JRSIS HEALTH CARE CORPORATION Cautionary Statement Regarding Forward Looking Statements
The discussion contained in this Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E ofthe United States Securities Exchange Act of 1934, as amended. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases like "anticipate," "estimate," "plans," "projects," "continuing," "ongoing," "target," "expects," "management believes," "we believe," "we intend," "we may," "we will," "we should," "we seek," "we plan," the negative of those terms, and similar words or phrases. We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the industry in which we operate as of the date of this Form 10-Q. These forward-looking statements are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. The "Risk Factors" section in our Annual Report on Form 10-K describes factors, among others, that could contribute to or cause these differences. Actual results may vary materially from those anticipated, estimated, projected or expected should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect. Because the factors discussed in the Risk Factors section of our Form 10-K could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this Form 10-Q. The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of such financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate these estimates, including those related to useful lives of real estate assets, bad debts, impairment, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates. The analysis set forth below is provided pursuant to applicableSEC regulations and is not intended to serve as a basis for projections of future events. Overview
Harbin Jiarun Hospital Company Limited ("Jiarun") was established inHarbin in the Province ofHeilongjiang ofthe People's Republic of China ("PRC") by the ownerJunsheng Zhang onFebruary 17, 2006 .
Harbin Jiarun Hospital Co., Ltd Nanjing Road Branch ("
Harbin Jiarun Hospital Co., Ltd Harbin New District Branch ("3rd
Jiarun is a private hospital serving patients on a municipal and county level and providing both Western and Chinese medical practices to the residents ofHarbin . Jiarun specializes in the areas of Pediatrics, Dermatology, ENT,Traditional Chinese Pharmaceuticals (TCM), Ophthalmology, Internal Pharmaceuticals Dentistry, General Surgery, Rehabilitation Science, Gynecology and General Medical Services. 2 OnNovember 20, 2013 ,Junsheng Zhang , the senior officer ofJiarun Hospital , establishedJRSIS Health Care Corporation , aFlorida corporation ("JHCC" or the "Company"). OnFebruary 25, 2013 , the officer ofJiarun Hospital establishedJRSIS Health Care Limited ("JHCL"), a wholly owned subsidiary of the Company, and onSeptember 17, 2012 , the officer ofJiarun Hospital establishedRunteng Medical Group Co., Ltd ("Runteng"), a wholly owned subsidiary of JHCL. Runteng, aHong Kong registered Investment Company, holds a 70% ownership interest inHarbin Jiarun Hospital Company Ltd , aHeilongjiang registered company. OnDecember 20, 2013 , the Company acquired 100% of the issued and outstanding capital stock ofJRSIS Health Care Limited , a privately heldLimited Liability Company registered in theBritish Virgin Islands , for 12,000,000 shares of our common stock. JHCL, through its wholly owned subsidiary,Runteng Medical Group Co., Ltd , holds majority ownership in Jiarun, a company duly incorporated, organized and validly existing under the laws ofChina . As the parent company, JHCC rely on Jiarun to conduct 100% of our businesses and operations. We have two sources of patient revenues: in-patient service revenues and out-patient service revenues. In addition to providing services to our patients, we also sell pharmaceuticals to our patients. Revenues from such sales are included in either our in-patient service revenues or our out-patient service revenues. Our revenues come from individuals as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon local government established charges. Revenue from the sale of pharmaceuticals is recognized when it is both earned and realized. The Company's policy is to recognize the sale of pharmaceuticals when the title to the pharmaceuticals, ownership and risk of loss have transferred to the purchasers, and collection of the sales proceeds is reasonably assured, all of which generally occur when the patient receives the pharmaceuticals. Patient service revenue is recognized when it is both earned and realized. The Company's policy is to recognize patient service revenue when the medical service has been provided to the patient and collection of the revenue is reasonably assured.
Critical Accounting Policies and Management Estimates
In preparing our financial statements we are required to formulate accounting policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for the periods endedSeptember 30, 2021 , there were two estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results, as follows:
? The determination, as set forth in Note 3 to our Financial Statements, that
the
warranted an allowance for doubtful accounts of
was based on our review of statements from Harbin Medical Insurance Management
Center. Generally, the Center sets for each hospital an insurance claim limit,
even though the hospital is not permitted to refuse to receive patients. If
the hospital receives too many patients, it will exceed the claim limit, and
record an excess insurance claim. The Center will pay part of the excess
insurance claim from an insurance regulatory fund that is shared among all
local hospitals that have excess insurance claims, but full reimbursement is
not assured. In accordance with the principle of prudence, the Company made a
determination that any excess insurance claim outstanding for more than two
years without reimbursement should be treated as a doubtful account. As of
without reimbursement was
? The determination to record depreciation of our principal medical property and
equipment over an average useful life of approximately twenty years. (A
quantification of that depreciation is set forth in Note 6 to our Financial
Statements.) The determination was based primarily on our expectation that the
useful life of our hospital facilities would exceed thirty years, based on the
experience of comparable facilities in our location.
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Results of Operations
The following table shows key components of the results of operations during
three months ended
Three Months Ended
September 30, Change
2021 2020 $ %
Revenue:
Pharmaceuticals $ 3,347,069 $ 2,462,951 $ 884,118 36 %
Patient services 8,811,811 7,553,134 1,258,677 17 %
Total revenue 12,158,880 10,016,085 2,142,795 21 %
Operating costs and expenses:
Cost of pharmaceuticals sold 2,744,179 1,798,004
946,175 53 %
Medical consumables 3,296,482 2,852,588 443,894 16 %
Salaries and benefits 3,291,211 2,067,965 1,223,246 59 %
Office supplies 313,518 488,478 (174,960 ) (36 )%
Vehicle expenses 104,965 39,381 65,584 167 %
Utilities expenses 121,400 87,344 34,056 39 %
Rentals and leases 352,600 73,174 279,426 382 %Advertising and promotion expenses 11,183 9,118
2,065 23 %
Interest expense, net 344,521 317,704 26,817 8 %
Warrant expense (5,077 ) (263,953 ) 258,876 (98 )%
Professional fee 11,556 20,791 (9,235 ) (44 )%
Depreciation 837,917 649,726 188,191 29 %Total operating costs and expenses 11,424,455 8,140,320 3,284,135 40 % Earnings from operations before other income and income taxes 734,425 1,875,765 (1,141,340 ) (61 )% Other income (723 ) (5,620 ) 4,897 (87 )% Earnings from operations before income taxes 733,702 1,870,145 (1,136,443 ) (61 )% Income tax 192,207 837,659 (645,452 ) (77 )% Net income 541,495 1,032,486 (490,991 ) (48 )% Less: net income attributable to non-controlling interests 172,987 266,545 (93,558 ) (35 )% Net income attributable to the Company$ 368,508 $ 765,941 $ (397,443 ) (52 )% Comprehensive income: Foreign currency translation adjustment attributable to non-controlling interests 30 298,571 (298,541 ) (100 )% Foreign currency translation adjustment attributable to the Company 7,325 648,903
(641,578 ) (99 )%
Comprehensive income $ 548,850 $ 1,979,960 $ (1,431,110 ) (72 )%
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The following table shows key components of the results of operations during
nine months ended
Nine Months Ended
September 30, Change
2021 2020 $ %
Revenue:
Pharmaceuticals $ 8,308,401 $ 6,054,148 $ 2,254,253 37 %
Patient services 22,917,313 16,966,307 5,951,006 35 %
Total revenue 31,225,714 23,020,455 8,205,259 36 %
Operating costs and expenses:
Cost of pharmaceuticals sold 6,434,461 4,328,675 2,105,786 49 %
Medical consumables 7,138,746 5,589,590 1,549,156 28 %
Salaries and benefits 8,703,710 5,936,083 2,767,627 47 %
Office supplies 890,821 1,048,658 (157,837 ) (15 )%
Vehicle expenses 224,363 167,199 57,164 34 %
Utilities expenses 469,055 392,827 76,228 19 %
Rentals and leases 902,327 159,782 742,545 465 %Advertising and promotion expenses 28,898 9,256
19,642 212 %
Interest expense, net 1,076,691 774,471 302,220 39 %
Convertible notes expense - (322,363 ) 322,363 (100 )%
Warrant expense 1,636 181,136 (179,500 ) (99 )%
Professional fee 31,701 40,385 (8,684 ) (22 )%
Depreciation 2,449,963 1,808,738 641,225 35 %Total operating costs and expenses 28,352,372 20,114,437 8237,935 41 % Earnings from operations before other income and income taxes 2,873,342 2,906,018 (32,676 ) (1 )% Other income (expenses) (37,324 ) (17,026 ) (20,298 ) 119 % Earnings from operations before income taxes 2,836,018 2,888,992 (52,974 ) (2 )% Income tax 775,514 1,138,507 (362,993 ) (32 )% Net income 2,060,504 1,750,485 310,019 18 % Less: net income attributable to non-controlling interests 697,962 537,804 160,158 30 % Net income attributable to the Company$ 1,362,542 $ 1,212,681 $ 149,861 12 % Comprehensive income: Foreign currency translation adjustment attributable to non-controlling interests 118,190 179,112 (60,922 ) (34 )% Foreign currency translation adjustment attributable to the Company 287,271 361,761 (74,490 ) (21 )% Comprehensive income$ 2,465,965 $ 2,291,358 $ 174,607 8 % 5 Revenue Operating revenue for the three and nine months endedSeptember 30, 2021 , which resulted primarily from pharmaceuticals revenue and patient services revenue, was$12,158,880 and$31,225,714 , an increase of 21% and 36% as compared with the operating revenue of$10,016,085 and$23,020,445 for the three and nine months endedSeptember 30, 2020 . Revenue from the sale of pharmaceuticals increased by 37%, while revenue from provision of patient services increased by 35% for the nine months endedSeptember 30, 2021 . The year-to-year increase was primarily a result of the partial alleviation of restrictions imposed by government agencies in 2020 on business operations withinHarbin City in order to control the spread of COVID-19 in 2020. These restrictions limited our ability to perform non-emergency medical services, which caused the number of treated inpatients during the first nine months of 2020 to fall by 35% to 9,874 patients, compared with the 15,292 patients treated atJiarun Hospital in the first nine months of 2019. During the first nine months of 2021, however, restrictions on business operations inHarbin City were reduced, resulting in an increase in patients treated atJiarun Hospital by 14% to 11,300, compared with the 9,874 patients treated atJiarun Hospital in the first nine months of 2020. It is noteworthy thatJiarun Hospital served 3,992 fewer patients in the nine months endedSeptember 30, 2021 than it served during the comparable pre-COVID period: the nine months endedSeptember 30, 2019 . However, revenue from patient services was 53% greater in the first nine months of 2021 than in the first nine months of 2019. The increase in per-patient revenue from 2019 to 2021 reflects upgrades in the variety and quality of services provided byJiarun Hospital , as well as government-approved increases in allowable fee rates. Operating Costs and Expenses
Total operating costs and expenses were$11,424,455 and$28,352,372 for the three and nine months endedSeptember 30, 2021 , an increase of$3,284,135 or 40% as compared to$8,140,320 for the third quarter of 2020, and an increase of$8,237,935 or 41% as compared to$20,114,437 for the first nine months of 2020. The 40% increase in operating expenses for the three months endedSeptember 30, 2021 exceeded the 21% increase in revenue in that quarter, with the result that pre-tax operating income decreased by 61% for the quarter. However, since revenue increased by 36% nine months - to- nine months, the increase of 41% in operating costs and expenses caused only a 2% reduction in the profitability of the Company's operations for the first nine months of 2021. The primary reasons that operating costs grew faster than revenue were:
?
the cost of medical consumables. These 46% and 40% increase in expenses
attributable to pharmaceuticals and medical consumables exceeded the 35%
increase in patient service revenue because COVID-related disruptions in
production of pharmaceuticals and medical consumables led to significant price
increases. Medical consumables mainly consist of materials expenses, medical
repair expenses and test reagents. The largest components of the increase were
the increase in materials expenses of $540,521 .
?
in salaries, and
increase in our labor costs exceeded the patient service revenue as we are
still ramping up to full scale operations of our branch hospitals, and have
not yet achieved efficient operations in the branches.
?
of leases for property related to our new 3rd Branch Hospital ?
because we increased the book value of our property and equipment as a result
of additional property and equipment placed in service by
2021, which led to a 35% increase in depreciation during the first nine months
of 2021.
Income Taxes
Corporate Income Tax (CIT) is determined under the Provisional Regulations of
PRC Concerning Income Tax on Enterprises promulgated by the PRC. Income tax is
payable by enterprises at a rate of 25% of their taxable income.
According to the PRC "Notice on Preferential Corporate Income Tax (CIT)
Treatment for Eligible Equipment or Machinery (Cai Shui [2018] No. 54)", a 100%
immediate tax deduction for CIT purposes is allowed for purchases of equipment
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 the first half year of 2021 the Company purchased
Eligible Equipment for RMB 23.8 million , with $673,561 deferred income tax,
creating differences between the tax treatment mandated by the Chinese
government and GAAP tax treatment.
Income from operations and net income
Income from Operations was$2,873,342 for the nine months endedSeptember 30, 2021 , as compared with operating income of$2,906,018 for the nine months endedSeptember 30, 2020 . After deducting other income and expenses as well as the provision for income tax, the Company's net income for the nine months endedSeptember 30, 2021 was$2,060,504 , representing an increase of$310,019 or 18%, from$1,750,485 recorded for the nine months endedSeptember 30, 2020 . The increase occurred, despite lower pre-tax income, because the Company recorded a 32% lower allowance for income tax, despite recording pre-tax income that was only 2% lower than was recorded in the prior year period. 6
Our major net income was produced by Jiarun. Because we own only 70% of the equity interest in Jiarun (the other 30% being owned by our Chairman,Junsheng Zhang ), we reduced our net income for the nine months period endedSeptember 30, 2021 and 2020 by an allocation to the "non-controlling interests" of$697,962 and$537,804 , respectively, before recognizing net income attributable to the Company. After those allocations, our net income attributable to the Company for the nine months endedSeptember 30, 2021 and 2020 was$1,362,542 ($0.074 per share) and$1,212,681 ($0.067 per share), respectively.
Foreign Currency Translation Adjustment.
Our reporting currency is theU.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by thePeople's Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the nine months endedSeptember 30, 2021 and 2020, foreign currency translation adjustments of$405,461 (of which$118,190 was attributable to the non-controlling interest) and$(540,973) (of which$(179,112) was attributable to the non-controlling interest), respectively, have been reported as other comprehensive income (loss) in the consolidated statements of operations and comprehensive income.
Liquidity and Capital Resources
As ofSeptember 30, 2021 , the Company had$527,642 of cash and cash equivalents, a decrease of$317,186 from our cash balance atDecember 31, 2020 . The decrease was primarily caused by our investing activities, particularly the expansion of our facilities, which used$6,444,421 of cash during the first nine months
year of 2021. Our working capital deficit atSeptember 30, 2021 was$5,547,105 , an increase of$1,669,694 from our deficit of$3,877,411 in working capital atDecember 31, 2020 . The deficit increases primarily due to our ongoing use of cash from operations to fund the expansion of our facilities. Our working capital deficit limits our ability to finance expansion. It is noteworthy, however, that our current liabilities include$1,533,565 in amounts due to related parties, all of which is owed to our Chairman,Junsheng Zhang , and$3,305.236 representing the current portion of our lease obligations, most of which is also owed to Chairman Zhang. We believe, therefore, that our liquidity is adequate to continue operations at our current level and fund
a modest expansion program. Although our current resources and cash flows are adequate to pay our current ongoing obligations, we anticipate that our future liquidity requirements will arise from the need to fund our growth and future capital expenditures. The primary sources of funding for such growth requirements are expected to be additional funds raised from the sale of equity and/or debt financing. However, we can provide no assurances that we will be able to obtain additional financing on terms satisfactory to us.
Cash Flows and Capital Resources
Our cash flows for the first nine months of 2021 and 2020 are summarized below:
Nine Months Ended
September 30,
2021 2020
Net cash provided by operating activities 7,378,481 7,507,822
Net cash used in investing activities (6,444,421 ) (6,390,591 )
Net cash used in financing activities (1,260,015 ) (2,304,079 ) Effect of exchange rate fluctuation on cash and cash equivalents 8,770
27,821
Net increase in cash and cash equivalents (317,185 ) (1,159,027 )
Cash and cash equivalents, beginning of period 844,827 1,971,129
Cash and cash equivalents, ending of period $ 527,642 $ 812,102
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Net Cash Provided by Operating Activities
For the nine months endedSeptember 30, 2021 , we had positive cash flow from operating activities of$7,378,481 , an increase of$129,341 from$7,507,822 for the nine months endedSeptember 30, 2020 . In addition to the$2,060,504 in net income during the 2021 period, cash flow from operations was increased by non-cash expenses:$2,449,963 depreciation and$1,076,691 imputed interest expense. The major sources of cash flow from operations, however, were an increase in accounts payable by$3,455,082 and a reduction of our inventory balance by$268,905 . These were partially offset by the$547,667 increase in prepayment,$1,465,861 increase in amount due to related parties; and$2,970,050 increase in net accounts receivable.
Net cash used in investing activities for the nine months endedSeptember 30, 2021 was$6,444,421 , compared to net cash used in investing activities of$6,390,591 for the nine months endedSeptember 30 , 30, 2020. The cash used in investing activities for the nine months endedSeptember 30, 2021 and 2020 was mainly used for the purchase of medical equipment and payment of Construction in progress relating to the opening of our new 3rdBranch Hospital .
Net cash used in financing activities for the nine months endedSeptember 30, 2021 was$1,260,015 , as compared to net cash used in financing activities of$1,528,349 for nine months endedSeptember 30, 2020 . The cash used in financing activities for the nine months endedSeptember 30, 2021 was mainly due to payment of finance lease and interest expenses, while for the nine months endedSeptember 30, 2020 cash was also used to satisfy convertible notes we had sold. Although our current resources and cash flows are adequate to pay our current ongoing obligations, we anticipate that our future liquidity requirements will arise from the need to fund our growth and future capital expenditures. The primary sources of funding for such growth requirements are expected to be additional funds raised from the sale of equity and/or debt financing. However, we can provide no assurances that we will be able to obtain additional financing on terms satisfactory to us.
Trends, Events and Uncertainties
The COVID-19 pandemic has had a significant adverse impact and created many uncertainties related to our business, and we expect that it will continue to do so. The Company is experiencing challenges in sales and has suffered a significant decrease in revenues which has increased financial uncertainty. Our future business outlook and expectations are very uncertain due to the impact of the COVID-19 pandemic and are very difficult to quantify. It is difficult to assess or predict the impact of this unprecedented event on our business, financial results or financial condition.The China Ministry of Health , as well as other related agencies, may change the monetary amounts we can charge for medical services, drugs and medications. We cannot predict the impact of these proposed changes since the changes are not fully defined and we do not know whether such changes will ever be implemented or when they may take effect.
We plan to acquire other hospitals and companies involved in the healthcare
industry in the PRC using cash and shares of our common stock. Substantial
capital may be needed for these acquisitions and we may need to raise additional
funds through the sale of our common stock, debt financing or other
arrangements. We do not have any commitments or arrangements from any person to
provide us with any additional capital. Additional capital may not be available
to us, or if available, on acceptable terms, in which case we would not be able
to acquire other hospitals or businesses in the healthcare industry.
Other than the factors listed above we do not know of any trends, events or
uncertainties that have had or are reasonably expected to have a material impact
on our net sales or revenues or income from continuing operations. Our business
is not seasonal in nature.
8
Off-Balance Sheet Arrangements
We do not have any off-balance sheet items reasonably likely to have a material effect on our financial condition.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the FASB, the AICPA and the
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