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.
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 six months ended
June 30,
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
(USD to RMB/USD to HKD)
|
|
(USD to RMB/USD to HKD)
|
|
Assets and liabilities
|
period end exchange rate
|
|
|
6.8656 / 7.8119
|
|
|
6.6198 / 7.8463
|
|
Revenue and expenses
|
period average
|
|
|
6.7839 / 7.8426
|
|
|
6.3681 / 7.8378
|
|
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 six months ended June 30, 2019 and 2018, no customer
accounted for more than 10% of net revenue. As of June 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.
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).
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
June 30,
2019
|
|
|
Fair Value Measurement at
June 30, 2019
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Convertible Note
|
|
$
|
557,189
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
557,189
|
|
Warrant liability
|
|
$
|
76,645
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
76,645
|
|
A summary of changes in Warrant liability for the period ended
June 30, 2019 was as follows:
Balance at January 1, 2019
|
|
$
|
-
|
|
Issuance of warrants on May 30, 2019
|
|
|
77,995
|
|
Change in fair value of warrant liability
|
|
|
(1,350
|
)
|
Balance at June 30, 2019
|
|
|
76,645
|
|
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:
Warrants
|
|
June
30,
2019
|
|
Market price per share (USD/share)
|
|
$
|
7.50
|
|
Exercise price (USD/share)
|
|
|
10.00
|
|
Risk free rate
|
|
|
1.737
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected term/Contractual life (years)
|
|
|
4.92
|
|
Expected volatility
|
|
|
50.08
|
%
|
A summary of changes in Convertible Note for the period ended
June 30, 2019 was as follows:
Balance at January 1, 2019
|
|
$
|
-
|
|
Issuance of Convertible Note on May 30, 2019
|
|
|
282,000
|
|
Fair value loss on issuance of convertible notes
|
|
|
288,889
|
|
Change in fair value of convertible notes
|
|
|
(13,700
|
)
|
Balance at June 30, 2019
|
|
|
557,189
|
|
The fair value of the outstanding Convertible Note was calculated
using the Binomial Option Pricing Model with the following assumptions at inception and on subsequent valuation date:
Convertible
Note
|
|
June
30,
2019
|
|
Market price per share (USD/share)
|
|
$
|
7.50
|
|
Exercise price (USD/share)
|
|
|
60% on market price
|
|
Risk free rate
|
|
|
2.02
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected term/Contractual life (years)
|
|
|
0.42
|
|
Expected volatility
|
|
|
48
|
%
|
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.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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.
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.
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
|
|
June 30
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Accounts receivable
|
|
$
|
8,358,843
|
|
|
$
|
8,237,369
|
|
Less: allowance for doubtful debts
|
|
|
24,397
|
|
|
|
24,354
|
|
|
|
$
|
8,334,446
|
|
|
$
|
8,213,015
|
|
The Company experienced nil bad debts during
six months ended June 30, 2019 and 2018.
NOTE 4. Inventories
At June 30, 2019 and December 31, 2018, inventories
consist of the following:
|
|
June 30
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Western pharmaceuticals
|
|
$
|
496,803
|
|
|
$
|
809,499
|
|
Chinese herbal medicine
|
|
|
34,733
|
|
|
|
29,796
|
|
Medical material
|
|
|
357,697
|
|
|
|
321,477
|
|
Other material
|
|
|
3,525
|
|
|
|
3,073
|
|
|
|
$
|
892,758
|
|
|
$
|
1,163,845
|
|
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE 5. Prepayment
At June 30, 2019 and December 31, 2018 prepayment
consists of the following:
|
|
June 30
|
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Deposits on medical equipment
|
|
$
|
1,407,703
|
|
|
$
|
1,297,411
|
|
Heating fees
|
|
|
-
|
|
|
|
135,035
|
|
Others
|
|
|
465,944
|
|
|
|
393,768
|
|
|
|
$
|
1,873,647
|
|
|
$
|
1,826,214
|
|
NOTE 6. Property and Equipment
At June 30, 2019 and December 31, 2018, property
and equipment, at cost, consist of:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Transportation equipment
|
|
$
|
1,174,428
|
|
|
$
|
1,000,303
|
|
Medical equipment
|
|
|
16,585,940
|
|
|
|
15,001,892
|
|
Electrical equipment
|
|
|
1,682,862
|
|
|
|
1,649,229
|
|
Office equipment and others
|
|
|
926,866
|
|
|
|
813,635
|
|
Buildings
|
|
|
24,053,766
|
|
|
|
24,011,797
|
|
Software
|
|
|
171,999
|
|
|
|
138,366
|
|
Total fixed assets at cost
|
|
|
44,595,861
|
|
|
|
42,615,222
|
|
Accumulated depreciation
|
|
|
(5,979,379
|
)
|
|
|
(4,891,253
|
)
|
Reclass to Right-of-use assets
|
|
|
(17,068,227
|
)
|
|
|
-
|
|
Total fixed assets, net
|
|
$
|
21,548,255
|
|
|
$
|
37,723,969
|
|
The Company recorded depreciation expense
of $554,355 and $400,331, $1,092,579 and $782,180 for the three and six months ended June 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 $291,613 and $291,104 as of June 30, 2019 and December 31,
2018. The long-term deferred expenses were $1,084,521 and $1,238,455 as of June 30, 2019 and December 31, 2018.
The Company recorded consulting fee of
$16,534 and $17,685 for the three months ended June 30, 2019 and 2018, and decoration fees of $40,117 and $33,144 for
the three months ended June 30, 2019 and 2018, respectively.
The Company recorded consulting fee
of $33,254 and $35,425 for the six months ended June 30, 2019 and 2018, and decoration fees of $114,308 and $33,144 for
the six months ended June 30, 2019 and 2018, respectively.
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 $2,963,067.
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 $17.5 million and $17.3
million, respectively, as of June 30, 2019.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE 8. Right-of-Use Assets and Lease Liabilities
(Continued)
As of June 30, 2019, the Company has
the following amounts recorded on the Company’s unaudited condensed consolidated balance sheet:
|
|
June 30,
2019
|
|
Assets
|
|
|
|
|
Operating lease assets
|
|
$
|
388,645
|
|
Finance lease assets
|
|
|
17,068,227
|
|
Total
|
|
$
|
17,456,872
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating lease liabilities
|
|
|
107,190
|
|
Finance lease liabilities
|
|
|
2,747,424
|
|
Long-term
|
|
|
|
|
Operating lease liabilities
|
|
|
281,455
|
|
Finance lease liabilities
|
|
|
14,185,661
|
|
Total
|
|
$
|
17,321,730
|
|
The future minimum lease payments
for annual capital lease obligation as of June 30, 2019 are as follows:
Year
|
|
Amounts
|
|
2019
|
|
$
|
1,678,359
|
|
2020
|
|
|
2,276,516
|
|
2021
|
|
|
1,484,796
|
|
Thereafter
|
|
|
11,493,414
|
|
Total
|
|
$
|
16,933,085
|
|
The Company recorded finance interest lease
fees of $319,073 and $312,321 for the three months ended June 30, 2019 and 2018, and recorded finance interest lease fees of $580,994
and $634,805 for the six months ended June 30, 2019 and 2018, respectively.
Future annual minimum lease payments, for
non-cancellable operating leases are as follows:
Year ending December 31
|
|
Amount $
|
|
2019
|
|
|
52,005
|
|
2020
|
|
|
113,076
|
|
2021
|
|
|
123,858
|
|
2022
|
|
|
99,706
|
|
|
|
|
388,645
|
|
The company has recorded operating lease
expense of $28,589 and $26,654 for three months ended June 30, 2019 and 2018, and recorded operating lease expense of $56,752 and
$53,391 for six months ended June 30, 2019 and 2018 respectively
At June 30, 2019 right-of-use assets, consist
of:
|
|
June 30, 2019
(Unaudited)
|
|
|
|
Operating lease
|
|
|
Finance lease
|
|
|
Total
|
|
Lease assets
|
|
$
|
439,075
|
|
|
$
|
17,606,451
|
|
|
$
|
18,045,526
|
|
Accumulated amortization
|
|
|
(50,430
|
)
|
|
|
(538,224
|
)
|
|
|
(588,654
|
)
|
Total right-of-use assets, net
|
|
$
|
388,645
|
|
|
$
|
17,068,227
|
|
|
$
|
17,456,872
|
|
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 $538,224 and $nil in depreciation and amortization for the six months ended June 30, 2019 and 2018, respectively. For
the six months ended June 30, 2019, the amount of depreciation and amortization was $1,092,579, also included general property
and equipment depreciation of $554,355.
The Company recorded operating lease expense
of $56,752 and $nil for the six months ended June 30, 2019 and 2018, including operating lease amortization expense of $50,430
and $nil for the six months ended June 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 2019, the Company issued a convertible promissory note to Labrys Fund, LP. The Note is
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 June 30, 2019, the Company marked to market the fair value of the debt derivatives and determined a fair value
of $557,189. The Company recorded a loss from change in fair value of debt derivatives of $275,189 for the six months ended June
30, 2019. The fair value of the embedded derivatives was determined using Binomial Option Pricing Model based on the following
assumptions: (1) dividend yield of 0%, (2) expected volatility of 48%, (3) weighted average risk-free interest rate of 2.02% (4)
expected life of 0.42 year, and (5) the quoted market price of the Company’s common stock at each valuation date.
Warrant liabilities – The
Company issued a common stock purchase warrant (the “warrant”) to purchase 28,200 shares of the registrant’s
common stock to warrants Labrys Fund, LP. 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 June 30, 2019, the Company marked to
market the fair value of the warrant liability and determined a fair value of $76,645. The Company recorded a loss from change
in fair value of warrant liability of $76,645 for the six months ended June 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 50.08%, (3) weighted average risk-free interest rate of 1.737% (4) expected life of 4.92 years, and (5) the quoted market price
of the Company’s common stock at each valuation date.
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 June 30, 2019 and December 31, 2018.
As of June 30, 2019 and December 31, 2018,
NCI on the consolidated balance sheet was $8,629,237 and $7,895,376, respectively, representing the 30% of Jiarun that is owned
by Junsheng Zhang.
For the three months ended June 30, 2019,
the comprehensive income attributable to shareholders’ equity and NCI is $274,282 and $274,291 respectively. For the six
months ended June 30, 2019, the comprehensive income attributable to shareholders’ equity and NCI is $1,297,027 and $733,861,
respectively.
For the three months ended June 30, 2018,
the comprehensive income attributable to shareholders’ equity and NCI is $478,191 and $269,753 respectively. For the six
months ended June 30, 2018, the comprehensive income attributable to shareholders’ equity and NCI is $2,482,097 and $1,127,474,
respectively.
NOTE 11. Revenue
The Company’s revenue consists of pharmaceuticals
sales and patient care revenue.
|
|
Three Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Pharmaceuticals:
|
|
|
|
|
|
|
Western pharmaceuticals
|
|
$
|
2,028,354
|
|
|
$
|
2,143,379
|
|
Chinese medicine
|
|
|
328,280
|
|
|
|
425,793
|
|
Herbal medicine
|
|
|
231,708
|
|
|
|
211,284
|
|
Total pharmaceuticals
|
|
$
|
2,588,342
|
|
|
$
|
2,780,456
|
|
|
|
|
|
|
|
|
|
|
Patient services:
|
|
|
|
|
|
|
|
|
Medical consulting
|
|
$
|
2,430,745
|
|
|
$
|
2,011,281
|
|
Medical treatment
|
|
|
2,280,302
|
|
|
|
2,234,658
|
|
Others
|
|
|
272,281
|
|
|
|
(1,825
|
)
|
Total patient services
|
|
$
|
4,983,328
|
|
|
$
|
4,244,114
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,571,670
|
|
|
$
|
7,024,570
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Pharmaceuticals:
|
|
|
|
|
|
|
Western pharmaceuticals
|
|
$
|
4,239,284
|
|
|
$
|
4,302,818
|
|
Chinese medicine
|
|
|
692,990
|
|
|
|
859,010
|
|
Herbal medicine
|
|
|
470,616
|
|
|
|
326,674
|
|
Total pharmaceuticals
|
|
$
|
5,402,890
|
|
|
$
|
5,488,502
|
|
|
|
|
|
|
|
|
|
|
Patient services:
|
|
|
|
|
|
|
|
|
Medical consulting
|
|
$
|
4,464,609
|
|
|
$
|
4,102,746
|
|
Medical treatment
|
|
|
4,862,731
|
|
|
|
4,216,113
|
|
Others
|
|
|
413,543
|
|
|
|
17,286
|
|
Total patient services
|
|
$
|
9,740,883
|
|
|
$
|
8,336,145
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,143,773
|
|
|
$
|
13,824,647
|
|
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 12.87 million, with $415,834 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 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
|
|
June 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:
|
|
June 30,
|
|
|
December 31,
|
|
Name of related parties
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Harbin Jiarun Pharmacy Co., Ltd
|
|
$
|
11,114
|
|
|
$
|
1,211
|
|
Heilongjiang Province Runjia Medical Equipment Co., Ltd
|
|
|
6,773
|
|
|
|
1,614
|
|
Jiarun Super Market Co., Ltd.
|
|
|
39,570
|
|
|
|
39,042
|
|
Harbin Qi-run Pharmacy Co., Ltd
|
|
|
16,856
|
|
|
|
17,280
|
|
Junsheng Zhang
|
|
|
364,134
|
|
|
|
50,000
|
|
|
|
$
|
438,447
|
|
|
$
|
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.
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 six months ended June 30,
|
|
Name of related parties
|
|
2019
|
|
|
2018
|
|
Harbin Jiarun Pharmacy Co., Ltd
|
|
$
|
55,337
|
|
|
$
|
125,824
|
|
Heilongjiang Province Runjia Medical Equipment Co., Ltd
|
|
|
7,577
|
|
|
|
6,197
|
|
Harbin Qi-run pharmacy Co., Ltd
|
|
|
-
|
|
|
|
13,326
|
|
|
|
$
|
62,914
|
|
|
$
|
145,347
|
|
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 June 30, 2019, the Company has balance of deposits for capital leases and capital lease obligations
of $436,961 and $12,170,609 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:
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
1,323,330
|
|
|
$
|
2,849,368
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average number of shares outstanding
|
|
|
15,530,972
|
|
|
|
14,921,354
|
|
Diluted weighted-average number of shares outstanding
|
|
|
15,535,829
|
|
|
|
14,921,354
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.0852
|
|
|
$
|
0.1910
|
|
Diluted
|
|
|
0.0852
|
|
|
|
0.1910
|
|
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 June 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 June 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 July 28, 2019, Jiarun’s beauty
center started to operate. The Management of the Company determined that there were no other reportable subsequent events to
be disclosed.