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 pharmaceutical 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 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. 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 endedMarch 31, 2022 , 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
allowance for doubtful accounts of
our review of the statement 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 receive 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 hospital
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
the amount of excess insurance claims aged over two years 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.
3
Results of Operations for Three Months Ended
The following table shows key components of the results of operations for three
months ended
Three Months Ended
March 31, Change
2022 2021 $ %
Revenue:
Pharmaceuticals $ 4,029,770 $ 1,764,301 $ 2,265,469 128 %
Patient services 11,589,641 5,561,933 6,027,708 108 %
Total revenue 15,619,411 7,326,234 8,293,177 113 %
Operating costs and expenses:
Cost of pharmaceuticals sold 3,330,910 1,351,156 1,979,754 147 %
Medical consumables 2,961,769 1,080,010 1,881,759 174 %
Salaries and benefits 3,408,406 2,259,143 1,149,263 51 %
Office supplies 327,860 247,418 80,442 33 %
Vehicle expenses 101,231 41,442 59,789 144 %
Utilities expenses 304,775 226,010 78,765 35 %
Operating leases expense 306,965 269,204 37,761 14 %Advertising and promotion expenses 6,780 16,638
(9,858 ) (59 %)
Interest expense 406,544 291,518 115,026 39 %
Professional fee 8,000 8,908 (908 ) (10 %)
Warrant expense (7 ) 20,531 (20,538 ) (100 %)
Depreciation 882,235 807,974 74,261 9 %Total operating costs and expenses 12,045,468 6,619,952 5,425,516 82 % Earnings from operations before other income and income taxes 3,573,943 706,282 2,867,661 406 % Other (expenses) income (6,751 ) (3,776 ) (2,975 ) 79 % Earnings from operations before income taxes 3,567,192 702,506 2,864,686 408 % Income tax 928,376 206,584 721,792 349 % Net income 2,638,816 495,922 2,142,894 432 % Less: net income attributable to non-controlling interests 791,645 168,238 623,407 371 %
Net income attributable to the Company
464 %
Comprehensive income:
Foreign currency translation adjustment 208,210 (73,749 ) 281,959 (382 %)
Foreign currency translation adjustment
attributable to non-controlling
interests 59,103 (22,590 ) 81,693 (362 %)
Foreign currency translation adjustment
attributable to the Company 149,103 (51,159 ) 200,266 (391 %)
Comprehensive income $ 2,847,026 $ 422,173 $ 2,424,853 574 %
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Revenue
Operating revenue for the three months endedMarch 31, 2022 , which resulted primarily from pharmaceuticals revenue and patient services revenue, was$15,619,411 , an increase of 113% as compared with the operating revenue of$7,326,234 for the three months endedMarch 31, 2021 . Revenue from the sale of pharmaceuticals increased by 128%, and revenue from provision of patient services increased by108%. The increase was primarily a result of the alleviation of COVID-related restrictions imposed by government agencies on business operations withinHarbin City during 2020 that continued during the first quarter of 2021. The restrictions severely restricted the Hospital's opportunities for performing out-patient treatment services and elective surgery, among other treatments. The restrictions has been relaxing, which allowedJiarun Hospital to provide a full scale of professional medical and healthcare services to theHarbin community in the first quarter of 2022. During the first quarter of 2022, the Company has provided service to 142,005 patients, an increase of 76% (or 61,543 patients); compared with the 80,462 patients treated atJiarun Hospital in the first quarter of 2021.
Operating Costs and Expenses
Total operating costs and expenses were$12,045,468 for the three months endedMarch 31, 2022 , an increase of$5,425,516 or 82% as compared to$6,619,952 for the first quarter of 2021. Since revenue increased by 113% quarter-to-quarter, the 82% increase in operating costs and expenses correlated with the 113% increase in revenue. The primary components of the$5,425,516 increase in costs and expenses were:
?
the cost of medical consumables. These 147% and 174% increases in expenses
attributable to pharmaceuticals and medical consumables were primarily related
to the 128% increase in pharmaceuticals revenue and the 108% increase in
patient service revenue. Medical consumables mainly consist of materials
expenses, medical repair expenses and test reagents. The largest component of
the increase was the increase in materials expenses of$820,722 .
?
in salaries, and
increase in our labor costs was primarily caused by the revenue increase
attributable to the hospitals, as we have been incurring sufficient human
resources to meet the full scale operations of our branch hospitals.
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 quarter of 2022 the Company purchased
Eligible Equipment for RMB 9.8 million , with $383,950 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$3,573,943 for the three months endedMarch 31, 2022 , as compared with operating income of$706,282 for the three months endedMarch 31, 2021 . After deducting other income and expenses as well as the provision for income tax, the Company's net income for the three months endedMarch 31, 2021 was$2,638,816 , representing an increase of$2,142,894 or 432%, from$495,922 recorded for the three months endedMarch 31, 2021 . The increase of income from operations and net income for the three months endedMarch 31, 2022 were primarily due to aforementioned upward changes in operating revenue and expenses. Our net income was produced by Jiarun. Because we own only 70% of the equity interest in Jiarun (the other 30% being owned by our Chairman,Junsheng Zhang ), we reduced our net income for the three months period endedMarch 31, 2022 and 2021 by an allocation to the "non-controlling interests" of$791,645 and$168,238 , respectively, before recognizing net income attributable to the Company. After those allocations, our net income attributable to the Company for the three months endedMarch 31 , 2022and 2021 was$1,847,171 ($0.0992 per share) and$327,684 ($0.0180 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 three months endedMarch 31, 2022 and 2021, foreign currency translation adjustments of$208,210 (of which$59,103 was attributable to the non-controlling interest) and$(73,749) (of which$(22,590) was attributable to the non-controlling interest), respectively, have been reported as other comprehensive income in the consolidated statements of operations and comprehensive income. 5
Liquidity and Capital Resources
As of
Our working capital deficit atMarch 31, 2022 was$3,122,501 , an improvement of$611,070 from our deficit of$3,733,571 in working capital atDecember 31, 2021 . The increase was primarily attributable to$4,617,839 in cash provided by operating activities during the first quarter of 2022. Our working capital deficit limits our ability to finance expansion. It is noteworthy, however, that our current liabilities include$37,434 in amounts due to related parties, all of which is owed to our Chairman,Junsheng Zhang , and$2,672,013 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 quarters of 2022 and 2021 are summarized below:
Three Months Ended
March 31,
2022 2021
Net cash provided by operating activities 4,617,839 267,086
Net cash (used in) investing activities (2,783,041 ) (296,102 )
Net cash (used in) financing activities (867,501 ) (400,236 )
Effect of exchange rate fluctuation on cash and cash equivalents 123,293 (11,931 )
Net (decrease) in cash and cash equivalents 1,090,590 (441,183 )
Cash and cash equivalents, beginning of period 855,971 844,827
Cash and cash equivalents, ending of period $ 1,946,561 $ 403,644 Net Cash Provided by Operating Activities
For the three months endedMarch 31, 2022 , we had positive cash flow from operating activities of$4,617,839 , an increase of$4,350,753 from$267,086 of cash flow for the three months endedMarch 31, 2021 . Cash flow from operations increased primarily because of our net income, but also in part because we increased our accounts payable by$1,905,118 and increased our accrued expenses and other current liabilities by$935,420 . Cash flow from operations was offset by an increase of$870,541 in accounts receivables and our used of$1,410,638 to fund prepayments and other current assets.
In addition, several other factors contributed to the increment in cash flow from operations, including:
? Our accounts payable and accrued expenses and other current liabilities
balance were increased by $1,905,118 and $935,420 respectively.
? Our net cash flow was reduced by a depreciation charge of $882,235 , whichdid not cause a corresponding use of cash, as well as other non-cash
expenses totaling $406,537 .
At the same time, as a result of the $4,617,839 in cash provided by operations,
our balance sheet at March 31, 2022 showed a working capital deficit of
$3,122,501 , representing an improvement of $611,070 from our working capital
deficit at December 31, 2021 .
Net cash used in investing activities for the three months endedMarch 31, 2022 was$2,783,041 , compared to net cash used in investing activities of$296,102 for the three months endedMarch 31, 2021 . The cash used in investing activities for the three months endedMarch 31, 2022 and 2021 was mainly used for the purchase of medical equipment and payment of Construction in progress.
Net cash used in financing activities for the three months endedMarch 31, 2022 was$867,501 , as compared to net cash used in financing activities of$400,236 for the three months endedMarch 31, 2021 . The cash used in financing activities for the three months endedMarch 31, 2022 and 2021 was mainly applied to payment of our finance lease and interest expenses. 6 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 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.
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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