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 2
nd
Branch (“2
nd
Branch Hospital”), a second hospital branch
of Jiarun, incorporated in Harbin city of Heilongjiang, China in November 2017. 2
nd
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 ASC810-10-45, which
states that the ownership interest in the subsidiary that is held by owners other than the parent is a non-controlling interest.
According to the supplemental agreement signed between Junsheng Zhang and Runteng on June 1, 2013, the comprehensive income from
Jiarun would be attributable to retained earnings and non-controlling interest for 70% and 30% respectively, from July 1, 2013.
NOTE 2. SUMMARIES OF SIGNIFICANT
ACCOUNTING POLICIES
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.
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.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
|
D.
|
Functional
currency and foreign currency translation
|
JRSS 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 the year Ended
December 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
(USD to RMB/USD to HKD)
|
|
|
(
USD to RMB/USD to HKD
)
|
|
Assets and liabilities
|
period end exchange rate
|
|
|
6.8776 / 7.8317
|
|
|
6.5074 / 7.8152
|
|
Revenue and expenses
|
period average
|
|
|
6.6193 / 7.8375
|
|
|
6.7578 / 7.7926
|
|
|
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 the years ended December 31, 2018 and 2017, no customer
accounted for more than 10% of net revenue. As of December 31, 2018 and 2017, three and two 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.
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.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
Inventories, consisting principally of
medicines, 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. And 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.
|
J.
|
Property
and equipment
|
Property and equipment are stated at cost.
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
|
Operating lease
Leases where substantially all the rewards
and risks of ownership of assets remain with the lessor are accounted for as operating leases. Minimum lease payments, including
scheduled rent increases, made under operating leases are charged to the consolidated statements of operations and other comprehensive
income (loss) on a straight-line basis over the lease term. Contingent rentals are excluded from minimum lease payments and are
recognized as expense when the achievement of the specified target is considered probable.
Capital lease
Leases which substantially transfer all
of the benefits and risks inherent in ownership to the lessee are classified as capital leases. In a capital lease, assets and
liabilities are recorded at the amount of the lesser of (a) the fair value of the leased asset at the inception of the lease or
(b) the present value of the minimum lease payments (excluding executing costs) over the lease term. Recorded assets are depreciated
over their estimated useful lives. During the lease term, each minimum lease payment is allocated between a reduction of the obligation
and interest expense to produce a constant periodic rate of interest on the remaining balance of the obligation. Leasehold improvements
are depreciated over the depreciable lives of the corresponding fixed asset or the related lease term, whichever is shorter.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
|
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).
There were no transfers between level 1,
level 2 or level 3 measurements for the years ended December 31, 2018 and 2017.
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.
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.
Medicine sales
Revenue from the sale of medicine is recognized
when it is both earned and realized. The Company’s policy is to recognize the sale of medicine when the title of the medicine,
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 medicine.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
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 medicine 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.
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 insurances. 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.
|
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
|
●
|
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.
|
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.
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.
The comparative figures have been reclassified
to conform to current year presentation.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
|
R.
|
Recently
adopted accounting pronouncements
|
In March 2017, the FASB issued ASU
No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable
Debt Securities. Under current GAAP, entities normally amortize the premium as an adjustment of yield over the contractual life
of the instrument. This guidance shortens the amortization period for certain callable debt securities held at a premium to the
earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2018. The adoption of ASU No. 2017-08 is not expected to have a material impact on the Company’s consolidated financial
statements.
In July 2017, the FASB issued Accounting
Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815) (“ASU 2017-11”). The update changes the classification of certain equity-linked
financial instruments (or embedded features) with down round features. The update also clarifies existing disclosure requirements
for equity-classified instruments. The update is effective retrospectively for annual reporting periods beginning after December
15, 2018, including interim periods within that reporting period. Early adoption is permitted for all companies in any interim
or annual period.
In July 2018, the FASB issued ASU No. 2018-11,
Leases (Topic 842): Targeted Improvements, which provides an additional, optional transition method related to implementing the
new leases standard. ASU 2018-11 provides that companies can initially apply the new leases standard at adoption and recognize
a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Management is evaluating
the new guidance and expects to report increased assets and liabilities as a result of recording right-of-use assets and lease
liabilities. We will adopt this guidance for our interim and annual periods beginning January 1, 2019
The FASB issued an Accounting Standards
Update (ASU) that helps organizations address certain stranded income tax effects in accumulated other comprehensive income (AOCI)
resulting from the Tax Cuts and Jobs Act. ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income, provides financial statement preparers with an option to reclassify
stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate
income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The ASU requires financial statement preparers to
disclose:
|
●
|
A description of the accounting policy for releasing
income tax effects from AOCI;
|
|
●
|
Whether they elect to reclassify the stranded income
tax effects from the Tax Cuts and Jobs Act; and
|
|
●
|
Information about the other income tax effects that are
reclassified.
|
The amendments affect any organization
that is required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and has items of
other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The
amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted. Organizations should apply the proposed amendments either in the period of adoption
or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate
in the Tax Cuts and Jobs Act is recognized. The adoption of this guidance is not expected to have a significant impact on the Company’s
financial statements.
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.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE
3. ACCOUNTS RECEIVABLE, NET
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable
|
|
$
|
8,237,369
|
|
|
$
|
5,704,697
|
|
Less: allowance for doubtful debts
|
|
|
24,354
|
|
|
|
25,740
|
|
|
|
$
|
8,213,015
|
|
|
$
|
5,678,957
|
|
The Company experienced nil bad debts during
the years ended December 31, 2018 and 2017.
NOTE
4. INVENTORIES
At December 31, 2018 and 2017, inventories
consist of the following:
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
Western medicine
|
|
$
|
809,499
|
|
|
$
|
662,079
|
|
Chinese herbal medicine
|
|
|
29,796
|
|
|
|
29,499
|
|
Medical material
|
|
|
321,477
|
|
|
|
243,445
|
|
Other material
|
|
|
3,073
|
|
|
|
1,526
|
|
|
|
$
|
1,163,845
|
|
|
$
|
936,549
|
|
NOTE
5. PREPAYMENT
At December 31, 2018 and 2017, prepayment
consists of the following:
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
Deposits on medical equipment
|
|
$
|
1,297,411
|
|
|
$
|
491,822
|
|
Heating fees
|
|
|
135,035
|
|
|
|
117,188
|
|
Others
|
|
|
393,768
|
|
|
|
291,670
|
|
|
|
$
|
1,826,214
|
|
|
$
|
900,680
|
|
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE
6. PROPERTY AND EQUIPMENT
At December 31, 2018 and 2017, property and
equipment, at cost, consist of:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Transportation equipment
|
|
$
|
1,000,303
|
|
|
$
|
871,653
|
|
Medical equipment
|
|
|
15,001,892
|
|
|
|
11,833,334
|
|
Electrical equipment
|
|
|
1,649,229
|
|
|
|
1,496,461
|
|
Office equipment and other
|
|
|
813,635
|
|
|
|
130,524
|
|
Buildings
|
|
|
24,011,797
|
|
|
|
15,389,204
|
|
Software
|
|
|
138,366
|
|
|
|
146,238
|
|
Total fixed assets at cost
|
|
|
42,615,222
|
|
|
|
29,867,414
|
|
Accumulated depreciation
|
|
|
(4,891,253
|
)
|
|
|
(3,715,784
|
)
|
Total fixed assets, net
|
|
$
|
37,723,969
|
|
|
$
|
26,151,630
|
|
Depreciation expense was $1,764,765 and
$1,268,253 for the years ended December 31, 2018 and 2017, 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. 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
and decoration fees were recorded as deferred expenses of $291,104 and $69,334 as of December 31, 2018 and 2017. The long-term
deferred expenses were $1,238,455 and 106,411 as of December 31, 2018 and 2017.
The Company recorded consulting fees of
$68,193 and $66,764, and decoration fees of $149,105 and $nil for the year ended December 31, 2018 and 2017, respectively.
NOTE
8. CAPITAL LEASE OBLIGATIONS AND DEPOSIT FOR CAPITAL LEASES
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 prepayment 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 with 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 this Contract or pledge this
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 by The People’s Bank of
China. After the completion of all payments, the ownership of the lease item will be transferred to Jiarun.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE
8. CAPITAL LEASE OBLIGATIONS AND DEPOSIT FOR CAPITAL LEASES
(Continued)
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 interest rate of 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 September 1, 2014, October 22, 2014,
March 26, 2015, May 7, 2015, July 3, 2015, October 16, 2015, April 6, 2016 and April 13, 2016 and November 25, 2016 and April 5
2017 Jiarun entered into several lease agreements to lease medical equipment and elevators from three lease finance companies,
which are all 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 used to offset against
the last quarterly payment. The medical equipment and elevator will be transferred to Jiarun upon the completion of the agreement.
These leases have been classified as capital
leases. The cost of the medical equipment included in these leases is included in the consolidated balance sheets as property and
equipment and construction in progress.
The future minimum lease payments for annual
capital lease obligation as of December 31, 2018 are as follows:
Year
|
|
Amounts
|
|
2019
|
|
$
|
2,161,977
|
|
2020
|
|
|
1,122,713
|
|
2021
|
|
|
349,522
|
|
Thereafter
|
|
|
17,907,974
|
|
Total
|
|
$
|
21,542,186
|
|
The Company recorded finance lease fees
of $1,178,074 and $1,286,306 for the years ended December 2018 and 2017, respectively.
NOTE
9. SHORT-TERM BANK LOANS
As of December 31, 2018 and 2017, the short-term
bank loans were $ nil and $445,647, respectively. The loans were primarily obtained from Harbin Bank with interest rate of 6.09%
per annum, from January 19, 2017 to January 18, 2018, for working capital and capital expenditure purposes. The interest expenses
were $2,150 and $23,956 for the year ended December 31, 2018 and 2017, respectively.
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 (NCI) recognized.
The Company holds 70% interest of Jiarun as of December 31, 2018 and 2017.
As of December 31, 2018 and 2017, NCI in
the consolidated balance sheet was $7,895,376 and $7,339,043, respectively. For the year ended December 31, 2018, the comprehensive
income attributable to shareholders’ equity and NCI is $1,103,381 and $556,333, respectively. For the year ended December
31, 2017, the comprehensive income attributable to shareholders’ equity and NCIs is $5,339,425 and $2,286,524, respectively.
NOTE
11. REVENUE
The Company’s revenue consists of
medicine sales and patient care revenue.
|
|
For the Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Medicine:
|
|
|
|
|
|
|
|
|
Western medicine
|
|
$
|
8,613,196
|
|
|
$
|
8,630,919
|
|
Chinese medicine
|
|
|
1,753,625
|
|
|
|
1,782,552
|
|
Herbal medicine
|
|
|
816,309
|
|
|
|
476,282
|
|
Total medicine
|
|
$
|
11,183,130
|
|
|
$
|
10,889,753
|
|
|
|
|
|
|
|
|
|
|
Patient services:
|
|
|
|
|
|
|
|
|
Medical consulting
|
|
$
|
8,720,373
|
|
|
$
|
7,110,475
|
|
Medical treatment
|
|
|
8,160,483
|
|
|
|
5,736,799
|
|
Others
|
|
|
392,773
|
|
|
|
410,930
|
|
Total patient services
|
|
$
|
17,219,629
|
|
|
$
|
13,258,204
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,402,759
|
|
|
$
|
24,147,957
|
|
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 law at 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..
The following table shows the components of the allowance for US income tax recorded for 2018:
|
|
Amounts
|
|
Loss before income tax
|
|
$
|
(222,412
|
)
|
Tax rate at 21%
|
|
|
(46,707
|
)
|
Disallowed tax losses
|
|
|
46,707
|
|
Income tax expense
|
|
$
|
—
|
|
BVI
JHCL was incorporated in the BVI and, under
the current laws of the BVI, it is not subject to income tax.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE
12. INCOME TAX EXPENSE
(Continued)
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%.
The following table shows the components of the allowance for Hong Kong income tax recorded for 2018:
|
|
Amounts
|
|
Loss before income tax
|
|
$
|
(672
|
)
|
Tax rate at 16.5%
|
|
|
(111
|
)
|
Disallowed tax losses
|
|
|
111
|
|
Income tax expense
|
|
$
|
—
|
|
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.
Jiarun had benefited from provisions of
the Regulations that exempted certain medical facilities from income tax. Recently, the local tax office informed Jiarun that to
the entitlement of fully tax-exempt status should be terminated in 2015. Jiarun was determined to pay $1,318,102 income tax for
the years 2015 through 2017, based on a preferential rate of 2.5% of gross revenue, and the government waived interest and penalties.
Beginning in 2018, Jiarun is paying income tax at the national rate of 25% of taxable income.
The following table shows the components of the allowance for PRC income tax recorded for 2018:
|
|
Amounts
|
|
Income tax expense
|
|
$
|
55,846
|
|
Income tax: 2018 deferred
|
|
|
1,391,702
|
|
Income tax: prior period
|
|
|
1,318,102
|
|
Tax expense from continuing operation
|
|
$
|
2,765,650
|
|
Reconciliation:
|
|
Amounts
|
|
Income tax at statutory rate
|
|
$
|
1,447,548
|
|
Expense on prior period adjustment
|
|
|
1,318,102
|
|
Tax expense from continuing operation
|
|
$
|
2,765,650
|
|
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 2018 the Company purchased Eligible Equipment for RMB 36.83million, with $1,391,702
deferred income tax, creating differences between tax and GAAP.
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 to which the Group has transactions with:
(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:
|
|
December 31,
|
|
Name of related parties
|
|
2018
|
|
|
2017
|
|
Harbin Baiyi Real Estate Development Co., Ltd,
|
|
$
|
99,811
|
|
|
$
|
1,738,710
|
|
Junsheng Zhang
|
|
|
46,500
|
|
|
|
46,500
|
|
Yanhua Xing
|
|
|
2,450
|
|
|
|
2,450
|
|
Weiguang Song
|
|
|
1,050
|
|
|
|
1,050
|
|
|
|
$
|
149,811
|
|
|
$
|
1,788,710
|
|
Amount due from Baiyi mainly represented
the deposit for the outpatient building decoration. The Company had paid a deposit of $99,811 in 2018.
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 which they had committed.
Amount due to related parties
Amount due to related parties
consisted of the following as of the periods indicated:
|
|
December 31,
|
|
Name of related parties
|
|
2018
|
|
|
2017
|
|
Harbin Jiarun Pharmacy Co., Ltd
|
|
$
|
1,211
|
|
|
$
|
7
|
|
Heilongjiang Province Runjia Medical Equipment Co., Ltd
|
|
|
1,614
|
|
|
|
6,014
|
|
Jiarun Super Market Co., Ltd.
|
|
|
39,042
|
|
|
|
—
|
|
Harbin Qi-run Pharmacy Co., Ltd
|
|
|
17,280
|
|
|
|
17,972
|
|
Junsheng Zhang
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
$
|
109,147
|
|
|
$
|
73,993
|
|
Amount due to Harbin Jiarun Pharmacy
Co., Ltd., Harbin Qi-run Pharmacy Co., Ltd. and Heilongjiang Province Runjia Medical Equipment Company Limited were mainly the
balance due for purchase of medicine and medical material from these three companies.
Amounts due to Junsheng Zhang represented
amounts paid by Mr. Zhang for the daily operation of the company.
Related parties’ transactions
Purchase of medicine and medical
material from related parties consisted of the following for the periods indicated:
|
|
For the Year ended December 31,
|
|
Name of related parties
|
|
2018
|
|
|
2017
|
|
Harbin Jiarun Pharmacy Co., Ltd
|
|
$
|
229,498
|
|
|
$
|
192,259
|
|
Heilongjiang Province Runjia Medical Equipment Co., Ltd
|
|
|
5,965
|
|
|
|
6,463
|
|
Harbin Qi-run Pharmacy Co., Ltd
|
|
|
28,770
|
|
|
|
30,443
|
|
|
|
$
|
264,233
|
|
|
$
|
229,165
|
|
JRSIS HEALTH CARE CORPORATION
notes to consolidated
financial statements
(AMOUNTS IN USD)
NOTE
13. RELATED PARTY TRANSACTIONS
(Continued)
Deposits for capital leases
and capital lease obligations
On June 5, 2013, Jiarun entered into a
Lease Agreement to lease its hospital complex from Harbin Baiyi Real Estate Development Co., Ltd, which is owned by Junsheng Zhang,
a related party. As of December 31, 2018, the Company had deposits for capital leases and capital lease obligations of $436,199
and $12,817,373 respectively. As of December 31, 2017, the Company had deposits for capital leases and capital lease obligations
of $461,014 and $14,632,836 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:
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
1,992,970
|
|
|
$
|
4,646,890
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average number of shares outstanding
|
|
|
14,948,397
|
|
|
|
14,311,932
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.1333
|
|
|
$
|
0.3247
|
|
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 of this type as of December 31, 2018 and 2017.
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 of this type as of December 31, 2018 and 2017.
Loss contingencies considered to be remote
by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
In August 2017 JRSS leased office space
under non-cancellable operating lease agreements. Under terms of the lease agreement, from August 2017, JRSS is committed to lease
expense payments of approximately $36,881 per year for 5 years. This office is used for a 2
nd
outpatient facility.
JRSIS HEALTH CARE CORPORATION
notes to consolidated
financial statements
(AMOUNTS IN USD)
NOTE
15. CONTINGENCIES AND COMMITMENT
(Continued)
In December 2017 JRSS leased office space
under non-cancellable operating lease agreements. Under terms of the lease agreement, from December 2017, JRSS is committed to
lease expense payments of approximately $68,128 per year for 5 years. This office is used for the operations of the 1
st
Branch
Company.
Future annual minimum lease payments, for
non-cancellable operating leases are as follows:
Year ending December 31
|
|
Amount $
|
|
2019
|
|
|
123,105
|
|
2020
|
|
|
129,284
|
|
2021
|
|
|
134,579
|
|
2022
|
|
|
105,441
|
|
|
|
|
492,409
|
|
The company has paid rentals and lease
expense of $109,326 and $26,636 for the years ended December 31, 2018 and 2017, respectively
NOTE 16. COMMON STOCK
During 2018 the Company issued 140,000 shares
of restricted common stock in exchange for US$140,000. The sale was made pursuant to SEC Regulation S to eight non-US persons during
2018, and accordingly was exempt from registration.
NOTE 17.
SUBSEQUENT
EVENTS
The Management of the Company determined
that there were no reportable subsequent events to be disclosed.