| ORGANIZATION AND PRINCIPAL ACTIVITIES | 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Zhongchao Inc. (“Zhongchao Cayman”,
or the “Company”) is a holding company incorporated on April 16, 2019, under the laws of the Cayman Islands. The Company
commenced operations in August 17, 2012, through its variable interest entity (“VIE”), Zhongchao Medical Technology
(Shanghai) Limited (“Zhongchao Shanghai”), a limited liability company established under the laws of the PRC. The Company
provides customized medical courses and customized medical training services to pharmaceutical enterprises, and not-for-profit
organizations (“NFPs”) including medical associations, medical institutions, medical journals, medical foundations,
hospitals and etc. in the PRC. The accompanying consolidated financial
statements reflect the activities of Zhongchao Shanghai and each of the following entities:
Name Background Ownership
Zhongchao Group Inc. (“Zhongchao BVI”)
● A
BVI company ● Incorporated
on April 23, 2019 ● A
holding company 100% owned by Zhongchao Cayman
Zhongchao Group Limited (“Zhongchao HK”)
● A
Hong Kong company ● Incorporated
on May 14, 2019 ● A
holding company 100% owned by Zhongchao BVI
Beijing Zhongchao Zhongxing Technology Limited (“Zhongchao WFOE”)
● A
PRC company and deemed a wholly foreign owned enterprise ● Incorporated
on May 29, 2019 ● Registered
capital of $10 million ● A
holding company 100% owned by Zhongchao HK
Zhongchao Shanghai
● A
PRC limited liability company ● Incorporated
on August 17, 2012 ● Registered
capital of RMB 20,250,067 (approximately $3,064,272) with registered capital fully paid-up ● Engaged
in technology development, technology transfer, and technical services in the field of medical technology, technical consulting in the
field of network technology, and medical information consulting VIE of Beijing Zhongchao Zhongxing Technology Limited
Shanghai Maidemu Cultural Communication Corp. (“Shanghai Maidemu”)
● A
PRC limited liability company ● Incorporated
on March 12, 2015 ● Registered
capital of $1,597,087 (RMB 10 million) with registered capital fully paid-up ● Planning
for cultural and artistic exchanges, designing, producing, acting for and publishing various kinds of advertisements, and medical consultation
(no medical diagnosis and treatment activities allowed). 100% owned by Zhongchao Shanghai
Shanghai Zhongxun Medical Technology Co., Ltd. (“Shanghai Zhongxun”)
● A
PRC limited liability company ● Incorporated
on May 27, 2017 ● Registered
capital of $1,021,525 (RMB 7 million) with registered capital fully paid-up ● Engaged
in technology development, transfer, service and consulting in the fields of medical technology and computer technology (no medical diagnosis
and treatment activities allowed). 100% owned by Zhongchao Shanghai
Shanghai Zhongxin Medical Technology Co., Ltd (formerly known as “Shanghai Jingyi Medical Technology Co., Ltd.,”) (“Shanghai Jingyi”)
● A
PRC limited liability company ● Incorporated
on October 10, 2018 ● Registered
capital of $1,530,784 (RMB 10 million) with registered capital of $1,491,749 to be funded ● Engaged
in technology development, transfer, service and consulting in the fields of medical technology and computer technology, market information
consulting and investigating. 100% owned by Shanghai Zhongxun*
Shanghai Huijing Information Technology Co., Ltd.,
(“Shanghai Huijing”)
● A
PRC limited liability company ● Incorporated
on September 28, 2016 ● Registered
capital of $149,948 (RMB 1 million) with registered capital of $74,974 to be funded ● Engaged
in technology development, transfer, service and consulting in the fields of computer technology, graphic designing, website page designing,
planning cultural and artistic exchanges. 100% owned by Shanghai Maidemu
Beijing Zhongchao Boya Medical Technology Co., Ltd.
(“Beijing Boya”)
● A
PRC limited liability company ● Incorporated
on April 27, 2020 ● Registered
capital of $141,185 (RMB 1 million) with registered capital of $141,185 to be funded ● Engaged
in technology development, transfer, service and consulting in the fields of medical technology and computer technology, market information
consulting and investigating. 70% owned by Zhongchao Shanghai, and 30% owned by Mr. Zhengbo Ma on behalf of Zhongchao Shanghai
Zhixun Internet Hospital (Liaoning) Co., Ltd. (“Liaoning Zhixun”)
● A
PRC limited liability company ● Incorporated
on July 6, 2020 ● Registered
capital of $426,642 (RMB 3 million) with registered capital of $426,642 to be funded ● Engaged
in online hospital services, medical services, elderly nursing services, remote healthcare management services, healthcare consulting
services, sales of medical appliances and other medical products. 100% owned by Shanghai Zhongxin
* 51%
of the equity interest owned by Shanghai Zhongxun before November 2020. Through certain entrustment agreements, Mr. Weiguang Yang, Beijing
Zhongchao Yixin Management Consulting Partnership, LLP (“Zhongchao Yixin”), and Beijing Zhongren Yixin Management Consulting
Partnership, LLP (“Zhongren Yixin”), hold 19%, 20% and 10% of the equity interest of Shanghai Jingyi on behalf of Shanghai
Zhongxun, respectively. As a result, Shanghai Zhongxun owns 100% of Shanghai Zhongxin’s equity interest. On August 14, 2019, Zhongchao WFOE entered
into a series of agreements (the “VIE Agreements”) with Zhongchao Shanghai and the shareholders of Zhongchao Shanghai.
The VIE Agreements are designed to provide Zhongchao WFOE with the power, rights and obligations equivalent in all material respects
to those it would possess as the sole equity holder of Zhongchao Shanghai, including absolute control rights and the rights to
the management, operations, assets, property and revenue of Zhongchao Shanghai. The purpose of the VIE Agreements is solely to
give Zhongchao WFOE the exclusive control over Zhongchao Shanghai’s management and operations. On August 14, 2019, Zhongchao Cayman completed
a reorganization of entities under common control of Weiguang Yang, who owned a majority of the voting power of Zhongchao Cayman
prior to the reorganization. Zhongchao Cayman, Zhongchao Group Inc. (“Zhongchao BVI”), and Zhongchao Group Limited
(“Zhongchao HK”) were established as the holding companies of Zhongchao WFOE. Zhongchao WFOE is the primary beneficiary
of Zhongchao Shanghai and its subsidiaries, and all of these entities are under common control which results in the consolidation
of Zhongchao Shanghai and subsidiaries which have been accounted for as a reorganization of entities under common control at carrying
value. The consolidated financial statements are prepared on the basis as if the reorganization became effective as of the beginning
of the first period presented in the consolidated financial statements. Total assets and liabilities presented on the Company’s
consolidated balance sheets and revenues, expenses, net incomes presented on consolidated statements of incomes as well as the
cash flows from operating, investing and financing activities presented on the consolidated statements of cash flows are substantially
the financial positions, operations and cash flows of Zhongchao Shanghai and its subsidiaries. On August 15, 2019, HF Capital Management
Delta, Inc. (“HF Capital”), a 6.25 % shareholder of Zhongchao Shanghai, planned to withdraw its equity interest in
Zhongchao Shanghai (which is representative of 1,350,068 shares in Zhongchao Shanghai, among which 675,068 shares were issued by
Zhongchao Shanghai and the remaining 675,000 shares were purchased from two existing shareholders), and to contribute the same
amount of capital to Zhongchao Cayman directly. The Company and HF Capital entered into a certain warrant agreement to purchase
ordinary shares of the Company, pursuant to which the Company granted a warrant to HF Capital, who expects to exercise the warrant
and receive the ordinary shares of the Company before the effective date and closing of the offering because these conditions are
considered to be administrative procedures and there is no uncertainties of going through them. The warrant entitled HF Capital
to purchase 1,350,068 Class A Ordinary Shares, representing 6.25% economic beneficial interest, or 1.37% of the voting ownership
interest of the Company as of December 31, 2019, or 5.42% economic beneficial interest, or 1.33% of the voting ownership interest
of the Company after the Company’s initial public offering in February 2020, from the Company, if the following conditions
are met:
1) All PRC governmental consent and approval required for HF Capital to exercise the warrant and payment of the capital contribution have been obtained, including without limitation, any approval or filing with respect to HF Capital’s investment into the Company, and payment by HF Capital of the capital contribution to the Company, and reasonable evidence thereof shall have been provided to the Company;
2) HF Capital has fully paid the capital contribution to Zhongchao Cayman; and
3) The Company released the paid-in capital of HF Capital from Zhongchao Shanghai The practice is solely a result of tax
planning from HF Capital. As the warrant does not cause the Company to transfer or receive any assets, or exchange any other financial
instruments on potentially favorable or unfavorable terms with shareholder. The warrant does not meet the definition of a financial
instrument as defined in ASC 480 Distinguishing Liabilities from Equity On December 2, 2019, the registration of
HF Capital’s withdrawal of its capital contribution in Zhongchao Shanghai was completed with local State Administration for
Industry and Commerce. The paid-in capital of HF Capital in an amount of RMB20 million (approximately US$2.9 million) is currently
being held in the corporate bank account of Zhongchao Shanghai and is to be deposited in a designated bank account mutually controlled
by Zhongchao Shanghai and HF Capital after the completion of HF Capital’s ODI procedures and to be released as HF Capital’s
capital contribution in Zhongchao Cayman. Class A Ordinary Shares issued and outstanding
presented on the financial statements is reconciled with the number of shares legally as follows:
December 31, 2020
December 31, 2019
Number of Class A Ordinary Shares legally issued and outstanding 18,085,355 14,752,352
Class A Ordinary Shares committed to be issued to HF Capital 1,350,068 1,350,068
Number of Class A Ordinary Shares outstanding and issued presented on the financial statements 19,435,423 16,102,420 VIE Agreements with Zhongchao Shanghai 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, the Company
operates its businesses in which foreign investment is restricted or prohibited in the PRC through certain PRC domestic companies. As
such, Zhongchao Shanghai is controlled through VIE Arrangements in lieu of direct equity ownership by the Company or any of its subsidiaries.
Such VIE Arrangements consist of a series of six agreements (collectively, the “VIE Arrangements”), which were signed
on August 14, 2019. The significant terms of the VIE Arrangements
by and among the Company’s wholly-owned subsidiary, Zhongchao WFOE, its consolidated variable interest entity, Zhongchao Shanghai,
and the shareholders of Zhongchao Shanghai are as follows: Agreements that Provide Us Effective Control
over Zhongchao Shanghai The Company’s PRC Wholly Foreign Owned Entity,
Zhongchao WFOE, has entered into the following agreements with Zhongchao Shanghai and its shareholders. Equity Interest Pledge Agreement Pursuant to the equity interest pledge
agreement dated August 14, 2019, each shareholder of Zhongchao Shanghai (collectively “Shareholder”) has pledged all
of its equity interest in Zhongchao Shanghai to guarantee the shareholder’s and Zhongchao Shanghai’s performance of
their obligations under the master exclusive service agreement, business cooperation agreement, exclusive option agreement and
proxy agreement and power of attorney. If Zhongchao Shanghai or any of its shareholders breaches their contractual obligations
under these agreements, Zhongchao WFOE, as pledgee, will be entitled to dispose the pledged equity interest entirely or partially.
Each of the shareholders of Zhongchao Shanghai agrees that, during the term of the equity interest pledge agreement, it will not
dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests without the prior written
consent of Zhongchao WFOE. In addition, Zhongchao WFOE has the right to collect dividends generated by the pledged equity interest
during the term of the pledge. The term of the initial equity interest pledge agreement is 20 years. After the expiration of the
term of initial pledge registration, Zhongchao WFOE may at its sole discretion require the Shareholders to extend the term of the
equity interest registration. Proxy Agreement and Power of Attorney Pursuant to the proxy agreement and power
of attorney dated August 14, 2019, each shareholder of Zhongchao Shanghai has irrevocably appointed Zhongchao WFOE to act as such
shareholder’s exclusive attorney-in-fact to exercise all shareholder rights, including, but not limited to, voting on all
matters of Zhongchao Shanghai requiring shareholder approval, disposing of all or part of the shareholder’s equity interest
in Zhongchao Shanghai, oversee and review Zhongchao Shanghai’s operation and financial information. Zhongchao WFOE is entitled
to designate any person to act as such shareholder’s exclusive attorney-in-fact without notifying or the approval of such
shareholder, and if required by PRC law, Zhongchao WFOE shall designate a PRC citizen to exercise such right. Each proxy agreement
power of attorney will remain in force for so long as the Zhongchao Shanghai exists. The shareholders of Zhongchao Shanghai do
not have the right to terminate this agreement or revoke the appointment of the attorney-in-fact without the prior written consent
of Zhongchao WFOE Spouse Consent Letters Pursuant to the Spouse Consent Letters
dated August 14, 2019, the spouse of each married shareholder of Zhongchao Shanghai, unconditionally and irrevocably agreed not
to assert any rights over the equity interest in Zhongchao Shanghai held by and registered in the name of their spouse. In addition,
each of them agreed to be bound by the VIE Arrangements described here if the spouse obtains any equity interest in Zhongchao Shanghai
for any reason. Master Exclusive Service Agreement Under the master exclusive service agreement
between Zhongchao WFOE and Zhongchao Shanghai dated August 14, 2019, Zhongchao WFOE has the exclusive right to provide Zhongchao
Shanghai with technical support, consulting services and other services. Zhongchao WFOE has the right to designate and appoint,
at its sole discretion, any entities affiliated with the Zhongchao WFOE to provide any and all services. The service fees are calculated
and paid on a yearly basis and at the amount that equals to 100% of the consolidated net profits of Zhongchao Shanghai. Zhongchao
WFOE may adjust the service fee at its discretion after taking into account multiple factors, such as the difficulty of the services
provided, the time consumed, the content and commercial value of services provided and the market price of comparable services.
Zhongchao WFOE owns the intellectual property rights arising out of the performance of this agreements. Zhongchao Shanghai shall
seek approval from Zhongchao WFOE prior to entering into any contracts obtaining the same or similar services as provided under
the Master Exclusive Service Agreement. This agreement will remain effective as long as Zhongchao Shanghai exists, unless Zhongchao
WFOE advance written notice to Zhongchao Shanghai and its shareholders or upon the transfer of all the equity interest held by
Zhongchao Shanghai’s shareholders to Zhongchao WFOE and/or a third party designated by Zhongchao WFOE. Business Cooperation Agreement Under the business cooperation agreement
dated August 14, 2019, without Zhongchao WFOE’s prior written consent, Zhongchao Shanghai agrees not to engage in any transaction
which may materially affect its asset, obligation, right or operation, including but not limited to: any activities not within
its normal business scope, merger and acquisition, offering any loan to any third party and incurring any debt from any third party.
Zhongchao Shanghai shall seek approval from Zhongchao WFOE prior to entering into any material contract, except the contracts executed
in the ordinary course of business. Zhongchao Shanghai shall cause the persons designated by Zhongchao WFOE to be the directors
and executive officers of Zhongchao Shanghai. This agreement will remain effective as long as Zhongchao Shanghai exists, unless
Zhongchao WFOE advance written notice to Zhongchao Shanghai and its shareholders or upon the transfer of all the equity interest
held by Zhongchao Shanghai’s shareholders to Zhongchao WFOE and/or a third party designated by Zhongchao WFOE Agreements that Provide Us with the
Option to Purchase the Equity Interest in Zhongchao Shanghai Exclusive Option Agreement Pursuant to the exclusive option agreement
dated August 14, 2019, each shareholder of Zhongchao Shanghai has irrevocably granted Zhongchao WFOE an exclusive option to purchase,
or have its designated person or persons to purchase, at its discretion, to the extent permitted under PRC law, all or part of
the shareholder’s equity interests in Zhongchao Shanghai. The purchase price is equal to the lowest price allowable under
PRC laws and regulations at the time of the transfer. Zhongchao Shanghai has agreed that without Zhongchao WFOE’s prior written
consent, Zhongchao Shanghai shall cause the persons designated by Zhongchao WFOE to be the directors and executive officers of
Zhongchao Shanghai, not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose
of its assets or beneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any
loans to any third parties, enter into any material contract, merge with or acquire any other persons or make any investments,
or distribute dividends to the shareholders. The shareholders of Zhongchao Shanghai have agreed that, without Zhongchao WFOE’s
prior written consent, they will not dispose of their equity interests in Zhongchao Shanghai or create or allow any encumbrance
on their equity interests. Moreover, without Zhongchao WFOE’s prior written consent, no dividend will be distributed to Zhongchao
Shanghai’s shareholders, and if any of the shareholders receives any profit, interest, dividend or proceeds of share transfer
or liquidation, the shareholder must give such profit, interest, dividend and proceeds to Zhongchao WFOE. These agreements will
remain effective as long as Zhongchao Shanghai exists unless Zhongchao WFOE advance written notice to Zhongchao Shanghai and the
shareholders or upon the transfer of all the equity interest held by the shareholders to Zhongchao WFOE and/or its designee. The Company has concluded that the Company
is the primary beneficiary of Zhongchao Shanghai and its subsidiaries, and should consolidate their financial statements. The Company
is the primary beneficiary based on the Proxy Agreement and Power of Attorney entered into as part of the VIE Agreements that each
equity holder of Zhongchao Shanghai assigned their rights as a shareholder of Zhongchao Shanghai to Zhongchao WOFE. These rights
include, but are not limited to, voting on all matters of Zhongchao Shanghai requiring shareholder approval, disposing of all or
part of the shareholder’s equity interest in Zhongchao Shanghai, oversee and review Zhongchao Shanghai’s operation
and financial information. As such, the Company, through Zhongchao WOFE, is deemed to hold all of the voting equity interest in
Zhongchao Shanghai and its subsidiaries. For the periods presented, the Company has not provided any financial or other support
to either Zhongchao Shanghai or its subsidiaries. However, pursuant to the Master Exclusive Services Agreement, the Company may
provide complete technical support, consulting services and other services during the term of the VIE agreements. Though not explicit
in the VIE agreements, the Company may provide financial support to Zhongchao Shanghai and its subsidiaries to meet its working
capital requirements and capitalization purposes. The terms of the VIE Agreements and the Company’s plan of financial support
to the VIEs were considered in determining that the Company is the primary beneficiary of the VIEs. Accordingly, the financial
statements of the VIEs are consolidated in the Company’s consolidated financial statements. Based on the foregoing VIE Agreements,
Zhongchao WFOE has effective control of Zhongchao Shanghai and its subsidiaries, which enables Zhongchao WFOE to receive all of
their expected residual returns and absorb the expected losses of the VIE and its subsidiaries. Accordingly, the Company consolidates
the accounts of Zhongchao Shanghai and its subsidiaries for the periods presented herein, in accordance with Accounting Standards
Codification, or ASC, 810-10, Consolidation. New VIE Agreements On August 1, 2020, all shareholders
of Zhongchao Shanghai, except Mr. Yang and Shanghai Xingzhong, decided to withdraw their capital contribution from Zhongchao Shanghai
(the “Capital Reduction”). Given the effect of the Capital Reduction, Mr. Yang became the 76.4% shareholder of Zhongchao Shanghai
with the remaining equity interests held by Shanghai Xingzhong. On September 10, 2020, Zhongchao WFOE, and Zhongchao Shanghai, and its
shareholders signed a confirmation agreement to confirm that the VIE Agreements entered on August 14, 2019 have been terminated because
of the Capital Reduction. Accordingly, on September
10, 2020, to clarify the legal effect of the Capital Reduction and to sustain the effective control over Zhongchao Shanghai by the Company,
Mr. Yang and Shanghai Xingzhong, as the shareholders of Zhongchao Shanghai, signed a series of VIE agreements with Zhongchao WFOE, the
terms of which are substantially the same as those of the Original VIE Agreements except the number of shareholders of Zhongchao Shanghai
reduced to two (the “New VIE Agreements”). Upon entry into the New VIE Agreements, the Original VIE Agreements, except for
the Master Exclusive Service Agreement, were expired. |
