service providers and overseas regulators and individuals shall fulfill due procedures in compliance with applicable national regulations.

As we have completed our public offering before the effective date of the Trial Measures (i.e., March 31, 2023), we believe we are not required to complete the filing procedures with the CSRC for our current listing. However, we may be required to file with the CSRC in connection with any future offering and financing. As the Trial Measures and the Archives Rules were newly published, there are substantial uncertainties as to the implementation and interpretation, and how they will affect our current listing, and future offering or financing. Especially, if we are required by the Trial Measures for any future offering or financing to file with the CSRC, we cannot assure you that we will be able to complete such filings in a timely manner, or even at all. Any failure of us to fully comply with new regulatory requirements may significantly limit or completely hinder our ability to offer or continue to offer the Class A Ordinary Shares, cause significant disruption to our business operations, severely damage our reputation, materially and adversely affect our financial condition and results of operations, and cause the Ordinary Shares to significantly decline in value or become worthless.

The joint statement by the SEC and the PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.

U.S. public companies that have substantially all of their operations in China have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud.

On April 21, 2020, the former SEC Chairman Jay Clayton and Public Company Accounting Oversight Board (the “PCAOB”) Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.

On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply minimum offering size requirement for companies primarily operating in “Restrictive Market”, (ii) adopt a new requirement relating to the qualification of management or board of director for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditors.

On May 20, 2020, the U.S. Senate passed The Holding Foreign Companies Accountable Act, or the HFCA Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national exchange. On December 2, 2020, the U.S. House of Representatives approved the HFCA Act. On December 18, 2020, the HFCA Act was signed into law.

On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. The SEC will implement a process for identifying such a registrant and any such identified registrant will be required to submit documentation to the SEC establishing that it is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in the registrant’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant.

Furthermore, the HFCA Act, which requires that the PCAOB be permitted to inspect the issuer’s public accounting firm within three years, may result in the delisting of our Company in the future if the PCAOB is unable to inspect our accounting firm at such future time.

In addition, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which, if signed into law, would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years. As a result, the time period before our Class A Ordinary Shares may be prohibited from trading or delisted will be reduced.

On November 5, 2021, the SEC approved the PCAOB’s Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act. Rule 6100 provides a framework for the PCAOB to use when determining, as contemplated under the HFCA Act, whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On December 16, 2021, the PCAOB issued a Determination Report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (1) mainland China, and (2) Hong Kong.

The lack of access to the PCAOB inspection in China prevents the PCAOB from fully evaluating audits and quality control procedures of the auditors based in China. As a result, the investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of these accounting firms’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause existing and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

Our current independent accounting firm, Prager Metis CPAs, LLC (“Prager Metis”), and our former independent accounting firm Marcum Asia CPAs LLP (“MarcumAsia” formerly known as “Marcum Bernstein & Pinchuk LLP”), both of whose audit report is included in this Annual Report on Form 20-F, are headquartered in New York, New York. Neither of them was included in the list of PCAOB Identified Firms in the PCAOB December Release. However, given that all PCAOB-registered firms in China were included on that list, our ability to retain an auditor subject to PCAOB inspection and investigation may depend on the relevant U.S. and PRC regulators reaching an agreement to permit these inspections and investigations. More broadly, the PCAOB entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which established a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections of the PCAOB-registered audit firms that audit Chinese companies that trade on U.S. exchanges. However, in the PCAOB December 2021 Release, the PCAOB identified problems in implementing these agreements and a lack of cooperation. Accordingly, we can offer no assurance that we will be able to retain an auditor that would allow us to avoid a trading prohibition for our securities under the HFCA Act.

In addition to the issues under the HFCA Act discussed above, the PCAOB’s inability to conduct inspections in China and Hong Kong prevented it from fully evaluating the audits and quality control procedures of the independent registered public accounting firm. However, as noted above, recent developments create uncertainty as to the PCAOB’s continued ability to conduct inspections of our independent accounting firm.

On December 15, 2022, the PCAOB determined that the PCAOB was able to secure complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary. However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in mainland China and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s, control. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward and is already making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB has indicated that it will act immediately to consider the need to issue new determinations with the HFCA Act if needed and does not have to wait another year to reassess its determinations.

Our securities may be delisted under the HFCA Act if the PCAOB is unable to inspect auditors with presence in China for three consecutive years. The delisting of our securities, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

The above recent developments may have added uncertainties to our ability to continue to list on Nasdaq or to offer our securities and we cannot assure you whether Nasdaq or regulatory authorities would apply additional and more stringent criteria to us since we are an emerging growth company and substantial all of our operations are conducting in China. 

The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company’s auditor was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.

The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition to the requirements of the HFCA Act are uncertain. Such uncertainty could cause the market price of our ordinary shares to be materially and adversely affected, and our securities could be delisted or prohibited from being traded on the national securities exchange earlier than would be required by the HFCA Act.

Moreover, on December 29, 2022, legislation entitled “Consolidated Appropriations Act, 2023” (the “Consolidated Appropriations Act”) was signed into law by President Biden. The Consolidated Appropriations Act contained, among other things, an identical provision to the AHFCAA, which reduces the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two.

If our Class A Ordinary Shares are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our Class A Ordinary Shares when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our Class A Ordinary Shares.

In light of recent events indicating greater oversight by the Cyberspace Administration of China over data security, particularly for companies seeking to list on a foreign exchange, though such oversight is not applicable to us, we may be subject to a variety of PRC laws and other obligations regarding data protection and any other rules, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, our listing on the Nasdaq Capital Market, financial condition, results of operations, and the offering.

Even though, currently, we are not subject to PRC laws relating to the collection, use, sharing, retention, security, and transfer of confidential and private information, such as personal information and other data, these laws continue to develop, and the PRC government may adopt other rules and restrictions in the future. Non-compliance could result in penalties or other significant legal liabilities.

The Cybersecurity Law, which was adopted by the National People’s Congress on November 7, 2016 and came into force on June 1, 2017, and the Cybersecurity Review Measures, or the “Review Measures,” which were promulgated on April 13, 2020, provide that personal information and important data collected and generated by a critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical information infrastructure operator purchases internet products and services that affect or may affect national security, it should be subject to cybersecurity review by the CAC. In addition, a cybersecurity review is required where critical information infrastructure operators, or the “CIIOs,” purchase network-related products and services, which products and services affect or may affect national security. Due to the lack of further interpretations, the exact scope of what constitute a “CIIO” remains unclear. Further, the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws.

On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the Data Security Law which took effect on September 1, 2021. The Data Security Law requires that data shall not be collected by theft or other illegal means, and it also provides that a data classification and hierarchical protection system. The data classification and hierarchical protection system protects data according to its importance in economic and social development, and the damages it may cause to national security, public interests, or the legitimate rights and interests of individuals and organizations if the data is falsified, damaged, disclosed, illegally obtained or illegally used, which protection system is expected to be built by the state for data security in the near future. In addition, the Office of the Central Cyberspace Affairs Commission and the Office of Cybersecurity Review under the CAC, published the Cybersecurity Review Measures (Revised Draft for Comments), or the “Review Measures Draft,” on July 10, 2021, which provides that, aside from CIIOs that intend to purchase internet products and services, data processing operators engaging in data processing activities that affect or may affect national security must be subject to the cybersecurity review by the Cybersecurity Review Office. According to the Review Measures Draft, a cybersecurity review is conducted by the CAC, to assess potential national security risks that may be brought about by any procurement, data processing, or overseas listing. The Review Measures Draft further requires that critical information infrastructure operators and services and data processing operators that possess personal data of at least one (1) million users must apply for a review by the Cybersecurity Review Office of PRC, if they plan to conduct listings in foreign countries. The deadline for public comments to the Review Measures Draft was July 25, 2021. While the Review Measures Draft has been released for consultation purpose, there is uncertainty about its final content, its adoption timeline or effective date, its final interpretation and implementation, and various other implications. It also remains uncertain whether any future regulatory changes would impose additional restrictions on companies like us.

As the PRC operating entities’ business do not involve the collection of personal data of at least 1,000,000 users, or implicate cybersecurity, as advised by our PRC legal counsel, we believe that we, our subsidiaries, or the VIE are not subject to the cybersecurity review of the CAC, if the Review Measures Draft becomes effective as they are currently published. As of the date of this prospectus, we have not received any notice from any authorities identifying us as a CIIO or requiring us to undertake a cybersecurity review by the CAC. Further, we have not been subject to any penalties, fines, suspensions, investigations from any competent authorities for violation of the regulations or policies that have been issued by the CAC to date. If the Review Measures Draft is enacted as proposed, we believe we are not subject to the cybersecurity review by the CAC for this offering, given that we are a CRF profile manufacturer and not engaged in any operation of information infrastructure. However, there remains uncertainty as to how the Review Measures Draft will be interpreted or implemented and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation related to the Review Measures Draft. If any such new laws, regulations, rules, or implementation and interpretation come into effect, we expect to take all reasonable measures and actions to comply. We cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and there is no assurance that we can fully or timely comply with such laws should they be deemed applicable to our operations. There is no certainty as to how such review or prescribed actions would impact our operations and we cannot guarantee that any clearance can be obtained or any actions that may be required for our listing on the Nasdaq capital market and the offering as well can be taken in a timely manner, or at all.

We may be liable for improper use or appropriation of personal information provided by our customers.

The business of the PRC operating entities involves collecting and retaining certain internal and customer data. We also maintain information about various aspects of our operations as well as regarding our employees. The integrity and protection of the customer, employee and company data is critical to our business. The customers and employees of the PRC operating entities expect that the PRC operating entities will adequately protect their personal information. The PRC operating entities are required by applicable laws to keep strictly confidential the personal information that they collect, and to take adequate security measures to safeguard such information.

The PRC Criminal Law, as amended by its Amendment 7 (effective on February 28, 2009) and Amendment 9 (effective on November 1, 2015), prohibits institutions, companies and their employees from selling or otherwise illegally disclosing a citizen’s personal information obtained in performing duties or providing services or obtaining such information through theft or other illegal ways. On November 7, 2016, the SCNPC issued the Cyber Security Law of the PRC, or Cyber Security Law, which became effective on June 1, 2017. Pursuant to the Cyber Security Law, network operators must not, without users’ consent, collect their personal information, and may only collect users’ personal information necessary to provide their services. Providers are also obliged to provide security maintenance for their products and services and shall comply with provisions regarding the protection of personal information as stipulated under the relevant laws and regulations.

The Civil Code of the PRC (issued by the PRC National People’s Congress on May 28, 2020 and effective from January 1, 2021) provides legal basis for privacy and personal information infringement claims under the Chinese civil laws. PRC regulators, including the CAC, the Ministry of Industry and Information Technology, or MIIT, and the Ministry of Public Security, have been increasingly focused on regulation in data security and data protection.

The PRC regulatory requirements regarding cybersecurity are evolving. For instance, various regulatory bodies in China, including the CAC, the Ministry of Public Security and the State Administration for Market Regulation, or the SAMR (formerly known as State Administration for Industry and Commerce, or the SAIC), have enforced data privacy and protection laws and regulations with varying and evolving standards and interpretations. In April 2020, the Chinese government promulgated Cybersecurity Review Measures, which came into effect on June 1, 2020. According to the Cybersecurity Review Measures, operators of critical information infrastructure must pass a cybersecurity review when purchasing network products and services which do or may affect national security.

According to the latest amended Cybersecurity Review Measures, which was promulgated on December 28, 2021 and became effective on February 15, 2022, and replaced the Cybersecurity Review Measures promulgated on April 13, 2020, online platform operator holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad. Cybersecurity Review Measures does not provide a definition of “online platform operator”, therefore, we cannot assure you that any PRC operating entities will not be deemed as an “online platform operator.” On November 14, 2021, the CAC released the Regulations on the Network Data Security Management (Draft for Comments), or the Data Security Management Regulations Draft, to solicit public opinion and comments. Pursuant to the Data Security Management Regulations Draft, data processor holding more than one million users/users’ individual information shall be subject to cybersecurity review before listing abroad. Data processing activities refers to activities such as the collection, retention, use, processing, transmission, provision, disclosure, or deletion of data. As of the date of this Annual Report, the MDMOOC online platform has more than 219,825 registered users and a database of more than 109,712 healthcare experts, and we currently do not hold more than one million users/users’ individual information. However, we may be deemed as a data processor under the Data Security Management Regulations Draft. 

The Cybersecurity Review Measures also provide that if a critical information infrastructure operator, or a CIIO, purchases internet products and services that affect or may affect national security, it should be subject to cybersecurity review by the CAC. We do not expect to be a CIIO, since (i) we do not hold a large amount of individual information, and (ii) data processed in our business is less likely to have a bearing on national security, thus it may not be classified as core or important data by the authorities. However, due to the lack of further interpretations, the exact scope of what constitutes a “CIIO” remains unclear. As of the date of this prospectus, we have not received any notice from any authorities identifying us as a CIIO or requiring us to undertake a cybersecurity review by the CAC. Further, as of the date of this prospectus, we have not been subject to any penalties, fines, suspensions, or investigations from any competent authorities for violation of the regulations or policies that have been issued by the CAC.

As of the date of this prospectus, we have not been informed by any PRC governmental authority of any requirement that we file for a cybersecurity review. However, if we are deemed to be a critical information infrastructure operator or a company that is engaged in data processing and holds personal information of more than one million users, we could be subject to PRC cybersecurity review.

As of the date hereof, as advised by our PRC legal counsel, we are of the view that we are in compliance with the applicable PRC laws and regulations governing the data privacy and personal information in all material respects, including the data privacy and personal information requirements of the Cyberspace Administration of China, and we have not received any complaints from any third party, or been investigated or punished by any PRC competent authority in relation to data privacy and personal information protection. However, as there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and regulations, we could be subject to cybersecurity review, and if so, we may not be able to pass such review in relation to this offering. In addition, we could become subject to enhanced cybersecurity review or investigations launched by PRC regulators in the future. Any failure or delay in the completion of the cybersecurity review procedures or any other non-compliance with the related laws and regulations may result in fines or other penalties, including suspension of business, website closure, removal of our app from the relevant app stores, and revocation of prerequisite licenses, as well as reputational damage or legal proceedings or actions against us, which may have material adverse effect on our business, financial condition or results of operations.

On June 10, 2021, the SCNPC promulgated the PRC Data Security Law, which took effect in September 2021. The PRC Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities, and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, illegally acquired or used. The PRC Data Security Law also provides for a national security review procedure for data activities that may affect national security and imposes export restrictions on certain data an information.

As uncertainties remain regarding the interpretation and implementation of these laws and regulations, we cannot assure you that we will comply with such regulations in all respects and we may be ordered to rectify or terminate any actions that are deemed illegal by regulatory authorities. We may also become subject to fines and/or other sanctions which may have material adverse effect on our business, operations and financial condition.

While we take various measures to comply with all applicable data privacy and protection laws and regulations, our current security measures and those of our third-party service providers may not always be adequate for the protection of our customer, employee or company data. We may be a target for computer hackers, foreign governments or cyber terrorists in the future.

Unauthorized access to our proprietary internal and customer data may be obtained through break-ins, sabotage, breach of our secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the security of the networks of our third party service providers, or other misconduct. Because the techniques used by computer programmers who may attempt to penetrate and sabotage our proprietary internal and customer data change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques.

Unauthorized access to our proprietary internal and customer data may also be obtained through inadequate use of security controls. Any of such incidents may harm our reputation and adversely affect our business and results of operations. In addition, we may be subject to negative publicity about our security and privacy policies, systems, or measurements. Any failure to prevent or mitigate security breaches, cyber-attacks or other unauthorized access to our systems or disclosure of our customers’ data, including their personal information, could result in loss or misuse of such data, interruptions to our service system, diminished customer experience, loss of customer confidence and trust, impairment of our technology infrastructure, and harm our reputation and business, resulting in significant legal and financial exposure and potential lawsuits.

The PRC operating entities’ failure to obtain, maintain or renew other licenses, approvals, permits, registrations or filings necessary to conduct their 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 the PRC operating entities’ business operations, and the PRC operating entities are required to obtain a wide range of licenses, approvals, permits, registrations and filings required for conducting their business in China, which we cannot assure you that the PRC operating entities have obtained all of them or will continue to maintain or renew all of them.

The PRC operating entities 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, (i) certain business operated on the PRC operating entities’ websites and mobile apps, including providing platform for users to release, collect and process medial information, may be deemed as the internet information services, thus they may be required to obtain a License for Value-added Telecommunications Services for provision of such services. Whoever engages in the internet information services without obtaining such license may be ordered to make a rectification, be confiscated of illegal gains, and be imposed a fine. If the circumstances are serious, it shall be ordered to suspend business for rectification; (ii) certain content posted on the PRC operating entities’ website or mobile apps, including the course materials, the courseware or audio-visual content uploaded by the PRC operating entities  in MDMOOC online platform, may be deemed as “internet cultural products,” and the PRC operating entities’ use of those contents may be regarded as “internet cultural activities,” thus they may be required to obtain an Internet Culture Business Operating License for provision of those contents. If any entity engages in the activities without obtaining such licenses, the competent administrative department shall order it to cease the operational internet cultural activities, give it a warning, and impose upon it a fine of less than RMB 30,000; if it refuses to cease the operational activities, it shall be blacklisted in the cultural market, and imposed upon it as a credit punishment; (iii) due to the ambiguity of the definition of “online publishing service,” the online distribution of content, including the PRC operating entities’ course materials, the courseware or audio-visual contents uploaded by the PRC operating entities  of MDMOOC online platform may be regarded as “online publishing service” and therefore they may be required to obtain an Online Publishing License. Where any entity or individual engages in online publishing services without approval, the competent departments shall ban such entity or individual according to their statutory functions and powers, and the competent departments shall order them to close their websites and delete all the relevant online publications, confiscate their illegal income and major equipment and tools used for engaging in the activities, and impose fines; (iv) certain medial and drug-related contents posted on the PRC operating entities’ website or mobile apps may be deemed as internet drug information service, and the PRC operating entities’ use of those contents may be required to obtain a Qualification Certificate for Internet Drug Information Services for provision of those contents. In the case of any engagement in the services without obtaining or making use of the License for Internet-based Drug Information Services beyond the period of validity thereof, the authority shall issue a warning and order the parties concerned to suspend from engaging in internet -based drug information services; if the circumstances are serious, punishments shall be given in accordance with relevant laws and regulations by the competent authority; and (v) certain PRC operating entities producing and posting videos on their website or mobile apps may be required to obtain a License for Production and Operation of Radio and TV Programs from the SARFT or its counterparts at the provincial level under the Regulations on the Administration of Production and Operation of Radio and Television Programs. Some of the applicable PRC operating entities have not obtained the above licenses or made such filings, and certain licenses that were obtained by the PRC operating entities have expired and have not been successfully renewed yet, and such PRC operating entities may be punished accordingly.

In addition, 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 the PRC operating entities provide on their 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 the PRC operating entities’ 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 the PRC operating entities are subject to any of these licenses or filing requirements, and as of the date of this Annual Report, the PRC operating entities 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 the PRC operating entities fail to do so, they 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 the PRC operating entities’ business, financial condition and results of operations. 

In addition, there can be no assurance that the PRC operating entities will be able to maintain their existing licenses, approvals, registrations or permits necessary to provide their 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 their business expansion from time to time. If the PRC operating entities fail to do so, the PRC operating entities’ business, financial conditions and operational results may be materially and adversely affected.

Failure to comply with PRC regulations in relation to lease property may subject us to penalty.

Certain PRC operating entities’ actual operating addresses are different from their registered addresses. In accordance with applicable PRC laws and regulations, a market entity may only register one domicile or principal place of business, otherwise it shall establish a branch at another address actually used by it and apply to the registration authority for registration. Failure to comply with the aforesaid provisions may cause the registration authorities to order a correction and confiscate the illegal income; if such PRC operating entities refuse to make correction, a fine ranging from RMB10,000 to RMB100,000 shall be imposed; in serious cases, the PRC operating entities may be ordered to close down pursuant to the law and a fine ranging from RMB100,000 to RMB500,000 shall be imposed.

In addition, the PRC operating entities have not registered all of their lease agreements with the relevant regulatory authorities. The failure to register the lease agreements for their leased properties will not affect the validity of these lease agreements, but the competent housing authorities may order the PRC operating entities to register the lease agreements in a prescribed period of time and impose a fine ranging from RMB1,000 to RMB10,000 for each nonregistered lease agreement if such PRC operating entities fail to complete the registration within the prescribed timeframe.

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

The majority of the operations of the PRC operating entities conducted outside of the U.S. In addition, our management consists of five officers who are all located in China and three independent directors, among which two are located in the United States and one is located in China. 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 the U.S. on us, our subsidiaries, the PRC operating entities, officers, directors (except two independent 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 the 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 or the PRC operating entities 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.

We may be subject to any enforcement actions brought by Chinese tax authorities if we fail to pay certain valued-added tax and income taxes in a timely manner.

In January 2008, the PRC Enterprise Income Tax Law (“EIT Law”) took effect, which was last amended by the Standing Committee of the National People’s Congress on December 29, 2018. The PRC Enterprise Income Tax Law applies a uniform 25 percent enterprise income tax rate to both FIEs and domestic enterprises, except where tax incentives are granted to special industries and projects. The PRC Enterprise Income Tax Law defines “resident enterprise” as an enterprise established outside of the territory of China but with its “de facto management body” within China, which will also be subject to the 25% enterprise income tax rate. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts, and properties of an enterprise. Enterprises qualified as “High and New Technology Enterprises” are entitled to a 15% enterprises income tax rate rather than the 25% uniform statutory tax rate. The preferential tax treatment continues as long as an enterprise can retain its “High and New Technology Enterprise” status. Under the PRC Enterprise Income Tax Law and its implementation regulations, dividends generated from the business of a PRC subsidiary after January 1, 2008, and payable to its foreign investor may be subject to a withholding tax rate of 10 percent if the PRC tax authorities determine that the foreign investor is a Non-resident Enterprise, unless there is a tax treaty with China that provides for a preferential withholding tax rate. Distributions of earnings generated before January 1, 2008, are exempt from PRC withholding tax.

The State Administration of Taxation (“SAT”) has promulgated several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including the Interim Measures for the Administration of Remittance of Income Tax for Non-Resident Enterprise Withheld at Source (the “Interim Measures”) which became effective on January 1, 2009, the Notice of the SAT on Strengthening the Administration of Enterprise Income Tax on Gain Derived from Equity Transfer Made by Non-Resident Enterprise (the “Notice”) which became effective on January 1, 2008 and was amended on July 19, 2015, the Announcement of the SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source (the “SAT Circular 37”) which was promulgated on October 17, 2017, became effective on December 1, 2017 and was amended on June 15, 2018, and the Public Notice of the SAT Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non-Resident Enterprises (the “Public Notice 7”) which became effective on February 3, 2015 and was amended on December 1, 2017 and December 29, 2017.

The SAT Circular 37 amended some provisions in Public Notice 7, repealed the Interim Measures and the Notice and simplifies procedures of withholding and payment of income tax levied on non-resident enterprises. Pursuant to these rules and notices, where a non-resident enterprise investor transfers equity interests or other taxable assets in a PRC resident enterprise indirectly by way of disposing of equity interests in an overseas holding company, the non-resident enterprise investor, being the transferor, may be subject to PRC enterprise income tax if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. In addition, Public Notice 7 provides clear criteria on how to assess reasonable commercial purposes.

According to the Temporary Regulations on Value-added Tax, which was most recently amended on November 19, 2017, and the Detailed Implementing Rules of the Temporary Regulations on Value-added Tax, which was amended on October 28, 2011, and became effective on November 1, 2011, all taxpayers selling goods, providing processing, repair or replacement services or importing goods within the PRC shall pay Value-Added Tax. The rate of VAT is 17%, 11% or 6% in certain limited circumstances depending on the product type.

On April 4, 2018, the Ministry of Finance and the SAT jointly issued the Notice of Adjustment of Value-added Tax Rates which declared that the VAT tax rate in regard to the sale of goods, provision of processing, repairs and replacement services and importation of goods into China shall be reduced from the previous 17% and 11% to 16% and 10% respectively from May 1, 2018.

According to the Announcement of the MOF, the SAT and the General Administration of Customs on Relevant Policies for Deepening Value-added Tax Reform promulgated on March 20, 2019 and became effective on April 1, 2019 (the “Announcement”), for the VAT taxable sales or imports by a general taxpayer of VAT, the applicable tax rate shall be adjusted to 13% from the original 16% and to 9% from original 10%.

Furthermore, according to the Trial Scheme for the Conversion of Business Tax to Value-added Tax, which was promulgated by the MOF and the SAT, the PRC began to launch taxation reforms in a gradual manner in January 1, 2012, whereby the collection of value-added tax in lieu of business tax items was implemented on a trial basis in regions showing significant radiating effects in economic development and providing outstanding reform examples, beginning with production service industries such as transportation and certain modern service industries.

In accordance with Notice of the Ministry of Finance and the State Administration of Taxation on Full Launch of the Pilot Scheme on Levying Value-added Tax in Place of Business Tax, a SAT circular that took effect on May 1, 2016, amended on July 11, 2017 and April 1, 2019, upon approval of the State Council, the pilot program of the collection of value-added tax in lieu of business tax shall be promoted nationwide in a comprehensive manner starting May 1, 2016, and all taxpayers of business tax engaged in the building industry, the real estate industry, the financial industry and the life service industry shall be included in the scope of the pilot program with regard to payment of value-added tax instead of business tax.

If we fail to timely pay any value-added tax and income taxes in full as required by the applicable laws and regulations and the competent tax authorities in China, the competent tax authorities may take any enforcement actions against us, which may adversely affect our business and results of operations.

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.

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. To our knowledge, as the date hereof, all our current PRC resident beneficial owners who has more than 5% of our voting power, including our founder Weiguang Yang, have filed the foreign exchange registration in connection with their respective overseas shareholding in our company in accordance with the Circular 37. However, 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 the initial public offering or any subsequent offerings 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.

Any transfer of funds by us to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to PRC regulations. Capital contributions to our PRC subsidiaries are subject to the approval of or filing with the MOFCOM in its local branches and registration with a local bank authorized by the SAFE. Any foreign loan procured by our PRC subsidiaries is required to be registered or filed with the SAFE or its local branches or satisfy relevant requirements as provided by SAFE. Any medium- or long-term loan to be provided by us to the variable-interest entities, or the VIEs, must be registered with the NDRC and the SAFE or its local branches. We may not be able to obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries. If we fail to receive such approvals or complete such registration or filing, our ability to use the proceeds of our financing activities and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business. There is, in effect, no statutory limit on the amount of capital contribution that we can make to our PRC subsidiaries, provided that the PRC subsidiaries complete the relevant filing and registration procedures. With respect to loans to the PRC subsidiaries by us, (i) if the relevant PRC subsidiaries 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 subsidiaries; and (ii) if the relevant PRC subsidiaries adopt the mechanism as provided in the PBOC Notice No. 9, or the Notice No. 9 Foreign Debt Mechanism, the outstanding amount of the loans shall not exceed 200% of the net asset of the relevant PRC subsidiary.

In addition, on October 23, 2019, the SAFE promulgated the Circular on Further Promoting the Facilitation of Cross-Border Trade and Investment, or SAFE Circular 28, pursuant to which, our PRC subsidiaries established in the pilot regions, which refers to the Guangdong-Hong Kong-Macao Greater Bay Area and Hainan province, are not required to register each of their foreign debts with the SAFE or its local branches but to complete foreign debts registration with the SAFE or its local branches in the amount of 200% of the net asset of the relevant PRC subsidiary. Upon such registrations, our relevant PRC subsidiaries will be allowed to procure foreign loans within the registered amount and complete the formalities for inward and outward remittance of funds, purchase and settlement of foreign currency directly with a bank, and are required to make declaration of international balance of payments pursuant to applicable regulations. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation.

According to the Notice of the PBOC on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or PBOC Notice No. 9, after a transition period of one year since the promulgation of PBOC Notice No. 9, the PBOC and the SAFE will determine the cross-border financing administration mechanism for the foreign-invested enterprises after evaluating the overall implementation of PBOC Notice No. 9. As of the date of this Annual Report, neither the PBOC nor the 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 the PBOC and the SAFE in the future and what statutory limits will be imposed on us when providing loans to our PRC subsidiaries. Currently, our PRC subsidiaries have the flexibility to choose between the Current Foreign Debt Mechanism and the Notice No. 9 Foreign Debt Mechanism. However, if a more stringent foreign debt mechanism becomes mandatory, our ability to provide loans to our PRC subsidiaries or the VIEs may be significantly limited, which may adversely affect our business, financial condition and results of operations. Despite neither the Foreign Investment Law nor its Implementing Regulation prescribes whether the certain concept “total investment amount” with respect to foreign-invested enterprises will still be applicable, no PRC laws and regulations have been officially promulgated to abolish the Current Foreign Debt Mechanism.

The Circular on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign- Invested Enterprises, or SAFE Circular 19, effective as of June 1, 2015, as amended by Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement under the Capital Account, or SAFE Circular 16, effective on June 9, 2016, allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, and also prohibit FIEs from using such Renminbi fund to provide loans to persons other than affiliates unless otherwise permitted under its business scope. As a result, we are required to apply Renminbi funds converted from the net proceeds we received from our financing activities within the business scopes of our PRC subsidiaries. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to use Renminbi converted from the net proceeds of our financing activities to fund the establishment of new entities in China by the VIEs or their respective subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries, or to establish new consolidated VIEs in China, which may adversely affect our business, financial condition and results of operations. Even though SAFE Circular 28 allows all FIEs (including those without an investment business scope) to utilize and convert their foreign exchange capital for making equity investment in China if certain requirements prescribed therein are satisfied, uncertainties still exist in relation to its interpretation and implementation.

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.

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. 

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 are subject to these regulations as our company is an overseas listed company. 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. 

Failure to make adequate contributions to various mandatory social security plans as required by PRC regulations may subject the PRC operating entities 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. The PRC operating entities 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. The PRC operating entities may be required to make up the contributions for these plans as well as to pay late fees and fines. If the PRC operating entities 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.

Failure to register with the competent authorities with respect to social insurance and housing provident fund as required by PRC regulations may subject the PRC operating entities to penalties.

PRC laws and regulations require newly established employers to apply for social security registration with the local social security agency and housing provident fund registration with housing provident fund management center within 30 days from the date of incorporation. As of the date of this Annual Report, the PRC operating entities without any employees haven’t made social security or housing provident fund registration with the competent authorities, which may subject them to make correction within a stipulated period or a fine. If the PRC operating entities are subject to fines, our financial condition and results of operations may be adversely affected.

If the number of dispatched workers of the PRC operating entities exceeds statutory limit, the PRC operating entities may be subject to penalties.

The PRC Labor Contract Law and the Interim Provisions on Labor Dispatch stipulate that an employer shall strictly control the number of dispatched workers it employed, which shall not exceed 10% of the total number of employees. As of the date of this Annual Report, the number of dispatched workers of certain PRC operating entities exceeds 10% of their total number of employees, which may subject them to make correction within a stipulated period or a fine ranging from RMB5,000 to RMB10,000 per person. If the PRC operating entities are subject to fines, our financial condition and results of operations may be adversely affected. The services agreements with certain dispatched workers will terminate upon the completion of the projects they are working on, and the PRC operating entities plan to enter to full-time employment agreements with all the staff in the future.

The PRC operating entities’ current employment practices may be restricted under the PRC Labor Contract Law and their 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 the PRC operating entities’ current employment policies and practices. We cannot assure you that the PRC operating entities’ employment policies and practices do not, or will not, violate the Labor Contract Law or its implementing rules and that the PRC operating entities will not be subject to related penalties, fines or legal fees. If the PRC operating entities 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 the PRC operating entities intend to enforce the non-compete provision with an employee in a labor contract or non-competition agreement, they 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 the PRC operating entities decide to significantly change or decrease the PRC operating entities’ workforce in the PRC, the Labor Contract Law could adversely affect the PRC operating entities’ ability to enact such changes in a manner that is most advantageous to their circumstances or in a timely and cost effective manner, thus our results of operations could be adversely affected.

If the chops of the PRC operating entities 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 the PRC operating entities are generally held securely by personnel designated or approved by us in accordance with their 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, the PRC operating entities could experience disruption to their normal business operations. The PRC operating entities may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

Item 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

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 the VIE, Zhongchao Medical Technology (Shanghai) Corp., or Zhongchao Shanghai, a PRC company, and through 11 subsidiaries of Zhongchao Shanghai, including Shanghai Zhongxun, Shanghai Zhongxin, Maidemu Health, Beijing Boya, Shanghai Xinyuan, Hainan Muxin, Shanghai Huijing, Xinjiang Pharmaceutical, Beijing Yisuizhen, West Angel and Liaoning Zhixun, each a PRC company. They commenced their 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, Hainan, Liaoning and Chongqing.

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 80.94% 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 and assuming the exercise of the HF Warrant. More Healthy Holding Limited is a BVI company 100% owned by Weiguang Yang (“More Healthy”).

As part of the Company’s organization for the purpose of the initial public offering and listing on Nasdaq, on August 1, 2019, the Company and HF Capital Management Delta, Inc., a company incorporated under the laws of the Cayman Islands (“HF Capital”) entered into a certain warrant agreement to purchase Class A Ordinary Shares of the Company (the “HF Warrant”). At the issuance of the HF Warrant, Yantai Hanfujingfei Investment Centre (LP), a limited partnership incorporated under PRC laws (“Yantai HF”, whose managing partner, Hanfor Capital Management Co., Ltd., was the sole member of HF Capital, and together with “HF Capital” hereinafter collectively referred to as “HF”) was a 6.25% shareholder of Zhongchao Shanghai and planned to withdraw its capital contribution in Zhongchao Shanghai but to contribute the same amount of capital to Zhongchao Cayman directly via HF Capital.

On July 15, 2023, upon the shareholders’ approvals at the annual general meeting, the Company adopted the amended and restated articles of association, pursuant to which each holder of Class B Ordinary Shares is entitled to one hundred (100) votes for each Class B Ordinary Shares held. Each shareholder of the Company’s Class A Ordinary Shares remains entitled to one (1) vote for each Class A Ordinary Share held.

On February 20, 2024, upon the shareholders’ approvals at the extraordinary general meeting of shareholders, the Company adopted the amended and restated memorandum and articles of association to effectuate a 1-for-10 share consolidation (the “2024 Share Consolidation”).

Upon the effectiveness of the 2024 Share Consolidation, every ten (10) Class A Ordinary Shares with a par value of US$0.0001 each will be consolidated into one (1) Class A Ordinary Share with a par value of US$0.001 each, and every ten (10) Class B Ordinary Shares with a par value of $0.0001 each will be consolidated into one (1) Class B Ordinary Share with a par value of $0.001 each. No fractional shares will be issued as a result of the Share Consolidation. Instead, any fractional shares that would have resulted from the Share Consolidation will be rounded up to the next whole number. The 2024 Share Consolidation affects all shareholders uniformly and will not alter any shareholder’s percentage interest in the Company’s outstanding ordinary shares, except for adjustments that may result from the treatment of fractional shares. Beginning with the opening of trading on February 29, 2024, the Company’s Class A Ordinary Shares began trading on a post-2024 Share Consolidation basis on the Nasdaq Capital Market under the same symbol “ZCMD,” but under a new CUSIP number of G9897X115.

The SEC maintains an internet site that contains reports and other information regarding issuers, including the Company, that file electronically with the SEC. The address of the SEC’s website is www.sec.gov.

B. Business Overview

Overview

Our Company

We are not a Chinese operating company, but an offshore holding company incorporated in the Cayman Islands. As a holding company with no material operations of our own, we consolidate the financial results, through a series of the Contractual Arrangements, with Zhongchao Shanghai and its subsidiaries, or collectively, “the PRC operating entities.” Neither we nor our subsidiaries own any equity interests in the PRC operating entities.

Our Class A Ordinary Shares currently trading on Nasdaq are the shares of the offshore holding company, Zhongchao Cayman. You are not investing in the PRC operating entities.   Instead, we consolidate financial results of Zhongchao Shanghai as primary beneficiary through the Contractual Arrangements.

Zhongchao Shanghai, together with its subsidiaries, is a platform-based internet technology company offering services to patients with oncology and other major diseases in China. The PRC operating entities address the needs along the patient journey of symptoms occurrence, medical consultations, medication prescriptions, medication management, and treatment consultations. The PRC operating entities provide online healthcare information, professional training and educational services to healthcare professionals, patient management services in the professional field of tumor and rare diseases, internet healthcare services, and pharmaceutical services and operate an online information platform to general public. The PRC operating entities also engage in sales of patent drug in China.

The PRC operating entities provide the healthcare information, education, and training services to the healthcare professionals under their “MDMOOC” brand, which we believe is one of the leading consumer brands in China’s healthcare training and education sector, as evidenced by the Securities Research Report on online medical care industry by Essence Securities Co., Ltd., a company provides securities services throughout China, where the PRC operating entities are considered as one of the main and typical public company proving medical training with doctor interactive and online training platform and leading the Internet medical education industry.  The PRC operating entities provide focused patient management services, via their “Zhongxun” IT system and WeChat mini program and Zhongxin Health WeChat mini program, to their pharmaceutical enterprises and NFP customers.

The PRC operating entities established Xinjiang Pharmaceutical, aiming at realizing medications accessibility and affordability for patients. Xinjiang Pharmaceutical cooperates with Zhixun Internet Hospital and other internet hospitals to build a 2B2C (to business and to customer) pharmaceutical procurement platform and streamline the delivery of medications from pharmaceutical factories to retail ends.

MDMOOC-Healthcare Information, Education, and Training for Professionals

The MDMOOC Online Platform of the PRC Operating Entities

The MDMOOC online platform of the PRC operating entities’ 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) on MDMOOC website.

MOOC Mobile App

The MOOC Medical mobile app of the PRC operating entities serves as a one-stop destination where they 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. The PRC operating entities designed the interface of their platform in simple white and sky blue, signaling health and learning respectively, and creating a soft and welcoming texture to their platform.

When users open the MOOC Medical mobile app, they will immediately see the featured banners that display academic courses, open classes, case library, and practice improvement courses. As users scroll down, courses that are most popular among the healthcare professionals, courses recommended by the PRC operating entities’ medical editors, and the latest healthcare news appear. Users can also explore various medical courses by medical specialty and subject areas.

Below are screenshots of the PRC operating entities’ mobile app main entrance interface:

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.

The screenshots below illustrate the content in the Opening Course:

Commencing from the fourth quarter of 2018, in addition to providing training and education courses through the platforms, the PRC operating entities have been engaged by certain customers on a project basis to establish individual columns on the MDMOOC online platform to provide training and knowledge of certain drug treatment for healthcare professionals and patients. Most of the drug treatments are cancer-related or rare disease-related. The PRC operating entities also plug in supplemental features, to manage the drug treatment including reviewing patients’ applications, tracking their usage of drugs, and collecting related information (such programs with new plug-in features are hereinafter referred as the “patient-aid projects”).

As of the date of this Annual Report, we have established nearly 22 courses for cancer-related drug treatment, including drug treatment for lung cancer, liver cancer, and extended blood cancer, and 7 columns for drug treatment of rare diseases, including drug treatment for pulmonary fibrosis, multiple sclerosis, systemic lupus erythematosus, Crohn’s disease and skin diseases.

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.

The PRC operating entities’ MDMOOC WeChat subscription account features similar interfaces and functions as their mobile app. It serves as additional access points to the PRC operating entities’ platform.

MDMOOC Website

Users can access online healthcare information, education and training content and the services through the PRC operating entities’ website MDMOOC.org. As more internet users shift to mobile ends, the PRC operating entities’ website mainly serves a comprehensive knowledge base targeting users who are in the process of researching for specific medical courses, articles, or news.

Below are screenshots of MDMOOC.org website:

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

The PRC operating entities plan to expand into new medical specialty areas that appeal to their current users base and attract new users. The PRC operating entities’ objective is to be the category leader in each of their 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, the PRC operating entities will (1) work with more medical associations to produce programs and courses to meet the need of healthcare professionals; (2) expand their R&D team and provide more support to their self-developed courses; (3) cooperate with international continuing medical education providers to improve the quality and diversity of their courses; and (4) expand their new media team to create and provide high-quality online courses for mobile users.

The MDMOOC Onsite Activities of the PRC Operating Entities

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

The PRC operating entities 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. The PRC operating entities have successfully held 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 accepted no more than twenty (20) applicants who shall hold academic credential above undergraduate. The PRC operating entities also required all applicants to have more than six-year working experience in the field of wound repair. The PRC operating entities have issued 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. The PRC operating entities believe that after attending these programs, the participants would acquire the basic capacity to lead a wound-management department in a hospital.

The PRC operating entities believe the combination of online and onsite services would provide their end-users the greatest convenience. With more choices of the forms of healthcare education, the PRC operating entities enrich the learning experience of their end-users.

New Plug-in to Certain Programs- Assistance in Patient-Aid Projects

The PRC operating entities have been engaged by certain customers on a project basis to establish individual columns on the MDMOOC online platform to provide training and knowledge of certain drug treatment for healthcare professionals and patients. Most of the drug treatments are cancer-related or rare disease-related. The PRC operating entities establish online columns to facilitate qualified patients to obtain free drug treatment from not-for-profit organizations (“NFPs”) till the earlier of the expiration of contract period or the free drugs are completely delivered. For each column, the PRC operating entities plug in features to manage the drug treatment including reviewing patients’ applications, tracking their usage of drugs, and collecting related information (such programs with new plug-in features are hereinafter referred as the “patient-aid projects”). Those customers are existing customers of us. They provide those drugs sponsored by pharmaceutical companies without charge to qualified patients and the PRC operating entities charge those customers on the services in connection with the online columns and related training and management. In this way, the PRC operating entities believe not only can they facilitate the clinical application of those drugs, but also benefit patients.

As of the date of this Annual Report, we have established nearly 22 columns for cancer-related drug treatment, including drug treatment for lung cancer, liver cancer, and extended blood cancer, and 7 columns  for drug treatment of rare diseases, including drug treatment for pulmonary fibrosis, multiple sclerosis, systemic lupus erythematosus, Crohn’s disease, and skin diseases. The total number of patients covered under these patient-aid projects has reached nearly 125,970  by the end of 2023.

Sunshine Health Forums-Healthcare Information and Education for the Public

The PRC operating entities’ 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, the PRC operating entities 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. The PRC operating entities developed Sunshine Health Forum, a WeChat subscription account, and Sunshine Health Forum.org, the official website providing portals to leading we-media the PRC operating entities have strategic relationships to improve the efficiency and effectiveness of the information acquisition for the PRC operating entities’ users. The PRC operating entities establish one school for each disease to make it easier for the public to obtain information they would like to know. We have established their 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.

The Content of the PRC Operating Entities

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

MDMOOC offers two distinct types of high-quality content to users:

The PRC operating entities’ original content is written exclusively for MDMOOC by medical experts, many of whom are nationally renowned in their specialties. This content includes:

MDMOOC provides its users access to a clinical case-share library via Internet and mobile application. As of the date of this Annual Report, the PRC operating entities’ case library has more than 28,000 clinical cases elaborating general patient data, the diagnosis after admission, and academic discussions.  The PRC operating entities’ users can easily locate the cases most related to them by searching the keywords and selecting the medical fields while they encounter similar medical phenomenon in their practice.

Zhongxin Health Patient Management Services in Patient-aid Projects

The PRC operating entities utilize its self-developed patient management system, branded as “Zhongxin Health” to provide patient management services to their pharmaceutical enterprises and NFPs customers to assist their patient management for patients with cancer, rare disease or other major diseases.

During cancer treatment processes, patients face various changes using one or more anti-tumor medications, including, among others, dosing punctuality, incorrect dosage, missed dose, taking with other drugs and adverse reaction management. If such challenges cannot be solved, the treatment process will be negatively affected, and patients’ confidence in treatment could be undermined, ultimately affecting the curative effects. In order to resolve medication-related challenges in a timely manner and promote the continuity of treatment, the PRC operating entities developed and designed the Zhongxin Health mini program with several functions. The program can automatically remind patients to take medications and precautions based on different types of cancers and medication consumption time. It can also provide general self-treatment information based on the adverse reactions that patients might have taking such medications and timely provide corresponding self-treatment information for such adverse reactions specifically encountered by patients during the medication administration process. Additionally, the program could improve patients’ self-management ability through various illustrations and video courses. Utilizing the program, patients can customize and self-manage their medication process based on different cancers and medication consumption time, and such system could help improve patients’ confidence in their treatment.

As of the date hereof, the PRC operating entities have participated in approximately 19 patient management projects for approximately 10 types of different medications, serving approximately 108,500 patients. For the fiscal years ended December 31, 2023, 2022 and 2021, approximately 19.3%, 44.4% and 45.1% of our revenues were generated from Zhongxin Health patient management services, respectively.  

Zhongxin Health Mini Program

Patients could access Zhongxin Health’s system through its WeChat mini program “Zhongxin Health.” Patients need to register log in WeChat by using their own accounts before accessing their portals for tailored patient management services. Tracing the design on MOOC Mobile App, Zhongxin Health mini program use white and sky blue color on the interface of the program, signaling health and learning respectively, and creating a soft and welcoming texture to their platform.

Zhongxin Health mini program interface includes three main pages, main page, medication management and account page. The main page is open to the general public with various sources without need to log in. It displays icons of medication management, hospital directory, medication directory, cancer treatment knowledge library and online medical health consultation, that users could click and be directed to corresponding information page. Scrolling down, it lists medical courses provided by physicians in China with a focus on lung cancer, liver cancer, other cancers and other major disease. At the bottom are the latest medical articles written or recommended by the PRC operating entities’ medical editors, and the users are able to add bookmarks categorized by different types of cancers to the main page for easy access to relevant articles in the future.

The screenshot below shows the main page of Zhongxin Health mini program:

Medication management page primarily provides information of medication information and the PRC operating entities’ patient management projects. On the top, users are able search by different types of disease, medication names and patient management projects names to look for information they need. Each patient management project has its separate page with detailed information, including but not limited to, name of medications, provider information, target patient, project policy, term and project contact information, followed by relevant articles. Users could check the projects status they applied for by providing their names and identification numbers to track their application status, prescription amount, delivery status and other relevant matters.

The screenshot below shows the main page of Zhongxin Health mini program:

The users could sign up and log in on the account page. Once logged in, the users are able to save articles, courses or other postings they are interested in on the mini program.

Xinjiang Pharmaceutical Drug Retail Services 

Xinjiang Pharmaceutical was established aiming at realizing medications accessibility and affordability for patients. Xinjiang Pharmaceutical has cooperates with Zhixun Internet Hospital and other internet hospitals to build a 2B2C (to business and to customer) pharmaceutical procurement platform and streamline the delivery of medications from pharmaceutical factories to retail ends. This approach enables Xinjiang Pharmaceutical to supply domestic and international high-quality and cost-effective drugs, improving drug accessibility and lowering medication cost.

Since the beginning of 2022, embracing the development opportunity of a series of investment promotion of pharmaceutical industry initiated by the Chongqing government, Xinjiang Pharmaceutical has been able to develop rapidly. Xinjiang Pharmaceutical has obtained Pharmaceutical Trade License, Medical Device Trade License, Qualification Certificate for Drug Information Service over the Internet and other related licenses. Xinjiang Pharmaceutical plans to engage in pharmaceutical import and export trade, OME (original equipment manufacturer) production, medical consumables operation, and pharmaceutical internet services, aiming to continuously expand the industry chain and supply chain of the pharmaceutical market in China. Meanwhile, it remains committed to becoming a competitive technology-based pharmaceutical service enterprise.

Xinjiang Pharmaceutical commenced its pharmaceutical business from the second half of 2022. For the year ended December 31, 2023 and 2022, Xinjiang Pharmaceutical generated revenues of approximately $9.03 million and $1.22 million from sales of patented drugs, respectively. As of the date hereto, the anti-influenza drug from Natco have been sold in over 20 provinces/cities in China

The Customers and End Users of the PRC Operating Entities

MDMOOC’s Customers and End Users

The PRC operating entities’ customers are enterprises, NFP, and medical journals, primarily located in China. The PRC operating entities’ terminal customers and end-users are healthcare professionals, nurses, doctors and other healthcare workers.

The PRC operating entities’ 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.

The PRC operating entities’ 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.

The PRC operating entities maintain good relationship with their customers and some of them have long term relationship with us. The PRC operating entities generate the revenue on a case-by-case or project-by-project basis and by providing their 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, 2023, we generated revenue of MDMOOC business from a total of 73 customers, of which 26 customers were NFP and 47 customers were pharmaceutical enterprises.   For the fiscal year ended December 31, 2022, we generated revenue of MDMOOC business from a total of 76 customers, of which 34 customers were NFP and 42 customers were pharmaceutical enterprises.  For the fiscal year ended December 31, 2021, we generated revenue from a total of 78 customers, of which 30 customers were NFP and 35 customers were pharmaceutical enterprises.

We generate the revenues from a relatively small number of customers. For the fiscal years ended December 31, 2023, 2022 and 2021, the PRC operating entities’ pharmaceutical enterprise customers accounted for 13.1%,  33.1% and 11.7% of our total revenues, respectively. For the fiscal years ended December 31, 2023, 2022 and 2021, the PRC operating entities’ NFP customers accounted for 39.2%, 58.0% and 86.2%, of our total revenues, respectively.    

Sunshine Health Forums’ Users

Unlike MDMOOC online platform which require the users to register with their healthcare qualification and some of the PRC operating entities’ programs are limited to certain registered users of the platform, the Sunshine Health Forums is accessible to the public without limitation.  

Zhongxin Health’s Customers and Users

Zhongxin Health’s customers are primarily pharmaceutical enterprises and NFPs including charity organizations, national public foundations, and nonprofit non-governmental association.

Zhongxin Health provides patient management services through its Zhongxun IT system and WeChat mini program and its Zhongxin Health WeChat mini program. The users are patients with cancer, rare disease or other major diseases. Users need to register on Zhongxun IT system and WeChat mini program or log in their WeChat before accessing their portals for tailored patient management services.

Xinjiang Pharmaceutical’s Customers 

Xinjiang Pharmaceutical’s customers are primarily pharmaceutical agents.

Branding and Marketing

The PRC operating entities believe that their rich content and satisfactory user experience have contributed to the expansion of their user base and the increase in user engagement, leading to a strong word-of-mouth effect that strengthens their brand awareness.

The PRC operating entities’ promote their platform and enhance brand awareness through a variety of online and offline marketing and brand promotion activities. The PRC operating entities cooperate with third-party apps, popular search engines and social media platforms for online and mobile marketing. These online apps and websites promote MDMOOC to those website users who are potentially interested in the PRC operating entities’ contents. MDMOOC gains a substantial growth of exposures in public and amounts of public subscribers under such precise measure of online audience delivery. The PRC operating entities also conduct onsite marketing primarily in the form of donation activities with hospitals to improve the PRC operating entities’ brand awareness.

Zhongxin Health mini program provides users with access to Zhixun Internet Hospital mini program, which could director the users who are interested in internet healthcare to use the online medical consultation service. 

Infrastructure, Operations and Technology

The success of the PRC operating entities’ business is supported by their strong technological capabilities that enable them to deliver superior user experience and increase their operational efficiency. The PRC operating entities’ technology team, coupled with the large volume of data generated and collected on their platform each day, have created opportunities for continued improvements in their technology capabilities, empowering reliability, scalability and flexibility.

As of the date of this Annual Report, the PRC operating entities had a technology team with approximately 10 engineers, including those focusing on technology development to support every aspect of their business operation and those focusing on underlying data and technology maintenance.

Big Data

The PRC operating entities build proprietary big data analysis framework on their platform to improve operating efficiencies and user satisfaction. The PRC operating entities leverage big data analytics and artificial intelligence technologies to enhance the accuracy of user behavior predictions and user profiling and optimize the PRC operating entities’ operation, targeted content and user experience.

The seamless collaboration among the PRC operating entities’ technology and operational teams, together with the PRC operating entities’ big data analytics capability, result in improved operational efficiency for the PRC operating entities’ and their healthcare training service providers. The PRC operating entities’ data engineers are involved in all critical operational areas. They have thorough understanding of the computational needs from different business segments, and are therefore capable of providing technological support to address diversified needs in operating the PRC operating entities’ platform.

Security and Data Privacy

The PRC operating entities are committed to protecting information of all participants on our platform. The PRC operating entities collect basic personal information and data, such as name, phone numbers, professional certificate code, and personal address, only with users’ prior consent. The PRC operating entities do not provide sensitive user data to their medical company customers, NFP customers or other third-parties. In accordance with ISO27001 requirements, the PRC operating entities establish, implement, maintain and continuously improve the information security management system.

The PRC operating entities have a security team of engineers and technicians dedicated to protecting the security of the PRC operating entities’ platform. The PRC operating entities’ back-end proprietary security system is capable of handling malicious attacks each day to safeguard the security of their platform and to protect the privacy of their users and healthcare training service providers. The PRC operating entities back up their user and certain other critical forms of data on a daily basis in separate and various secured data back-up systems to minimize the risk of data lost. The PRC operating entities encrypt confidential personal information they gather from their platform. To further ensure data security and avoid data leakage, the PRC operating entities have established internal protocols under which they grant classified access to confidential personal data to limited employees with strictly defined and layered access authority. The PRC operating entities strictly control and manage the use of data within their various teams.

Cloud Services

The PRC operating entities have developed a secure, efficient and cost-effective cloud-based core system to operate their business. Cloud-based technology allows us to process large amount of complex data in-house, which significantly reduces cost and improves operation efficiency. The PRC operating entities utilize the system of a leading enterprise cloud service provider, Alibaba Cloud, in China so that the PRC operating entities enjoy the instant scalability and robustness of cloud-based services.

Recent Development 

On February 10, 2022, Beijing Yisuizhen subscribed for 10.56% equity interest of West Angel (Beijing) Health Technology Co., Ltd, or West Angel, a PRC company, and nine shareholders of West Angel transferred all of their equity interest, equal to 49.44% of the total equity interest of West Angel to Beijing Yisuizhen. As a result, Beijing Yisuizhen holds 60% of the equity interest of West Angel at cash consideration of RMB 25 million and a 6.67% share consideration in Shanghai Zhongxin at discounted price. Prior to the acquisition, West Angel had developed online platform for communication between hospitals and patients and signed long-term service contracts with more than ten oncology hospitals to track and manage their patients. Their established healthcare CRM (HCRM), a system specially designated to track patient data to provide insight for understanding patient behaviors and habits for patient care, relationship management and experience, hospital marketing and services, which might have had contributed in expanding our source of hospital customers and developing HCRM for hospitals. However, in 2023, with a focus on anti-corruption in medical industry initiated by PRC governments, many hospital respond with enhanced scrutiny on medical expenditure including purchasing services from third parties. In order to have a hospital to engage West Angel for its HCRM, it will take a lot of time to complete the approval procedures by the hospital and a lot of efforts of West Angel to cooperate the approval procedures; and it has become very difficult to either retain existing customers or recruit new customers. In addition, due to significant medical costs of COVID-19, the medical budgets of hospitals are significantly reduced after the pandemic and a lot of hospitals do not sufficient fund to support HCRM. Furthermore, a few key software developers left West Angel after the acquisition which made software development difficult to be carried out as planned or meet the evolving needs of our customers. During the year ended December 31, 2023, the Company assessed and concluded that its software acquired as part of the acquisition of the West Angel would not support its ongoing business development. The Company charged impairment loss of $536,206 against software for the year ended December 31, 2023. Furthermore, during the fiscal year ended December 31, 2023, we assessed and concluded that our goodwill from the acquisition of West Angel was fully impaired as the operating results of West Angel reporting unit is significantly below our original anticipation. An impairment loss of $5,617,865 was charged against goodwill for the year ended December 31, 2023.

On August 2, 2022, Mr. Weiguang Yang transferred certain parts of his shares of Shanghai Zhongxin to several third parties. As a result, Mr. Weiguang Yang holds 12.33% of the equity interest of Shanghai Zhongxin.  Through a certain entrustment agreement on August 3, 2022, Mr. Weiguang Yang, Zhongchao Yixin, and Zhongren Yixin agreed to hold their equity interest of Shanghai Zhongxin on behalf of Shanghai Zhongxun. As a result, Shanghai Zhongxun owns 93.33% of Shanghai Zhongxin’s equity interest.

In September 2022, Liaoning Zhixun launched Zhixun Internet Hospital to provide standardized Internet healthcare services for patients with oncology or other major diseases. The establishment of Zhixun Internet Hospital will enable Zhongchao to form an All-in-One Service from patient education, online follow-up consultation, treatment compliance management, to living quality improvement, creating comprehensive services for both out-of-hospital and in-hospital patients.

In February 2023, Zhongchao VIE renewed the partnership Johnson & Johnson (China) Investment Limited (“J&J”). The renewed partnership is expected to further strengthen two parities’ cooperation in the global advanced field of innovative medical and health.

In March 2023, Zhongchao VIE launched “E-Class,” a medical education intelligent content production platform developed by Zhongchao VIE. The “E-Class” platform aims at enhancing the efficiency in creating health education courses, promoting doctors’ health education capabilities, and meeting patients’ demands for medical and health knowledge and information. 

In April 2023, Shanghai Zhongxin Medical Technology Co., Ltd. (“Shanghai Zhongxin”), one of the PRC operating entities, entered into a service agreement with Beijing Public Health Foundation (“BPHF”), a non-profit organization dedicated to enhancing Chinese citizens’ health through public welfare initiatives and aid programs, to work together to develop a patient aid project (the “BPHF Project”). This BPHF Project donates Trilaciclib Hydrochloride, which is used for protecting bone marrow during chemotherapy, to low-income cancer patients undergoing chemotherapy based on the patient’s needs.

In May 2023, Beijing Zhongchao Boya Medical Technology Co., Ltd. (“Beijing Boya”), one of the PRC operating entities, signed a strategic cooperation agreement with Shanghai Ximalaya Technology Co., Ltd. (“Ximalaya”), a widely popular Chinese online audio sharing platform in China. The cooperation focuses on health knowledge popularization, disease prevention advocacy, and behavioral intervention, gradually improving public health literacy. In July 2023, the PRC operating entities cooperated with Ximalaya to launch the first series of audio courses dedicated to cancer education. The cancer education course series, aptly named “Let’s Talk About Tumors”, is presented by a team of esteemed medical professionals from Grade A Tertiary Hospitals. Interspersed with engaging anecdotes, the series is designed to enhance patients’ and public’s understanding of various aspects of cancer, including its treatment, daily care requirements, and medication guidance, and thereby aims to improve the perception of the disease and increase public health literacy.

In June 2023, the PRC operating entities launched the Digital Online Education Platform for Common Diseases Clinical Diagnosis and Treatment (the “Online Education Platform”). This Online Education Platform is designed to elevate the clinical decision-making acumen and patient service capabilities of healthcare professionals, thereby delivering optimal solutions for clinical diagnoses and treatments of prevalent diseases.

In August 2023, Shanghai Maidemu Health Management Co., Ltd. (“Maidemu Health”) was incorporated under the PRC laws, as a wholly owned subsidiary of Zhongchao Shanghai. Maidemu Health is primarily engaged in health management and health product sale. In August 2023, Hainan Zhongteng completed its deregistration in accordance with PRC laws.

On August 30, 2023, Zhongchao Shanghai and Shanghai Maidemu Cultural Communication Corp., a PRC company wholly owned by Zhongchao Shanghai (“Shanghai Maidemu”) entered into a share transfer agreement, pursuant to which Shanghai Maidemu transferred all of the equity interest of Shanghai Huijing Information Technology Co., Ltd., a PRC company (“Shanghai Huijing”) to Zhongchao Shanghai for a cash consideration of RMB500,000. In March 2024, Shanghai Maidemu completed its deregistration in accordance with PRC laws.

In September 2023, the PRC operating entities introduced Patient-Reported Outcome (PRO) -based symptom management model to the recovery of lung cancer patients and enhancing their life quality. The PRO-based management model shifts the focus towards patients’ own experiences and feelings about their health, bringing a fresh perspective into patient care.

In October 2023, Zhongxin platform launched a WeChat mini program of Breast Cancer Follow-up Visit and Health Management Patient Guide (the “Guide”) on Pink Ribbon Day. The Guide aims to provide comprehensive reference for breast cancer patients and support their health management and disease recovery through every stage of their medical journey. The Guide details 15 essential follow-up checkpoints structured around the timeline of breast cancer post-treatment, offering clarity on the importance and rationale behind each to elevate patient awareness in health management. Additionally, it provides guidance on specific issues faced by patients who have undergone treatments such as endocrine therapy and radiation, addressing areas like cardiac health, lipid levels, bone health, and pulmonary health concerns.

In December 2023, Shanghai Zhongxin renewed its service agreement with Beijing Public Health Foundation (“BPHF”), a non-profit organization dedicated to enhancing Chinese citizens’ health through public welfare initiatives and aid programs. Pursuant to the agreement, Shanghai Zhongxin and BPHF extended its partnership to work together on a patient aid project to provide medication assistance services for cancer patients.

Research and Development (“R&D”)

Research and Development (“R&D”) is an integral part of the PRC operating entities’ continued growth. The PRC operating entities’ R&D consists of product development and technology support. The PRC operating entities’ product development team is focused on market research and product development. The PRC operating entities develop and update their products and services based on market conditions and government policies. The PRC operating entities’ product development team closely monitors the market to adjust and upgrade the PRC operating entities’ existing educational products, and designs new products based on customers’ requests, The PRC operating entities’ technology team has experience in the development, design, operation and maintenance of platform products, servers and mobile apps, responsible for monitoring the performance of the PRC operating entities’ websites, mobile apps and technology infrastructure to enable us to respond quickly to potential problems, updating and exploring new and advanced technologies and integrating them into the PRC operating entities’ existing and new services.

As of the date of this Annual Report, we have 4 researchers in the product development team and 3 developers in our technology support team.

The PRC operating entities’ product development team is focused on market research and product development. The PRC operating entities develop and update their products and services based on market conditions and government policies. The PRC operating entities’ product development team closely monitors the market to adjust and upgrade their existing educational products, and designs new products based on customers’ requests. The PRC operating entities 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 the PRC operating entities’ programs. Also, the PRC operating entities work with healthcare professionals to develop the PRC operating entities’ programs. When starting to create any programs, the PRC operating entities 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. The PRC operating entities incorporate such needs into their program design. When developing the PRC operating entities’ 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 the PRC operating entities complete the course production, they invite these professionals to do final review on the content to assure its correctness.

The PRC operating entities’ 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 the PRC operating entities’ online platform, updating and exploring new and advanced technologies and integrating them into the PRC operating entities’ existing and new services.

During fiscal years 2023, 2022 and 2021, our R&D expenses were approximately $514,411, $411,524 and $758,878, respectively, representing 2.6%, 2.9% and 4.7% of our total revenues for fiscal years 2023, 2022 and 2021, respectively. 

Intellectual Property

The PRC has domestic laws for the protection of rights in copyrights, trademarks and trade secrets. The PRC is also a signatory to all of the world’s major intellectual property conventions, including:

The PRC Trademark Law, adopted in 1982 and was most recently amended on April 23, 2019 and will become effective on November 1, 2019, with its implementation rules adopted in 2014, protects registered trademarks. The Trademark Office of the State Administration of Industry and Commerce of the PRC, handles trademark registrations and grants trademark registrations for a term of ten years.

The PRC operating entities’ intellectual property rights are important to their business. The PRC operating entities rely on a combination of trade secrets, confidentiality procedures and contractual provisions to protect their intellectual property. They also rely on and protect unpatented proprietary expertise, recipes and formulations, continuing innovation and other trade secrets to develop and maintain their competitive position. The PRC operating entities enter into confidentiality agreements with most of their employees and consultants, and control access to and distribution of the PRC operating entities’ documentation and other licensed information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the PRC operating entities’ technology without authorization, or to develop similar technology independently. Since the Chinese legal system in general, and the intellectual property regime in particular, is relatively weak, it is often difficult to enforce intellectual property rights in China. Policing unauthorized use of the PRC operating entities’ technology is difficult and the steps they take may not prevent misappropriation or infringement of their proprietary technology. In addition, litigation may be necessary in the future to enforce the PRC operating entities’ intellectual property rights, to protect their trade secrets or to determine the validity and scope of the proprietary rights of others, which could result in substantial costs and diversion of their resources and could have a material adverse effect on their business, results of operations and financial condition. The PRC operating entities require their employees to enter into non-disclosure agreements to limit access to and distribution of the PRC operating entities’ proprietary and confidential information. These agreements generally provide that any confidential or proprietary information developed by the PRC operating entities or on their behalf must be kept confidential. These agreements also provide that any confidential or proprietary information disclosed to third parties in the course of the PRC operating entities’ business must be kept confidential by such third parties. In the event of trademark infringement, the State Administration for Industry and Commerce has the authority to fine the infringer and to confiscate or destroy the infringing products.

The PRC operating entities’ primary trademark portfolio consists of 36 registered trademarks. The PRC operating entities’ trademarks are valuable assets that reinforce the brand and their consumers’ favorable perception of their products. The current registrations of these trademarks are effective for varying periods of time and may be renewed periodically, provided that we, as the registered owner, comply with all applicable renewal requirements including, where necessary, the continued use of the trademarks in connection with similar goods. In addition to trademark protection, the PRC operating entities own   40 URL designations and domain names, including www.mdmooc.org, www.mdmooc.com, www.zhongxun.online, ygjkclass.com, zxylmd.com, which are important to our business.

As of the date of this Annual Report, we have registered 36 trademarks. The following is a list of trademarks we have registered that are important to our business:

No.

Current Owner

Mark

Registration Number

Status

Class/Description

Expiration Date

Country of Registration

1

Zhongchao Medical Technology (Shanghai) Corp. Ltd

21587105

Approved

Category 5: Pharmaceutical preparations; Vaccines; Analgesics; Medical drugs; Medical tea; Medical ointments; Supplements; Medical nutrients; Glucose used as medical food additives; Medical nutritional food (cut-off)

2027.11.27

China

2

Zhongchao Medical Technology (Shanghai) Corp. Ltd

18418154

Approved

Category 9: Recorded computer programs (programs); computer software (recorded); recorded computer operating procedures; downloadable computer application software; electronic publications (downloadable software); computer programs (downloadable software); measuring devices; dosimeters; measuring instruments; inspection mirrors (cut-off)

2026.12.27

China

3

Zhongchao Medical Technology (Shanghai) Corp. Ltd

19719148

Approved

Category 38:Teleconference Services; Providing Internet Chat Room; Digital File Transfer; Video Conference Services; Providing Online Forum; Data Stream Transfer; Information Transfer; Television Broadcasting; Computer Aided Information and Image Transfer (Deadline)

2027.06.06

China

4

Zhongchao Medical Technology (Shanghai) Corp. Ltd

21587230

Approved

Category 44: health care; medical assistance; rental of medical equipment; treatment services; health counseling; dietary and nutritional guidance; dispensing; art therapy; massage; beauty services (deadline)

2027.11.27

China

No.

Current Owner

Mark

Registration Number

Status

Class/Description

Expiration Date

Country of Registration

5

Zhongchao Medical Technology (Shanghai) Corp. Ltd

21587258

Approved

Category 5: Pharmaceutical preparations; Vaccines; Analgesics; Medical drugs; Medical tea; Medical ointments (cut-off)

2028.01.20

China

6

Shanghai Zhongxun Medical Technology Co., Ltd.

47286982

Approved

Category 41: Education; Providing of training, Providing of educational information; Arranging and conducting of conferences, congresses and symposiums; Organization of exhibitions for cultural or educational purposes; Arranging and conducting of training; Publication of books and texts (cut-off)

2031.02.12

China

7

Beijing Zhongchao Boya Medical Technology Co., Ltd.

59485462

Approved

Category 41: Providing of training, Arranging of experts conferences, Mobile libraries; text publishing (except advertising texts); E-books and magazines publishing; Providing non-downloadable global computer network online publishing; Publishing electronic newspapers through global computer network; Providing global network publishing Editing website publishing; Publishing and distributing medical technology related scientific paper (cut-off)

2032.03.13

China

8

Beijing Zhongchao Boya Medical Technology Co., Ltd.

59474281

Approved

Category 44: Medical clinic services; Healthcare; Therapeutic services; Medical equipment rental; Health counseling; Diet nutrition guidance; Art therapy methods; Dispensing; Beauty services; Massage (cut-off)

2032.03.13

China

No.

Current Owner

Mark

Registration Number

Status

Class/Description

Expiration Date

Country of Registration

9

Shanghai Zhongxun Medical Technology Co., Ltd.

47299361

Approved

Category 44: Hospitals; Healthcare; Dispensing Consulting; Telemedicine services; Health consulting; Therapeutic services; Diet nutrition guidance; Providing medication information for patient; Medical information; Medical counseling (cut-off)

2031.02.20

China

10

Shanghai Zhongxin Medical Technology Co., Ltd

59477566

Approved

Category 44: Medical clinic services; Medical assistance; Therapeutic services; Medical equipment rental; Health consulting; Diet nutrition guidance; Art therapy measures; Dispensing; Beauty services; Massage (cut-off)

2032.03.13

China

11

Chongqing Xinjiang Pharmaceutical Co., Ltd.

65011381

Approved

Category 5: Medical drugs; human drugs; Chinese patent medicines; medical nutrition products; dietary fiber; mineral dietary supplements; Medical ; Veterinary medications; Dental fillings; Tablets (cut-off)

2032.11,23

China

12

Chongqing Xinjiang Pharmaceutical Co., Ltd.

64995408

Approved

Category 42: Implementation of early evaluation in the field of new drugs; Drug evaluation; Pharmaceutical research; Computer software maintenance for Internet use; Medical planning computer programming; Computer software design; Computer hardware design and development consulting; Computer system analysis; Provision of Internet search engines; Cloud calculate(cut-off)

2032.11.13

China

13

Chongqing Xinjiang Pharmaceutical Co., Ltd.

64988009

Category 35: Displaying merchandise on communication media for retail purposes; Advertising; Commercial information offered through website; Franchising business management; Import and export agency; Promoting for others; Systemizing computer database information; Seeking sponsorship; Retail sale of pharmaceutical, veterinary, hygienic preparations and medical supplies (cut-off)

2033.01.20

China

The following is a list of our patent applications:

As of the date of this Annual Report, the PRC operating entities owns 37  copyrights that have been approved. The following is a list of the PRC operating entities’ copyrights that have been approved and important to the PRC operating entities’ business: 

Seasonality

We do not experience seasonality in our overall operations.

Legal Proceedings   

From time to time we, our subsidiaries, and the PRC operating entities may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We, our subsidiaries, and the PRC operating entities are not currently a party to any legal proceedings that in the opinion of the management, if determined adversely to us, would have a material adverse effect on our business, financial condition, operating results or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Government Regulation   

Regulation Related to Online Services

Regulation Related to Online Transmission of Audio-Visual Programs

The Measures for the Administration of Publication of Audio-Visual Programs through Internet or Other Information Network, or the Audio-Visual Measures, promulgated by the SARFT, on July 6, 2004 and put into effect on October 11, 2004, and ceased to be effect apply to the activities relating to the opening, broadcasting, integration, transmission or download of audio-visual programs using internet or other information network. Under the Audio-Visual Measures, to engage in the business of transmitting audio-visual programs, a license issued by the SARFT is required, and “audio-visual programs (including audio-visual products of films and televisions)” is defined under the Audio-Visual Measures as the audio-visual programs consisting of movable pictures or sounds that can be listened to continuously, which are shot and recorded using video cameras, recorders and other audio-visual equipment for producing programs. Foreign invested enterprises are not allowed to carry out such business. On April 13, 2005, the State Council promulgated the Certain Decisions on the Entry of the Non-state-owned Capital into the Cultural Industry. On July 6, 2005, five PRC governmental authorities, including the SARFT, jointly adopted the Several Opinions on Canvassing Foreign Investment into the Cultural Sector. According to these regulations, non-state-owned capital and foreign investors are not allowed to engage in the business of transmitting audio-visual programs through information networks. However, the Audio-Visual Measures was repealed according to the Administrative Provisions on Audio-Visual Program Service through Special Network and Directed Transmission that was promulgated by the State Administration of Press, Publication, Radio, Film and Television, or the SAPPRFT (currently known as the National Radio and Television Administration of China, or the NRTA), on April 25, 2016, effective as of June 1, 2016 and amend on March 23, 2021.

To further regulate the provision of audio-visual program services to the public via the internet, including through mobile networks, within the territory of China, the SARFT and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program Provisions, on December 20, 2007, which came into effect on January 31, 2008 and was last amended on August 28, 2015. Under the Audio-Visual Program Provisions, “internet audio-visual program services” is defined as activities of producing, redacting and integrating audio-visual programs, providing them to the general public via internet, and providing service for other people to upload and transmit audio-visual programs, and providers of internet audio-visual program services are required to obtain a License for Online Transmission of Audio-Visual Programs issued by the SARFT, or complete certain record-filing procedures with the SARFT. In general, providers of internet audio-visual program services must be either state-owned or state-controlled entities, and the business to be carried out by such providers must satisfy the overall planning and guidance catalog for internet audio-visual program service determined by the SARFT. On May 21, 2008, SARFT issued a Notice on Relevant Issues Concerning Application and Approval of License for the Online Transmission of Audio-Visual Programs, as amended on August 28, 2015, which sets out detailed provisions concerning the application and approval process regarding the License for Online Transmission of Audio-Visual Programs. According to the above regulations, providers of internet audio-visual program services that engaged in such services prior to the promulgation of the Audio-Visual Program Provisions are eligible to apply for the license so long as those providers did not violate the relevant laws and regulations in the past or their violation of the laws and regulations is minor in scope and can be rectified in a timely manner and they have no records of violation during the last three months prior to the promulgation of the Audio-Visual Program Provisions. Further, on March 30, 2009, SARFT promulgated the Notice on Strengthening the Administration of the Content of Internet Audio-Visual Programs, which reiterates the pre-approval requirements for the audio-visual programs transmitted via the internet, including through mobile networks, where applicable, and prohibits certain types of internet audio-visual programs containing violence, pornography, gambling, terrorism, superstition or other similarly prohibited elements.

On March 17, 2010, the SARFT promulgated Tentative Categories of Internet Audio-Visual Program Services, or the Categories, which clarified the scope of internet audio-visual programs services, which was amended on March 10, 2017. According to the Categories, there are four categories of internet audio-visual program services which are further divided into seventeen sub-categories. The third sub-category to the second category covers 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. 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.”

On March 16, 2018, the SAPPRFT promulgated the Notice on Further Regulating the Transmission Order of Internet Audio-Visual Program Services, providing that the classic literary works, radio, film and television programs, internet original audio-visual programs shall not be re-edited, re-dubbed, re-subtitled or partly captured and consolidated as a new program without authorizations and providers of internet audio-visual program services shall strictly manage and supervise such re-edited programs uploaded by the internet users and shall not provide any transmission channel for those internet audio-visual programs which have political orientation issues, copyright issues or content issues.

On November 18, 2019, the CAC, the Ministry of Culture and Tourism and the NRTA jointly issued the Administrative Provisions on Internet Audio-Video Information Services, or the Internet Audio-Video Information Services Provisions, which became effective on January 1, 2020. The Internet Audio-Video Information Services Provisions defines the “Internet audio-video information services” as providing audio and video information production, uploading and transmission to the public via Internet platforms such as websites and applications. Entities providing Internet audio-video information services must obtain relevant licenses subject to applicable PRC laws and regulations and are required to authenticate users’ identities based on their organizational codes, PRC ID numbers, or mobile phone numbers etc.

Regulation Related to Internet Culture Activities

On May 10, 2003, Ministry of Culture (currently known as the Ministry of Culture and Tourism, MOCT) MOCT promulgated the Interim Administrative Provisions on Internet Culture, or the Internet Culture Provisions, which became effective on July 1, 2003 and was amended on February 17, 2011 and December 15, 2017. The Internet Culture Provisions require ICP services providers engaging in commercial “internet culture activities” to obtain an Internet Culture Business Operating License from the MOCT. “Internet cultural activity” is defined in the Internet Culture Provisions as an act of provision of internet cultural products and related services, which includes (i) the production, duplication, importation, and broadcasting of the internet cultural products; (ii) the online dissemination whereby cultural products are posted on the internet or transmitted via the internet to end-users, such as computers, fixed-line telephones, mobile phones, television sets and games machines, for online users’ browsing, use or downloading; and (iii) the exhibition and comparison of the internet cultural products. In addition, “internet cultural products” is defined in the Internet Culture Provisions as cultural products produced, broadcast and disseminated via the internet, which mainly include internet cultural products specially produced for the internet, such as online music entertainment, online games, online shows and plays (programs), online performances, online works of art and online cartoons, and internet cultural products produced from cultural products such as music entertainment, games, shows and plays (programs), performances, works of art, and cartoons through certain techniques and duplicating those to internet for dissemination. In addition, foreign-invested enterprises are not allowed to engage in the above-mentioned services except online music.

Regulation Related to Online Publishing

On June 27, 2002, the SAPPRFT and the MIIT jointly promulgated the Tentative Internet Publishing Administrative Measures, or the Internet Publishing Measures, which took effect on August 1, 2002. The Internet Publishing Measures require entities that engage in internet publishing to obtain an Internet Publishing License for engaging in internet publishing from the SAPPRFT. Pursuant to the Internet Publishing Measures, the definition of “internet publishing” is broad and refers to the act by ICP services providers to select, edit and process works created by themselves or others and subsequently post such works on the internet or transmit such works to the users’ end through internet for the public to browse. The “works” as defined under the Internet Publishing Measures include (i) contents from books, newspapers, periodicals, audio-visual products, electronic publications that have already been formally published or works that have been made public in other media, and (ii) all other edited or processed works of literatures, art, natural science, social science, engineering technology, etc.

On February 4, 2016, the SAPPRFT and the MIIT jointly issued the Administrative Provisions on Online Publishing Services, or the Online Publishing Provisions. The Online Publishing Provisions, taking effect on March 10, 2016, superseded the Internet Publishing Measures. Compared with the Internet Publishing Measures, the Online Publishing Provisions set out more detailed provisions for online publishing activities, which mainly cover issues such as defining online publishing services, licensing and approvals, the administrative and supervisory regime and legal liabilities. According to the Online Publishing Provisions, all online publishing services provided within the territory of China are subject to the Online Publishing Provisions, and an online publishing services permit shall be obtained to provide online publishing services. Pursuant to the Online Publishing Provisions, “online publishing services” refer to providing online publications to the public through information networks; and “online publications” refer to digital works with publishing features such as having been edited, produced or processed and are made available to the public through information networks, including: (i) written works, pictures, maps, games, cartoons, audio/video reading materials and other original digital works containing useful knowledge or ideas in the field of literature, art, science or other fields; (ii) digital works of which the content is identical to that of any published book, newspaper, periodical, audio/video product, electronic publication or the like; (iii) network literature databases or other digital works, derived from any of the aforesaid works by selection, arrangement, collection or other means; and (iv) other types of digital works as may be determined by the SAPPRFT. As the scope of online publication is broad, certain contents the PRC operating entities post on their website, such as video-audio clips and course materials, may be deemed as online publications. In addition, foreign-invested enterprises are not allowed to engage in the foregoing services. The Administrative Regulations on Publishing (2020 Revised), which was promulgated by the State Council and became effective on November 29, 2020, specifies that entities and individually owned businesses engaging in retail of publications shall obtain a publication business permit.

Regulations on Value-Added Telecommunication Services and Internet Content Services

The Telecommunications Regulations of the PRC, or the Telecom Regulations, promulgated on September 25, 2000 by the State Council and most recently amended on February 6, 2016, provide a regulatory framework for telecommunications services providers in the PRC. As required by the Telecom Regulations, a commercial telecommunications services provider in the PRC shall obtain an operating license from the MIIT, or its counterparts at provincial level prior to its commencement of operations.

The Telecom Regulations categorize all telecommunication businesses in the PRC as either basic or value-added. The Catalog of Telecommunications Business, or the Telecom Catalog, issued as an attachment to the Telecom Regulations and most recently updated on June 6, 2019, further categorizes value-added telecommunication services into two classes: class I value-added telecommunication services and class II value-added telecommunication services. Information services provided via cable networks, mobile networks, or internet fall within class II value-added telecommunications services.

Pursuant to the Measures on Telecommunications Business Operating Licenses, or the Telecom License Measures, promulgated by the MIIT on March 1, 2009 and last amended on July 3, 2017, any approved telecommunications services provider shall conduct its business in accordance with the specifications in its license for value-added telecommunications services, or VATS License. The Telecom License Measures further prescribes types of VATS Licenses required for operation of different value-added telecommunications services together with qualifications and procedures for obtaining such VATS Licenses.

Pursuant to the Administrative Measures on Internet Information Services, promulgated on September 25, 2000 and amended on January 8, 2011 by the State Council, commercial internet information services providers, which means providers of information or services to internet users with charge, shall obtain a VATS License with the business scope of internet information services, namely the Internet Content Provider License or the ICP License, from competent regulatory authorities before providing any commercial internet content services within the PRC.

Based on the Notice regarding the Strengthening of Ongoing and Post Administration of Foreign Investment Telecommunication Enterprises issued by the MIIT in October 2020, the MIIT no longer issues Examination Letters for Foreign Investment in Telecommunication Business. Foreign-invested enterprises would need to submit relevant foreign investment materials to MIIT for the establishment or change of telecommunication operating permits.

Restrictions on Foreign Direct Investment in Value-Added Telecommunications Services

Foreign direct investment in telecommunications companies in China is governed by the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision), which was promulgated on December 11, 2001 and amended on September 10, 2008 and February 6, 2016 by the State Council. The regulations require that foreign-invested value-added telecommunications enterprises in China to be established as Sino-foreign equity joint ventures and, with a few exceptions, the foreign investors may acquire up to 50% of the equity interests in such joint ventures. In addition, the major foreign investor, as defined therein, is required to demonstrate a good track record and experience in operating value-added telecommunications businesses. Moreover, foreign investors that meet these requirements must obtain approvals from the MIIT and the MOFCOM, or their authorized local counterparts, which retain considerable discretion in granting such approvals. On March 29, 2022, the Decision of the State Council on Revising and Repealing Certain Administrative Regulations, which took effect on May 1, 2022, was promulgated to amend certain provisions of regulations including the Provisions on the Administration of Foreign-Invested Telecommunications Enterprises (2016 Revision), the requirement for major foreign investor to demonstrate a good track record and experience in operating value-added telecommunications businesses was deleted. However, as this promulgation is relatively new and no detailed guidance or implementation measures have been issued, there remains uncertainty as to how it should be interpreted and implemented.

On July 13, 2006, the Ministry of Information Industry (currently known as the MIIT), or the MII, released the Circular on Strengthening the Administration of Foreign Investment in the Operation of Value-added Telecommunications Business, or the MII Circular. The MII Circular prohibits domestic telecommunications enterprises from leasing, transferring or selling telecommunications business operation licenses to foreign investors in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of telecommunications business in China. Furthermore, under the MII Circular, the internet domain names and registered trademarks used by a value-added telecommunications services operator shall be legally owned by that operator (or its shareholders). If a license holder fails to comply with the requirements in the MII Circular and fails to cure such non-compliance within a time limit as required by the competent authority, the MII or its local counterparts have the discretion to take measures against such license holders, including revoking their VATS Licenses.

Regulations Relating To Drugs Retail Industry

In September 1984, the SCNPC promulgated the Drug Administration Law of the PRC, which was amended in 2001, 2013, 2015 and 2019 respectively to regulate all entities or individuals engaging in research, manufacture, operation, use, supervision and management of drugs within the PRC. According to the Drug Administration Law, no pharmaceutical operation, including pharmaceutical whole sale and pharmaceutical retail business, is permitted without obtaining the Pharmaceutical Operation License. Where the trading of drugs is conducted without a Pharmaceutical Operation License, the illegal incomes by selling drugs shall be confiscated and the local Food and Drug Administration, or the FDA (currently known as the Medical Products Administration, or the MPA) shall impose the fine ranging from 15 to 30 times of the value of the illegally sold drugs (including sold or unsold drugs). The Implementation Rules for the Drug Administration Law of the PRC, was promulgated by the State Council in August 2002 and amended in 2016 and 2019, which emphasized the detailed implementation rules of drugs administration. The China Food and Drug Administration, or the CFDA (currently known as the National Medical Products Administration, or the NMPA) promulgated the Measures for the Administration of Pharmaceutical Operation License in February 2004 as amended in 2017, which stipulates the procedures for applying the Pharmaceutical Operation License and the requirements and qualifications for pharmaceutical wholesalers or pharmaceutical retailers with respect to their management system, personnel, facilities and etc. The valid term of the Pharmaceutical Operation License is five years and shall be renewed through application six months prior to its expiration date.

According to the Measures on Prescription Drugs and OTC Drugs Classification Management (Trial) and the Interim Provisions on the Circulation of Prescription and OTC Drugs, which were both promulgated by the State Drug Administration, which was restructured and integrated into the CFDA, and became effective in January 2000, drugs are divided into prescription drugs and over-the-counter drugs, or OTC drugs. For prescription drugs, the dispensing, purchase and use can only be based on the prescription issued by the certified medical practitioner or certified medical assistant practitioner. In addition, the prescription drugs can only be advertised and promoted in professional medical magazines. OTC drugs, on the other hand, are further divided into Class A and Class B and they both can be purchased and used without a prescription and promoted in public upon approval by the relevant governmental authorities. The pharmaceutical wholesale enterprises distributing prescription drugs and/or OTC drugs, as well as pharmaceutical retail enterprises selling prescription drugs and/or Class-A OTC drugs are required to obtain the Pharmaceutical Operation License.

According to the Administrative Measures for the Supervision and Administration of Circulation of Pharmaceuticals, promulgated by the CFDA in January 2007 and effective in May 2007, pharmaceutical manufacture and operation enterprises and medical institutions shall be responsible for the quality of pharmaceuticals they manufacture, provide or use. The operation of prescription drugs is highly regulated under these rules. Prescription drugs may not be sold by pharmaceutical retail enterprises without valid prescriptions and an enterprise in violation of such restriction will be instructed to rectify any violation, given a disciplinary warning, if it fails to do so or the circumstances are serious, it shall be imposed a fine of no more than RMB1,000. In addition, a pharmaceutical manufacture or operation enterprise shall not sell prescription drugs directly to the public by post or over Internet, and the enterprise in violation of such restriction shall be instructed to rectify, given a disciplinary warning, and imposed a fine of not more than two times the value of the pharmaceuticals sold, but not more than RMB30,000. The newly revised Drug Administration Law of the PRC in 2019 does not include restrictions on online sale of prescription drugs. Furthermore, according to the Administrative Standard of Pharmaceutical Operating Quality, promulgated by the CFDA in April 2000 and amended in 2012, 2015 and 2016 respectively, the pharmaceutical operation enterprises shall take effective quality control measures over the process of procurement, storage, transportation and sale of drugs in order to ensure their quality.

On December 26, 2016, the Medical Reform Office of the State Council, the NHFPC, the China Food and Drug Administration, and five other government authorities promulgated the Notice on Issuing the Implementing Opinions on Promoting the “Two-invoice System” for the Drug Procurement by Public Medical Institutions (Trial), which became effective on the same date. On January 24, 2017, the General Office of the State Council further promulgated the Several Opinions on Further Reform and Improvement in Policies of Drug Production, Circulation and Use. According to these rules, a two invoice system is encouraged to be gradually and fully adopted for drug procurement by 2018. The two-invoice system generally requires a drug manufacturer to issue only one invoice to its distributor, followed by the distributor issuing a second invoice directly to the end customer hospital. Only one distributor is permitted to distribute drug products between the manufacturer and the hospital. The system also encourages manufacturers to sell drug products directly to hospitals. Pharmaceutical manufacturers and distributors who fail to implement the two-invoice system may be disqualified from attending future bidding events or providing distribution for hospitals and blacklisted for drug procurement practices.

According to the Circular on Issuing the Opinions on Promoting the Drug Pricing Reform promulgated by the National Development and Reform Commission and other six governmental authorities in 2015, except for narcotic drugs and Class I psychotropic drugs, the prices of drugs previously set by the government were cancelled from June 1, 2015. Instead of direct price controls which were historically used in the PRC, the government regulates prices mainly by establishing a centralized procurement mechanism, revising medical insurance reimbursement standards and strengthening regulation of medical and pricing practices. In January 2019, the Notice of the General Office of the State Council on Issuance of the Pilot Plan Regarding the Centralized Procurement and Use of the Drugs Organized by the State improved the pricing mechanism of drugs, which also further regulates the scope and mode of centralized procurement. In February 2019, the National Healthcare Security Administration issued the Opinions on Supporting Measures of Medical Insurance for the Pilot Program of Centralized Procurement and Use of Drugs Organized by the State which provides supporting measures for the medical security department to implement the pilot work of the centralized procurement and use of drugs organized by the State. In September 2019, National Healthcare Security Administration and other eight government authorities issued the Implementation Opinions on Region Expansion of the Organization of Centralized Procurement and Use of Drugs by the State, which expand the pilot program to wider areas, further reduce the medication burden of the masses and intensify reform and innovation. In January 2021, the General Office of the State Council has further published an updated policy Opinion on Promoting the Normalization and Institutionalization of Centralized Volume-Based Procurement of Drugs to solidify the centralized procurement scheme, pursuant to which emphasis shall be placed on including drugs that are listed in the Drug Catalog for Basic Medical Insurance with large consumption and high procurement price in the procurement scope, and gradually covering various drugs which are clinically necessary and reliable. In principle, all holders registration certificates of drugs falling under the scope of the centralized volume-based procurement and meet the requirements for the centralized volume-based procurement in terms of quality standards, production capacity, and supply stability, may participate in such procurement. All public medical institutions shall participate in the centralized volume-based drug procurement.

Regulations Relating To Online Drug Information Services

According to the Measures Regarding the Administration of Drug Information Service over the Internet, promulgated by the CFDA on July 8, 2004 and amended on November 17, 2017, the Internet drug information service refers to the activities of providing medical information (including medical devices) and other services to Internet users through the Internet, and where any website intends to provide Internet drug information services, it shall, prior to applying for an operation permit or record-filing from the State Council’s department in charge of information industry or the telecom administrative authority at the provincial level, file an application with the provincial FDA, and shall be subject to the examination and approval thereof for obtaining the qualifications for providing Internet drug information services. The validity term for a Qualification Certificate for Internet Drug Information Services is five years and may be renewed at least six months prior to its expiration date upon a re-examination by the relevant authority. Pursuant to the Measures Regarding the Administration of Drug Information Service over the Internet, the Internet drug information services are classified into two categories, namely, profit-making services and non-profit making services. Profit-making services refer to that of providing Internet users with drug information in return for service fees whilst non-profit-making services refers to that of providing Internet users with drug information which is shared and accessible by the public through the Internet free of charge. Furthermore, the information relating to drugs shall be accurate and scientific in nature, and its provision shall comply with the relevant laws and regulations. No product information of stupefacient, psychotropic drugs, medicinal toxic drugs, radiopharmaceutical, detoxification drugs and pharmaceutics made by medical institutes shall be distributed on the website. In addition, advertisements relating to drugs (including medical devices) shall be approved by the NMPA or its competent branches, and shall specify the approval document number.

Regulations Relating To Operation Of Medical Devices

The Measures on the Supervision and Administration of the Business Operations of Medical Devices, or the Measures on Medical Devices, which was promulgated by CFDA on July 30, 2014 and amended on November 17, 2017, a proposed amendment was promulgated on March 10, 2022 and took effect on May 1, 2022, applies to any business activities of medical devices as well as the supervision and administration thereof conducted within the territory of the PRC. Pursuant to the Measures on Medical Devices, CFDA shall be responsible for the supervision and administration of nationwide business operations concerning medical devices. Medical devices are divided into three classes depending on the degree of risks of medical devices. Entities engaged in distribution of Class III medical devices shall obtain a medical device operating license and entities engaged in distribution of Class II medical devices shall complete filings with the competent local MPA, while entities engaged in distribution of medical devices of Class I are not required to conduct any filing or obtain any license. In addition, in accordance with Regulations on Supervision and Administration of Medical Devices, promulgated by the State Council on February 9, 2021 and effective as of June 1, 2021, Class II and Class III medical devices shall be registered with the NMPA or its local branches, while Class I medical devices shall be filed with the competent local MPA. In the event that the business operator in distribution of Class III medical devices without a medical device operating license or the business operator in distribution of Class II or Class III medical devices that are not registered with the NMPA or its local branches, the business operator may be imposed fine or be shut down by the authorities.

Regulations Relating To Healthcare Services

General Policies

According to the Guiding Opinions of the State Council on Actively Propelling the “Internet Plus” Action Plan issued by the State Council on July 1, 2015, the new mode of online medical treatment and public health shall be promoted. It is imperative to develop online medical treatment and public health services based on the internet, support third-party institutions to build the service platforms for sharing medical information such as medical images, health archives, testing reports, electronic medical records and other medical information, and gradually set up the standard system for cross-hospital sharing and exchange of medical data. The mobile internet shall be vigorously used to provide online appointments for diagnosis and treatment, reminder of waiting for diagnosis, pricing and payment, inquiry about diagnosis and treatment reports, drug delivery and other services. Medical institutions shall be guided in providing basic-level examination, higher-level diagnosis and other remote medical treatment to small and medium-sized cities and rural areas. Internet enterprises shall be encouraged to cooperate with medical institutions in establishing online medical information platforms, strengthen the integration of regional medical treatment and public health service resources, make full use of the internet, big data and other means, and improve the capability to prevent and control major diseases and public health emergencies. Internet-extended doctor’s advice, electronic prescription and other internet medical service applications shall be vigorously explored. The qualified medical inspection institutions and medical service institutions shall be encouraged to collaborate with internet enterprises to develop gene testing, disease prevention and other health service modes.

In April 2018, the Opinions on Promoting the Development of “Internet Plus Health Care” issued by the General Office of the State Council encouraged medical institutions to apply the internet and other information technologies to expand the space and content of medical services, developed an online and offline integrated medical service model that covers the whole process of medical service. Internet hospitals under the support of medical institutions shall be allowed. Medical institutions may use internet hospitals as their secondary name and, based on the physical hospitals, use Internet technology to provide safe and appropriate medical services, allowing follow-up online diagnosis for some common diseases and chronic diseases. After acquiring documents on the medical records of patients, physicians shall be allowed to prescribe online for some common diseases and chronic diseases.

On July 17, 2018, the National Health Commission and the National Administration of Traditional Chinese Medicine jointly promulgated three documents, including the Measures for the Administration of Internet Diagnosis and Treatment (Trial), the Measures for the Administration of Internet Hospitals (Trial) and the Specifications for the Administration of Remote Medical Services (Trial). Pursuant to the Measures for the Administration of Internet Hospitals (Trial), “internet hospitals” include: (a) internet hospitals as the second name of physical medical institutions, and (b) internet hospitals that are independently established on the support of physical medical institutions.

Internet Hospital

According to the Measures for the Administration of Internet Hospitals (Trial), the PRC implements access management for internet hospitals pursuant to the Administrative Regulations on Medical Institutions and the Implementation Measures of the Administrative Regulations on Medical Institutions. Before implementing access for internet hospitals, provincial health administrative departments shall establish provincial internet medical service supervision platforms to connect with information platforms of internet hospitals to achieve real-time supervision. Establishing an internet hospital is governed by the administrative approval process as stipulated in the Measures for the Administration of Internet Hospitals (Trial). According to the Measures for the Administration of Internet Hospitals (Trial), applying for establishing an internet hospital is required to submit an application to the practice registration authority of its supported physical medical institution, and submit the application form, the feasibility study report on the establishment, the address of the supported physical medical institution, and the agreement jointly signed by the applicant and the supported physical medical institution in relation to establishing an internet hospital through cooperation. If an internet hospital information platform is set up through cooperation with a third-party institution, the relevant cooperation agreement should be submitted. For an internet hospital sets up through cooperation, if the cooperation partner changes or other factors exist that will invalidate the cooperation agreement, reapplication for establishing an internet hospital is required.

Such cooperation agreement should be submitted. For an internet hospital sets up through cooperation, if the cooperation partner changes or other factors exist that will invalidate the cooperation agreement, reapplication for establishing an internet hospital is required.

In terms of practicing rules on Internet hospitals, the Measures for the Administration of Internet Hospitals (Trial) provides that where a third-party institution jointly establishes an Internet hospital on the support of the physical medical institution, it shall provide the physical medical institution with professional services such as physicians and pharmacists, and information technology support services, and clarify the responsibilities and rights of all parties in respect of medical services, information security, and privacy protection through agreements and contracts. In terms of supervision and management of Internet hospitals, the Measures for the Administration of Internet Hospitals (Trial) clarifies that provincial health administrative departments and the registration authorities for Internet hospitals jointly implement supervision on Internet hospitals through the provincial Internet medical service supervision platform, focusing on the supervision on Internet hospitals’ personnel, prescriptions, diagnosis and treatment behaviors, patients’ privacy protection and information security. Administrative Regulations on Medical Institutions and Implementation Measures of the Administrative Regulations on Medical Institutions set out the regulatory framework for the management and operation of the medical institutions, and the operation of Internet hospitals shall comply with Administrative Regulations on Medical Institutions and Implementation Measures of the Administrative Regulations on Medical Institutions as well. Additionally, the Basic Standards for Internet Hospitals (Trial) as attached to the Measures for the Administration of Internet Hospitals (Trial) sets forth specific requirements for diagnosis and treatment items, departments, personnel, buildings and device and equipment, and rules and regulations of Internet hospitals.

On February 3, 2019, The Health Commission of Guangdong and the Bureau of Traditional Chinese Medicine of Guangdong issued a notice on the forwarding of three documents including The Construction Standards of Internet Hospitals (Trial), which states that articles 8 and 9 of the Measures for the Administration of Internet Diagnosis and Treatment (Trial) shall apply when a physical medical institution newly applied for establishment or a physical medical institution that has obtained the Practicing License for Medical Institutions applies for the establishment of an internet hospital. Before above-mentioned medical institutions’ application, the internet hospital information system must be connected to the provincial internet medical service supervision platform to meet the needs of supervision over the whole process of internet diagnosis and treatment and accept the supervision and administration by regulatory authorities. At the time of practice registration, the above-mentioned medical institutions shall meet both the basic standards for medical institutions of relevant grades and categories and for internet hospitals.

Medical Institutions

According to the Administrative Regulations on Medical Institutions (the “Regulations”), promulgated by the State Council, effective on September 1, 1994, revised on February 6, 2016 and March 29, 2022 (effective on May 1, 2022), hospitals, health centers, sanatoriums, out-patient departments, clinics, health clinics, health posts (rooms) and first aid stations are medical institutions. The health administrative departments of the local people’s governments at or above the county level shall be responsible for the supervision and administration of the medical institutions within their respective administrative regions. The establishment of medical institutions by entities or individuals shall be subject to the examination and approval of the health administrative department of the local people’s governments at or above the county level and obtain the written approval for the establishment of medical institutions if required by the relevant provisions of the State Council. Furthermore, according to the Regulations, the practice of medical institutions shall complete the registration and obtain Practicing License for Medical Institution. Furthermore, pursuant to the Administrative Regulations on Medical Institutions and Implementation Measures of the Administrative Regulations on Medical Institutions, where a medical institution intends to change its name, address, legal representative or major person-in-charge, form of ownership, target of service, mode of service, registered fund (capital), diagnosis and treatment subjects, or number of beds (dental chairs), it shall apply to the registration authority for registration of such alteration.

Patient Diagnosis Service

According to the Measures for the Administration of Internet Diagnosis and Treatment (Trial), internet diagnosis and treatment activities shall be provided by medical institutions which have obtained a “Practicing License for a Medical Institution”, and the Internet-based diagnosis services provided by a medical institution shall be consistent with its diagnosis subjects. Physicians and nurses carrying out internet diagnosis and treatment activities shall be able to be found in the national electronic registration system of physicians and nurses. A medical institution shall conduct electronic real-name verification for the medical staff members carrying out internet diagnosis and treatment activities.

According to the Measures for the Administration of Internet Hospitals (Trial), internet hospitals must inform patients about risks of internet hospitals and obtain their consents for internet diagnosis and treatment. When a patient receives medical treatment in a physical medical institution and the attending physician consults other physicians through internet hospitals, the physicians providing consultation may issue diagnosis opinions and a prescription; and when a patient does not receive medical treatment in a physical medical institution, a physician may only provide follow-up diagnosis for a patient of some common diseases and chronic diseases through internet hospitals, internet hospitals may provide signing service for contract of family doctors. When a patient’s condition changes or there are other circumstances under which online diagnosis and treatment services are inappropriate, the physician shall refer the patient to a physical medical institution. Internet diagnosis and treatment activities shall not be allowed for any patient receiving initial diagnosis.

Management of Prescription and Medical Records

Internet hospitals who provide internet diagnosis and treatment activities shall strictly comply with the Measures for the Administration of Prescriptions and other provisions on the administration of prescriptions. Before issuing a prescription online, the physician shall have the patient’s medical records and issue a prescription online for the same disease diagnosed after confirming that the patient is specifically diagnosed in a physical medical institution to have a common disease or chronic disease or several common diseases or chronic diseases. The physicians are subject to making prescription recommendations to patients based on treatment standards and drug instructions. Under any of the following circumstances, the health administrative department at or above the county level shall request the medical institutions to make corrections within a grace period, and may impose a fine no more than RMB5,000; and under serious circumstances, Practice License for Medical Institutions shall be revoked: (i) prescribing by a pharmacist who has not obtained the right to prescribe or whose prescription right has been canceled; (ii) prescribing narcotic drugs and the psychotropic drugs of category I by pharmacists who have not obtained the prescription right for such narcotic drugs and psychotropic drugs; (iii) employing persons who have not obtained the qualifications for the professional and technical positions of pharmaceutical science to conduct the prescription adjustment. If the medical practitioners issue prescriptions without obtaining prescription rights at a medical institution not registered in their licenses, during their practicing activities, they will be given a warning or be ordered to suspend their practicing activities for a period of not less than six months but not more than one year and under the serious circumstances, their Practice Certificates for Medical Practitioners will be revoked.

Prescription Outflow

In March 2007, the National Ministry of Health (currently the National Health Commission of the People’s Republic of China) promulgated the Measures for the Administration of Prescriptions, stipulating that doctors must use the common name of drugs when prescribing, and shall not restrict the outflow of prescriptions. In April 2016, the General Office of the State Council issued the Notice on Printing and Distributing the Key Tasks of Deepening the Reform of the Medical and Health System in 2016, proposing to promote the separation of dispensing from prescription in various methods and prohibit public hospitals from restricting the outflow of prescriptions. In May 2021, the National Healthcare Security Administration and National Health Commission issued the Guiding Opinions on Establishing and Improving the “Dual Channel” Management Mechanism for National Healthcare Insurance Negotiated Drugs, proposing that the designated retail pharmacies should be connected with the medical insurance information platform and the E-prescription circulation platform to ensure the smooth flow of E-prescriptions. In particular, with regard to the zero-markup policy for drugs. In March 2012, the State Council promulgated the Plan and Implementation for Deepening the Reform of the Medical and Health System During the 12th Five Year Plan Period, which proposes the abolishment of the “compensation system for the medical cost through drug-selling profits” and the separation of dispensing from prescription. The Plan initiated the gradual cancelation of the drug markups in public hospitals, which would prohibit public hospitals from selling drugs to patients at a price higher than the actual purchase price, reducing the three sources of public hospital incomes that were government subsidies, services charges and drug markups to government subsidies and services charges only. In September 2012, according to Notice on promoting pharmaceutical price reform in county level public hospitals further released the NDRC, zero markup drug policy began to be implemented in county level institutions. On May 6, 2015, the General Office of the State Council issued the Guiding Opinions on the Pilot Programs of Comprehensive Reform of Urban Public Hospitals, launching the pilot programs on the separation of dispensing from prescription in all urban public hospitals, and actively exploring a variety of effective ways to reform the compensation system for the medical cost through drug-selling profits. On April 19,2017, the National Health and Family Planning Commission (currently the National Health Commission), the Ministry of Finance, the Medical Reform Office of the State Council and other relevant government bodies issued the Notice on All-round Promotion of the Comprehensive Reform of Public Hospitals, requiring that the comprehensive reform of public hospitals be fully promoted by September 30, 2017, and that the drug markups (except for Chinese herbal medicine) be cancelled in all public hospitals.

Practicing Physicians

On August 20, 2021, the Standing Committee of NPC (the “SCNPC”) issued the Doctors Law of the PRC (the “Doctors Law”), effective on May 1, 1999, and amended on August 27, 2009 and March 1, 2022. According to the Doctors Law, when taking medical, preventive or healthcare measures and when signing relevant medical certificate, the practicing physicians shall conduct diagnosis and investigation personally and fill out the medical files without delay as required. No practicing physicians may conceal, forge or destroy any medical files or the relevant data. On November 5, 2014, the National Health and Family Planning Commission of PRC (the “NHFPC”, now known as the National Health Commission of PRC), the NDRC, the Ministry of Human Resources and Social Security, the State Administration of Traditional Chinese Medicine, and the China Insurance Regulatory Commission (now known as the China Banking and Insurance Regulatory Commission), jointly issued Several Opinions on Promoting and Standardizing Multi-Place Practice of Physicians, which puts forward to simplify the registration procedure of the multiple place practice and proposes the feasibility of exploring the “record management.” According to Administrative Measures for the Registration of Practicing physicians, promulgated by the NHFPC on February 28, 2017, effective on April 1, 2017, practicing physicians shall obtain the practice certificate for practicing physicians to practice upon registration. Person who fails to obtain the practice certificate for practicing physicians shall not engage in medical treatment, prevention and healthcare activities. A medical practitioner who practices for multiple institutions at the same place of practice shall determine one institution as the main practicing institution where he or she practices, and apply for registration to the administrative department of health and family planning approving the practice of such institution; and, for other institutions where the medical practitioner is to practice, respectively apply for recordation to the administrative health and family planning authority.

Protection of Patients’ Information

Internet hospitals shall strictly comply with the relevant laws and regulations in the PRC on information security and confidentiality of medical data, and appropriately keep patients’ information, and shall not illegally trade or disclose patients’ information. When patients’ information and medical data are illegally or improperly disclosed, a medical institution shall report to the competent health administrative department in a timely manner and immediately take effective rectification.

New Rules Governing Healthcare Industry

The PRC government recently issued several policies to regulate participants in the healthcare industry, including pharmacies, physicians, hospitals, and health insurance companies, such as the Guidance on Promoting Hospital Safety and Order Management, the Promotion Action of High-quality Development of Public Hospitals (2021-2025), the Construction Plan of National Clinical Specialty, the Notice on Publicizing the 5G+ Healthcare Application Pilot Project, the Notice on Promulgating Five Specifications Including the Specifications for Pharmaceutical Outpatient Service of Medical Institutions, the Notice on National Medical Insurance Plan in the 14th Five-year Plan, and the Detailed Rules for the Supervision of Internet Diagnosis and Treatment (Trial).

Detailed Rules for the Supervision of Internet Diagnosis and Treatment (Trial) (the “Supervision Rules”) stated that medical institutions’ electronic prescriptions, and prescription review records should be traceable, and the data interface should be opened to the provincial supervision platform. The Supervision Rules also stated that prescription drug selling before a prescription is issued is strictly prohibited and that a medical institution shall conduct electronic real-name verification for the medical staff members carrying out Internet diagnosis and treatment activities. The Notice on Promulgating Five Specifications Including the Specifications for Pharmaceutical Outpatient Service of Medical Institutions requires the pharmacist in outpatient services holds professional qualifications.

The Supervision Rules also stated that for the internet hospitals that are affiliated to physical institutions, their electronic medical records should be integrated. Moreover, the physician should collect the patient’s medical diagnosis records before starting follow-up consultations. To fulfill the requirements, hospitals need to operate an effective hospital information management system, these would require system upgrading and platform rebuild. The Notice on Publicizing the 5G+ Healthcare Application Pilot Project encourages the application of 5G technology in remote diagnosis, remote treatment, and hospital management.

The Guidance on Promoting Hospital Safety and Order Management in the 14th Five-year Plan aims to further maintain normal medical order and protect the personal safety of medical staff. The Promotion Action of High-quality Development of Public Hospitals (2021-2025) raises several main actions so as to achieve high-quality development of public hospitals and further strengthen the public welfare feature of public hospitals, among others, including the construction of key clinical specialist groups according to the Construction Plan of National Clinical Specialty in the 14th Five-year Plan.

In addition, the National Medical Insurance Plan in the 14th Five-year Plan, issued by the General Office of the State Council on September 23, 2021, intends to take a series of measures to achieve the high-quality development of the basic medical insurance system, insecure people’s health and promote common wealth, including encouraging the innovation of insurance products, adjusting and optimizing the medical insurance catalog on a dynamic basis, and improve direct settlement services for medical treatment in different places.

Regulations Related to Internet Information Security and Privacy Protection

PRC government authorities have enacted laws and regulations with respect to internet information security and protection of personal information from any abuse or unauthorized disclosure. Internet information in China is regulated and restricted from a national security standpoint. The Decisions on Maintaining Internet Security which was enacted by the Standing Committee of the PRC National People’s Congress (“SCNPC”) in December 2000 and amended in August 2009, may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an information service provider violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites.