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. 2 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 ("
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 andGeneral Medical Services . 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 relies 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 occurs 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. 3
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 period endedSeptember 30, 2020 , 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 an insurance claim limit for the hospital. Although
the hospital cannot refuse to receive patients, if the hospital receives too
many patients and exceeds the claim limit, there is an excess insurance claim
that may not be recoverable. During the next year or two, the Center will pay
part of the excess insurance claim to the hospital from an insurance regulatory
fund that is shared with all local hospitals that have excess insurance claims.
In accordance with the principle of prudence, the Company made a determination
that an excess insurance claim that had been outstanding for over two years
without reimbursement should be treated as a doubtful account.
? 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. Results of Operations
The following table shows key components of the results of operations during
three months ended
Three Months Ended
September 30, Change
2020 2019 $ %
Revenue:
Pharmaceuticals $ 2,462,951 $ 2,544,030 $ (81,079 ) (3 )%
Patient services 7,553,134 5,219,170 2,333,964 45 %
Total revenue 10,016,085 7,763,200 2,252,885 29 %
Operating costs and expenses:
Cost of pharmaceuticals sold 1,798,004 1,670,367 127,637 8 %
Medical consumables 2,852,588 1,382,547 1,470,041 106 %
Salaries and benefits 2,067,965 1,740,684 327,281 19 %
Office supplies 488,478 509,647 (21,169 ) (4 )%
Vehicle expenses 39,381 69,710 (30,329 ) (44 )%
Utilities expenses 87,344 90,982 (3,638 ) (4 )%
Rentals and leases 73,174 24,112 49,062 203 %Advertising and promotion expenses 9,118 13,194
(4,076 ) (31 )%
Interest expense, net 317,704 276,679 41,025 15 %
Convertible notes expense - 152,904 (152,904 ) (100 )%
Warrant expense (263,953 ) 96,800 (360,753 ) (373 )%
Professional fee 20,791 114,130 (93,339 ) (82 )%
Depreciation 649,726 551,810 97,916 18 %Total operating costs and expenses 8,140,320 6,693,566 1,446,754 22 % Earnings from operations before other income and income taxes 1,875,765 1,069,634 806,131 75 % Other income (5,620 ) (3,294 ) (2,326 ) 71 % Earnings from operations before income taxes 1,870,145 1,066,340 803,805 75 % Income tax 837,659 221,641 616,018 278 % Net income 1,032,486 844,699 187,787 22 % Less: net income attributable to non-controlling interests 266,545 369,366
(102,821 ) (28 )%
Net income attributable to the Company
61 %
Comprehensive income:
Foreign currency translation adjustment
attributable to non-controlling
interests 298,571 (295,109 ) 593,680 (201 )%
Foreign currency translation adjustment
attributable to the Company 648,903 (686,463 ) 1,335,366 (195 )%
Comprehensive income $ 1,979,960 $ (136,873 ) $ 2,116,833 (1547 )% 4
The following table shows key components of the results of operations during
nine months ended
Nine Months Ended
September 30, Change
2020 2019 $ %
Revenue:
Pharmaceuticals $ 6,054,148 $ 7,946,920 $ (1,892,772 ) (24 )%
Patient services 16,966,307 14,960,053 2,006,254 13 %
Total revenue 23,020,455 22,906,973 113,482 (0.5 )%
Operating costs and expenses:
Cost of pharmaceuticals sold 4,328,675 6,040,467 (1,711,792 ) (28 )% Medical consumables 5,589,590 3,251,086 2,338,504 72 % Salaries and benefits 5,936,083 4,847,107 1,088,976 22 % Office supplies 1,048,658 1,189,712 (141,054 ) (12 )% Vehicle expenses 167,199 227,787 (60,588 ) (27 )% Utilities expenses 392,827 388,632 4,195 1 % Rentals and leases 159,782 80,864 78,918 98 %
Advertising and promotion expenses 9,256 39,659 (30,403 ) (77 )% Interest expense, net 774,471 814,032 (39,561 ) (5 )% Convertible notes expense (322,363 ) 428,093
(750,456 ) (175 )%
Warrant expense 181,136 173,445 7,691 4 %
Professional fee 40,385 219,045 (178,660 ) (82 )%
Depreciation 1,808,738 1,644,389 164,349 10 %Total operating costs and expenses 20,114,437 19,344,318 770,119 4 % Earnings from operations before other income and income taxes 2,906,018 3,562,655 (656,637 ) (18 )% Other income (expenses) (17,026 ) (12,662 ) (4,364 ) 34 % Earnings from operations before income taxes 2,888,992 3,549,993 (661,001 ) (19 )% Income tax 1,138,507 637,475 (501,032 ) (79 )% Net income 1,750,485 2,912,518 (1,162,033 ) (40 )% Less: net income attributable to non-controlling interests 537,804 1,113,855 (576,051 ) (52 )% Net income attributable to the Company$ 1,212,681 $ 1,798,663 $ (585,982 ) (33 )% Comprehensive income: Foreign currency translation adjustment attributable to non-controlling interests 179,112 (305,737 ) 484,849 (159 )% Foreign currency translation adjustment attributable to the Company 361,761 (712,766 ) 1,074,527 (151 )% Comprehensive income$ 2,291,358 $ 1,894,015 $ 397,343 21 % Revenue Operating revenue for the three and nine months endedSeptember 30, 2020 , which resulted primarily from pharmaceuticals revenue and patient services revenue, was$10,016,085 and$23,020,455 , an increase of 29% and 0.5% as compared with the operating revenue of$7,763,200 and$22,906,973 for the three and nine months endedSeptember 30, 2019 . Revenue from the sale of pharmaceuticals decreased by 24%, while revenue from provision of patient services increased by 13% for the nine months endedSeptember 30, 2020 . The decrease was primarily a result of restrictions imposed by government agencies on business operations withinHarbin City in order to control the spread of COVID-19. 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. The restrictions were significantly reduced during the three months endedSeptember 30, 2020 , with the result that revenue from patient services increased by 44% in that quarter, compared to the third quarter of 2019 5
Operating Costs and Expenses
Total operating costs and expenses were$8,140,320 and$20,114,437 for the three and nine months endedSeptember 30, 2020 , an increase of$1,446,754 or 22% as compared to$6,693,566 for the third quarter of 2019, and an increase of$770,119 or 4% as compared to$19,344,318 for the first nine months of 2019. The 22% increase in operating expenses for the three months endedSeptember 30, 2020 lagged the 29% increase in revenue in that quarter, with the result that pre-tax operating income increased by 75% for the quarter. However, since revenue increased by only 0.5% nine months - to- nine months, the increase of only 4% in operating costs and expenses caused a substantial reduction in the profitability of the Company's operations for the first nine months of 2020. The primary reasons for the disparity between the increase in revenues and the reduction in operating costs were:
? the 72% increase in the expense for medical consumables during the nine months
ended
the 35% reduction in patients, because the hospital used more medical materials
to prevent the spread of COVID-19.
? an increase in salaries and benefits of
by the initiation of operations at our two new branch hospitals. The increase
exceeded the revenue increase attributable to the hospitals, as we incurred
labor costs in preparation for full scale operations. 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 on the condition that the unit price of each item of equipment or machinery is individually less thanRMB5 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 forRMB 35.8 million , with$1.1 million deferred income tax, creating differences between tax and GAAP.
Income from operations and net income
Income from Operations was$2,906,018 for the nine months endedSeptember 30, 2020 , as compared with operating income of$3,562,655 for the nine months endedSeptember 30, 2019 . 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, 2020 was$1,750,485 representing a decrease of$1,162,033 or 40%, over$2,912,518 for the nine months endedSeptember 30, 2019 . On the other hand, we realized a$806,131 increase (75%) in income from operations comparing the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2019 , with a 22% increase in net income. In both cases, the changes in income from operations and net income were primarily due to the aforementioned 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 by an allocation to the "non-controlling interests" of, before recognizing net income attributable to the Company:$537,804 and$1,113,855 for the nine months endedSeptember 30, 2020 and 2019, respectively, and$266,545 and$369,366 for the three month periods then ended. After those allocations, our net income attributable to the Company for the nine months endedSeptember 30, 2020 and 2019 was$1,212,681 ($0.0673 per share) and$1,798,663 ($0.1098 per share), respectively. Net income attributable to the Company for the three months endedSeptember 30, 2020 and 2019 was$764,941
and$475,333 , 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, 2020 , foreign currency translation adjustments of$540,873 (of which$179,112 was attributable to the non-controlling interest) have been reported as other comprehensive income in the consolidated statements of operations and comprehensive income. For the nine months endedSeptember 30, 2019 , foreign currency translation adjustments of ($1,018,503 ) (of which ($305,737 ) was attributable to the non-controlling interest) have been reported as other comprehensive loss in the consolidated statements of operations and comprehensive income. 6
Liquidity and Capital Resources
As ofSeptember 30, 2020 , the Company had$812,102 in cash and cash equivalents, a decrease of$1,159,027 from our cash balance atDecember 31, 2019 . The decrease was primarily caused by our investing activities, which used$6,390,591 of cash during the first nine months of 2020. Our working capital deficit atSeptember 30, 2020 was$2,950,924 , an deterioration of$1,549,375 from our deficit of$1,401,549 in working capital atDecember 31, 2019 . The decrease was primarily attributable to the fact that we reduced our current assets by$3,069,855 , while increasing our fixed assets, in particular increasing our property and equipment balance by$5,825,361 . Our working capital deficit limits our ability to finance expansion. It is noteworthy, however, that our current liabilities include$438,246 in amounts due to related parties, all of which is owed to our Chairman,Junsheng Zhang , and$1,753,200 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 half of 2020 and 2019 are summarized below:
Nine Months Ended
September 30,
2020 2019
Net cash provided by operating activities 7,507,822 8,837,226
Net cash used in investing activities (6,390,591 ) (3,460,652 )
Net cash used in financing activities (2,304,079 ) (3,574,870 )
Effect of exchange rate fluctuation on cash and cash equivalents 27,821 (48,969 )
Net increase in cash and cash equivalents (1,159,027 ) 1,752,735
Cash and cash equivalents, beginning of period 1,971,129 256,450
Cash and cash equivalents, ending of period $ 812,102 $ 2,009,185 Net Cash Provided by Operating Activities
For the nine months endedSeptember 30, 2020 , we had positive cash flow from operating activities of$7,507,822 , a decrease of$1,329,404 from$8,837,226 for the nine months endedSeptember 30, 2019 . Cash flow from operations decreased in part because of the$1,162,033 decrease in net income during the nine months endedSeptember 30, 2020 . In addition, several other factors contributed to the reduction in cash flow from operations, including:
? The Company increased its inventory balance by
months of 2020, whereas the inventory balance increased by only
the first nine months of 2019.
? The Company reduced its accrued expenses balance by
nine months of 2020; during the first nine months of 2019 accrued expenses
balance reduced by
? The Company used
nine months of 2020; during the first nine months of 2019, the Company received
? The Company reduced its debt to related parties by
nine months of 2020; during the first nine months of 2019, the Company increased the amount due to related parties by$2.716.217 . 7 Cash flow from operating activities during the first nine months of 2020 substantially exceeded net income, primarily because of an increase in the Company's accounts payable balance by$2,238,219 and an increase in the accounts receivable balance by$1,712,746 . These items do not necessarily represent patterns that will be repeated: the Company's ability to defer satisfaction of its payables without injuring its relations with vendors is limited; the surge in third quarter revenue leading to increased accounts receivable reflects in part delivery of medical procedures that were delayed by the pandemic. It is the case, therefore, that the Company's ability to generate cash from operating activities during the first nine months of 2020 despite the reduction in its profitability may not be replicable in the future operation.
Net cash used in investing activities for the nine months endedSeptember 30, 2020 was$6,390,591 , compared to net cash used in investing activities of$3,460,652 for the nine months endedJune 30, 2019 . The cash used in investing activities for the nine months endedSeptember 30, 2020 and the nine months endedSeptember 30, 2019 was mainly used for the purchase of medical equipment and payment of Construction in progress.
Net Cash Provided by Financing Activities
Net cash used in financing activities for the nine months endedSeptember 30, 2020 was$2,304,079 , as compared to net cash used in financing activities of$3,574,870 for the nine months endedSeptember 30, 2019 . The cash used in financing activities for the nine months endedSeptember 30, 2020 was mainly due to payment on account of finance leases of$3,418,708 .
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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