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. 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
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 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,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
(USD to RMB/USD to HKD)
|
|
|
(USD to RMB/USD to HKD)
|
|
Assets and liabilities
|
|
period end exchange rate
|
|
|
6.5326 / 7.7527
|
|
|
|
6.9680 / 7.7876
|
|
Revenue and expenses
|
|
period average
|
|
|
6.6020 / 7.7561
|
|
|
|
6.9088 / 7.8351
|
|
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, 2020 and 2019, no customer accounted for more than 10% of net
revenue. As of December 31, 2020 and 2019, three and three 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.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
H. Inventories
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 recorded 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
|
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.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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).
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
December 31,
|
|
|
Fair Value Measurement at
December 31, 2020
|
|
|
|
2020
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Convertible Note
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Warrant liability
|
|
$
|
1,149
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,149
|
|
A summary of changes in Warrant liability for the
period ended December 31, 2020 was as follows:
Balance at January 1, 2020
|
|
$
|
110,840
|
|
Change in fair value of warrant liability
|
|
|
139,467
|
|
Exercise in January, 2020
|
|
|
(249,158
|
)
|
Balance at December 31, 2020
|
|
|
1,149
|
|
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
The fair value of the outstanding warrants was
calculated using the Binomial Option Pricing Model with the following assumptions at inception and on subsequent valuation date:
|
|
September 30,
2020
|
|
Warrants
|
|
Auctus
|
|
Market price per share (USD/share)
|
|
$
|
0.12
|
|
Exercise price (USD/share)
|
|
|
0.60
|
|
Risk free rate
|
|
|
0.257
|
%
|
Dividend yield
|
|
|
-
|
|
Expected term/Contractual life (years)
|
|
|
1.58
|
|
Expected volatility
|
|
|
79.14
|
%
|
A summary of changes in Convertible Note for the
year ended December 31, 2020 was as follows:
Balance at January 1, 2020
|
|
$
|
774,567
|
|
Change in fair value of convertible notes
|
|
|
(322,363
|
)
|
Paid in February, 2020
|
|
|
(202,204
|
)
|
Paid in April, 2020
|
|
|
(250,000
|
)
|
Balance at December 31, 2020
|
|
|
-
|
|
In May and July of 2019, the Company issued three
convertible promissory notes, one each to Labrys Fund, LP, Auctus Fund, LLC and Harbor Gates Capital, LLC. On October 31, 2019, the Company
repaid the convertible promissory note issued to Labrys Fund, LP, On February 11, 2020, the Company repaid the convertible promissory
note issued to Harbor Gates Capital, LLC. On April 30, 2020, the Company fully satisfied the Promissory Note that it issued to Auctus
Fund, LLC in July 2019. Therefore, the Labrys’, Harbor Gates’ and Auctus’ Convertible Notes have no fair value as of
each subsequent reporting date.
|
1.
|
The
fair value of the outstanding Convertible Note issued to Harbor Gates was calculated using Binomial Option Pricing Model
|
|
2.
|
The
fair value of the outstanding Convertible Note issued to Auctus was calculated using Monte Carlo simulation “MC simulation”
method.
|
Cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are reflected in the accompanying consolidated financial statements at amounts that approximate
fair value because of the short-term nature of these instruments. The fair value of the Company’s capital lease obligations also
approximates carrying value as they bear interest at current market rates.
M. Segment and geographic information
The Company is operating in one segment in accordance
with the accounting guidance FASB ASC topic 280, “Segment Reporting”. The company’s revenues are from customers in People’s
Republic of China (“PRC”). All assets of the company are located in PRC.
N. Revenue recognition
The Company recognizes revenue when the amount
of revenue can be reliably measured, it is probable that economic benefits will flow to the entity, and specific criteria have been met
for each of the Company’s activities as described below.
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.
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.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
|
|
●
|
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.
|
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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.
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
|
|
|
|
2020
|
|
|
2019
|
|
Accounts receivable
|
|
$
|
7,691,679
|
|
|
$
|
7,308,224
|
|
Less: allowance for doubtful debts
|
|
|
3,300,027
|
|
|
|
2,724,389
|
|
|
|
$
|
4,391,652
|
|
|
$
|
4,583,835
|
|
The Company recorded $389,940 and $2,700,035 in bad
debts in other income(expense) during the years ended December 31, 2020 and 2019. These increases in our allowance for doubtful debts
represent unreimbursed excess insurance claims submitted by the Company to the Harbin Medical Insurance Management Center more than two
years ago.
NOTE
4. INVENTORIES
At December 31, 2020 and 2019, inventories consist
of the following:
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
Western medicine
|
|
$
|
720,622
|
|
|
$
|
554,414
|
|
Chinese herbal medicine
|
|
|
32,840
|
|
|
|
37,621
|
|
Medical material
|
|
|
697,535
|
|
|
|
475,916
|
|
Other material
|
|
|
7,220
|
|
|
|
4,790
|
|
|
|
$
|
1,458,217
|
|
|
$
|
1,072,741
|
|
NOTE
5. PREPAYMENT
At December 31, 2020 and 2019, prepayment consists
of the following:
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
Deposits on medical equipment
|
|
$
|
173,438
|
|
|
$
|
744,569
|
|
Heating fees
|
|
|
78,356
|
|
|
|
175,736
|
|
Others
|
|
|
374,128
|
|
|
|
381,046
|
|
|
|
$
|
625,922
|
|
|
$
|
1,301,351
|
|
NOTE
6. PROPERTY AND EQUIPMENT
At December 31, 2020 and 2019, property and equipment,
at cost, consist of:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Transportation equipment
|
|
$
|
1,263,860
|
|
|
$
|
1,184,896
|
|
Medical equipment
|
|
|
24,234,134
|
|
|
|
17,291,984
|
|
Electrical equipment
|
|
|
2,300,036
|
|
|
|
1,842,552
|
|
Office equipment and other
|
|
|
1,354,139
|
|
|
|
964,669
|
|
Buildings
|
|
|
28,139,226
|
|
|
|
23,700,288
|
|
Software
|
|
|
198,063
|
|
|
|
185,043
|
|
Total fixed assets at cost
|
|
|
57,489,458
|
|
|
|
45,169,432
|
|
Accumulated depreciation
|
|
|
(10,213,582
|
)
|
|
|
(7,021,013
|
)
|
Total fixed assets, net
|
|
$
|
47,275,876
|
|
|
$
|
38,148,419
|
|
Reclass to Right-of-use assets
|
|
|
(15,820,452
|
)
|
|
|
(15,309,797
|
)
|
Depreciation expense was $2,696,065 and $2,212,022
for the years ended December 31, 2020 and 2019, respectively.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
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 portions of the prepaid consulting
and decoration fees were recorded as deferred expenses of $452,205 and $257,203 as of December 31, 2020 and 2019. The long-term deferred
expenses were $2,510,460 and $2,978,936 as of December 31, 2020 and 2019.
The Company recorded consulting fees of $36,546
and $65,306, and decoration fees of $447,457 and $224,485 for the year ended December 31, 2020 and 2019, respectively.
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 with proper accounting principles, this payment was booked as a 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 by 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 $1,004,593) 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 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 $2,609,047.
On November 20, 2020 Jiarun entered into a sale
and leaseback agreement for the sale-leaseback of properties from Haier Finance Leasing Company Limited, with a collective net value of
$2,272,053.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE 8. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES
(Continued)
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. In October 2019 JRSS updated
this operating lease agreements to expand the operating area for the remain lease period, under terms of the new lease agreement, from
October 2019, JRSS is committed to lease expense payments of approximately $186,308 per year.
The Company’s adoption of the new lease
standard included new processes and controls regarding asset financing transactions, financial reporting and a system-related implementation
required for the new lease standard. The Company’s accounting for finance leases (formerly referred to as capital leases prior to
the adoption of the new lease standard) remained substantially unchanged. The impact of the adoption of the new lease standard included
the recognition of right-of-use (“ROU”) assets and lease liabilities. The adoption of the new lease standard resulted in additional
net lease assets and net lease liabilities of approximately $16.19 million and $16.91 million, respectively, as of December
31, 2020.
As of December 31, 2020, the Company has
the following amounts recorded on the Company’s unaudited condensed consolidated balance sheet:
|
|
December 31,
2020
|
|
Assets
|
|
|
|
Operating lease assets
|
|
$
|
366,828
|
|
Finance lease assets
|
|
|
15,820,452
|
|
Total
|
|
$
|
16,187,280
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating lease liabilities
|
|
|
209,689
|
|
Finance lease liabilities
|
|
|
2,254,977
|
|
Long-term
|
|
|
|
|
Operating lease liabilities
|
|
|
157,139
|
|
Finance lease liabilities
|
|
|
14,287,507
|
|
Total
|
|
$
|
16,909,312
|
|
The future minimum lease payments for annual capital
lease obligation as of December 31, 2020 are as follows:
Year
|
|
Amounts
|
|
2021
|
|
$
|
2,180,328
|
|
2022
|
|
|
1,231,961
|
|
2023
|
|
|
1,038,746
|
|
Thereafter
|
|
|
12,458,277
|
|
Total
|
|
$
|
16,909,312
|
|
The Company recorded finance interest lease fees
of $1,071,804 and $1,166,100 for the year ended December 31, 2020 and 2019.
Future annual minimum lease payments for non-cancellable
operating leases are as follows:
Year
ending December 31
|
|
Amount $
|
|
2021
|
|
|
209,689
|
|
2022
|
|
|
157,139
|
|
2023
|
|
|
-
|
|
|
|
|
366,828
|
|
The Company recorded operating lease expense of
$223,949 and $124,763 for the years ended December 31, 2020 and 2019.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
At December 31, 2020 right-of-use assets consist
of:
|
|
December 31, 2020
|
|
|
|
Operating
leases
|
|
|
Finance
leases
|
|
|
Total
|
|
Lease assets
|
|
$
|
559,607
|
|
|
$
|
16,936,882
|
|
|
$
|
17,496,489
|
|
Accumulated amortization
|
|
|
(192,779
|
)
|
|
|
(1,116,430
|
)
|
|
|
(1,309,209
|
)
|
Total right-of-use assets, net
|
|
$
|
366,828
|
|
|
$
|
15,820,452
|
|
|
$
|
16,187,280
|
|
The Company recorded finance lease amortization
expense of $1,116,430 and $1,080,463 in depreciation and amortization for the year ended December 31, 2020 and 2019, respectively. For
the year ended December 31, 2020, the amount of depreciation and amortization was $2,696,065, which included general property and equipment
depreciation of $1,579,635.
The Company recorded operating lease expense of
$223,949 and $124,763 for the years ended December 31, 2020 and 2019, including operating lease amortization expense of $192,779 and $101,199
for the years ended December 31, 2020 and 2019, respectively.
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company has adopted the provisions of ASC
subtopic 825-10, Financial Instruments (“ASC 825-10”). ASC 825-10 defines fair value as the price that would be received from
selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining
the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal
or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset
or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Debt derivatives – In May and July of 2019,
the Company issued three convertible promissory notes to Labrys Fund, LP. Auctus Fund, LLC and Harbor Gates Capital, LLC The Notes were
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 Notes. 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.
During 2019 and 2020, the Company redeemed the
Notes issued to Labrys Fund, LP, Harbor Gates Capital, LLC and Auctus Fund, LLC.
Warrant liabilities – The Company issued
two common stock purchase warrants (the “warrants”) to purchase 28,200 shares and 21,000 shares of the registrant’s
common stock to Labrys Fund, LP and Auctus Fund, LLC. These warrants contain certain reset provisions. The accounting treatment of derivative
financial instruments requires that the Company record fair value of the derivatives as of the inception date (issuance date) and to record
changes in fair value as of each subsequent reporting date.
In January 2020 the Company issued 38,322 shares
of common stock to Labrys Fund, LP in full satisfaction of its warrant. At December 31, 2020, the Company marked to market the fair value
of the Auctus Fund warrant liability and determined a fair value of $1,149. The Company recorded a loss from issuance expense and change
in fair value of warrant liability of $139,467 and $110,840 for the year ended December 31, 2020. 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 79.14%, (3) weighted average risk-free interest rate of 0.257%, (4) expected life of 1.58 years, and (5) the quoted market price of
the Company’s common stock at each valuation date.
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 held a
70% interest in Jiarun as of December 31, 2020 and 2019.
As of December 31, 2020 and 2019, NCI in the consolidated
balance sheet was $9,802,677 and $8,168,613, respectively. For the year ended December 31, 2020, the comprehensive income attributable
to shareholders’ equity and NCI is $3,804,952 and $1,634,064, respectively. For the year ended December 31, 2019, the comprehensive
income attributable to shareholders’ equity and NCIs is $634,297 and $273,237, respectively.
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
NOTE
11. REVENUE
The Company’s revenue consists of medicine
sales and patient care revenue.
|
|
For the Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Medicine:
|
|
|
|
|
|
|
Western medicine
|
|
$
|
7,239,395
|
|
|
$
|
8,331,289
|
|
Chinese medicine
|
|
|
864,533
|
|
|
|
1,398,311
|
|
Herbal medicine
|
|
|
1,296,185
|
|
|
|
1,048,639
|
|
Total medicine
|
|
$
|
9,400,113
|
|
|
$
|
10,778,239
|
|
|
|
|
|
|
|
|
|
|
Patient services:
|
|
|
|
|
|
|
|
|
Medical consulting
|
|
$
|
12,619,561
|
|
|
$
|
9,636,511
|
|
Medical treatment
|
|
|
12,287,228
|
|
|
|
9,941,595
|
|
Others
|
|
|
1,399,295
|
|
|
|
1,107,088
|
|
Total patient services
|
|
$
|
26,306,084
|
|
|
$
|
20,685,194
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,706,197
|
|
|
$
|
31,463,433
|
|
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 2020:
|
|
Amounts
|
|
Loss before income tax
|
|
$
|
(620,341
|
)
|
Tax rate at 21%
|
|
|
(130,272
|
)
|
Disallowed tax losses
|
|
|
130,272
|
|
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.
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 2020:
|
|
Amounts
|
|
Loss before income tax
|
|
$
|
(3,881
|
)
|
Tax rate at 16.5%
|
|
|
(640
|
)
|
Disallowed tax losses
|
|
|
640
|
|
Income tax expense
|
|
$
|
-
|
|
JRSIS HEALTH CARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN USD)
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.
The following table shows the components of the allowance for PRC income tax recorded for 2020:
|
|
Amounts
|
|
Income tax expense
|
|
$
|
-
|
|
Income tax: 2020 deferred
|
|
|
1,369,615
|
|
Tax expense from continuing operation
|
|
$
|
1,369,615
|
|
Reconciliation:
|
|
Amounts
|
|
Income tax at statutory rate
|
|
$
|
1,369,615
|
|
Tax expense from continuing operation
|
|
$
|
1,369,615
|
|
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 purchase of eligible equipment on the condition that the unit price of each item of equipment or machinery
is individually less than RMB 5 million. Depreciation for tax purposes is not required. Basis differences between tax and GAAP for depreciation
of property and equipment exist because in 2020 the Company purchased Eligible Equipment for RMB 42.13 million, with $1,369,615 deferred
income tax, creating differences between the tax treatment mandated by the Chinese government and GAAP tax treatment.
NOTE
13. RELATED PARTY TRANSACTIONS
The following is the list of the related parties
with which the Company had transactions in the past two years:
(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
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
|
|
2020
|
|
|
2019
|
|
Harbin Jiarun Pharmacy Co., Ltd
|
|
$
|
33,624
|
|
|
$
|
-
|
|
Heilongjiang Province Runjia Medical Equipment Co., Ltd
|
|
|
1,761
|
|
|
|
4,306
|
|
Jiarun Super Market Co., Ltd.
|
|
|
282
|
|
|
|
-
|
|
Harbin Baiyi Real Estate Development Co., Ltd,
|
|
|
114,584
|
|
|
|
1,043,131
|
|
Junsheng Zhang
|
|
|
12,670
|
|
|
|
747,103
|
|
|
|
$
|
162,921
|
|
|
$
|
1,794,540
|
|
Amount due to Harbin Jiarun Pharmacy Co.,
Ltd., Jiarun Super Market Co., Ltd.. And Heilongjiang Province Runjia Medical Equipment Company Limited were mainly the balance due for
purchase of medicine and medical material from these four companies.
Amount due to Baiyi mainly represented the debt for
the inpatient and outpatient building extension decoration and beauty center decoration.
Amounts due to Junsheng Zhang represented amounts
paid by Mr. Zhang for the daily operation of the company.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
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
|
|
2020
|
|
|
2019
|
|
Harbin Jiarun Pharmacy Co., Ltd
|
|
$
|
33,624
|
|
|
$
|
86,304
|
|
Heilongjiang Province Runjia Medical Equipment Co., Ltd
|
|
|
-
|
|
|
|
7,377
|
|
Jiarun Super Market Co., Ltd.
|
|
|
282
|
|
|
|
-
|
|
|
|
$
|
33,906
|
|
|
$
|
93,681
|
|
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, 2020, the Company had deposits for capital leases and capital lease obligations of $459,232 and $12,831,348, respectively.
As of December 31, 2019, the Company had deposits for capital leases and capital lease obligations of $430,540 and $12,253,578, 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
|
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
2,679,095
|
|
|
$
|
888,061
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted-average number of shares outstanding
|
|
|
18,060,070
|
|
|
|
16,757,890
|
|
Diluted weighted-average number of shares outstanding
|
|
|
18,270,070
|
|
|
|
16,783,362
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.1483
|
|
|
$
|
0.0530
|
|
Diluted
|
|
|
0.1466
|
|
|
|
0.0529
|
|
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, 2020 and 2019.
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, 2020 and 2019.
Loss contingencies considered to be remote by
management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE 16. COMMON STOCK
During the first quarter of 2020, the Company
issued 38,332 shares to Labrys Fund, LP in full satisfaction of a common stock purchase warrant that the Company had sold to Labrys Fund,
LP during 2019, On February 27, 2020, Auctus Fund, LLC converted into 2,000 shares of the Company’s common stock with $2,400 in
accrued interest and fees arising under the Promissory Note it had purchase from the Company in July 2019. On August 4, 2020, the Company
issued 40,000 shares to StockVest for advertising, promotional and marketing services. On October 27, 2020, the Company issued 40,000
shares to StockVest for advertising, promotional and marketing services. On November 5, 2020, the Company issued 150,000 shares to Auctus
Fund, LLC for services.
These issuances were made pursuant to SEC Regulation
S to eight non-US persons during 2020, and accordingly were exempt from registration under the Securities Act of 1933.
NOTE 17. GOING CONCERN
As reflected in the accompanying consolidated
financial statements, the Company had a $4,109,557 negative retained earnings or accumulated deficit as of December 31, 2020; in addition,
the Company’s total current liabilities exceeded its current assets by $3,877,411. These factors raised substantial doubt about
its ability to continue as a going concern. In view of the matters described above, recoverability of a major portion of the recorded
asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent
upon the Company’s ability to raise additional capital, obtain financing and succeed in its future operations. The financial statements
do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
To continue as a going concern, the Company is
actively pursuing additional funding and strategic partners to enable it to implement its business plan. In addition, the Company is also
working to devote more efforts to improve its operation and generate more profits. Management believes that these actions will allow the
Company to continue its operations through the next fiscal year.
NOTE 18. SUBSEQUENT
EVENTS
The Management of the Company determined that
there were no material reportable subsequent events to be required to disclose.