We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the U.S. that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our financial results on a half-yearly basis as press releases, distributed pursuant to the rules and regulations of the New York Stock Exchange. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
We are exempt from certain corporate governance requirements of the New York Stock Exchange.
WeAs a foreign private issuer, we are permitted to exempt from certain corporate governance requirements of the New York Stock Exchange (the “NYSE”) by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our. Certain corporate governance practices andin the Cayman Islands, which is our home country, may differ significantly from the New York Stock Exchange corporate governance practiceslisting standards. For instance, we are not required toto: (i) have a majority of the board of directors be followed by U.S. domestic companies under the NYSE rules. The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers. The significantly different standards applicable to us do not require us to:
independent; (ii) have a compensation committee or a corporate governance and nominating committee consisting entirely of independent directors; or (iii) have regularly scheduled executive sessions with only independent directors each year. We intend to rely on all such exemptions provided by the NYSE to a foreign private issuer, except that we have established a compensation committee and have three memberssome of the audit committee, will seek shareholder approval for the implementation of share incentive plans and for the increase in the number of shares available to be granted under share incentive plans and have adopted and disclosed corporate governance guidelines and a code of business conduct and ethics for directors, officers and employees.these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements of the NYSE.
We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax consequences to United States Holders.
We believe we were not a “passivepassive foreign investment company” or a PFIC, (a “PFIC”) for our taxable year ended on December 31, 2016, and we do not expect to become one for our current taxable year or in the future,2019, although there can be no assurance in this regard. The determination of whether or not we are a PFIC is made on an annual basis and depends on the composition of our income and assets. A non-U.S. corporation will be considered a PFIC for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the value of its assets (based(generally based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (which includes cash). The market value of our assets may be determined in large part by the market price of our ADSs and ordinary shares, which is likely to fluctuate. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend our cash. If we are treated as a PFIC for any taxable year during which United States Holders (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation”) hold ADSs or ordinary shares, certain adverse United States federal income tax consequences could apply to such United States Holders.Holders with respect to any “excess distribution” received from us and any gain from a sale or other disposition of ADSs or ordinary shares. See “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation— Passive Foreign Investment Company.”
If a United States person is treated as owning at least 10% of our shares, such holder may be subject to adverse U.S. federal income tax consequences.
If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our stock (including our ordinary shares and ADSs), such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if any). If our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as controlled foreign corporations (regardless of whether we are not treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income” and investments in U.S. property by controlled foreign corporations, regardless of whether we make any distributions. An individual that is a United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. Failure to comply with these reporting obligations may subject you to significant monetary penalties and may prevent the statute of limitations with respect to your U.S. federal income tax return for the year for which reporting was due from starting. We cannot provide any assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries is treated as a controlled foreign corporation or whether such investor is treated as a United States shareholder with respect to any of such controlled foreign corporations or furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. A United States investor should consult its advisors regarding the potential application of these rules to an investment in the stock.
Risks Related to Our Industry
Healthcare administrative authorities in China currently set procurement quotas for certain types of medical equipment.
The procurement, installation and operation of large medical equipment in China are regulated by the Rules on Procurement and Use of Large Medical Equipment issued on December 31, 2004 by the NHC, the National Development and Reform Commission of PRC (“NDRC”) and the Ministry of Health,Finance, regulate the procurement, installation and operation of large medical equipment in China. Pursuant to these rules, the NDRC and the Ministry of Finance. Pursuant to these rules, quotas for large medical equipment are set by the NDRC and the Ministry of HealthNHC or the relevant provincial healthcare administrative authorities set quotas for large medical equipment, and hospitals must obtain a large medical equipment procurement license prior to the procurement of any such equipment.
For medical equipment classified as Class A large medical equipment, which includes gamma knife systems, proton beam therapy systems and PET-CT scanners,PET-MR, the NHC conducts procurement planning and approval are conducted byapproval. In addition, the NHFPC and the NDRC andNHC issues large medical equipment procurement licenses are issued by the NHFPC.licenses. For medical equipment classified as Class B large medical equipment, which includes gamma knife systems, PET-CT scanners and linear accelerators, and MRI and CT scanners, procurement planning and approval are conducted by the relevant provincial healthcare administrative authorities with ratification by the NHFPCconduct procurement planning and the large medical equipment procurement licenses are issued by the relevant provincial healthcare administrative authorities.approval. These rules apply to all public and private civilian medical institutions, whether non-profit or for-profit.
Although these rules do not directly apply to military hospitals in China, which are hospitals regulated by the military but most of which are otherwise the same as other government-owned civilian hospitals open to the public, they are used as a reference by the healthcare administrative authority of the general logistics department of the PRC People’s Liberation Army (the “PLA”) in approvinguses these rules as a reference to approve the procurement of such medical equipment. The procurement regulations issued by the Ministry of HealthNHC stipulate that from 20112018 to 2015,2020, the total number of PET-CT large medical equipment procurement licenses issued in China cannot exceed 160 and710 by the end of 2015, the total number2020. According to “the configuration plan of PET-CT systems in China cannot exceed 270. There is currently no guidance as to the total number of Class A large medical equipment procurement licenses that may befrom 2018 to 2020” (“2018 to 2020 Plan”) issued for other typesby NHC on October 26, 2018, national master plan configures a maximum of Class A large10 newly added proton therapy treatment systems between 2018 and 2020.The allocation will depend on the actual situation of regional function orientation, radiation capacity of medical equipment thatservices and the centers in our network operate.service level of diagnosis and treatment of medical institutions. In addition, many“2018 to 2020 Plan” also stipulates the provincial administrative authorities do not provide the general public with information on their procurement planning and quotas for Class B large medical equipment procurement licenses, if any. licenses.
Although the current number of procurement licenses available did not have a significantsignificantly impact on our existing expansion planplans in 2017,2019, the limitation on the number of procurement licenses available and any adverse changechanges to such procurement licenses available in the future, as a result of any change in government policy, increases in competition and the number of applicants for the procurement licenses or other factors, or any failure of our hospital partners and our planned hospital(s) to obtain such licenses, as expected, may affect our expansion plan after 2017, which2019. Any of the foregoing could have a material adverse effect onmaterially adversely affect our future prospects.
In addition, for most of the medical equipment that we intend to install and operate in our planned proton center, premium cancer hospitals and specialty cancer hospitals, we will need to obtain large medical equipment procurement licenses from the NHFPCNHC or provincial level healthcare administrative authorities. Such licenses mightWe may not be obtainedable to obtain such licenses in a timely manner or at all, which could delay or prevent the opening of our planned hospitals, and could have a material adverse effect onmaterially adversely affect our growth strategy and results of operations. See “—Risks Related to Our Company—We plan to establish and operate proton centers, premium cancer hospitals and specialty cancer hospitals that will be majority owned by us and are subject to significant risks.”
CertainA few of our hospital partners have not received large medical equipment procurement licenses or interim procurement permits for some of the medical equipment in our network of centers which could result in fines or the suspension from use of such medical equipment.
The quota requirement for large medical equipment procurement became effective in March 2005. A medical institution that houses equipment purchased prior to that time is required to retroactively apply for and obtain a large medical equipment procurement license. If a medical institution is unable to obtain a procurement license as a result of a lack of procurement quotas for such medical equipment allocated to the region in which the medical institution is located, an interim procurement permit for large medical equipment must be obtained instead.
As of December 31, 2016, of2019, we had eight cooperative centers under service-only agreements pursuant to which we only managed those cooperative centers in exchange for a management fee and we did not purchase and lease to the 95 units ofhospitals the medical equipment used at those cooperative centers. Medical equipment in the other 23 cooperative centers in our network that arewere subject to large medical equipment procurement quota requirements, 93of which 20 centers obtained procurement licenses, two centers were issued with ain the processing of applying for the procurement license or permit and 2 haveone center was not yet been issued withclear whether any procurement license or permit.permit was required according to the current regulations. Although our hospital partners have appliedare in the process of applying to the competent regulatory authorities for procurement licenses for these last six centers,or permits, we cannot assure you that they will be successful. If our hospital partners fail to receiveobtain either a procurement license or an interim procurement permit, the cooperative centers in our network operating such medical equipment may be required to discontinue operations and may be deprived of the revenue derived from the operation ofoperating such equipment or assessed a fine, anyfine. Any of whichthe foregoing risks could have a material adverse effect onmaterially adversely affect our business, financial condition and results of operation.
Pricing for the services provided by our network of centers may be adversely affected bysuffer from reductions in treatment and examination fees set by the Chinese government.
Cooperative centers in our network are primarily located in non-profit civilian and military hospitals in China. The medical service fees charged by these non-profit hospitals are subject to price ceilings set by the relevant provincial or regional price control authorities and healthcare administrative authorities in accordance with the Opinion Concerning the Reform of Medical Service Pricing Management issued on July 20, 2000 by the NDRC and the Ministry of Health. TheseThose authorities may adjust these price ceilings can be adjusted by those authorities downwards or upwards from time to time. For example, in 2006, treatment fees for the head gamma knife in one of the centers in our network decreased by approximately 30% and in 2007, and treatment fees for the body gamma knife in one of the centers in our network decreased by approximately 25%. However, overall, the average medical service fees for each of the treatments and diagnostic imaging services provided across our network of centers have remained stable since 2008. The relevant price control authorities and healthcare administrative authorities provide notices to hospitals, which in turn provide immediate notice to us, as to any change in the pricing ceiling for medical services. The timing between when notices are provided by the relevant price control authorities and healthcare administrative authorities and the effective date of such pricing change varies in different cities and regions as well as the relevant medical services in question, but typically ranges from one to three months. According to the Implementation Plan for the Recent Priorities of the Health Care System Reform (2009-2011), which was issued by the State Council on March 18, 2009, the Chinese government is aiming to reduce the examination fees for large medical equipment. In addition, according to the Opinion on the Reform of Pharmaceuticals and Healthcare Service Pricing Structures issued on November 9, 2009 by the NDRC, the Ministry of Health and the Ministry of Human Resources and Social Security (the “MHRSS”), the Chinese government is also aiming to reduce theHistorically, treatment fees for large medical equipment. Ifequipment were requested to reduce. In the future, if the government reduces examination or treatment fees for the services provided by the centers in our network, are reduced by the government under these or other policies, our contracted percentage of each center’s revenue net of specified operating expenses may decrease, hospitals may be discouraged from entering into or renewing their agreements with us, and our business, financial condition and results of operations may be materially and adversely affected.
In January 2009, the Chinese government approved in principle a healthcare reform plan to address the affordability of healthcare services, the rural healthcare system and healthcare service quality in China. In March 2009, the Chinese government published the healthcare reform plan for 2009 to 2010, which broadly addressed medical insurance coverage, essential medicines, provision of basic healthcare services and reform of public hospitals. The published healthcare reform plan also called for additional government spending on healthcare over the next three years of RMB850.0 billion to support the reform plan. According to the Implementation Plan for the Recent Priorities of the Health Care System Reform (2009-2011), which was issued by the State Council on March 18, 2009, the Chinese government is aiming to reduce the examination fees for large medical equipment. In addition, according to the Opinion on the Reform of Pharmaceuticals and Healthcare Service Pricing Structures issued on November 9, 2009 by the NDRC, the Ministry of Health and the MHRSS, the Chinese government is also aiming to reduce the treatment fees for large medical equipment. Although many details related to the implementation of the healthcare reform plan are not yet clear, the implementation of any policy that reduces examination or treatment fees for large medical equipment or provides more funding for hospitals to purchase their own equipment may have a material and adverse effect on our business, financial condition and results of operations.
Our business may be harmed by technological and therapeutic changes or by shifts in doctors’ or patients’ preferences for alternative treatments.
The treatment of cancer patients is subject to potentially revolutionary technological and therapeutic changes. Future technological developments could render our equipment and the services provided in our network of centers and our hospital obsolete. We may incur significant costs in replacing or modifying equipment in which we have already made a substantial investmentinvestments prior to the end of its anticipated useful life.
In addition, there may be significant advances in other cancer treatment methods, such as chemotherapy, surgery, biological therapy or in cancer prevention techniques, which could reduce demand or even eliminate the need for the radiotherapy services that we provide. Also, patientsPatients and doctors may also choose alternative cancer therapies over radiotherapy due to any number of reasons. Any shifts in doctors’ or patients’ preferences for other cancer therapies over radiotherapy may have a material adverse effect onmaterially adversely affect our business, financial condition and results of operations.
The technology used in some of our radiotherapy equipment, particularly our body gamma knife and our proton beam therapy system, has been in use for a limited period of time and the international medical community has not yet developed a large quantity of peer-reviewed literature that supports their safe and effective use.
The technology in some of our radiotherapy equipment, particularly the body gamma knife system and the proton beam therapy system, has been in use for a limited period of time, and the international medical community has not yet developed a large quantity of peer-reviewed literature that supports their safe and effective use. As a result, such technology may not continue to gain acceptance by doctors and patients in China or may lose any acceptance such technology has previously gained if negative information were to emerge concerning their effectiveness or safety. safety emerges.
As our agreements with manufacturers do not directly address such contingencies, we cannot assure you that equipment manufacturers wouldwill allow us to return their equipment or towill otherwise reimburse us for any losses that we may suffer under all such circumstances. Since each unit of our medical equipment represents a significant investment, any of the foregoing could have a material adverse effect onmaterially adversely affect our business, financial condition and results of operation.
We or our hospital partners may be unable to obtain various permits and authorizations from regulatory authorities in China relating to our medical equipment, which could delay the installation or interrupt the operation of our equipment.
For our hospital-based centers, our hospital partners are required tomust obtain a radiation safety permit from the Ministry of Environmental Protection (“MEP”) and a radiotherapy permit from the competent healthcare administrative authorities in order to operate the medical equipment in our network of centers that contains radioactive materials or emit radiation during operation.
Our hospital partners aremust also required to obtain a radiation worker permit from the competent provincial healthcare administrative authorities for each medical technician who operates such equipment. Any failure on the part of our hospital partners to obtain approvals or renewals of these permits from the MEP or the competent healthcare administrative authorities could delay the installation, or interrupt the operation, of our medical equipment, either of which could have a material adverse effect onmaterially adversely affect our business, financial condition and results of operation.
Each of our planned proton center, premium cancer hospitals and specialty cancer hospitals in China that will bewe majority owned by us will be required toown must obtain a radiation safety permit from the MEP and a radiotherapy permit, as well as a medical institution practicing license and radiation worker permits for our staff from the relevant provincial healthcare administrative authorities.
Any failure on our part to obtain approvals or renewals of these permits could delay the opening, or interrupt the operation, of our proton center, premium cancer hospitals and specialty cancer hospitals, which could have a material adverse effect onmaterially adversely affect our business, financial condition and results of operation. For more information on risks related to our planned specialty cancer hospitals, see “—Risks Related to Our Company—We plan to establish and operate proton centers, premium cancer hospitals and specialty cancer hospitals that will be majority owned by us and are subject to significant risks.”
If the government and public insurers in the PRC do not continue to provide sufficient coverage and reimbursement for the radiotherapy and diagnostic imaging services provided by our network of centers, our revenues could be adversely affected.
Self-payments account for approximately 34.4%28.8% of total medical expenses in China in 2012,2017, approximately 30.0%28.9% of total medical expenses were sourced from direct payments by the government and approximately 35.6%42.3% of total medical expenses were sourced from government-directed public medical insurance schemes, commercial insurance plans and employers in 2012,2017, according to the Ministry of Health.NHC. For public servants and others covered by 1989 Administrative Measure on Public Health Service and the 1997 Circular of Reimbursement Coverage of Large Medical Equipment of Public Health Service, the government currently either fully or partially reimburses medical expenses for certain approved cancer diagnosis and radiotherapy treatment services, including treatments utilizing linear accelerators and diagnostic imaging services utilizing CT and MRImagnetic resonance imaging (“MRI”) scanners.
However, gamma knife treatments and PETpositron emission tomography (“PET”) scans are currently not eligible for reimbursement under this plan. Urban residents in China are covered by one of two urban public medical insurance schemes and rural residents are covered under a new rural healthcare insurance program launched in 2003.
The urban employees basic medical insurance scheme, which covers employed urban residents, partially reimburses urban workers for treatments utilizing linear accelerators and gamma knife systems and diagnostic imaging services utilizing CT and MRI scanners, with reimbursement levels varying from province to province. For urban non-workers and rural residents, the types of cancer diagnosis and radiotherapy treatments that are covered are generally set with reference to the policy for urban employees in the same region of the country, butcountry. However, the reimbursement levels for covered medical expenses for urban non-workers and rural residents, which vary widely from region to region and treatment to treatment, are generally lower than those for urban employees in the same region.
We cannot assure you that the current coverage or reimbursement levels for cancer diagnosis or radiotherapy treatments will persist. If the national or provincial authorities in China decide to reduce the coverage or reimbursement levels for the radiotherapy and diagnostic imaging services provided by our network of centers, patients may opt for or be forced to resort to other forms of cancer therapy andtherapy. In addition, our business, financial condition and results of operation could be materially and adversely affected.
We will target the high net-worth population which is not covered by the government insurance programs. If we cannot meet their demands effectively or reach them through effective marketing, our financial position and results of operations may be adversely affected.
Our planned proton center and premium cancer hospitals will provide international-standard cancer treatments, especially radiotherapy services. We will target the high net-worth population in China, who may demand high-quality and differentiated medical services not available in government hospitals. As China’s economic growth continues, the number of high net-worth population will keep growing as well.
However, this group of population usually has access to high-quality medical services and many of them visit hospitals overseas already. Our success depends on whether we will be able tocan provide the quality of medical services comparable andto or better tothan international standard.standards. If we fail to target this group of patients, i.e., high net-worth population, or fail to offer competitive services, our financial position and results of operations may be adversely affected.
We are facing competition from other hospitals in the market. Inmarket, in particular competition for high-end patients.
As China’s healthcare reform deepens and more private hospitals enter into the market, more hospitals will be established to offer differentiated services that are not currently unavailableavailable in China’s healthcare service market. The high-net-worth population usually has access and resources to the best hospitals and medical experts in China. In order toTo reach this group of patients, we need to establish our industry position and reputation as the best cancer specialty service provider in China, which offers comparable or better services than other domestic and international hospitals.
Our planned proton centers, premium cancer hospitals and specialty cancer hospitals will face growing competition from other private and international hospitals in China. If we cannot establish a set of proper medical protocols and build up a strong reputation among the patients, our revenue and profits will be affected adversely.
In recent years, national policy of limiting foreign investment in the healthcare industry has been relaxed, foreign hospitals constantly influx the Chinese market, and Chinese patients have gradually turned to look forsought healthcare services in the overseas market, such as Japan, Korea, other Southeast Asian countries. We also face the risks of loss of patient source.sources.
As China’s healthcare reforms progress and restrictions are relaxed on private and international investments, more international hospitals are planning to enter into the Chinese healthcare service market. As a result, our planned proton center, premium cancer hospitals and specialty cancer hospitals will face future competition from the newly-entered international hospitals, many of which will target the same group of high net-worth population. However, if we cannot execute our strategy properly, our operation and financial conditions will be affected.
In addition, more Chinese patients are traveling overseas to seek best treatment available to locations such as Hong Kong, Taiwan, Korea or Southeast Asian nations. Concord CancerInternational Hospital in Singapore and the MD Anderson Proton Therapy Center in the United States also receive patients from mainland China.
Development of cancer radiotherapy and cancer treatment technology, and medical equipment based on the new technologies and research are advancing rapidly. If we cannot keep pace with advances in medical technology, we will be at risk.
We believe our planned proton center will offer the most advanced and cutting-edge treatment to cancer patients in China, including proton beam therapy, the most sophisticated radiotherapy currently available in the market. While considered the most accurate and effective radiotherapy mode now,at this time, proton therapy treatment may be overtaken by new trends or breakthroughs in the radiotherapy market. For instance, there is a trend of miniaturization of proton therapy equipment, which delivers the same treatment at lower upfront investmentinvestments and physical specification. specifications.
Although the miniature proton therapy equipment is not widely adopted, if the trend becomes popular, our planned proton center may face more competition as the capital expenditure requiredexpenditures for proton centercenters will be substantially lower and more hospitals and institutions may decide to enter into the segment and offer the treatment at lower price.prices. We need to follow the technology development closely or face the risk of lower cost alternative treatments.
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 onmaterially adversely affect the overall economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.
Our businessWe conduct our operations are conducted primarily in China.China although we also conduct our operations in Singapore. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
| · | the degree of government involvement; |
| · | the level of development; |
| · | the growth rate; |
| · | the control of foreign exchange; |
| · | the allocation of resources; |
| · | an evolving regulatory system; and |
| · | lack of sufficient transparency in the regulatory process. |
While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese economy has also experienced certain adverse effects due to the recent global financial crisis. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect onnegatively affect us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, the Chinese government still owns a substantial portion of the productive assets in China is still owned by theChina. The Chinese government. The continuedgovernment’s control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business.
The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Any adverse change in the economic conditions or government policies in China could have a material adverse effect onmaterially adversely affect overall economic growth and the level of healthcare investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect onmaterially adversely affect our businesses.
Uncertainties with respect to the PRC legal system could have a material adverse effect onmaterially adversely affect us.
The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. 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 since then has been to significantly enhance the protections afforded to various forms of foreign investments in China.
We conduct all of our business through our subsidiaries established in China. TheseChina and Singapore. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to foreign-invested enterprises. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us.
In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical, or in some circumstances, impossible. For example, we may have to resort to administrative and court proceedings to enforce the legal protectionprotections that we enjoy either by law or contract. 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.
These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, customers and suppliers. In addition, such uncertainties, including the inability to enforce our contracts, together with any development or interpretation of PRC law that is adverse to us, could materially and adversely affect our business and operations.business. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries.
Accordingly, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.
The M&A rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
The M&A rule (as defined below) establishes additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirementscomplex. These procedures and regulations require in some instances that the Ministry of Commerce (“MOFCOM”) be notified in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise.
We may grow our business in part by acquiring complementary businesses. Complying with the requirements of the M&A rule to complete such transactions could be time-consuming, and anytime-consuming. Any required approval processes, including obtaining approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
Relevant PRC foreign exchange rules may limit our ability to acquire PRC companies and adversely affect the implementation of our strategy, as well as our business and prospects.
On July 4, 2014, SAFEState Administration of Foreign Exchange (“SAFE”) promulgated the Notice on Relevant Issues Concerning Foreign Exchange Control of Domestic Residents’ Overseas Investment and Financing and Roundtrip Investment through Offshore Special Purpose Vehicles (“SAFE Circular No. 37”), which replaced the former Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles (generally known as (“SAFE Circular No. 75)75”) promulgated by SAFE on October 21, 2005.
SAFE Circular No. 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, which is referred to in SAFE Circular No. 37 as a “special purpose vehicle.” SAFE Circular No. 37 further requires amendment toamending the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC residents share transfer or exchange, merger, division or other material events.
In the event that a PRC resident holding interests in a special purpose vehicle fails to complete the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities and theactivities. The special purpose vehicle may also be restricted in its ability to contributefrom contributing additional capital into its PRC subsidiaries. Furthermore, failureFailure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
Currently, several of our shareholdersbeneficial owners who are residents in the PRC and are or may be subject to the requirements of making registrationregistering with the competent local branch of SAFE with respect to their investments in our company as required by SAFE Circular No. 75 and75. They will update their registration filings with SAFE under SAFE Circular No. 37 when there are any changes that should be registered under SAFE Circular No. 37. However, we may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners that are required to make such registrations, and if or when we have such shareholders or beneficial owners, we may not always be able to compel them to comply with SAFE Circular No. 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 No. 37 or other related regulations. The failure or inability of such individuals to comply with the registration procedures set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.
Governmental control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiaries to obtain financing.
We receive substantially all 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, if any. 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 the SAFE, by complying with certain procedural requirements. Our PRC subsidiaries may also retain foreign currency in their respective current account bank accounts for usemaking payments in payment of international current account transactions. However, we cannot assure you that the PRC government will notmay 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. In particular, if
If our PRC subsidiaries borrow foreign currency from us or other foreign lenders, they must do so within approved limits that satisfy their approval documentation and PRC debt to equity ratio requirements. Further, suchSuch loans must be registered with the SAFE or its local counterpart. In practice, it could be time-consuming to complete such SAFE registration process.
If we finance our PRC subsidiaries through additional capital contributions, the amount of these capital contributions must be approved by or filed with MOFCOM in China or its local counterpart. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice requires that Renminbi converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise in its business scope.
In addition, SAFE strengthened its oversight of the flow andover use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without approval from SAFE, and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes within the company’s approved business scope. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulations.
On March 30, 2015, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises (“SAFE Circular No. 19”), which replaced the former notice on the conversion by a foreign-invested company of foreign currency into Renminbi. Pursuant to SAFE Circular No. 19, among other things, the foreign exchange capital of foreign-invested enterprises shall be subject to the discretional foreign exchange settlement and forsettlement. For domestic equity investment made with the capital obtained from foreign exchange settlement, the invested enterprises first shall handle the registration of domestic reinvestment at the foreign exchange bureaus (banks) at the places of registration and open the corresponding Account Pending for Foreign Exchange Settlement Payment, and then thePayment.
The enterprises making the investment shall then transfer the capital in Renminbi obtained from foreign exchange settlement based on the actual investment scale to the Account Pending for Foreign Exchange Settlement Payment opened by the invested enterprises, whichenterprises. This may facilitatehelp foreign-invested enterprises in carryingcarry out domestic equity investment with the capital obtained from foreign exchange settlement to some extent.
Fluctuations in the value of the Renminbi may have a material adverse effect onmaterially adversely affect your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years.
Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.dollar.
There remains significant international pressure on the PRC government to further liberalize its currency policy, which could result in a further and more significant fluctuation in the value of the Renminbi against the U.S. dollar. In addition, as we rely entirely on dividends paid to us by our PRC subsidiaries, any significant revaluation of the Renminbi may have a material adverse effect onmaterially adversely affect our revenues and financial condition, and the value of any dividends payable on our ADSs in foreign currency terms.
For example, to the extent that we need to convert U.S. dollars that we receive from a future offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect ondecrease the Renminbi amount that we receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of makingto make payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect onnegatively affect the U.S. dollar amount available to us. In addition, appreciation or depreciation in the value of the Renminbi 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 rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect onmaterially adversely affect our ability to conduct our business.
We conduct our business primarily through our consolidated subsidiaries incorporated in China.China and Singapore. We rely on dividends paid by these consolidated subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities established in China is subject to limitations. Regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China.
Each of our PRC subsidiaries, including wholly foreign-owned enterprises (“WFOEs”)(generally known as WFOEs), and joint venture enterprises is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory capital reserve fund until the aggregate amount of such reserves reaches 50% of its respective registered capital. Our statutory reserves are not distributable as loans, advances or cash dividends. We anticipate that in the foreseeable future our PRC subsidiaries will need to continue to set aside 10% of their respective after-tax profits to their statutory reserves.
In addition, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
In addition, under the PRC Enterprise Income Tax Law (the “EIT Law”), the Circular issued by the State Administration of Taxation on January 29, 2008 regarding a summary on the dividend rates under the double tax treaties (“Notice 112”), the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (“PRC-HK DTA”), or the Double Taxation Arrangement (Hong Kong), which became effective on December 8, 2006, and the Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties (“Notice 601”), which became effective on October 27, 2009, dividends from our PRC subsidiaries paid to us through our Hong Kong subsidiary may be subject to a withholding tax at a rate of 10%, or at a.
This rate ofmay be lowered to 5% if our Hong Kong subsidiary is considered as a “beneficial owner” that is generally engaged in substantial business activities and entitled to treaty benefits under the Double Taxation Arrangement (Hong Kong). Furthermore, the ultimate tax rate will be determined by treaty between the PRC and the tax residence of the holder of the PRC subsidiary. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact.
Dividends we receive from our operating subsidiaries located in the PRC would be subject to PRC withholding tax.
The EIT Law provides that a maximum income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises,” to the extent such dividends are derived from sources within the PRC, and thePRC. The State Council has reduced such rate to 10%, in the absence of any applicable tax treaties that may reduce such rate, through the implementation regulations.
We are a Cayman Islands holding company and substantially all of our income may be derived from dividends we receive from our operating subsidiaries located in the PRC. If we are required under the EIT Law to pay income tax for any dividends we receive from our subsidiaries, the amount of dividends, if any, we may pay to our shareholders and ADS holders may be materially and adversely affected.
According to the PRC-HK DTA, Notice 112, Notice 601 and Guoshuihan [2009] No. 81, dividends paid to enterprises incorporated in Hong Kong are subject to a withholding tax of 5% provided that a Hong Kong resident enterprise owns over 25% of the PRC enterprise continuously in the last 12 months before distributing the dividend and can be considered as a “beneficial owner” and entitled to treaty benefits under the PRC-HK DTA. Thus, as
Cyber Medical Networks Limited (“Cyber Medical”) is a Hong Kong company and owns 100% of CMS Hospital Management, undercompany. Under the aforementioned arrangement, dividends paid to us throughby Cyber Medical by CMS Hospital Management may be subject to the 5% income tax if we and Cyber Medical are considered as “non-resident enterprises” under the EIT Law and Cyber Medical is considered as a “beneficial owner” and entitled to treaty benefits under the PRC-HK DTA.
If Cyber Medical is not regarded as the beneficial owner of any such dividends, it will not be entitled to the treaty benefits under the PRC-HK DTA. As a result, such dividends would be subject to normal withholding income tax of 10% as provided by the PRC domestic law rather than the favorable rate of 5% applicable under the PRC-HK DTA.
The British Virgin Islands, where Our Medical Services, Ltd. (“OMS”), the direct holding company of or Aohua Technology, is incorporated, does not have a tax treaty with the PRC. Thus, if OMS is considered a “non-resident enterprise” under the EIT law, the 10% withholding tax would be imposed on our dividend income received from Aohua Technology.
We may be classified as a “resident enterprise” for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders.
The EIT Law provides that enterprises established outside of China whose “effective management organizations” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income. In addition, a circular issued by the State Administration of Taxation on April 22, 2009 regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and 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 regulations to the enterprise income tax, aan “effective management organizations”organization” 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 properties of an enterprise. In addition, the circular mentioned above sets out criteria for determining whether “effective management organizations” are located in China for overseas incorporated, domestically controlled enterprises.
However, as this circular only applies to enterprises established outside of China that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “effective management organizations” for overseas incorporated enterprises that have no actual controller like us and some of our subsidiaries. Therefore, although substantially all of our management is currently located in the PRC, it remains unclear whether the PRC tax authorities would require our overseas registered entities to be treated as PRC tax resident enterprises.
We do not currently consider our company to be a PRC tax resident enterprise. However, if the PRC tax authorities disagree with our assessment and determine that we are a “resident enterprise,” we may be subject to enterprise income tax at a rate of 25% on our worldwide income and dividends paid by us to our non-PRC shareholders as well as capital gains recognized by them with respect to the sale of our shares, except for the income from equity investment income such as dividend and bonus between “resident enterprise,” and other resident enterprises of China, which shall be identified as tax-exempted income, may be subject to a PRC withholding tax. This will have an impact on our effective tax rate, a material adverse effect onmaterially adversely affect our net income and results of operations, and may require us to withhold tax on our non-PRC shareholders.
Dividends payable by us to our foreign investors and gains on the sale of our ADSs or ordinary shares may become subject to taxes under PRC tax laws.
Under the EIT Law and implementation regulations issued by the State Council, a 10% PRC income tax is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC or which have such establishment or place of business but have income not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or shares by such investors is also subject to a 10% PRC income tax if such gain is regarded as income derived from sources within the PRC.
It is unclear whether dividends paid on our ordinary shares or ADSs, or any gain realized from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and would as a result be subject to PRC tax. If we are considered a PRC “resident enterprise,” then any dividends paid to our overseas shareholders or ADS holders that are “nonresident enterprises” may be regarded as being derived from PRC sources and, as a result, would be subject to PRC withholding tax at a rate of 10%.
In addition, if we are considered a PRC “resident enterprise,” non-resident enterprise shareholders of our ordinary shares or ADSs may be eligible for the benefits of income tax treaties entered into between China and other countries. If we are required under the EIT Law to withhold PRC income tax on dividends payable to our non-PRC investors that are “non-resident enterprises,” or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, the value of your investment in our ordinary shares or ADSs may be materially and adversely affected.
If we are found to have failed to comply with applicable laws, we may incur additional expenditures or be subject to significant fines and penalties.
Our operations are subject to PRC laws and regulations applicable to us. However, the scope of many PRC laws and regulations are uncertain, and their implementation could differ significantly in different localities. In certain instances, local implementation rules and their implementation are not necessarily and fully consistent with the regulations at the national level. Although we strive to comply with all applicable PRC laws and regulations, we cannot assure you that the relevant PRC government authorities will notmay determine that we have not been in compliancecomplied with certain laws or regulations.
Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board and, as such, investors may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”), is required by the laws of the United States to undergo regular inspections by PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by PCAOB.
In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRCChina Securities Regulatory Commission (the “CSRC”) and the Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC or the Ministry of Finance in the United States and the PRC, respectively.PRC. PCAOB continues to beremains in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
Inspections of other firms that PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (“EQUITABLE”) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the New York Stock Exchange of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs and ordinary shares could be adversely affected. It is unclear if this proposed legislation will be enacted. Furthermore, there has been recent deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such policies were to materialize, the resulting legislation, if it were to apply to us, would likely have a material adverse impact on our business and the price of our ADSs and ordinary shares.
We face risks related to natural disasters and health epidemics in China, which could have a material adverse effect onmaterially adversely affect our business and results of operations.
Our business could be materially and adversely affected by severe weather conditions and natural disasters or the outbreak of health epidemics in China. As our network of radiotherapy and diagnostic imaging centers are located in hospitals across China, our operations may be particularly vulnerable to any health epidemic. In the last decade, the PRC has suffered health epidemics related to the outbreak of avian influenza, severe acute respiratory syndrome, the influenza A (H1N1) and H7N9. In December 2019, a strain of novel coronavirus, COVID-19, causing respiratory illness emerged in the city of Wuhan in the Hubei province of China. The PRC government has taken certain emergency measures to combat the spread of the virus, including implementation of travel bans and closure of factories and businesses. Since that time, other cities in China and other countries throughout the world have been affected by the spread of the virus. The outbreak has negatively impacted our network centers and self-owned hospital operations in China and resulted in less patient treatment from late January to early March due to travel restrictions and quarantines. Our total revenue declined for January and March of 2020 as compared to the same period in the prior year. As the COVID-19 outbreak has further spread outside the PRC and it is uncertain as to whether the COVID-19 outbreak will continue to be contained in the PRC, our operation result and financial position of 2020 might be adversely impacted to a certain extent, which is highly unpredictable at this time. We continue to monitor the spread of COVID-19 in China, Singapore and globally and have put in place and will continue to put in place measures as appropriate and necessary for our business. Any prolonged deviations from normal daily operations could negatively impact our business. While the full impact of this outbreak is unknown at this time, we are closely monitoring the rapid developments in China and Singapore that have become exposed to the virus and continually assessing the potential impact on our business.
Any future natural disasters or health epidemics in the PRC could cause severe disruption toseverely disrupt our daily operations, and may even require a temporary closure of our centers. Such closures may disrupt our business operations and adversely affect our results of operations. Our operationoperations could also be disrupted if our suppliers, customers or business partners were affected by such natural disasters or health epidemics.
Proceedings instituted recently by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.
In December 2012, the SEC brought administrative proceedings against five accounting firms in China, including our independent registered public accounting firm, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of these firms from practicing before the SEC for a period of six months. The decision is neither final nor legally effective unless and until reviewed and approved by the SEC.
On February 12, 2014, four of these PRC-based accounting firms appealed to the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.
If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our consolidated financial statements, our consolidated financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to our delisting from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
Risks Related to Our Ordinary Shares and ADSs
The market price for our ADSs may be volatile.
The market price for our ADSs has been and may continue to be highly volatile and subject to wide fluctuations in response to factors including the following:
| · | announcements of technological or competitive developments; |
| · | regulatory developments in China affecting us or our competitors; |
| · | announcements of studies and reports relating to the effectiveness or safety of the services provided in our network of centers or those of our competitors; |
| · | actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results; |
| · | changes in financial estimates by securities research analysts; |
| · | changes in the economic performance or market valuations of other medical services companies; |
| · | addition or departure of our senior management and other key personnel; |
| · | release or |
| · | sales or perceived sales of additional ordinary shares or ADSs; and |
| · | general economic or political conditions in China or elsewhere in the world. |
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. For example, the securities of some China-based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. prices.
The trading performances of these Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have engaged in any inappropriate activities.
In particular, the global financial crisis and the ensuing economic recessions in many countries have contributed and may continue to contribute to extreme volatility in the global stock markets, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011. These broad market and industry fluctuations may adversely affect the market price of our ADSs.
In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted securities class action litigation against that company. If we were involved in a class action suit or other securities litigation, it would divert the attention of our senior management, require us to incur significant expense and, whether or not adversely determined, could have a material adverse effect onmaterially adversely affect our business, financial condition, results of operations and prospects.
Substantial future sales or perceived sales of our ADSs in the public market could cause the price of our ADSs to decline.
Sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. In addition, certain of our shareholders or their transferees and assignees have the right to cause us to register the sale of their shares under the Securities Act upon the occurrence of certain circumstances.
Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.
Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.
Holders of ADSs do not have the same rights as our shareholders and may only exercise voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, if the vote is by show of hands, the depositary will vote the deposited securities in accordance with the voting instructions received from a majority of holders of ADSs that provided timely voting instructions. If the vote is by poll, the depositary will vote the deposited securities in accordance with the voting instructions it timely receives from ADS holders. In the event of poll voting, deposited securities for which no instructions are received will not be voted.
Under our fourth amended and restated articles of association, the minimum notice period required to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner.
We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ordinary shares are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting.
Holders of our Class B ordinary shares will control the outcome of shareholder actions in our company.
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share. We plan to exchangeIn 2018, the Class A ordinary shares held by Morgancreek Investment Holding Limited (“Morgancreek”), which is beneficially owned by Dr. Jianyu Yang and Dr. Zheng Cheng, with were converted into Class B ordinary shares at one-to-one ratio and Morgancreek completed its restructuring. Immediately after whichthe exchange and Morgancreek’s restructuring, the spouse of Dr. Jianyu Yang, our chairman and chief executive officer, indirectly held 70% interest in Morgancreek, will hold 59,770,876Dr. Jianyu Yang became Morgancreek’s sole director and Morgancreek held 38,287,948 of our Class B ordinary shares or 44.7%and 4,660,976 of our ADSs. Dr. Jianyu Yang has the power to direct Morgancreek as to the voting and disposition of the combined total outstandingClass B ordinary shares (representing 93.7%and the ADSs held by Morgancreek. As of the date of this annual report, Dr. Jianyu Yang beneficially held 40.5% in our company, representing 73.2% of the total voting rights)rights in our company. Their shareholding, in particular the
The greater voting rights of the Class B ordinary shares gives Class B ordinary shareholders the power to control any actions that require shareholder approval under Cayman Islands law, our amended and restated memorandum and articles of association and the NYSE requirements, includingrequirements. These actions include the election and removal of any member of our board of directors,directors; mergers, consolidations and other business combinations,combinations; changes to our amended and restated memorandum and articles of association,association; the number of shares available for issuance under share incentive plansplans; and the issuance of significant amounts of our ordinary shares in private placements.
Due to the disparate voting rights attached to the two classes of our ordinary shares, holders of our Class B ordinary shares could have sufficient voting rights to determine the outcome of all matters requiring shareholder approval even if it should, at some point in the future, holdholds considerably less than a majority of the combined total of our outstanding Class A and Class B ordinary shares.
As a result of their ownership of Class B ordinary shares, the voting power of holdersHolders of our Class B ordinary shares may also cause transactions to occur that might not be beneficial to you as a holder of ADSs and may prevent transactions that would be beneficial to you. For example, their voting power may prevent a transaction involving a change of control of us, including transactions in which you as a holder of our ADSs might otherwise receive a premium for your securities over the then-current market price.
Similarly, theyholders of our Class B ordinary shares may approve a merger or consolidation of our company that may result in you receiving a stake (either in the form of shares, debt obligations or other securities) in the surviving or new consolidated company, which may not operate our current business model and dissenter rights may not be available to you in such an event.
Due to the disparate voting rights attached to these two classes, our Class B ordinary shareholders will have significant voting rights over matters requiring shareholder approval, including the election and removal of directors and certain corporate transactions, such as mergers, consolidations and other business combinations. This concentrated control could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
You may be subject to limitations on transfers of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems is expedient to do so in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.
We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make any such rights available to you in the United States unless we register such rights and the securities to which such rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary bank will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempted from registration under the Securities Act.
We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, weWe may also not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
In addition, theThe depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs.
For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive such distribution.
There can be no assurance that the going private transaction will be successfully consummated. Potential uncertainty involving the going private transaction may adversely affect our business and the market price of our ADSs.
Our board of directors received a non-binding proposal letter, dated July 11, 2016, from Dr. Jianyu Yang, our chairman and chief executive officer, Morgancreek, an investment vehicle controlled by Dr. Yang, and Blue Ocean Management Limited to acquire all of our outstanding Class A ordinary shares and ADSs, in both cases, that are not beneficially owned by them and their affiliates, at a price of US$1.73 per Class A ordinary share or US$5.19 per ADS, as the case may be, in cash, in a “going private” transaction, subject to certain conditions. Consistent with its fiduciary duties, the board of directors, in consultation with its legal and financial advisors, will carefully review the proposal to determine the course of action that it believes is in the best interests of our shareholders. The going private transaction, whether or not consummated, presents a risk of diverting management focus, employee attention and resources from other strategic opportunities and from operational matters. Potential uncertainty involving the going private transaction may adversely affect our business and the market price of our common shares.
| ITEM 4. | INFORMATION ON THE COMPANY |
| A. | History and Development of the Company |
Concord Medical Services Holdings Limited (“Concord Medical”) was incorporated in the Cayman Islands on November 27, 2007 as a limited liability company. Concord Medical became our ultimate holding company on March 7, 2008, when the shareholders of Ascendium Group Limited (“Ascendium”), a holding company incorporated in the British Virgin Islands on September 10, 2007, exchanged all of their shares of Ascendium for shares of Concord Medical. Prior to that, on October 30, 2007, Ascendium had acquired 100% of the equity interestinterests in Our Medical Services, Ltd. (“OMS”), resulting in a change in control. We refer to this transaction as the OMS reorganization in this annual report. Prior to the OMS reorganization, OMS, together with Shenzhen Aohua Medical Service Co., Ltd. (“Aohua Medical”), in which OMS effectively held all of the equity interestinterests at the time, operated all of our business.
Aohua Medical was incorporated by OMS on July 23, 1997 and1997. OMS contributed RMB4.8 million to Aohua Medical, representing 90% of the equity interestinterests in Aohua Medical. The remaining 10% equity interest in Aohua Medical was held by two nominees who acted as the custodians of such equity interest. On June 10, 2009, this 10% equity interest was transferred to our subsidiary Shenzhen Aohua Medical Leasing and Services Co., Ltd. (“Aohua Leasing”). The two nominees have not maintained their required capital contributions at any time subsequent to the incorporation of Aohua Medical. Due to this capital deficiency as well as other legal conditions, the two nominees had no legal rights to participate either retrospectively or prospectively at any time in any profits or losses of Aohua Medical or to share in any residual assets or any proceeds in the event that Aohua Medical encountered a liquidation event. For these reasons, we did not account for this 10% equity interest as a minority interest in our consolidated results of operations or financial position. In December 2011, we effectuated a merger through which Aohua Medical was merged into Aohua Leasing. Aohua Leasing acquired all of the assets and assumed all of the liabilities of Aohua Medical, which was dissolved upon the merger. Aohua Leasing subsequently changed its name to Aohua Technology.
On July 31, 2008, our subsidiary Ascendium acquired 100% of the equity interestinterests in China Medstar Pte. Ltd. (“China Medstar”), together with its wholly owned PRC subsidiary, Shanghai Medstar, for approximately £17.1 million. China Medstar, through its then subsidiary Shanghai Medstar, engaged in the provision ofprovided medical equipment leasing and management services to hospitals in the PRC. On March 1,In 2009, 100% of the equity interestinterests in Shanghai Medstar waswere transferred from China Medstar to Ascendium. On August 17, 2009, the registration for such transfer was completed.
On October 28, 2008, we acquired 100% of the equity interestinterests in Yundu through our subsidiaries Aohua Leasing and Meizhong Jiahe (formerly known as CMS Hospital Management Co., Ltd. (“CMS Hospital Management”)) with a consideration of approximately RMB35.0 million.
In April 2010, we acquired four radiotherapy and diagnostic imaging centers in Hebei Province with a consideration of RMB60.0 million, including RMB42.0 million in cash and RMB18.0 million in contingent consideration, by acquiring 100% of the equity interestinterests in Tianjin Concord Medical (formerly known as Tianjin Kangmeng Radiology Equipment Management Co., Ltd.).
In July 2010, we acquired 52% of the equity interestinterests in Chang’an CMS International Cancer Center (CCICC) and Xi’an Wanjiehuaxiang Medical Technology Development Co., Ltd. (“WHT”) with a consideration of RMB103.2 million from Chang’an Hospital. In June 2012, through Cyber Medical and Shanghai Medstar, we acquired 52% of the equity interests in Chang’an Hospital with a total consideration of approximately RMB248.8 million in cash. In December 2014, we sold our 52% equity interest in Chang’an Hospital and WHT for total cash consideration of approximately RMB397.9 million in order to focus on building a nationwide network of diagnosis and treatment centers and specialized cancer hospitals.
In May, June and September 2011, we incorporated four holding companies, namely, (i) US Proton Therapy Holdings Limited (BVI) in British Virgin Islands, (ii) US Proton Therapy Holdings Limited (Delaware) in Delaware, USA,U.S., (iii) Guangzhou Concord Cancer Hospital Co., Ltd.Center in PRC, and (iv) Medstar Overseas Limited in British Virgin Islands for potential future acquisitions and businesses. None of these holding companies had any substantive assets or business as of the date of this annual report.
In December 2011, we effectuated a merger through which Aohua Medical was merged into Aohua Leasing. Aohua Leasing acquired all of the assets and assumed all of the liabilities of Aohua Medical, which was dissolved upon the merger. Aohua Leasing subsequently changed its name to Shenzhen Aohua Medical Technology Development Co., Ltd.
In June 2012, we acquired through Cyber Medical and Shanghai Medstar 52% of the equity interest in Chang’an Hospital, with a total consideration of approximately RMB248.8 million in cash. The results of operations of Chang’an Hospital were consolidated into our results of operation commencing in the third quarter of 2012.
In December 2012, we acquired 19.98% of equity interestinterests in the MD Anderson Proton Therapy Center, a leading proton treatment center in the world, with a total consideration of approximately US$32.3 million. In August 2015, we acquired an additional 7.04% equity interest of 7.04% in the MD Anderson Proton Therapy Center from an existing owner of the general partner, with a total consideration of approximately US$4.6 million. According to the partnership agreement, we have significant influence over the MD Anderson Proton Therapy Center. In November 2018, MD Anderson Proton Therapy Center reached an agreement with The University of Texas MD Anderson Cancer Center (“UTMDACC”) to sell all its assets and liabilities to UTMDACC, as well as terminating management service agreement between MD Anderson Proton Therapy Center and PTC-Houston Management, LP, at a consideration of RMB212.9 million. In December 2018, we received all the shared consideration from PTC-Houston Management, LP. After the transaction, we still retained the partnership shares of 59.51% in PTC-Houston Management, LP., the general partner of the center.
In October 2014, we established a wholly-owned free-standing radiotherapy cancer center, Datong Meizhong Jiahe Cancer Center in Datong City, Shanxi Province, to provide advanced, best-practice diagnostic and radiotherapy services with 100 beds.
In December 2014, we sold the 52% equity interest in Chang’an Hospital and WHT for a total cash consideration of approximately RMB397.9 million (US$64.1 million), in order to fully concentrate on building a nationwide network of diagnosis and treatment centers and specialized cancer hospitals.
In January 2015, our shareholders approved the creation of a dual class share structure.
In April 2015, we acquired 100% of the equity interestinterests in Fortis Healthcare Singapore Pte. LimitedSurgical Hospital (“Fortis Surgical Hospital”) with a consideration of SGD55.0 million (RMB253.5 million) in cash from Fortis Healthcare International, Pte. Limited (“Fortis Healthcare International”), a subsidiary of Fortis Healthcare Ltd. After the transaction, the hospital was renamed Concord Healthcare Singapore Pte. Ltd. In October 2015, we changed theits name of Fortis Surgical Hospital to Concord Cancer Hospital, which provides oncology as its main service, including medical oncology and surgical oncology, in Singapore. In June 2017, we changed the name to Cancer International Hospital.
On January 25, 2016, our indirectly wholly-owned subsidiary, Meizhong Jiahe completed its listing on the National Equities Exchange and Quotations, (the “NEEQ”(“NEEQ”), which is also known as the New Third Board in China, for a private placement financing. Meizhong Jiahe will focus on providing management services to our existing network centers and specialty cancer hospital projects in the future. In September and December 2016, Meizhong Jiahe has completed two rounds of the private offeringofferings of additional shares and received proceeds of approximately RMB141.7 million, (US$20.4 million).after which we held a 85.34% equity interest in Meizhong Jiahe. In February 2018, Meizhong Jiahe delisted from NEEQ.
In January 2016, we acquired 100% equity interest in Beijing Century Friendship from Chang’an Information Industry (Group) Co., Ltd. and an additional100% of the equity interests in Beijing Century Friendship, which held a 55% equity interest in Beijing Proton Medical Center, with a total consideration of RMB100.6 million, and ultimately holdmillion. As a result, we indirectly held an 80% equity interest in Beijing Proton Medical Center through Beijing Century Friendship and King Cheers. See the paragraphs below regarding details of the subsequent restructurings and the changes in our effective equity interests in Beijing Century Friendship and Beijing Proton Medical Center. Beijing Century Friendship has engaged in the establishment and construction of Beijing Proton Medical Center.
On February 22, 2016, the board of Meizhong Jiahe approved a restructuring plan (the “Reorganization”), pursuant to which Meizhong Jiahe acquired 100% of the equity interestinterests in Aohua Technology with a cash consideration of approximately RMB322.7 million in cash and 100% of the equity interestinterests in Beijing Century Friendship with a cash consideration of approximately RMB100.6 million.million in cash. After completion of the Reorganization in September 2016, Meizhong Jiahe holds the network business which was formerly under Aohua Technology’s management, and our cancer radiotherapy hospital business in China.
In February 2017,November 2016, we entered into a framework strategic cooperation agreement, as amended, with Zhongrong International Trust Co., Ltd.Guofu Investment Management Company Limited (“ZR Trust”Guofu”) to establish an offshore fund, namely Zhongrong International Growth Fund SPC - ZR Concord Healthcare Investment Fund SP (“SP”) for the purpose of acquiring our several hospital businesses, including Concord International Hospital, Guangzhou Concord Cancer Center and PTC-Houston Management, LP (collectively, the “CCM Hospital Business”). Pursuant to the framework agreement, among others, ZR Trust will participateGuofu shall provide management and consultation services on the funds, and we shall continue to manage the CCM Hospital Business. ZR Guofu subscribed Class A shares of SP with a consideration of RMB521.4 million, while we subscribed Class B shares of the SP with the consideration of creditor’s rights of RMB166.3 million due from CCM Hospital Business and cash of RMB7.5 million. In 2016, ZR Guofu and we injected RMB521.4 million and RMB7.5 million, respectively, to the SP, which was then provided to the CCM Hospital Business as loans. After the restructuring mentioned below, only Cancer International Hospital was retained in the third round private offeringCCM Hospital Business.
In 2016, ZR Guofu and we established an onshore fund, Guofu Huimei. The registered capital of Meizhong JiaheGuofu Huimei is RMB1,009.0 million. In 2016, ZR Guofu and we subscribed the registered capital of RMB746.0 million and RMB263.0 million, respectively, for a 73.93% equity interest and a 26.07% equity interest, respectively, in Guofu Huimei. The capital injection was completed in April 2017. In 2018, ZR Guofu and Guofu Huimei reached an agreement, pursuant to which ZR Guofu withdrew its investments in Guofu Huimei. As a result, ZR Guofu exited the onshore fund, Guofu Huimei, and our equity interests in Guofu Huimei increased to 100%.
In April 2017, ZR Guofu and subscribe no less than 15%we entered into a supplemental contract to the framework agreement, pursuant to which, Guofu Huimei will be used as the platform to invest and provide loans to some domestic entities engaging in hospital business. Among others, during 2017, Guofu Huimei acquired a 78.31% equity interest in Meizhong Jiahe. Furthermore, ZR Trust and we formed Zhongrong Taihe Healthcare Fund, an onshore fund, withBeijing Century Friendship which holds a total investment amount of RMB1,003.0 million (US$144.5 million), in which our55% equity interest is 25.6%. The fund granted a loan of RMB300.0 million to Guangzhou Concord Cancer Hospital in February 2017 and will invest in several newly established hospitals in China, including 43.4% equity interest of Beijing Proton Medical Center.Center with a consideration of RMB388.5 million and a 54.8% equity interest in Shanghai Meizhong Jiahe Cancer Center with a consideration of RMB182.1 million through capital injections. As a result of the foregoing, our effective equity interest in Beijing Century Friendship decreased from 100% to 42.1%, our total effective equity interest in Beijing Proton Medical Center decreased to 48.16% (through Beijing Century Friendship and King Cheers) from 80% and our total effective equity interest in Shanghai Meizhong Jiahe Cancer Center was 49.48% (after more acquisitions by our other subsidiaries in 2017). In June 2018, Meizhong Jiahe entered into agreements with Guofu Huimei to purchase its 78.31% equity interest in Beijing Century Friendship, which holds a 55% equity interest in Beijing Proton Medical Center, and a 54.8% equity interest in Shanghai Meizhong Jiahe Cancer Center with a consideration of RMB388.5 million and RMB182.1 million, respectively. Meanwhile, ZR Guofu and Guofu Huimei reached an agreement, pursuant to which ZR Guofu withdrew its original investments in Guofu Huimei. Therefore, we held a 100% equity interest in Beijing Century Friendship, a 80% equity interest in Beijing Proton Medical Center and a 90% equity interest in Shanghai Meizhong Jiahe Cancer Center through our wholly-owned or majority-owned subsidiaries upon execution and closing of the agreement. Our effective equity interest in Beijing Century Friendship is 60%, our total effective equity interest in Beijing Proton Medical Center is 58% (through Beijing Century Friendship and King Cheers) and our effective equity interest in Shanghai Meizhong Jiahe Cancer Center is 55.42%.
Pursuant to the supplemental contract, the 75% equity interest in SP held by the ZR Guofu is contractually required to be repurchased by us at the end of four years from the establishment of SP in November 2016 at a consideration equivalent to the investment cost of RMB521.4 million. ZR Guofu is also entitled to an annual premium at 15% for its capital contribution of RMB521.4 million in SP in the form of interest expense and consultation expense. In addition, our share in Beijing Century Friendship, certain construction in progress and certain land use rights are pledged to secure our obligation to repurchase capital contribution from ZR Guofu.
In November 2017, ZR Guofu transferred its rights to the mandatorily redeemable non-controlling interest in SP to Tianjin Jiatai.
On December 20, 2017, we repaid a loan with principal of RMB97.1 million to ZR Guofu, and repurchased a 100% equity interest in CMS Holdings with a consideration of US$1.0. Upon completion, we pledged the shares in CMS Holdings to ZR Guofu.
In 2018, ZR Guofu and Guofu Huimei reached an agreement, pursuant to which ZR Guofu withdrew its investments in Guofu Huimei. In September 2018, ZR Guofu completed the withdrawal of its investments in Guofu Huimei and exited Guofu Huimei, and we became the sole shareholder of Guofu Huimei. We obtained control of Guofu Huimei in October 2018. We hold a 100% equity interest in Guofu Huimei. In addition, after Guofu Huimei became our wholly-owned subsidiary, SH Rongchi and Tianjin Jiatai became our equity investees. During 2019, Tianjin Jiatai made capital injection in a total of RMB34.5 million (US$5.1 million) to Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd., and increased the equity interests in it from 56.77% to 78.34%. In July 2019, we entered into an agreement with Tianjin Jiatai, to purchase all of its 90% equity interests in Wuxi Meizhong Jiahe Cancer Center Co., Ltd. at a consideration of RMB27.0 million (US$3.9 million). After the acquisition, Wuxi Meizhong Jiahe Cancer Center Co., Ltd. became our wholly owned subsidiary. In August 2019, we further injected capital of RMB82.1 million (US$11.8 million) to Wuxi Meizhong Jiahe Cancer Center Co., Ltd. In September 2019, we entered into an agreement with ZR Guofu, pursuant to which ZR Guofu sold its 77.18% equity interests in Tianjin Jiatai to us at a cash consideration of RMB421.7 million (US$60.6 million). We paid the consideration in August and September 2019 and completed the related registration on November 18, 2019. In November 2019, ZR Guofu entered into another agreement with us and Tianjin Jiatai to withdraw from Tianjin Jiatai and its subsidiaries. As a result of ZR Guofu’s withdrawal, we became the sole shareholder of Tianjin Jiatai and its subsidiaries, including Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd., Wuxi Meizhong Jiahe Cancer Center Co., Ltd., Heze Meizhong Jiahe Cancer Center Co., Ltd., SH Rongchi and Oriental Light Group Limited.
We expect our acquisitions support our strategy to facilitate our long-term goal to develop specialized hospital chains in cancer and oncology treatment services including diagnostic imaging, radiation oncology treatment and medical oncology treatment.
In October 2017, an indirect subsidiary of Fosun International Limited, a company organized under the laws of Hong Kong principally engaged in creating customer-to-maker ecosystems in health, happiness and wealth, entered into a share purchase agreement with the affiliates of Carlyle Group (“Carlyle entities”) to purchase all of our ordinary shares beneficially owned by the Carlyle entities, which accounted for approximately 9.9% of our then total issued and outstanding shares. The transaction closed in November 2017.
In March 2018 and July 2018, we, the investment institutions led by CICC Capital Management Company Limited (“CICC Capital”), a wholly-owned subsidiary of China International Capital Corporation Limited (“CICC”), and other investors entered into agreements pursuant to which the parties jointly made a strategic investment in our subsidiary, Meizhong Jiahe. The total investment was RMB1.5 billion. After completion of the investment, those investment institutions led by CICC Capital and the other minority investors held a total of 40% of the equity interests in Meizhong Jiahe and our equity interests in Meizhong Jiahe was diluted to 60%. As of December 31, 2019, our effective equity interests in Meizhong Jiahe was 60%. In February 2020, we and CITIC Industrial Investment Group Limited (“CITIC”) entered into agreements pursuant to which CITIC will make an investment of approximately RMB700 million in Meizhong Jiahe, subject to the satisfaction of closing conditions. Upon completion in March 2020, our ownership in Meizhong Jiahe was diluted from 60% to 50.01%.
Shanghai Concord Medical Imaging Diagnostic Center, our first independent imaging diagnostic center, obtained an independent imaging diagnostic license in October 17, 2017. Through Shanghai Concord Medical Imaging Diagnostic Center, we expect to introduce world-class diagnostic technology and management services, covering the Yangtze River Delta Region through a remote sharing consultation platform, and provide a full range of imaging diagnosis and high-quality services for domestic and foreign commercial insurance patients.
See “—C. Organizational Structure” for our effective equity interests in our subsidiaries as of December 31, 2019.
As of the date of this annual report, we conduct substantially all of our operations through Concord International Hospital in Singapore, Datong Meizhong Jiahe Cancer Center in PRC and Shanghai Meizhong Jiahe Cancer Center in PRC for our hospital business and the following subsidiaries for our network business in the PRC:
| · | Aohua Technology, our |
| · | Shanghai Medstar, our |
| · | Meizhong Jiahe, our |
| · | Yundu, our |
See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Acquisitions and Capital Expenditures” for more details of the capital expenditures.
Our principal executive offices are located at 18/F, Tower A, Global Trade Center, 36 North Third Ring Road East, Dongcheng District, Beijing, People’s Republic of China, 100013. Our telephone number at this address is (86 10) 5903-6688 and our fax number is (86 10) 5957-5252. Our registered office in the Cayman Islands is located at Scotia Centre, 4th Floor, P.O. Box 2804, George Town,31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands KY1-1112.Islands. Our agent for service of process in the United States is Corporation Service Company , located at 251 Little Falls Drive, Wilmington, DE USA 19808. Our website iswww.concordmedical.com. The information contained on our website is not a part of this annual report.
The SEC also maintains a website atwww.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. Our annual report and some of the other information submitted by us to the SEC may also be accessed through this web site.
Initial Public Offering
On December 11, 2009, our ADSs were listed on the New York Stock Exchange.NYSE.
ADS RepurchasesDual Class Share Structure
On August 10,In January 2015, we announcedour shareholders approved the implementationcreation of a dual class share repurchase programstructure. In October 2018, Bluestone Holdings Limited, a company indirectly wholly owned by Mr. Zheng Cheng, transferred its shares in Morgancreek to companies wholly owned by Mr. Hao Zhou and Ms. Bi Zhang, the spouse of up to US$20.0 million worth of our outstanding ADSs for cash in the open market transactions or in privately negotiated transactions as long as the price per ADS is no more than US$7.99, depending on market conditions and other factors through June 2016. See “Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers.”
Going Private Proposal
Our board of directors received a non-binding proposal letter, dated July 11, 2016, from Dr. Jianyu Yang, our chairman and chief executive officer, Morgancreek, an investment vehicle controlled by Dr. Yang, and Blue Ocean Management Limited to acquirerespectively. On the same day, all of our outstandingthe Class A ordinary shares held by Morgancreek were converted into Class B ordinary shares. Morgancreek transferred 7,500,000 Class B ordinary shares to Bluestone. Upon completion of these transactions, Mr. Zhou and ADSs, in both cases, that are not beneficially owned by themMs. Zhang indirectly hold 30% and their affiliates, at a price70% shares of US$1.73 perMorgancreek, respectively, and Dr. Cheng holds ordinary shares of our company through Bluestone. As of the date of this annual report, 130,241,995 ordinary shares were outstanding, including 84,454,047 Class A ordinary share or US$5.19 per ADS, as the case may be, in cash, in a “going private” transaction, subjectand 45,787,948 Class B ordinary shares. Class A ordinary shares are each entitled to certain conditions. Consistent with its fiduciary duties, the board of directors, in consultation with its legal and financial advisors, will carefully review the proposalone vote, whereas Class B ordinary shares are each entitled to determine the course of action that it believes is in the best interests of our shareholders.ten votes.
| B. | Business Overview |
Overview
We operate an extensive network of radiotherapy and diagnostic imaging centers in China. As of December 31, 2016,2019, our network comprisedconsisted of 9531 cooperative centers based in 5721 hospitals, spanning 49over 21 cities across 1913 provinces and administrative regions in China. These hospitals are substantially comprisedconsist of 3A hospitals, the highest ranked hospitals by quality and size in China as determined in accordance with the standards of National Health and Family Planning CommissionNHC in China (formerly the Ministry of Health).
Since April 2015, we started to operatehave operated Concord CancerInternational Hospital in Singapore, thatwhich we acquired from Fortis Healthcare International, providing oncology as its main service, including medical oncology and surgical oncology, in Singapore. We plan to establish Concord CancerInternational Hospital as a platform for high-end medical treatment that will also include academic research targeting patients in Singapore as well as patients coming from China as part of our efforts to expand overseas business.overseas.
Cancer has become a serious global public health problem. According to the latest global cancer data issued on September 18, 2018 and WHO World Cancer Report 2014,2018, both issued by World Health Organization (“WHO”), the burden of cancer is a major cause ofrose to 18.1 million new cases and 9.6 million cancer death affecting populations in all countries2018 globally and regions. In China, both cancer incidence and mortality are demonstrating upward trends in the past decade. In 2012, 21.8% ofthere were 3.8 million new cancer cases and 26.9%2.3 million cancer-caused deaths in China. Moreover, according to the China Health Statistics Yearbook 2019, cancer is still one of deaths caused by cancer occurredthe leading causes of death (26.0% of total death) in China. According to Thethe latest Chinese Cancer Report issued by the Chinese National Central Cancer Registry (or NCCR,Institute in January 2019, the burden of cancer showed a governmental organization forcontinuous upward trend in China in recent 10 years, the incidence of cancer surveillance affiliated to the Bureau of Disease Control, National Health and Family Planning Commission in China), there were approximately 3.37 million new cancer cases in 2011 (the latest year with statistics available) or six new cases per minute. The total case number increased by 280,000, or 9%, compared with year 2010. In 2011, 2.11 million cancer-related deaths occurred in China, representing a year-on-year increase of 150,000 deaths, or 7.6%. It is expected thatabout 3.9% from 2005 to 2015 and the mortality increased by 2.5% annually from 2005 to 2015. The number of cancer cases and cancer-caused death will continueis expected to increase in the next decade. Major factors that contribute to the increase of cancer cases include:include demographic reasons, such as aging population, smoking and air pollution.
Radiotherapy is considered to be a mature treatment for many types of cancer now.cancer. For example, nasopharyngeal cancer (NPC)(“NPC”), also known as ‘Canton Cancer’, is the most prevalent cancer in Southern China, including Guangdong, Guangxi and Fujian Provinces, andas well as Hong Kong and Taiwan. Currently theThe most common treatment of NPC is radiotherapy or comprehensive therapy based on radiotherapy.
In the future, more advanced treatment methods, such as proton therapy, willare expected to be used for the treatment of NPC patients. Proton therapy can significantly reduce the radiation damage to the critical organs. Currently, weWe are working with leading domestic and international medical institutions to develop a clinical workflow of proton therapy for NPC.
We are also working with such institutions to reduce the cancer survival rate gap between China and U.S., by providing more advanced medical treatment to our patients. We believe that our leading network and experience and expertise uniquely position us to address the underserved market in China for radiotherapy and diagnostic imaging services.
MostWe established most of the cooperative centers in our network are established through long-term lease and management services arrangements entered into with our hospital partners. Under these arrangements, we receive a contracted percentage of each cooperative center’s revenue. Each cooperative center is located on the premises of our hospital partners and is typically equipped with a primary unit of advanced radiotherapy or diagnostic imaging equipment, such as a linear accelerator, head gamma knife system, body gamma knife system, positron emission tomography-computed tomographyPET-CT scanner (“PET-CT scanner”), or magnetic resonance imaging scanner (“MRI scanner”). scanner.
We provide clinical support services to doctors who work in the cooperative centers in our network, whichnetwork. These services include developing treatment protocols for doctors and organizing joint diagnosis between doctors in our network and clinical research. In addition, we help recruit and determine the compensation of doctors and other medical personnel in our network and are typically in charge of most of the non-clinical aspects of the centers’ daily operations, including marketing, training and administrative duties. Our hospital partners are responsible for the centers’ clinical activities, the medical decisions made by doctors, and the employment of the doctors in accordance with regulations.
We believe that our success is largely due to the high quality clinical care provided at our network of centers and our market-oriented management culture and practices. Many of the doctors who work in our network have extensive clinical experience in radiotherapy, some of whom are recognized as leading experts in radiation oncology in China. We enhance the quality of clinical care in our network through established training of, and on-going clinical education for, doctors in our network.
We believe that our market-oriented management culture and practices allow us to manage cooperative centers more efficiently and offer more consistent and better patient services than our competitors. We believe that our success has givenallowed us to develop a strong reputation within the medical community, which in turn gives us a competitive advantage in gaining patient referrals and establishing new cooperative centers.
To complement our organic growth, we have also selectively acquired businesses to expand our network of centers. In July 2008, we acquired China Medstar, a company then publicly listed on the Alternative Investment Market of the London Stock Exchange (the “AIM”)(AIM) for approximately £17.1 million. At the time of the acquisition, China Medstar jointly managed 23 centers with its hospital partners across 14 cities in China. In April 2010, we acquired four radiotherapy and diagnostic imaging centers in Hebei Province forwith a consideration of RMB60.0 million by acquiring 100% of the equity interestinterests in Tianjin Concord Medical (formerly known as Tianjin Kangmeng Radiology Equipment Management Co., Ltd.)
Since 2010, we have shifted our focus to developing our own proton centers, premium cancer hospitals and specialty cancer hospitals. We are currently establishing freestanding radiotherapy cancer centers in our network of centers in China which we will be wholly owned by usown and registeredregister as specialty cancer hospitals with required departments, including radiation, imaging, test laboratory, inpatient and nursing. In May 2016, Datong Meizhong Jiahe Cancer Center, the first cancer hospital under our Meizhong Jiahe brand, was opened preliminarily. We plan to establish further specialty cancer hospitalspreliminarily in Taizhou, Wuxi, HangzhouMay 2016 and Nanchangofficially opened for operations in the future.May 2017.
We also plan to establish and operate premium cancer hospitals and proton centers in China and out of Chinaoverseas to develop our hospital business as part of our growth strategy. Our premium cancer hospitals, which will provide premium cancer treatment services to our patients, currently include Concord CancerInternational Hospital in Singapore that we acquired in April 2015 from Fortis Healthcare International and two planned hospitals in China, namely, Shanghai Concord Cancer HospitalCenter and Guangzhou Concord Cancer Hospital, that are scheduled to commenceCenter. We commenced construction of Shanghai Concord Cancer Center in the first half yearSeptember 2017, with an estimated construction period of 2017. three years. We also commenced construction of Guangzhou Concord Cancer Center in November 2017, with an estimated construction period of three years.
We believe our planned proton center will offer the most advanced and cutting-edge treatment to cancer patients by providing services such as proton beam therapy, the most sophisticated radiotherapy currently available in the market. We are in the process of establishing the Beijing Proton Medical Center, which we expect to beand the first proton beam therapy treatment centerconstruction commenced in China equippedJune 2017, with an estimated construction period of three and a proton beam therapy system licensed for clinical use and is scheduled to commence construction in the second quarter of 2017.half years. In December 2012, we acquired 19.98% of indirect ownership of 19.98% of the equity interests in the MD Anderson Proton Therapy Center, and inCenter. In August 2015, we acquired an additional 7.04% equity interest of 7.04% in the MD Anderson Proton Therapy Center from an existing owner of the general partner to expand our expertise and knowledge base in preparation for the future operation of future proton centers in China. According to the partnership agreement, we have significant influence over the MD Anderson Proton Therapy Center. Although MD Anderson Proton Therapy Center sold its assets and liabilities in November 2018, we retained the partnership shares of 59.51% in PTC-Houston Management, LP., the general partner of the center.
Our business structure has evolved in recent years through the development of new specialty cancer hospital,hospitals, such as Datong Meizhong Jiahe Cancer Center, and premium hospitals, in view of the decreases in the number of patient cases due to the closure of some existing cooperative centers.hospitals. Our total net revenues were RMB606.9RMB331.0 million, RMB616.5RMB190.9 million and RMB455.0RMB198.4 million (US$65.528.5 million) for the yearyears ended December 31, 2014, 20152017, 2018 and 2016,2019, respectively. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Key Components of Results of Operations—Revenues” regarding our total net revenues by segments and our total net revenues by geographic regions for the three years ended December 31, 2017, 2018 and 2019. For additional information relating to our history and reorganization and our financial presentation, see “—A. History and Development of the Company,” “—C. Organizational Structure” and “Item 5. Operating and Financial Review and Prospects.”
Our Network of Centers
As of December 31, 2016,2019, we operated an extensive network of 9531 cooperative centers based in 5721 hospitals, spanning 49over 21 cities across 1913 provinces and administrative regions in China. These hospitals are substantially comprisedconsist of 3A hospitals, the highest ranked hospitals by quality and size in China as determined in accordance withbased on the standards of the Ministry of Health.NHC. Our network includes 5519 radiotherapy centers and 3812 diagnostic imaging centers and 3includes no centers that provide other treatment and diagnostic services, such as electroencephalography for the diagnosis of epilepsy, thermotherapy to increase the efficacy of and for pain relief after radiotherapy and chemotherapy, high intensity focused ultrasound therapy for the treatment of cancer, stereotactic radiofrequency ablation for the treatment of Parkinson’s Disease and refraction and tonometry for the diagnosis of ophthalmic conditions.
Each cooperative center is typically equipped with a primary unit of medical equipment, such as a linear accelerator, head gamma knife system, body gamma knife system, PET-CT scanner or MRI scanner. Each cooperative center is located on the premises of our hospital partners with the facilities of the centers provided by the hospitals. Each cooperative center is usually comprised oftypically includes a treatment area, a patient preparation and observation room, working areas for the center’s doctors and other personnel and a waiting and reception area.
Our Arrangements with Hospital Partners
Lease and Management Services Arrangements
As of December 31, 2016,2019, we had 9531 cooperative centers that were established under lease and management services arrangements. We typically establish such centers with hospitals by entering into a lease agreement and a management agreement.
Under these lease and management services arrangements, we are responsible for purchasing the medical equipment used in these cooperative centers. We lease this medical equipment to the hospitals for a fixed period of time and establish and manage the cooperative centers in conjunction with our hospital partners. These arrangements are typically long-term in nature, ranging from 5 to 20 years.
We receive from the hospital a contracted percentage of each center’s revenue net of specified operating expenses. SuchThe contracted percentage typically ranges from 50% to 90% and are typically adjusted based on a declining scale over the term of the arrangement. We also have cooperative centers that operate under revenue-sharing agreements, which stipulate the percentage of the revenue and the pre-operating expenses to be shared with our hospital partners.
The specified operating expenses of cooperative centers typically include variable expenses such as the salaries and benefits of the medical and other personnel at the cooperative center, the cost of medical consumables, marketing expenses, training expenses, utility expenses and routine equipment repair and maintenance expenses. Typically, these lease and management services arrangements may be terminated upon the mutual agreement of the parties if the cooperative centers experience an operating loss for a specified period of time or fail to achieve certain operating targets.
In addition, the arrangements typically can be terminated upon the default or failure by either party to perform its respective obligations under the arrangement. In the event of termination, most arrangements call for the parties to reach a mutual agreement as to the resolution ofresolve the remaining obligations of the parties or the division of assets that have been acquired for the cooperative centers. Under certain of these arrangements, our hospital partners are required tomust compensate us based on the average contracted percentage for an agreed upon period of time if we are not responsible for the early termination. Since the beginning of 2007, we have terminated the agreements of 43 cooperative centers in our network with our hospital partners primarily due to the unsatisfactory performances of the cooperative centers located in these hospitals.
Management Services
From time to time, we provide management services to radiotherapy and diagnostic imaging centers under service-only agreements. As of December 31, 2016,2019, we had such agreements for eight cooperative centers. Unlike the cooperative centers established under lease and management services arrangements, we do not purchase and lease to the hospitals the medical equipment used at the cooperative centers established under service-only agreements. Rather, we only manage such cooperative centers in exchange for a management fee typically consisting of a contracted percentage of the revenue net of specified operating expenses of the cooperative center.
In addition, as compared to our lease and management services arrangements, the terms of the service-only agreements are typically shorter. We enter into such service-only agreements on a strategic basis to expand the coverage of our network. We will continue from timeexpect to time enter into additional strategic service-only agreements with other hospitals in the future.
Technical Services
We also provide technical services to radiotherapy and diagnostic imaging centers under technical service agreements. As of December 31, 2016,2019, we had such agreements at 4five cooperative centers. Similar to management services arrangements, we do not invest in the medical equipment installed at the cooperative centers.
Instead, we provide technical support, equipment and software maintenance and tele-diagnosis services to these cooperative centers in exchange for a fixed fee. The terms are usually similar to those of our lease and management services contracts. As our telemedicine business continues to grow,grows, we expect to enter into more of the technical services agreements with other hospitals in the future.
Brand Royalty Fees
Starting from the year of 2016, we granted several newly set-up specialty cancer hospitals, on a fixed annual fee, the right to use the brand of Meizhong Jiahe. For the yearyears ended December 31, 2016,2017, 2018 and 2019, revenue from brand royalty fees amounted to RMB7.1RMB6.6 million, RMB5.2 million and RMB5.1 million (US$1.10.7 million).
Service Offerings in Our NetworkNetwork; Medical Equipment
Each of the cooperative centers in our network is typically equipped with a primary unit of medical equipment, such as a linear accelerator, head gamma knife system, body gamma knife system, PET-CT scanner or MRI scanner. Set forth below is a summary of the principal treatment and diagnostic imaging modalitiessystems provided at our cooperative centers.
Linear Accelerators External Beam Radiotherapy
As of December 31, 2016,2019, we owned 23seven linear accelerators (excluding those in the eight cooperative centers in our network under service-only agreements pursuant to which we only manage those cooperative centers in exchange for a management fee and we did not purchase and lease to the hospitals the medical equipment used at those cooperative centers). As of December 31, 2019, the cooperative centers under service-only agreements in our network owned two linear accelerators. Linear accelerators use microwave technology to deliver a high-energy x-ray beam directed at the tumor. Linear accelerators can be used to treat tumors in the brain or elsewhere in the body. A typical course of treatment given to a patient ranges from 20 to 40 daily sessions and with each session lasting for 10 to 20 minutes.
Since linear accelerators move during treatment, they are not as precise as gamma knife systems. However, linear accelerators are capable of treating larger tumors. Linear accelerators can also be integrated with specialized computer software and advanced imaging and detection equipment to provide more effective and advanced treatments.
Such advanced treatments include three-dimensional conformal radiation therapy, which uses imaging equipment to create detailed, three-dimensional representations of the tumor and surrounding organs. The radiation beam can then be shaped to match the patient’s tumor, thereby reducing the radiation damage to healthy tissues. In general, such advanced modalitiesmethods increase the medical service fees that can be charged as compared to the maximum medical service fees that can be charged for treatments.
Gamma Knife Radiosurgery
A gamma knife is used in radiosurgery for the treatment of tumors and other abnormal growths. A gamma knife uses multiple radiation sources, which differentiates it from traditional radiotherapy where only a single radiation source is used. These radioactive sources, which are typically cobalt-60, a radioactive isotope, emit gamma rays that are passed through a collimator unit to produce a highly-focused beam of radiation. The individual beams then converge to deliver an extremely concentrated dose of radiation to locations within the patient that are identified using imaging guidance systems, such as PET-CT or MRI scanners.
The intense radiation produced by a gamma knife at a precise target point destroys tumor cells, while minimizing damage to the surrounding healthy tissues. The treatment procedure is minimally or non-invasivenot invasive and may be used as a primary or supplementary treatment option for cancer patients. The treatment requires no general anesthesia and provides an alternative treatment option to patients who may not be good candidates for surgery.
In addition, the gamma knife procedure usually involves shorter patient hospitalization, is more cost effective than surgery and avoids many of the potential risks and complications that are associated with other treatment options. Our network of centers currently operates two types of gamma knife systems, head gamma knife systems and body gamma knife systems. As of December 31, 2016,2019, we owned 29five gamma knife systems, including 17two head gamma knife systems and 12three body gamma knife systems (excluding those in the eight cooperative centers under service-only agreements in our network). As of December 31, 2019, the cooperative centers under service-only agreements in our network owned three gamma knife systems, including two head gamma knife systems and one body gamma knife systems.
Head Gamma Knife Systems
Head gamma knife systems are primarily used for the treatment of brain tumors. The treatment is typically completed in one 10 to 30 minute session rather than in multiple daily sessions spanning several weeks during which time small doses of radiation are given at each session. Head gamma knife systems can also be used to treat other conditions, such as certain types of brain lesions, trigeminal neuralgia (facial pain) and arteriovenous malformations (abnormal connection between veins and arteries).
Body Gamma Knife Systems
Body gamma knife systems are used for the treatment of tumors located in the body but outside of the brain. Treatments using the body gamma knife are provided over a course of multiple sessions spanning several weeks. The radiation that converges from the individual beams is less concentrated than in head gamma knife systems due to the difficulty of fixing and restricting the movement of the body. This is a widely used technology in China that was developed domestically and approved by theThe PRC State Food and Drug Administration (the “SFDA”). However, the body gamma knife system has not been broadly introduced developed and approved this widely adopted outside of China. We believe this is because the Chinese manufacturers of body gamma knife system have determined that the time and cost of gaining approval for use of the body gamma knife system in countries other than China are likely commercially prohibitive. In addition, potential gamma knife system manufacturers outside of China may not have historically viewed clinical studies conducted by users of body gamma knife systems in China as sufficiently convincing for them to try to develop such systems outside of China. As a result, we believe that the international medical community has not yet had the opportunity to develop a large quantity of peer-reviewed literature that supports the safe and effective use of body gamma knife system and to adopt suchused technology outside of China.
Cyberknife
The CyberKnife Robotic Radiosurgery System is a non-invasive alternative to surgery for the treatment of both cancerous and noncancerous tumors anywhere in the body, including the prostate, lung, brain, spine, liver, pancreas and kidney. The treatment – which delivers beams of high dose radiation to tumors with extreme accuracy – offers new hope to patients worldwide. Though its name may conjure images of scalpels and surgery, the CyberKnife treatment involves no cutting. In fact, the CyberKnife System is the world’s first and only robotic radiosurgery system designed to treat tumors throughout the body non-invasively. It provides a pain-free, non-surgical option for patients who have inoperable or surgically complex tumors, or who may be looking for an alternative to surgery. As of December 31, 2016, we have 2 Cyber-knife centers in China. Our first CyberKnife® Robotic Radiosurgery System (the “CyberKnife System”) is located in Changhai Hospital, which has treated over 744 patients in 2016. Our second Cyber-knife center is in Jinan City of Shandong Province, which has treated over 313 patients in 2016.
Diagnostic Imaging
Our network of centers employs a wide range of diagnostic imaging equipment. Such equipment includes some of the most advanced diagnostic imaging technology available in China, including PET-CT scanners. A PET-CT scanner is a device that combines a positron emission tomography (“PET”)PET scanner and a computed tomography (“CT”)CT scanner in one unit. PET-CT scanners allow the functional imaging obtained by PET scanning, which depicts the spatial distribution of metabolic or biochemical activities in the body, to be more precisely aligned or correlated with the anatomic imaging obtained by a CT scanner.
Other diagnostic imaging services offered in our cooperative centers include MRI. MRI scanners use a powerful magnetic field, radio frequency pulses and computers to produce detailed pictures of organs, soft tissues, bone and virtually all other internal body structures. MRI technology, which does not involve radiation, is typically able to provide a much greater level of contrast between the different soft tissues of the body than CT, making it especially useful in neurological or oncological imaging. As of the date of this annual report,December 31, 2019, we owned 15nine MRI scanners and did not own any PET-CT scanner (excluding those in the eight cooperative centers under service-only agreements in our network) and the cooperative centers under service-only agreements in our network owned one PET-CT scanners and 20two MRI scanners.
Medical Equipment Procurement
The medical equipment used in our network of centers is highly complex and there are usually a limited number of manufacturers worldwide that produce such equipment. We typically purchase medical equipment used in our cooperative network directly from domestic manufacturers and through importers from overseas manufacturers.
In accordance with the relevant PRC laws and regulations, the procurement, installation and operation of Class A or Class B large medical equipment by hospitals in China are subject to procurement quotas or procurement planning and aplanning. A large medical equipment procurement license must also be obtained prior to the purchase of such medical equipment. For medical equipment classified as Class A large medical equipment, which includes gamma knife systems, proton beam therapy systems and PET-CT scanners, quotas are set by the Ministry of HealthNHC and the NDRC and large medical equipment procurement licenses are issued by the Ministry of Health.NHC. For medical equipment classified as Class B large medical equipment, which includes linear accelerators and MRI and CT scanners, procurement planning and approval is conducted by the relevant provincial healthcare administrative authorities conduct procurement planning and approvals with ratification by the Ministry of Health and theNHC. Provincial healthcare administrative authorities issue large medical equipment procurement licenses are issued by the relevant provincial healthcare administrative authorities.licenses. A large medical equipment procurement license is not required for medical equipment that is not classified as either Class A or Class B large medical equipment.
These rules concerning procurement of large medical equipment apply to all public and private medical institutions in China, whether non-profit or for-profit, except for military hospitals in China, which have a separate procurement system. See “Item 4. Information on the Company—B. Business Overview—Regulation of Our Industry—Regulations in China—Regulation of Medical Institutions—Large Medical Equipment Procurement License.”
Once non-profit hospitals have obtained large medical equipment procurement licenses, the purchase of medical equipment for such hospitals is conducted through a collective tender process. The tender process is centralized in accordance with the relevant PRC laws and regulations and is supervised by the NHFPCNHC for Class A large medical equipment. For Class B large medical equipment, the tender process is supervised by the relevant provincial heath administrative authorities.authorities supervise the tender process. Equipment purchases by military hospitals are also conducted through a centralized collective tender process supervised by the general logistics department of the PLA.
The government or military authority will appoint an agent to manage the tender process who must be certified by the government and be qualified to conduct the tender process. The agent publicizes information relevant to the tender process, such as the type of equipment requested by the hospital and the desired commercial terms.
The manufacturers will prepare the tender document according to the agent’s requirement and submit their bids to the agent on or before the specified date. The agent will then consultconsults with industry experts in evaluating each bid and the industry experts will make a determination on the winning manufacturer. When the tender process is complete, the results are publicly announced and an import permit is issued for the equipment of the winning manufacturer. We then begin negotiations with such manufacturer or its importer onwith respect to the purchase price and the purchasing terms for the equipment based on the general commercial terms submitted by such manufacturer in the tender process.
Other Treatment and Diagnostic Modalities
Our network of centers also includes cooperative centers that provide other treatments and diagnostic services through the use of other types of medical equipment. Such equipment currently includes CT, ECT, electroencephalography for the diagnosis of epilepsy, thermotherapy to increase the efficacy of and for pain relief after radiotherapy and chemotherapy, high intensity focused ultrasound therapy for the treatment of cancer, stereotactic radiofrequency ablation for the treatment of Parkinson’s Disease and refraction and tonometry for the diagnosis of ophthalmic conditions. In 2014, 2015 and 2016, revenues derived from cooperative centers that provide such other services were approximately 11.3%, 8.9% and 13.5%, respectively, of our total net revenues.
Financing Leases and Other Business Arrangements
We have entered into financing lease agreements in connection with sale and leaseback agreements with several hospitals to which we lease radiotherapy, diagnostic and other equipment. We will transfer the leased properties to the lessee by the end of the lease term pursuant to the financing lease agreement. The terms of the financing leases vary, usually between three to 10ten years. The net investment in financing lease is in the range of RMB11.4 million to RMB78.0 million, depending on the types of equipment subject to the leases.
We have, from time to time, purchased medical equipment from manufacturers or distributors for re-sale to hospitals. We also have contractual relationships with certain equipment manufacturers and acted as a distributor of such manufacturer’s equipment in selling medical equipment to hospitals. Although we may continue these activities on a limited basis in the future, we do not expect these activities to represent an important part of our business going forward.
Specialty Cancer Hospitals
In addition to our cooperative centers, we are currently in the process of establishing specialty cancer hospitals that will focus on providing radiotherapy services as well as diagnostic imaging services, chemotherapy and surgery. We intend for these specialty cancer hospitals to provide a complete and coordinated treatment program for cancer patients. We expect these hospitals to be centers of excellence in our network providing cancer treatments to patients using the latest radiotherapy technology in China in our network of centers.
Typically, in China, the various specialist doctors such as surgeons, radiation oncologists or medical oncologists who provide care to a given cancer patient do not collaborate. We believe that the quality of cancer treatment will be greatly improved at our specialty cancer hospitals, because we will employ and manage the various specialist doctors directly and thereby promote the appropriate coordination of their services for the benefit of cancer patients. We believe that these hospitals will play an important role in further strengthening our reputation as the leading provider of radiotherapy services in China and developing our corporate brand. These
We expect to wholly own and operate these specialty cancer hospitals will be wholly owned and operated by us.hospitals. We willexpect to purchase all the medical equipment for these hospitals and employ and manage all the personnel, including doctors, nurses, medical technicians and administrative personnel. The specialty cancer hospitals will be licensed as for-profit hospitals in China and subject to the relevant PRC laws and regulations and permits requirements.
As for-profit hospitals, we do not expect that the medical service fees of our specialty cancer hospitals will notto be subject to price controls, butalthough they will be subject to certain taxes not applicable to non-profit hospitals. We plan to fund the development of our specialty cancer hospitals with bank loans and cash on hand.
In October 2014, we established a wholly-owned radiotherapy cancer center, Datong Meizhong Jiahe Cancer Center in Datong City, Shanxi Province, to provide advanced, best-practice diagnostic and radiotherapy services with 100 beds with a planned gross floor area of 5,983 sq.m.square meters. It is the first free-standing center in our network of centers. In May 2016, Datong Meizhong Jiahe Cancer Center, was opened preliminarily.preliminarily in May 2016 and officially opened for operation in May 2017.
In May 2017, we opened Shanghai Meizhong Jiahe Cancer Center in Shanghai to provide outpatient services, imaging diagnosis services and daily radiotherapy and chemotherapy services. Since February 28, 2019, the nuclear magnetic resonance imaging and cancer radiotherapy services and the basic medical services, including general outpatient registration, chemotherapy, linear accelerator radiotherapy, blood examination, image examination (such as nuclear magnetic resonance, CT, ultrasound, molybdenum target, electrocardiogram), medicines and consumables, of our Shanghai Meizhong Jiahe Cancer Center’s basic medical services have been fully covered by Shanghai basic medical insurance. The center is registered as a specialty cancer hospital with required departments, including radiation, imaging, test laboratory, inpatient and nursing. ThisWe plan to have this center will apply to join the local social insurance coverage. This free-standing center facility isconstitutes an important step of our broader strategy to build a nationwide chain of free-standing cancer treatment and diagnosis centers in the future. We also plan to establish specialty cancer hospitals in Taizhou, Wuxi, Hangzhou and Nanchang in the future.
Operation of Radiotherapy and Diagnostic Imaging Centers in Our Network
The following is a brief summary of the various aspects of the operations of the radiotherapy and diagnostic imaging centers in our network of centers.
Management Structure
We manage each of the radiotherapy and diagnostic centers jointly with our hospital partners. Our hospital partners appoint a medical director to each center and are responsible for the centers’ clinical activities, the medical decisions made by doctors, and the employment of doctors in accordance with the licensing regulations. We provide clinical support to doctors, including developing treatment protocols for doctors and organizing joint diagnosis between doctors in our network and clinical research.
We appoint either an operations director or a project manager to each cooperative center. SuchThe director or manager provides most of the non-clinical aspects of the centers’ day-to-day operations, which include marketing, providing training and clinical education to doctors and other medical personnel in the cooperative centers and other general administrative duties such as arranging for the repair and maintenance of medical equipment. Budgets for each cooperative center are established annually based on discussions between our hospital partners and us. Costs incurred at the cooperative centers usually require approval of both our hospital partners and us. As a matter of practice, certain major expenditures of the cooperative center are subject to further approval by our hospital partners’ management and our management.
We have established operating procedures and a comprehensive quality assurance program designed to ensure that our cooperative centers operate efficiently and provide consistent and high quality services. The operating procedures cover the use and maintenance of the medical equipment and interactions with patients, from initial patient appointment and registration to post-treatment follow-up. The operations director or project manager of each cooperative center is primarily responsible for ensuring the adherence to our operating procedures and comprehensive quality assurance program.
At the corporate level, we have established a dedicated operations department to supervise and provide support to ensure the effective operation of each cooperative center. We actively monitor the activities of each cooperative center and conduct scheduled annual evaluations for all ofthe cooperative centers. These evaluations focus on whether the applicable procedures are followed and whether our operating personnel are performingfollow applicable procedures and perform at the expected level. In addition to the scheduled annual review, we also conduct unscheduled evaluations for certain randomly selected centers.
The results of these evaluations are used to help determine the compensation received by our operations directors or project managers and our other employees at the cooperative centers. We receive weekly reports on the operating activities for each cooperative center, which help us identify opportunities for continued improvement with regardsrespect to various aspects of each center’s operations. We also have a risk management department that helps to ensure that we meet applicable PRC laws and regulations and compliance standards for the operation of our business. We have also adopted a code of ethics.
For our specialty cancer hospitals, we intend to maintain full operating control over all clinical and non-clinical aspects of its operation, including direct supervision over medical decisions made by doctors.
Staffing
In addition to the operations director or project manager appointed by us to each cooperative center, we also typically staff each cooperative center with dedicated marketing and accounting personnel. Our hospital partners appoint medical directors to the cooperative centers and, except in very limited cases, they also assign all of the doctors and other medical personnel to the cooperative centers.
However, we also help our hospital partners to recruit many of the doctors or medical personnel providingthat provide services at the cooperative center.centers. We provide feedback to our hospital partners as to the suitability and performance of the doctors and other medical personnel at each cooperative center, and work with our hospital partners to help ensure that each cooperative center is staffed with the most qualified and suitable personnel. In addition, we help our hospital partners to determine the compensation of doctors and other medical personnel providing services in our network of centers. We also, on
On a very limited basis, we also enter into employment agreements with doctors to work at cooperative centers in our network after consulting with our hospital partners where such centers are based. We are currently in the process of establishing specialty cancer hospitals, such as Datong Meizhong Jiahe Cancer Center. We willexpect to be responsible for employing and managing all personnel of such specialty cancer hospitals, including doctors and other medical personnel, in the future.
Medical Affairs
We have a medical affairs department to support the training, clinical education and clinical research activities of our network of centers. Prior to setting up a new center, we arrange training for the medical professionals of such new center at certain established centers in our network designated as training centers. This provides the medical professionals of each new center with the opportunity to gain hands-on clinical experience in advanced radiotherapy treatment and diagnostic imaging technologies, and to benefit from the considerable clinical knowledge of the doctors and other medical personnel at the designated training centers.
The doctors at the designated training centers will evaluate the performance of the medical professionals of the new center and ensure that they can provide high quality clinical care. In addition, we also arrange training for the medical staff with the medical equipment manufacturers.
We also periodically provide follow-up training at selected centers and host academic conferences and semi-annual academic seminars where doctors and other medical personnel from our network of centers and medical experts in China are invited to share their knowledge and clinical experience. From time to time, we invite experts from professional or academic institutions, such as the Oncology Hospital of the Chinese Academy of Medical Science, to give lectures and provide guidance as to the latest developments and trends in radiotherapy treatments.
We believe that a well-managed clinical research program enhances the reputation of doctors in our network, which in turn enhances the reputation of our network of centers. We maintain a database of radiotherapy treatments. This collection of data can be used, upon approval by us and our hospital partners, to conduct cross-center clinical research and statistical analysis to determine the efficacy and potential of treatment methods offered in our network.
We actively organize, encourage and assist doctors in our network to engage in clinical research and to publish their results. We assist in coordinating the clinical research efforts between different radiotherapy and diagnostic imaging centers in our network, which is critical for certain research initiatives that require a significant amount of clinical data that would be difficult for one center to collect.
Doctors in China have historically had very limited opportunities for discussions or consultations with doctors outside of their own hospital. Our network offers doctors the opportunity to consult with each other on challenging cases and treatments. In addition, we have developed treatment protocols that are introduced to each cooperative center and can be followed by doctors in our network of centers.
We also evaluate the clinical activities of each cooperative center as part of our annual evaluations to ensure that high quality treatments or services are provided to patients. We also publish an internal quarterly magazine titled “Stereotactic Radiosurgery” that highlights the different clinical cases being treated in our centers and the latest developments in radiosurgery treatment. We further assist in the publication of other literature related to radiosurgery.
Marketing
Marketing efforts for each cooperative center in our network are primarily initiated and implemented by the marketing personnel or the operations director or project manager situated at each cooperative center with the support of our headquarters. Each center’s marketing efforts are directed at other doctors in the hospital where the cooperative center is based and at other local hospitals.
These marketing efforts are focusedfocus on informing such doctors of the applicability and benefits of radiotherapy and the expertise and experience of the doctors at the cooperative centers. We also create and distribute educational materials and brochures and engage in consumer advertising and educational campaigns through television, magazines and electronic media.
Each cooperative center is required tomust report its marketing activities to us, and we closely monitor such activities and giveprovide approval for major marketing initiatives. We also oversee the budget for marketing activities at the cooperative centers.
We assist the cooperative centers by providing relevant content for marketing materials and help to coordinate with leading experts in the medical community to attend conferences or seminars hosted by the centers. As our network of centers continues to expandexpands and as we began operating the first of our specialty cancer hospitals in the first half of 2017, we plan to begin centralizingcentralized certain of our marketing and advertising efforts.
Accounting and Payment Collection
Our hospital partners are responsible for patient billing and fee collections and for delivering to us our contracted percentage of medical fees based on our arrangements with them. We typically hire accounting personnel at each of our centers who are in charge of keeping books and records as to the revenues and expenses of the center. We reconcile the accounting records for each cooperative center in our network with our hospital partners periodically.
After the revenue net of specified operating expenses of a cooperative center is agreed upon between us and our hospital partner,partners, we will bill our hospital partnerpartners for our portion of the revenue determined based on our contracted percentage. Our hospital partners will then go through their internal approval process, which usually takes about 45 days from the time of billing before making payments to us. We have implemented accounting procedures at each of the cooperative centers in our network, and perform periodic reviews to help ensure that such activities are properly conducted. For our specialty cancer hospitals, we are responsible for patient billing and fee collection.
Medical Equipment Maintenance and Repair
Equipment maintenance and repair are typically carried out by theThe equipment manufacturers or third party service companies.companies typically carry out equipment maintenance and repair. The manufacturers typically provide equipment warranties for a period of one year. After the warranty period expires, we typically enter into service agreements with the manufacturers or third party service companies to provide periodic maintenance and repair services.
We have also established a dedicated engineering team that is responsible for the general preventive maintenance of medical equipment used in our network of centers. Our engineering team serves as an initial point of contact when problems are encounteredarise and coordinates with equipment manufacturers or a third-party service company to help ensure that problems are resolved in a timely manner whenever they arise.manner.
Pricing of Medical Services
Medical service fees generated through the use of both Class A and Class B large medical equipment at non-profit civilian hospitals and militaryhospitals. Military hospitals are subject to the pricing guidance of the relevant provincial or regional price control authorities and healthcare administrative authorities. The pricing guidance sets forth the range of medical service fees that can be charged by nonprofitnon-profit civilian medical institutions and military hospitals. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Industry—Pricing for the services provided by our network of centers may be adversely affected bysuffer from reductions in treatment and examination fees set by the Chinese government.”
The relevant price control authorities and healthcare administrative authorities provide notices to hospitals, which in turn provide immediate notices to us, as to any change in the pricing ceiling for medical services. The timing between when notices are provided by the relevant price control authorities and healthcare administrative authorities and the effective date of such pricing change varies in different cities and regions as well as the relevant medical services in question, but typically ranges from one to three months. For-profit hospitals or centers based in for-profit hospitals in China, such as our planned specialty cancer hospitals, are not subject to such pricing restrictions and are entitled to set medical service fees based on their cost structures, market demand and other factors.
Our Premium Cancer Hospitals
Permits Needed to Establish a Medical Institution
In order to establish a medical institution, we need to apply for and receive approvals and permits/licenses from various government authorities and agencies. Since 2011, foreign invested healthcare services institutions are removed from “restricted” to “allowed” category. In addition, since 2012, companies that are registered in Hong Kong, Macau and Taiwan are permitted to establish wholly-owned medical institutions in selected cities in China, including Beijing, Shanghai, Chongqing and certain cities in Jiangsu Province, Fujian Province, Hainan Province and Guangdong and Hainan Provinces,Province, after obtaining relevant permits from the local authorities and agencies, the procedure of which may be substantially different in various regions.
The procedure to establish a wholly-owned foreign medical institution in Beijing, for instance, also requires applications to the several government agencies and departments, including local public health bureau, fire department and environmental protection bureau. These agencies need to review the application from different perspectives, such as compliance with local healthcare planning, fire safety and environment impact. If radiation therapy is included in the services to be offered, radiation protection review will be included in the procedures as well. After reviews are completed and approvals from the above agencies are received, we can apply to the local public health bureau for a Permit of Operations for Foreign Invested Medical Institution. Then we need to apply to the Beijing Municipal Bureau of Commerce for Permit to Establish Foreign Invested Corporation, after which we can apply to the local Administration of Industry and Commerce to obtain a license for the registration of the corporation.
All of our self-owned hospitals have received these permits or equivalents.
Shanghai Concord Cancer HospitalCenter
In April 2014, we received the relevant government approval for the establishment of Shanghai Concord Cancer Hospital,Center, a 400-bed cancer specialty hospital with a planned gross floor area of 158,769 sq.m.square meters in Shanghai New Hongqiao International Medical Center. Our Shanghai Concord Cancer HospitalCenter will utilize the advance domestic and international therapeutic methods, medical process and management system. ItThe hospital plans to install the most advanced cancer diagnosis and treatment equipment and multidiscipline system. We are in the process of finalizing the pre-construction work. The construction of this hospital project is expected to commencecommenced in the second quarter ofSeptember 2017, with an estimated construction period of 3.5three years.
Guangzhou Concord Cancer HospitalCenter
In January 2011, we entered into a framework agreement with Sun Yat-Sen University Cancer Center and a third party to build Guangzhou Concord Cancer Hospital,Center, a 400-bed specialty hospital in Guangzhou with a planned gross floor area of 40,000 sq.m.square meters for cancer diagnosis and treatment. In May 2012, we obtained the approval of establishing medical institution from the Ministry of HealthNHC of Guangdong Province. Guangzhou Concord Cancer HospitalCenter was granted the land usage rights from the local land administrative bureau in 2012 and obtained the relevant land use rights certificate in 2013. The construction of this hospital project commenced in FebruaryNovember 2017, with an estimated construction period of 3.5three years.
Concord CancerInternational Hospital
As a part of our overseas business expansion, we acquired 100% of the equity interestinterests in Fortis Surgical Hospital from Fortis Healthcare International, a subsidiary of Fortis Healthcare Ltd., forwith a consideration of SGD55.0 million (RMB253.5 million) in cash in April 2015 and2015. We changed itsthe name of the hospital to Concord Cancer Hospital in October 2015. In June 2017, we changed its name to Concord CancerInternational Hospital. Concord International Hospital has 31-bed patient capacity and provides oncology as its main service, including medical oncology and surgical oncology, in Singapore.
Concord CancerInternational Hospital is a private facility in Singapore that was originally established in July 2012. We plan to establish Concord CancerInternational Hospital as a platform for high-end medical treatment that will also include academic research targeting patients in Singapore as well as patients coming from China as part of our efforts to expand overseas business.
Our Proton Centers
Beijing Proton Medical Center
We have entered into a framework agreement with Chang’an Information Industry (Group) Co., Ltd. and China-Japan Friendship Hospital to establish Beijing Proton Medical Center. TheWe expect Beijing Proton Medical Center willto allow us to bring the latest in radiotherapy treatment technology to China and increase the radiotherapy treatment options available to cancer patients. The
Beijing Proton Medical Center is expected to be equipped with the first proton beam therapy system in China licensed for clinical use. The Beijing Proton Medical Center is expected to have a gross floor area of approximately 12,555 square meters and 50 licensed patient beds. The Beijing Proton Medical Center will primarily offer treatments using a proton beam therapy system, which are designed to be non-invasive and usually do not require hospitalization.
Proton beam therapy is a form of external beam radiotherapy that uses beams of protons rather than the x-ray beams used by linear accelerators. The advantages of proton beam therapy compared to other types of external beam radiotherapy is that a proton beam’s signature energy distribution curve, known as the “Bragg peak,” allows for greater accuracy in targeting tumor cells so that healthy tissue is exposed to a smaller dosage. Proton beam therapy can focus cell damage caused by the proton beam at the precise depth of the tissue where the tumor is situated, while tissues located before the Bragg peak receive a reduced dose and tissues situated after the peak receive none. These advantages make proton beam therapy a preferred option for treating certain types of cancers where conventional radiotherapy would damage surrounding tissues to an unacceptable level, such as tumors near optical nerves, the spinal cord or central nervous system and in the head and neck area, as well as prostate cancer and cancer in pediatric cases. Proton beam therapy is not a widely utilized treatment modality, with only approximately 55 proton beam therapy treatment centers in operation or under construction worldwide.
The framework agreement contemplates that we are to invest equity capital to the Beijing Proton Medical Center project that was previously invested and developed by Chang’an Information Industry (Group) Co., Ltd., King Cheers Holdings Ltd. (HK) and China-Japan Friendship Hospital. In January 2016, we acquired from Chang’an Information Industry (Group) Co., Ltd. a 100% equity interest in Beijing Century Friendship, an entitywhich held a 55% equity interest in Beijing Proton Medical Center and was set up for the construction of Beijing Proton Medical Center, from Chang’an Information Industry (Group) Co., Ltd., and an additional 55% equity interest in Beijing Proton Medical Center, with a total cash consideration of RMB100.6 million. Currently,As a result, we held a total of 80% equity interest in Beijing Proton Medical Center through Beijing Century Friendship and King Cheers Holdings Ltd. (HK), both of which are our wholly subsidiaries, own approximately 55.0%Cheers. During 2017, more investments were injected to Beijing Century Friendship and 25.0%Beijing Proton Medical Center. Our total equity interestsinterest in Beijing Proton Medical Center respectively. As a result,decreased from 80% to 48.16%, with the remaining equity interests held by China-Japan Friendship Hospital and parties from Zhongrong. During 2018, we, ultimately own approximately 80.0%through our majority-owned subsidiary, acquired all the equity interests in Beijing Century Friendship, which held 55% of Beijing Proton Medical Center, with the remainingCenter. We hold 58% equity interest owned by China-Japanin Beijing Proton Medical Center through Beijing Century Friendship Hospital. and King Cheers. See “Item 4. Information on the Company—History and Development of the Company.”
We have received the relevant government approvals for the establishment of Beijing Proton Medical Center. The construction of this hospital project is expected to commencecommenced in the second quarter ofJune 2017, with an estimated construction period of 3.5three and a half years.
The MD Anderson Cancer Center (The ProvinceProton Therapy Center)
In December 2012, we acquired 19.98% of indirect ownership of 19.98% of the equity interests in the MD Anderson Proton Therapy Center, and in August 2015, we acquired an additional 7.04% equity interest of 7.04% in the MD Anderson Proton Therapy Center from an existing owner of the general partner. The MD Anderson Proton Therapy Center is a leading proton treatment center in the world. According to the partnership agreement, we have significant influence over the MD Anderson Proton Therapy Center.
As we plan to invest and operate two proton centers in China in the future, this transaction willmay enable us to expand our expertise and knowledge base in preparation for the operation of future proton centers. After the closing of the transaction, we became the second largest owner of the MD Anderson Proton Therapy Center, behind The University of Texas MD Anderson Cancer Center.UTMDACC. We joined both the Boardboard of Directorsdirectors of PTC-Houston Management, LP, the general partner of the center, and the center’s advisory committee.
The MD Anderson Proton Therapy Center is an affiliate of The University of Texas MD Anderson Cancer Center.UTMDACC. Opened in 2006, it was the fourth proton treatment center in the U.S. Since its opening, the center has treated more than 4,000 patients, accounting for 15% of the total number of patients who received proton treatment in the United States. For nine of the past 1110 years, including from 2007 to 2012, The University of Texas MD Anderson Cancer CenterUTMDACC has been ranked No. 1the leading in cancer carehospital in the U.S. News & World Report’s “Best Hospitals” survey.
The MD Anderson Proton Therapy Center is an international center of excellence for proton therapy, research and education. It is the world’s first proton therapy facility located within a comprehensive cancer center – and the only proton therapy center that is part of the top-ranked cancer center in the world. Its highly skilled and experienced cancer care team includes radiation oncologists, pediatric radiation oncologists, research nurses, registered nurses, radiation therapists, medical dosimetrists, physicists and other cancer professionals who work to provide an individualized treatment plan for each patient’s cancer.
The MD Anderson Proton Therapy Center houses four treatment rooms that include one fixed beam room and three equipped with gantries within 96,000-square-feet of space. Each gantry is three stories tall, 35 feet in diameter, weighs 190 tons and rotates around a patient to direct the proton beam precisely at the cancerous tumor. The center also includes clinical space and examination rooms for consultations and patient visits, anesthesiology work areas, holding and recovery areas, medical dosimetry areas for treatment planning and other areas specifically related to the care, treatment, education and research of proton technology. Additionally,In addition, the Proton Therapy Center has a dedicated, on-site machine shop that produces the apertures and other pieces needed to precisely and effectively deliver proton therapy to patients.
In November 2018, MD Anderson Proton Therapy Center reached an agreement with UTMDACC to sell all its assets and liabilities to UTMDACC, as well as terminating management service agreement between MD Anderson Proton Therapy Center and PTC-Houston Management, LP. After the transaction, we still retained the partnership shares of 59.51% in PTC-Houston Management, LP.
Business Development
We have aOur business development team is responsible for pursuing opportunities to develop cooperative centers with hospitals and aour hospital investment team is responsible for pursuing opportunities to establish proton centers, premium cancer hospitals and specialty cancer hospitals. When examining potential opportunities, we take into account factors that include:
| · | population density, demographics and the level of economic development of the regions or cities in which such new centers and hospitals would be located; and |
| · | the reputation of the potential hospital partner and its doctors, nurses and other personnel and the number of licensed patient beds and patient volume for our planned cooperative centers. |
After each potential opportunity is identified and evaluated by the business development team or the hospital investment team, as applicable, the opportunity is presented to our investment committee for review. Our investment committee is comprisedconsists of several of our senior executives and members of our board of directors, and includes chairman of the committee, Dr. Jianyu Yang, Mr. Yaw Kong Yap and two rotating regional directors. New projects need to be approved by a super-majority approval of our investment evaluation committee and also by our chief executive officer.
Seasonality
During a fiscal year, the first quarter usually sees fewest patient visits, both inpatient and outpatient, mainly due to the Chinese New Year. The fourth quarter is usually the busiest quarter during the year, as most patients, especially patients from the rural areas, will have more free time to visit hospitals.
Since our cooperative centers are located within the government hospitals, they are subjectedalso subject to seasonality of the patient traffic as well.traffic. Our planned proton center, premium cancer hospitals and specialty cancer hospitals will also be affected by seasonality, although to a lesser degree, as cancer patients need to receive treatment and diagnosis immediately.
Competition
The radiotherapy and diagnostic imaging markets in China and Singapore are fragmented and the competition is intense. The cooperative centers in our network and our hospital compete primarily on a regional or local basis with government-owned and private hospitals that offer radiotherapy and diagnostic imaging services either directly or in conjunction with third parties, such as China Renji Medical Group Ltd. and Jiancheng Investment Co. In addition, since hospitals typically establish radiotherapy and diagnostic imaging centers located on their premises through long term lease and management services arrangements with us or our competitors, in a given locality over a given period there may only be a limited number of top-tier hospitals who havemay not yet have entered into long-term arrangements with us or other companies like and type of certaincompanies.
Certain medical equipment that can be purchased by us or our hospital partners, such as head gamma knife systems of PET-CT scanners, further limit the number of top-tier hospitals that we or our competitors can enter into arrangements with in a given period. We primarily compete with our competitors based on the range of the option of services provided, by us and our competitors, the reputation of cooperative centers in our network and our hospital among doctors and patients in China and Singapore and level of patient service and satisfaction.
In addition, we also compete with those who offer other types of available treatment methods that we do not offer, such as chemotherapy, surgery, different forms of radiotherapy that we do not currently offer, other alternative treatment methods commercialized in recent years and certain treatments that are currently in the experimental stage. These treatments may be more effective or less costly, or both, compared to the treatment methods that our centers and hospital provide.
Intellectual Property
WeTo protect our corporate name, we have applied to the PRC Trademark Office of the State Administration for Market Regulation (formerly known as the State Administration for Industry and CommerceCommerce) for and obtained the registration of our trademark “Medstar” in October 2009 and ina total of 52 other 22 trademarks, including “Concord Medical”,Medical,” as of the date of this annual report to protect our corporate name.report. We also own the rights to 119108 domain names that we use in connection with the operation of our business. Many of the domain names that we own include domain names in Chinese that contain relevant key words associated with various types of cancer, radiotherapy, gamma knife systems, linear accelerators or other medical equipment used or treatments and services provided in our network. We believe that such domain names provide us with the opportunity to enhance our marketing efforts for the treatments and services provided in our network and enhance patients’ knowledge as to cancers, the benefits of radiotherapy and the various treatment options that are available.
Other than the use of our trademark and domain names, our business generally isdoes not directly dependent upondepend on any patents, licensed technology or other intellectual property. However, we cannot be certain that the equipment manufacturers from which we purchase equipment have all requisite third-party consents and licenses for the intellectual property used in the equipment they manufacture.
As a result, those equipment manufacturers may be exposed to risks associated with intellectual property infringement and misappropriation claims by third parties which, in turn, may subject us to claims that the equipment we have purchased infringes the intellectual property rights of third parties. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Company—We may fail to protect our intellectual property rights or we may be exposed to misappropriation and infringement claims by third parties, either of which may have a material adverse effect as tomaterially adversely affect our business.”
As we begin to operate specialty cancer hospitals under our own brand name in the future and as our brand name gains more recognition among the general public, we will work to increase, maintain and enforce our rights in our trademark portfolio, theportfolio. The protection of whichthese rights is important to our reputation and branding strategy and the continued growth of our business.
Environmental Matters
The Ministry of HealthNHC enacted the Administrative Measures on Medical Wastes Management of Medical Institutions in 2003, which sets forth the management of and criteria for the disposal of medical waste generated in the operation of medical institutions. As the supervising authority, the environmental protection authority at the county or higher levels is responsible for environmental inspections of hospitals within their jurisdictions. The Ministry of HealthNHC and the environmental protection authorities have also promulgated a series of specific regulations on the disposal of dangerous medical waste and the requirements of vehicles used to transport medical wastes.
In addition, certain medical equipment used in our network of centers, such as gamma knife systems, use radioactive sources. In accordance with the Regulation on Radioisotope and Radiation Equipment Safety and Protection promulgated by the PRC State Council in 2005, these radioactive sources should be returned to the manufacturer of such radioactive materials or sent to dedicated radioactive waste disposal units appointed by the MEP. Radioactive materials are generally obtained from, and returned to, the medical equipment manufacturers or other third parties, which then have the ultimate responsibility for their proper disposal.
However, as all centers in our network are located on the premises of our hospital partners, we do not directly oversee the disposal of certain medical waste generated in the centers. The failure of any of our hospital partners to dispose of such waste in accordance with PRC laws and regulations may have an adverse effect on the operation of centers in our network. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Company—Most of our radiotherapy and diagnostic imaging equipment contains radioactive materials or emits radiation during operation.”
We are responsible for the disposal of the medical waste generated from our own hospital in Singapore. For our planned proton center, premium cancer hospitals and specialty cancer hospitals, we will also be responsible for the disposal of the medical waste generated.
Insurance
We maintain property insurance on many of the medical equipment used in our network of centers to protect against loss in the event of fire, earthquake, flood and a wide range of natural disasters.
We do not typically maintain any professional malpractice liability insurance since we do not employ the doctors and other medical personnel providing services in the cooperative centers, except in very limited cases and the centers are located on the premises of our hospital partners. Accordingly,We have entered into framework agreements to establish proton center, premium cancer hospitals and specialty cancer hospitals that are to be majority-owned by us. We are in the process of employing all of the personnel of such hospitals, including doctors, nurses and medical technicians. As a result, we have obtained professional malpractice liability insurance for such centers and hospitals. However, there can be no assurance that such insurance will be available at a reasonable price or that we will be able to maintain adequate levels of professional and general liability insurance coverage.
We are not directly responsible for any incidents that occur in the course of providing treatment. However, as certain agreements entered into with our hospital partners require us to share in the expenses related to medical disputes and for such expenses to be included as the expenses of the cooperative centers, while the centers will purchase the professional malpractice liability insurance themselves, we have obtained professional malpractice liability insurance for a limited number of centers. We have also obtained professional malpractice liability insurance for our hospital in Singapore.
We do not maintain product liability insurance for the medical equipment. Except for our own hospital in Singapore, we do not maintain real property insurance on the cooperative centers as this is the responsibility of our hospital partners.
We do not maintain business interruption insurance or key employee insurance for our executive offices as we believe it is not the normal industry practice in China to maintain such insurance. We consider our current insurance coverage to be adequate. However, uninsured damage to any of the medical equipment in our network of centers or inadequate insurance carried by our partner hospitals as to their respective centers could result in significant disruption tosignificantly disrupt the operation of centers in our network and result in a material adverse effect tomaterially adversely affect our business, financial condition and results of operations.
We have entered into framework agreements to establish proton center, premium cancer hospitals and specialty cancer hospitals that are to be majority-owned by us. We will employ all of the personnel of such hospitals, including doctors, nurses and medical technicians. As a result, we plan to obtain professional malpractice liability insurance for such centers and hospitals. However, there can be no assurance that such insurance will be available at a reasonable price or that we will be able to maintain adequate levels of professional and general liability insurance coverage.
Legal and Administrative Proceedings
We are not currently involved in any material litigation, arbitration or administrative proceedings. However, we may from time to time become a party to various other litigation, arbitration or administrative proceedings arising in the ordinary course of our business.
Regulation of Our Industry
This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China and Singapore or our shareholders’ right to receive dividends and other distributions from us.
Regulations in China
General Regulatory Environment
China’s healthcare industry is regulated by various government agencies, including the NHFPC.NHC. The NHFPCNHC has branch offices across China that oversee the healthcare industry at the provincial and county levels, which branch offices, together with the NHFPC,NHC, we refer to as the healthcare administrative authorities. The healthcare administrative authorities and other government agencies, such as the NDRC, the SFDA, the MEP and MOFCOM, have promulgated rules and regulations relating to the procurement of large medical equipment, the pricing of medical services, the operation of radiotherapy equipment, the licensing and operation of medical institutions and the licensing of medical staff.
Permits Required by Our Company
Medical Equipment Operating Enterprise Permits
The SFDA categorizes medical equipment into three classes according to the level of control by the government authorities that, in the judgment of the SFDA, is required for their safe and effective operation. Class I medical equipment are those medical equipment that require only an ordinary level of control in order to ensure their safe and effective operation. Class II medical equipment are those medical equipment that require a heightened level of control in order to ensure their safe and effective operation. Class III medical equipment are those medical equipment that are used to support or maintain human life, are implanted into the human body or otherwise pose a potential danger to the human body. Class III medical equipment require strict control in order to ensure their safe and effective operation. In order to ensure an adequate level of control in the operation of Class II and Class III medical equipment, enterprises that engage in the operation of such equipment, which include gamma knife systems, linear accelerators, MRI systems and PET-CT systems, must each obtain a medical equipment operating enterprise permit from the relevant provincial drug supervision and administration agency. As a result, our subsidiaries Shanghai Medstar Yundu and Aohua Technology must each obtain a medical equipment operating enterprise permit from the relevant provincial drug supervision and administration agency pursuant to the Medical Equipment Supervision and Administration Regulation effective as of April 1, 2000. Each such permit is valid for a term of five years and, prior to expiration, must be reviewed by and an extension of its term must be obtained from the relevant authorities. All our aforementioned subsidiaries have obtained medical equipment operating enterprise permits.
Radiation Safety Permits
As organizations that produce, sell or use radioactive materials or devices in the PRC, our subsidiaries Shanghai Medstar, Aohua Technology are required to obtain radiation safety permits from the relevant national or provincial environmental protection authorities pursuant to the Regulation on Radioisotope and Radiation Equipment Safety and Protection issued on September 14, 2005 by the PRC State Council and the Rules on Radioisotopes and Radiation Device Safety Permit issued on January 18, 2006 by the State Environmental Protection Administration (now the MEP) and amended on December 6, 2008 by the MEP. Each such radiation safety permit is valid for a term of five years and, prior to expiration, must be reviewed by and an extension of its term must be obtained from the relevant authorities. Shanghai Medstar has received a radiation safety permit, but the radiation safety permit of Aohua Technology expired on October 14, 2014 and has not been obtained from the relevant authorities due to the fact that Aohua Technology has stopped selling radioactive materials or devices in the PRC.
Any organization that is subject to radiation safety permitting requirements is required to strictly observe state regulations regarding individual radiation dosage monitoring and health administration, conduct individual dosage monitoring and occupational health examinations for its staff that are directly involved in the production, sale or use of radioactive materials or devices and maintain individual dosage files and occupational health files. Any used radioactive source materials must be returned to the manufacturer or the original exporter of the equipment. If return to the manufacturer or the original exporter is not possible, the used radioactive materials must be delivered to a qualified radioactive waste consolidation and storage unit for storage.
Leasing Company Permit
As foreign-invested companies engaged in the leasing or financial leasing business, certain of our subsidiaries must obtain a Foreign-invested Enterprise Approval Certificate from the MOFCOM or its competent local branch. Each such certificate will specify the permitted business scope of the foreign-invested company as either leasing or financial leasing. Foreign-invested leasing companies are permitted to operate their businesses for no more than 30 years after obtaining such certificates, after which time they are required to apply for and obtain an extension of the term of their certificate. Foreign-invested leasing companies are also required to observe the rules for the registered capital and total investment provided in the Company Law issued by the Standing Committee of National People’s Congress of the PRC on December 29, 1993, as amended from time to time, and other relevant regulations. Foreign-invested financial leasing companies, such as our subsidiary, Shanghai Medstar, are required to have qualified professionals and senior managers with professional qualifications and with no less than 3 years of management experience. Our subsidiary, Shanghai Medstar, has obtained a foreign-invested financial leasing company permit.
Regulation of Medical Institutions
Distinction between For-Profit and Non-Profit Medical Institutions
Medical institutions in China can be divided into three main categories: public non-profit medical institutions, private non-profit medical institutions and for-profit medical institutions. Medical institutions falling under each category have differing registered business purposes and governing financial, tax, pricing and accounting standards than medical institutions falling under one of the other categories. Public non-profit medical institutions, including those owned by the government and military hospitals, are set up and operated to provide a public service and are eligible for financial subsidies from the government. In contrast, private non-profit medical institutions are not eligible for government financial subsidies. Both public and private nonprofit medical institutions are required to set their medical service fees within a range stipulated by the relevant governmental price control authorities, to implement financial and accounting systems in accordance with standards promulgated by government authorities and to retain any profits for the continued development of such institutions.
For-profit medical institutions are permitted to set prices for their medical services in accordance with the market, to implement financial and accounting systems in accordance with market practice for business enterprises and to distribute profits to their shareholders. Like private non-profit medical institutions, for-profit medical institutions are not entitled to government financial subsidies. The proton center, premium cancer hospitals and specialty cancer hospitals that we plan to develop will be established as for-profit medical institutions.
Medical Institution Practicing License
Pursuant to the Regulation on Medical Institution issued on February 26, 1994 and amended on February 6, 2016 by the PRC State Council, any organization or individual that intends to establish a medical institution must obtain a medical institution practicing license from the relevant healthcare administrative authorities. In determining whether to approve any application, the relevant healthcare administrative authorities are to consider whether the proposed medical institution comports with the population, medical resources, medical needs and geographic distribution of existing medical institutions in the regions for which such authorities are responsible as well as whether the proposed medical institution meets the basic medical standards set by the Ministry of Health.NHC. Each of the independent proton center, premium cancer hospitals and specialty cancer hospitals that we intend to establish would need to obtain such a medical institution practicing license.
Large Medical Equipment Procurement License
The procurement, installation and operation in China of large medical equipment, which is defined as any medical equipment valued at over RMB5.0 million or listed in the medical equipment administration catalogue of the Ministry of Health,NHC, is regulated by the Rules on Procurement and Use of Large Medical Equipment issued on December 31, 2004 by the Ministry of Health,NHC, the NDRC and the Ministry of Finance, which became effective on March 1, 2005. Pursuant to these rules, quotas for large medical equipment are set by the NHFPCNHC and the NDRC or the relevant provincial healthcare administrative authorities, and hospitals must obtain a large medical equipment procurement license prior to the procurement of any such equipment that is covered by the rules on procurement. For large medical equipment classified as Class A large medical equipment, which includes gamma knife systems, proton beam therapy systems and PET-CT scanners,PET-MR, quotas are set by the NHFPCNHC and the NDRC and large medical equipment procurement licenses are issued by the NHFPC.NHC. For large medical equipment classified as Class B large medical equipment, which includes gamma knife system, PET-CT scanners and linear accelerators, and MRI and CT scanners, procurement planning and approval is conducted by the relevant provincial healthcare administrative authorities with ratificationconduct procurement planning and approval. These rules apply to public and private civilian medical institutions, whether non-profit or for-profit.
According to “2018 to 2020 Plan” issued by NHC on October 26, 2018, the NHFPCnational master plan configures a maximum of 10 newly added proton therapy treatment systems between 2018 and 2020.The allocation will depend on the actual situation of regional function orientation, radiation capacity of medical services and the largeservice level of diagnosis and treatment of medical equipment procurement licenses are issued byinstitutions. In addition, “2018 to 2020 Plan” stipulates provincial the relevant provincial healthcare administrative authorities. However, many provincial administrative authorities do not provide the general public with information on their procurement planning and quotas for Class B large medical equipment procurement licenses, if any. A large medical equipment procurement license is not required for medical equipment that is not classified as either Class A or Class B large medical equipment. These rules concerning procurement of large medical equipment apply to all public and private medical institutions in China, whether non-profit or for-profit, except for military hospitals which have a separate procurement system. See “—Regulation of Military Hospitals.”licenses.
In accordance with the 2011-2015 National PET-CT Procurement“2018 to 2020 Plan, issued on September 30, 2011, by the Ministry of Health and the NDRC,” the total number of PET-CT large medical equipment procurement licenses issued in China cannot exceed 270710 from the date of the plan through the end of 2015,2020, the new licenses cannot exceed 160. In accordance with the National Gamma Ray Stereotactic Head Radiosurgery System Procurement Plan issued on March 20, 2007 by the Ministry of Health377 and the NDRC, from the date of the plan through the end of 2010, the total number of large medical equipment procurement licenses issued for head gamma knife systems cannot exceed 60254 nationwide. Procurement applications for head gamma knife equipment must be filed with the relevant provincial healthcare administrative authorities along with a feasibility report, which must be reviewed by such provincial authorities before it is submitted to the Ministry of Health for approval. There is currently no guidance as to the total number of large medical equipment procurement licenses that may be issued for other types of medical equipment that the cooperative centers in our network operate.
With respect to any Class A or Class B large medical equipment purchased before the Rules on Procurement and Use of Large Medical Equipment came into effect on March 1, 2005, the medical institution that houses such equipment must apply to the Ministry of HealthNHC or the relevant provincial healthcare administrative authorities for a large medical equipment procurement license for such equipment. If such medical institution is unable to obtain a procurement license as a result of a lack of procurement quotas for such medical equipment allocated to the region in which the medical institution is located, an interim procurement permit for large medical equipment is required to be obtained instead. Moreover, any medical institution holding an interim permit must pay taxes on income derived from the use of the equipment covered by the interim permit and, upon the expiration of the useful life of such medical equipment, the medical institution must dispose of such equipment and is not permitted to replace it with a newer model. Some of our medical equipment have not yet received a large medical equipment procurement license or interim permits. For more information, see “Item 3. Key Information—D. Risk Factors —RisksFactors—Risks Related to Our Industry—CertainA few of our hospital partners have not received large medical equipment procurement licenses or interim procurement permits for some of the medical equipment in our network of centers which could result in fines or the suspension from use of such medical equipment.”
Radiotherapy Permit
Medical institutions that engage in radiotherapy are governed by the Regulatory Rules on Radiotherapy issued on January 24, 2006 by the Ministry of HealthNHC and are required to obtain a radiotherapy permit from the relevant healthcare administrative authorities. These rules require such medical institutions to possess qualifications sufficient for radiotherapy work, which include having adequate facilities for housing radiotherapy equipment as well as having qualified, properly trained personnel. Medical institutions that operate medical equipment containing radioactive materials are also required to obtain a radiation safety permit. See “—Permits Required by Our Company—Radiation Safety Permits.”
Radiation Worker Permit
Medical institutions that engage in the operation of medical equipment that contains radioactive materials or emits radiation during operation are required to obtain a radiation worker permit from the competent healthcare administrative authorities for each medical technician who operates such equipment.
Regulation of Military Hospitals
The procurement, installation and operation of large medical equipment by medical institutions of the PLA is regulated by the healthcare administrative authority of the general logistics department of the PLA with reference to the Rules on Procurement and Use of Large Medical Equipment. The general logistic department of the PLA issues a large equipment application permit to those military hospitals approved for procurement. The procurement planning records and annual reviews are provided to the Ministry of HealthNHC for its records.
Restrictions on Cooperation Agreements
Since the effectiveness in September 2000 of the Implementation Opinions on the Management by Classification of Urban Medical Institutions by the Ministry of Health,NHC, the State Administration of Traditional Chinese Medicine, the Ministry of Finance and the NDRC, non-profit medical institutions other than military hospitals have been prohibited from entering into new cooperation agreements or continuing to operate under existing cooperation agreements with third parties pursuant to which the parties jointly invest in or cooperate to set up for-profit centers or units that are not independent legal entities. However, according to the Opinions on Certain Issues Regarding Management by Classification of Urban Medical Institutions issued on July 20, 2001 by the Ministry of Health,NHC, the State Administration of Traditional Chinese Medicine, the Ministry of Finance and the NDRC, a non-profit medical institution that lacks sufficient funds to purchase medical equipment outright may enter into a leasing agreement pursuant to which the medical institution leases medical equipment at market rates. In response to this regulatory change, we have replaced the majority of our cooperation agreements with non-profit civilian hospitals with leasing and management agreements.
Regulation of Proton Treatment Centers
Pursuant to the Administrative Measures on Clinical Application of Medical Technology, effective as of May 1, 2009, medical institutions must apply to the Ministry of HealthNHC for approval before utilizing certain medical technologies. On November 13, 2009, the Ministry of HealthNHC issued the Trial Administrative Rules on Proton and Heavy Ion Radiotherapy Technologies, which provide the guidelines for government authorities to review and approve applications of medical institutions for clinical use of proton and heavy ion radiotherapy technologies. Furthermore, these rules set out the minimum requirements for medical institutions and their medical staff to provide proton and heavy ion radiotherapy. Such requirements include, among other things, that medical institutions that are eligible for providing proton and heavy ion radiotherapy must (i) be 3A hospitals, (ii) have a radiotherapy department with 10 or more years of radiotherapy experience and 30 or more inpatient beds, (iii) have a diagnostic imaging department with five or more years of diagnostic imaging experience and equipped with diagnostic imaging equipment such as MRI, CT and PET-CT, and (iv) have at least two staff doctors possessing technical competence in the clinical application of proton and heavy ion radiotherapy technologies. Our Beijing Proton Medical Center has already received preliminary approval from the Ministry of HealthNHC prior to the promulgation of these new rules. These rules will apply to any proton or heavy ion radiotherapy treatment centers that we or our hospital partners may build and operate in the future.
Registration of Doctors
Doctors in China must obtain a doctor practitioner or assistant doctor practitioner license in accordance with the Law on Medical Practitioners, effective as of May 1, 1999, and the Interim Measures for Registration of Medical Practitioners, effective as of July 16, 1999. Currently, each doctor is required to practice in the medical institution specified in such doctor’s registration. If a doctor intends to change his/her practice location, including but not limited to moving to or from a non-profit medical institution or to or from a for-profit medical institution, practice classification, practice scope or other registered matters, such doctor is required to apply for such change with the competent healthcare administrative authorities. However, with the approval of the medical institution with which a doctor is affiliated, a doctor may, within his/her scope of practice, undertake outside consultations, including diagnostic and treatment activities, for patients of another medical institution.
The Notice Concerning the Doctors to Practice in Different Locations, which is issued by the Ministry of HealthNHC on September 11, 2009, sets forth the basic principles for doctors to practice in different medical institutions. Pursuant to the notice doctors are allowed to be employed by more than two medical institutions subject to the approval of the Ministry of Health.NHC. However the implementation details are currently unclear. On January 1, 2010, the Trial Management Measures Concerning the Doctors to Practice in Different Locations issued by Guangdong provincial branches of the Ministry of HealthNHC became effective. The measures provide that doctors, who meet the requirements set forth therein, may apply to practice in different medical institutions. The measures are currently effective for a trial period of three years.
Pricing of Medical Services
Pursuant to the Opinion Concerning the Reform of Medical Service Pricing Management issued by the NDRC and the Ministry of HealthNHC on July 20, 2000, medical services fees generated through the use of both Class A and Class B large medical equipment at nonprofit medical institutions and military hospitals are subject to the pricing guidelines of the relevant provincial or regional price control authorities and healthcare administrative authorities. The pricing guidance sets forth the range of medical services fees that can be charged by non-profit medical institutions and military hospitals. For-profit medical institutions are not subject to such pricing restrictions and are entitled to set medical services fees based on their cost structures, market demand and other factors. According to the Implementation Plan for the Recent Priorities of the Health Care System Reform (2009-2011), which was issued by the State Council on March 18, 2009, the Chinese government is aiming to reduce the examination fees for large medical equipment. In addition, according to the Opinion on the Reform of Pharmaceuticals and Healthcare Service Pricing Structures issued on November 9, 2009 by the NDRC, the NHC and the Ministry of Health and the MHRSS,Ministry of Human Resources and Social Security (the “MHRSS”), the Chinese government is also aiming to reduce treatment fees for large medical equipment. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Industry—Pricing for the services provided by our network of centers may be adversely affected bysuffer from reductions in treatment and examination fees set by the Chinese government.”
Medical Insurance Coverage
China has a complex medical insurance system that is currently undergoing reform. Typically, those covered by medical insurance must pay for medical services out of their own pocket at the time services are rendered and must then seek reimbursement from the relevant insurer. For public servants and others covered by the 1989 Administrative Measure on State Provision of Healthcare and the 1997 Circular on Reimbursement Coverage of Large Medical Equipment under State Provision of Healthcare, the PRC government currently either fully or partially reimburses medical expenses for certain approved cancer diagnosis and radiotherapy treatment services, including treatments utilizing linear accelerators and diagnostic imaging services utilizing CT and MRI scanners. However, gamma knife treatments and PET scans are currently not eligible for reimbursement under this plan.
Urban residents in China that are not covered by the 1989 Administrative Measure on State Provision of Healthcare and the 1997 Circular on Reimbursement Coverage of Large Medical Equipment under State Provision of Healthcare are covered by one of two nationwide public medical insurance schemes, which are the Urban Employees Basic Medical Insurance Program and the Urban Residents Basic Medical Insurance Program. Rural residents in China are covered under a new Rural Cooperative Medical Program launched in 2003. The Urban Employees Basic Medical Insurance Program, which covers employed urban residents, partially reimburses urban workers for treatments utilizing linear accelerators and gamma knife systems and diagnostic imaging services utilizing CT and MRI scanners, with reimbursement levels varying from province to province. However, diagnostic imaging services utilizing PET and PET-CT scans are currently not reimbursable under the Urban Employees Basic Medical Insurance Program. For urban non-workers who are covered by the Urban Residents Basic Medical Insurance Program and rural residents who are covered by the new Rural Cooperative Medical Program, the types of cancer diagnosis and radiotherapy treatments that are covered are generally set with reference to the policy for urban employees in the same region of the country. However, the reimbursement levels for covered medical expenses for urban non-workers and rural residents, which vary widely from region to region and treatment to treatment, are generally lower than those for urban employees in the same region. Currently no reimbursement is available for proton beam therapy treatments.
The table below summarizes certain key aspects of these three medical insurance programs:
| Urban Employee Basic Medical Insurance Program | Urban Residents Basic Medical Insurance Program | Rural Cooperative Medical Program | ||||||||||
| Urban Employee Basic Medical Insurance Program | Urban Residents Basic Medical Insurance Program | Rural Cooperative Medical Program | ||||||||||
| Launch Time | 1998 | 2007 | 2003 | 1998 | 2007 | 2003 | ||||||
| Participants | Urban employees | Urban non-employees | Rural residents | Urban employees | Urban non-employees | Rural residents | ||||||
| Participation | Mandatory | Voluntary | Voluntary | Mandatory | Voluntary | Voluntary | ||||||
| Number of People covered in 2010 | Approximately 237 million (36% of China’s urban population) | Approximately 195 million (29% of China’s urban population) | Approximately 815 million (96% of China’s rural population) | Approximately 237 million (36% of China’s urban population) | Approximately 195 million (29% of China’s urban population) | Approximately 815 million (96% of China’s rural population) | ||||||
| Total reimbursement amount | RMB280 billion in 2009 | N/A | RMB66.2 billion in 2010 | RMB180 billion in 2009 | N/A | RMB66.2 billion in 2010 | ||||||
| Funding | Employers and employees: · employer contributes approximately 6% of each employee’s total salary; and | Households and the government: · monthly premium are paid by each household; and | Individuals and the government: · individual pays no less than RMB20 per year and local government subsidizes no less than RMB40 per person annually; and | Employers and employees: · employer contributes approximately 6% of each employee’s total salary; and | Households and the government: · monthly premium are paid by each household; and | Individuals and the government: | ||||||
| · employee contributes approximately 2% of such employee’s total salary. | · Government subsidies no less than RMB80 per person annually and RMB40 per person annually for the mid/western regions of China, with greater subsidies provided to low-income families and disabled persons. | · government subsidizes RMB40 per person annually for the middle and western regions of the country and a smaller amount for the eastern region. | · employee contributes approximately 2% of such employee’s total salary. | · government subsidizes no less than RMB80.0 per person annually and RMB40.0 per person annually for the mid/western regions of China, with greater subsidies provided to low-income families and disabled persons. | · government subsidizes RMB40.0 per person annually for the middle and western regions of the country and a smaller amount for the eastern region. | |||||||
| General Reimbursement Policy | Reimbursement comes from two sources — individual’s reimbursement account and the social medical expense pool: | There is no specific requirement or guidance from the central government. Reimbursement policy is separately determined by local governments. | The central government suggests that, beginning in the second half of 2009, the reimbursement cap for all regions should be no less than six times the average annual per capita net income of rural residents in the region. | |||||||||
| · All of the employee’s contribution and 30% of the employer’s contribution are allocated to the individual’s reimbursement account; the reimbursement cap from the individual account is the balance of that account; and | ||||||||||||
| · The remaining 70% of the employers’ contribution is aggregated into a social medical expense pool; the reimbursement cap from the social medical expense pool for an individual participant in a calendar year is around four times the regional average annual salary. | ||||||||||||
| Urban Employee Basic Medical Insurance Program | Urban Residents Basic Medical Insurance Program | Rural Cooperative Medical Program | ||||
| General Reimbursement Policy | Reimbursement comes from two sources—individual’s reimbursement account and the social medical expense pool: | There is no specific requirement or guidance from the central government. Reimbursement policy is separately determined by local governments. | The central government suggests that, beginning in the second half of 2009, the reimbursement cap for all regions should be no less than six times the average annual per capita net income of rural residents in the region. | |||
| ·all of the employee’s contribution and 30% of the employer’s contribution are allocated to the individual’s reimbursement account; the reimbursement cap from the individual account is the balance of that account; and | ||||||
| ·the remaining 70% of the employers’ contribution is aggregated into a social medical expense pool; the reimbursement cap from the social medical expense pool for an individual participant in a calendar year is around four times the regional average annual salary. | ||||||
| Examples of Local Reimbursement Policy | Shanghai: reimbursement cap from the social medical expense pool for an individual participant in a calendar year is approximately four times the average annual salary in Shanghai from the previous year. | Jiangsu Province: approximately 50% to 60% of medical expense can be reimbursed by the program. | Guangdong Province: maximum reimbursement amount is approximately RMB50,000 per person per year. | |||
| Inner Mongolia: reimbursement cap from the social medical expense pool for an individual participant in a calendar year is RMB25,000. | Sichuan Province: approximately 60% (and not less than 50%) of medical expense can be reimbursed by the program. | Hubei Province: maximum reimbursement amount for hospitalization is approximately RMB30,000 per person per year. | ||||
| Guangdong Province: approximately 40% to 60% of medical expense can be reimbursed by the program; maximum reimbursement amount is approximately two times the average annual salary in Guangdong Province from the previous year. | Anhui Province: maximum reimbursement amount for hospitalization is approximately RMB30,000 per person per year. |
Sources: Ministry of Health, MHRSS, National Bureau of Statistics, and various other central and local PRC government websites.
Foreign Exchange Control and Administration
Pursuant to the Foreign Exchange Administration Regulation promulgated on January 29, 1996, as amended on January 14, 1997 and August 5, 2008, and various regulations issued by the SAFE and other relevant PRC government authorities, the Renminbi is freely convertible only with respect to current account items, such as trade-related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriations of investments, require the prior approval of the SAFE or its local branches for conversion of Renminbi into foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC. Payments for transactions that take place within the PRC must be made in Renminbi. Foreign exchange transactions under the capital account are still subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities, or their competent local branches.
On August 29, 2008, the SAFE promulgated SAFE Circular No. 142, a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how converted Renminbi may be used. This notice requires that Renminbi converted from the foreign currency-denominated capital of a foreign-invested company only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise in its business scope. In addition, the SAFE strengthened its oversight of the flow and use of Renminbi funds converted from the foreign currency-denominated capital of a foreign-invested company. The use of such Renminbi may not be changed without SAFE’s approval and may not be used to repay Renminbi loans if the proceeds of such loans have not yet been used for purposes within the company’s approved business scope. Violations of SAFE Circular No. 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulation. Furthermore, SAFE promulgated a circular on November 19, 2010 (“(generally known as Circular No. 59”)59), which tightens the examination on the authenticity of settlement of net proceeds from an offering and requires that the settlement of net proceeds shall be in accordance with the description in its prospectus. On August 4, 2014, SAFE issued SAFE Circular 36 that launched the pilot reform of administration regarding conversion of foreign currency registered capitals of foreign-invested enterprises in 16 pilot areas. According to SAFE Circular 36, an ordinary foreign-invested enterprise in the pilot areas is permitted to use Renminbi converted from its foreign-currency registered capital to make equity investments in the PRC, subject to certain registration and settlement procedure as set forth in SAFE Circular 36.
On July 4, 2014, SAFE promulgated the Notice on Relevant Issues Concerning Foreign Exchange Control of Domestic Residents’ Overseas Investment and Financing and Roundtrip Investment through Offshore Special Purpose Vehicles (“SAFE Circular No. 37”), which replaced the former Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles (generally known as (“SAFE Circular No. 75)75”) promulgated by SAFE on October 21, 2005.
SAFE Circular No. 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, which is referred to in SAFE Circular No. 37 as a “special purpose vehicle.” SAFE Circular No. 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC residents share transfer or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to complete the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.
Currently, several of our shareholdersbeneficial owners who are residents in the PRC and are or may be subject to the requirements of making registration with the competent local branch of SAFE with respect to their investments in our company as required by SAFE Circular No. 75 and will update their registration filings with SAFE under SAFE Circular No. 37 when there are any changes that should be registered under SAFE Circular No. 37. However, 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 No. 37 or other related regulations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China — Relevant China—PRC foreign exchange rules may limit our ability to acquire PRC companies and adversely affect the implementation of our strategy, as well as our business and prospects.”
Dividend Distributions
Pursuant to the Foreign Exchange Administration Regulation promulgated in 1996, as amended in 1997 and 2008, and various regulations issued by the SAFE and other relevant PRC government authorities, the PRC government imposes restrictions on the convertibility of Renminbi into foreign currencies and, in certain cases, on the remittance of currency out of China. Our PRC subsidiaries are regulated under the Foreign Investment Enterprise Law, which was issued on April 12, 1986 and amended on October 31, 2000, the Implementation Rules of the Foreign Investment Enterprise Law, which was issued on October 28, 1990 and amended on April 12, 2001, and the newly revised PRC Company Law, which became effective as of December 28, 2013. Pursuant to these regulations, each of our PRC subsidiaries must allocate at least 10.0% of its after-tax profits to a statutory common reserve fund. When the accumulated amount of the statutory common reserve fund exceeds 50.0% of the registered capital of such subsidiary, no further allocation is required. Funds allocated to a statutory common reserve fund may not be distributed to equity owners as cash dividends. Furthermore, each of our PRC subsidiaries may allocate a portion of its after-tax profits, as determined by such subsidiary’s ultimate decision-making body, to its staff welfare and bonus funds, which allocated portion may not be distributed as cash dividends.
Regulations Relating to Employee Share Options
Pursuant to the Administration Measure for Individual Foreign Exchange issued in December 2006 and the Implementation Rules of Administration Measure for Individual Foreign Exchange, issued in January 2007 by the SAFE, all foreign exchange matters relating to employee stock award plans or stock option plans for PRC residents may only be transacted upon the approval of the SAFE or its authorized branch. On March 28, 2007, the SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Award Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who participate in employee stock award and share option plans of an overseas publicly-listed company must register with the SAFE and complete certain related procedures. These procedures must be conducted by a PRC agent designated by the subsidiary of such overseas publicly-listed company with which the PRC citizens affiliate. The PRC agent may be a subsidiary of such overseas publicly-listed company, any such PRC subsidiary’s trade union having legal person status, a trust and investment company or other financial institution qualified to act as a custodian of assets. Such participant’s foreign exchange income received from the sale of shares or dividends distributed by the overseas publicly-listed company must first be remitted into a collective foreign exchange account opened and managed by the PRC agent prior to any distribution of such income to such participants in a foreign currency or in Renminbi.
Pursuant to Circular No. 106, employee stock award plans of SPVs and employee share option plans of SPVsspecial purpose vehicles must be filed with the SAFE while applying for the registration for the establishment of the SPVs.special purpose vehicles. After employees exercise their options, they must apply for an amendment to the registration for the SPVspecial purpose vehicle with the SAFE. We intend to comply with these regulations and to ask our PRC optionees to comply with these regulations. In accordance with the Circular of the State Administration of Foreign Exchange on Issues concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas issued by SAFE on February 15, 2012, individuals who participate in equity incentive plans of the same overseas listed company shall, through the domestic company to which the said company is affiliated, collectively entrust a domestic agency to handle issues like foreign exchange registration, account establishment, funds transfer and remittance, and entrust an overseas institution to handle issues like exercise of options, purchase and sale of corresponding stocks or equity, and transfer of corresponding funds. However, as these rules have only been recently promulgated, itIt is currently unclear how these rules will be interpreted and implemented. If the applicable authorities determine that we or our PRC optionees have failed to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.
Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the PRC Ministry of Commerce,MOFCOM, the State Assets Supervision and Administration Commission, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The M&A Rule, among other things, includes provisions that require any offshore special purpose vehicle, (“SPV”), formed for the purpose of an overseas listing of equity interests in a PRC company that is controlled directly or indirectly by one or more PRC companies or individuals, to obtain the approval of the CSRC prior to the listing and trading of such SPV’sspecial purpose vehicle’s securities on an overseas stock exchange. The application of the M&A Rule is currently unclear. However, our PRC counsel, Jingtian & Gongcheng Attorneys At Law, has advised us that based on its understanding of the current PRC laws, rules and regulations and the M&A Rule, the M&A Rule does not require that we obtain prior CSRC approval for the listing and trading of our ADSs on the NYSE, because our acquisition of the equity interestinterests in our PRC subsidiaries is not subject to the M&A Rule due to the fact that Shanghai Medstar wasand Aohua Technology were already a foreign-invested enterpriseenterprises before September 8, 2006, the effective date of the M&A Rule. Jingtian & Gongcheng Attorneys At Law has further advised us that their opinions summarized above are subject to the timing and content of any new laws, rules and regulations or clear implementations and interpretations from the CSRC in any form relating to the M&A Rule.
Regulation of Loans between a Foreign Company and its Chinese Subsidiary
A loan made by foreign investors as shareholders in a foreign-invested enterprise is considered to be foreign debt in China and is subject to several Chinese laws and regulations, including the Foreign Exchange Administration Regulation of 1996 and its amendments of 1997 and 2008, the Interim Measures on Foreign Debts Administration of 2003 (the “Interim Measures”), the Statistical Monitoring of Foreign Debts Tentative Provisions of 1987 and its implementing rules of 1998, the Administration Provisions on the Settlement, Sale and Payment of Foreign Exchange of 1996, and the Notice of the SAFE on Issues Related to Perfection of Foreign Debts Administration, dated October 21, 2005.
Under these rules and regulations, a shareholder loan in the form of foreign debt made to a Chinese entity does not require the prior approval of the SAFE. However, such foreign debt must be registered with and recorded by the SAFE or its local branch in accordance with the relevant PRC laws and regulations. Our PRC subsidiaries can legally borrow foreign exchange loans up to their respective borrowing limits, which is defined as the difference between the amount of their respective “total investment” and “registered capital” as approved by the MOFCOM, or its local counterparts. Interest payments, if any, on the loans are subject to a 10% withholding tax unless any such foreign shareholder’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Pursuant to Article 18 of the Interim Measures, if the amount of foreign exchange debt of our PRC subsidiaries exceeds their respective borrowing limits, we are required to apply to the relevant Chinese authorities to increase the total investment amount and registered capital to allow the excess foreign exchange debt to be registered with the SAFE.
Taxation
For a discussion of applicable PRC tax regulations, see “Item 5. Operating and Financial Review and Prospects.”
Regulation on Employment
On June 29, 2007, the National People’s Congress promulgated the Labor Contract Law of PRC (the “Labor Law”), which became effective as of January 1, 2008. On September 18, 2008, the PRC State Council issued the PRC Labor Contract Law Implementation Rules, which became effective as of the date of issuance. The Labor Law and its implementation rules are intended to give employees long-term job security by, among other things, requiring employers to enter into written contracts with their employees and restricting the use of temporary workers. The Labor Law and its implementation rules impose greater liabilities on employers, require certain terminations to be based upon seniority rather than merit and significantly affect the cost of an employer’s decision to reduce its workforce. Employment contracts lawfully entered into prior to the implementation of the Labor Law and continuing after the date of its implementation remain legally binding and the parties to such contracts are required to continue to perform their respective obligations thereunder. However, employment relationships established prior to the implementation of the Labor Law without a written employment agreement were required to be memorialized by a written employment agreement that satisfies the requirements of the Labor Law within one month after it became effective on January 1, 2008.
Regulations in Singapore
Singapore’s healthcare regulatorysystem is regulated by the Ministry of HealthNHC of Singapore along withand its statutory boards (the “MOH of Singapore”). All healthcare facilities such as hospitals, medical centers, community health centers, nursing homes, clinics (including dental clinics) and clinical laboratories (including x-ray laboratories) are required to apply for licenses under The Private Hospitals and Medical Clinics Act (Chapter 248) and the regulations made thereunder or the PHMC(the “PHMC Act/Regulations.Regulations”). All healthcare facilities are also required to maintain a good standard of medical/clinical services under the PHMC Act/Regulations.
License Required by Our Company
Pursuant to the PHMC Act which was issued in 1980 and revised in 1999, no premises or conveyance shall be used as a private hospital or healthcare establishment except under the authority and in accordance with the terms and conditions of a license issued by the MOH of Singapore; if a private hospital or healthcare establishment is not licensed or is used otherwise than in accordance with the terms and conditions of its license, every person having the management or control thereof shall be guilty of an offence and shall be liable on conviction to a fine not exceeding SGD20,000 or to imprisonment for a term not exceeding 2 years or to both; the MOH of Singapore may order the person having the management or control of any unlicensed private hospital or healthcare establishment to close that private hospital or healthcare establishment either forthwith or within such time as they may specify; and if the person to whom an order is given fails to comply with the order, he shall be guilty of an offence and shall be liable on conviction to a fine not exceeding SGD10,000 or to imprisonment for a term not exceeding 12 months or to both and, in the case of a continuing offence, to a further fine not exceeding SGD1,000 for every day or part thereof during which the offence continues after conviction. Our subsidiary, Concord Cancer Hospital. hasWe have obtained a license from the MOH of Singapore to operate Concord CancerInternational Hospital.
Registration of Medical Practitioner
The Singapore Medical Council, a statutory board under the MOH of Singapore, maintains the Register of Medical Practitioners in Singapore, administers the compulsory continuing medical education (CME) programme(generally known as CME) program and also governs and regulates the professional conduct and ethics of registered medical practitioners. Pursuant to the Medical Registration Act (Chapter 174) which was issued in 1997 and revised in 2014, no person shall practice as a medical practitioner or do any act as a medical practitioner unless he is registered under this act and has a valid practicing certificate.
Duties and Responsibilities of Persons who Manage a Private Hospital
Pursuant to Guidelines under the PHMC Act (1980) and Regulations (1991), any person who manages a private hospital, medical clinic or clinical laboratory shall, where applicable: (a) at all times exercise close personal supervision of the premises and the persons employed therein and cause all orders and directions of the medical practitioner in charge of the patients to be faithfully and diligently carried out; (b) keep and maintain all materials, equipment and appliances necessary for the proper diagnosis, care or treatment of patients or running of the services and shall provide any additional equipment and appliances as may be directed by the MOH of Singapore from time to time; (c) accept for admission into the private hospital (excluding nursing homes) only those patients recommended by a registered medical practitioner; (d) be responsible for the maintenance of the standards of practice acceptable to the MOH of Singapore; and (e) be responsible for the notification for any patient with or suspected to have a notifiable disease, as required under the Infectious Diseases Act of Singapore.
Requirements of Drugs, etcetc.
Pursuant to Guidelines under the PHMC Act (1980) and Regulations (1991), every private hospital shall maintain: (a) storage of all antiseptics, drugs for external use and disinfectants separate from internal and injectable medication; (b) an adequate supply of medicinal products and appropriate records of such products; and (c) a means of identifying the signatures of all medical practitioners authorized to use the pharmaceutical services for prescriptions.
Requirements of Equipment
Pursuant to Guidelines under the PHMC Act (1980) and Regulations (1991), every private hospital shall ensure that procedures are drawn up regarding the proper use, care and maintenance of all equipment used in the private hospital and shall comply with established or recommended procedures; and every piece of equipment used in any endoscopic, operative or invasive procedure shall be rendered sterile by the appropriate procedure.
| C. | Organizational Structure |
The following diagram illustrates our company’s organizational structure, and the place of formation, ownership interest and affiliation of each of our principal subsidiaries and consolidated affiliated entities as of the date of this annual report.December 31, 2019.
| D. | Property, |
Our principal headquarters are located at 18/F, Tower A, Global Trade Center, 36 North Third Ring Road East, Dongcheng District, Beijing, 100013. We occupy and use this office space with a gross floor area of approximately 1,930 square meters, pursuant to lease agreements entered into in January 2012.
The following table sets forth our leased properties for office space use as of the date of this annual report:
| Location | Size (in square meters) | Expiration Date | Usage of Property | |||||
| Beijing | 1,930 | May | Office space | |||||
| Beijing | 29 | June | Office space | |||||
| Beijing | 253 | January | Office space | |||||
| Shanghai | 30 | October | Office space | |||||
| Shenzhen | 242 | December | Office space | |||||
| Tianjin | 10 | March 2022 | Office space | |||||
| Guangzhou | 284 | July 2020 | Office space | |||||
| Guangzhou | 586 | October 2020 | Office space | |||||
We also own certain properties in China and Singapore to establish and operate premium cancer hospitals and specialty cancer hospitals as part of our business expansion. When we state that we own certain properties in China, we own the relevant land use rights because land is owned by the PRC government under the PRC land system.
The following table sets forth the details of our leased and self-owned properties for hospital and medical center use as of the date of this annual report:
| Location | Planned/ Actual Size (in square meters) | Planned/ Actual Capacity (beds) | Usage of Property | Nature of Properties | Status(4)(5) | Planned/ Actual Size (in square meters) | Planned/ Actual Capacity (beds) | Usage of Property | Nature of Properties | Status(4)(5) | ||||||||||||||
| Singapore | 2,544 | 31 | Concord Cancer Hospital | Owned | Acquired in 2015 | 2,544 | 31 | Concord International Hospital | Owned | Acquired in 2015 | ||||||||||||||
| Shanghai(1) | 158,769 | 400 | Shanghai Concord Cancer Hospital | Owned | Held for future development | 158,769 | 400 | Shanghai Concord Cancer Center | Owned | Held for future development | ||||||||||||||
| Guangzhou(2) | 40,000 | 400 | Guangzhou Concord Cancer Hospital | Owned | Held for future development | 40,000 | 400 | Guangzhou Concord Cancer Center | Owned | Held for future development | ||||||||||||||
| Wuxi(3) | 8,743 | 200 | Planned Specialty Cancer Hospital Project | Owned | Held for future development | 8,743 | 200 | Wuxi Meizhong Jiahe Cancer Center | Owned | Held for future development | ||||||||||||||
| Datong | 5,983 | 100 | Datong Meizhong Jiahe Cancer Center | Leased (Expire in September 2034) | Under construction | 5,983 | 100 | Datong Meizhong Jiahe Cancer Center | Leased (Expire in September 2034) | In operation | ||||||||||||||
| Shanghai | 2,500 | 0 | Shanghai Meizhong Jiahe Cancer Center | Leased (Expire in September 2026) | In operation | |||||||||||||||||||
| Shanghai | 10,986 | 0 | Shanghai Meizhong Jiahe Medical Imaging Diagnosis Center | Leased (Expire in September 2036) | In operation | |||||||||||||||||||
Notes:
| (1) | In July 2015, we entered into the land use rights grant contract for |
| (2) | In August 2012, we entered into the land use rights grant contract for |
| (3) | In January 2016, we entered into the land use rights grant contract for |
| (4) | See “Item 4. Information on the Company—B. Business Overview—Our Network of Centers,” “Item 4. Information on the Company—B. Business Overview—Our Premium Cancer Hospitals” and “Item 4. Information on the Company—B. Business Overview—Our Proton Centers” for more details of each our hospital projects. |
| (5) | See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Acquisitions and Capital Expenditures” for more details of the capital expenditures plans of our planned hospital projects. |
The cooperative centers in our network typically have gross floor area ranging from approximately 100 to 400 square meters depending on the services provided at the cooperative center.
We owned the following primary medical equipment as of December 31, 2016,2019, which are located in the various centers across our network:
| Number of primary medical equipment owned(1): | |||||
| Linear accelerators | |||||
| Head gamma knife systems | |||||
| Body gamma knife systems | |||||
| PET-CT scanners | |||||
| MRI scanners | |||||
| Others(2) | |||||
| Total | |||||
| (1) | Excluding data from eight centers under service-only agreements as of December 31, |
| (2) |
See “Item 4. Information on the Company—B. Business Overview—Environment Matter” regarding the environment issues which may affect our utilization of our assets.
| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion may contain forward lookingforward-looking statements based upon current expectations that involve risks and uncertainties. See “—G. Safe Harbor.” Our actual results may differ materially from those anticipated in these forward lookingforward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information —D. Risk Factors” or in other parts of this annual report.
| A. | Operating Results |
Overview
We operate an extensive network of radiotherapy and diagnostic imaging centers in China. MostWe have established most of the cooperative centers in our network are established through long-term lease and management services arrangements with hospitals typically ranging from 5 to 20 years entered into with hospitals.years. Under these arrangements, we receive a contracted percentage of each center’s revenue. Such contracted percentages typically range from 50% to 90% and are adjusted based on a declining scale over the term of the arrangement. Each cooperative center is located on the premises of our hospital partners and is typically equipped with a primary unit of advanced radiotherapy or diagnostic imaging equipment, such as a linear accelerator, head gamma knife system, body gamma knife system, PET-CT scanner or MRI scanner. We manage each cooperative center jointly with our hospital partnerpartners and we purchase the medical equipment used in our network of centers and lease such equipment to our hospital partners. In June 2012, we acquired 52% of the equity interest in Chang’an Hospital for a total cash consideration of approximately RMB248.8 million. After this acquisition, the results of operations of Chang’an Hospital were consolidated into our results of operation commencing in the third quarter of 2012. In December 2014, we sold the 52% equity interest in Chang’an Hospital and WHT for a total cash consideration of approximately RMB397.9 million (US$64.1 million), in order to fully concentrate on building a nationwide network of diagnosis and treatment centers and specialized cancer hospitals. Financial results from Chang’an Hospital and WHT prior to the disposal were reclassified as “net income from discontinued operations” in the consolidated statements of comprehensive income (loss). In April 2015, we acquired 100% of the equity interest in Concord Cancer Hospital for a total cash consideration of SGD55.0 million (RMB253.5 million). After the completion of this acquisition, the results of operations of Concord Cancer Hospital were consolidated into our results of operation commencing in the second quarter of 2015.
In January 2016, we acquired a 100% equity interest in Beijing Century Friendship, and an additionalwhich held a 55% equity interest in Beijing Proton Medical Center, with a total consideration of RMB100.6 million, and ultimately hold 80% equity interest in Beijing Proton Medical Center.million. After the completion of this acquisition, we held a total of 80% of the equity interests in Beijing Proton Medical Center through Beijing Century Friendship and King Cheers and the results of operations of Beijing Century Friendship and Beijing Proton Medical Center were consolidated into our results of operation commencing in the first quarter of 2016. In April 2017, more investments were injected to Beijing Century Friendship and Beijing Proton Medical Center. Upon the capital injection, our equity interest in Beijing Century Friendship decreased from 100% to 42.1% and our total equity interest in Beijing Proton Medical Center decreased to 48.16% (through Beijing Century Friendship and King Cheers) from 80%. As a result, we lost the control in Beijing Century Friendship and Beijing Proton Medical Center in April 2017 and accounted for it as a deemed disposal and recognized a gain. Beijing Century Friendship and Beijing Proton Medical Center were not our consolidated subsidiaries commencing in the third quarter of 2017. During 2018, we, through our majority-owned subsidiary, acquired all the equity interests in Beijing Century Friendship which held a 55% equity interest in Beijing Proton Medical Center. See “Item 4. Information on the Company—History and Development of the Company.” As a result, as of December 31, 2018, our effective equity interest in Beijing Century Friendship was 60% and our total effective equity interest in Beijing Proton Medical Center was 58% (through Beijing Century Friendship and King Cheers). As of December 31, 2019, our effective equity interest in Beijing Century Friendship was 60% and our total effective equity interest in Beijing Proton Medical Center was 58% (through Beijing Century Friendship and King Cheers). In October 2018, we obtained the control of Beijing Century Friendship and Beijing Proton Medical Center. The results of operations of Beijing Century Friendship and Beijing Proton Medical Center were therefore consolidated into our results of operation commencing in the fourth quarter of 2018.
During 2018, Guofu Huimei was undergoing certain restructuring. Upon the completion, we became a holder of 90% equity interest in Shanghai Meizhong Jiahe Cancer Center. As of December 31, 2018, our effective equity interest in Shanghai Meizhong Jiahe Cancer Center was 55.42%. See “Item 4. Information on the Company—History and Development of the Company.” In October 2018, we obtained the control of Shanghai Meizhong Jiahe Cancer Center. The results of operations of Shanghai Meizhong Jiahe Cancer Center was consolidated into our results of operation commencing in the fourth quarter of 2018.
In 2016, ZR Guofu and we established an offshore fund, SP, and an onshore fund, Guofu Huimei, for the purpose of investments in our hospital business. See “Item 4. Information on the Company—A. History and Development of the Company.” The offshore fund SP was determined as a variable interest entity as the cash injection from ZR Guofu was not equity at risk. The 75% equity interest in SP held by the ZR Guofu was contractually required to be repurchased by us at the end of four years from the establishment of SP in November 2016 at a consideration equivalent to the investment cost of RMB521.4 million. ZR Guofu was also entitled to an annual premium at 15% for its capital contribution of RMB521.4 million in SP in the form of interest expense and consultation expense. In addition, our shares in Beijing Century Friendship, certain construction in progress and certain land use rights have been pledged to secure our obligation to repurchase capital contribution from ZR Guofu. As we maintained the power to direct the activities that most significantly affect SP’s economic performances through agreed terms of supplemental contracts and absorbed the expected losses of SP, we were the primary beneficiary of SP and consolidated SP and its subsidiaries in 2016. In November 2017, ZR Guofu transferred its rights to the mandatorily redeemable non-controlling interest in SP to Tianjin Jiatai. As of December 31, 2017, we held a 26.07% equity interest in Guofu Huimei. The onshore fund Guofu Huimei was not a variable interest entity, we did not control but we could exercise significant influence over Guofu Huimei and thus we recorded Guofu Huimei as an investment under equity method. In 2018, ZR Guofu and Guofu Huimei reached an agreement pursuant to which ZR Guofu withdrew its investments in Guofu Huimei. In September 2018, ZR Guofu completed the withdrawal of its investments in Guofu Huimei and exited Guofu Huimei and we became the sole shareholder of Guofu Huimei. We accounted for it as a single transaction and obtained control of Guofu Huimei, Beijing Century Friendship and Beijing Proton Medical Center on October 8, 2018. We hold a 100% equity interest in Guofu Huimei and Guofu Huimei was consolidated into our results of operation commencing in the fourth quarter of 2018. In addition, after Guofu Huimei became our wholly-owned subsidiary, SH Rongchi and Tianjin Jiatai became our equity investees and were accounted for as investments under equity method in 2018. During 2019, Tianjin Jiatai made capital injection in a total of RMB34.5 million (US$5.1 million) to Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd., and increased the equity interests in it from 56.77% to 78.34%. In July 2019, we entered into an agreement with Tianjin Jiatai, to purchase all of its 90% equity interests in Wuxi Meizhong Jiahe Cancer Center Co., Ltd. at a consideration of RMB27.0 million (US$3.9 million). After the acquisition, Wuxi Meizhong Jiahe Cancer Center Co., Ltd. became our wholly owned subsidiary. In August 2019, we further injected capital of RMB82.1 million (US$11.8 million) to Wuxi Meizhong Jiahe Cancer Center Co., Ltd. In September 2019, we entered into an agreement with ZR Guofu, pursuant to which ZR Guofu sold its 77.18% equity interests in Tianjin Jiatai to us at a cash consideration of RMB421.7 million (US$60.6 million). We paid the consideration in August and September 2019 and completed the related registration on November 18, 2019. In November 2019, ZR Guofu entered into another agreement with us and Tianjin Jiatai to withdraw from Tianjin Jiatai and its subsidiaries. As a result of ZR Guofu’s withdrawal, we became the sole shareholder of Tianjin Jiatai, and its subsidiaries, including Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd., Wuxi Meizhong Jiahe Cancer Center Co., Ltd., Heze Meizhong Jiahe Cancer Center Co., Ltd., SH Rongchi and Oriental Light Group Limited, and their results of operation were consolidated into our results of operation. Immediately prior to the acquisition of Tianjin Jiatai, including its subsidiaries, in November 2019, the rights to the mandatory redeemable to non-controlling interest in SP held by Tianjin Jiatai amounted to RMB434.2 million (US$62.4 million). The mandatorily redeemable non-controlling interest, being a pre-existing relationship between the parties, was settled as a result of the business combination. Upon the completion of the acquisition and the settlement of mandatorily redeemable non-controlling interest, SP is no longer a variable interest entity. However, we continue to consolidate SP under the voting model.
Our business has dropped in recent years due to termination of some cooperative centers and hospitals which resulted in decreases in the number of patient cases incenters. Revenues from our network and hospitals. Our total net revenuesbusiness decreased to RMB455.0RMB121.5 million (US$65.517.4 million) in 20162019 from RMB616.5RMB138.1 million in 20152018 and RMB606.9RMB299.3 million in 2014,2017, primarily due to termination of centers and reduction in profit sharing amount dueattributable to the change in profit sharing ratio for centers that are at the later stage of cooperative agreements. However, revenues from our hospital business increased to RMB76.8 million (US$11.0 million) in 2019 from RMB52.8 million in 2018 and RMB31.7 million in 2017, primarily due to increases in revenues generated from Concord International Hospital in Singapore, Datong Meizhong Jiahe Cancer Center and Shanghai Meizhong Jiahe Cancer Center in PRC upon the normal operation.
On January 1, 2018,we changed our method of accounting for revenue from contracts with customers, our method of accounting the recognition of the income tax consequence of intra-entity transfer of assets, the presentation of the cash flows and our method of accounting for certain long-term investments in the year ended December 31, 2018. We adopted ASU No. 2014-09,Revenue from Contracts with Customers, (“ASC 606”), which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605,Revenue Recognition, (“ASC 605”), using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with historic accounting under ASC 605. The impact of adopting the new revenue standard was not material to our consolidated financial statements and there was no adjustment to beginning retained earnings on January 1, 2018. We adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, on January 1, 2018 using the modified retrospective adoption method. The adoption of this accounting standard resulted in an adjustment to beginning accumulated deficit for deferred tax liability and beginning accumulated deficit. This deferred tax liability is entirely offset and therefore resulted in a change to beginning accumulated deficit. The cumulative effect of changes made to our consolidated balance sheet as of January 1, 2018 for the adoption of ASU 2016-16 was RMB5.6 million (US$0.8 million). We also adopted ASU 2016-18,Statement of Cash Flows (Topic 230): Restricted Cash, effective January 1, 2018 using the retrospective transition method and included all restricted cash with cash and cash equivalent when reconciling beginning-of-period and end-of-period total amounts presented in the consolidated statements of cash flows. Net increase (decrease) in cash in 2016 and 2017 was adjusted. The impact of adopting this new standard was not material to our consolidated financial statements. Furthermore, we adopted ASC Topic 321,Investments-Equity Securities, (“ASC 321”) and the cumulative effect of adopting the new standard on opening accumulated deficit is nil. See “—Critical Accounting Policies—Long-term Investments.” The impact of adopting this new standard was not material to our consolidated financial statements. Prior to adopting ASC 842, we accounted for the prepaid land use right in the PRC cost less accumulated amortization. We recorded amortization on a straight-line basis over the terms of the land use rights agreement of 50 years. Upon the adoption of ASC 842, operating leases related to land use right are subject to ASC 842 and right-of-use assets and lease liabilities are recognized on the consolidated balance sheet.
Factors Affecting Our Results of Operations
Our financial performance and results of operations are generally affected by the number of cancer patients in China and in the regions in which we have business operations. According to a reportthe latest global cancer data issued on September 18, 2018 and WHO World Cancer Report 2018, both issued by Frost & Sullivan, patients diagnosed withWHO, the burden of cancer rose to 18.1 million new cases and 9.6 million cancer death in China increased from approximately 2.82018 globally and there were 3.8 million patients in 2003 to 3.5 million patients in 2008. The total number of new cancer cases and 2.3 million cancer-caused deaths in China was 3.5 million in 2012,China. Moreover, according to 2012the China Health Statistics Yearbook 2018, cancer is still one of the leading causes of death (26.1% of total death) in China. According to the latest Chinese Cancer Registry Annual Report. According to CAReport issued by the Chinese National Cancer J Clin, newInstitute in January 2019, the burden of cancer cases will increase to approximately 4.3 millionshowed a continuous upward trend in China in recent 10 years, the incidence of cancer increased by about 3.9% from 2005 to 2015 and the mortality increased by 2.5% annually from 2005 to 2015.
Based on a survey conducted by the Ministry of Health,NHC, the increase in cancer cases is primarily attributable to demographic changes and urbanization. With the continued increase in disposable income, government healthcare spending and medical insurance coverage, there has been a considerable increase in demand for cancer diagnosis and treatments and we have been able to grow our business significantly by providing high quality radiotherapy and diagnostic imaging services in China to address suchthese needs. In addition, public hospitals generally lack the financial resources to purchase, or the expertise to operate, radiotherapy and diagnostic imaging centers. Such factors combined have contributed favorably to the growth of our business.
We believe that the radiotherapy and diagnostic imaging market will continue to beremain favorable in the future. However, changes in the cancer treatment market in China, whether due to changes in government policy or any decrease in the number of cancer cases treated by radiotherapy in China, may have an adverse effect onadversely affect our results of operations. See “Item 4. Information on the Company—B. Business Overview—Regulation of Our Industry.”
In addition to general industry and regulatory factors, our financial performance and results of operations are affected by company-specific factors. We believe that the most significant of these factors are:
| · | our ability to expand our network and our hospitals in and out of China; |
| · | the number of patient cases treated in our network and our hospitals; |
| · | the operational arrangements with our hospital partners; |
| · | the range and mix of services provided in our network and our hospitals; and |
| · | the cost of our medical equipment. |
Our Ability to Expand Our Network of Centers and Our Hospitals in and out of China
As of December 31, 2016,2019, our network comprised 95consisted of 31 cooperative centers based in 5721 hospitals, spanning 49over 21 cities across 1913 provinces and administrative regions in China. Our ability to expand, and to optimize the number of, our network of centers is one of the most important factors affecting our results of operation and financial condition. Historically, our business growth has been primarily driven by developing new cooperative centers throughby entering into new arrangements with hospital partners or acquisitions from third parties and we expect this to continue to be the key driver for our future growth.parties. In addition to our cooperative centers, we are currently establishing specialty cancer hospitals in our network as well as proton centers and premium cancer hospitals in China.
The development of these hospitals is an important step of our broader strategy and will alsois expected to become the key driver of our future growth. Each additional center and hospital that we develop increases the number of patient cases treated in our network and hospitals and contributes to our continued revenue growth. However, new cooperative centers developed through ourby entering into new arrangements with hospital partners and our planned hospitals generally involve a ramp-up period during which time the operating efficiency of such centers and hospitals may be lower than that of our established centers, which may negatively affect our profitability. In addition, if we establish additional cooperative centers and hospitals through acquisition, our acquired intangible assets will increase and the resulting amortization expenses may, to a significant extent, offset the benefit of the increase in revenues generated from cooperative centers and hospitals established through acquisitions. Further,
Furthermore, other factors such as the financial resources and know-how of hospitals in China to purchase medical equipment directly and to operate radiotherapy and diagnostic imaging centers independently, and the number of units of radiotherapy and diagnostic imaging equipment that are allocated by the PRC government for purchase, will also affect our ability to expand our network and our hospitals. Our ability to expand, and to optimize the number of cooperative centers and specialty cancer hospitals in our network and our hospitals will depend on a number of factors, such as:
| · | the reputation of our existing network of cooperative centers and doctors providing services in our network of centers and our hospitals; |
| · | our financial resources; |
| · | our ability to timely establish and manage new cooperative centers in conjunction with our hospital partners and our own planned hospitals; |
| · | our relationship with our hospital partners; and |
| · | performance of our hospital partners and our own planned hospitals. |
In 2014, we added six new cooperative centers to our network, all of which were under lease agreement services arrangements. We closed 11 cooperative centers, 1214 cooperative centers and 713 cooperative centers in 2014, 20152017 and 2016,2018, respectively, due to expiryexpiration of the arrangements with certain of these cooperative centers as well as our focus on developing our hospital business going forward. We did not close any cooperative center in 2019. Our first specialty cancer hospital, Datong Meizhong Jiahe Cancer Center, opened preliminarypreliminarily in May 2016. We plan to establish further specialty cancer hospitals2016 and officially opened for operation in Taizhou, Wuxi, Hangzhou and Nanchang in the future.May 2017.
Our premium cancer hospitals, which will provide premium cancer treatment services to our patients, currently include Concord CancerInternational Hospital in Singapore, thatwhich we acquired in April 2015 from Fortis Healthcare International, and two planned hospitals in China, Shanghai Concord Cancer HospitalCenter and Guangzhou Concord Cancer Hospital, that are scheduled to commenceCenter. We commenced construction of Shanghai Concord Cancer Center in May 2017. September 2017, with an estimated construction period of three years. We also commenced construction of Guangzhou Concord Cancer Center in November 2017, with an estimated construction period of three years.
We are in the process of establishing the Beijing Proton Medical Center, which we expect to be the first proton beam therapy treatment centerCenter. The construction commenced in China equippedJune 2017, with an estimated construction period of three and a proton beam therapy system licensed for clinical use and is scheduled to commence construction in the second quarter of 2017.half years. In December 2012, we acquired 19.98% of indirect ownership of 19.98% of the equity interests in the MD Anderson Proton Therapy Center, and in August 2015, we acquired additional 7.04% of the equity interest of 7.04%interests in the MD Anderson Proton Therapy Center from an existing owner of the general partner to expand our expertise and knowledge base in preparation for the operation of future proton centers in China. Although MD Anderson Proton Therapy Center sold its assets and liabilities in November 2018, we retained the partnership shares of 59.51% in PTC-Houston Management, LP., the general partner of the center.
The Number of Patient Cases Treated in Our Network and Our Hospitals
Increasing the number of patient cases diagnosed and treated at our existing centers and hospital is important for the continued growth of our business. The number of patient cases is primarily driven by doctor referrals.reputation of the doctors, centers and hospitals. Doctors decide whether to refer patients to centers in our network and our hospitals based on factors such as the reputation of the center and hospital, the location of the center and hospital and the reputation of the doctors who provide services in the center and hospital. In addition, the referring doctors’ awareness of the efficacy and benefits of radiotherapy treatments and their preference as to other cancer treatment methods also contribute to their willingness to refer cases for diagnosis and treatment to the centers in our network and our hospital.
Accordingly, we have focused our marketing efforts on increasing referring doctors’ awareness of the efficacy of radiotherapy treatments and the advantages of the treatment options available to their patients in our network of centers and our hospital. There is also typically a ramp-up period for newly established centers and hospital during which time acceptance by doctors and patients of such new centers and hospital gradually pick up and the number of patient cases increase. The
However, the numbers of our treatment and diagnostic patient cases were 27,190in our network decreased from 11,111 and 275,576147,158, respectively, in 2016,2018, to 10,367 and 142,175, respectively, representing an increasesin 2019, primarily due to the reduction of 8.4%our network centers. However, our treatment and a decrease of 11.0% from 2015, respectively.diagnostic patient cases in Datong Meizhong Jiahe Cancer Center in PRC, Concord International Hospital in Singapore and Shanghai Meizhong Jiahe Cancer Center in PRC increased to 2,973, 2,550 and 3,070, respectively, in 2018, to 4,145, 3,614 and 4,269, respectively, in 2019.
The Operational Arrangements with Our Hospital Partners
The majority of our total net revenues is derived from our lease and management services arrangements with our hospital partners which typically range from 5five to 20 years and under which we receive a contracted percentage of each cooperative center’s revenue. Such contracted percentage typically range from 50% to 90% and are typically adjusted based on a declining scale over the term of the arrangement but in certain circumstances, are fixed for the duration of the arrangement.
In the event that specified operating expenses exceed the revenues of the cooperative center, we would collect no revenues from such center. As a result, our ability to negotiate a higher contracted percentage and our ability to contain operating expenses will have a significant effect onsignificantly affect our revenues and profitability.
In negotiations with hospitals as to our contracted percentage, we consider factors such as:
| · | the size and location of potential hospital partner; |
| · | the length of the arrangement; |
| · | the type of medical equipment to be installed in the hospital’s center; |
| · | the capabilities of the doctors that will provide services at the cooperative centers; and |
| · | the potential growth of such center. |
Our ability to achieve a higher contracted percentage also depends on our bargaining power relative to our potential hospital partners and on the purchase price of the medical equipment to be used at the new cooperative centers. We believe that our contracted percentage of cooperative centers’ revenue for new arrangements will generally decline over time as the purchase prices of the primary medical equipment used in our network of centers decrease due to technological advancement and increased competition.
We also provide management services to a small number of cooperative centers through service-only agreements where we receive a management fee equal to a contracted percentage of each cooperative center’s revenue net of specified operating expenses. Such service-only agreements typically increase our profitability as we do not own the medical equipment used by such centers, and thus do not incur the associated depreciation expenses.
However, service-only agreements are usually short-term in nature, and the risk of non-renewal of such agreements is high. We also typically receive a lower contracted percentage under such service-only agreements compared to the percentage we receive from cooperative centers managed under lease and management services arrangements. Accordingly, we do not intend to substantially increase the number of service-only agreements in the future.
We are currently in the process of establishing proton centers, premium cancer hospitals and specialty cancer hospitals that we will be majority owned and operated by us.operate. For such hospitals, we will need to hire a significant number of medical and other personnel and incur other start-up costs that will result in an increase in our operating expenses without a corresponding increase in revenues during the initial ramp-up period. As a result, our profitability may be negatively affected.
The Range and Mix of Services Provided in Our Network and Our Hospitals
The medical service fees charged for the services provided in our network of centers and our hospitals vary by the type of medical equipment used as well as the provinces or regions in China and Singapore in which such centers and hospitals are located due to the varying applicable price ceilings. Medical service fees in China are subject to government controlled price ceilings established by the relevant government authorities in the different provinces and regions. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Industry—Pricing for the services provided by our network of centers may be adversely affected bysuffer from reductions in treatment and examination fees set by the Chinese government” and “Item 4. Information on the Company—B. Business Overview—Regulation of Our Industry—Regulations in China—Regulation of Medical Institutions—Pricing of Medical Services.”
The maximum medical service fees for the same treatment using the same equipment may differ betweenamong provinces and regions. Centers and hospitals established in provinces or regions with a significantly higher price ceiling may result in an increase in our revenues derived from such centers and hospitals and higher profit margin for the centers and hospitals, resulting in an increase in our profitability. In addition, certain medical services allow us to charge higher fees than other types of medical services.
For example, medical service fees for treatments provided through head gamma knife systems typically range from approximately RMB9,000RMB12,000 to RMB20,000RMB16,000 per patient case, with each treatment lasting one session for approximately 1030 to 3090 minutes, medical service fees for treatments provided through body gamma knife systems typically range from approximately RMB12,500RMB20,000 to RMB25,000RMB30,000 per patient case, with each treatment lasting fivethree to tensix sessions and 1030 to 2060 minutes each, and medical service fees for treatments provided through linear accelerators typically range from approximately RMB8,000RMB5,000 to RMB40,000RMB60,000 per patient case, with each treatment lasting from 2030 to 40 sessions and 10 to 20 minutes each.
In addition, linear accelerators can be integrated with specialized computer software and advanced imaging and detection equipment to provide more effective and advanced treatments such as three-dimensional conformal radiation therapy, which significantly increase the medical service fees per treatment. Furthermore, diagnostic imaging services typically have a lower profit marginmargins than radiotherapy treatment.treatments.
The Cost of Our Medical Equipment
Depreciation expense associated with the medical equipment that we purchase and use in our centers and hospitals represents a significant portion of our cost of revenues. Our ability to reduce the price of medical equipment purchased, thereby reducing the depreciation expense associated with the medical equipment purchased, will serve to increase our profitability. Our extensive network of centers has provided us with increased bargaining power with equipment manufacturers.
We have entered into strategic agreements with certain medical equipment manufacturers in order to lower the average cost of our equipment. SuchThese agreements provide that we will receive preferential pricing if we purchase a certain number of units of equipment from a manufacturer within a given period of time.period. However, we are not required by such agreements to commit to purchase a minimum number of units of equipment from such manufacturers or precluded from purchasing equipment from other manufacturers.
We aim to continue to enter into additional strategic agreements with medical equipment manufacturers to further reduce the cost of our equipment in the future. Furthermore, we expect the purchase prices of our primary medical equipment to decrease over time as a result of technological advancement and increased competition.
Financial Impact of Our Acquisitions and Disposals
The consideration we paid for each acquisition was allocated to the net assets acquired at estimated fair value, with the acquired intangible assets amortized over the period of expected benefits to be realized.
In June 2012, During 2018, we acquired through Cybermore equity interests in Beijing Century Friendship, Beijing Proton Medical Center, Shanghai Meizhong Jiahe Cancer Center and Shanghai Medstar, 52%Guofu Huimei and ZR Guofu and Guofu Huimei reached an agreement according to which ZR Guofu withdrew its original investments in Guofu Huimei. See “Item 4. Information on the Company—History and Development of the equity interest in Chang’an Hospital forCompany.” Upon the completion, we held a total cash consideration of approximately RMB248.8 million, which gave us effective control over the full capacity of 1,100 beds in Chang’an Hospital. The results of operations of Chang’an Hospital were consolidated into our results of operation commencing in the third quarter of 2012.
In December 2014, we sold the 52% equity interest in Chang’an Hospital and WHT for a total cash consideration of approximately RMB397.9 million (US$64.1 million), in order to fully concentrate on building a nationwide network of diagnosis and treatment centers and specialized cancer hospitals. Financial results from Chang’an Hospital and WHT were reported as discontinued operations for all periods presented.
In April 2015, we acquired 100% equity interest in Concord Cancer Hospital forBeijing Century Friendship, a total cash consideration of SGD55.0 million (RMB253.5 million). After the completion of this acquisition, the results of operations of Concord Cancer Hospital were consolidated into our results of operation commencing in the second quarter of 2015.
In December 2012, we acquired 19.98%80% equity interest in the MD AndersonBeijing Proton TherapyMedical Center, a leading proton treatment center in the world, for a total consideration approximately US$32.3 million. In August 2015, we acquired additional90% equity interest in Shanghai Meizhong Jiahe Cancer Center and a 100% equity interest in Guofu Huimei through our wholly-owned or majority-owned subsidiaries. We account for it as a single transaction and obtained control of 7.04% in the MD AndersonGuofu Huimei, Beijing Century Friendship, Beijing Proton TherapyMedical Center from an existing ownerand Shanghai Meizhong Jiahe Cancer Center on October 8, 2018. The fair value of the general partner,gross assets acquired during the acquisition is not concentrated in a single identifiable asset or a group of similar identifiable assets and it meets the definition of a business and was accounted for aas business acquisition under ASC 805. Our effective equity interest in Beijing Century Friendship is 60%, our total consideration of approximately US$4.6 million. Financial results from the MD Andersoneffective equity interest in Beijing Proton TherapyMedical Center were reported as income (loss) fromis 58% (through Beijing Century Friendship and King Cheers), our effective equity method investments since 2015.interest in Shanghai Meizhong Jiahe Cancer Center is 55.42% and our effective equity interest in Guofu Huimei is 100%.
During 2019, Tianjin Jiatai made capital injection to Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd., and increased the equity interests in it from 56.77% to 78.34%. In July 2019, we entered into an agreement with Tianjin Jiatai, to purchase all of its 90% equity interests in Wuxi Meizhong Jeahe Cancer Center Co., Ltd. After the acquisition, Wuxi Meizhong Jiahe Cancer Center Co., Ltd. became our wholly owned subsidiary. In September 2019, we entered into an agreement with ZR Guofu, pursuant to which ZR Guofu sold its 77.18% equity interests in Tianjin Jiatai to us. We paid the consideration in August and September 2019 and completed the related registration on November 18, 2019. In November 2019, ZR Guofu entered into another agreement with us and Tianjin Jiatai to withdraw from Tianjin Jiatai and its subsidiaries. As a result of ZR Guofu’s withdrawal, we became the sole shareholder of Tianjin Jiatai and its subsidiaries, including Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd., Wuxi Meizhong Jiahe Cancer Center Co., Ltd., Heze Meizhong Jiahe Cancer Center Co., Ltd., SH Rongchi and Oriental Light Group Limited. These transactions are entered into in conjunction of each other and therefore, are accounted for as a single transaction. The fair value of the gross assets acquired during the acquisition is not concentrated in a single identifiable asset or a group of similar identifiable assets and it meets the definition of a business and was accounted for as business acquisition under ASC 805.
Beijing Century Friendship and Beijing Proton Medical Center
In January 2016, we acquired a 100% equity interest in Beijing Century Friendship, and an additionalwhich held a 55% equity interest in Beijing Proton Medical Center, with a total consideration of RMB100.6 million,million. As a result, we held a total of 80% of the equity interests in Beijing Proton Medical Center through Beijing Century Friendship and ultimately holdKing Cheers Center and the results of operations of Beijing Century Friendship and Beijing Proton Medical Center were consolidated into our results of operation commencing in the first quarter of 2016.
In April 2017, more investments were injected to Beijing Century Friendship and Beijing Proton Medical Center. See “Item 4. Information on the Company—History and Development of the Company.” Upon the capital injection, our equity interest in Beijing Century Friendship decreased from 100% to 42.1% and our total equity interest in Beijing Proton Medical Center decreased to 48.16% (through Beijing Century Friendship and King Cheers) from 80%. As a result, we lost the control in Beijing Century Friendship and Beijing Proton Medical Center in April 2017 and accounted for it as a deemed disposal and recognized a gain. The gain was measured as the difference between the fair value of the retained non-controlling interest at the date of deconsolidation and the carrying amount of the former subsidiaries’ net assets. The direct interest held in Beijing Century Friendship and Beijing Proton Medical Center by us was accounted for as equity method investment. Beijing Century Friendship and Beijing Proton were not our consolidated subsidiaries commencing in the third quarter of 2017.
During 2018, we, through our majority-owned subsidiary, acquired all the equity interests in Beijing Century Friendship (and therefore, a 80% equity interest in Beijing Proton Medical Center). As a result, as of December 31, 2018, our effective equity interest in Beijing Century Friendship was 60% and our total effective equity interest in Beijing Proton Medical Center was 58% (through Beijing Century Friendship and King Cheers). In addition, in October 2018, we obtained the control of Beijing Century Friendship and Beijing Proton Medical Center. The results of operations of Beijing Century Friendship and Beijing Proton Medical Center were therefore consolidated into our results of operation commencing in the fourth quarter of 2018.
Shanghai Meizhong Jiahe Cancer Center
As of December 31, 2017, our total effective equity interest in Guofu Huimei was 35.20%. During 2018, Guofu Huimei was undergoing certain restructuring. Upon the completion, we became a holder of 90% equity interest in Shanghai Meizhong Jiahe Cancer Center. Our effective equity interest in Shanghai Meizhong Jiahe Cancer Center was 55.42%. See “Item 4. Information on the Company—History and Development of the Company.” In addition, in October 2018, we obtained the control of Shanghai Meizhong Jiahe Cancer Center. The results of operations of Shanghai Meizhong Jiahe Cancer Center were consolidated into our results of operation commencing in the fourth quarter of 2018.
Guofu Huimei and Tianjin Jiatai
As of December 31, 2017, our total effective equity interest in Guofu Huimei was 26.07%. Guofu Huimei was not a variable interest entity, we did not control Guofu Huimei but we could exercise significant influence over Guofu Huimei and thus we recorded Guofu Huimei as an investment under equity method. In 2018, ZR Guofu and Guofu Huimei reached an agreement pursuant to which ZR Guofu withdrew its investments in Guofu Huimei. In September 2018, ZR Guofu completed the withdrawal of its investments in Guofu Huimei and exited Guofu Huimei and we became the sole shareholder of Guofu Huimei. We obtained control of Guofu Huimei in October 2018. As a result, we hold a 100% equity interest in Guofu Huimei and Guofu Huimei was consolidated into our results of operations commencing in fourth quarter of 2018.
In addition, after Guofu Huimei became our wholly-owned subsidiary, SH Rongchi and Tianjin Jiatai became our equity investees and were accounted for as investments under equity method. During 2019, Tianjin Jiatai made capital injection in a total of RMB34.5 million (US$5.1 million) to Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd., and increased the equity interests in it from 56.77% to 78.34%. In July 2019, we entered into an agreement with Tianjin Jiatai, to purchase all of its 90% equity interests in Wuxi Meizhong Jiahe Cancer Center Co., Ltd. with a consideration of RMB27.0 million (US$3.9 million). After the acquisition, Wuxi Meizhong Jiahe Cancer Center Co., Ltd. became our wholly owned subsidiary. In August 2019, we further injected capital of RMB82.1 million (US$11.8 million) to Wuxi Meizhong Jiahe Cancer Center Co., Ltd. In September 2019, we acquired 77.18% equity interests in Tianjin Jiatai from ZR Guofu with a cash consideration of RMB421.7 million (US$60.6 million). We paid the consideration in August and September 2019 and completed the related registration on November 18, 2019. In November 2019, ZR Guofu entered into another agreement with us and Tianjin Jiatai to withdraw from Tianjin Jiatai and its subsidiaries. As a result of ZR Guofu’s withdrawal, we became the sole shareholder of Tianjin Jiatai and its subsidiaries, including Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd., Wuxi Meizhong Jiahe Cancer Center Co., Ltd., Heze Meizhong Jiahe Cancer Center Co., Ltd., SH Rongchi and Oriental Light Group Limited, and their results of operations were consolidated into our results of operation upon the completion of the commercial registration.
Key Components of Results of Operations
Revenues
Our revenues are generated from our network business and our hospital business. The following table sets forth revenue contribution from our network business and our hospital business for the periods indicated:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| RMB | % of Total Net Revenues | RMB | % of Total Net Revenues | RMB | US$ | % of Total Net Revenues | RMB | % of Total Net Revenues | RMB | % of Total Net Revenues | RMB | US$ | % of Total Net Revenues | |||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except for percentages) | (in thousands, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Revenues | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Network business | 606,883 | 100.0 | 597,746 | 97.0 | 443,601 | 63,892 | 97.5 | 299,321 | 90.4 | 138,070 | 72.3 | 121,537 | 17,458 | 61.3 | ||||||||||||||||||||||||||||||||||||||||||
| Hospital business | — | — | 18,739 | 3.0 | 11,441 | 1,648 | 2.5 | 31,656 | 9.6 | 52,828 | 27.7 | 76,826 | 11,035 | 38.7 | ||||||||||||||||||||||||||||||||||||||||||
| Total net revenues | 606,883 | 100.0 | 616,485 | 100.0 | 455,042 | 65,540 | 100.0 | 330,977 | 100.0 | 190,898 | 100.0 | 198,363 | 28,493 | 100.0 | ||||||||||||||||||||||||||||||||||||||||||
The following table sets forth our total net revenues by geographic regions for the periods indicated:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| RMB | % of Total Net Revenues | RMB | % of Total Net Revenues | RMB | US$ | % of Total Net Revenues | RMB | % of Total Net Revenues | RMB | % of Total Net Revenues | RMB | US$ | % of Total Net Revenues | |||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except for percentages) | (in thousands, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PRC | 606,883 | 100.0 | 597,746 | 97.0 | 443,601 | 63,892 | 97.5 | 302,304 | 91.3 | 149,548 | 78.3 | 164,167 | 23,581 | 82.8 | ||||||||||||||||||||||||||||||||||||||||||
| Singapore | — | — | 18,739 | 3.0 | 11,441 | 1,648 | 2.5 | 28,673 | 8.7 | 41,350 | 21.7 | 34,196 | 4,912 | 17.2 | ||||||||||||||||||||||||||||||||||||||||||
| Total net revenues | 606,883 | 100.0 | 616,485 | 100.0 | 455,042 | 65,540 | 100.0 | 330,977 | 100.0 | 190,898 | 100.0 | 198,363 | 28,493 | 100.0 | ||||||||||||||||||||||||||||||||||||||||||
Network businessBusiness
Revenues generated from our network business consistsconsist of revenues derived from our network of centers that are directly related to the number of patient cases treated in our cooperative centers. We receive a contracted percentage of each center’s revenue. Such revenues are derived from medical service fees received by our hospital partners for the services provided in the cooperative centers. The specified operating expenses of cooperative centers typically include variable expenses, such as salaries and benefits of the medical and other personnel at the cooperative center, the cost of medical consumables, marketing expenses, training expenses, utility expenses and routine equipment repair and maintenance expenses.
Corporate level expenses that cannot be directly attributable to one cooperative center are typically accounted for as our cost of revenues. In addition, under certain lease and management services arrangements with our hospital partners, certain of the center-incurred expenses may be accounted for as our cost of revenues rather than as the expenses of the cooperative centers. Our contracted percentages typically range from 50% to 90% and are typically adjusted on a declining scale over the term of the arrangement. Revenues derived from such cooperative centers are accounted for as “lease and management services” on our consolidated statement of operation.
We also provide management services to a limited number of cooperative centers through service-only agreements under which the medical equipment is owned by the hospital or other third parties.parties own the medical equipment. We typically receive a management fee from each cooperative center equal to a contracted percentage of the cooperative center’s revenue net of specified operating expenses. Revenues derived from providing management services through service-only agreements are accounted for as “management services” on our consolidated statement of operation.operations. As of December 31, 2016,2019, we managed eight centers under service-only agreements.
Fees forFor medical services provided at the cooperative centers, are paidpatients pay fees directly to our hospital partners by patients and we are not responsible for patient billing and fee collection. Medical service fees in China are typically paid in full upfront by patients prior to receiving services. Generally, patients claim reimbursements, if any is available under the applicable public or private medical insurance plans. As a result, hospitals do not generally experience bad debt problems.
However, the healthcare reform announced by the PRC government in January 2009 has introduced pilot public medical insurance plans. Under these plans patients are only responsible for paying their deductible amounts upfront and hospitals are responsible for seeking reimbursements from the relevant government authorities after the treatments are provided. Certain of the hospitals in which some of the centers in our network are based are involved in such pilot medical insurance plan. We do not expect such change in payment timing to have a direct effect onmaterially affect our ability to collect our contracted percentage from our hospital partners. However, the ability of our hospital partners to collect medical service fees from the government authorities in a timely manner may affect the timing of payments made by our hospital partners to us as a result.
In the past, we have recorded uncollectible accounts receivable. Our allowance for doubtful accounts amounted to RMB2.3 million, RMB1.8RMB3.6 million and RMB0.06 million(US$0.01RMB7.1 million (US$1.0 million) as of December 31, 2014, 20152018 and 2016,2019, respectively.
We have historically derived a large portion of our total net revenues from a limited number of our hospital partners. For the years ended December 31, 2014, 20152017, 2018 and 2016,2019, net revenue derived from our top five hospital partners amounted to approximately 22.5%32.7%, 25.3%35.0% and 27.7%34.6%, respectively, of our total net revenues. Our largest hospital partner accounted for 6.4%12.5%, 7.5%9.7% and 9.9%, respectively,9.4% of our total net revenues during those periods.periods, respectively.
The following table sets forth revenue contribution from the leases and management service centers whose contracts would expire in the next five fiscal years:
| Number of centers | Aggregate revenues in 2016 | Percentage to total revenues | ||||||||||||||
| RMB in thousands | US$ in thousands | |||||||||||||||
| 2017 | 20 | 138,420 | 19,936 | 30.4 | % | |||||||||||
| 2018 | 6 | 39,264 | 5,665 | 8.6 | % | |||||||||||
| 2019 | 5 | 32,155 | 4,631 | 7.6 | % | |||||||||||
| 2020 | 11 | 73,029 | 10,518 | 16.0 | % | |||||||||||
| 2021 | 11 | 71,875 | 10,352 | 15.8 | % | |||||||||||
| Total | 53 | 354,743 | 51,102 | 78.4 | % | |||||||||||
| Number of Centers | Aggregate Revenues in 2019 | of Total Net Revenues | ||||||||||||||||
RMB in | US$ in | % | ||||||||||||||||
| 2020 | 5 | 7,122.1 | 1,020 | 3.6 | ||||||||||||||
| 2021 | 9 | 27,548.4 | 3,946 | 13.9 | ||||||||||||||
| 2022 | 4 | 10,587.2 | 1,516 | 5.3 | ||||||||||||||
| 2023 | 5 | 22,863.8 | 3,275 | 11.5 | ||||||||||||||
| 2024 | 1 | 1,228.0 | 176 | 0.6 | ||||||||||||||
| Total | 24 | 69,349.4 | 9,933 | 35.0 | ||||||||||||||
Hospital businessBusiness
Revenues generated from our hospital business consists of medicine income and medical service income generated from our self-owned hospitals. Medicine income includes medicine prescribed to patients during or after treatment by the doctors in our hospitals.
Medical service income include revenue generated from outpatients, which mainly consist of activities for physical examination, treatment, surgeries and tests, as well as that generated from inpatients, which mainly consist of activities for clinical examination and treatment, surgeries, and other fees such as room charges and nursing care. In 2016,2019, we derived all of our revenues from hospital business from the operation of Concord CancerInternational Hospital in Singapore.Singapore, Datong Meizhong Jiahe Cancer Center and Shanghai Meizhong Jiahe Cancer Center.
Cost of Revenues and Operating Expenses
The following table sets forth our cost of revenues and operating expenses in absolute amounts and as percentage of our total net revenues for the periods indicated.indicated.
| Year Ended December 31, | ||||||||||||||||||||||||||||
| 2014 | 2015 | 2016 | ||||||||||||||||||||||||||
| RMB | % of Total Net Revenues | RMB | % of Total Net Revenues | RMB | US$ | % of Total Net Revenues | ||||||||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||||||||||
| Cost of revenues | 274,562 | 45.2 | 353,336 | 57.3 | 286,543 | 41,271 | 63.0 | |||||||||||||||||||||
| Gross profit | 332,321 | 54.8 | 263,149 | 42.7 | 168,499 | 24,269 | 37.0 | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Selling expenses(1) | 95,096 | 15.7 | 112,815 | 18.3 | 70,093 | 10,095 | 15.4 | |||||||||||||||||||||
| General and administrative expenses(1) | 53,576 | 8.8 | 132,952 | 21.6 | 205,908 | 29,657 | 45.3 | |||||||||||||||||||||
| Impairment of long-lived assets | — | — | 23,125 | 3.8 | 61,124 | 8,804 | 13.4 | |||||||||||||||||||||
| Total operating expenses | 148,672 | 24.5 | 268,892 | 43.7 | 337,125 | 48,556 | 74.1 | |||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||||||
| 2017 | 2018 | 2019 | ||||||||||||||||||||||||||
| RMB | % of Total Net Revenues | RMB | % of Total Net Revenues | RMB | US$ | % of Total Net Revenues | ||||||||||||||||||||||
| (in thousands, except for percentages) | ||||||||||||||||||||||||||||
| Cost of revenues | 232,979 | 70.4 | 171,136 | 89.6 | 214,193 | 30,767 | 108.0 | |||||||||||||||||||||
| Gross profit (loss) | 97,998 | 29.6 | 19,762 | 10.4 | (15,830 | ) | (2,274 | ) | (8.0 | ) | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Selling expenses(1) | 43,608 | 13.2 | 21,718 | 11.4 | 30,241 | 4,344 | 15.2 | |||||||||||||||||||||
| General and administrative expenses(1) | 237,646 | 71.8 | 291,854 | 152.9 | 315,134 | 45,266 | 158.9 | |||||||||||||||||||||
| Impairment of long-lived assets | 28,600 | 8.6 | 5,433 | 2.8 | 76,089 | 10,930 | 38.4 | |||||||||||||||||||||
| Total operating expenses | 309,854 | 93.6 | 319,005 | 167.1 | 421,464 | 60,540 | 212.5 | |||||||||||||||||||||
| (1) | Our selling expenses included share-based compensation |
Cost of RevenuesRevenues..Our cost of revenues for network business primarily consists of the amortization of acquired intangibles, the depreciation of medical equipment purchased, installed and operated in our network of centers and other costs, including material cost of disposal medical supplies. With the exceptiondecrease of the amortization of acquired intangible assets, we expect such cost of revenues to increasedecrease in the future in line with the growthdecrease in our total net revenues as we continue to expandbecause of the termination of our network of centers and purchase more medical equipment. cooperative centers.
Our cost of revenues also include salaries and benefits for personnel employed by us and assigned to centers in our network, such as our project managers, as well as other costs that include certain training, marketing and selling and equipment repair and maintenance expenses that are not accounted for as the centers’ operating expenses in accordance with the terms of our lease and management services arrangements with our hospital partners. In addition, certain expenses are allocated as our cost of revenues instead of centers’ operating expenses if such expenses are incurred across several centers and cannot be allocated to one individual center. Our amortization of acquired intangibles in connection with the OMS reorganization, the acquisition of China Medstar, and other businesses was RMB23.1 million, RMB15.9 million and RMB9.6 million (US$1.4 million) in 2014, 2015 and 2016, respectively.We expect our amortization of acquired intangibles in connection with the OMS reorganization and the acquisition of China Medstar and other businesses to fall between the range of approximately RMB7.5 million and RMB1.1 million annually between 2017 and 2021.
Our cost of revenues for hospital business primarily consists of medicine costs, medical consumables, labor costs of doctors, nurses and other staff involved in the care or treatment of patients, depreciation, utilities as well as other related costs incurred in the normal business of a hospital.
Selling Expenses.Expenses. Selling expenses consist primarily of expenses associated with the development of new centers and hospitals, such as salaries and benefits for our business development personnel, marketing expenses and travel related expenses. Selling expenses increased in absolute amount from 20142017 to 20152018 and further increased from 2018 to 2019 due to increased conference, office,the increase in advertisement and travel expenses for our network business. Selling expenses decreasedpromotion fees, which because we opened two new cooperative centers in absolute amount from 2015 to 2016 due to termination of cooperative centers.2019. We expect our selling expenses towill continue to decreaseincrease in absolute amount in the future as we expect our Guangzhou Concord Cancer Center will commence operation in line with the termination of cooperative centers.2020. Our selling expenses include share-based compensation RMB0.7of RMB1.5 million in 2014, RMB0.82017, RMB2.0 million in 20152018 and RMB0.8RMB2.9 million (US$0.10.4 million) in 2016.2019.
General and Administrative Expenses.Expenses. General and administrative expenses consist primarily of salaries and benefits for our finance, human resources and administrative personnel, fees and expenses of legal, accounting and other professional services, insurance expenses, travel related expenses, depreciation of equipment and facilities used for administrative purposes, and other expenses. Our general and administrative expenses also include share-based compensation expenses of RMB10.1 million in 2014, 20152017, RMB9.2 million in 2018 and 2016 that amounted to RMB6.6 million, RMB7.3 million and RMB7.6RMB17.7 million (US$1.12.5 million), respectively. in 2019. See “—Share-based Compensation.”
Without taking into account the share-based compensation expenses, our general and administrative expenses have increased in absolute dollar terms as we have recruited additional general and administrative employees and have incurred additional costs related to the growth of our business. We expect such expenses to continue to increase in absolute dollar terms in the future, in line with the expansion of our network business and hospital business and the growth in our total net revenues.
Impairment of long-lived assetsLong-lived Assets. Our impairment of long-lived assets was nil, RMB23.1RMB28.6 million, RMB5.4 million and RMB61.1RMB76.1 million (US$8.810.9 million) for the yearyears ended December 31, 2014, 20152017, 2018 and 2016.2019, respectively.
Share-based Compensation
On November 17, 2007, OMS, the predecessor of our company, adopted a share option plan (the “OMS option plan”) pursuant to which OMS granted to three of its executive directors, Mr. Haifeng Liu, Dr. Jianyu Yang and Mr. Steve Sun (the “OMS grantees”) options to purchase a total of up to 25,000,000 ordinary shares (the “OMS share options”) to purchase the ordinary shares of OMS at an exercise price of US$0.80 per share, which the board of OMS determined to become vested upon the satisfaction of a number of performance conditions that related to the completion of the OMS reorganization, achievement of net profit target of OMS, and the raising of new financing. The OMS share options were exercisable from the date of completion of the 2007 audited consolidated financial statements of OMS to December 31, 2008 and were transferrable to any individuals designated by the OMS grantees.
On August 18, 2008, the board of directors of OMS contemplated that the OMS grantees had achieved all performance conditions outlined in the OMS option plan. However, as the capital structure of our company had changed at that time such that we had replaced OMS as the ultimate holding company of our subsidiaries, the board of directors of OMS resolved that the OMS option plan would be settled in vested options to purchase 21,184,600 ordinary shares to purchase shares of our company, with each option having an exercise price of US$0.79 exercisable before December 31, 2008. On the same day, two of the OMS grantees, Dr. Jianyu Yang and Mr. Steve Sun, exercised their respective options to purchase an aggregate of 6,355,400 ordinary shares of our company, with total proceeds from such exercise received by us amounting to approximately RMB34.4 million. We recorded share-based compensation expense of approximately RMB49.5 million in 2007 related to these options granted, which was recorded in general and administrative expenses. The third OMS grantee, Mr. Haifeng Liu, sold all of his vested options to purchase 14,829,200 ordinary shares of our company to three former directors of China Medstar who are now our directors and executive officers as employment incentive for such directors. The three executive directors subsequently exercised the vested options with total proceeds from such exercise received by us amounting to approximately US$11.7 million. Given the transfer of the OMS share options to the three directors was provided as an employment incentive, we recorded additional share-based compensation expense of approximately RMB4.2 million in 2008, which was recorded in general and administrative expenses.
On October 16, 2008, our board of directors adopted the 2008 share incentive plan, which was subsequently amended on November 17, 2009 and November 26, 2011 to increase the number of ordinary shares available for grant under the plan. The plan providesprovided for the grant of options, share appreciation rights, or other share-based awards to key employees, directors or consultants. Our board of directors and shareholders initially authorized the issuance of up to 4,765,800 ordinary shares upon exercise of awards granted under our 2008 share incentive plan. On November 26, 2011, our board of directors and the shareholders authorized the issuance of additional 5,101,968 ordinary shares under the 2008 share incentive plan. On May 29, 2015, our board of directors and the shareholders authorized the issuance of additional 4,940,550 ordinary shares under the 2008 share incentive plan.
On November 27, 2009 and September 30, 2011, we granted options to purchase a total of 4,765,800 ordinary shares at exercise prices of US$3.67 and US$2.17 per share, respectively, under our 2008 share incentive plan to our directors and employees. We did not grant any option under our 2008 share incentive plan in 2012 and 2013. On February 18, 2014, we granted options to purchase 3,479,604 shares at an exercise price of US$2.04 per share.share that have a contractual life of eight years and vest over four equal installments on the first, second, third and fourth anniversary of the grant date. We also granted 1,370,250 restricted shares, 21,132 restricted shares and 69,564 restricted shares on February 18, 2014, July 1, 2014 and August 1, 2014, respectively, to certain directors, officers and employees. On August 7, 2017, August 8, 2017 and September 13, 2017, we granted 1,453,950 restricted shares, 3,319,200 restricted shares and 45,000 restricted shares, respectively, to certain directors, officers and employees. On October 2, 2018, we granted 5,992,605 restricted shares to certain directors, officers and employees. The restricted shares vest over four equal installments on the first, second, third, and fourth anniversary of the grant date.
We recognize the compensation expense on a straight-line basis over the requisite service period for the entire award. With respect to share options, we calculated the estimated grant date fair value of the share options granted on the date of grant, using a Binomial Tree Model. The risk-free rate was based on the US Treasury bond yield curve in effect at the time of grant for periods corresponding with the expected term of the option. The dividend yield was estimated based on the average of our historical dividend yields. The volatility assumption was estimated based on the historical price volatility of ordinary shares of comparable companies in the health care industry. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair value of the our shares that would have been received by the option holders if all in-the-money options had been exercised on the issuance date.
We recorded share-based compensation expenses of approximately RMB11.6 million in 2017, RMB11.1 million in 2018 and RMB20.6 million (US$3.0 million) in 2019. The 2008 share incentive plan was terminated on the tenth anniversary of the effective date in October 2018. The awards granted prior to the terminate date are still subject to the 2008 share incentive plan.
Taxation
Cayman Islands
We are incorporated in the Cayman Islands. Under the current lawlaws of the Cayman Islands, we are not subject to income or capital gains tax. In addition, dividend payments made by us are not subject to withholding tax in the Cayman Islands.
British Virgin Islands
Certain of our subsidiaries are established in the British Virgin Islands and under the current laws of the British Virgin Islands, such subsidiaries are not subject to income or capital gains tax.
United States
We had assessable profitsUS Proton Therapy Holdings Limited (Delaware) is incorporated in the state of Delaware, the United States in 2011. The entity is subject to U.S. Federal Income Taxfederal and state income tax (graduated federal income tax rate up to 35%) in 2014. We did not have any assessable profits2017 and a flat federal income tax rate of 21% in 2018 and 2019) on its taxable income under the current laws of the United States. The activities of US Proton Therapy Holdings Limited (Delaware) are located solely in the state of Texas and as such, it is subject to Texas franchise tax. The amount of current income tax for federal and state for US Proton Therapy Holdings Limited (Delaware) was recorded as nil, RMB2.9 million and RMB negative 1.4 million (US$ negative 0.2 million) for the United States profits tax in 2015.years ended December 31, 2017, 2018, and 2019, respectively.
Hong Kong
We did not have any assessable profits subject to the Hong Kong profits tax in 2014, 20152017, 2018 and 2016.2019. We do not anticipate having any income subject to income taxes in Hong Kong in the foreseeable future.
Singapore
China Medstar is incorporated in Singapore and does not conduct any substantive operations of its own. Concord Cancer Hospital, incorporated in Singapore, was acquired inIn April 2015, and waswe acquired Concord International Hospital, which has remained in a loss position since its establishment. No provision for Singapore profits tax has been made in the consolidated financial statements as the companies have no assessable profits for the years ended December 31, 20152017, 2018 and 2016.2019. In addition, upon payments of dividends by China Medstar and Concord CancerInternational Hospital to its shareholder, no Singapore withholding tax will be imposed.
People’s Republic of China
Our PRC subsidiaries are incorporated in the PRC and are governed by applicable PRC income tax laws and regulations. Under the EIT Law and the implementation regulations, the PRC has adopted a uniform tax rate of 25% for all enterprises. Our PRC subsidiaries are subject to the tax rate of 25% since 2012.
The EIT Law provides that enterprises established outside of China whose “effective management organizations” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income. In addition, a recent circular issued by the State Administration of Taxation regarding the standards used to classify certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises and 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 regulations to the EIT Law, an “effective management organizations” 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 properties of an enterprise. In addition, the recent circular mentioned above details that certain Chinese-invested enterprises controlled by Chinese enterprises or Chinese group enterprises will be classified as “resident enterprises” if all of 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 directors with voting rights or senior management.
However, as this circular only applies to enterprises established outside of China that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “effective management organizations” for overseas incorporated enterprises that are controlled by individual PRC residents like us and some of our subsidiaries. Therefore, although substantially all of our management is currently located in the PRC, it remains unclear whether the PRC tax authorities would require our overseas registered entities to be treated as PRC tax resident enterprises. If the PRC tax authorities determine that we are a “resident enterprise,” we may be subject to enterprise income tax at a rate of 25% on our worldwide income.
Under the EIT Law, a maximum withholding income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises,” to the extent such dividends are derived from sources within the PRC, and the State Council has reduced such rate to 10% through the implementation regulations. We are a Cayman Islands holding company and substantially all of our income may be derived from dividends we receive from our operating subsidiaries located in the PRC. According to the PRC-HK DTA, Notice 112, Notice 601 and Guoshuihan [2009] No. 81, dividends paid to enterprises incorporated in Hong Kong are subject to a withholding tax of 5% provided that a Hong Kong resident enterprise owns no less than 25% of the PRC enterprise continuously in the last 12 months before distributing the dividend and can be considered as a “beneficial owner” and entitled to treaty benefits under the PRC-HK DTA.
Thus, dividends paid to us through our Hong Kong subsidiary by our subsidiaries in China may be subject to the 5% income tax if the Cayman Islands holding company and our Hong Kong subsidiary are considered as “non-resident enterprises” under the EIT Law and our Hong Kong subsidiary is considered to be a “beneficial owner” and entitled to treaty benefits under the PRC-HK DTA. If we are considered as non-resident enterprise and required under the EIT Law to pay income tax for any dividends we receive from our subsidiaries, it will materially and adversely affect the amount of dividends, if any, we may pay to our shareholders and ADS holders.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) disclosuredisclosures of contingent assets and liabilities at the end of each reporting period,balance sheet dates, and (iii) the reported amounts of revenuerevenues and expenses during eachthe reporting period.periods. We continually evaluate these estimates and assumptions based on historical experience, knowledge and assessment of current business and other conditions, expectations regarding the future based on available information and reasonable assumptions, which together form a basis for making judgments about matters not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
Some of our accounting policies require higher degrees of judgment than others in their application. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We consider the policies discussed below to be critical to an understanding of our financial statements as their application places the most significant demands on the judgment of our management.
Revenue Recognition
Our net revenues consist of network revenues and hospital revenues. The majority of our network revenues are derived directly from hospitals that enter into medical equipment lease and management service arrangements with us. To a lesser extent, revenues are generated from stand-alone management service arrangements where our hospital partner has previously acquired the equipment or through another vendor or sale of medical equipment.
Network On January 1, 2018, we adopted ASU No. 2014-09,Revenue from Contracts with Customers, (ASC 606), which supersedes the revenue recognition requirements in ASC 605,Revenue Recognition, using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with historic accounting under ASC 605. The impact of adopting the new revenue standard was not material to consolidated financial statements and there was no adjustment to beginning retained earnings on January 1, 2018.
Lease and Management Services
Lease and management service arrangements typically includeUnder ASC 606, an entity recognizes revenue when our customer obtains control of promised goods or services, in an amount that reflects the purchase and installation of diagnostic imaging and/or radiation oncology system (“medical equipment”) at the hospital, and the full-time deployment of a qualified system technician who is responsible for certain management services related to the radiotherapy or diagnostic services being performed by the hospital centers’ doctors to their patients.
We enter into both leases and management service arrangements with independent hospitals consisting of terms that range from 5 to 20 years. Pursuant to these arrangements, we receive a portion of the profit, based on the profit sharing formula as defined in the arrangements, of the hospital unit that delivers the diagnostic imaging and/or radiation oncology services.
Pursuant to ASC 840, we determinedconsideration that the lease and management serviceentity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements contain a lease of medical equipment. The hospital has the ability and right to operate the medical equipment while obtaining more than a minor amount of the output. The arrangements also contain a non-lease deliverable being the management service element. The arrangement consideration should be allocated between the lease element and the non-lease deliverables on a relative fair value basis, however because all of the consideration is earned through the contingent rent feature discussed below, there is no impact of such allocation.
ASC 840 is applied to the leaseor elements of thean arrangement and ASC 605 is applied to other elements of the arrangement not within the scope of ASC 840. Revenue not606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services it transfers to the customer.
Once a contract is determined to be within the scope of ASC 840 is recognized when there is persuasive evidence606 at contract inception, we review the contract to determine which performance obligations we must deliver and which of an arrangement,these performance obligations are distinct. We recognize revenue based on the fee is fixed or determinable, collectability is reasonably assured and the deliveryamount of the medical equipmenttransaction price that is allocated to each performance obligation when that performance obligation is satisfied or services has occurred.as it is satisfied.
We are a principal and record revenue on a gross basis when we are primarily responsible for fulfilling the service, have discretion in establish pricing and control the promised service before transferring that service to customers. Otherwise, we record revenue at the net amounts as commissions.
The lease rentalsWe recognize revenue net of value added taxes. If revenue recognition is deferred to a later period, the related value added tax are also deferred and management service receivable under the lease arrangement are based entirely on a profit sharing formula (“contingent rent feature”). The profitabilitywill be recognized only upon recognition of the business unit is not only dependent on the medical equipment placed at the hospital, but also the hospital’s ability to manage the costs and appoint doctors and clinical staff to operate the equipment. Certain of the lease and management service arrangements may include a transfer of ownership or bargain purchase option at the end of the lease term. Due to the length of the lease term, the collectability of these minimum lease payments is not considered reasonably predictable and there are also inherent uncertainties regarding the future costs to be incurred by us relating to the arrangement. Given these uncertainties, we account for all of these lease arrangements as operating leases.
As the collectability of the minimum lease rental is not considered predictable, and the remaining rental is considered contingent, we recognize revenue when a lease payment under the arrangement becomes fixed, i.e. when the profit share under the arrangement is determined and agreed upon by both parties to the agreement. Similarly, for the service element of the arrangement, revenue is only considered determinable at the time a payment under the arrangement becomes fixed, i.e. when the profit share under the arrangement is determined and agreed upon by both parties. Revenue is recognized when it is determined that the basic criteria, referred to above, have also been met.deferred revenue.
For the years ended December 31, 2014, 2015 and 2016, the revenue from lease and management services amounted to RMB511.6 million, RMB525.2 million and RMB378.7 million (US$54.5 million), respectively.ASC 606 Revenue
Management Services and Technical Services and Brand Royalty Fees
We provide stand-alone management and technical services to certain hospitals which are already in possession ofpossess radiotherapy and diagnostic equipment and stand-alone technical services to certain hospitals.equipment. Management services typically include the provision of diagnosis and treatment techniques, expertsexpert support, advertising and promotion as well as comprehensive operational management.management services. Technical services mainly include services related to the maintenance and upgrade of leasingthe radiotherapy and diagnostic equipment. Brand royalty fees are mainly generated from hospitals using the brand of Meizhong Jiahe with a fixed annual fee.
The fees for management services and technical services are eithercalculated based on a contractedpredetermined percentage of monthly revenue generated by the specified hospital unit (“revenue share”) or in limited instances on a fixed monthly fee. Fixed monthlyVariable fees are fully constrained at contract inception due to the uncertainty of the hospital units’ monthly revenue. Variable fees are included in the transaction price when a significant reversal of revenue recognized ratably over the service term. The consideration that is based on a revenue share arrangement is recognized whennot expected to occur, typically upon receipt of the monthly fees under the arrangement are determined and agreed upon by both parties to the agreement.revenue statement from hospitals. Fixed monthly fees are recognized ratably over the service term.
For the years ended December 31, 2014, 2015 and 2016, revenue from management services amounted to RMB37.7 million, RMB21.6 million and RMB20.6 million (US$3.0 million), respectively. For the years ended December 31, 2014, 2015 and 2016, the revenue from technical services amounted to RMB20.8 million, RMB21.5 million and RMB17.5 million (US$2.5 million), respectively. For the years ended December 31, 2014, 2015 and 2016, revenue from brand royalty fees amounted to nil, nil and RMB7.1 million (US$1.0 million), respectively.Consumables Sales
Direct Financing Lease Income
PursuantConsumable sales represented the sales of supplies to ASC 840, we record revenue attributable to direct financing leases so as to produce a constant rate of return oncertain hospitals in the balancePRC. Under the majority of the net investment in the lease. During the years ended December 31, 2014, 2015consumable sales contracts, we act primarily as a reseller, and 2016, we had financing lease income of RMB29.3 million, RMB23.3 million and RMB14.1 million (US$2.0 million), net of taxes, respectively.
Consumables Sales
Pursuantdo not have pricing authority or have title to the application of ASC 605, weinventory prior to delivery to the hospital. We are an agent and generally record revenue related to consumables sales on a net basis when the consumables are delivered to the customer and the sales price is determinable. During the years ended December 31, 2014, 2015 and 2016, we had consumables sales of RMB7.6 million, RMB6.2 million and RMB5.5 million (US$0.8 million), respectively.
We are subject to sales taxes, such as business tax, VAT and goods and service tax on the revenue. We have recognized revenues net of these taxes and related surcharges. Such taxes and related surcharges for the years ended December 31, 2014, 2015 and 2016 were approximately RMB24.0 million, RMB22.2 million and RMB5.9 million (US$0.8 million), respectively. In the event that revenue recognition is deferred to a later period, the related tax and other surcharges are also deferred and will be recognized only upon recognition of the deferred revenue.Brand Royalty Fees
Hospital RevenueBrand royalty fees represented the right to use the brand of Meizhong Jiahe by several specialty cancer hospitals since the year of 2016, on a fixed annual fee. Fixed annum fees are recognized ratably over the service term.
Prior to 2015, we operated a full service hospital that we acquired in 2012, Chang’an Hospital, which was then disposed of in 2014. Starting 2015, we began to operate a premium cancer hospital through the acquisition of Concord CancerInternational Hospital. Hospital revenue consists of medicinemedical service income and medical servicemedicine income. Medicine income includes medicine prescribed to patients during or after treatment by the doctors.
Medical Service Income
Medical service income includeincludes revenue generated from outpatients, which mainly consist of activities for physical examinations, treatments, surgeries and tests, as well as thattests. Medical service income also includes revenue generated from inpatients, which mainly consist of activities for clinical examinations and treatments, surgeries, and other fees such as room charges and nursing care. Revenue is recognized, in accordance with ASC 605,Revenue Recognition (“ASC 605”), when there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection is reasonably assured, and the medicine orWe are a principal as we are primarily responsible for providing medical services to the income, control the promised services before transferring to patients, and have pricing discretion. We generally record revenue generated from medical service on a gross basis.
In limited instances, the patient services are delivered.provided by visiting consultants, who do not have employment agreements with us and are not considered our employees. As the visiting consultants have the discretion to take their patients to other hospital for the required treatment and set their own consultation fee charged to patients, we are an agent in such arrangement. We collect fees on behalf of the visiting consultants and record revenue at the net amounts as commissions.
Medicine Income
Medicine income includes medicine prescribed to patients during or after treatment by the doctors in our hospital business. We are a principal as we are primarily responsible for providing medicine to the patients and have pricing discretion. We generally record medicine income on a gross basis.
Cost of RevenueRevenues
Network Costs
Network costs mainly consist of the amortization of acquired intangibles, depreciation of medical equipment purchased, installed and operated in the network of centers and other costs, including salaries and material costs of medical supplies.
Costs relating to Lease and Management Service Arrangement
Cost of medical equipment that is leased under an operating lease is included in property, plant and equipment in theon our balance sheet. The medical equipment is depreciated using our depreciation policies. The cost of the management service component is recognized as an expense as incurred.
Cost of Sales-Type Lease
Cost of sales-type lease as a lessor is recorded as the carrying value of the underlying asset at lease commencement.
Cost of Management Services and Technical Services
Cost of management services and technical services mainly include labor costs, and, where applicable, medical consumables and maintenance expenses which are expensed as incurred.
Cost of Consumables Sales
Cost of consumables sales, recorded net against the related revenue, includes the cost of the consumables purchased and other direct costs involved in the consumables sales.
Hospital Costs
Hospital costs mainly include medicine costs, medical consumables, labor costs of doctors, nurses and other staff involved in the care or treatment of patients, depreciation, rental fees of hospital buildings, utilities as well asand other related costs incurred in the normal business of a hospital.
Accounts Receivable and Allowance for Doubtful Accounts
We consider many factors in assessing the collectability of itsour receivables due from itsour customers, such as the age of the amounts due, the customer’s payment history and credit-worthiness. An allowance for doubtful accounts is recorded in the period in which uncollectabilityloss is determined to be probable. Accounts receivable balances are written off after all collection efforts have been exhausted.
Fees for medical services provided at the centers are paid directly to our hospital partners by patients and we are not responsible for patient billing and fee collection. Medical service fees in China are typically paid in full upfront by patients prior to receiving services. Generally, patients claim reimbursements, if any, is available under the applicable public or private medical insurance plans. As a result, hospitals do not generally experience bad debt problems. However, the healthcare reform announced by the PRC government in January 2009 has introduced pilot public medical insurance plans. Under these plans patients are only responsible for paying their deductible amounts upfront and hospitals are responsible for seeking reimbursements from the relevant government authorities after the treatments are provided. Certain of the hospitals in which some of the centers in our network are based are involved in such pilot medical insurance plan. We do not expect such change in payment timing to have a direct effect on our ability to collect our contracted percentage from our hospital partners. However, the ability of our hospital partners to collect medical service fees from the government authorities in a timely manner may affect the timing of payments made by our hospital partners to us as a result.
The following table sets forth our account receivables by age and pay or type as of December 31, 2016:
| 1-6 months | 7-12 months | 1-2 years | Over 2 years | Total | ||||||||||||||||
| RMB in thousands | ||||||||||||||||||||
| Network Business | ||||||||||||||||||||
| Accounts receivable | 116,806 | 46,801 | 23,133 | 1,923 | 188,663 | |||||||||||||||
| Allowance for doubtful accounts | — | — | — | — | — | |||||||||||||||
| Accounts receivable, net | 116,806 | 46,801 | 23,133 | 1,923 | 188,663 | |||||||||||||||
| Hospital Business | ||||||||||||||||||||
| Accounts receivable | 907 | 70 | 6 | — | 983 | |||||||||||||||
| Allowance for doubtful accounts | (9 | ) | (44 | ) | (4 | ) | — | (57 | ) | |||||||||||
| Accounts receivable, net | 898 | 26 | 2 | — | 926 | |||||||||||||||
We routinely evaluate the collectability of accounts receivable of each customer on a specific identification basis. At the time when we arebecome aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, subsequent to the original sale, we record a specific allowance against amounts due, and thereby reduces the net recognized receivable to the collectible amount. Accounts receivable balances are written off after all collection efforts have been exhausted.
Leases
Lessee Accounting
We attemptlease office space, plant and machinery, and land use rights. Our offices and facility leases generally have lease terms between 1 to 18 years. Our lease agreements include fixed and variable lease payments and do not contain material residual value guarantees. Our leases do not contain restrictions or covenants that restrict us from incurring other financial obligation. We also make upfront payments to acquire the leased land from the owners, with lease periods of 50 years (“land use right”). There is no ongoing payment under the terms of these land use rights.
We determine if an arrangement is a lease at inception and classifies leases as operating or finance leases in accordance with the recognition criteria in ASC 842-20-25-2. We classify a lease as a finance lease if the lease meets any one of the following criteria:
| a. | The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. |
| b. | The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. |
| c. | The lease term is for a major part of the remaining economic life of the underlying asset. |
| d. | The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. |
| e. | The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. |
We classify a lease as an operating lease when it does not meet any one of these criteria.
For operating leases, we recognize a right-of-use (“ROU”) asset and a lease liability based on the present value of the lease payments over the lease term on the consolidated balance sheets at commencement date. Lease expense is recorded on a straight-line basis over the lease term. As our leases do not provide an implicit rate, we estimate its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. In estimating its incremental borrowing rate, we consider its credit rating, nature of underlying asset, and publicly available data of borrowing rates for loans of similar amount, currency and term as the lease.
When we enter into sale-leaseback transactions as lessee, it first assesses whether the effectively transferred the underlying asset using the guidance in ASC 606. If we transfer the control of the leased asset to the buyer-lessor, we account for the sale of the underlying asset in accordance with ASC606. The subsequent leaseback of the asset is accounted for in accordance with ASC842 in the same manner as any other lease. If we do not transfer the control of the leased asset to the buyer-lessor, it is a failed sales-leaseback transaction and subsequently accounted for as a financing arrangement.
Lessor Accounting
We provide sales-type, direct financing and operating leases of various medical equipment primarily to hospitals in the PRC for periods ranging from 5 to 20 years. We classify a lease as a sales-type lease in accordance with the recognition criteria in ASC 842-20-25 if the lease meets any one of the criteria mentioned above when determining a finance lease. For sales-type leases, we derecognize the underlying asset and recognize the net investment in the lease which is the sum of the lease receivable when collectability is probable at lease commencement. All initial direct costs are expensed at commencement date. We subsequently recognize interest income over the lease term using the effective interest method. Many of our leases contain variable lease payments based on the revenue or profit generated from the hospitals’ use of the underlying assets, the specific amounts of which are agreed monthly with the hospitals and settled based on our payment terms. In such circumstances, we recognize a selling loss at commencement for the difference between the net investment in the lease and the carrying amount of the underlying asset. We do not include variable lease payments in the net investment in the lease and such payments are recognized as income in profit or loss in the period when the facts and circumstances on which the variable lease payments are based occur.
When none of the criteria in ASC 842-20-25-2 are met, we classify a lease as either a direct financing lease or an operating lease. We classify as a direct financing lease if (i) the present value of the sum of lease payments and any residual value guarantee equals or exceeds substantially all the fair value of the underlying asset; and (ii) it is probable at inception that it will collect accounts receivables withinthe lease payments plus any amount necessary to satisfy a residual value guarantee. If both of the criteria above are not met, the lease is classified as an operating lease.
A general description of our lease income for each type of lease arrangement was as follows:
| i. | Sales-type lease income |
We provide diagnostic imaging and/or radiation oncology system (“medical equipment”) to hospitals in the PRC through lease arrangements ranging from 5 to 20 years. In certain circumstances, we also provide full-time qualified system technician responsible for certain management services related to the radiotherapy or diagnostic services being performed by the hospital payment terms. Standard payment termscenters’ doctors to their patients. We receive a portion of the hospital’s revenue or profits from delivering the diagnostic imaging and / or radiation oncology services to patients, based on the revenue-sharing or profit-sharing formula predetermined in the contracts.
We evaluate such arrangements at inception to determine whether they contain a lease and the lease classification under ASC 842. Most of such arrangements are classified as sales-type leases since these agreements often include an option to the hospitals to purchase the underlying asset which the hospitals are reasonably certain to exercise. Variable lease payments are fully constrained at inception of the contract. Variable fees are included in the arrangement transaction price when significant reversal is not expected to occur, which is the time when the hospital calculates the profit sharing under the arrangement and agreed upon by both parties, typically 90 days after invoice date. Hospital payment terms varyat month end.
Our arrangements may contain lease and non-lease components. Non-lease components primarily include payments for maintenance, update and consultation services related to the medical equipment. We allocate the lease and non-lease components of the contract consideration on a relative standalone selling price basis.
| ii. | Operating lease income |
We elected the package of practical expedients which allowed us not to separate lease and non-lease components for diagnostic imaging and /or radiation oncology systems assets and recognizes profit sharing revenue under ASC 842. If there is a non-lease component whose pattern and timing is not the same we allocate the consideration on a relative standalone selling price basis.
| iii. | Direct financing lease income |
We purchase hospital equipment from one another. Any departurethird party equipment manufacturers which is installed at various hospitals throughout the PRC. The hospitals utilize the hospital equipment radiotherapy or diagnostic services being performed by the hospital centers’ doctors to their patients. These lease arrangements include either title transfer upon maturity of the lease term or bargain purchase option held by the hospital. We receive fixed monthly rental payments from the standard hospital, payment term must be approved bywhich on a discounted basis does not give rise to any dealer profit. We record revenue attributable to direct financing leases so as to produce a constant rate of return on the chief financial officer and/orbalance of the finance controller.net investment in the lease.
Long-term Investments
Our long-term investments consist of equity investments without readily determinable fair value and equity method investments.
Prior to adopting ASC 321,Investments-Equity Securities, on January 1, 2018, we carried at cost our investments in investees that did not have readily determinable fair value and over which we did not have significant influence, in accordance with ASC Subtopic 325-20,Investments-Other: Cost Method Investments, (“ASC 325-20”). We only adjusted the carrying value of such investments for other-than-temporary decline in fair value and for distribution of earnings that exceed our share of earnings since our investment.
Our management evaluatesregularly evaluated the impairment of equity investments without readily determinable fair value based on the performance and financial position of the investee as well as other evidence of market value. Such evaluation included, but was not limited to, reviewing the investee’s cash position, recent financing, projected and historical financial performance, cash flow forecasts and financing needs. An impairment loss was recognized in earnings equal to the excess of the investment’s cost over our account receivablefair value at the balance sheet date of the reporting period for which the assessment was made. The fair value would then become the new cost basis of the investment.
We have adopted ASC 321 since January 1, 2018 and the cumulative effect of adopting the new standard on opening accumulated deficit is nil. Pursuant to ASC 321, equity investments, except for those accounted for under the equity method and those that result in consolidation of the investee and certain other investments, are measured at fair value, and any changes in fair value are recognized in earnings. For equity securities without readily determinable fair value and do not qualify for the existing practical expedient in ASC Topic 820,Fair Value Measurements and Disclosures, (“ASC 820”), to estimate fair value using the net asset value per share (or its equivalent) of the investment, we have elected to use the measurement alternative to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer, if any. Pursuant to ASC 321, for equity investments that we elect to use the measurement alternative, we make a quarterly basis. qualitative assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the entity has to estimate the investment’s fair value in accordance with the principles of ASC 820. If the fair value is less than the investment’s carrying value, the entity has to recognize an impairment loss in net income equal to the difference between the carrying value and fair value.
Investments in equity investees represent investments in entities in which we can exercise significant influence but do not own a majority equity interest or control are accounted for using the equity method of accounting in accordance with ASC Subtopic 323-10,Investments-Equity Method and Joint Ventures: Overall, (“ASC 323-10”). We apply the equity method of accounting that is consistent with ASC 323-10 in limited partnerships in which we hold a three percent or greater interest. Under the equity method, we initially record our investment at cost and prospectively recognize our proportionate share of each equity investee’s net profit or loss into our consolidated statements of operations. The difference between the cost of the equity investee and the amount of the underlying equity in the net assets of the equity investee is recognized as equity method goodwill included in equity method investments on the consolidated balance sheets. We evaluate our equity method investments for impairment under ASC 323-10. An impairment loss on the equity method investments is recognized in the consolidated statements of operations when the decline in value is determined to be other-than-temporary.
As of the dateDecember 31, 2018 and 2019, we recorded long-term investments of this annual report, we do not expect any material uncertainties which would affect the future realization of revenues.RMB388.4 million and RMB64.9 million (US$9.3 million), respectively.
Goodwill
Goodwill represents the excess of the purchase price over the estimatedamounts assigned to the fair value of net tangiblethe assets acquired and identifiable intangible assets acquired.the liabilities assumed of an acquired business. In accordance with ASC Topic 350,Intangibles, Goodwill and Other Intangible Assets, (“ASC 350”), recorded goodwill amounts are not amortized, but rather are tested for impairment at least annually or more frequently if there are indicators of impairment present.
In accordance with ASC 350, we assignassigned and assessassessed goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment. As of December 31, 2014, goodwill2018 and 2019, we had been derecognizedthree reporting units, consisting of network business, overseas hospital business and domestic hospital business. Goodwill that has arisen as a result of the disposalacquisitions of Chang’an Hospital.subsidiaries during the year was assigned to hospital business reporting unit.
Intangible Assets, Net
Intangible assets relate to medical business qualification and permission for medical equipment operation, customer relationships and operating leases medical insurance coverage and radiotherapy permit that are not considered to have an indefinite useful life.lives. Intangible assets are carried at cost less accumulated amortization and any recorded impairment. Intangible assets acquired in a business combination were recognized initially at fair value at the date of acquisition. These intangible assets are amortized on a straight line basis over the economic life.
The operating license relates to the medical business qualification and permission for medical equipment operation. The favorable leases relate to favorable lease terms as lessee based on market conditions that exist on the date of acquisition and are amortized over the remaining term of the leases. The customer relationship assets relate to the ability to sell existing and future services to existing customers and have been estimated using the income method. Operating leases relate to favorable operating lease terms based on market conditions that existedexist on the date of acquisition and are amortized over the remaining term of the leases. The medical insurance coverage as an approved healthcare provider is issued by the medical insurance authority, based on which the hospital can join in the medical insurance network and can be reimbursed by the medical insurance authority for medical services provided to the patients who have been covered by medical insurance included in social insurance or other contribution, which is amortized over the remaining business license period. Radiotherapy permit is a legal license issued by government for deploying and operating radiotherapy equipment in a hospital, the economic life of this license is assessed to be the estimated remaining useful lives of the radiotherapy equipment.
Impairment of Long-Lived Assets and Acquired Intangibles
We evaluate our long-lived assets or asset group including acquired intangibles with finite lives for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of a group of long-lived assets may not be fully recoverable.
When these events occur, we evaluate the impairment by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, we recognize an impairment loss based on the excess of the carrying amount of the asset group over its fair value, generally based upon discounted cash flows or quoted market prices.
Share-based Compensation
Share-based awards and restricted shares granted to employees are accounted for under ASC718, CompensationASC 718,-StockCompensation-Stock Compensation (“ASC 718”).
In accordance with ASC 718,we determine whether a share option should be classified and accounted for as a liability award or equity award. AllPrior to adopting ASU 2018-07,Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting to simplify the accounting for share-based payments to nonemployees (“ASU 2018-07”), all grants of share-based awards to employees classified as equity awards are recognized in the financial statements based on their grant date fair values which are calculated using an option pricing model. We have elected to recognize compensation expense using the straight-line method for all share options granted with graded vesting based on service conditions. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards are reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent period if actual forfeitures differ from initial estimates.Forfeitures were accounted as they occur. Share-based compensation expense wasis recorded net of estimated forfeitures such that expense wasis recorded only for those share-based awards that are expected to vest.
We adopted ASU 2018-07 on January 1, 2019, which uses the modified retrospective method. Subsequent to the adoption, we measure equity awards using their fair value on grant date. The impact of adopting the new standard was insignificant.
Business Combination and NoncontrollingNon-controlling Interests
We account for business combinations using the purchase method of accounting in accordance with ASC 805.805,Business Combinations. ASC 805 requires us to recognize separately from goodwill the assets acquired, the liabilities assumed and the noncontrollingnon-controlling interest at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. In cases where we acquire less than 100% ownership interest, we will derive the fair value of the acquired business as a whole, which will typically include a control premium and subtract the consideration transferred by us for the controlling interest to identify the fair value of the non-controlling interest.
In addition, the share purchase agreements entered into may contain contingent consideration provisions obligating us to pay additional purchase consideration, upon the acquired business’s achievement of certain agreed upon operating performance based milestones. Under ASC 805, these contingent consideration arrangements are required to be recognized and measured at fair value at the acquisition date as either a liability or as an equity instrument, with liabilityinstrument. Liability instruments being required tomust be remeasured at each reporting period through the results of our comprehensive income (loss) until such time as to when the contingency is resolved. Where the fair value of the net assets acquired exceeds the consideration paid, a gain as a result of the bargain purchase will be recognized through the consolidated statements of comprehensive income (loss) at the close of the transaction. For our majority-owned subsidiaries, a noncontrolling interest is recognized to reflect the portion of our equity which is not attributable, directly or indirectly, to us. Consolidated net income on the consolidated statements of comprehensive income includes the net income (loss) attributable to noncontrolling interests. The cumulative results of operations attributable to noncontrolling interests are recorded as noncontrolling interests in our consolidated balance sheets.
We derive estimates of the fair value of assets acquired and liabilities assumed using reasonable assumptions based on historical experiences and on the information obtained from management of the acquired companies. Critical estimates in valuing certain of the intangible assets and pre-existing agreements included but were not limited to the following: deriving estimates of future expected cash flows from the acquired business, the determination of an appropriate discount rate deriving assumptions regarding the period of time that the related benefits would continue and the initial measurement and recognition of any contingent consideration arrangements and the evaluation of whether contingent consideration arrangement is in substance compensation for future services. Unanticipated events may occur which may affect the accuracy or validity of such assumptions or estimates.
In a business combination achieved in stages, we re-measure the previously held equity interest in the acquiree immediately before obtaining control at its acquisition date fair value and the re-measurement gain or loss, if any, is recognized in the consolidated income statements.
For our non-wholly owned subsidiaries, a non-controlling interest is recognized to reflect portion of equity that is not attributable, directly or indirectly, to us. When the non-controlling interest is contingently redeemable upon the occurrence of a conditional event, which is not solely within our control, the non-controlling interest is classified as mezzanine equity. We accretes changes in the redemption value over the period from the date that it becomes probable that the mezzanine equity will become redeemable to the earliest redemption date using the effective interest method. When the non-controlling interest is mandatory redeemable on a fixed or determinable date, the non-controlling interest is classified as liabilities.
If a transaction does not meet the definition of a business, the transaction is recorded as an asset acquisition. Accordingly, the identifiable assets acquired and liabilities assumed are measured at the fair value of the consideration paid, based on their relative fair values at the acquisition date. Acquisition-related costs are included in the consideration paid and capitalized. Any contingent consideration payable that is dependent on the purchaser’s future activity is not included in the consideration paid until the activity requiring the payment is performed. Any resulting future amounts payable are recognized in profit or loss when incurred. No goodwill and no deferred tax asset or liability arising from the assets acquired and liabilities assumed are recognized upon the acquisition of assets.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. We adopted ASU 2017-01 on January 1, 2018, there is no significant impact on our consolidated financial statements.
Income Taxes
We follow the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change in tax rate.
We adopted ASC 740,Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in income taxes. InterestsInterest and penalties arising from underpayment of income taxes shall be computed in accordance with the related PRCapplicable tax laws. The amount of interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount previously taken or expected to be taken in a tax return. Interests and penalties recognized in accordance with ASC 740 is classified in the financial statements as a component of income tax expense.
In accordance with the provisions of ASC 740, we recognize in itsour financial statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement.
Our estimated liability for unrecognized tax positions which is included in the “accrued expenses and other liabilities” account and “accrued unrecognized tax benefits and surcharges, non-current portion” account is periodically assessed for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may differ from our estimates.
As each audit is concluded, adjustments, if any, are recorded in our financial statements. Additionally, inIn future periods, changes in facts, circumstances, and new information may require us to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur.
Discontinued Operations
On January 1, 2018, we adopted ASU No. 2016-16, Income Taxes(Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs using the modified retrospective adoption method. In 2015, Aohua Technology transferred 100% equity of Tianjin Concord Medical to Shanghai Medstar, resulting in a deferred tax liability of RMB5.6 million (US$0.8 million). Upon the adoption of ASU 2016-16, the deferred tax liability was reversed through an opening adjustment to accumulative deficit as of January 1, 2018. The disposalcumulative effect of Chang’an Hospital and WHT represents discontinued operations and the results of its operations should be classified as discontinued operations in thechanges made to our consolidated statement of comprehensive income (loss) for all periods presented.
Derivative Instruments
ASC topic 815,Derivatives and Hedging (“ASC 815”), requires all contracts which meet the definition of a derivative to be recognized on the balance sheet as either assets or liabilities and recorded at fair value. Changes inof January 1, 2018 for the fair valueadoption of derivative financial instruments are either recognized periodically in earnings or in other comprehensive income (loss) depending on the use of the derivative and whether it qualifies for hedge accounting. Changes in fair values of derivatives not qualifiedASU 2016-16 was as hedges are reported in earnings. The estimated fair values of derivative instruments are determined at discrete points in time based on the relevant market information. These estimates are calculated with reference to the market rates using industry standard valuation techniques.follows:
| Balance at December 31, 2017 | Adjustments Due to ASU 2016-16 | Balance at January 1, 2018 | ||||||||||
| RMB | RMB | RMB | ||||||||||
| (in thousands) | ||||||||||||
| Liabilities: | ||||||||||||
| Deferred tax liabilities | 73,577 | (5,632 | ) | 67,945 | ||||||||
| Equity: | ||||||||||||
| Accumulated deficit | (879,393 | ) | 5,632 | (873,761 | ) | |||||||
Segment Reporting
In accordance with ASC 280,Segment Reporting (“ASC 280”), our chief operating decision maker (“CODM”) has been identified as the chief executive officer, who is also the executive chairman of the board of directors. For the years ended December 31, 2013,2017, 2018 and 2019, our CODM evaluates segment performance based on the measures of revenues, costs of sales and gross profit (loss) by the network and hospital segments. Subsequent to the disposal of Chang’an Hospital and WHT on December 18, 2014, we have only one reporting segment for network for the year ended December 31, 2014 as the results of Chang’an Hospital and WHT had been presented as discontinued operations in the financial statements. For the years ended December 31, 20152017, 2018 and 2016, since the acquisition of Concord Cancer Hospital in April, 2015,2019, we had two operating and reporting segments, including our CODM evaluates segment performance based on revenues and profit by the network and premium cancer hospital segments.
Results of Operations
The following table sets forth a summary, for the periods indicated, of our consolidated results of operations. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period.period.
| Year Ended December 31, | ||||||||||||||||
| 2014 | 2015 | 2016 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| (in thousands, except share, per share and per ADS data) | ||||||||||||||||
| Selected Consolidated Statements of Comprehensive Income (Loss) Data | ||||||||||||||||
| Revenues, net of business tax, value-added tax and related surcharges | 606,883 | 616,485 | 455,042 | 65,540 | ||||||||||||
| Cost of revenues | (274,562 | ) | (353,336 | ) | (286,543 | ) | (41,271 | ) | ||||||||
| Gross profit | 332,321 | 263,149 | 168,499 | 24,269 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses(1) | (95,096 | ) | (112,815 | ) | (70,093 | ) | (10,095 | ) | ||||||||
| General and administrative expenses(2) | (53,576 | ) | (132,952 | ) | (205,908 | ) | (29,657 | ) | ||||||||
| Impairment of long-lived assets | — | (23,125 | ) | (61,124 | ) | (8,804 | ) | |||||||||
| Operating income (loss) | 183,649 | (5,743 | ) | (168,626 | ) | (24,287 | ) | |||||||||
| Interest expense | (53,470 | ) | (53,214 | ) | (89,327 | ) | (12,866 | ) | ||||||||
| Foreign exchange gain | 9,585 | 10,348 | 13,472 | 1,940 | ||||||||||||
| Gain (loss) from disposal of property, plant and equipment | (3,955 | ) | (4,220 | ) | (7,619 | ) | (1097 | ) | ||||||||
| Interest income | 21,208 | 22,447 | 27,982 | 4,030 | ||||||||||||
| Changes in fair value of derivatives | 2,605 | 33,731 | 713 | 103 | ||||||||||||
| Loss on debt extinguishment | — | (36,648 | ) | — | — | |||||||||||
| Income (loss) from equity method investments | 13,911 | (5,572 | ) | 616 | 89 | |||||||||||
| Other income, net | 2,113 | 33,617 | 18,191 | 2,620 | ||||||||||||
| Income (loss) from continuing operations before income taxes | 175,646 | (5,254 | ) | (204,598 | ) | (29,468 | ) | |||||||||
| Income tax expenses | (80,850 | ) | (74,025 | ) | (60,486 | ) | (8,712 | ) | ||||||||
| Net income (loss) from continuing operations | 94,796 | (79,279 | ) | (265,084 | ) | (38,180 | ) | |||||||||
| Net income (loss) from discontinued operations | 25,476 | — | — | — | ||||||||||||
| Net income (loss) | 120,272 | (79,279 | ) | (265,084 | ) | (38,180 | ) | |||||||||
| Net income (loss) attributable to non-controlling interests | (4,437 | ) | (975 | ) | (3,217 | ) | (463 | ) | ||||||||
| Net income (loss) attributable to ordinary shareholders | 124,709 | (78,304 | ) | (261,867 | ) | (37,717 | ) | |||||||||
| Earnings (loss) per share | ||||||||||||||||
| From continuing operations | 0.70 | (0.58 | ) | (2.00 | ) | (0.29 | ) | |||||||||
| From discontinued operations | 0.22 | — | — | — | ||||||||||||
| Basic/Diluted | 0.92 | (0.58 | ) | (2.00 | ) | (0.29 | ) | |||||||||
| Earnings (loss) per ADS | ||||||||||||||||
| From continuing operations | 2.10 | (1.75 | ) | (6.00 | ) | (0.87 | ) | |||||||||
| From discontinuing operations | 0.66 | — | — | — | ||||||||||||
| Basic/Diluted | 2.76 | (1.75 | ) | (6.00 | ) | (0.87 | ) | |||||||||
| Year Ended December 31, | ||||||||||||||||
| 2017 | 2018 | 2019 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| (in thousands, except share, per share and per ADS data) | ||||||||||||||||
| Selected Consolidated Statements of Comprehensive Loss Data | ||||||||||||||||
| Revenues, net of value-added tax | 330,977 | 190,898 | 198,363 | 28,493 | ||||||||||||
| Cost of revenues | (232,979 | ) | (171,136 | ) | (214,193 | ) | (30,767 | ) | ||||||||
| Gross profit | 97,998 | 19,762 | (15,830 | ) | (2,274 | ) | ||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expenses(1) | (43,608 | ) | (21,718 | ) | (30,241 | ) | (4,344 | ) | ||||||||
| General and administrative expenses(2) | (237,646 | ) | (291,854 | ) | (315,134 | ) | (45,266 | ) | ||||||||
| Impairment of long-lived assets | (28,600 | ) | (5,433 | ) | (76,089 | ) | (10,930 | ) | ||||||||
| Operating loss | (211,856 | ) | (299,243 | ) | (437,294 | ) | (62,814 | ) | ||||||||
| Interest expense | (89,959 | ) | (46,232 | ) | (28,700 | ) | (4,122 | ) | ||||||||
| Year Ended December 31, | ||||||||||||||||
| 2017 | 2018 | 2019 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| (in thousands, except share, per share and per ADS data) | ||||||||||||||||
| Foreign exchange gain, net | 4,023 | 36,531 | 34,990 | 5,026 | ||||||||||||
| (Loss) gain on disposal of long-lived assets | (31,437 | ) | 4,711 | (1,299 | ) | (187 | ) | |||||||||
| Interest income | 12,077 | 14,168 | 9,165 | 1,316 | ||||||||||||
| Income (loss) from equity method investments | 1,454 | (20,747 | ) | (5,078 | ) | (729 | ) | |||||||||
| Gain on disposal of subsidiaries | 58,913 | 3,341 | - | - | ||||||||||||
| Other income, net | 2,890 | 34,206 | 37,138 | 5,335 | ||||||||||||
| Gain on disposal of an equity method investment | — | 48,019 | - | - | ||||||||||||
| Loss before income taxes | (253,895 | ) | (225,246 | ) | (391,078 | ) | (56,175 | ) | ||||||||
| Income tax (expenses) benefit | (31,789 | ) | (34,051 | ) | 38,986 | 5,600 | ||||||||||
| Net loss | (285,684 | ) | (259,297 | ) | (352,092 | ) | (50,575 | ) | ||||||||
| Net loss attributable to non-controlling interests | (1,364 | ) | (24,422 | ) | (45,043 | ) | (6,470 | ) | ||||||||
| Net loss attributable to Concord Medical Services Holdings Limited | (284,320 | ) | (234,875 | ) | (307,049 | ) | (44,105 | ) | ||||||||
| (1) | Our selling expenses included share-based compensation of |
| (2) | Our general and administrative expenses included share-based compensation |
The following table presents our revenues disaggregated by revenue source.
| Year Ended December 31, | ||||||||||||||||
| 2017 | 2018 | 2019 | ||||||||||||||
| RMB | RMB | RMB | US$ | |||||||||||||
| (in thousands) | ||||||||||||||||
| Network revenue: | ||||||||||||||||
| Operating lease income(1) | 232,015 | 71,864 | 53,485 | 7,683 | ||||||||||||
| Sales-type lease income(1) | - | - | 1,130 | 162 | ||||||||||||
| Management services and technical services | 46,143 | 50,291 | 48,416 | 6,954 | ||||||||||||
| Direct financing lease income(1) | 7,554 | 4,859 | 3,944 | 567 | ||||||||||||
| Brand royalty fees | 6,604 | 5,189 | 5,081 | 730 | ||||||||||||
| Consumables sales | 7,005 | 5,867 | 9,482 | 1,362 | ||||||||||||
| 299,321 | 138,070 | 121,538 | 17,458 | |||||||||||||
| Hospital revenue: | ||||||||||||||||
| Medicine income and medical service | 31,656 | 52,828 | 76,825 | 11,035 | ||||||||||||
| Total revenues | 330,977 | 190,898 | 198,363 | 28,493 | ||||||||||||
(1) Operating lease income, sales-type lease income and direct financing lease income were recognized under ASU 2016-02,Leases (Topic 842).
Year Ended December 31, 20162019 Compared to the Year Ended December 31, 20152018
Total Net Revenues.Revenues. Our total net revenues decreasedincreased by 26.2%3.9% to RMB455.0RMB198.4 million (US$65.528.5 million) for the year ended December 31, 20162019 from RMB616.5RMB190.9 million for the year ended December 31, 2015,2018, primarily due to the increase in our net revenues from the hospital business, which was partially offset by a decrease in our net revenues from the network business due to termination of some cooperative centers and reduction of profit sharing amount.
Network Business. Our net revenues generated from our network business decreased by 12.0% to RMB121.5 million (US$17.4 million) for the year ended December 31, 2019 from RMB138.1 million for the year ended December 31, 2018, primarily due to termination of some cooperative centers and reduction of profit sharing amount attributable to the change in profit sharing ratio for cooperative centers that were at the later stage of cooperative agreements.
Network business.Hospital Business. Our net revenues generated from networkhospital business decreasedincreased by 25.8%45.5% to RMB443.6RMB76.8 million (US$63.911.0 million) for the year ended December 31, 20162019 from RMB597.7RMB52.8 million for the year ended December 31, 2015,2018, primarily duebecause Datong Meizhong Jiahe Cancer Center and Concord International Hospital in Singapore stepped into normal operation and Shanghai Meizhong Jiahe Cancer Centers Co., Ltd. was consolidated into our results of operations in the fourth quarter of 2018.
Cost of Revenues. Total cost of revenues increased by 25.2% to termination of some cooperative centers and reduction of profit sharing amount for cooperative centers that at the later stage of cooperative agreements.
Hospital business.Our net revenues generated from hospital business decreased by 38.9% to RMB11.4RMB214.2 million (US$1.630.8 million) for the year ended December 31, 20162019 from RMB18.7RMB171.1 million for the year ended December 31, 2015,2018, primarily due to partial closure of some of the business unit as a result of renovation of Singapore Concord Cancer Hospital.
Cost of Revenues.Totalincrease in our cost of revenues decreased by 18.9% to RMB286.5 million (US$41.3 million) for the year ended December 31, 2016 from RMB353.3 million for the year ended December 31, 2015, primarily due to termination of some cooperative centers and reduction in operational cost of the existing operating centers resulted from cost control measure.hospital business.
Network business.Business. Our cost of revenues of network business decreased by 23.0%2.7% to RMB247.5RMB77.1 million (US$35.611.0 million) for the year ended December 31, 20162019 from RMB321.3RMB79.3 million for the year ended December 31, 2015, primarily due to termination of some cooperative centers and reduction in operational cost of the existing operating centers resulted from cost control measure.2018.
Hospital business.Business. Our cost of revenuerevenues of hospital business increased by 21.8%49.2% to RMB39.0RMB137.1 million (US$5.619.6 million) for the year ended December 31, 20162019 from RMB32.1RMB91.9 million for the year ended December 31, 2015,2018, primarily due to increased marketing and promotion cost andcosts of revenues attributable to an increase in hospital clinical staff and facilities.facilities, and the consolidation of Shanghai Meizhong Jiahe Cancer Centers Co., Ltd. in the fourth quarter of 2018.
Gross Profit and Gross Margin.Margin. As a result of the foregoing, ourwe had a gross loss of RMB15.8 million (US$2.3 million), compared to gross profit decreasedof RMB19.8 million for the year ended December 31, 2018.
Operating Expenses. Our operating expenses increased by 36.0%32.1% to RMB168.5RMB421.5 million (US$24.360.4 million) for the year ended December 31, 20162019 from RMB263.1RMB319.0 million for the year ended December 31, 2015. Our gross margin decreased to 37.0% for the year ended December 31, 2016 from 42.7% for the year ended December 31, 2015,2018 primarily due to terminationincreased operating costs of centers and reduction of profit sharing, which brought more significant decrease in net revenue compared to decrease in cost, and increased operational cost in hospitals.
Operating Expenses.Selling Expenses. Our operatingselling expenses business increased by 25.4%39.2% to RMB337.1RMB30.2 million (US$48.64.3 million) for the year ended December 31, 20162019 from RMB268.9RMB21.7 million for the year ended December 31, 2015 primarily due to increased operational cost in hospitals.
Selling Expenses.Our selling expenses decreased by 37.9% to RMB70.1 million (US$10.1 million) for the year ended December 31, 2016 from RMB112.8 million for the year ended December 31, 2015.2018. Selling expenses as a percentage of total net revenues decreasedincreased to 15.4%15.2% for the year ended December 31, 20162019 from 18.3%11.4% for the year ended December 31, 2015.2018. The decreaseincrease was mainly due we started to termination of someoperate two new cooperative centers in July and better cost control measure implementedDecember of 2019, respectively, which resulted in cooperative centers.higher advertisement and promotion fees.
General and Administrative Expenses.Expenses. General and administrative expenses increased by 54.9%8.0% to RMB205.9RMB315.1 million (US$29.745.2 million) for the year ended December 31, 20162019 from RMB133.0RMB291.9 million for the year ended December 31, 2015.2018. General and administrative expenses as a percentage of total net revenues increased to 45.3%158.9% for the year ended December 31, 20162019 from 21.6%152.9% in 2015.2018. The increase was mainly due to new hospital operationsincreased labor cost incurred for the preparsion of opening of Guangzhou Concord Cancer Center and Shanghai Concord Cancer Center.
Impairment of Long-lived Assets. We had impairment of long-lived assets of RMB5.4 million and RMB76.1 million (US$10.9 million) for the years ended December 31, 2018 and 2019, respectively. The increase was mainly due to the impairment of long-lived assets of the three low performance cooperative centers and the Second Affiliated Hospital of Baotou Medical College which was involved in Singapore and Datong, and establishment of Singapore Office.litigation.
Operating Loss. As a result of the foregoing, our operating loss was RMB168.6RMB437.3 million (US$24.362.8 million) for the year ended December 31, 20162019 as compared to operating loss of RMB5.7RMB299.2 million for the year ended December 31, 2015.2018.
Interest Expense. Our interest expense increaseddecreased to RMB28.7 million (US$4.1 million) for the year ended December 31, 2019 from RMB53.2RMB46.2 million for the year ended December 31, 20152018, primarily due to RMB89.3the increase in capitalized interest of RMB10.0 million (US$12.91.4 million) in 2019 .
Foreign Exchange Gain, Net. Our foreign exchange gain, net decreased to RMB35.0 million (US$5.0 million) for the year ended December 31, 2016,2019 from RMB36.5 million for the year ended December 31, 2018, primarily due to interests of a loan of RMB300.0 million lent to Guangzhou Concord Cancer Hospital Zhongrong Taihe Healthcare Fund and payment of interests when we fully repaid the IFC loan and the loan borrowed from HSBC Bank (China) Company Limited by Medstar Shanghai in 2016.exchange rate fluctuation.
(Loss) Gain from Disposal of Long-lived Assets
Foreign Exchange Gain..Our foreign exchange gain increased to RMB13.5 We had a loss from disposal of long-lived assets of RMB1.3 million (US$1.90.2 million) for the year ended December 31, 20162019, as compared to a gain from RMB10.3disposal of long-lived assets of RMB4.7 million for the year ended December 31, 2015,2018. The change in 2019 was primarily due to appreciation in valuethe disposals of our bank deposits denominated in U.S. dollars.two cooperative centers. In 2018, we had gains upon actual disposal of those terminated cooperative centers when the proceeds exceeded the residual values of the long-lived assets after accounting for the impairment.
Interest Income.Income. Our interest income increaseddecreased to RMB28.0RMB9.2 million (US$4.01.3 million) for the year ended December 31, 20162019 from RMB22.4RMB14.2 million for the year ended December 31, 2015. This increase was primarily due to the increased amount of restricted cash, increases in interest rates in China and overseas and adjustment of cash deposit composition ratio.
Changes in Fair Value of Derivatives.Our gain from changes in fair value of derivatives decreased to RMB0.7 million (US$0.1 million) for the year ended December 31, 2016 from RMB33.7 million for the year ended December 31, 2015, primarily due to settlement of the IFC loan.
Income (loss) from equity method investments.Our income from equity method investments was RMB0.6 million (US$0.1 million) for the year ended December 31, 2016, as compared to loss from equity method investments of RMB5.6 million for the year ended December 31, 2015. The income was primarily due to the increased in net profit of MD Anderson Proton Therapy Center.
Income Tax Expenses.Our income tax expenses decreased by 22.3% to RMB60.5 million (US$8.7 million) for the year ended December 31, 2016 from RMB74.0 million for the year ended December 31, 2015.2018. This decrease was primarily due to the decrease in profit before tax.the amount of cash and restricted cash deposited in financial institutions located in the PRC to secure offshore loans as the offshore loans were fully repaid in 2019.
Income (loss) from Equity Method Investments
Net Loss.As a result of the foregoing, we had a net. Our loss of RMB265.1from equity method investments decreased to RMB5.1 million (US$38.20.7 million) for the year ended December 31, 2016, as compared to a net loss of RMB79.32019 from RMB20.7 million for the year ended December 31, 2015.2018. The change in 2019 was primarily due to acquisition of the equity interests in Tianjin Jiatai.
Other Income, Net; Gain on Disposal of Subsidiaries; Gain on Disposal of an Equity Method Investment. For the year ended December 31, 2018, we had other income, net of RMB34.2 million, gain on disposal of subsidiaries of RMB3.3 million and gain on disposal of an equity method investment of RMB48.0 million. For the year ended December 31, 2019, we had other income, net of RMB37.1 million (US$5.3 million). We did not have gain on disposal of subsidiaries and gain on disposal of an equity method investment in 2019. Our other income, net in 2019 was primarily a re-measurement gain relating to our disposal of pre-existing equity interests in Wuxi Meizhong Jiahe Cancer Center, Tianjin Jiatai and Shanghai Meizhong Jiahe Imaging Diagnostic Center.
Income Tax (Expenses) Benefit. We had income tax benefit of RMB39.0 million (US$5.6 million) for the year ended December 31, 2019, compared to income tax expenses of RMB34.1 million for the year ended December 31, 2018. We had income tax benefit in 2019 because we had net tax operating losses from our PRC subsidiaries and our consolidated VIEs.
Net Loss. As a result of the foregoing, our net loss increased to RMB352.1 million (US$50.6 million) for the year ended December 31, 2019 from RMB259.3 million for the year ended December 31, 2018.
Year Ended December 31, 20152018 Compared to the Year Ended December 31, 20142017
Total Net Revenues.Our total net revenues increaseddecreased by 1.6%42.3% to RMB616.5RMB190.9 million for the year ended December 31, 20152018 from RMB606.9RMB331.0 million for the year ended December 31, 2014,2017, primarily due to a decrease in our net revenues from the increased revenue contributionsnetwork business due to termination of some cooperative centers and reduction of profit sharing amount, which was partially offset by the increase in our net revenues from diagnostic equipment patients following the acquisition of Concord Cancer Hospital in Singapore.hospital business.
Network business.Business. Our net revenues generated from our network business decreased by 1.5%53.9% to RMB597.7RMB138.1 million for the year ended December 31, 20152018 from RMB606.9RMB299.3 million for the year ended December 31, 2014,2017, primarily due to the closuretermination of 12some cooperative centers and reduction of profit sharing amount attributable to the change in 2015 as a resultprofit sharing ratio for cooperative centers that were at the later stage of our focus on developing hospital business in the future.cooperative agreements.
Hospital business.Business. Our net revenues generated from hospital business is RMB18.7increased by 66.9% to RMB52.8 million for the year ended December 31, 2015, primarily attributable to the acquisition of Concord Cancer Hospital in Singapore in April 2015.
Cost of Revenues.Total cost of revenues increased by 28.7% to RMB353.32018 from RMB31.7 million for the year ended December 31, 2015 from RMB274.62017, primarily because Datong Meizhong Jiahe Cancer Center and Concord International Hospital in Singapore stepped into normal operation and Shanghai Meizhong Jiahe Cancer Center was consolidated into our results of operations in the fourth quarter of 2018.
Cost of Revenues. Total cost of revenues decreased by 26.5% to RMB171.1 million for the year ended December 31, 2014,2018 from RMB233.0 million for the year ended December 31, 2017, primarily due to the increasedecrease in our cost of revenues forof network business due to termination of some cooperative centers and reduction in operating costs of the existing operating centers resulting from cost control measures, which was partially offset by the increase in our networkcost of revenues of hospital business.
Network business.Business. Our cost of revenues of network business increaseddecreased by 17.0%52.4% to RMB321.3RMB79.3 million for the year ended December 31, 20152018 from RMB274.6RMB166.4 million for the year ended December 31, 2014 to,2017, primarily due to increasedtermination of some cooperative centers and reduction in operating costs of the existing operating centers resulting from cost caused by cost-sharing split change based on the new leasing and management agreements signed between us and certain public hospital partners and increased medical consumable expenses and maintenance expenses for the network.control measures.
Hospital business.Business. Our cost of revenuerevenues of hospital business was RMB32.1increased by 38.0% to RMB91.9 million for the year ended December 31, 2015.2018 from RMB66.6 million for the year ended December 31, 2017, primarily due to increased costs of revenues attributable to an increase in hospital clinical staff and facilities, and the consolidation of Shanghai Meizhong Jiahe Cancer Center in the fourth quarter of 2018.
Gross Profit and Gross Margin.Margin. As a result of the foregoing, our gross profit decreased by 20.8%79.8% to RMB263.1RMB19.8 million for the year ended December 31, 20152018 from RMB332.3RMB98.0 million for the year ended December 31, 2014.2017. Our gross margin decreased to 42.7%10.4% for the year ended December 31, 20152018 from 54.8%29.6% for the year ended December 31, 2014, primarily due to change in cost-sharing split between us and certain public hospital partners in our network business, as well as the gross loss recorded for our hospital business in 2015.2017.
Operating Expenses.Expenses. Our operating expenses increased by 80.9%3.0% to RMB268.9RMB319.0 million for the year ended December 31, 20152018 from RMB148.7RMB309.9 million for the year ended December 31, 20142017 primarily due to the increasesincreased operating costs of selling expenses and general and administrative expenses.hospitals.
Selling Expenses.Expenses. Our selling expenses increaseddecreased by 18.6% from RMB95.150.2% to RMB21.7 million for the year ended December 31, 2014 to RMB112.82018 from RMB43.6 million for the year ended December 31, 2015, which included RMB0.3 million selling expenses from hospital business in 2015.2017. Selling expenses as a percentage of total net revenues increaseddecreased to 18.3%11.4% for the year ended December 31, 20152018 from 15.7%13.2% for the year ended December 31, 2014.2017. The increasedecrease was mainly due to increased conference, office,termination of some cooperative centers and travel expenses to expand our network business.improved cost control measures implemented in cooperative centers.
General and Administrative Expenses.Expenses. General and administrative expenses increased from RMB53.6by 22.8% to RMB291.9 million for the year ended December 31, 2014 to RMB133.02018 from RMB237.6 million for the year ended December 31, 2015, which included RMB30.5 million general administrative expenses from hospital business in 2015.2017. General and administrative expenses as a percentage of total net revenues increased to 21.6%152.9% for the year ended December 31, 2018 from 71.8% in 2015 from 8.8% in 2014.2017. The increase in general administrative expense from network business was mainly due to increased expenditure of MD Anderson Proton Therapy Center’s consultant service for Guangzhou Concord Cancer Center and Shanghai Concord Cancer Center and increased bad debts from our networkdebt allowance in 2018.
Impairment of centers.Long-lived Assets. We had impairment of long-lived assets of RMB28.6 million and RMB5.4 million for the years ended December 31, 2017 and 2018, respectively. In 2018, most terminated centers were disposed and only two centers had impairment loss in 2018.
Operating Loss. As a result of the foregoing, our operating loss was RMB5.7RMB299.2 million for the year ended December 31, 20152018 as compared to operating incomeloss of RMB183.6RMB211.9 million for the year ended December 31, 2014.2017.
Interest Expense. Our interest expense remained relatively stable at RMB53.5 million and RMB53.2 for the year ended December 31, 2014 and 2015, respectively.
Foreign Exchange Gain.Our foreign exchange gain increaseddecreased to RMB10.3RMB46.2 million for the year ended December 31, 20152018 from RMB9.6RMB90.0 million for the year ended December 31, 20142017, primarily due to appreciationcapitalized interest of approximately RMB55.5 million in 2018.
Foreign Exchange Gain, Net. Our foreign exchange gain, net increased to RMB36.5 million for the year ended December 31, 2018 from RMB4.0 million for the year ended December 31, 2017, primarily due to increase in the value of our bank deposits denominated in U.S. dollars.
Interest Income.(Loss) Gain from Disposal of Long-lived AssetsOur interest income increased to RMB22.4. We had a gain from disposal of long-lived assets of RMB4.7 million for the year ended December 31, 20152018, as compared to a loss from RMB21.2disposal of long-lived assets of RMB31.4 million for the year ended December 31, 2014.2017. The change in 2018 was primarily due to termination of cooperative centers. In 2017, the long-lived assets were impaired upon termination of the cooperative centers. In 2018, we had gains upon actual disposal of those terminated cooperative centers when the proceeds exceeded the residual values of the long-lived assets after accounting for the impairment.
Interest Income. Our interest income increased to RMB14.2 million for the year ended December 31, 2018 from RMB12.1 million for the year ended December 31, 2017. This increase was primarily due to the increase inincreased interest income from restricted cash depositeddeposit in bank for loans.banks.
Income (loss) from Equity Method Investments
Changes in Fair Value. We had loss from equity method investments of Derivatives.Our gain from changes in fair value of derivatives increased significantly to RMB33.7RMB20.7 million for the year ended December 31, 20152018, as compared to an income from RMB2.6equity method investments of RMB1.5 million for the year ended December 31, 2014,2017. The change in 2018 was primarily due to the significant decreaseloss incurred by Shanghai Meizhong Jiahe Cancer Center, our equity investees in fair valuethe first three quarters of 2018.
Other Income, Net; Gain on Disposal of Subsidiaries; Gain on Disposal of an Equity Method Investment. For the year ended December 31, 2017, we had other income, net of RMB2.9 million and gain on disposal of subsidiaries of RMB58.9 million. The gain on disposal of subsidiaries was primarily attributable by our loss of control in Beijing Century Friendship and Beijing Proton Medical Center, which we accounted for as a deemed disposal and recognized a gain. For the year ended December 31, 2018, we had other income, net of RMB34.2 million, gain on disposal of subsidiaries of RMB3.3 million and gain on disposal of an equity method investment of RMB48.0 million. Gain on disposal of subsidiaries in 2018 was primarily due to the completion of the transfer of our derivatives as a result100% equity interest in CMS Radiotherapy Holdings Limited to our related party, Beijing Allcure Medical Technology Co. Ltd., in May 2018. Our other income, net in 2018 was primarily attributable by investment income for disposal preexisting shares for Guofu Huimei, Beijing Century Friendship, Beijing Proton Medical Center and Shanghai Meizhong Jiahe Cancer Center. Our gain on disposal of our partially early terminationan equity method investment in 2018 was primarily due to gain from disposal of the IFC Loan.assets and liabilities of MD Anderson Proton Therapy Center.
Income Tax Expenses
Loss on Debt Extinguishment.We recorded a one-off loss on debt extinguishment of RMB36.6. Our income tax expenses increased by 7.1% to RMB34.1 million for the year ended December 31, 2015 as compared to nil for the year ended December 31, 2014, primarily due to the amendment to repayment terms of the IFC Loan, which was fully repaid in February 2016.
Income (loss)2018 from equity method investments.Our loss from equity method investments was RMB5.6RMB31.8 million for the year ended December 31, 2015, as compared to income from equity method investments of RMB13.9 million for the year ended December 31, 2014. The loss was primarily due to changes in valuation of our MD Anderson Proton Therapy Center in 2015.2017.
Income Tax Expenses.Our income tax expenses decreased by 8.4% to RMB74.0 million for the year ended December 31, 2015 from RMB80.9 million for the year ended December 31, 2014. This decrease was primarily due to the decrease in profit before tax.
Net Loss.Loss. As a result of the foregoing, we had a net incomeloss of RMB120.3RMB259.3 million for the year ended December 31, 2014,2018, as compared to a net loss of RMB79.3RMB285.7 million for the year ended December 31, 2015.2017.
| B. | Liquidity and Capital Resources |
Our liquidity needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out and continued expansion of our network of centers and our hospitals and (b) our working capital needs, which include payment of our operating expenses and financing of our accounts receivable; and (ii) net cash used in investing activities that consists of the investments in our direct investment entities. To date, we have financed our operations primarily through cash flows from operations and short-short-term and long-term bank borrowings, as well as the issuance of convertible notes.borrowings.
We had net current assetsliabilities of RMB243.8RMB345.0 million (US$35.149.6 million) as of December 31, 2016.2019. As of December 31, 2016,2019, we had RMB189.9RMB74.3 million (US$27.410.7 million) in cash RMB562.4and cash equivalents, nil in restricted cash, RMB285.5 million (US$81.041.0 million) in short-term borrowings outstanding, of which RMB568.5RMB1,291.8 million (US$81.9185.6 million) was secured by restricted cash deposited in local banks, and RMB298.3 million (US$43.0 million) inthe non-current portion of long-term borrowings outstanding, includingand RMB42.9 million (US$6.2 million) in the current portion of such long-term borrowings outstandingoutstanding.
We had net losses in recent years. For the three years ended December 31, 2017, 2018 and 2019, our net loss was approximately RMB285.7 million, RMB259.3 million and RMB352.1 million (US$50.6 million), respectively. As of RMB82.6December 31, 2019, we had an accumulated deficit of RMB1,785.6 million (US$11.9256.5 million) and a total shareholders’ deficit of RMB122.8 million (US$17.6 million). We had net cash used in operating activities of RMB38.6 million and RMB195.3 million (US$28.1 million) for the years ended December 31, 2018 and 2019, respectively. As of December 31, 2019, we had net current liabilities of RMB345.0 million (US$49.6 million). These conditions raised substantial doubt about our ability to continue as a going concern.
Our board and management are now reviewing strategy and priorities for the next 12 months and analyzing the cash flow forecast for the next 12 months. By taking into account of (i) the receipt of the capital injection from CITIC Industrial Investment Group Limited of RMB700.0 million (US$100.5 million), (ii) the credit facilities of RMB557.4 million (US$80.1 million) provided by a bank in PRC, and (iii) a financing arrangement agreed by a third party for medical equipment purchase of RMB207.0 million (US$29.7 million), we believe that our current cash and anticipated cash flowflows from operations and financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for at least the next 12 months.
In December 2012We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell equity securities or debt securities or borrow from banks. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of equity securities would dilute our shareholders. The incurrence of debt would divert cash from working capital and November 2013, thecapital expenditures to service debt obligations and could result in operating and financial covenants that would restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business, operations and prospects may suffer. See “Item 3. Risk Factors — D. Risks Related to Our Company entered into— Our recurring losses and negative cash flows could raise substantial doubt regarding our ability to continue as a short-term credit facility of US$16.5 million and US$16.5 million, respectively, with HSBC Bank (Hong Kong) Company Limited, secured by restricted cash deposited in HSBC Bank (China) Company Limited, which are used for the investment of MD Anderson Proton Therapy Center. The loans carried an interest rate of three-month LIBOR+1.75% and one-month LIBOR+1%, respectively, and have been renewed on a yearly basis. As of December 31, 2016, we had an outstanding balance of US$16.5 million in total.going concern.”
In December 2012, Ascendium entered into a short-term loan agreement with Agricultural Bank Of China Limited, Hong Kong Branch, whereby we are entitled to borrow a secured loan of US$18.0 million for general working capital purposes. We drew down US$16.5 million in December 2012 under the loan commitment, with a floating annual interest rate of three-month LIBOR/HIBOR+1.4%. In December 2013, we had renewed the term of the loan agreement to a maximum of up to three years with a floating annual interest rate of three-month LIBOR/HIBOR+2%. As of December 31, 2016, the loan has been fully repaid.
In September 2013, Shanghai Medstar entered into a short-term credit facility of RMB15.0 million with HSBC Bank (China) Company Limited. The borrowings contained restrictive covenants requiring the maintenance of tangible net worth of RMB600.0 million and RMB1,350.0 million by Aohua Technology and the Company, a total liability to tangible net worth ratio, as calculated based on PRC generally accepted accounting principles, of 0.7 times at all time by Shanghai Medstar, a total liability and contingent liability to tangible net worth ratio, as calculated based on PRC generally accepted accounting principles, of 0.5 times, 0.5 times and 0.55 times by Shanghai Medstar, Aohua Technology and the Company and a total loan to tangible net worth ratio, as calculated based on PRC generally accepted accounting principles, of 0.7 times at all time by Shanghai Medstar. As of December 31, 2016, the loan has been fully repaid.
In July 2014, Aohua Medical entered into a long-term loan agreement of RMB66.0 million with China Construction Bank Limited that bears an interest rate of 5.23% per annum. As of December 31, 2016, we had an outstanding balance of RMB17.9 million (US$2.6 million), which will be due in July 2017.
In September 2014, we entered into a short-term credit facility with HSBC Bank (Hong Kong) Company Limited, whereby we are entitled to borrow a loan of US$25.0 million. We drew down US$12.1 million, US$3.9 million, US$1.0 million, US$4.1 million and US$3.9 million in September 2014, October 2014, December 2014, September 2015 and October 2015, respectively. These loans were secured by restricted cash deposited in HSBC Bank (China) Company Limited for dividend payment bearing an interest rate of one-month LIBOR/HIBOR+1% per annum, and were used to pay dividend. These loans have been renewed on a yearly basis. As of December 31, 2016, we had an outstanding balance of US$24 million.
In April 2015, Ascendium entered into a short-term credit facility with Bank of Communications Co., Ltd., New York Branch, whereby we are entitled to borrow a revolving loan of up to US$15.0 million bearing an interest rate of three-month LIBOR. In April 2016, the loan has been fully repaid.
In June 2015, Ascendium entered into a short-term credit facility with Bank of Communications Co., Ltd., New York Branch, whereby we are entitled to borrow a revolving loan of up to US$15.0 million bearing an interest rate of three-month LIBOR. In June 2016, the loan has been fully repaid.
In June 2015, CCM (Hong Kong) Medical Investments Limited (“CCM Hong Kong”), as the borrower, entered into a long-term loan agreement with the Company, as guarantor A, Shanghai Medstar, as guarantor B, Ascendium, as the shareholder of the borrower, and Gopher Investment Fund III SPC, or Gopher, for the account of Gopher Asia Credit SP, as the original lender, whereby we are entitled to borrow a U.S. dollar term loan of up to US$25.0 million bearing an interest rate of 9.0% per annum for our general working capital purposes. This loan is secured by certain shares in CCM Hong Kong beneficially owned by Ascendium and guaranteed by the Company and Shanghai Medstar. As of December 31, 2016, we had an outstanding balance of RMB173.6 million (US$25.0 million), which will be due in June 2018.
In August 2015, we entered into a short-term credit facility with HSBC Bank (Hong Kong) Company Limited, whereby we are entitled to borrow a loan of US$25.0 million. We drew down US$6.0 million in December 2015 and repaid in 2016. We drew down US$14.4 million in 2016. This loan was secured by restricted cash deposited in HSBC Bank (China) Company Limited bearing an interest rate of three-month LIBOR+1% per annum, and was used for our investment in Concord Cancer Hospital in Singapore. As of December 31, 2016, we had an outstanding balance of US$14.4 million.Indebtedness
In July 2016, Shanghai Medstar entered into a long-term loan agreement of RMB16.5 million (US$2.4 million) with Agricultural Bank Of China Limited, Shanghai Branch that bears an interest rate of 4.75% per annum. As of December 31, 2016,2019, the loan has been fully repaid.
In May 2018, Shanghai Concord Cancer Center entered into a long-term loan agreement of RMB1.0 billion (US$143.6 million) with Bank of Shanghai that bears an interest rate of 5.88% per annum. The loan is secured by land use rights and construction in progress. As of December 31, 2019, we had an outstanding balance of RMB15.1RMB549.6 million (US$2.278.9 million). The loan will be due in May 2028.
In July 2018, Guangzhou Concord Cancer Center entered into a long-term loan agreement of RMB500.0 million (US$71.8 million) with China Construction Bank that bears an interest rate of 4.9% per annum. The loan is secured by land use rights. As of December 31, 2019, we had an outstanding balance of RMB500.0 million (US$71.8 million). The loan will be due in July 2019.2028.
In November 2016, Shanghai MedstarJuly 2018, Ascendium entered into a short-term loan agreement of RMB40.4RMB180.0 million (US$26.2 million) with HSBC Bank (China) Company Limitedof Shanghai that bears an interest rate of 4.35%5.87% per annum. The loan was secured by restricted cash deposited in Bank of Shanghai of RMB158.0 million, bearing an interest rate of 4.6% per annum. As of December 31, 2016,2019, the loan has been fully repaid.
In December 2018, Medstar Overseas entered into a short-term loan agreement of RMB250.0 million (US$36.4 million) with Shanghai Huarui Bank that bears an interest rate of 3.3% per annum. The loan is secured by restricted cash deposited in Shanghai Huarui Bank of RMB150.3 million, bearing an interest rate of 1.5% per annum. As of December 31, 2019, the loan has been fully repaid.
In December 2018, Ascendium entered into a short-term loan agreement of RMB128.0 million (US$18.6 million) with Shanghai Huarui Bank that bears an interest rate of 3.3% per annum. The loan was secured by restricted cash deposited in Shanghai Huarui Bank of RMB102.1 million, bearing an interest rate of 1.5% per annum. As of December 31, 2019, the loan has been fully repaid.
In December 2018, Shanghai Medstar entered into a long-term loan agreement of RMB65.0 million (US$9.3 million) with Zhejiang Marine Leasing Co., Ltd. The loan bears an interest rate of 8% per annum. The loan was secured by equipment. As of December 31, 2019, we had an outstanding balance of RMB40.4RMB64.0 million (US$5.89.2 million). The loan will be due in November 2017.December 2023.
InCertain bank borrowings were secured by accounts receivable with a carrying value of nil and RMB30.5 million (US$4.4 million), including lease receivables with a carrying value of nil and RMB25.0 million (US$3.6 million), certain land use rights with a carrying value of RMB425.7 million and RMB416.5 million (US$59.8 million), certain construction in progress with a carrying value of RMB633.4 million and RMB1,152.4 million (US$165.5 million), deposit for non-current asset with a carrying value of RMB13.8 million and nil, and restricted cash of RMB422.0 million and nil, as of December 2016, Shanghai Medstar entered into a short-term loan agreement of RMB111.0 million with Agricultural Bank Of China Limited, Shanghai Branch that bears an interest rate of 4.35% per annum. 31, 2018 and 2019, respectively.
As of December 31, 2016,2018 and 2019, the short-term bank and other borrowing bore a weighted average interest of 4.08% and 7.73% per annum, and the long-term bank and other borrowings bore a weighted average interest of 9.81% and 11.49% per annum, respectively.
As of December 31, 2019, we had an outstanding balance of RMB111.0unutilized short-term bank credit lines and unutilized long-term bank credit lines amounting to nil and RMB557.4 million (US$16.080.1 million). The, respectively.
From time to time, we also enter into loan has been fully repaid in April 2017.agreements with our related parties. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”
IFC loanAccounts Receivable
On February 18, 2014,Fees for medical services provided at the centers are paid directly to our hospital partners by patients and we borrowedare not responsible for patient billing and fee collection. Medical service fees in China are typically paid in full upfront by patients prior to receiving services. Generally, patients claim reimbursements, if any, is available under the applicable public or private medical insurance plans. As a result, hospitals do not generally experience bad debt problems.
However, the healthcare reform announced by the PRC government in January 2009 has introduced pilot public medical insurance plans. Under these plans patients are only responsible for paying their deductible amounts upfront and hospitals are responsible for seeking reimbursements from International Finance Corporation (“IFC”)the relevant government authorities after providing treatments. Certain of the hospitals in which some of the centers in our network are based are involved in such pilot medical insurance plan.
We do not expect such change in payment timing to materially affect our ability to collect our contracted percentage from our hospital partners. However, the ability of our hospital partners to collect medical service fees from the government authorities in a loantimely manner may affect the timing of payments made by our hospital partners to us as a principal amount of US$20.0 million which is repayable on October 15, 2018 and April 15, 2019 by two equal installments.result.
The loan gives IFCfollowing table sets forth our account receivables by age and pay or type as of December 31, 2019:
| 1-6 months | 7-12 months | 1-2 years | Over 2 years | Total | ||||||||||||||||
| RMB | RMB | RMB | RMB | RMB | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Network Business | ||||||||||||||||||||
| Accounts receivable | 38,728 | 9,521 | 14,999 | 3,896 | 67,144 | |||||||||||||||
| Allowance for doubtful accounts | — | (192 | ) | (3,216 | ) | (3,461 | ) | (6,869 | ) | |||||||||||
| Accounts receivable, net | 38,728 | 9,329 | 11,783 | 435 | 60,275 | |||||||||||||||
| Hospital Business | ||||||||||||||||||||
| Accounts receivable | 12,837 | 822 | 66 | 9 | 13,734 | |||||||||||||||
| Allowance for doubtful accounts | — | (203 | ) | (66 | ) | (9 | ) | (278 | ) | |||||||||||
| Accounts receivable, net | 12,837 | 619 | — | — | 13,456 | |||||||||||||||
We attempt to collect accounts receivables within the right to converthospital payment terms. Standard payment terms are typically 90 days after invoice date. Hospital payment terms vary from one another. Any departure from the loan in whole standard hospital payment term must be approved by the chief financial officer and/or in part, at any time prior to the fifth anniversaryfinance controller. Our management evaluates our accounts receivable on a quarterly basis. As of the date of this annual report, we do not expect any material uncertainties which would affect the disbursementfuture realization of the loan, into ADSs of our Company at the conversion price in effect at such time. The conversion price is initially set at US$6.90 per ADS subject to adjustments as set forth in the loan agreement. The conversion and other features (i.e. the redemption option upon certain contingencies, step down interest feature), which are not clearly and closely related to the debt host contract, are bifurcated and accounted for as a compound derivative. The compound derivatives are accounted for as a liability at fair value for each reporting period.revenues.
At inception, the fair value of the host debt instrument amounted to RMB87.8 million (US$14.1 million) was recorded as a long term bank borrowing in the consolidated balance sheet. The host debt instrument is accreted to the redemption value on the maturity date using the effective interest method.
On October 12, 2015, we entered into a repayment agreement with IFC, pursuant to which, a principal amount of US$10.0 million can be repaid by December 31, 2015 and the remaining principal amount of US$10.0 million can be repaid on February 29, 2016 and May 31, 2016 in two equal installments. The repayment is accounted for under extinguishment accounting and a loss on debt extinguishment of RMB36.6 million was recognized in the consolidated statement of comprehensive income (loss) for the year ended December 31, 2015. The outstanding balance of the IFC loan was fully repaid in February 2016.
Statements of Cash Flow
The following table sets forth a summary of our cash flows for the periods indicated:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||||||||||
| RMB | RMB | RMB | US$ | RMB | RMB | RMB | US$ | |||||||||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
| Selected Consolidated Statements of Cash Flow Data | ||||||||||||||||||||||||||||||||
| Net cash generated from (used in) operating activities | 490,381 | (175,138 | ) | (78,078 | ) | (11,247 | ) | 26,732 | (38,591 | ) | (195,347 | ) | (28,058 | ) | ||||||||||||||||||
| Net cash (used in) generated from investing activities(1) | 287,055 | (391,083 | ) | (74,847 | ) | (10,780 | ) | |||||||||||||||||||||||||
| Net cash generated from (used in) financing activities | (579,144 | ) | 590,398 | (131,370 | ) | (18,921 | ) | |||||||||||||||||||||||||
| Exchange rate effect on cash | (2,643 | ) | (17,419 | ) | (11,240 | ) | (1,618 | ) | ||||||||||||||||||||||||
| Net increase (decrease) in cash | 195,649 | 6,758 | (295,535 | ) | (42,566 | ) | ||||||||||||||||||||||||||
| Net cash used in investing activities(1) | (313,010 | ) | (1,000,355 | ) | (1,071,507 | ) | (153,913 | ) | ||||||||||||||||||||||||
| Net cash generated from financing activities | 189,899 | 1,203,042 | 513,268 | 73,726 | ||||||||||||||||||||||||||||
| Effect of foreign exchange rate changes on cash and cash equivalent and restricted cash | 157 | 459 | 1,161 | 166 | ||||||||||||||||||||||||||||
| Net (decrease) increase in cash | (96,222 | ) | 164,555 | (752,425 | ) | (108,079 | ) | |||||||||||||||||||||||||
| Cash at beginning of the year | 283,033 | 478,682 | 485,440 | 69,918 | 758,399 | 662,177 | 826,732 | 118,753 | ||||||||||||||||||||||||
| Cash at end of the year | 478,682 | 485,440 | 189,905 | 27,352 | 662,177 | 826,732 | 74,307 | 10,674 | ||||||||||||||||||||||||
| (1) | Net cash used in investing activities in |
Net Cash Generated from (Used in) Operating Activities
The primary factors affecting our operating cash flow is the amount and timing of payments of our contractual percentage of each center’s revenue net of specified operating expenses that we received from our hospital partners, the payment of medicine expenses and medical service fees by our patients in Concord CancerInternational Hospital, and cash payments that we made in connection with establishing new cooperative centers and hospitals.
Net cash used in operating activities was RMB78.1 million (US$11.2 million) for the year ended December 31, 2016, resulted2019 was RMB195.3 million (US$28.1 million), resulting primarily from our net loss of RMB265.1RMB352.1 million (US$38.250.6 million), which was partially offsetas adjusted by the reconciliation of certain non-cash items, including (i) impairment of long-lived assets of RMB76.1 million (US$10.9 million), (ii) interest and consultation expenses of RMB53.2 million (US$7.6 miilion), (iii) depreciation of property, plant and equipment of RMB117.1RMB44.4 million (US$16.96.4 million), (iv) allowance for doubtful accounts, net of US$24.5 million (US$3.5 million), (v) deferred tax expense of RMB22.5 million (US$3.2 million), (vi) a selling loss recognized at sale-type lease commencement of RMB21.2 million (US$3.0 million), and (vii) share-based compensation of RMB20.6 million (US$3.0 million). Additional factors affecting operating cash flow included (i) a decrease in accrued expenses and other liabilities of RMB60.9 million (US$8.8 million), (ii) an increase in prepayments and other current assets of RMB11.0 million (US$1.6 million) and (ii) impairment(iii) a decrease in accrued unrecognized tax benefit of long-lived assets of RMB61.1RMB16.2 million (US$8.82.3 million).
Net cash used in operating activities was RMB175.1 million for the year ended December 31, 2015, resulted2018 was RMB38.6 million, resulting primarily from (i) our net loss of RMB79.3RMB259.3 million, as adjusted by the reconciliation of certain non-cash items, including (i) interest and (ii) deposits for the land use rights in connection with our premium cancer hospitalsconsultation expenses of RMB379.3 million, which was partially offset by (i) depreciation of property, plant and equipment of RMB138.1 million and (ii) accrued unrecognized tax benefit of RMB24.6 million.
Net cash generated from operating activities was RMB490.4 million for the year ended December 31, 2014, resulted primarily from (i) our net income of RMB120.3RMB46.2 million, (ii) depreciation of property, plant and equipment of RMB175.0RMB40.8 million, (iii) gains from disposal of an equity method investment, attributable to MD Anderson Proton Therapy Center’s sale of its assets and liabilities to UTMDACC, of RMB48.0 million, and (iv) gains from revaluation of previously held equity interests of RMB28.8 million. Additional factors affecting operating cash flow included (i) an increase in accrued expenses and other liabilities of RMB51.9 million, (ii) an increase in accounts receivable of RMB48.4 million, (iii) an increase in other non-current assets of RMB41.1 million, and (iv) an increase in accrued unrecognized tax benefitbenefits of RMB60.4 million.RMB46.2 million.
Net cash generated from operating activities for the year ended December 31, 2017 was RMB26.7 million, resulting primarily from changes in accounts receivable of RMB43.4 million, changes in prepayments and other current assets of RMB4.2 million, changes in accrued expenses and other liabilities of RMB11.2 million and adjustments on (i) depreciation of property, plant and equipment of RMB83.2 million, (ii) interest and consultation expense of RMB125.3 million, (iii) loss on disposal of long-lived assets, net of RMB31.4 million and (iv) impairment of long-lived assets of RMB28.6 million. These were offset by our net loss of RMB285.7 million.
Net Cash Generated from (Used in)Used in Investing Activities
Net cash used in investing activities for the year ended December 31, 20162019 was RMB74.8RMB1,071.5 million (US$10.8153.9 million), consisting primarily of (i) prepayments in long-term investmentacquisitions of and (ii) acquisitiondeposits for the purchases of property, plant and equipment of RMB700.9 million (US$100.7 million), acquisitions of Tianjin Jiatai, SH Rongchi, Heze Meizhong Jiahe Cancer Center, Shanghai Meizhong Jiahe Imaging Diagnostic Center and Wuxi Meizhong Jiahe Cancer Center, net of cash acquired of RMB420.6 million (US$60.4 million), and settlement of investment in Shanghai Meizhong Jiahe Cancer Center of RMB105.1 million (US$15.1 million), which waswere partially offset by proceeds from principal portiondisposal of direct financing leasesproperty, plant and equipment of RMB69.3 million (US$10.0 million) and redemption of short-term investment of RMB50.0 million (US$7.2 million).
Net cash used in investing activities for the year ended December 31, 20152018 was RMB391.1RMB1,000.4 million, consisting primarily of acquisitionacquisitions of Concord Cancer Hospital and depositdeposits for the purchases of property, plant and equipment. of RMB764.4 million and acquisitions of Guofu Huimei, Shanghai Meizhong Jiahe Cancer Center, Beijing Century Friendship and Beijing Proton Medical Center, net of cash acquired of RMB528.7 million and purchase of short-term investments of RMB252.3 million, partially offset by redemption from short-term investment of RMB202.3 million proceeds from disposal of an equity investment, attributable to our sharing of proceeds generated from MD Anderson Proton Therapy Center’s sale of its assets and liabilities to UTMDACC, of RMB212.9 million and proceeds from disposal of property, plant and equipment of RMB113.0 million.
Net cash generated fromused in investing activities for the year ended December 31, 20142017 was RMB287.1RMB313.0 million, consisting primarily of cash generated(i) acquisitions of and deposits for the purchases of property, plant and equipment of RMB197.8 million and investments in equity method investees of RMB97.8 million, which were partially offset by proceeds from disposal of Chang’an Hospitalproperty, plant and WHT.equipment of RMB38.1 million and proceeds from principal portion of direct financing leases of RMB61.9 million.
Net Cash Generated from (Used in) Financing Activities
Net cash used in financialgenerated from financing activities for the year ended December 31, 20162019 was RMB131.4RMB513.3 million (US$18.973.7 million), consisting primarily consisting (i) repayment of proceeds from long-term bank and short term bankother borrowings of RMB892.3RMB934.4 million (US$128.5 million) and (ii) dividends paid to ordinary shareholders of RMB285.8 million (US$41.2 million), which was partially offset by proceeds received from advance payment of investment from others of RMB528.9 million (US$76.2134.2 million) and proceeds received from short-term bank borrowings of RMB497.6RMB285.5 million (US$71.641.0 million), which were partially offset by the repayment of long-term bank borrowings of RMB253.8 million (US$36.5 million) and the repayment of short-term bank borrowings of RMB442.8 million (US$63.6 million).
Net cash generated from financialfinancing activities for the year ended December 31, 20152018 was RMB590.4RMB1,203.0 million, consisting primarily consisting (i)of proceeds receivedfrom issuance of contingently redeemable non-controlling interests of a subsidiary of RMB1,500 million associated with the strategy investment in Meizhong Jiahe by CICC and other investors, proceeds from short-term bank borrowings of RMB726.7 million and proceeds from long-term bank and other borrowings of RMB343.3 million and (ii) proceeds from asset backed securities of RMB396.5RMB472.6 million, which waswere partially offset by the repayment of short-term bank borrowings of RMB864.3 million, repayment of long-term bank borrowings of RMB348.0RMB504.8 million, borrowings from related parties of RMB174.3 million and repayment of secured borrowings of RMB243.3 million.
Net cash used in financialgenerated from financing activities for the year ended December 31, 20142017 was RMB579.1RMB189.9 million, consisting primarily consisting (i) dividends paid to ordinary shareholders of RMB453.6proceeds received from short term borrowing of RMB292.8 million and (ii)long-term bank and other borrowings of RMB280.4 million, which were partially offset by the repayment of long-term and short termshort-term bank borrowings of RMB383.9RMB317.9 million, which was partially offset by proceeds received fromrepayment of long-term bank borrowings of RMB291.9RMB87.4 million, payments for purchase of mandatorily redeemable non-controlling interests of RMB97.1 million and repayment of secured borrowings of RMB81.0 million.
Acquisitions and Capital Expenditures
In December 2012, we acquired 19.98% of equity interest in the MD Anderson Proton Therapy Center for a total consideration of approximately RMB201.2 million and in August 2015, we acquired additional 7.04% of equity interest in the MD Anderson Proton Therapy Center for a total consideration of approximately RMB4.6 million. In April 2015,January 2016, we acquired 100% of the equity interest in Concord Cancer Hospital for a total cash consideration of SGD55.0 million (RMB235.5 million). In January 2016, we acquired 100% equity interestinterests in Beijing Century Friendship, and an additionalwhich held a 55% equity interest in Beijing Proton Medical Center, with a total consideration of RMB100.6 million. After the transaction, we held a total of 80% of the equity interests in Beijing Proton Medical Center through Beijing Century Friendship and King Cheers.
In June 2018, Meizhong Jiahe entered into separate agreements with Guofu Huimei to purchase all its 78.31% equity interest in Beijing Century Friendship which held a 55% equity interest in Beijing Proton Medical Center and a 54.8% equity interest in Shanghai Meizhong Jiahe Cancer Center at consideration of RMB388.5 million and ultimately holdRMB182.1 million, respectively. The consideration was paid in June 2018 and July 2018, respectively, and the related commercial registrations were completed on July 26, 2018 and October 8, 2018, respectively. Meanwhile, ZR Guofu and Guofu Huimei reached an agreement, according to which ZR Guofu withdrew its investments in Guofu Huimei, amounting to RMB746.0 million. We became the sole shareholder of Guofu Huimei after ZR Guofu’s withdrawal of its investments in Guofu Himei in July 2018 and the completion of commercial registration on September 3, 2018. Upon the completion, we held a 100% equity interest in Beijing Century Friendship, a 80% equity interest in Beijing Proton Medical Center.Center, a 90% equity interest in Shanghai Meizhong Jiahe Cancer Center and a 100% equity interest in Guofu Huimei through our wholly-owned or majority-owned subsidiaries. We accounted for it as a single transaction and obtained control of Guofu Huimei, Beijing Century Friendship and Beijing Proton Medical Center and Shanghai Meizhong Jiahe Cancer Center on October 8, 2018.
In 2014, 20152017, 2018 and 2016,2019, our capital expenditures totaled RMB109.9RMB289.9 million, RMB182.0RMB870.7 million and RMB118.9RMB675.3 million (US$17.196.7 million), respectively. In past years, our capital expenditures related primarily to the purchase of medical equipment and the acquisition of assets from third parties. Our capital expenditureexpenditures in 20162019 decreased by RMB63.1RMB195.4 million (US$28.0 million) as compared to 2015,2018, primarily due to terminationdecreases in acquisitions of some cooperative centers.and deposits for the purchases of property, plant and equipment.
We estimate that our expected aggregate capital expenditures in 20172020 will be approximately RMB600 millionRMB1.0 billion (US$143.2 million) to RMB800 millionRMB1.1 billion (US$157.6 million),which we will use mainly for construction and medical equipment procurement of premium hospitals in Shanghai, Guangzhou and Guangzhou. We expect the capital expenditure required to support the construction of our proton center and premium cancer hospitals to be approximately RMB590 million in 2017. We also intend to open three to five specialty cancer hospitals each year in the next three years, and expect the capital expenditure required to support such expansion to be approximately RMB150 million to RMB250 million per year from 2017. Our expected sources of funding for these hospitals are approximately 70% from bank loans and approximately 30% from cash flows from operations.Beijing. As of December 31, 2016,2019, we had bank credit lines totaling RMB3.1RMB1.6 billion (US$444.5229.7 million), of which RMB1.5 billionRMB557.4 million (US$80.1 million) had not been utilized. There are no financing termsterm among our bank loan terms which will have an adverse effect on our operations.
We believe that our current levels of cash and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, we may need additional cash resources in the future if we experience changed business conditions or other developments, or if we decide to distribute special dividends or if we find and wish to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions.
If we ever determine that our cash requirements exceed our amounts of cash on hand, we may seek to issue debt or equity securities or obtain a credit facility. Any issuance of equity or equity-linked securities could cause dilution for our shareholders. Any incurrence of indebtedness could increase our debt service obligations and cause us to be subject to restrictive operating and finance covenants. It is possible that, whenWhen we need additional cash resources, financing willmay only be available to us in amounts or on terms that would not be acceptable to us or financing willmay not be available at all.
Restrictions on Cash Dividends
We conduct our business primarily through our consolidated subsidiaries incorporated in China and Singapore. We rely on dividends paid by these consolidated subsidiaries for our cash needs, including the funds necessary to pay any dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. The payment of dividends by entities established in China is subject to limitations. Regulations in China permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Each of our PRC subsidiaries, including wholly foreign-owned enterprises (generally known as WFOEs), and joint venture enterprises is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves or statutory capital reserve fund until the aggregate amount of such reserves reaches 50% of its respective registered capital. Our statutory reserves are not distributable as loans, advances or cash dividends. We anticipate that in the foreseeable future our PRC subsidiaries will need to continue to set aside 10% of their respective after-tax profits to their statutory reserves. In addition, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We rely on dividends paid by our subsidiaries for our cash needs, and any limitation on the ability of our subsidiaries to make payments to us could materially adversely affect our ability to conduct our business.”
The ability of our subsidiary to convert renminbi into U.S. dollars and make payments to us is subject to PRC foreign exchange regulations. Under these regulations, the renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. Conversion of renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of SAFE. See “Item 10. Additional Information — D. Exchange Controls”
Recent Adopted Accounting Pronouncement
Adoption of ASU 2016-02
We adopted ASU 2016-02,Leases, and all subsequent ASUs relating to this topic (collectively, “ASC 842”) effective January 1, 2019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to not reassess (1) whether expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for existing leases as of the adoption date. We elected to not separate lease and associated non-lease components if certain criteria are met as provided by ASU 2018-11. We also made an accounting policy election to exempt short-term leases of 12 months or less from balance sheet recognition requirements associated with the new standard. We will recognize fixed rental payments for these short-term leases as a straight-line expense over the lease term.
Prior to adopting ASC 842, we accounted for the prepaid land use right in the PRC cost less accumulated amortization. We record amortization on a straight-line basis over the terms of the land use rights agreement of 50 years. Upon the adoption of ASC 842, operating leases related to land use right are subject to ASC 842 and right-of-use assets and lease liabilities are recognized on the consolidated balance sheet.
The impact arising from the adoption of ASC 842 at January 1, 2019 for leases as lessee was as follows:
| Balance as of December 31, 2018 | Adjustment due to the adoption of ASU 2016-02 | Balance as of January 1, 2019 | ||||||||||
| (RMB in thousand) | ||||||||||||
| Assets: | ||||||||||||
| Right-of-use assets, net | - | 529,843 | 529,843 | |||||||||
| Prepayments, other receivables and other assets | 227,714 | (1,186 | ) | 226,528 | ||||||||
| Prepaid land lease payments | 438,323 | (438,323 | ) | - | ||||||||
| Liabilities: | ||||||||||||
| Operating lease liabilities, current | - | 13,101 | 13,101 | |||||||||
| Operating lease liabilities, noncurrent | - | 77,233 | 77,233 | |||||||||
Recent Accounting Pronouncement Pending Adoption
In May 2014,June 2016, the Financial Accounting Standards Board (“FASB”)FASB issued ASU No. 2014-092016-13,Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2014-09”2016-13”),Revenue from Contracts which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with Customers.an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is originally effective for the annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. ASU 2015-14, Revenue from Contracts with Customers, defers the effective date of ASU 2014-09 by one year. As a result, ASU 2014-092016-13 is effective for annual reporting periods, and interim periods, beginning after December 15, 20172019. In November 2018, the FASB issued Accounting Standards Update No. 2018-19—Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326. Among other things, the amendments clarify the reference for purchased financial assets with credit deterioration in a business combination to ASC 326-20. The amendments have the same effective dates as ASU 2016-13 (Topic 326) for entities that have not yet adopted that standard. We are currently in the process of evaluating the impact of the adoption of ASU 2019-11 and do not expect any material impact on our consolidated financial statements as a result of adopting the new standard.
In August 2018, the FASB issued ASU No. 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Under the guidance, public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for all entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. We do not expect any material impact on the consolidated statements as a result of adopting the new standard.
In November 2019, the FASB issued ASU 2019-08,Codification Improvements – Share-Based Consideration Payable to a Customer. ASU 2019-08 requires entities to measure and classify share-based payments that are granted to a customer in conjunction with a revenue arrangement and are not in exchange for a distinct good or service in accordance with ASC 718. This guidance is effective for all public business entities (“PBEs”) and other entities that have adopted ASU 2018-07 in fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted tobut cannot precede an entity’s adoption of ASU 2018-07. We do not expect any material impact on the original effective date. We plan to adoptconsolidated statements as a result of adopting the new standard on January 1, 2018, using the modified retrospective method. The cumulative effect of initially applying the guidance will be recognized at the date of initial application. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.standard.
In January 2016,December 2019, the FASB issued ASU No. 2016-01 (“ASU 2016-01”),2019-12,Financial InstrumentsSimplifying the Accounting for Income Taxes. ASU 2016-01 requires equity investments (except those accounted2019-12 eliminates certain exceptions related to the approach for underintra period tax allocation, the equity methodmethodology for calculating income taxes in an interim period and the recognition of accounting or those that result in consolidationdeferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the investee) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactionsaccounting for the identical or a similar investment of the same issuer. ASU 2016-01 also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entityincome taxes. This guidance is required to measure the investment at fair value. For public business entities, the amendments are effective for PBEs for fiscal years beginning after December 15, 2017, including2020, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluatingdo not expect any material impact on the impactconsolidated statements as a result of adopting this standard on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”),Leases. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public business entities for annual reporting periods and interim periods within those years beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07,Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting(“ASU 2016-09”) to simplify the accounting for share-based payment transactions, including the income tax consequences, an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for public companies for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230,Statement of Cash Flows, (“ASC 230”) including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. In addition, in November 2016, the FASB issued ASU 2016-18,Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”). ASU 2016-18 clarifies certain existing principles in ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. These ASUs will be effective for our fiscal year beginning December 1, 2018 and subsequent interim periods. Early adoption is permitted. The adoption of ASU 2016-15 and ASU 2016-18 will modify our current disclosures and classifications within the consolidated statement of cash flows but they are not expected to have a material effect on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.Under the new standard, the selling (transferring) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the purchasing (receiving) entity is required to recognize a deferred tax asset or liability, as well as the related deferred tax benefit or expense, upon purchase or receipt of the asset. This pronouncement is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We are still evaluating the impact of adopting this standard on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18 (“ASU 2016-18”),Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for public business entities in the first quarter of 2018. Early adoption is permitted. We are currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01,Business Combinations (Topic 805): Clarifying Definition of a Business(“ASU 2017-01”). ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial statements. We are currently evaluating the impact of adopting this standard on ours consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (“ASU 2017-04”),Intangibles – Goodwill andOther (Topic 350):Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. This standard is effective for public business entities in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.standard.
| C. | Research and Development, Patents and Licenses, etc. |
We do not make, and do not expect to make, significant expenditures on research and development activities.
| D. | Trend Information |
Other than as disclosed elsewhere in this annual report, we are not aware of any known trends, uncertainties, demands, commitments or events for the year ended December 31, 20162019 that are reasonably likely to have a material adverse effect onmaterially adversely affect our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosedreported financial information not necessarily to be not necessarily indicative of our future operating results or financial condition.
| E. | Off-Balance Sheet Arrangements |
We do not engage in trading activities involving non-exchange traded contracts or interest rate swap transactions or foreign currency forward contracts. In the ordinary course of our business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financials partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that we do not reflect in our consolidated financial statements. We do not have any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
| F. | Tabular Disclosure of Contractual Obligations |
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2016:2019:
| Total | Less than 1 year | 1-3 years | More than 3 | Payments due by Period | ||||||||||||||||||||||||||||||||
| RMB | RMB | RMB | RMB | Total | Less than 1 year | 1-3 years | 3-4 years | More than 4years | ||||||||||||||||||||||||||||
| (in thousands) | (RMB in thousands) | |||||||||||||||||||||||||||||||||||
| Short-term debt obligations | 562,372 | 562,372 | — | — | 285,500 | 285,500 | - | - | - | |||||||||||||||||||||||||||
| Long-term debt obligations | 298,303 | 82,632 | 215,671 | — | 1,334,702 | 42,939 | 277,705 | 184,432 | 829,626 | |||||||||||||||||||||||||||
| Secured borrowings | 328,216 | 79,613 | 166,707 | 81,896 | ||||||||||||||||||||||||||||||||
| Capital lease obligations | 400 | — | — | 400 | 400 | — | 400 | — | — | |||||||||||||||||||||||||||
| Operating lease obligations | 91,220 | 15,028 | 14,492 | 61,700 | 365,957 | 25,362 | 45,135 | 39,302 | 256,158 | |||||||||||||||||||||||||||
| Purchase obligations | 83,338 | 83,338 | — | — | 622,584 | 622,584 | — | — | — | |||||||||||||||||||||||||||
| Total | 1,363,849 | 822,983 | 396,870 | 143,996 | 2,609,143 | 976,385 | 323,240 | 223,734 | 1,085,784 | |||||||||||||||||||||||||||
Our short- and long-term debt obligations as of December 31, 2016 represent2019 represented bank borrowings obtained by our subsidiaries. Our short-term bank borrowing outstanding as of December 31, 20162019 had a weighted average interest rate of 2.72%7.73% per annum. Our long termlong-term bank borrowingand other borrowings outstanding as of December 31, 20162019 had a weighted average interest rate of 7.44%11.49% per annum.
As of December 31, 2016,2019, we had RMB562.4RMB285.5 million (US$81.041.0 million) in short-term borrowings outstanding, of which RMB532.8and RMB1,334.7 million (US$76.7 million) was secured by restricted cash deposited in local banks, and RMB298.3 million (US$43.0191.7 million) in long-term borrowings outstanding, including the current portion of such long-term borrowings outstanding of RMB82.6RMB42.9 million (US$11.96.2 million).
As of December 31, 2016,2019, our operating lease obligations for 2017, 2018, 20192020, 2021, 2022 and 20202023 and thereafter are RMB15.0were RMB25.4 million (US$2.23.6 million), RMB10.3RMB24.5 million (US$1.53.5 million), RMB4.1RMB20.7 million (US$0.63.0 million), RMB20.0 million (US$2.9 million) and RMB4.1RMB275.5 million (US$0.639.6 million), respectively.
As of December 31, 2016,2019, we had purchase obligations for certain medical equipment that amounted to RMB83.3RMB622.6 million (US$12.089.4 million), which are all scheduled to be paid within one year.
| G. | Safe Harbor |
This annual report contains forward lookingforward-looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition, all of which are largely based on our current expectations and projections. The forward lookingforward-looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” or other and similar expressions. We have based these forward lookingforward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward lookingforward-looking statements include, among other things, statements relating to:
| · | the risks, challenges and uncertainties in the radiotherapy and diagnostic imaging industry and for our business generally; |
| · | our current expansion strategy, including our ability to expand our network of centers and to establish specialty cancer hospitals; |
| · | our ability to maintain strong working relationships with our hospital partners; |
| · | our expectations regarding patients’ and their referring doctors’ demand for and acceptance of the radiotherapy and diagnostic imaging services offered by our centers; |
| · | changes in the healthcare industry in China, including changes in the healthcare policies and regulations of the PRC government; |
| · | technological or therapeutic changes affecting the field of cancer treatment and diagnostic imaging; |
| · | our ability to comply with all relevant environmental, health and safety laws and regulations; |
| · | our ability to obtain and maintain permits, licenses and registrations to carry on our business; |
| · | our future prospects, business development, results of operations and financial condition; and |
| · | fluctuations in general economic and business conditions in China. |
The forward lookingforward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report completely and with the understanding that our actual future results may be materially different from what we expect.
| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| A. | Directors and Senior Management |
Directors and Executive Officers
The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
| Name | Age | Position/ Title | ||
| Jianyu Yang | Chairman, chief executive officer | |||
| Zheng Cheng | Director | |||
| Qing Pan | 46 | Director | ||
| Yaw Kong Yap | Chief financial officer, president | |||
| Denny Lee | Independent director | |||
| Weibo Yin | Independent director | |||
| Independent director |
Dr. Jianyu Yanghas served as our chairman since November 2011 and has served as our chief executive officer since 2008. He served as a director of our company and president from 2008 to 2011. Prior to joining our company, Dr. Yang served as chief executive officer of Eguard Resource Development Co., Ltd., a PRC company listed on the Shenzhen Stock Exchange in China principally engaged in the provision of comprehensive solutions in recycling, re-use of solid wastes and wastewater since 2003, vice president of Beijing Sound Environmental Group Co. Ltd. from 2002 to 2003, assistant to the general manager of Xiangcai Securities Co., Ltd. from 2000 to 2002, and senior economist at China Agricultural Bank from 1999 to 2000. Dr. Yang received a doctorate degree in economics from Liaoning University in 1999 in China.
Dr.Mr. Zheng Chenghad has served as our director since 2008 and served as our president sincefrom November 2011 and had served asuntil September 2015, our chief operating officer from 2008 until MarchSeptember 2015 and remains to be a director. He served as co-chairman of theour board of directors from 2008 to 2011. Dr.Mr. Cheng was a cofounderco-founder of China Medstar. Prior to founding China Medstar in 1996, Dr.Mr. Cheng served as division chief of steel products of China National Defense Military Material General Company from 1992 to 1996 and military physician in the Department of Cerebral Surgery of the Beijing Air Force General Hospital from 1986 to 1992 and in the No. 1 Field Clinic of Yunnan Laoshan Frontier in 1986. Dr.Mr. Cheng received his bachelor’s degree in clinical neurosurgery from the First Military Medical University of the People’s Liberation Army of China in 1986. Dr.Mr. Cheng is a qualified clinical surgeon in China.
Mr. Qing Pan has served as a director of our company since November 2019. Mr. Qing Pan is the CFO of Noah Holdings Limited (“Noah”). As a veteran in the investment and finance community, Mr. Pan spent 17 years with Deloitte as an audit partner before joining Noah. He was also a former member of the accounting research division at Deloitte’s headquarter in the US. Mr. Pan received an MBA and a master degree in science from Northeastern University in Boston, U.S., in 1999. Mr. Pan is certified in public accounting in the U.S., mainland China and Hong Kong.
Mr. Yaw Kong Yaphad served as a senior vice president from 2008 until July 2014 and has been serving as our chief financial officer since then.July 2014 and our president since March 2019. He served as our senior vice president from 2008 to July 2014 and a director and financial controller of our company from 2008 to 2011. Mr. Yap joined China Medstar in 2005 and served as its chief financial officer prior to our acquisition of China Medstar. Prior to joining China Medstar, Mr. Yap served as the chief executive officer of Advanced Produce Centre Development Pte, Ltd., a Singapore real estate company, from 2003 to 2005, the chief financial officer of Global Fruits Pte Limited from 1999 to 2003, the regional financial controller of America Air Filtration Asia from 1996 to 1998 and the financial controller of Chevalier International (USA) Ltd. from 1991 to 1996.2005. Mr. Yap received a bachelor’s degree from Indiana University of Pennsylvania in the United States in 1990. Mr. Yap is Certified Public Accountant in the United States.
Mr. Zhe YinMs. Xiao Fuhas served as a director of our companychief operating officer since December 2013. Mr. Yin is currently a co-founderMarch 2019 and has been the director andserved as our senior vice president of Noah Holdings Limited since 2005. Mr. Yin was the deputy general manager of the wealth management department at Xiangcai Securities from November 2003 to September 2005. Prior to that, Mr. Yin worked at Bank of Communications of China from July 19972009 to November 2003 as a wealth and product manager. Mr. Yin received his bachelor’s degree in economics from Shanghai University of Finance and EconomicsMarch 2019. Ms. Xiao Fu joined China Medstar in 1997 and received an Executive MBA degreeserved as its Senior Vice President prior to our acquisition of China Medstar. Ms. Xiao Fu graduated from China Europe International Business School.the Shanghai Second Military Medical University in 1986, majoring in Healthcare.
Dr. Matthew D. Callister
Ms. Yan Suihas served as a director ofour chief medical officer since March 2019. Prior to joining our company, since August 2015. Ms. Sui is currentlyDr. Callister served as the DeputySenior Physician Executive of Banner MD Anderson Cancer Center and Service Line in 2014, the Division Chief Investment Officer of Noah Holding (HK) Limited. Before joining Noah Holding (HK) Limited on March 2014, Ms. Sui workedRadiation Oncology at Noah Wealth Management (Beijing) Limited asBanner MD Anderson Cancer Center in 2011 and a Product DirectorConsultant at the Department of Radiation Oncology of Mayo Clinic Arizona in 2004. Dr. Callister has been an Adjunct Associate Professor of Radiation Oncology at the UT-MD Anderson Cancer Center from March 20102011 to February 2014. She worked at Toshiba Medical Systems (China) Limited as a Marketing Executive from 1993 to 1994. Ms. Suipresent. Dr. Callister received a Bachelor'sDoctor of Medicine degree from the Duke University School of Economics from Beijing University of TechnologyMedicine in 1991, a Master’s degree of Business Administration from University of Hull in 2000 and a Master's degree of Commerce (honors) from University of Sydney in 2008.1997.
Mr. Denny Leehas served as an independent non-executive director of our company since December 2009. Mr. Lee currently serves as an independent non-executive director on the board of NetEase, Inc. (formerly known as Netease.com Inc.), one of the China’s leadinga China internet and online game service providers, which isprovider listed on the NASDAQ Global Select Market. Mr. Lee was the chief financial officer of Netease.comNetease, Inc., from 2002 to 2007. Prior to joining Netease.comNetease, Inc., Mr. Lee worked in the Hong Kong office of KPMG for more than ten years. Mr. Lee also serves as an independent non-executive director and the chairman of the audit committee of the following companies, (i) New Oriental Education & Technology Group Inc., thea provider of private education services in China, (ii) NIO Inc., the principal business of which is design, jointly manufacture, and sell smart and connected premium electric vehicles, (iii) Jianpu Technology Inc., the principal business of which is operation of open platform for discovery and recommendation of financial products in China, all of which are listed on the New York Stock Exchange;NYSE, and (iv) China Metal Resources Utilization Limited, a company listed on the Main Board of the Hong Kong Stock Exchange. Mr. Lee graduated from the Hong Kong Polytechnic University and was awarded the Professional Diploma in Accounting in November 1990. He is a fellow of The Chartered Association of Certified Accountants and an associate member of The Hong Kong Institute of Certified Public Accountants.
Dr. Weibo Yinhas served as an independent director of our company since November 2011. He is the Honorary President of Chinese Society of Radiation Oncology and a board member of the International Congress of Radiation Oncology. Dr. Yin has served various positions such as professor emeritus, professor, associate professor and resident doctor in Cancer Hospital of Chinese Academy of Medical Sciences and Peking Union Medical University since 1957. In addition, Dr. Yin has published 155 research papers on radiation oncology, in 32 of which he was the first author. Dr. Yin received his M.D. degree from Peking Union Medical University in 1957.
Mr. Yongjun LiDr. Liping Zhanghas served as an independent director of our company since December 2013. Mr. Li is currentlySeptember 2017. She joined Trinity Western University as assistant professor in 2005 and has served as associate professor in Trinity Western University since 2014. Prior to joining Trinity Western University, she was a teaching assistant in the Chair of Department of Public Policy in PekingEconomics at University a position he has held since 2008. Mr. Li is also the Associate Professor of School of Government in Peking University. Mr. Li was the Lecturer of School of Government in Peking UniversityOttawa from 20021999 to 2004 and2004. Dr. Zhang received a Ph.D.doctorate degree in Economicseconomics from Peking University of Ottawa in 2002.2005.
The address of our directors and executive officers is Concord Medical Services Holdings Limited, 18/F, Tower A, Global Trade Center, 36 North Third Ring Road East, Dongcheng District, Beijing, People’s Republic of China, 100013.
No family relationship exists among any of our directors or members of our executive officers named above and no arrangement or understanding exists between any of our major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or executive officers.
| B. | Compensation |
Compensation of Directors and Executive Officers
In 2016,2019, the aggregate cash compensation to all of our directors and our executive officers was RMB2.7RMB10.1 million (US$0.41.5 million). For share-based compensation, see “—Share Incentive Plans.” We did not have any amount accrued in 20162019 for pension, retirement or other similar benefits to our directors and our executive officers.officers, except as disclosed in “—D. Employees” and elsewhere in this annual report on Form 20-F.
Share Incentive Plans
OMS Share Option Plan
On November 17, 2007, OMS, the predecessor of our company, adopted the OMS option plan, pursuant to which OMS granted to three of its executive directors, Mr. Haifeng Liu, Dr. Jianyu Yang and Mr. Steve Sun, or the OMS grantees, options to purchase a total of up to 25,000,000 ordinary shares, or the OMS share options, to purchase the ordinary shares of OMS at an exercise price of US$0.80 per share, which theshare. The board of OMS determined these options to become vested upon the satisfaction of a number of performance conditions that related to the completion of the OMS reorganization, achievement of net profit target of OMS, and the raising of new financing. The OMS share options were exercisable from the date of completion of the 2007 audited consolidated financial statements of OMS to December 31, 2008 and were transferrable to any individuals designated by the OMS grantees.
On August 18, 2008, the board of directors of OMS contemplated that the OMS grantees had achieved certain performance conditions outlined in the OMS option plan. However, as the capital structure of our company had changed at that time such that we had replaced OMS as the ultimate holding company of our subsidiaries, the board of directors of OMS resolved that the OMS option plan would be settled in vested options to purchase 21,184,600 ordinary shares to purchase shares of our company, with each option having an exercise price of US$0.79 per share exercisable before December 31, 2008.
On the same day, two of the OMS grantees, Dr. Jianyu Yang and Mr. Steve Sun, exercised their respective options to purchase an aggregate of 6,355,400 ordinary shares of our company, with total proceeds from such exercise received by us amounting to approximately RMB34.4 million. We recorded share-based compensation expense of approximately RMB49.5 million in 2007 related to these options granted, which was recorded in general and administrative expenses. The third OMS grantee, Mr. Haifeng Liu, sold all of his vested options to purchase 14,829,200 ordinary shares of our company to three former directors of China Medstar who are now our directors and executive officers as employment incentive for such directors.
The three executive directors subsequently exercised the vested options with total proceeds from such exercise received by us amounting to approximately US$11.7 million. Given the transfer of the OMS share options to the three directors was provided as an employment incentive, we recorded additional share-based compensation expense of approximately RMB4.2 million in 2008, which was recorded in general and administrative expenses.
2008 Share Incentive Plan
The 2008 share incentive plan was adopted by our shareholders on October 16, 2008 and amended on November 17, 2009 to increase the number of ordinary shares available for grant under the plan. Our share incentive plan provides for the grant of options, share appreciation rights, or other share-based awards, referred to as “awards.” The purpose of the plan is to aid us in recruiting and retaining key employees, directors or consultants and to motivate such persons to exert their best efforts on behalf of our company by providing incentives through the granting of awards. Our board of directors believes that our company will benefitbenefits from the added interest that such persons will have in the welfare of theour company as a result of their proprietary interest in theour company’s success. Our share incentive plan has provided for the grant of options, share appreciation rights, or other share-based awards, referred to as “awards.” The 2008 share incentive plan was terminated upon its tenth anniversary on October 16, 2018. Any awards granted prior to the termination and remained outstanding will remain effective and subject to the 2008 share incentive plan.
Termination of Awards.Awards. Options have specified terms set forth in a share option agreement. If the recipient’s employment with theour company is terminated for any reason, the recipient’s vested options shall remain exercisable subject to the provisions of the plan and the option agreement and the recipient’s unvested options shall terminate without consideration. If the options are not exercised or purchased by the last day of the exercise period, they will terminate.
Administration.Administration. Our 2008 share incentive plan is currently administered by the compensation committee of our board of directors. Our board of directors or the compensation committee is authorized to interpret the plan, to establish, amend and rescind any rules and regulations relating to the plan, and to make any other determinations that it deems necessary or desirable for the administration of the plan. Our board of directors or the compensation committee will determine the provisions, terms and conditions of each award consistent with the provisions of the plan, including, but not limited to, the exercise price for an option, vesting schedule, forfeiture provisions, form of payment of exercise price and other applicable terms.
Option Exercise.Exercise. The term of options granted under the 2008 share incentive plan may not exceed eight years from the date of grant. The consideration to be paid for our ordinary shares upon exercise of an option or purchase of shares underlying the option may include cash, check or other cash-equivalent, consideration received by us in a cashless exercise and, to the extent permitted by our board of directors or the compensation committee and subject to the provisions of the option agreement, ordinary shares or a combination of ordinary shares and cash or cash-equivalent.cash-equivalents.
Change in Control. If a third-party acquires us through the purchase of all or substantially all of our assets, a merger or other business combination or if during any two consecutive year period individuals who at the beginning of such period constituted the board of directors cease for any reason to constitute a majority of our board of directors, then, if so determined by our board of directors or the compensation committee with respect to the applicable award agreement or otherwise, any outstanding awards that are unexercisable or otherwise unvested or subject to lapse restrictions will automatically be deemed exercisable or otherwise vested or no longer subject to lapse restrictions, as the case may be, as of immediately prior to such change in control.
Our board of directors or the compensation committee may also, in its sole discretion, decide to cancel such awards for fair value, provide for the issuance of substitute awards that will substantially preserve the otherwise applicable terms of any affected awards previously granted, or provide that affected options will be exercisable for a period of at least 15 days prior to the change in control but not thereafter.
Amendment and Termination of Plan.Plan. Our board of directors may at any time amend, alter or discontinue our 2008 share incentive plan. Amendments or alterations to our 2008 share incentive plan are subject to shareholder approval if they increase the total number of shares reserved for the purposeswas terminated upon its tenth anniversary of the plan or change the maximum number of shares for which awards may be granted to any participant. Any amendment, alteration or termination of our 2008 share incentive plan must not adversely affect awards already granted without written consent of the recipient of such awards. Unless terminated earlier, our 2008 share incentive plan will continue in effect for a term of ten years from theeffective date of its adoption.on October 16, 2018.
Our board of directors and shareholders authorized the issuance of up to 4,765,800 ordinary shares upon exercise of awards granted under our 2008 share incentive plan upon the adoption of the plan. On November 26, 2011, theour board of directors and the shareholders authorized the issuance of additional 5,101,968 ordinary shares under the 2008 share incentive plan. On May 29, 2015, our board of directors and shareholders authorized the issuance of additional 4,940,550 ordinary shares under the 2008 share incentive plan.
On November 27, 2009 and September 30, 2011, we granted options to purchase 4,765,800 ordinary shares at an exercise price of US$3.67 and US$2.17 per share, respectively, of which options to purchase an aggregate of 1,716,500 ordinary shares were granted to our executive officers and directors including 288,700 ordinary shares to Dr. Jianyu Yang, 288,700 ordinary shares to Dr. Zheng Cheng, 264,400 ordinary shares to Mr. Steve Sun, 250,000 ordinary shares to Mr. Jing Zhang, 230,000 ordinary shares to Mr. Yaw Kong Yap, 264,400 ordinary shares to Mr. Boxun Zhang, 130,300 ordinary shares to Mr. Denny Lee and 355,884 ordinary shares to Mr. Jigang Sun, and the remainder to other employees.
On February 18, 2014, we granted options to purchase 3,479,604 ordinary shares at an exercise price of US$2.037, of which options to purchase an aggregate of 2,439,126 ordinary shares were granted to our executive officers and directors including 716,310 ordinary shares to Mr. Jianyu Yang, 716,310 ordinary shares to Dr. Zheng Cheng, 275,250 ordinary shares to Mr. Jing Zhang, 225,204 ordinary shares to Mr. Yaw Kong Yap, 116,283 ordinary shares to Mr. Denny Lee, 69,771 ordinary shares to Mr. Weibo Yin, 69,771 ordinary shares to Mr. Yongjun Li, and 250, 227 ordinary shares to Mr. Adam Jigang Sun, and the remainder to other employees. Such options have an exercise price equal to the price per ordinary share of our initial public offering and are subject to a four-year vesting schedule with 25% vesting on each of the first, second, third and fourth anniversary of the grant date, and will terminate no later than eight years from their grant date.
On February 18, 2014, July 1, 2014 and August 1, 2014, we granted 1,370,250, 21,132 and 69,564 restricted shares, respectively, of which 116,223332,446 restricted shares to Mr. Jing Zhang, 116,223our executive officers and 1,228,500 restricted shares to Mr. Yaw Kong Yap, 3,080,150other employees. Such restricted shares are subject to a four-year vesting schedule with 25% vesting on each of the first, second, third and fourth anniversary of the grant date, and will terminate no later than eight years from their grant date.
On August 7, 2017, August 8, 2017 and September 13, 2017, we granted 1,453,950, 3,319,200 and 45,000 restricted shares, respectively, of which 901,950 restricted shares to our executive officers and directors, 3,916,200 restricted to other employees. Such restricted shares are subject to a four-year vesting schedule with 25% vesting on each of the first, second, third and fourth anniversary of the grant date, and will terminate no later than eight years from their grant date.
On October 2, 2018, we granted 5,992,605 restricted shares to certain directors, officers and employees, of which 2,412,000 restricted shares to our executive officers and directors and 3,580,605 restricted shares to other employees. Such restricted shares are subject to a four-year vesting schedule with 25% vesting on each of the first, second, third and fourth anniversary of the grant date, and will terminate no later than eight years from their grant date.
The following table summarizes, as of December 31, 2016,2019, the outstanding options and restricted shares granted to our directors and executive officers and other individuals as a group.
| Name | Ordinary Shares Underlying Outstanding Options | Exercise Price Underlying Outstanding Options (US$/Share) | Restricted Shares | Grant Date | Expiration Date | |||||||||||
| Dr. Jianyu Yang | 288,700 | 3.7 | — | November 27, 2009 | November 26, 2017 | |||||||||||
| 716,310 | 2.037 | — | February 18, 2014 | February 17, 2022 | ||||||||||||
| Dr. Zheng Cheng | 288,700 | 3.7 | — | November 27, 2009 | November 26, 2017 | |||||||||||
| 716,310 | 2.037 | — | February 18, 2014 | February 17, 2022 | ||||||||||||
| Mr. Yaw Kong Yap | 230,000 | 3.7 | — | November 27, 2009 | November 26, 2017 | |||||||||||
| 225,204 | 2.037 | — | February 18, 2014 | February 17, 2022 | ||||||||||||
| — | — | 95,091 | February 18, 2014 | February 17, 2022 | ||||||||||||
| — | — | 21,132 | July 1, 2014 | June 30, 2022 | ||||||||||||
| Mr. Denny Lee | 130,300 | 3.7 | — | November 27, 2009 | November 26, 2017 | |||||||||||
| 116,283 | 2.037 | — | February 18, 2014 | February 17, 2022 | ||||||||||||
| Mr. Weibo Yin | 69,771 | 2.037 | — | February 18, 2014 | February 17, 2022 | |||||||||||
| Mr. Yongjun Li | 69,771 | 2.037 | — | February 18, 2014 | February 17, 2022 | |||||||||||
| Other individuals as group | 3,080,150 | 3.7 | — | November 27, 2009 | November 26, 2017 | |||||||||||
| 1,325,643 | 2.037 | — | February 18, 2014 | February 17, 2022 | ||||||||||||
| 355,884 | 2.2 | — | September 30, 2011 | September 30, 2019 | ||||||||||||
| — | — | 1,085,298 | February 18, 2014 | February 17, 2022 | ||||||||||||
| — | — | 69,564 | August 1, 2014 | July 31, 2022 | ||||||||||||
Name | Ordinary | Exercise | Restricted Shares | Grant Date | Expiration Date | |||||||||||
| Jianyu Yang | 716,310 | 2.037 | — | February 18, 2014 | February 17, 2022 | |||||||||||
| Zheng Cheng | 716,310 | 2.037 | — | February 18, 2014 | February 17, 2022 | |||||||||||
| Yaw Kong Yap | 225,204 | 2.037 | — | February 18, 2014 | February 17, 2022 | |||||||||||
| — | — | 95,091 | February 18, 2014 | February 17, 2022 | ||||||||||||
| — | — | 21,132 | July 1, 2014 | June 30, 2022 | ||||||||||||
| — | — | 761,850 | August 7, 2017 | August 6, 2025 | ||||||||||||
| — | — | 930,000 | October 2, 2018 | October 1,2026 | ||||||||||||
| Xiao Fu | 149,775 | 2.037 | — | February 18, 2014 | February 17, 2022 | |||||||||||
| — | — | 63,240 | February 18, 2014 | February 17, 2022 | ||||||||||||
| — | — | 243,000 | August 8, 2017 | August 7, 2025 | ||||||||||||
| — | — | 720,000 | October 2, 2018 | October 1,2026 | ||||||||||||
| Matthew D. Callister | — | — | 450,000 | October 2, 2018 | October 1,2026 | |||||||||||
| Denny Lee | 116,283 | 2.037 | — | February 18, 2014 | February 17, 2022 | |||||||||||
| — | — | 95,100 | August 7, 2017 | August 6, 2025 | ||||||||||||
| — | — | 222,000 | October 2, 2018 | October 1,2026 | ||||||||||||
| Weibo Yin | 69,771 | 2.037 | — | February 18, 2014 | February 17, 2022 | |||||||||||
| Liping Zhang | — | — | 45,000 | September 13, 2017 | September 12,2025 | |||||||||||
| — | — | 90,000 | October 2,2018 | October 1,2026 | ||||||||||||
| Other individuals as group | 600,849 | 2.037 | — | February 18, 2014 | February 17, 2022 | |||||||||||
| — | — | 824,643 | February 18, 2014 | February 17, 2022 | ||||||||||||
| — | — | 69,564 | August 1, 2014 | July 31, 2022 | ||||||||||||
| — | — | 486,000 | August 7, 2017 | August 6, 2025 | ||||||||||||
| — | — | 2,729,700 | August 8, 2017 | August 7, 2025 | ||||||||||||
| — | — | 3,580,605 | October 2, 2018 | October 1,2026 | ||||||||||||
| C. | Board Practices |
Committees of the Board of Directors
Board of Directors
We currently have seven directors, including three independent directors, on our board of directors. Our board of directors consists of an audit committee and a compensation committee. We currently do not plan to establish a nominating committee. Each committee’s members and functions are described below.
Audit Committee
Our audit committee consists of Mr. Denny Lee, Dr. Weibo Yin and Mr. Yongjun Li.Dr. Liping Zhang. Mr. Denny Lee is the chairman of our audit committee. Mr. Denny Lee and Mr. Yongjun LiDr. Liping Zhang meet the criteria of audit committee financial experts as set forth under the applicable rules of the SEC. Our board of directors has determined that each of our audit committee members satisfies the requirements for an “independent director” within the meaning of Section 303A of the NYSE Listed Company Manual and meets the criteria for independence set forth in Rule 10A-3 of the Exchange Act. Our board of directors has also determined that the simultaneous service by Mr. Denny Lee on the audit committee of threefive other public companies would not impair his ability to effectively serve on our audit committee.
The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
| · | selecting our independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by our independent registered public accounting firm; |
| · | reviewing with our independent registered public accounting firm any audit problems or difficulties and management’s response; |
| · | reviewing and approving all proposed related-party transactions, as defined in Item 404 of Regulation S-K under the Securities Act; |
| · | discussing the annual audited financial statements with management and our independent registered public accounting firm; |
| · | reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant control deficiencies; |
| · | annually reviewing and reassessing the adequacy of our audit committee charter; |
| · | such other matters that are specifically delegated to our audit committee by our board of directors from time to time; |
| · | meeting separately and periodically with management and our internal auditor and independent registered public accounting firm; and |
| · | reporting regularly to the full board of directors. |
Compensation Committee
Our compensation committee consists of Dr. Jianyu Yang, Mr. Denny Lee and Mr. Yongjun Li.Dr. Liping Zhang. Dr. Jianyu Yang is the chairman of our compensation committee. Our compensation committee assists the board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Members of the compensation committee are not prohibited from direct involvement in determining their own compensation. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:
| · | approving and overseeing the compensation package for our executive officers; |
| · | reviewing and making recommendations to the board with respect to the compensation of our directors; |
| · | reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executive officer based on such evaluation; and |
| · | reviewing periodically and making recommendations to the board regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. |
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time. A director may be liable for any loss suffered by us as a result of a breach of their fiduciary duties.
The functions and powers of our board of directors include, among others:
| · | conducting and managing the business of our company; |
| · | representing our company in contracts and deals; |
| · | convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings; |
| · | declaring dividends and other distributions; |
| · | appointing officers and determining the term of office of officers; |
| · | exercising the borrowing powers of our company and mortgaging the property of our company; and |
| · | approving the transfer of shares of our company, including the registration of such shares in our share register. |
Terms of Directors and Executive Officers
Our executive officers are elected and appointed by and serve at the discretion of theour board of directors. Our directors are not subject to a term of office and hold office until such time as they resign or are removed from office withoutwith cause by special resolution or the unanimous written resolution of all shareholders or withwithout cause by ordinary resolution or the unanimous written resolutions of all shareholders. A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors or (ii) dies or is found by our company to be or becomes of unsound mind. We have not entered into any service agreements with our directors that provide for any type of compensation upon termination.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we may agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.
Employment Agreements
We or any of our subsidiaries do not have any directors’ service contracts with our directors providing for benefits upon termination of appointment.
We have entered into employment agreements with all of our executive officers. Under these agreements, each of our executive officers is employed for a non-fixed period of time. These employment agreements can be terminated in accordance with the Labor Contract Law of the PRC and other relevant regulations. Under the Labor Contract Law, we can terminate without any prior notice the employment agreement with any of our executive officers in the event that such officer’s actions have resulted in material and demonstrable harm to our interest.
Under certain circumstances, including where the officer has not performed as expected and, upon internal reassignment or training, still fails to be qualified for the job, we may also terminate the employment agreement with any of our executive officers upon providing a 30-day notice or paying one month in severance. Our executive officer may typically terminate his or her employment at any time if we fail to provide labor protection or work conditions as stipulated in the employment agreement.
The executive officers may also terminate the employment agreement at any time without cause upon a 30-day notice. Usually, if we terminate the employment agreement of any of our executive officers, we have to pay them certain severance pay in proportion to their working years with us, except where such officer’s actions have resulted in material and demonstrable harm to our interests, among other circumstances.
Each executive officer has agreed to hold, both during and subsequent to the terms of his or her agreement, in confidence and not to use, except in pursuance of his or her duties in connection with the employment, any of our confidential information, technological secrets, commercial secrets and know-how. Each of our executive officers has entered into a confidentiality agreement with us. Our executive officers have also agreed to disclose to us all inventions, designs and techniques resulted from work performed by them, and to assign us all right, title and interest of such inventions, designs and techniques.
Interested Transactions
A director may vote in respect of any contract or transaction in which he or she is interested, provided that the nature of the interest of any directors in such contract or transaction is disclosed by him or her at or prior to its consideration and any vote on that matter.
Remuneration and Borrowing
The directors may determine remuneration to be paid to the directors. The compensation committee assists the directors in reviewing and approving the compensation structure for the directors. The directors may exercise all the powers of theour company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, and to issue debentures or other securities whether outright or as security for any debt obligations of our company or of any third party.
Qualification
There is no shareholding qualification for directors.
| D. | Employees |
Our employees consist of all personnel that work in our headquarters and our regional offices and certain personnel that work in our network of centers and our hospital in Singapore. Our employees in our network of centers are generally the operation directors or project managers and the marketing, accounting or administrative personnel of the cooperative centers. We had 601, 745583, 584 and 739738 employees as of December 31, 2014, 20152017, 2018 and 2016,2019, respectively. As of December 31, 2016,2019, we had 649658 and 9080 employees based in China and Singapore, respectively. The following table set forth certain information about our employees by function as of the period indicated:
| As of December 31, 2016 | As of December 31, 2019 | |||||||||||||||
| Employees | % of Total | Employees | % of Total | |||||||||||||
| Management | 38 | 5.1 | 51 | 6.9 | ||||||||||||
| Administration | 22 | 3.0 | 74 | 10.0 | ||||||||||||
| Financial control | 72 | 9.7 | 41 | 5.6 | ||||||||||||
| Hospital and Operation | 220 | 29.8 | 390 | 52.8 | ||||||||||||
| Marketing | 3 | 0.4 | 23 | 3.1 | ||||||||||||
| Business development | 15 | 2.0 | 5 | 0.7 | ||||||||||||
| Centers | 369 | 49.9 | 154 | 20.9 | ||||||||||||
| Total | 739 | 100.0 | 738 | 100.0 | ||||||||||||
We have entered into employment agreements with each of our employees. We may terminate the employment of any of our employees in the event that such employee’s actions have resulted in material and demonstrable harm to our interests or if the employee has not performed as expected. An employee may typically terminate his or her employment at any time for any material breach of the employment agreement by us. The employee may also terminate the employment agreement at any time without cause upon 30 days prior notice. Each of our employees who havehas access to sensitive and confidential information has also entered into a non-disclosure and confidentiality agreement with us. For information as to employment agreements with our executive officers, see “Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements.”
We are required under the local laws and regulations to make contributions to our employee benefit plans based on specified percentages of the salaries, bonuses, housing allowances and certain other allowances of our employees, up to a maximum amount specified by the respective local government authorities. The total amount of the contributions that we made to employee benefit plans in 2014, 20152017, 2018 and 20162019 was RMB12.8RMB13.1 million, RMB12.9RMB13.3 million, RMB13.3 million and RMB13.3RMB22.9 million (US$1.93.3 million), respectively. Of the total amount of contributions that we made to employee benefit plans in 20152017, 2018 and 2016, RMB0.22019, RMB0.4 million, RMB0.3 million and RMB0.3 million (US$0.04 million) were attributable to Concord CancerInternational Hospital in Singapore that we acquired in 2015, respectively.
Our success depends to a significant extent upon, among other factors, our ability to attract, retain and motivate qualified personnel. Many of our employees have extensive industry experience, and we place a strong emphasis on continuously improving our employees’ expertise by providing periodic training to enhance their skills and knowledge. Our employees are not covered by any collective bargaining agreement. We believe that we have a good relationship with our employees.
In accordance with applicable PRC laws and regulations, the Ministry of HealthNHC oversees the activities of doctors in China. The relevant local healthcare administrative authorities above the county level are responsible for the supervision of doctors located in their regions. Doctors in China are regulated by a registration system and each doctor may only practice medicine in the sole medical institution where such doctor is registered.
Doctors are not permitted to be registered in more than one medical institution. However, doctors may, upon the approval of the medical institution with which they are registered, enter into consulting agreements with third parties to engage in medical practice for another institution. We enter into such consulting contracts with doctors from time to time to provide expert assistance and consultation to our company and our network of centers.
In very limited cases, we enter into employment agreements with doctors to work at cooperative centers in our network after consulting with our hospital partners where such centers are based. These doctors register their practice with the hospitals in accordance with applicable PRC laws and regulations. For information as to regulations of medical practitioners in Singapore, see “Item 4. Information on the Company—B. Business Overview—Regulation of Our Industry—Regulations in Singapore—Registration of Medical Practitioner.”
| E. | Share Ownership |
In January 2015, our shareholders passed a special resolution authorizing us to (i) re-designate each share issued and outstanding immediately prior to the adoption of our fourth amended and restated memorandum of association as a Class A ordinary share; and (ii) issue a new class of convertible shares as the Class B ordinary shares. The Class B ordinary shares will have different voting rights and conversion features to the Class A ordinary share. We plan to exchange Class A ordinary shares held by Morgancreek with Class B ordinary shares at a one-to-one ratio, after which Morgancreek will hold, 59,770,876 Class B ordinary shares, or 44.7% of the combined total outstanding ordinary shares (representing 93.7% of the total voting rights) in our Company.
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of the date of this annual report by:
| · | each of our directors and executive officers; and |
| · | each person known to us to own beneficially more than 5.0% of our ordinary shares. |
Ordinary Shares Beneficially | ||||||||
| Number | % | |||||||
| Directors and Executive Officers: | ||||||||
| Jianyu Yang(3) | 60,596,808 | 46.0 | % | |||||
| Zheng Cheng(4) | 60,596,808 | 46.0 | % | |||||
| Yaw Kong Yap(5) | 1,022,587 | 0.8 | % | |||||
| Zhe Yin | — | — | ||||||
| Yan Sui | — | — | ||||||
| Weibo Yin | * | * | ||||||
| Yongjun Li | * | * | ||||||
| Denny Lee | * | * | ||||||
| All directors and officers as a group | 61,941,563 | 46.8 | % | |||||
| Principal Shareholders: | ||||||||
| Morgancreek Investment Holdings Limited(6) | 59,770,876 | 45.6 | % | |||||
| Solar Honor Limited(7) | 15,379,303 | 11.7 | % | |||||
| Carlyle Entities(8) | 13,086,350 | 9.9 | % | |||||
The calculations in the table below are based on 130,241,995 ordinary shares outstanding, including 84,454,047 Class A ordinary and 45,787,948 Class B ordinary shares outstanding, as of the date of this annual report.
Ordinary Shares Beneficially Owned(1) | ||||||||||||||||||||
Class A Ordinary | Class B | Total Ordinary | % of | % of | ||||||||||||||||
| Directors and Executive Officers: | ||||||||||||||||||||
| Jianyu Yang(4) | 14,699,238 | 38,287,948 | 52,987,186 | 40.5 | 73.2 | |||||||||||||||
| Zheng Cheng(5) | 716,310 | 7,500,000 | 8,216,310 | 6.3 | 13.9 | |||||||||||||||
| Qing Pan | — | — | — | — | — | |||||||||||||||
| Yaw Kong Yap(6) | 1,496,652 | — | 1,496,652 | 1.1 | 0.3 | |||||||||||||||
| Xiao Fu | * | — | * | * | * | |||||||||||||||
| Matthew D. Callister | * | — | * | * | * | |||||||||||||||
| Denny Lee | * | — | * | * | * | |||||||||||||||
| Weibo Yin | * | — | * | * | * | |||||||||||||||
| Liping Zhang | * | — | * | * | * | |||||||||||||||
| All directors and officers as a group | 17,873,319 | 45,787,948 | 63,661,267 | 47.7 | 87.2 | |||||||||||||||
| Principal Shareholders: | ||||||||||||||||||||
| Morgancreek Investment Holdings Limited(7) | 13,982,928 | 38,287,948 | 52,270,876 | 40.1 | 73.2 | |||||||||||||||
| Solar Honor Limited(8) | 15,379,303 | — | 15,379,303 | 11.8 | 2.8 | |||||||||||||||
| Oasis Inspire Limited(9) | 13,086,350 | — | 13,086,350 | 10.0 | 2.4 | |||||||||||||||
| Bluestone Holdings Limited(10) | — | 7,500,000 | 7,500,000 | 5.8 | 13.8 | |||||||||||||||
* Less than 1%.
| (1) | Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Exchange Act. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days of this annual report, including through the exercise of any option, warrant or other right, the vesting of restricted shares or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person. |
| (2) |
| (3) | For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. Class A ordinary shares are each entitled to one vote, whereas Class B ordinary shares are each entitled to ten votes. Our Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a one-for-one basis. |
| Represents (i) |
| Represents (i) |
| Represents (i) 541,800 Class A ordinary shares held by Mr. Yap and (ii) |
| Represents |
| Represents 14,163,325 Class A ordinary shares, and 405,326 ADSs, each representing three Class A ordinary shares, held by Solar Honor Limited, a limited liability company organized under the laws of British Virgin Islands wholly owned by |
| Represents |
| (10) | Represents 7,500,000 Class B ordinary shares, each convertible into one Class A ordinary share, held by Bluestone Holdings Limited, a limited liability company organized under the laws of the British Virgin Islands. The address of the principal office of Bluestone Holdings Limited is Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, British Virgin Islands. |
As of April 27, 2017,the date of this annual report, a total of 15,129,69115,179,697 ADSs representing 45,389,07345,539,091 Class A ordinary shares were outstanding. Such ordinary shares were registered in the name of a nominee of JPMorgan Chase Bank, N.A., the depositary for the ADSs. We have no further information as to ordinary shares or ADSs held, or beneficially owned, by U.S. persons.
We are currently not aware that we are directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person severally or jointly and we are currently not aware of any arrangement that may, at a subsequent date, result in a change of control of our company, other than the beneficial ownership and restructuring information as disclosed in this “E. Share Ownership” and “Item 4. Information on the Company—History and Development of the Company.”
See “—B. Compensation—Compensation of Directors and Executive Officers—Share Incentive Plans” for a summary of our share incentive plan and the options granted thereunder.re
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
| A. | Major Shareholders |
Please refer toSee “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
| B. | Related Party Transactions |
Borrowings with Related Parties
In April 2017, we entered a loan agreement with Tianjin Jiatai, an equity held by our equity method investee in 2017, for a loan of RMB91.9 million. The loan is intend to be used for purchase medical equipment for Shanghai Meizhongjiahe Medical Image Center which is under the control of Tianjin Jiatai. According to the contract, the terms of the agreement do not stipulate any interest and the payment schedule, the repayment should be settled within five years since the validation date of the contract as appropriate. In 2018 and 2019, we repaid RMB36.4 million and RMB34.5 million (US$5.0 million), respectively, and incurred an interest expense of RMB193,000 and nil, respectively. As of December 31, 2014, outstanding amount due to related parties were derecognized upon the disposal of Chang’an Hospital.
In November 2014, Shanghai Medstar and Nanjing Jiangyuan Andike Positron Technology Co., Ltd. (“Nanjing JYADK”) entered into a loan agreement with JYADK, of which Shanghai Medstar is a non-controlling shareholder and Nanjing JYADK is a controlling shareholder. Pursuant to this loan agreement, Shanghai Medstar agreed to lend an amount of approximately RMB3.2 million to JYADK at the prevailing bank loan interest rate for borrowings of the same term and priority to finance the business operation of JYADK and its holding companies. As of December 31, 2014, 2015 and 2016, we had outstanding loan amounts from JYADK of nil, RMB3.2 million and RMB4.7 million (US$0.7 million).
In June 2015, CCM Hong Kong, as the borrower, entered into a long-term loan agreement with the Company, as guarantor A, Shanghai Medstar, as guarantor B, Ascendium, as the shareholder of the borrower, and Gopher for the account of Gopher Asia Credit SP, as the original lender, whereby we are entitled to borrow a U.S. dollar term loan of up to US$25.0 million bearing an interest rate of 9.0% per annum for our general working capital purposes. Gopher is controlled by Mr. Zhe Yin, a director of the Company. This loan is secured by certain shares in the borrower beneficially owned by Ascendium and guaranteed by the Company and Shanghai Medstar. As of December 31, 2015 and 2016,2019, we had an outstanding balance of RMB161.9RMB20.9 million (US$3.0 million). In addition, we provided management services to Tianjin Jiatai pursuant to our management agreement. In 2017, 2018 and RMB172.62019, we recognized management service income of RMB6.6 million, (US$24.9 million), respectively, which will be due in June 2018.
As of December 31, 2014, 2015 and 2016, we had amounts outstanding from Beijing Nai’ensi Technology Limited (“Nai’ensi”), which is controlled by Dr. Zheng Cheng, a director of the Company, of RMB31.8 million, RMB28.4 millionnil and nil, respectively, in connection with our financing lease arrangement with Nai’ensi.from Tianjin Jiatai.
In 2015 and 2016,January 2019, we provided consultation services toentered a subsidiary of Beijing Allcure Medical Technologyloan agreement with Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd. (“JWYK”), an entity controlled by a directorequity investee of theour company, in exchange for a service fee in the amountloan of RMB0.1RMB28.0 million. The loan was intended to be used for its daily operation and did not bear any interest. In November 2019, Shanghai Meizhong Jiahe Imaging Diagnostic Center Co., Ltd. became our subsidiary and was consolidated into our company. The outstanding balance of RMB2.0 million and RMB70 thousand (US$10 thousand) respectively. As of December 31, 2014, we had no outstanding amounts from JWYK.has been offset.
Reorganization and Private Placement
See “Item 4. Information on the Company—A. History and Development of the Company,” and “Item 4. Information on the Company—C. Organizational Structure.”
Share Incentives
For a discussion of the share option plan adopted in 2007 by OMS, our predecessor, and our 2008 share incentive plan, see “Item 6. Directors, Senior Management and Employees—B. Compensation—Compensation of Directors and Executive Officers—Share Incentive Plans.”
Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—C. Board Practices— Indemnification Agreements.”
Employment Agreements
See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Employment Agreements.”
| C. | Interests of Experts and Counsel |
Not applicable.
| ITEM 8. | FINANCIAL INFORMATION |
| A. | Consolidated Statements and Other Financial Information |
We have appended consolidated financial statements filed as part of this annual report.
Legal and Administrative Proceedings
We are not currently involved in any material litigation, arbitration or administrative proceedings. However, we may from time to time become a party to various other litigation, arbitration or administrative proceedings arising in the ordinary course of our business.
Dividend Policy
On January 7, 2014, July 28, 2014 and December 11, 2015, our Boardboard of Directorsdirectors declared special cash dividends of US$0.24 per ordinary share (or US$0.72 per ADS), US$0.30 per ordinary share (or US$0.90 per ADS) and US$0.33 per ordinary share (or US$0.99 per ADS) on the Company’sour outstanding ordinary shares, respectively. The total amount for the special dividend is approximately US$32.4 million, US$40.6 million and US$44.5 million, based on the number of ordinary shares outstanding as of September 30, 2013, March 31, 2014 and September 30, 2015, respectively. No special dividend was declared on 2017, 2018 and 2019.
Going forward, we intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to pay further dividends, the form, frequency and amount will depend uponon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our board of directors may deem relevant.
If we pay any further dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including any applicable fees and expenses. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
| B. | Significant Changes |
WeExcept as described in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
| ITEM 9. | THE OFFER AND LISTING |
| A. |
Our ADSs, each representing three ofSee “—C. Markets.” for our host market and trading symbol. We have a dual-class ordinary share structure in which Class A ordinary shares have been listed ondifferent voting rights from Class B ordinary shares. Class A ordinary shares are each entitled to one vote, whereas Class B ordinary shares are each entitled to ten votes. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our ADSs—Holders of our Class B ordinary shares will control the New York Stock Exchange since December 11, 2009 under the symbol “CCM.” The table below shows, for the periods indicated, the high and low market prices foroutcome of shareholder actions in our ADSs. The closing price for our ADSs on the New York Stock Exchange on April 28, 2017 was US$4.39 per ADS.company.”
| Market Price Per ADS | ||||||||
| High | Low | |||||||
| Yearly: | ||||||||
| 2012 | 4.95 | 2.60 | ||||||
| 2013 | 5.59 | 4.00 | ||||||
| 2014 | 9.96 | 5.20 | ||||||
| 2015 | 8.23 | 4.40 | ||||||
| 2016 | 5.13 | 3.51 | ||||||
| Quarterly: | ||||||||
| 2015 | ||||||||
| First quarter | 7.77 | 5.75 | ||||||
| Second quarter | 8.23 | 5.70 | ||||||
| Third quarter | 7.13 | 4.51 | ||||||
| Fourth quarter | 5.80 | 4.40 | ||||||
| 2016 | ||||||||
| First quarter | 5.13 | 4.07 | ||||||
| Second quarter | 5.00 | 3.51 | ||||||
| Third quarter | 4.55 | 3.63 | ||||||
| Fourth quarter | 4.62 | 3.85 | ||||||
| 2017 | ||||||||
| First quarter | 4.96 | 4.50 | ||||||
| Second quarter | 4.76 | 4.37 | ||||||
| Monthly: | ||||||||
| 2016 | ||||||||
| November | 4.60 | 4.09 | ||||||
| December | 4.62 | 4.25 | ||||||
| 2017 | ||||||||
| January | 4.63 | 4.50 | ||||||
| February | 4.96 | 4.51 | ||||||
| March | 4.91 | 4.52 | ||||||
| April | 4.76 | 4.37 | ||||||
| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
Our ADSs, each representing three of our Class A ordinary shares, have been listed on the New York Stock ExchangeNYSE since December 11, 2009 under the symbol “CCM.”
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
| F. | Expenses of the Issue |
Not applicable.
| ITEM 10. | ADDITIONAL INFORMATION |
| A. | Share Capital |
Not applicable.
| B. | Memorandum and Articles of Association |
We are a Cayman Islands exempted company with limited liability and our affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and the Companies Law (as amended) of the Cayman Islands, which is referred to as the Companies Law below. Our registered office is in the Cayman Islands is at Scotia Centre, 4th Floor, P.O. Box 2804, George Town, Grand Cayman, Cayman Islands KY1-1112.
On January 27, 2015, our shareholders by special resolution adopted our fourth amended and restated memorandum and articles of association, which replaced the third memorandum and articles of association in its entirety. entirety and is filed as Exhibit 1.1 with this annual report on Form 20-F.
The following are summaries of material provisions of our fourth amended and restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary shares.
Registered Office
Our registered office in the Cayman Islands is located at P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KY1-1205, Cayman Islands.
Objects
The objects for which we are established are unrestricted and we shall have full power and authority to carry out any object not prohibited by any law as provided by Section 7(4) of the Companies Law.
Director’s Powers
See “Item 6. Directors, Senior Management and Employees.”
Ordinary Shares
General
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. All references to ordinary shares include the Class A ordinary shares and the Class B ordinary shares.
All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing our ordinary shares are issued in the registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their ordinary shares.
DividendsDividends; Rights to Share Profit
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the Companies Law.
Subject to any rights and restrictions for the time being attached to any ordinary shares, the Company by ordinary resolution may declare dividends, but no dividend shall exceed the amount recommended by our board of directors.
No dividend may be declared and paid unless our board of directors determine that, immediately after the payment, we will be able to pay our debts as they fall due in the ordinary course of business and we have funds lawfully available for such purpose. Under Cayman Islands law, payment of the dividends may be made out of the following:
| · | profits, realized or unrealized, or any reserve set aside from profits; |
| · | “share premium account,” which represents the excess of the price paid to our company on issue of its shares over the par or “nominal” value of those shares; or |
| · | any other fund or account which can be authorized for this purposes in accordance with the Companies Law. |
Voting Rights
Each holder of Class A ordinary shares is entitled to one vote on all matters upon which the Class A ordinary shares are entitled to vote. Each holder of Class B ordinary shares is entitled to ten votes on all matters upon which the Class B ordinary shares are entitled to vote. Each holder is entitled to have the respective number(s) of vote for each share registered in his name on the register of members. Voting at any meeting of shareholders is by show of hands unless a poll is demanded by the chairman of our board of directors or by any shareholder present in person or by proxy.
A quorum is required for a meeting of shareholders. Shareholders who hold at least one-third of all our ordinary shares in issue at the meeting present in person or by proxy or, if a corporation or other non-natural person, by its duly authorized representative constitutes a quorum. Shareholders’ meetings are held annually and may be convened by our board of directors on its own initiative or upon a request to the directors by shareholders holding in the aggregate at least ten percent of our ordinary shares.paid-up capital. At least seven days advanced notice is required prior to convening our annual general meeting and other shareholders meetings.
An ordinary resolution of the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast in a general meeting to pass. A special resolution requires the affirmative vote of not less than two-thirds of the votes cast attaching to the ordinary shares to pass.
Transfer of Ordinary Shares
Subject to the restrictions of our articles of association, as applicable, any of our shareholders may transfer all or any of such shareholder’s ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our directors may also decline to register any transfer of any ordinary share unless:
| · | the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; |
| · | the instrument of transfer is in respect of only one class of ordinary shares; |
| · | the instrument of transfer is properly stamped, if required; |
| · | in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; or |
| · | the ordinary shares transferred are free of any lien in favor of us. |
If our directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send notice of such refusal to both the transferor and transferee. The registration of transfers may, on 14 days’ notice, given by advertisement in one or more newspapers or by electronic means, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year.
Liquidation
On a return of capital in connection with the winding up of the company or otherwise (other than in connection with conversion, redemption or purchase of ordinary shares), assets available for distribution to the holders of ordinary shares shall be distributed among them on a pro rata basis. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders proportionately.
Calls on Ordinary Shares and Forfeiture of Ordinary Shares
Our board of directors may from time to time call upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. Ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption of Ordinary Shares
Subject to the provisions of the Companies Law, we are under the terms of our fourth amended and restated memorandum and articles of association to:
| · | issue ordinary shares on terms that they are to be redeemed or are liable to be redeemed at our option or at the option of the shareholders, on such terms and in such manner as we may, before the issue of such ordinary shares, determine; |
| · | purchase our own ordinary shares (including any redeemable shares) on such terms and in such manner as we may determine and agree with our shareholders; and |
| · | make a payment in respect of the redemption or purchase of our own ordinary shares in any manner authorized by the Companies Law, including out of our capital, profits or the proceeds of a fresh issue of ordinary shares. |
VariationsCalls on Ordinary Shares and Forfeiture of Ordinary Shares
Our board of directors may from time to time call upon shareholders for any amounts unpaid on their ordinary shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. Ordinary shares that have been called upon and remain unpaid are subject to forfeiture.
Sinking Fund
Our fourth amended and restated memorandum and articles of association do not provide for sinking fund.
Variation of Rights of Shares
All or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law, be varied either with the unanimous written consent of the holders of not less than two-thirds of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Meetings of Shareholders
Shareholders’ meetings may be convened by our board of directors or by the board of directors where required to do so pursuant to a requisition by one or more shareholders holding at the date of deposit of the requisition of shareholders holding at the date of deposit of the requisition not less than 10% of such of the paid-up capital of the company as at that date of the deposit that carry the right to vote at general meetings.
Advance notice of not less than seven clear days is required for the convening of our annual general shareholders’ meeting and any other general meeting of our shareholders. A quorum required for and throughout a meeting of shareholders consists of at least one shareholder entitled to vote and present in person or by proxy or (in the case of a shareholder being a corporation) by its duly authorised representative representing not less than one-third of all voting power of our share capital in issue.
Limitations on the Rights to Own Shares
There are no limitations under the Companies Law or under our fourth amended and resatated memorandum and articles of association that limit the right of non-resident or foreign owners to hold or vote our ordinary shares.
Inspection of Books and Records
The notice of registered office is a matter of public record. A list of the names of the current directors and alternate directors (if applicable) is made available by the Registrar of Companies for inspection by any person on payment of a fee. The register of mortgages is open to inspection by creditors and members.
Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we will provide our shareholders with annual audited financial statements. See “ — “—H. Documents on Display.”
Ownership Threshold
There are no provisions under the Companies Law or under our fourth amended and resatated memorandum and articles of association that govern the ownership threshold above which shareholder ownership must be disclosed.
An exempted company is required to maintain a beneficial ownership register at its registered office that records details of the persons who ultimately own or control, directly or indirectly, more than 25% of the equity interests or voting rights of the company or have rights to appoint or remove a majority of the directors of the company. The beneficial ownership register is not a public document and is only accessible by a designated competent authority of the Cayman Islands. Such requirement does not, however, apply to an exempted company with its shares listed on an approved stock exchange, which includes the NYSE. Accordingly, for so long as the shares of the Company are listed on the NYSE, the Company is not required to maintain a beneficial ownership register.
Changes in Capital
We may from time to time by ordinary resolutions:
| · | increase the share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe; |
| · | consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares; |
| · | convert all or any of our paid up shares into stock and reconvert that stock into paid up shares of any denomination; |
| · | sub-divide our existing shares, or any of them into shares of a smaller amount that is fixed by the fourth amended and restated memorandum and articles of association; and |
| · | cancel any shares that, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so cancelled. |
Subject to the Companies Law and our fourth amended and restated memorandum and articles of association with respect to matters to be dealt with by ordinary resolution, we may, by special resolution, reduce our share capital and any capital redemption reserve in any manner authorized by law.
Issuance of Additional Shares
Our fourth amended and restated memorandum of association authorizes our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent there are available authorized but unissued shares.
Our fourth amended and restated memorandum of association authorizes our board of directors (subject to the other provisions with respect to variation of rights of ordinary shares under the articles of association) to establish from time to time one or more series of preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series, including:
| · | the designation of the series; |
| · | the number of shares of the series; |
| · | the dividend rights, dividend rates, conversion rights, voting rights; and |
| · | the rights and terms of redemption and liquidation preferences. |
Our board of directors may issue preferred shares without action by our shareholders to the extent there are available authorized but unissued preferred shares. In addition, the issuance of preferred shares may be used as an anti-takeover device without further action on the part of the shareholders. Issuance of these shares may dilute the voting power of holders of ordinary shares.
Actions Requiring the Approval of a Supermajority of Our Board of Directors
Actions require the approval of a supermajority of at least two-thirds of our board of directors, including:
| · | the appointment or removal of either our chief executive officer or chief financial officer; |
| · | any anti-takeover action in response to a takeover attempt; |
| · | any merger resulting in our shareholders immediately prior to such merger holding less than a majority of the voting power of the outstanding share capital of the surviving business entity; |
| · | the sale or transfer of all or substantially all of our assets; and |
| · | any change in the number of directors on our board of directors. |
Change in Control
Some provisions of our fourth amended and restated articles of association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders. However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our fourth amended and restated memorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Conversion of the Shares
All of the issued and outstanding Class B ordinary shares shall automatically convert into Class A ordinary shares, at a ratio of one Class A ordinary share for each Class B ordinary share, in the event that the total number of issued and outstanding Class B ordinary shares is less than 5% of the total number of ordinary shares issued and outstanding. Any Class B ordinary share that is sold, transferred, assigned or disposed of by a registered holder or beneficial owner of such Class B ordinary share to any person who is not (i) the registered holder or beneficial owner of Class B ordinary shares or (ii) an affiliate of the registered holder or beneficial owner such Class B ordinary share being transferred, assigned or disposed of, such Class B ordinary share shall automatically convert into one Class A ordinary share upon the completion of such transfer, assignment or disposition.
Class A ordinary shares are not convertible under any circumstances.
Difference Between Class A and Class B Ordinary Shares
The difference between the Class A ordinary shares and Class B ordinary shares are the special voting attached to the Class B ordinary shares and the conversion rights as disclosed above.
Differences in Corporate Law
The Companies Law is modelled after that of England and Wales but does not follow recent statutory enactments in England. In addition, the Companies Law differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies incorporated in the State of Delaware.
Mergers and Similar Arrangements
A merger of two or more constituent companies under Cayman Islands law requires a plan of merger or consolidation to be approved by the directors of each constituent company and authorization by a special resolution of the members of each constituent company.
A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders. For this purpose a subsidiary is a company of which at least ninety percent (90%) of the issued shares entitled to vote are owned by the parent company.
The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save in certain circumstances, a dissentient shareholder of a Cayman constituent company is entitled to payment of the fair value of his shares upon dissenting to a merger or consolidation. The exercise of appraisal rights will preclude the exercise of any other rights save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must, in addition, represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
| · | the statutory provisions as to the required majority vote have been met; |
| · | the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class; |
| · | the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law. |
When a takeover offer is made and accepted by holders of 90% of the shares within four months, the offeror may, within a two-month period commencing on the expiration of such four month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.
Shareholders’ Suits
In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, there are exceptions to the foregoing principle, including when:
| · | a company acts or proposes to act illegally or ultra vires; |
| · | the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and |
| · | those who control the company are perpetrating a “fraud on the minority.” |
Indemnification of Directors and Executive Officers and Limitation of Liability
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our fourth amended and restated memorandum and articles of association permit indemnification of officers and directors against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained in their capacities as such other than by reason of dishonesty, willful default or fraud which may attach to such directors or officers. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we intend to enter into indemnification agreements with our directors and senior executive officers that will provide such persons with additional indemnification beyond that provided in our fourth amended and restated memorandum and articles of association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Anti-Takeover Provisions in the Memorandum and Articles of Association
Some provisions of our fourth amended and restated memorandum and articles of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our Memorandum and Articles of Association, as amended and restated from time to time, for what they believe in good faith to be in the best interests of our company.
Directors’ Fiduciary Duties
Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company—a duty to actbona fidein the best interests of the company, a duty not to make a profit based on his or her position as director (unless the company permits him to do so) and a duty not to put himself in a position where the interests of the company conflict with his or her personal interest or his or her duty to a third party. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
Shareholder Action by Written Consent
Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Our fourth amended and restated memorandum and articles of association provide that shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
Shareholder Proposals
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annual general meetings or allow our shareholders to requisition a shareholders’ meeting. Our Memorandum and Articles of Association allow our shareholders to requisition shareholders’ meetings.
Cumulative Voting
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted under Cayman Islands law, our fourth amended and restated memorandum and articles of association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise.
Under our fourth amended and restated memorandum and articles of association, directors may be removed from office with cause by special resolution or the unanimous written resolution of all shareholders or without cause by ordinary resolution or the unanimous written resolutions of all shareholders.
Transactions with Interested Shareholders
The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered intobona fidein the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up
Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so.
Under the Companies Law and our fourth amended and restated memorandum and articles of association, our company may be dissolved, liquidated or wound up by the vote of holders of not less than two-thirds of our shares voting at a meeting
Variation of Rights of Shares
Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our fourth amended and restated memorandum and articles of association, all or any of the special rights attached to any class of shares may be varied either with the written consent of the holders of not less than two-thirds of the issued shares of that class or with the sanction of a special resolution passed at a general meeting of the holders of the shares of that class.
Amendment of Governing Documents
Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. As permitted by Cayman Islands law, our fourth amended and restated memorandum and articles of association may only be amended by a special resolution of shareholders.
Rights of Non-Resident or Foreign Shareholders
There are no limitations imposed by our fourth amended and restated memorandum and articles of association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our fourth amended and restated memorandum and articles of association governing the ownership threshold above which shareholder ownership must be disclosed.
Directors’ Power to Issue Shares
Subject to applicable law, our board of directors is empowered to issue or allot shares or grant options and warrants with or without preferred, deferred, qualified or other special rights or restrictions.
| C. | Material Contracts |
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report.
| D. | Exchange Controls |
See “Item 4. Information on the Company—B. Business Overview—Regulation of Our Industry.”
| E. | Taxation |
Cayman Islands Taxation
The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation, and there is no taxation in the nature of inheritance tax or estate duty. No Cayman Islands stamp duty will be payable unless an instrument is executed in, brought to, or produced before a court of the Cayman Islands. The Cayman Islands are not parties to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
People’s Republic of China Taxation
The EIT Law and the implementation regulations for the EIT Law issued by the PRC State Council, impose a single uniform income tax rate of 25% on all Chinese enterprises, including foreign-invested enterprises, and levies a withholding tax rate of 10% on dividends payable by Chinese subsidiaries to their non-PRC enterprise shareholders except with respect to any such non-PRC enterprise shareholder whose jurisdiction of incorporation has a tax treaty with China that provides for a different withholding agreement. The EIT Law provides that enterprises established outside of China whose “effective management organizations” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income. Under the implementation regulations for the EIT Law issued by the PRC State Council, a “effective management organizations” 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 treasury and assets of an enterprise. On April 22, 2009, the State Administration of Taxation promulgated a circular which sets out criteria for determining whether “effective management organizations” are located in China for overseas incorporated, domestically controlled enterprises. However, as this circular only applies to enterprises incorporated under the laws of foreign countries or regions that are controlled by PRC enterprises or groups of PRC enterprises, it remains unclear how the tax authorities will determine the location of “effective management organizations” for overseas incorporated enterprises that are controlled by individual PRC residents like us and some of our subsidiaries. Therefore, although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would require us to be treated as a PRC tax resident enterprise. We do not currently consider our company to be a PRC tax resident enterprise. However, if the Chinese tax authorities disagree with our assessment and determine that we are a PRC tax resident enterprise, we may be subject to a 25% enterprise income tax on our global income.
Under the EIT Law and implementation regulations issued by the State Council, a 10% PRC income tax is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources within the PRC. Furthermore, a circular issued by the Ministry of Finance and the State Administration of Taxation on February 22, 2008 stipulates that undistributed earnings generated prior to January 1, 2008 are exempt from enterprise income tax. We are a holding company incorporated in the Cayman Islands, which indirectly holds, through Ascendium, Cyber Medical and OMS, our equity interests in our PRC subsidiaries. Our business operations are principally conducted through PRC subsidiaries. Thus, dividends for earnings accumulated beginning on January 1, 2008 payable to us by our subsidiaries in China, if any, will be subject to the 10% income tax if we are considered as “nonresident enterprises” under the EIT Law. Under the EIT law, Notice 112, which was issued on January 29, 2008 and the PRC-HK DTA, which became effective on December 8, 2006, dividends from our PRC subsidiaries paid to us through our Hong Kong subsidiary may be subject to a 10% withholding tax or a 5% withholding tax if our Hong Kong subsidiary can be considered as a “beneficial owner” and entitled to treaty benefits under the PRC-HK DTA. Under the existing implementation rules of the EIT Law, it is unclear whether the PRC tax authority would treat us as PRC tax resident enterprise. Accordingly dividends paid by us to our non-PRC tax resident enterprise ADS holders and ordinary shareholders may be deemed to be derived from sources within the PRC and, therefore, be subject to the 10% PRC income tax.
Similarly, any gain realized on the transfer of our ADSs or ordinary shares by our non-PRC tax resident enterprise ADS holders and ordinary shareholders may also be subject to the 10% PRC income tax if we are considered as PRC tax resident enterprise and such gain will be regarded as income derived from sources within the PRC.
United States Federal Income Taxation
The following discussion describes the material United States federal income tax consequences of the ownership of our ordinary shares and ADSs as of the date hereof. The effects of any applicable state or local laws and other U.S. federal tax laws, such as estate and gift tax laws, the Medicare contribution tax on net investment income and the impact of the alternative minimum tax, are not discussed. The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and regulations, rulings and judicial decisions thereunder as of the date hereof. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.
The discussion is applicable to United States Holders (as defined below) who hold our ordinary shares or ADSs as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). As used herein, the term “United States Holder” means a holder of an ordinary share or ADS that is for United States federal income tax purposes:
| · | an individual who is a citizen or resident of the United States; |
| · | a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
| · | an estate the income of which is subject to United States federal income taxation regardless of its source; or |
| · | a trust |
This discussion does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:
| · | a dealer in securities or currencies; |
| · | a financial institution; |
| · | a regulated investment company; |
| · | a real estate investment trust; |
| · | an insurance company; |
| · | a tax exempt organization; |
| · | a person who acquired ordinary shares or ADSs pursuant to the exercise of any employee share option or otherwise as compensation; |
| · | a trader in securities that has elected the mark-to-market method of accounting for your securities; |
| U.S. expatriates and certain former citizens or long-term residents of the United States; |