10-Q 1 f10q0919_jrsishealthcare.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2019

 

or

 

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

 

For the transition period from _______ to _______

 

Commission File Number: 000-56013

 

JRSIS HEALTH CARE CORPORATION.

(Exact name of Registrant as specified in its charter)

 

Florida   46-4562047
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

 

No. 38 South Street 

Hulan District, Harbin City, 

Heilongjiang Province, China 150025  

(Address, including zip code, and telephone number, including area code, 

of Registrant’s principal executive offices)

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒ No ☐

 

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

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer   ☐ Smaller reporting company ☒
  Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
         

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of the date of filing of this report, there were outstanding 17,975,999 shares of the issuer’s common stock, par value $0.001 per share.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
PART I – FINANCIAL INFORMATION 1
     
Item 1 Consolidated Financial Statements F-1 - F-21
     
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 2
     
Item 3 Quantitative and Qualitative Disclosures About Market Risk 8
     
Item 4 Controls and Procedures 8
     
PART II – OTHER INFORMATION 9
     
Item 1 Legal Proceedings 9
     
Item 1A Risk Factors 9
     
Item 2 Unregistered Sale of Equity Securities and Use of Proceeds 9
     
Item 3 Defaults Upon Senior Securities 9
     
Item 4 Mine Safety Disclosures 9
     
Item 5 Other Information 9
     
Item 6 Exhibits 10
     
  Signatures 11

 

i

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.    Consolidated Financial Statements

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Item Regulation S-X, Rule 10-01(c) Interim Financial Statements, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results that can be expected for the year ended December 31, 2019.

 

1

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Page
     
JRSIS HEALTH CARE CORPORATION    
     
Consolidated Balance Sheets — September 30, 2019 (Unaudited) and December 31, 2018   F-2
     
Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)   F-3
     
Consolidated Statements of Shareholders' Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)   F-4
     
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)   F-5
     
Notes to Consolidated Financial Statements (Unaudited)   F-6 - F-21

 

F-1

 

 

JRSIS HEALTH CARE CORPORATION 

CONSOLIDATED BALANCE SHEETS 

(AMOUNTS IN USD, EXCEPT SHARES)

 

   September 30,   December 31, 
   2019   2018 
   (Unaudited)     
Assets        
Current Assets:        
Cash and cash equivalents  $2,009,185   $256,450 
Accounts receivable, net   7,342,050    8,213,015 
Inventories   1,214,664    1,163,845 
Other receivables   43,164    7,590 
Prepayments   1,040,645    1,826,214 
Prepaid commitment fee   300,000    - 
Amount due from related parties   -    149,811 
Deferred expenses   280,472    291,104 
Deposits for capital leases-current portion   249,916    72,700 
Total current assets   12,480,096    11,980,729 
Construction in progress   1,890,860    803,257 
Property and equipment, net   21,764,088    37,723,969 
Long term deferred expenses   968,022    1,238,455 
Deposits for capital leases   663,743    720,306 
Right-of-use assets   16,049,885    - 
Total assets  $53,816,694   $52,466,716 
           
Liabilities and shareholders’ equity          
Current Liabilities:          
Accounts payable  $3,129,650   $3,635,761 
Notes payable   408,446    668,175 
Deposits received   6,831    14,213 
Amount due to related parties   2,701,097    109,147 
Other payable   26,769    49,707 
Deferred tax payable-current   -    107,365 
Tax payable   -    41,156 
Payroll payable   416,410    383,943 
Lease obligation-current portion   2,618,526    2,161,977 
Convertible note   1,152,593    - 
Total current liabilities   10,460,322    7,171,444 
           
Deferred tax payable   1,894,054    1,231,462 
Lease obligation   13,431,359    19,380,209 
Other capital lease payable   3,584,182    2,651,084 
Warrant liabilities   173,445    - 
Total liabilities  $29,543,362   $30,434,199 
           
Shareholders’ equity          
Common stock; $0.001 par value, 100,000,000 shares authorized; 18,015,999 and 14,975,000 issued and outstanding at September 30, 2019 and December 31, 2018, respectively   18,016    14,975 
Additional Paid-in capital   15,449,034    2,191,363 
Retained earnings   1,798,663    12,913,912 
Other comprehensive income   (1,695,875)   (983,109)
Total shareholders’ equity of the Company   15,569,838    14,137,141 
Non-controlling interest   8,703,494    7,895,376 
Total shareholders’ equity   24,273,332    22,032,517 
Total liabilities and shareholders’ equity  $53,816,694   $52,466,716 

 

See notes to consolidated financial statements 

 

F-2

 

 

JRSIS HEALTH CARE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME 

(AMOUNTS IN USD, EXCEPT SHARES) (UNAUDITED)

 

   Three Months Ended 
September 30,		   Nine Months Ended 
September 30,		 
   2019   2018   2019   2018 
Revenue:                
Pharmaceuticals  $2,544,030   $2,648,488   $7,946,920   $8,136,990 
Patient services   5,219,170    4,117,599    14,960,053    12,453,744 
Total revenue   7,763,200    6,766,087    22,906,973    20,590,734 
Operating costs and expenses:                    
Cost of pharmaceuticals sold   1,670,367    1,817,244    6,040,467    5,571,186 
Medical consumables   1,382,547    1,142,947    3,251,086    2,882,982 
Salaries and benefits   1,740,684    1,132,315    4,847,107    3,235,366 
Office supplies   509,647    147,646    1,189,712    527,015 
Vehicle expenses   69,710    44,650    227,787    110,882 
Utilities expenses   90,982    77,240    388,632    339,070 
Rentals and leases   24,112    24,886    80,864    78,277 
Advertising and promotion expenses   13,194    57,755    39,659    73,477 
Interest expense   276,679    258,857    814,032    844,153 
Professional fee   114,130    93,557    219,045    93,557 
Loss of fair value of convertible notes   152,904    -    428,093    - 
Warrant expense   96,800    -    173,445    - 
Depreciation   551,810    392,840    1,644,389    1,175,020 
Total operating costs and expenses   6,693,566    5,189,937    19,344,318    14,930,985 
Earnings from operations before other income and income taxes   1,069,634    1,576,150    3,562,655    5,659,749 
Other income (expenses)   (3,294)   (4,104)   (12,662)   (12,541)
Earnings from operations before income taxes   1,066,340    1,572,046    3,549,993    5,647,208 
Income tax   221,641    871    637,475    5,507 
Net income   844,699    1,571,175    2,912,518    5,641,701 
Less: net income attributable to non-controlling interests   369,366    471,352    1,113,855    1,692,510 
Net income attributable to the Company  $475,333   $1,099,823   $1,798,663   $3,949,191 
Comprehensive income:                    
Foreign currency translation adjustment attributable to non-controlling interests   (295,109)   (264,394)   (305,737)   (358,078)
Foreign currency translation adjustment attributable to the Company   (686,463)   (618,229)   (712,766)   (985,500)
Comprehensive income  $(136,873)  $688,552   $1,894,015   $4,298,123 
Less: Comprehensive income attributable to non-controlling interests   74,257    206,958    808,118    1,334,432 
Comprehensive income attributable to the Company  $(211,130)  $481,594   $1,085,897   $2,963,691 
                     
Basic earnings per share  $0.0264   $0.0734   $0.1098   $0.2643 
Diluted earnings per share   0.0263   $0.0734   $0.1097   $0.2643 
Weighted average number of shares outstanding (Basic)   18,013,200    14,975,000    16,380,863    14,939,432 
Weighted average number of shares outstanding (Diluted)   18,055,867    14,975,000    16,398,532    14,939,432 

 

See notes to consolidated financial statements

  

F-3

 

 

JRSIS HEALTH CARE CORPORATION 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY 

(AMOUNTS IN USD, EXCEPT SHARES)

 

   Common stock   Retained   Other 
comprehensive		   Additional
paid-in		   Non-
Controlling		   Total 
Shareholders’		 
   Quantity   Amount   Earnings   income   capital   Interest   equity 
Balance at December 31, 2017   14,835,000   $14,835   $10,920,942   $(93,520)  $2,051,503   $7,339,043   $20,232,803 
Net income   -    -    1,419,979    -    -    608,562    2,028,541 
Shares issued   130,000    130              129,870         130,000 
Foreign currency translation adjustment   -    -    -    583,927    -    249,159    833,086 
Balance at March 31, 2018   14,965,000   $14,965   $12,340,921   $490,407   $2,181,373   $8,196,764   $23,224,430 
Net income   -    -    1,429,389    -    -    612,596    2,041,985 
Foreign currency translation adjustment   -    -    -    (951,198)   -    (342,843)   (1,294,041)
Shares issued   10,000    10    -    -    9,990    -    10,000 
Balance at June 30, 2018   14,975,000   $14,975   $13,770,310   $(460,791)  $2,191,363   $8,466,517   $23,982,374 
                                    
Net income   -    -    1,099,823    -    -    471,352    1,571,175 
Foreign currency translation adjustment   -    -    -    (618,229)   -    (264,394)   (882,623)
Shares issued   -    -    -    -    -    -    - 
Balance at September 30, 2018   14,975,000   $14,975   $14,870,133   $(1,079,020)  $2,191,363   $8,673,475   $24,670,926 

 

   Common stock   Retained   Other
comprehensive		   Additional
paid-in		   Non-
Controlling		   Total 
Shareholders’		 
   Quantity   Amount   Earnings   income   capital   Interest   equity 
Balance at December 31, 2018   14,975,000   $14,975   $12,913,912   $(983,109)  $2,191,363   $7,895,376   $22,032,517 
Net income   -    -    668,588    -    -    288,799    957,387 
Foreign currency translation adjustment   -    -    -    354,157    -    170,771    524,928 
Balance at March 31, 2019   14,975,000   $14,975   $13,582,500   $(628,952)  $2,191,363   $8,354,946   $23,514,832 
Net income   -    -    654,742    -    -    455,690    1,110,432 
Foreign currency translation adjustment   -    -    -    (380,460)   -    (181,399)   (561,859)
Stock dividend   2,994,999    2,995    (12,913,912)   -    12,910,917    -    - 
Shares issued   40,000    40    -    -    299,960    -    300,000 
Balance at June 30, 2019   18,009,999    18,010    1,323,330    (1,009,412)   15,402,240    8,629,237    24,363,405 
                                    
Net income   -    -    475,333    -    -    369,366    844,699 
Foreign currency translation adjustment   -    -    -    (686,463)   -    (295,109)   (981,572)
Stock dividend   -    -    -    -    -    -    - 
Shares issued   6,000    6    -    -    46,794    -    46,800 
Balance at September 30, 2019   18,015,999    18,016    1,798,663    (1,695,875)   15,449,034    8,703,494    24,273,332 

 

See notes to consolidated financial statements

 

F-4

 

 

JRSIS HEALTH CARE CORPORATION 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(AMOUNTS IN USD, EXCEPT SHARES) 

   Nine Months Ended
September 30,		 
   2019   2018 
   (Unaudited)   (Unaudited) 
Cash Flows From Operating Activities        
Net income  $2,912,518   $5,641,701 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   1,644,389    1,175,020 
Prepaid commitment expense   300,000    - 
Loss of fair value of convertible notes   428,093    - 
Warrant expense   173,445    - 
Changes in operating assets and liabilities:          
Accounts receivable, net   593,886    (2,563,284)
Inventories   (97,062)   (432,653)
Amount due from related parties   143,381    1,736,603 
Prepayments and other current assets   66,226    506,413 
Accounts payable   (633,301)   772,960 
Amount due to related parties   2,716,217    871,403 
Deposits received   (7,138)   8,587 
Accrued expenses and other current liabilities   596,572    (488,749)
Net cash provided by operating activities   8,837,226    7,228,001 
           
Cash Flows From Investing Activities          
Purchases of property and equipment   (2,936,684)   (7,013,770)
Prepayment for property and equipment acquisition   637,708    2,238,925 
Payment of Construction in progress   (1,161,676)   (986,380)
Net cash (used in) investing activities   (3,460,652)   (5,761,225)
           
Cash Flows From Financing Activities          
Proceeds from shareholders   -    139,632 
Payments of finance lease obligations   (7,824,219)   (3,135,748)
Interest expense   814,032    844,153 
Derivative Financial Instruments   724,500    - 
Short-term bank loan   -    (2,184)
Proceeds from finance lease   2,964,017    - 
Non-cash issuance of common stock   (253,200)   - 
Net cash (used in) financing activities   (3,574,870)   (2,154,147)
           
Effect of exchange rate fluctuation on cash and cash equivalents   (48,969)   130,329 
Net increase(decrease) in cash and cash equivalents   1,752,735    (557,042)
           
Cash and cash equivalents, beginning of period   256,450    884,292 
Cash and cash equivalents, ending of period  $2,009,185   $327,250 
           
Supplemental disclosure of cash flow information          
Cash paid for income taxes   637,475    5,507 
Cash paid for interest   814,032    844,153 

 

See notes to consolidated financial statements

 

F-5

 

  

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 1. DESCRIPTION OF BUSINESS AND ORGANIZATION

 

JRSIS Health Care Corporation (the “Company” or “JRSS”) was incorporated on November 20, 2013 under the laws of the State of Florida. In December 2013 JRSS acquired 100% of the equity in JRSIS Health Care Limited (“JHCL”), which is a Limited Liability Company registered in British Virgin Island (“BVI”) on February 25, 2013. JHCL owns 100% of the equity in Runteng Medical Group Co., Ltd (“Runteng”), a limited liability company registered in Hong Kong on September 17, 2012. Runteng owns 70% of the equity in Harbin Jiarun Hospital Co., Ltd (“Jiarun”), a for-profit hospital incorporated in Harbin City of Heilongjiang, China in February 2006. The remaining 30% of the equity in Jiarun is owned by Junsheng Zhang, who is the Chairman of the Board of JRSIS Health Care Corporation.

 

Jiarun is a private hospital serving patients on a municipal and county level and providing both Western and Chinese medical practices to the residents of Harbin. Jiarun also owns 100% of the equity in:

 

●Harbin Jiarun Hospital Co., Ltd Nanjing Road Branch (“NRB Hospital”), a hospital branch of Jiarun, incorporated in Harbin city of Heilongjiang, China in October 2017. NRB Hospital is a private hospital serving patients on a municipal and county level and providing both Western and Chinese medical practices to the residents of Harbin.

 

●Harbin Jiarun Hospital Co., Ltd 2nd Branch (“2nd Branch Hospital”), a second hospital branch of Jiarun, incorporated in Harbin city of Heilongjiang, China in November 2017. 2nd Branch Hospital is a private hospital serving patients on a municipal and county level and providing both Western and Chinese medical practices to the residents of Harbin.

 

30% of the equity in Jiarun is held by Junsheng Zhang and is therefore a non-controlling interest (“NCI”), accounted for pursuant to ASC 810-10-45, which states that the ownership interest in the subsidiary that is held by owners other than the parent is a non-controlling interest.

 

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES

 

A. Basis of presentation

 

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

 

B. Principles of consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances have been eliminated in consolidation. Non-controlling interests represent the equity interest in Jiarun that is not attributable to the Company. Non-controlling interest is reported in the consolidated financial position within equity, separate from the Company’s equity. Net income or loss and comprehensive income or loss are attributed to the Company’s and the non-controlling interest.

 

C. Use of estimates

 

The preparation of audited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ from those estimates. Significant items subject to such estimates and assumptions include valuation allowances for receivables and recoverability of carrying amount and the estimated useful lives of long-lived assets. These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable. Actual results could differ from these estimates.

 

F-6

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

D. Functional currency and foreign currency translation

 

JRSS’s and JHCL’s functional currency is the United States dollar (“US$”). Runteng’s functional currency is the Hong Kong dollar (“HK$”). The functional currency of Jiarun is the Renminbi (“RMB”).

 

The Company’s reporting currency is US$. Assets and liabilities of Runteng and Jiarun are translated at the current exchange rate at the balance sheet dates, revenues and expenses are translated at the average exchange rates during the reporting periods, and equity accounts are translated at historical rates. Translation adjustments are reported in other comprehensive income.

 

The exchange rates used for foreign currency translation are as follows:

 

      For nine months ended 
September 30,		  
      2019   2018  
     

(USD to RMB/USD

to HKD)

  

(USD to RMB/USD

to HKD)

  
Assets and liabilities period end exchange rate     7.1383/ 7.8399     6.8683 / 7.8286  
Revenue and expenses period average     6.8633/ 7.8384     6.5152/ 7.8402  

 

E. Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The majority of sales are either cash receipt in advance or cash receipt upon delivery. For nine months ended September 30, 2019 and 2018, no customer accounted for more than 10% of net revenue. As of September 30, 2019, and December 31, 2018, 3 and 3 customers accounted for more than 5% of net accounts receivable, respectively. For those credit sales, the Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

F. Cash and cash equivalents

 

Cash and cash equivalents include all cash, deposits in banks and other liquid investments with initial maturities of three months or less.

 

G. Accounts receivable

 

Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on aging data, historical collection experience, customer specific facts and economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. 

 

H. Inventories

 

Inventories, consisting principally of pharmaceuticals, are stated at the lower of cost or market using the first-in, first-out method (“FIFO”). This policy requires the Company to make estimates regarding the market value of inventory, including an assessment of excess or obsolete inventory. The Company determines excess or obsolete inventory based on an estimate of the future demand and estimated selling prices for its products. 

 

I. Construction in progress

 

Construction in progress represents the new hospital painting and decoration costs. All direct costs relating to the polishing and decoration are capitalized as construction in progress. No depreciation is provided in respect of construction in progress. 

 

F-7

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

  

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

J. Property and equipment

 

Property and equipment is recorded at cost upon acquisition and is depreciated on a straight-line basis over the assets’ estimated useful lives or over their lease terms of the assets. Expenditures for maintenance and repairs are charged to operations when incurred, while additions and betterments are capitalized. Depreciation is recorded on a straight-line basis reflective of the useful lives of the assets. When assets are retired or disposed, the asset’s original cost and related accumulated depreciation are eliminated from accounts and any gain or loss is reflected in income.

 

The estimated useful lives for property and equipment categories are as follows:

 

Buildings and improvement 10-40 years
Medical equipment 5-15 years
Transportation instrument 5-10 years
Office equipment 5-10 years
Electronic equipment 5-10 years
Software 5-10 years

 

K. Leases

 

In February 2016, the FASB issued ASU 2016-02–Leases (Topic 842), which increases transparency and comparability among organizations by recognizing right-of-use (“ROU”) lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU maintains a distinction between finance leases and operating leases, which is substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. Retaining this distinction allows the recognition, measurement and presentation of expenses and cash flows arising from a lease to remain similar to the previous accounting treatment. A lessee is permitted to make an accounting policy election by class of underlying asset to exclude from balance sheet recognition any lease assets and lease liabilities with a term of 12 months or less, and instead to recognize lease expense on a straight-line basis over the lease term. For both financing and operating leases, the ROU asset and lease liability is initially measured at the present value of the lease payments in the consolidated balance sheet. In July 2018, the FASB issued ASU 2018-11 which provides entities with the option to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if necessary. As discussed in Note 8, we adopted ASU 2016-02–Leases (Topic 842) effective January 1, 2019 utilizing the transition option provided by ASU 2018-11.

 

L. Fair Value Measurement

 

The Company applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

Fair value is defined as the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value for the assets and liabilities required or permitted to be recorded, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; 

 

Level 2: Quoted prices in markets that are not active, or inputs that is observable, either directly or indirectly, for substantially the full term of the asset or liability; 

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

F-8

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

  

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis:

 

   Carrying Value at
September 30,		   Fair Value Measurement at
September 30, 2019		 
   2019   Level 1   Level 2   Level 3 
Convertible Note  $1,152,593   $             -   $             -   $1,152,593 
Warrant liability  $173,445   $-   $-   $173,445 

 

A summary of changes in Warrant liability for the period ended September 30, 2019 was as follows:

 

Balance at January 1, 2019  $- 
Issuance of warrants on May 30, 2019   77,995 
Issuance of warrants on July 30, 2019   74,486 
Change in fair value of warrant liability   20,964 
Balance at September 30, 2019   173,445 

 

The fair value of the outstanding warrants was calculated using the Binomial Option Pricing Model with the following assumptions at inception and on subsequent valuation date:

 

   September 30, 2019 
Warrants  Labrys   Auctus 
Market price per share (USD/share)  $8.30   $8.3 
Exercise price (USD/share)   10.00    6.00 
Risk free rate   1.477%   1.534%
Dividend yield   0%   0%
Expected term/Contractual life (years)   4.67    2.83 
Expected volatility   52.26%   52.66%

 

A summary of changes in Convertible Note for the period ended September 30, 2019 was as follows:

 

Balance at January 1, 2019  $- 
Issuance of Convertible Note on May 30, 2019   282,000 
Issuance of Convertible Note on July 15, 2019   192,500 
Issuance of Convertible Note on July 30, 2019   250,000 
Fair value loss on issuance of convertible notes   681,175 
Change in fair value of convertible notes   (253,082)
Balance at September 30, 2019   1,152,593 

 

The fair value of the outstanding Convertible Note was calculated using Monte Carlo simulation “MC simulation” method and the Binomial Option Pricing Model with the following assumptions at inception and on subsequent valuation date:

 

   September 30, 2019 
Convertible Note  Harbor
Gates 1		   Auctus 2 
Market price per share (USD/share)  $8.3   $8.3 
Exercise price (USD/share)  $5    60% on lowest trading price 
Risk free rate   2.02%   1.81%
Dividend yield   0%   0%
Expected term/Contractual life (years)   0.29    0.58 
Expected volatility   62.97%   55%
           

  

F-9

 

 

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

 

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

In May and July, 2019, the Company issued three convertible promissory notes, one each to Labrys Fund, LP, Auctus Fund, LLC and Harbor Gates Capital, LLC. On October 31, 2019, the Company repaid the convertible promissory note issued to Labrys Fund, LP. Therefore, the Labrys’ Convertible Note has no fair value as of each subsequent reporting date.

 

1.The fair value of the outstanding Convertible Note issued to Harbor Gates was calculated using Binomial Option Pricing Model

 

2.The fair value of the outstanding Convertible Note issued to Auctus was calculated using Monte Carlo simulation “MC simulation” method.

 

Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the accompanying consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s capital lease obligations also approximates carrying value as they bear interest at current market rates.

 

M. Segment and geographic information

 

The Company is operating in one segment in accordance with the accounting guidance FASB ASC topic 280, “Segment Reporting”. The Company’s revenues are from customers in People’s Republic of China (“PRC”). All assets of the company are located in PRC.

 

N. Revenue recognition

 

The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that economic benefits will flow to the entity, and specific criteria have been met for each of the Company’s activities as described below.

 

Pharmaceutical sales

 

Revenue from the sale of pharmaceuticals is recognized when it is both earned and realized. The Company’s policy is to recognize the sale of pharmaceuticals when the title of the pharmaceuticals, ownership and risk of loss have transferred to the purchasers, and collection of the sales proceeds is reasonably assured, all of which generally occur when the patient receives the pharmaceuticals.

 

Given the nature of this revenue source of the Company’s business and the applicable rules guiding revenue recognition, the revenue recognition practices for the sale of pharmaceuticals do not contain estimates that materially affect results of operations nor does the Company have any policy for return of products.

 

Patient Services

 

In accordance with the medical licenses under which Jiarun operates, the scope of its approved medical patient service includes medical consulting, surgery, obstetrics and gynecology, pediatrics, anesthesia, clinic laboratory, medical imaging, and traditional Chinese medicine.

 

Patient service revenue is recognized when it is both earned and realized. The Company’s policy is to recognize patient service revenue when the medical service has been provided to the patient and collection of the revenue is reasonably assured.

 

The Company provides services to both patients covered by social insurance and patients who are not covered by social insurance. The Company charges the same rates for patient services regardless of the coverage by social insurance.

 

Patients who are not covered by social insurance are liable for the total cost of medical treatment.

 

●For out-patient medical services, revenue is recognized when the Company provides medical service to the patient. The Company collects payment before the patient leaves the hospital.

 

●For in-patient medical services, when a patient checks into the hospital, the Company estimates the approximate fee the patient will spend in the hospital based on patient’s symptoms. At that time, the Company collects the estimated fees from the patient and records the payment as deposits received.

 

During the in-patient services period, the Company recognizes revenue when the patient service is provided and deducts the cost of service from the deposit received. The Company records these transactions based on daily reports generated by the respective medical department. When medical services exceed patient deposits received the Company records revenue and accounts receivable when the patient services are provided.

 

When a patient checks out from the hospital, the Company calculates and determines the remaining deposit, if any, and refunds the unused portion of the deposit to the patients. In the case where the patient has a balance in accounts receivable, accounts receivable are required to be paid in full at checkout.

 

Patients covered by social insurance will receive a portion or full medical services reimbursed or paid by the social insurance agencies via prepaid cards or insurance claim settlement process.

 

F-10

 

 

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

 

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Settlement process

 

The Company is a registered medical service vendor under the state social insurance system for various social insurance agencies. The insurance agencies include “Social Medical Insurance funded by PRC and Heilongjiang Province” and “Heilongjiang Province New Rural Cooperative Medical Care System”. The Company utilizes an online system maintained by the social insurance agencies for patients who are covered by social insurance agencies.

 

●The Company records patients’ information in the social insurance system at check in. The system determines the covered portion and amounts based on the information input to the system.

 

●At the time of check out, the Company collects payment for services the patients are liable for and records accounts receivable from the social insurance agencies for the portion of services covered by the social insurance. In the case that the patients have made payment during the in-patient services period, the Company refunds any amount in excess of the portion they are liable for.

 

●The Company is responsible for submitting supporting documents of patient services provided to the social insurance agencies for their review. The Company is also required to reconcile its records with the social insurance agencies once a month. Once the social insurance agencies approve the reconciliation, the insurance agencies will settle the accounts receivable balance in the next month following the approval.

 

O. Income taxes

 

The Company has adopted FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

In July 2006, the FASB issued FIN 48(ASC 740-10), Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 (ASC 740), which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial statements. Under FIN 48 (ASC 740-10), tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

 

The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially reverse previously recorded tax liabilities or deferred tax asset valuation allowance.

 

As a result of the implementation of FIN 48 (ASC 740-10), the Company made a comprehensive review of its portfolio of tax positions in accordance with recognition standards established by FIN 48 (ASC 740-10). The Company recognized no material adjustments to liabilities or shareholder’s equity as a result of the implementation. The adoption of FIN 48 did not have a material impact on the Company’s unaudited consolidated financial statements.

 

Enterprise income tax is determined under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC, income tax is payable by enterprises at a rate of 25% of their taxable income.

 

F-11

 

  

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

P. Earnings per share

 

Basic earnings per common share is computed by using net income divided by the weighted average number of shares of common stock outstanding for the periods presented. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding for the periods presented.

 

Q. Reclassification

 

The comparative figures have been reclassified to conform to current year presentation.

 

R. Recently adopted accounting pronouncements 

 

The FASB has issued Accounting Standards Update (ASU) No. 2019-01, Leases (Topic 842): Codification Improvements. The new ASU aligns the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in Topic 820, Fair Value Measurement) should be applied.

 

The ASU also requires lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal payments received under leases” within investing activities.

 

Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard.

 

Leases. In February 2016, the FASB issued guidance which requires companies generally to recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance using the modified retrospective approach as of January 1, 2019. See Note 8 - Leases for further details.

 

We do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

 

NOTE 3. Accounts Receivable, Net

 

   September 30   December 31 
   2019   2018 
   (Unaudited)     
Accounts receivable  $7,365,515   $8,237,369 
Less: allowance for doubtful debts   23,465    24,354 
   $7,342,050   $8,213,015 

 

The Company experienced nil bad debts during nine months ended September 30, 2019 and 2018.

 

NOTE 4. Inventories

 

At September 30, 2019 and December 31, 2018, inventories consist of the following:

 

   September 30   December 31 
   2019   2018 
   (Unaudited)     
Western pharmaceuticals  $611,076   $809,499 
Chinese herbal medicine   40,349    29,796 
Medical material   558,721    321,477 
Other material   4,518    3,073 
   $1,214,664   $1,163,845 

 

F-12

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 5. Prepayment

 

At September 30, 2019 and December 31, 2018 prepayment consists of the following:

 

   September 30   December 31 
   2019   2018 
   (Unaudited)     
Deposits on medical equipment  $606,113   $1,297,411 
Heating fees   -    135,035 
Deposits on decoration   234,825    - 
Others   199,707    393,768 
   $1,040,645   $1,826,214 

 

NOTE 6. Property and Equipment

 

At September 30, 2019 and December 31, 2018, property and equipment, at cost, consist of:

 

   September 30,   December 31, 
   2019   2018 
   (Unaudited)     
Transportation equipment  $1,145,672   $1,000,303 
Medical equipment   16,691,161    15,001,892 
Electrical equipment   1,700,230    1,649,229 
Office equipment and others   920,697    813,635 
Buildings   23,134,855    24,011,797 
Software   165,428    138,366 
Total fixed assets at cost   43,758,043    42,615,222 
Accumulated depreciation   (6,293,680)   (4,891,253)
Reclass to Right-of-use assets   (15,700,275)   - 
Total fixed assets, net  $21,764,088   $37,723,969 

 

The Company recorded depreciation expense of $551,810 and $392,840, $1,644,389 and $1,175,020 for the three and nine months ended September 30, 2019 and 2018, respectively.

 

NOTE 7. Long term deferred expenses

 

On May 7, 2015, July 3, 2015 and October 16, 2015, Jiarun entered into three lease agreements to lease medical equipment from Hair Finance Leasing (China) Co., Ltd. (“Hair”), a third party, for a five-year period, in which Jiarun is required to pay a consulting fee to Hair for the services provided over the five years. The consulting fee paid but attributable to the current and subsequent accounting periods was accounted for as deferred expenses and long term deferred expenses.

 

During the year ended December 31, 2018, the Company paid approximately $1.6 million for the decoration of its outpatient building and the two Branch Hospitals.

 

The consulting and decoration fees paid but attributable to the current and subsequent accounting periods were accounted for as deferred expenses and long term deferred expenses.

 

The current portion of the prepaid consulting fee was recorded as deferred expenses of $280,472 and $291,104 as of September 30, 2019 and December 31, 2018. The long-term deferred expenses were $968,022 and $1,238,455 as of September 30, 2019 and December 31, 2018.

 

The Company recorded consulting fee of $16,049 and $16,512 for the three months ended September 30, 2019 and 2018, and decoration fees of $49,303 and $51,937 for the three months ended September 30, 2019 and 2018, respectively.

 

The Company recorded consulting fee of $55,169 and $58,762 for the nine months ended September 30, 2019 and 2018, and decoration fees of $169,477 and $91,906 for the nine months ended September 30, 2019 and 2018, respectively.

 

F-13

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 8. Right-of-Use Assets and Lease Liabilities

 

On January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 842, “Leases” (“new lease standard”). The new lease standard was adopted using the optional transition method approach that allows for the cumulative effect adjustment to be recorded without restating prior periods. The Company has elected the practical expedient package related to the identification, classification and accounting for initial direct costs whereby prior conclusions do not have to be reassessed for leases that commenced before the effective date. As the Company will not reassess such conclusions, the Company has not adopted the practical expedient to use hindsight to determine the likelihood of whether a lease will be extended or terminated or whether a purchase option will be exercised.

 

Finance lease 

 

On June 5, 2013, Jiarun entered into a lease agreement to lease its hospital building from Harbin Baiyi Real Estate Development Co., Ltd (“the Lessor”), which is owned by Junsheng Zhang, a related party. The Lease has a term of 30 years, requiring annual prepayments of a rent of RMB7,000,000. The first payment was made on September 1, 2014. At the end of the leasing period, a final payment will be made to settle the total leasing amount. Both parties agreed for Jiarun to pay RMB3,000,000 as deposit at the execution of the Leasing agreement, which will be deducted from the final rental settlement. In accordance to accounting principles and treatment, this payment was booked as deposit in our accounts. The Lessor shall return the premium for lease to Jiarun at expiration of the Contract or pledge the deposit as part of rents for the last period or periods in 2043. The implicit interest rate, which determined the rental fee after fair value was amortized, was calculated at 6.55%, which is the benchmark interest rate announced from The People’s Bank of China. After the completion of all payments, the ownership of the lease item will be transferred to Jiarun.

 

The leasing agreement for our hospital building contains the following provisions:

 

●Rental payments of RMB7,000,000 (equivalent to $1,144,913) per year, payable at the beginning of September.

 

●An option allowing the lessor to extend the lease for thirty years beyond the last renewal option exercised by the Company.

 

●A guarantee by the Company that the lessor will realize $nil from selling the asset at the expiration of the lease This lease is a capital lease because its term (30 years) exceeds 75% of the building’s estimated economic life. In addition, the present value ($15,185,032) of the minimum lease payments exceeds 90% of the fair value of the building ($15,721,295).

 

●Accumulated annual amounts resulting from applying an interesting rate 6.55% to the balance of the lease obligation at the beginning of each year. The lease obligation is increased by the amount of the prior year’s interest, the amount of the net rental payment at the beginning of each year; and this amount represents the guaranteed residual value at the end of the lease term.

 

On May 7, 2015, July 3, 2015, October 16, 2015, April 6, 2016, November 25, 2016, April 5 2017 and May 25, 2019 Jiarun entered into several lease agreements to lease medical equipment and an elevator from three lease finance companies, which are all unrelated third parties, for three to five-year periods, in which Jiarun is required to make monthly or quarterly payments toward the leases. The Company was also required to pay deposits up front, which deposits will later be offset against the last quarterly payment. The medical equipment and elevator will be transferred to Jiarun upon the completion of the agreement. 

 

On March 25, 2019 Jiarun entered into a sale and leaseback agreement for the sale-leaseback of properties from Haitong Hengxin International Leasing Company Limited, with a collective net value of $2,964,017.

 

Operating lease 

 

In August 2017 JHCC leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from August 2017, JHCC is committed to make lease payments of approximately $36,881 per year for 5 years. This office is used for outpatient services by 2nd Branch Hospital.

 

In December 2017 JHCC leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from December 2017, JHCC is committed to make lease payments of approximately $68,128 per year for 5 years. This office is used by 1st Branch Company.

 

The Company’s adoption of the new lease standard included new processes and controls regarding asset financing transactions, financial reporting and a system-related implementation required for the new lease standard. The Company’s accounting for finance leases (formerly referred to as capital leases prior to the adoption of the new lease standard) remained substantially unchanged. The impact of the adoption of the new lease standard included the recognition of right-of-use (“ROU”) assets and lease liabilities. The adoption of the new lease standard resulted in additional net lease assets and net lease liabilities of approximately $16.05 million and $16.05 million, respectively, as of September 30, 2019.

 

F-14

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 8. Right-of-Use Assets and Lease Liabilities (Continued)

 

As of September 30, 2019, the Company has the following amounts recorded on the Company’s unaudited condensed consolidated balance sheet:

 

   September 30
2019		 
Assets    
Operating lease assets  $349,609 
Finance lease assets   15,700,276 
Total  $16,049,885 
Liabilities     
Current     
Operating lease liabilities   105,961 
Finance lease liabilities   2,512,565 
Long-term     
Operating lease liabilities   243,648 
Finance lease liabilities   13,187,711 
Total  $16,049,885 

 

The future minimum lease payments for annual capital lease obligation as of September 30, 2019 are as follows:

 

Year  Amounts 
2019  $702,259 
2020   2,189,548 
2021   1,428,073 
Thereafter   11,380,396 
Total  $15,700,276 

 

The Company recorded finance interest lease fees of $231,063 and $279,920 for the three months ended September 30, 2019 and 2018, and recorded finance interest lease fees of $812,057 and $914,725 for the nine months ended September 30, 2019 and 2018, respectively.

 

Future annual minimum lease payments, for non-cancellable operating leases are as follows:

 

Year ending December 31  Amount $ 
2019   25,830 
2020   108,756 
2021   119,127 
2022   95,896 
    349,609 

 

The company has recorded operating lease expense of $24,112 and $24,886 for three months ended September 30, 2019 and 2018, and recorded operating lease expense of $80,864 and $78,277 for nine months ended September 30, 2019 and 2018 respectively

 

At September 30, 2019 right-of-use assets, consist of:

 

   September 30, 2019
(Unaudited)		 
   Operating lease   Finance lease   Total 
Lease assets  $424,612   $16,629,814   $17,054,426 
Accumulated amortization   (75,003)   (929,538)   (1,004,541)
Total right-of-use assets, net  $349,609   $15,700,276   $16,049,885 

 

F-15

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 8. Right-of-Use Assets and Lease Liabilities (Continued)

 

The Company recorded finance lease amortization expense of $929,538 and $nil in depreciation and amortization for the nine months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019, the amount of depreciation and amortization was $1,644,389, also included general property and equipment depreciation of $714,851.

 

The Company recorded operating lease expense of $80,864 and $nil for the nine months ended September 30, 2019 and 2018, including operating lease amortization expense of $75,003 and $nil for the nine months ended September 30, 2019 and 2018, respectively.

 

NOTE 9. Derivative Financial Instruments

 

Derivative Financial Instruments

 

The Company adopted the provisions of ASC subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

Debt derivatives – In May and July of 2019, the Company issued three convertible promissory notes to Labrys Fund, LP. Auctus Fund, LLC and Harbor Gates Capital, LLC The Notes are convertible into common stock, at holders’ option, at a discount to the market price of the Company’s common stock. The Company has identified the embedded derivatives relating to certain anti-dilutive (reset) provisions in the note. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of debenture and record the change in fair value as of each subsequent reporting date.

 

At December 31, 2018, the Company had no debt derivatives. At September 30, 2019, the Company marked to market the fair value of the debt derivatives and determined a fair value of $1,152,593. The Company recorded a loss from change in fair value of debt derivatives of $428,093 for the nine months ended September 30, 2019. The fair value of the embedded derivatives was determined using Monte Carlo simulation “MC simulation” method and Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 55% and 62.97%, (3) weighted average risk-free interest rate of 1.81% and 2.02% (4) expected life of 0.58 and 0.29 year, and (5) the quoted market price of the Company’s common stock at each valuation date.

 

Warrant liabilities – The Company issued two common stock purchase warrants (the “warrants”) to purchase 28,200 shares and 21,000 shares of the registrant’s common stock to Labrys Fund, LP and Auctus Fund, LLC. These warrants contain certain reset provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date (issuance date) and to fair value as of each subsequent reporting date.

 

At September 30, 2019, the Company marked to market the fair value of the warrant liability and determined a fair value of $173,445. The Company recorded a loss from change in fair value of warrant liability of $173,445 for the nine months ended September 30, 2019. The fair value of the warrant liability was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 52.26% and 52.66%, (3) weighted average risk-free interest rate of 1.477% and 1.534% (4) expected life of 4.67 and 2.83 years, and (5) the quoted market price of the Company’s common stock at each valuation date.

 

F-16

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 10. Non-controlling Interests

 

Jiarun is the Company’s majority-owned subsidiary which is consolidated in the Company’s financial statements with a non-controlling interest recognized. The Company holds a 70% equity interest in Jiarun as of September 30, 2019 and December 31, 2018.

 

As of September 30, 2019 and December 31, 2018, NCI on the consolidated balance sheet was $8,703,494 and $7,895,376, respectively, representing the 30% of Jiarun that is owned by Junsheng Zhang.

 

For the three months ended September 30, 2019, the comprehensive income attributable to shareholders’ equity and NCI is $(211,130) and $74,257 respectively. For the nine months ended September 30, 2019, the comprehensive income attributable to shareholders’ equity and NCI is $1,085,897 and $808,118, respectively.

 

For the three months ended September 30, 2018, the comprehensive income attributable to shareholders’ equity and NCI is $481,594 and $206,958 respectively. For the nine months ended September 30, 2018, the comprehensive income attributable to shareholders’ equity and NCI is $2,963,691 and $1,334,432, respectively.

 

NOTE 11. Revenue

 

The Company’s revenue consists of pharmaceuticals sales and patient care revenue.

 

   Three Months Ended 
September 30,		 
   2019   2018 
   (Unaudited)   (Unaudited) 
Pharmaceuticals:        
Western pharmaceuticals  $1,989,732   $1,995,674 
Chinese medicine   296,327    421,652 
Herbal medicine   257,971    231,162 
Total pharmaceuticals  $2,544,030   $2,648,488 
           
Patient services:          
Medical consulting  $2,732,914   $1,877,179 
Medical treatment   2,215,895    2,240,810 
Others   270,361    (390)
Total patient services  $5,219,170   $4,117,599 
           
   $7,763,200   $6,766,087 

 

   Nine Months Ended 
September 30,		 
   2019   2018 
   (Unaudited)   (Unaudited) 
Pharmaceuticals:        
Western pharmaceuticals  $6,229,016   $6,298,491 
Chinese medicine   989,317    1,280,662 
Herbal medicine   728,587    557,837 
Total pharmaceuticals  $7,946,920   $8,136,990 
           
Patient services:          
Medical consulting  $7,197,523   $5,979,926 
Medical treatment   7,078,626    6,456,923 
Others   683,904    16,895 
Total patient services  $14,960,053   $12,453,744 
           
   $22,906,973   $20,590,734 

 

F-17

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 12. Income Tax Expense

 

The Company uses the asset-liability method of accounting for income taxes prescribed by ASC 740 Income Taxes. The Company and its subsidiaries each file their taxes individually.

 

United States

 

JRSS is subject to the United States of America tax at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the periods presented, and its earnings are planned to be reinvested indefinitely into the operations of the Company in the PRC.

 

BVI

 

JHCL was incorporated in the BVI and, under the current laws of the BVI, it is not subject to income tax.

 

Hong Kong

 

Runteng was incorporated in Hong Kong and is subject to Hong Kong profits tax. Runteng is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. The applicable statutory tax rate is 16.5%.

 

PRC

 

Corporate Income Tax (CIT) is determined under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC. Income tax is payable by enterprises at a rate of 25% of their taxable income.

 

According to the PRC “Notice on Preferential Corporate Income Tax (CIT) Treatment for Eligible Equipment or Machinery (Cai Shui [2018] No. 54)”, a 100% immediate tax deduction for CIT purposes is allowed on the condition that the unit price of each item of equipment or machinery is individually less than RMB5 million. Depreciation for tax purposes is not required. Basis differences between tax and GAAP for depreciation of property and equipment exist because in 2019 the Company purchased Eligible Equipment for RMB 17.25 million, with $637,475 deferred income tax, creating differences between tax and GAAP.

 

F-18

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 13. Related Party Transactions

 

The following is the list of the related parties with which the Group has had transactions:

 

(a) Junsheng Zhang, the Chairman of the Company 

(b) Harbin Baiyi Real Estate Development Co., Ltd., owned by Junsheng Zhang 

(c) Harbin Jiarun Pharmacy Co., Ltd., owned by Junsheng Zhang 

(d) Heilongjiang Province Runjia Medical Equipment Company Limited, owned by Junsheng Zhang 

(e) Jiarun Super Market Co., Ltd., owned by Junsheng Zhang 

(f) Harbin Qi-run Pharmacy Limited, owned by Junsheng Zhang 

(g) Yanhua Xing and Weiguang Song, the former shareholders of JHCL

 

Amount due from related parties

 

Amount due from related parties consisted of the following as of the periods indicated: 

 

Name of related parties  September 30,
2019		   December 31,
2018		 
   (Unaudited)     
Harbin Baiyi Real Estate Development Co., Ltd  $           -   $99,811 
Junsheng Zhang   -    46,500 
Yanhua Xing   -    2,450 
Weiguang Song   -    1,050 
   $-   $149,811 

 

Amount due from Junsheng Zhang, Yanhua Xing and Weiguang Song, who are the prior shareholders of JHCL, was mainly for the paid-in capital to be paid.

 

Amount due to related parties

 

Amount due to related parties consisted of the following as of the periods indicated: 

 

   September 30,   December 31, 
Name of related parties  2019   2018 
   (Unaudited)     
Harbin Jiarun Pharmacy Co., Ltd  $27,682   $1,211 
Heilongjiang Province Runjia Medical Equipment Co., Ltd   5,394    1,614 
Jiarun Super Market Co., Ltd.   38,286    39,042 
Harbin Qi-run Pharmacy Co., Ltd   16,212    17,280 
Junsheng Zhang   2,613,523    50,000 
   $2,701,097   $109,147 

 

Amount due to Harbin Jiarun Pharmacy Co., Ltd., Harbin Qi-run pharmacy Co., Ltd and Heilongjiang Province Runjia Medical Equipment Company Limited were mainly for the balance for purchase of pharmaceuticals and medical material from these four companies.

 

Amounts due to Junsheng Zhang represented the balance paid by Mr. Zhang for the daily operation of the Company.

 

F-19

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 13. Related Party Transactions (Continued)

 

Related parties’ transactions

 

Purchase of pharmaceuticals and medical material from related parties consisted of the following for the periods indicated:

 

   For nine months ended
September 30,		 
Name of related parties  2019   2018 
Harbin Jiarun Pharmacy Co., Ltd  $69,583   $194,866 
Heilongjiang Province Runjia Medical Equipment Co., Ltd   7,201    6,057 
Harbin Qi-run Pharmacy Co., Ltd   -    19,035 
   $76,784   $219,958 

 

Deposits for capital leases and Capital lease obligations

 

On June 5, 2013, Jiarun entered into a Lease Agreement to lease a new hospital building from Harbin Baiyi Real Estate Development Co., Ltd, which is owned by Junsheng Zhang, a related party. As of September 30, 2019, the Company has balance of deposits for capital leases and capital lease obligations of $420,268 and $11,687,838 respectively. As of December 31, 2018, the Company has balance of deposits for capital leases and capital lease obligations of $477,656 and $14,271,606 respectively.

 

NOTE 14.  Basic and Diluted Earnings Per Share

 

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares comprise shares issuable upon the exercise of share-based awards, using the treasury stock method. The reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income from continuing operations is shown as follows: 

 

   Nine Months Ended
September 30,		 
   2019   2018 
   (Unaudited)   (Unaudited) 
Numerator:        
Net income available to common stockholders  $1,798,663   $3,949,191 
Denominator:          
Basic weighted-average number of shares outstanding   16,380,863    14,939,432 
Diluted weighted-average number of shares outstanding   16,398,532    14,939,432 
Net income per share:          
Basic  $0.1098   $0.2643 
Diluted   0.1097    0.2643 

 

F-20

 

 

JRSIS HEALTH CARE CORPORATION 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(AMOUNTS IN USD)

 

NOTE 15. Contingencies and Commitment

 

Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. There was no contingency as of September 30, 2019 and December 31, 2018.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. There was no contingency as of September 30, 2019 and December 31, 2018.

 

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

NOTE 16. Subsequent Events

 

On October 31, 2019, the Company prepaid the Note that it issued to Labrys Fund, LP in June 2019. On the same day, Labrys Fund, LP returned the 40,000 returnable shares issued by the Company in connection with sale of the Note.

 

On August 13, 2019 Harbor Gates Capital LLC purchased a $192,000 convertible debenture from the Company for $175,000. The Company intends to repay that debenture on its due date. The Company's agreement with Harbor Gates Capital grants it the right to purchase an additional convertible debenture in the principal amount of $83,000 for a price of $75,000.

 

The Management of the Company determined that there were no other reportable subsequent events to be disclosed.

 

F-21

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement Regarding Forward Looking Statements

 

The discussion contained in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,” “we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we plan,” the negative of those terms, and similar words or phrases.    We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the industry in which we operate as of the date of this Form 10-Q. These forward-looking statements are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. The “Risk Factors” section in our Annual Report on Form 10-K describes factors, among others, that could contribute to or cause these differences. Actual results may vary materially from those anticipated, estimated, projected or expected should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect. Because the factors discussed in the Risk Factors section of our Form 10-K could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this Form 10-Q.

 

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of such financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate these estimates, including those related to useful lives of real estate assets, bad debts, impairment, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

 

Overview

 

Harbin Jiarun Hospital Company Limited (“Jiarun”) was established in Harbin in the Province of Heilongjiang of the People’s Republic of China (“PRC”) by the owner Junsheng Zhang on February 17, 2006.

 

Harbin Jiarun Hospital Co., Ltd Nanjing Road Branch (“NRB Hospital”) was established in Harbin in the Province of Heilongjiang of the People’s Republic of China (“PRC”) by Jiarun on October 30, 2017.

 

Harbin Jiarun Hospital Co., Ltd 2nd Branch (“2nd Branch Hospital”) was established in Harbin in the Province of Heilongjiang of the People’s Republic of China (“PRC”) by Jiarun on November 2, 2017.

 

Jiarun is a private hospital serving patients on a municipal and county level and providing both Western and Chinese medical practices to the residents of Harbin. Jiarun specializes in the areas of Pediatrics, Dermatology, ENT, Traditional Chinese Pharmaceuticals (TCM), Ophthalmology, Internal Pharmaceuticals Dentistry, General Surgery, Rehabilitation Science, Gynecology and General Medical Services.

 

On November 20, 2013, Junsheng Zhang, the senior officer of Jiarun Hospital, established JRSIS Health Care Corporation, a Florida corporation (“JHCC” or the “Company”). On February 25, 2013, the officer of Jiarun Hospital established JRSIS Health Care Limited (“JHCL”), a wholly owned subsidiary of the Company, and on September 17, 2012, the officer of Jiarun Hospital established Runteng Medical Group Co., Ltd (“Runteng”), a wholly owned subsidiary of JHCL. Runteng, a Hong Kong registered Investment Company, holds a 70% ownership interest in Harbin Jiarun Hospital Company Ltd, a Heilongjiang registered company.

 

On December 20, 2013, the Company acquired 100% of the issued and outstanding capital stock of JRSIS Health Care Limited, a privately held Limited Liability Company registered in the British Virgin Islands, for 12,000,000 shares of our common stock. JHCL, through its wholly owned subsidiary, Runteng Medical Group Co., Ltd, holds majority ownership in Jiarun, a company duly incorporated, organized and validly existing under the laws of China. As the parent company, JHCC relies on Jiarun to conduct 100% of our businesses and operations.

 

2

 

 

We have two sources of patient revenues: in-patient service revenues and out-patient service revenues. In addition to provide services to our patients, we also sell pharmaceuticals to our patients. Revenues from such sales are included in either our in-patient service revenues or our out-patient service revenues. Our revenues come from individuals as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon local government established charges. Revenue from the sale of pharmaceuticals is recognized when it is both earned and realized. The Company’s policy is to recognize the sale of pharmaceuticals when the title to the pharmaceuticals, ownership and risk of loss have transferred to the purchasers, and collection of the sales proceeds is reasonably assured, all of which generally occur when the patient receives the pharmaceuticals. Patient service revenue is recognized when it is both earned and realized. The Company’s policy is to recognize patient service revenue when the medical service has been provided to the patient and collection of the revenue is reasonably assured. 

  

Critical Accounting Policies and Management Estimates

 

In preparing our financial statements we are required to formulate accounting policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for the quarter ended September 30, 2019, there were two estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results, as follows:

 

  ● The determination, as set forth in Note 3 to our Financial Statements, that the $7,342,050 in accounts receivable as of September 30, 2019 warranted an allowance for doubtful accounts of only $23,465, despite representing over 26% of our annual revenue for 2018. Our determination was based on our review of the likelihood of recovery as well as the fact that we incurred no bad debts in either 2018 or 2017.

 

  ● The determination to record depreciation of our property and equipment over an average useful life of approximately twenty years. The determination was based primarily on our expectation that the useful life of our hospital facilities would exceed thirty years, based on the experience of comparable facilities in our location.

 

Results of Operations for Three Months Ended September 30, 2019 and 2018 

 

The following table shows key components of the results of operations during three months ended September 30, 2019 and 2018: 

 

   Three Months Ended 
September 30,		   Change 
   2019   2018   $   % 
                 
Revenue:                
Pharmaceuticals  $2,544,030   $2,648,488   $(104,458)   (4)%
Patient services   5,219,170    4,117,599    1,101,571    27%
Total revenue   7,763,200    6,766,087    997,113    15%
Operating costs and expenses:                    
Cost of pharmaceuticals sold   1,670,367    1,817,244    (146,877)   (8)%
Medical consumables   1,382,547    1,142,947    239,600    21%
Salaries and benefits   1,740,684    1,132,315    608,369    54%
Office supplies   509,647    147,646    362,001    245%
Vehicle expenses   69,710    44,650    25,060    56%
Utilities expenses   90,982    77,240    13,742    18%
Rentals and leases   24,112    24,886    (774)   (3)%
Advertising and promotion expenses   13,194    57,755    (44,561)   (77)%
Interest expense, net   276,679    258,857    17,822    7%
Loss of fair value of convertible notes   152,904    -    152,904    n/a%
Warrant expense   96,800    -    96,800    n/a%
Professional fee   114,130    93,557    20,573    22%
Depreciation   551,810    392,840    158,970    40%
Total operating costs and expenses   6,693,566    5,189,937    1,503,629    29%
Earnings from operations before other income and income taxes   1,069,634    1,576,150    (506,516)   (32)%
Other income   (3,294)   (4,104)   810    (20)%
Earnings from operations before income taxes   1,066,340    1,572,046    (505,706)   (32)%
Income tax   221,641    871    220,770    25347%
Net income   844,699    1,571,175    (726,476)   (46)%
Less: net income attributable to non-controlling interests   369,366    471,352    (101,986)   (22)%
Net income attributable to the Company  $475,333   $1,099,823   $(624,490)   (57)%
Comprehensive income:                    
Foreign currency translation adjustment attributable to non-controlling interests   (295,109)   (264,394)   (30,715)   12%
Foreign currency translation adjustment attributable to the Company   (686,463)   (618,229)   (68,234)   11%
Comprehensive income  $136,873   $(688,552)  $825,425    (120)%

 

3

 

 

Results of Operations for the nine months Ended September 30, 2019 and 2018

 

The following table shows key components of the results of operations during nine months ended September 30, 2019 and 2018: 

 

   Nine Months Ended 
September 30,		   Change 
   2019   2018   $   % 
                 
Revenue:                
Pharmaceuticals  $7,946,920   $8,136,990   $(190,070)   (2)%
Patient services   14,960,053    12,453,744    2,506,309    20%
Total revenue   22,906,973    20,590,734    2,316,239    11%
Operating costs and expenses:                    
Cost of pharmaceuticals sold   6,040,467    5,571,186    469,281    8%
Medical consumables   3,251,086    2,882,982    368,104    13%
Salaries and benefits   4,847,107    3,235,366    1,611,741    50%
Office supplies   1,189,712    527,015    662,697    126%
Vehicle expenses   227,787    110,882    116,905    105%
Utilities expenses   388,632    339,070    49,562    15%
Rentals and leases   80,864    78,277    2,587    3%
Advertising and promotion expenses   39,659    73,477    (33,818)   (46)%
Interest expense, net   814,032    844,153    (30,121)   (4)%
Loss of fair value of convertible notes   428,093    -    428,093    n/a%
Warrant expense   173,445    -    173,445    n/a%
Professional fee   219,045    93,557    125,488    134%
Depreciation   1,644,389    1,175,020    469,369    40%
Total operating costs and expenses   19,344,318    14,930,985    4,413,333    30%
Earnings from operations before other income and income taxes   3,562,655    5,659,749    (2,097,094)   (37)%
Other income (expenses)   (12,662)   (12,541)   (121)   1%
Earnings from operations before income taxes   3,549,993    5,647,208    (2,097,215)   (37)%
Income tax   637,475    5,507    631,968    11476%
Net income   2,912,518    5,641,701    (2,729,183)   (48)%
Less: net income attributable to non-controlling interests   1,113,855    1,692,510    (578,655)   (34)%
Net income attributable to the Company  $1,798,663   $3,949,191   $(2,150,528)   (54)%
Comprehensive income:                    
Foreign currency translation adjustment attributable to non-controlling interests   (305,737)   (358,078)   52,341    (15)%
Foreign currency translation adjustment attributable to the Company   (712,766)   (985,500)   272,734    (28)%
Comprehensive income  $1,894,015   $4,298,123   $(2,404,108)   (56)%

 

Revenue

 

Operating revenue for three and nine months ended September 30, 2019, which resulted primarily from pharmaceuticals (i.e. pharmaceuticals) revenue and patient services revenue, were $7,763,200 and $22,906,973, an increase of 15% as compared with the operating revenue of $6,766,087 for the three months ended September 30, 2018, and an increase of 11% as compared with the operating revenue of $20,590,734 for the nine months ended September 30, 2018. The increase during the nine months was primarily a result of the number of treated inpatients growing by 3% to 15,292 inpatients, more than the 14,798 inpatients treated in the nine months ended September 30, 2018.

 

4

 

 

Operating Costs and Expenses

 

Total operating costs and expenses were $6,693,566 and $19,344,318 for the three and nine months ended September 30, 2019, an increase of $1,503,629 or 29% as compared to $5,189,937 for the third quarter of 2018, and an increase of $4,413,333 or 30% as compared to $14,930,985 for the nine months ended September 30, 2018. Since revenue increased by only 11% nine months - to- nine months, the 30% increase in operating costs and expenses caused a substantial reduction in the profitability of the Company’s operations. The primary components of the $4,413,333 increase in costs and expenses during the nine months ended September 30, 2019 were:

 

  ● $469,281 increase in cost of pharmaceuticals. Although sales of pharmaceuticals decreased by 2%, the cost of the pharmaceuticals sold increased by 8%. The increase was attributable to both Western pharmaceuticals and Chinese traditional medicines, and primarily reflects increases in the market price of those pharmaceuticals that we were unable to pass along to patients and their insurers due to government regulation and competitive factors. We cannot predict whether this disparity between costs and revenues will continue in future periods, as it will be determined in large part by government policy.

 

  ● $1,611,741 increase in salaries and benefits, reflecting a $1,370,568 increase in salaries and $294,965 increase in social insurance expense. This 50% increase in our labor costs was primarily caused by the initiation of operations at our two new branch hospitals. The increase exceeded the revenue increase attributable to the hospitals, as we incurred labor costs in preparation for full scale operations.

 

  ● $662,697 increase in office supplies, likewise primarily attributable to the expansion of our operations during 2019.

  

Income Taxes

 

Corporate Income Tax (CIT) is determined under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC. Income tax is payable by enterprises at a rate of 25% of their taxable income.

 

According to the PRC “Notice on Preferential Corporate Income Tax (CIT) Treatment for Eligible Equipment or Machinery (Cai Shui [2018] No. 54)”, a 100% immediate tax deduction for CIT purposes is allowed on the condition that the unit price of each item of equipment or machinery is individually less than RMB5 million. Depreciation for tax purposes is not required. Basis differences between tax and GAAP for depreciation of property and equipment exist because in 2019 the Company purchased Eligible Equipment for RMB 17.25 million, with $637,475 deferred income tax, creating differences between tax and GAAP.

 

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Income from operations and net income

 

Income from Operations was $3,562,655 for the nine months ended September 30, 2019, as compared with operating income of $5,659,749 for the nine months ended September 30, 2018. After deducting other income and expenses as well as the provision for income tax, the Company’s net income for the nine months ended September 30, 2019 was $2,912,518 representing a decrease of $2,729,183 or 48%, over $5,641,701 for the nine months ended September 30, 2018. The decrease of income from operations and net income for the nine months ended September 30, 2019 were primarily due to aforementioned changes in operating revenue and expenses.

 

Our net income was produced by Jiarun. Because we own only 70% of the equity interest in Jiarun (the other 30% being owned by our Chairman, Junsheng Zhang), we reduced our net income for the nine months period ended September 30, 2019 and 2018 by an allocation to the “non-controlling interests” of $1,113,855 and $1,692,510, respectively, before recognizing net income attributable to the Company. After those allocations, our net income attributable to the Company for the nine months ended September 30, 2019 and 2018 was $1,798,663 ($0.1098 per share) and $3,949,191 ($0.2643 per share), respectively.

 

Foreign Currency Translation Adjustment.

 

Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the nine months ended September 30, 2019 and 2018, foreign currency translation adjustments of $1,018,503 (of which $305,737 was attributable to the non-controlling interest) and $1,343,578 (of which $358,078 was attributable to the non-controlling interest), respectively, have been reported as other comprehensive loss in the consolidated statements of operations and comprehensive income.

 

Liquidity and Capital Resources

 

As of September 30, 2019, the Company had $2,009,185 of cash and cash equivalents, an increase of $1,752,735 from our cash balance at December 31, 2018. The increase was primarily the result of our operating activities providing $8,837,226 of cash during the nine months ended September 30, 2019.

 

Our working capital at September 30, 2019 was $2,019,774, a decrease of $2,789,511 from our $4,809,285 in working capital at December 31, 2018. The decrease was primarily attributable to our use of $4,098,360 in cash to purchase medical equipment and to fund construction in progress during the nine months ended September 30, 2019.  

 

The primary non-cash component of our working capital at September 30, 2019 was accounts receivable totaling $7,342,050. This balance equaled 26% of our total revenue for 2018 and was less than our total revenue for the quarter ended September 30, 2019. Nevertheless, we have carefully examined our accounts receivable and believe that our allowance for doubtful accounts - $23,465 - is appropriate, given our strong relationships with our corporate customers (who are responsible for most of our accounts receivable) and the fact that we have recorded no bad debts in either 2019 or 2018.  

 

Although our current resources and cash flows are adequate to pay our current ongoing obligations, we anticipate that our future liquidity requirements will arise from the need to fund our growth and future capital expenditures. The primary sources of funding for such growth requirements are expected to be additional funds raised from the sale of equity and/or debt financing. However, we can provide no assurances that we will be able to obtain additional financing on terms satisfactory to us. 

  

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Cash Flows and Capital Resources 

 

Our cash flows for the nine months ended September 30, 2019 and 2018 are summarized below:  

 

   Nine Months Ended
September 30,		 
   2019   2018 
Net cash provided by operating activities   8,837,226    7,228,001 
Net cash used in investing activities   (3,460,652)   (5,761,225)
Net cash used in financing activities   (3,574,870)   (2,154,147)
Effect of exchange rate fluctuation on cash and cash equivalents   (48,969)   130,329 
Net increase(decrease) in cash and cash equivalents   1,752,735    (557,042)
Cash and cash equivalents, beginning of period   256,450    884,292 
Cash and cash equivalents, ending of period  $2,009,185   $327,250 

 

Net Cash Provided by Operating Activities

 

For the nine months ended September 30, 2019, we had positive cash flow from operating activities of $8,837,226, an increase of $1,609,225 from $7,228,001 for the nine months ended September 30, 2018. Cash flow from operations increased despite the $2,729,183 decrease in net income in nine months ended September 30, 2019 as a result of several factors, including:

 

  ● During the nine months ended September 30, 2018 the Company's accounts receivable balance increased by $2,563,284, whereas the accounts receivable balance decreased by $593,886 during the nine months ended September 30, 2019;

 

  ● Depreciation expense in the nine months ended September 30, 2019, which is a non-cash expense, was $1,644,389, an increase of $469,369 compare to $1,175,020 the nine months ended September 30, 2018;
     
  ● The Company increased its inventory balance by $97,062 during the nine months ended September 30, 2019, whereas it purchased $432,653 in additional inventory during the nine months ended September 30, 2018.

 

  ● The Company increased its accrued expenses balance by $596,572 during the nine months ended September 30, 2019; during the nine months ended September 30, 2018 accrued expenses decreased by $488,749.

 

Several of these items represent benefits from prepayments made in earlier periods or deferral to the future of expenses incurred during the nine months ended September 30, 2019, which indicates that the Company’s ability to generate cash during the nine months ended September 30, 2019 despite the reduction in its profitability may not be replicable.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities for the nine months ended September 30, 2019 was $3,460,652, compared to net cash used in investing activities of $5,761,225 for the nine months ended September 30, 2018. The cash used in investing activities for the nine months ended September 30, 2019 and 2018 was mainly used for the purchase of medical equipment and payment of construction in progress.

 

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Net Cash Provided by Financing Activities

 

Net cash used in financing activities for the nine months ended September 30, 2019 was $3,574,870 as compared to net cash used in financing activities of $2,154,147 for the nine months ended September 30, 2018. The cash used in financing activities for the nine months ended September 30, 2019 was mainly due to payment for finance lease of $7,425,245. This was partially offset by proceeds from finance lease of $2,565,043 because, on March 25, 2019 Jiarun entered into a sale and leaseback agreement for the sale-leaseback of properties from Haitong Hengxin International Leasing Company Limited, with a collective net value of $2,963,067.

 

Trends, Events and Uncertainties

 

The China Ministry of Health, as well as other related agencies, may change the prices we can charge for medical services, drugs and medications. We cannot predict the impact of these proposed changes since the changes are not fully defined and we do not know whether such changes will ever be implemented or when they may take effect.

 

We plan to acquire other hospitals and companies involved in the healthcare industry in the PRC using cash and shares of our common stock. Substantial capital may be needed for these acquisitions and we may need to raise additional funds through the sale of our common stock, debt financing or other arrangements. We do not have any commitments or arrangements from any person to provide us with any additional capital. Additional capital may not be available to us, or if available, on acceptable terms, in which case we would not be able to acquire other hospitals or businesses in the healthcare industry.

 

Other than the factors listed above we do not know of any trends, events or uncertainties that have had or are reasonably expected to have a material impact on our net sales or revenues or income from continuing operations. Our business is not seasonal in nature.

  

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet items reasonably likely to have a material effect on our financial condition.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements issued by the FASB, the AICPA and the SEC did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluations of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of September 30, 2019. Based on this evaluation, we concluded that our disclosure controls and procedures are effective in timely alerting us to material information required to be included in our periodic reports.

 

Changes in Internal Control over Financial Reporting

 

During the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

The Company has no knowledge of existing or pending legal proceedings against the Company, nor is the Company involved as a plaintiff in any proceeding or pending litigation. There are no proceedings in which any of the Company’s directors, officers or any of their respective affiliates, or any beneficial stockholder, is an adverse party or has a material interest adverse to our interest.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes from the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2018.

 

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a) Unregistered sales of equity securities

 

The Company did not effect any sales of unregistered securities during the third quarter of fiscal 2019.

 

(b) Purchases of equity securities

 

The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the third quarter of 2019.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5 OTHER INFORMATION

 

None,

 

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ITEM 6. EXHIBITS

 

INDEX TO EXHIBITS

 

Exhibit   Description
10.1   Harbor Gates Convertible Promissory Note Agreement
10.2   Auctus Convertible Promissory Note Agreement
10.3   Auctus Common Stock Purchase Warrant Agreement
31.1   Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

JRSIS HEALTH CARE CORPORATION. (Registrant)

 

Signature   Title   Date
         
/s/ Lihua. Sun   Chief Executive Officer   November 13, 2019
Lihua. Sun   (Principal Executive Officer)    
         
/s/ Xuewei. Zhang   Chief Financial Officer   November 13, 2019
Xuewei. Zhang   (Principal Financial and Accounting Officer)    

 

 

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