Item 1. Business
Corporate Structure
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 privately held 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 privately held, 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 operates 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”), which was incorporated in Harbin City, Heilongjiang, Province, 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”), which was incorporated in Harbin City, Heilongjiang Province, 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.
Our present corporate structure is as follows:
Our Business
We operate Jiarun Hospital and its two branch hospitals, collectively being a private hospital with 950 beds located in Harbin, the capital of Heilongjiang Province in northeastern China. Jiarun Hospital offers patients care and pharmaceuticals in the areas of both Western and Chinese medical practices. Jiarun specializes in Pediatrics, Dermatology, Ears, Nose and Throat (ENT), Traditional Chinese Medicine (TCM), Ophthalmology, Internal Medicine, Dentistry, General Surgery, Rehabilitation Science, Gynecology, General Medical Services, etc. Our ambulances operate 24 hours a day.
As is common in China, we generate revenues from both the provision of patient services and the sale of pharmaceuticals. These two areas respectively were responsible for 74% and 26% of our total revenues for the year ended December 31, 2020, and 66% and 34% of the total revenues for the year ended December 31, 2019.
Patient Services
In accordance with the medical licenses under which Jiarun operates, the scope of the Hospital’s approved patient services 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, collects the estimated fee from the patient, and records the payment as a deposit.
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, the account receivable is 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 the insurance claim settlement process.
Pharmaceuticals
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 purchaser, and collection of the sales proceeds is reasonably assured, all of which generally occur when the patient receives the pharmaceuticals.
Given the nature of this revenue source, and the applicable rules guiding revenue recognition, the revenue recognition practices for the sale of pharmaceuticals do not contain estimates that materially affect results of operations nor any policy for return of products.
Jiarun Hospital opened in its current location in December 2014. In April 2018 we added a building to the hospital complex for delivery of outpatient services. In October and November 2017, NRB Hospital and 2nd Branch Hospital were incorporated in Harbin City; they started to operate in April 2018, providing outpatient and inpatient services.
JRSS plans 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.
Customers
The Company has successfully marketed our value proposition to a large number of corporate customers as well as individual customers. We are in direct competition with two government-owned hospitals in the Hulan district of Harbin City. Management believes we are able to offer a more comprehensive examination menu at competitive prices, and provide an affordable “one-stop” service to our corporate customers who contract us to provide healthcare services to their employees and clients across the country. We are also able to provide our customers with satisfying experiences by providing customized services, streamlined processes, access to advanced equipment, a comfortable environment, customer service-oriented staff and greater privacy, characteristics which are highly valued by our corporate and individual customers.
Suppliers
Over the years of operations, we have developed a solid and reliable image and reputation with the general public and the medical academia and industry. Leveraging our positive track record and brand name, we have established supplier relationships with a number of well-known local and international healthcare and financial companies and medical academia. The following are some of the most recognized suppliers that the hospitals have established working relationships with:
Competition
We compete with two government-owned hospitals in the city of Harbin. We believe that we will be able to effectively compete with them because we:
● Employ extensive marketing tactics to reach a large segment of customers, such as our special “Mobile clinics free medical service” program, which provides free medical services to the Jiarun Hospital community and neighboring towns, thus providing an expanded customer base and expanding the influence of the marketing plan;
● Provide advanced medical facilities and comfortable environments;
● Maintain the highest level of professional healthcare; and
● Offer competitive prices for medical treatment and drugs and medications
Marketing
To increase our visibility, in April 2014, Jiarun purchased a clinicar. This mobile clinic promotes our business by providing free clinical services in Jiarun Hospital’s local community. With the hospital complex hospital already in use, Jiarun is able to further improve its healthcare services ability and expand its service coverage area to additional communities and towns. We also plan to send out our experts and medical team to communities to provide free public services, including consultation and medical services to attract customers.
In the future, we plan to further strengthen our marketing efforts and improve our brand awareness through advertising on newspapers, magazines, and television. We will continue to focus on community medical service by maintaining a good relationship with our communities and providing quality medical service to the neighborhood residents. We understand that the key to success is to provide quality services.
PRC Laws and Regulations Affecting Our Business
According to the PRC Regulation of Healthcare Institutions, hospitals shall register with the Administration of Health of the local government to obtain the necessary business license for the provision of hospital services. We received our business license from Harbin City government in February of 2006. Other existing regulations having material effects on our business include those dealing with physician’s licensing, usage of medicine and injection, public security in health and medical advertising.
Healthcare providers in China are required to comply with many laws and regulations at the national and local government levels. These laws and regulations include the following:
● We must register with and maintain an operating license from the local Administration of Health. We are subject to review by the local Administration of Health at an annual inspection.
● Personnel and employees directly performing medical services in medical institutions are required to obtain qualification certificates.
● Pursuant to the Interim Provisions on the Administration of Medical Examinations, or the Medical Examination provisions, issued in August 2009 by the NHFPC, the NHFPC or its local branches are responsible for the regulation of medical examination activities. Medical institutions that plan to operate medical examination businesses should apply to the NHFPC or its local branches for the approval of such medical examination business and register such business with the NHFPC or its local branches by including the business in their medical institution practicing licenses.
● Pursuant to the Rules on Administration of Radiation-related Diagnose and Treatment issued in January 2006 by the NHFPC, medical institutions that plan to conduct radiation-related diagnosis and treatment businesses should apply to the NHFPC or its local branches and obtain radiation-related diagnosis and treatment licenses. JRSS, which engages in radiation-related diagnosis and treatment business, has obtained radiation-related diagnosis and treatment licenses.
● All waste materials from our hospital must be properly collected, sterilized, deposited, transported and disposed of. We are required to keep records of the origin, type and amount of all waste materials generated by our hospital.
● We must have at least 20 beds and at least 14 medical professionals on staff, including three doctors and five nurses.
● We must establish and follow protocols to prevent medical malpractice. The protocols require us to:
● insure that patients are adequately informed before they consent to medical operations or procedures;
● maintain complete medical records which are available for review by the patient, physicians and the courts;
● voluntarily report any event of malpractice to a local government agency;
● support the medical services we provide in any administrative investigation or litigation.
If we fail to comply with applicable laws and regulations, we could suffer penalties, including the loss of our license to operate.
Before we can acquire a hospital or a company in the healthcare field in the PRC, we will be required to submit an application to the PRC Ministry of Commerce. As part of the application we must submit a number of documents, including:
● Our financial statements and the financial statements of the company we propose to acquire,
● A copy of the business license of the company we propose to acquire,
● Evidence that the shareholders of the company we propose to acquire have approved the transaction, and
● An appraisal, conducted by an independent party, of the value of the company we propose to acquire.
Insurance
Insurance companies in China offer limited business insurance products. Therefore we do not maintain either business liability insurance or medical malpractice insurance. While business liability and medical malpractice insurance is available to a limited extent in China, we have determined that the risks, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to purchase such insurance. Product or medical malpractice liability or uninsured damage to any of our medical centers or the medical equipment in our medical centers could result in significant disruption to the operation of our medical centers and result in a material adverse effect to our business, financial condition and results of operations.
Taxes
Enterprise income tax is defined 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.
Jiarun is subject to the exemption provided for medical and health institutions that mainly provide medical services under the PRC’s regulation titled “To Replace the Business Tax with a Value-Added Tax Regulations 【Cai Shui (2016) 36】.” Attachment 3 Article 1 (7) of that regulation provides that hospitals, clinics and other medical institutions that provide medical services shall be exempt from value-added tax. The tax-exempt status will remain effective until notification from the tax bureau.
Employees
As of December 31, 2020, we had 875 employees, consisting of 658 doctors and nurses, and a drug management staff of 22, who are supported by 195 non-medical employees. None of our employees are represented by a labor union or similar collective bargaining organization.
Item 1A.
Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and other information in this 10K before deciding to invest in our Company. If any of the following risks actually occur, our business, financial condition and results of operations could be seriously harmed. As a result, the trading price of our common stock could decline and you could lose all or part of your investment.
Risks Related to Our Business
The spread of COVID-19 through the population of the City of Harbin and the mandatory quarantines imposed by the government to stop the spread have significantly interfered with the business of Jiarun Hospital, which will have a significant adverse effect on our income and profitability.
The Company’s only business activity is ownership and operation of Jiarun Hospital (including its two satellites), the largest hospital in the City of Harbin. Many residents of Harbin have contracted COVID-19 during the current pandemic. As a result, the national and local government have imposed serious restrictions on business operations within the City, including mandatory quarantines. The quarantines have prevented Jiarun Hospital from carrying on its normal operations. We are unable to predict the extent to which the pandemic and related impacts may adversely impact our business operations, financial performance, consolidated results of operations and consolidated financial position in the future or interfere with the achievement of our strategic objectives.
If we fail to properly manage the employment of our doctors and nurses, we may be subject to penalties including fines, loss of licenses, or an order to cease practice against our medical centers, which could materially and adversely affect our business.
The practicing activities of doctors and nurses are strictly regulated under the PRC laws and regulations. Doctors and nurses who practice at medical institutions must hold practicing licenses and may only practice within the scope and at the specific medical institutions for which their practicing licenses are registered.
In practice, it usually takes four to nine weeks for doctors and nurses to transfer their practicing licenses from one medical institution to another or add another medical institution to their permitted practicing institutions. Some of our recently hired doctors have submitted applications to transfer their practicing licenses from their previous employers to our medical centers but have not finished the process. We cannot assure you that these doctors will complete the transfer of their practicing licenses or the government procedures timely, or at all. Our failure to properly manage the employment of our doctors and nurses may subject us to administrative penalties including fines, loss of licenses, or, in the worst-case scenario, an order to cease practice against our medical centers, which could materially and adversely affect our business.
Our business exposes us to liability risks that are inherent in the operation of complex medical equipment, which may experience failures or cause injury either because of defects, faulty maintenance or repair, or improper use.
Our business exposes us to liability risks that are inherent in the operation of complex medical equipment, which may experience failures or cause injury either because of defects, faulty maintenance or repair, or improper use. Extended downtime of our medical equipment could result in lost revenues, dissatisfaction on the part of customers and damage to our reputation. Any injury caused by our medical equipment in our medical centers due to equipment defects, improper maintenance or improper operation could subject us to liability claims. Regardless of their merit or eventual outcome, such liability claims could result in significant legal defense costs for us, harm our reputation, and otherwise have a material adverse effect on our business, financial condition, and results of operations.
We primarily rely on equipment manufacturers or third-party service providers to maintain and repair the complex medical equipment used in our medical centers. If any of these manufacturers or third-party service providers fails to perform its contractual obligations to provide such services or refuses to renew these service agreements on terms acceptable to us, or at all, we may not be able to find a suitable alternative service provider or establish our own maintenance and repair team in a timely manner. Similarly, any failure of or significant quality deterioration in such service providers’ services could materially and adversely affect customer experience. We also rely on both equipment manufacturers and our own internal expertise to provide technical training to our staff on the proper operation of such equipment. If such medical technicians are not properly and adequately trained, or if they make errors in the operation of the complex medical equipment even if they are properly trained, they may misuse or ineffectively use the complex medical equipment in our medical centers. Such failure could result in unsatisfactory medical examination results, diagnosis, treatment outcomes, patient injury or possibly death, any of which could materially and adversely affect our business, financial condition, results of operations and prospects.
We may not be able to compete against companies with substantially greater resources.
The hospital industry is intensely competitive, and we expect competition to intensify further in the future. This is a very capital-intensive business and companies with greater resources may have advantages that make our model weaker in comparison.
Our business is subject to various government regulations that may limit our profitability.
We are subject to various national and provincial laws and regulations affecting medical products in China. The State Food and Drug Administration (“SFDA”), Ministry of Health of The People’s Republic of China (“MoHPRC”) and equivalent state agencies regulate healthcare services made by businesses in the offering of service, which apply to us. We are also subject to government laws and regulations governing health, safety, working conditions, employee relations, wrongful termination, wages, taxes and other matters applicable to businesses in general. Any such new regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have a material adverse effect on our business, results of operations, and financial condition.
We may incur uninsured losses.
Medical malpractice insurance has only recently become generally available to the medical community in China, and Jiarun Hospital has not yet found a policy that we consider appropriate for our operations. If Jiarun Hospital became party to a medical malpractice lawsuit, any loss we incur would be funded from our working capital. Moreover, although we maintain vehicle insurance and basic Chinese social insurances and related insurance, we cannot assure that we will not incur other types of uninsured liabilities and losses as a result of the conduct of our business. Should uninsured losses occur, the holders of our common stock and debt could lose their invested capital.
Like most providers of medical services, we are subject to potential litigation.
We are exposed to the risk of litigation for a variety of reasons, including service liability lawsuits, employee lawsuits, commercial contract disputes, government enforcement actions, and other legal proceedings. We cannot assure that future litigation in which we may become involved will not have a material adverse effect on our financial condition, operating results, business performance, and business reputation.
We do not maintain any business liability insurance. Insurance companies in China offer limited business insurance products. While business liability insurance is available to a limited extent in China, we have determined that the risks, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to purchase such insurance. Product or medical malpractice liability or uninsured damage to any of our medical centers or the medical equipment in our medical centers could result in significant disruption to the operation of our medical centers and result in a material adverse effect to our business, financial condition and results of operations.
We may incur cost overruns in the distribution of our various services.
We may incur substantial cost overruns in the distribution of our services. Unanticipated costs may force us to obtain additional capital or financing from other sources or may cause us to lose our entire investment if we are unable to obtain the additional funds necessary to implement our business plan. We cannot assure that we will be able to obtain sufficient capital to successfully continue the implementation of our business plan. If a greater investment in the business is required due to cost overruns, the probability of earning a profit or a return of the shareholders’ investment in us diminishes.
Our bylaws require that we indemnify our directors and officers against claims.
Our bylaws provide that we will indemnify and hold harmless our officers and directors against claims arising from our activities, to the maximum extent permitted by business laws of the State of Florida. If we were called upon to perform under our indemnification agreement, then the portion of our assets expended for such purpose would reduce the amount otherwise available for our business. We have no executed indemnification agreement.
If we are unable to hire, retain or motivate qualified personnel, consultants, independent contractors, and advisors, we may not be able to grow effectively.
Our performance will be largely dependent on the talents and efforts of highly skilled individuals. Future success depends on our continuing ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of our organization. Competition for such qualified employees is intense. If we do not succeed in attracting excellent personnel or in retaining or motivating them, we may be unable to grow effectively. In addition, all future success depends largely on our ability to retain key consultants and advisors. We cannot assure that any skilled individuals will agree to become an employee, consultant, or independent contractor of Jiarun. Our inability to retain their services could negatively impact our business and our ability to execute our business strategy.
Risks Related to the Company’s Corporate Structure
The failure to comply with PRC regulations relating to mergers and acquisitions of domestic enterprises by offshore special purpose vehicles may subject us to severe fines or penalties and create other regulatory uncertainties regarding our corporate structure.
On August 8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the China Securities Regulatory Commission (the “CSRC”), the State-owned Assets Supervision and Administration Commission of the State Council (the “SASAC”), the State Administration of Taxation (the “SAT”), the State Administration for Industry and Commerce (the “SAIC”), and the State Administration of Foreign Exchange (“SAFE”), jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), which took effect as of September 8, 2006. This regulation, among other things, has certain provisions that require offshore special purpose vehicles (“SPVs”) formed for the purpose of acquiring PRC domestic companies and controlled directly or indirectly by PRC individuals and companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.
The application of the M&A Rules with respect to our corporate structure remains unclear, with no current consensus existing among leading PRC law firms regarding the scope and applicability of the M&A Rules. We believe that the MOFCOM and CSRC approvals under the M&A Rules were not required in the context of the acquisition by our U.S. parent of control of Jiarun because at such time the share exchange was a foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations. However, we cannot be certain that the relevant PRC government agencies, including the CSRC and MOFCOM, would reach the same conclusion, and we cannot be certain that MOFCOM or the CSRC may deem that the transactions effected by the share exchange circumvented the M&A Rules, and other rules and notices, and that prior MOFCOM or CSRC approval was required. Further, we cannot rule out the possibility that the relevant PRC government agencies, including MOFCOM, would deem that the M&A Rules required us or our entities in China to obtain approval from MOFCOM or other PRC regulatory agencies in connection with JRSS’s control of Jiarun.
If the CSRC, MOFCOM, or another PRC regulatory agency subsequently determines that CSRC, MOFCOM or other approval was required for the share exchange transaction, we may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating privileges in the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations and reputation, as well as the trading price of our common stock. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to restructure our current corporate structure, or to seek regulatory approvals that may be difficult or costly to obtain.
The M&A Rules, along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy. For example, our operating companies’ ability to remit dividends to us, or to engage in foreign-currency-denominated borrowings, may be conditioned upon compliance with the SAFE registration requirements by such Chinese domestic residents, over whom we may have no control.
SAFE regulations relating to offshore investment activities by PRC residents may increase our administrative burdens and restrict our overseas and cross-border investment activity. If our shareholders and beneficial owners who are PRC residents fail to make any required applications, registrations, and filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.
SAFE has promulgated several regulations, including Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Oversea Special Purpose Vehicles, or “Circular No. 75,” issued on October 21, 2005 and effective as of November 1, 2005 and certain implementation rules issued in subsequent years, requiring registrations with, and approvals from, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities. These regulations apply to our shareholders and beneficial owners who are PRC residents, and may affect any offshore acquisitions that we make in the future.
SAFE Circular No. 75 requires PRC residents, including both PRC legal person residents and/or natural person residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of equity financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose company.” In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update his registration with the relevant SAFE branches, with respect to that offshore company, in connection with any material change involving an increase or decrease of capital, transfer or swap of shares, merger, division, equity or debt investment or creation of any security interest. Moreover, the PRC subsidiaries of that offshore company are required to coordinate and supervise the filing of SAFE registrations by the offshore company’s shareholders who are PRC residents in a timely manner. If a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries, and the offshore parent company may also be prohibited from injecting additional capital into its PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements described above may result in liability for the PRC shareholders and the PRC subsidiaries under PRC law for foreign exchange registration evasion.
Although we have requested our PRC shareholders to complete the SAFE Circular No. 75 registration, we cannot be certain that all of our PRC resident beneficial owners will comply with the SAFE regulations. The failure or inability of our PRC shareholders to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, prevent us from making capital injection into our PRC subsidiaries, limit our PRC subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected.
Risks Related to Doing Business in China
Changes in current policies of the PRC government could have a significant impact upon the business we conduct in the PRC and the profitability of our operations.
Current policies adopted by the PRC government indicate that it seeks to encourage a market-oriented economy. We believe that the PRC government will continue to develop policies that strengthen its economic and trading relationships with foreign countries and as a consequence, business development in the PRC will follow current market forces. While we believe that this trend will continue, we cannot assure you that such beneficial policies will not change in the future. A change in the current policies of the PRC government could result in confiscatory taxation, restrictions on currency conversion, or the expropriation or nationalization of private enterprises, all of which would have a negative impact on our current corporate structure and our operations. The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, those laws and regulations governing our business and those relating to the enforcement and operation of our contractual arrangements. At this time, we believe that the relevant PRC laws and regulations validate our current contractual arrangements and that our corporate structure is in keeping with such laws. However, no assurance can be given that PRC court rulings to be decided in the future will be consistent with our current interpretations. Further, new laws or regulations may be enacted which could have a negative impact on foreign investors. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business and no assurance can be given that our operations will not be affected by such laws and/or regulations.
We may be restricted from freely converting the Renminbi to other currencies in a timely manner.
At the present time, the RMB is not a freely convertible currency. We receive all of our revenue in RMB, which may need to be converted to other currencies, primarily U.S. dollars, in order to be remitted outside of the PRC. Effective July 1, 1996, foreign currency “current account” transactions by foreign investment enterprises are no longer subject to the approval of State Administration of Foreign Exchange (“SAFE,” formerly, “State Administration of Exchange Control”), but need only a ministerial review, according to the Administration of the Settlement, Sale and Payment of Foreign Exchange Provisions promulgated in 1996 (the “FX regulations”). “Current account” items include international commercial transactions, which occur on a regular basis, such as those relating to trade and provision of services. Distributions to joint venture parties also are considered “current account transactions.” Other non-current account items, known as “capital account” items, remain subject to SAFE approval. Under current regulations, we can obtain foreign currency in exchange for RMB from swap centers authorized by the government. We do not anticipate problems in obtaining foreign currency to satisfy our requirements; however, no assurance can be given that foreign currency shortages or changes in currency exchange laws and regulations by the PRC government will not restrict us from freely converting RMB in a timely manner.
Fluctuations in the exchange rate could have an adverse effect upon our business and reported financial results.
We conduct our business in Renminbi (“RMB”), thus our functional currency is the RMB, while our reporting currency is the U.S. dollar. The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, the political situation as well as economic policies and conditions. There remains significant international pressure on the significant appreciation of the RMB against the U.S. dollar. To the extent any of our future revenues are denominated in currencies other than the United States dollar, we would be subject to increased risks relating to foreign currency exchange rate fluctuations which could have a material adverse effect on our financial condition and operating results since operating results are reported in United States dollars and significant changes in the exchange rate could materially impact our reported earnings.
Because our principal assets are located outside of the United States and all of our directors and officers reside outside of the United States, it may be difficult for an investor to enforce any right founded on U.S. Federal Securities Laws against us and/or our officers and directors, or to enforce a judgment rendered by a United States court against us or our officers and directors.
Our operations and principal assets are located in the PRC, and our officers and directors are non-residents of the United States. Therefore, it may be difficult to effect service of process on such persons in the United States, and it may be difficult to enforce any judgments rendered against us or our officers and/or directors. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. As a result of all of the above, our shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders compared to shareholders of a corporation doing business entirely within the United States.
Risks Relating to Our Common Stock
Outstanding warrants to purchase up to 210,000 common shares at $0.60 per share may result in a reduction of the market price of the Common Stock.
During 2019 the Company issued to Auctus Fund LLC warrants to purchase 21,000 shares of common stock for $6.00 per share. Due to the reset provisions in the warrants agreement, Auctus Fund LLC is now entitled to purchase 210,000 shares for $0.60 per share or may purchase a lesser number of shares at that price using cashless exercise condition based on the contemporaneous market price of our common stock. If Auctus Fund exercises the warrants, it is likely to promptly resell the shares it purchases. Such resales would likely have the effect of reducing the market price of our common stock.
Because we are subject to “penny stock” rules, the level of trading activity in our stock may be reduced.
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules. If a trading market does develop for our common stock, these regulations will likely be applicable, and investors in our common stock may find it difficult to sell their shares.
FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may have the effect of reducing the level of trading activity in our common stock. As a result, fewer broker-dealers may be willing to make a market in our common stock, reducing a stockholder’s ability to resell shares of our common stock.
Our insiders beneficially own a significant portion of our stock, and accordingly, may have control over stockholder matters, the Company’s business and management.
Junsheng Zhang, the Chairman of the Board of JRSIS Health Care Corporation, owns 73.40% of the Company’s outstanding common stock. As a result, Mr. Zhang will have significant influence to:
● Elect or defeat the election of our directors;
● Amend or prevent amendment of our articles of incorporation or bylaws;
● Effect or prevent a merger, sale of assets or other corporate transaction; and
● Affect the outcome of any other matter submitted to the stockholders for vote.
Moreover, because of the significant ownership position held by our insiders, new investors will not be able to effect a change in the Company’s business or management, and therefore, shareholders would be subject to decisions made by management and the majority shareholder.
In addition, sales of significant amounts of shares held by our directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock. Management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders and have a material adverse effect on our earnings.
Our Board of Directors is authorized to issue up to 100,000,000 shares of common stock, of which 18,246,331 shares are issued and outstanding. Our Board of Directors has the authority to cause us to issue additional shares of common stock without consent of any of our stockholders. Any sale of common stock by us in a future private placement offering could result in dilution to the existing stockholders as a direct result of our issuance of additional shares of our capital stock. In addition, our business strategy may include expansion through internal growth by acquiring complementary businesses, acquiring, or licensing additional brands, or establishing strategic relationships with targeted customers and suppliers. In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our stockholders’ stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets, and this could negatively impact our earnings and results of operations.
If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our common stock, our stock price and trading volume could decline.
The trading market for our common stock may be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrade our common stock, our common stock price would likely decline. If analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline.
If we continue to fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which could negatively impact the price of our stock.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires us to evaluate and report on our internal control over financial reporting for all our current operations. The process of implementing our internal controls and complying with Section 404 will be expensive and time - consuming and will require significant attention of management. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude, and our independent registered public accounting firm concurs, that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness or a significant deficiency in our internal control, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including ineligibility for short form resale registration, action by the Securities and Exchange Commission, and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price and harm our business.
Because we do not intend to pay any dividends on our common stock in the near future, holders of our common stock must rely on stock appreciation for any return on their investment.
There are no restrictions in our Articles of Incorporation or Bylaws that prevent us from declaring dividends. The Florida Revised Statutes, however, do prohibit us from declaring dividends where, after giving effect to the distribution of the dividend we would not be able to pay our debts as they become due in the usual course of business; or our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution. We do not anticipate paying dividends for the foreseeable future, but will invest our cash resources in the growth of the Company. Accordingly, holders of our common stock will have to rely on capital appreciation, if any, to earn a return on their investment in our common stock.
As a result of these and other factors, our operating results may not meet the expectations of investors or public market analysts who choose to follow our company. Our failure to meet market expectations would likely result in decreases in the trading price of our common stock.
The audit reports included in this annual report have been prepared by auditors whose work may not be inspected fully by the Public Company Accounting Oversight Board and, as such, you may be deprived of the benefits of such inspection.
Our current independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and firms registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards.
Our auditors have a number of clients who have substantial operations within mainland China. But the PCAOB has been unable to complete inspections of the work of our auditors without the approval of the Chinese authorities. Thus, our auditors and their audit work are not currently inspected fully by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulation in their oversight of financial statement audits of U.S.-listed companies with significant operation in China. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.
Inspections of other firms that the PCAOB has conducted outside mainland China have identified deficiencies in those firms’ audit procedures and quality control procedures, which can be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in mainland China prevents the PCAOB from regularly evaluating our auditors’ audit procedures and quality control procedures as they relate to their work in mainland China. As a result, investors may be deprived of the benefits of such regular inspections.
The inability of the PCAOB to conduct full inspections of auditors in mainland China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures and quality control procedures as compared to auditors who primarily work in jurisdictions where the PCAOB has full inspection access. Investors may lose confidence in our reported financial information and the quality of our financial statements.
In addition, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress which, if passed, would require the SEC to maintain a list of issuers for which the PCAOB is unable to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (“EQUITABLE”) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ordinary shares could be adversely affected. It is unclear if this proposed legislation will be enacted. Furthermore, various deliberations have been carried out within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets.
On April 21, 2020, the SEC and the PCAOB issued a joint statement reiterating the greater risk that disclosures will be insufficient in many emerging markets, including the PRC, compared to those made by U.S. domestic companies. In discussing the specific issues related to the greater risk, the statement again highlights the PCAOB’s inability to inspect audit work paper and practices of accounting firms in the PRC, with respect to their audit work of U.S. reporting companies. However, it remains unclear what further actions, if any, the SEC and PCAOB will take to address the problem. There have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting the PRC-based companies from accessing U.S. capital markets.
If any such policies or deliberations were to materialize, the resulting legislation, if it were to apply to us, would likely have a material adverse impact on our business and the price of our ordinary shares.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties.
Jiarun Hospital leases our hospital complex from Harbin Baiyi Real Estate Development Co., Ltd, which is owned by Junsheng Zhang, the Chairman of our Board of Directors. The Lease was made in 2014 for a term of thirty years. Both parties agreed for the Hospital to pay 3 million RMB (US$436,199) as a deposit at the execution of the Leasing Agreement, which will be deducted from the final rental settlement. The Lease calls for an annual rent of RMB7,000,000 (US$1,004,593) to be prepaid at the start of each year. The annual rental was determined by amortizing the fair market value of the complex and applying an interest rate or 6.55% per annum, which was the benchmark interest rate announced by The People’s Bank of China. After the completion of all payments, the ownership of the leased property will be transferred to Jiarun.
In August 2017 JRSS leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from August 2017, JRSS is committed to lease expense payments of approximately $36,881 per year for 5 years. This office is used for a 2nd outpatient facility.
In December 2017 JRSS leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from December 2017, JRSS is committed to lease expense payments of approximately $68,128 per year for 5 years. This office is used for the operations of the 1st Branch Company.
In October 2019 JRSS updated the 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.
Item 3.
Item 3. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 4.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our shares of common stock have been listed for trading on the OTCQX® Best Market under the symbol “JRSS” since January 28, 2019. Previously, our common stock was listed for trading on the OTCQB market. Real-Time Level 2 Quotes for JRSIS Health Care Corporation common shares are available on www.otcmarkets.com. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
Holders of Securities
As of the date of filing of this report, we had 133 shareholders of record and 18,246,331 outstanding shares of common stock, par value $0.001.
There are currently effective prospectuses that will permit the public resale of 4,364,931 shares of our common stock now held by shareholders.
Dividends
We have not declared or paid any cash dividends on our common stock since our inception, and our board of directors currently intends to retain all earnings for use in the business for the foreseeable future. Any future payment of dividends will depend upon our results of operations, financial condition, cash requirements and other factors deemed relevant by our board of directors. There are currently no restrictions that limit our ability to declare cash dividends on its common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
We have no equity compensation plans.
Sales of Unregistered Securities
The Company did not effect any unregistered sales of equity securities during the quarter ended December 31, 2020.
Repurchase of Equity Securities
The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Act during the quarter ended December 31, 2020.
Item 6.
Item 6. Selected Financial Data.
Smaller reporting companies are not required to provide information required under this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted in the 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 applicable SEC regulations and is not intended to serve as a basis for projections of future events. See “Cautionary Statement Regarding Forward Looking Statements” above.
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 year ended December 31, 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 $7,691,679 balance in accounts receivable as of December 31, 2020 warranted an allowance for doubtful accounts of $3,300,027. The determination was based on 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 December 31, 2020, the amount of excess insurance claims aged over two years without reimbursement was $3,300,027, which was treated as a bad debt.
● 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 for the Years Ended December 31, 2020 and 2019
The following table shows key components of the results of operations during the years ended December 31, 2020 and 2019:
Revenue
Operating revenue for the year ended December 31, 2020, which resulted primarily from medicine (i.e. pharmaceuticals) revenue and patient services revenue, was $35,706,197, an increase of 13% as compared with the operating revenue of $31,463,433 for the year ended December 31, 2019. Revenue from the sale of medicine decreased by 13%, while revenue from provision of patient services grew by 27%. The increase in patient service revenue occurred despite the fact that the number of treated inpatients decreased by 29% to 14,649 patients, 6,002 less than the 20,651 patients treated in 2019. However, as the spread of COVID-19 through the population of the City of Harbin in 2020 resulted in patients with complex and life-threatening situations, the per capita medical expenses of inpatients increased to $1,151 in 2020, $387 or 51% more than the per capita medical expenses of inpatients in 2019. That 51% increase in per capita expense yielded only a 27% increase in patient service revenue, however, because the quarantines related to the pandemic prevented much of the elective medical procedures from occurring.
Operating costs and expenses
Total operating costs and expenses were $ 30,112,807 for the year ended December 31, 2020, an increase of $ 3,316,887 or 12% as compared to $ 26,795,920 for 2019. Since revenue increased by only 13% year-to-year, The 12% increase in operating costs and expenses correlated with the 13% increase in revenue. The primary components of the $3,316,887 increase in costs and expenses were:
● $3,667,196 increase in the cost of medical consumables. This 78% increase in expenses attributable to medical consumables was primarily related to the 51% increase in per capita medical expenses, as COVID-19 patients required more intensive treatment. Medical consumables mainly consist of materials expenses, medical repair expenses and test reagents. The largest components of the increase was the increase in materials expenses of $2,770,116 and an increase in inspection expenses of $448,620.
● $871,601 increase in salaries and benefits, reflecting $1,125,966 increase in salaries, partially offset by a $300,002 decrease in social insurance expense. This 12% increase in our labor costs was primarily caused by the revenue increase attributable to the hospitals, as we incurred labor costs in preparation for full scale operations of our branch hospitals.
● $76,797 increase in advertising and promotion expenses, likewise primarily attributable to the expansion of our operations during 2020.
● $484,043 increase in depreciation and amortization. This increase occurred because we increased the book value of our property and equipment as a result of additional property and equipment placed in service by $2,555,443 during 2019 and by $ 9,276,833 during 2020, which led to a 22% increase in depreciation during 2020.
Partially offsetting the factors listed above was a $1,038,653 decrease in the cost of medicine. As our sales of medicine decreased by 13%, the cost of the medicine sold decreased by 13%. The decrease was attributable to both Western medicine and Chinese traditional medicines.
After taking these factors into account, we reported $5,593,390 in Earnings from Operations during 2020, compared to $4,667,513 during 2019, which represented $925,877 or a 20% increase.
Other Income (expenses)
Other Income (expenses) for the year ended December 31, 2020 mainly consisted of a $389,940 increase in our allowance for doubtful accounts. The reasons for the increase was set forth above under “Critical Accounting Policies and Management Estimates”. As of December 31, 2020, the amount of excess insurance claims that are recorded on our books as bad debts was $3,300,027.
After taking other income (expenses) into account, the Company recorded Earnings before Income Taxes of $5,196,893 in 2020, an increase of $3,270,535 or 170% over Earnings before Income Taxes recorded in 2019, when we reduced our recorded Earnings by recording a bad debt expense of $2,700,035 related to excess insurance claims.
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.
The following table shows the components of the allowance for PRC income tax recorded for 2020:
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 2020 the Company purchased Eligible Equipment for RMB42.13 million, which produced $1,369,615 in deferred income tax, representing the difference between PRC tax treatment and GAAP treatment of taxation arising from equipment acquisition.
Net Income
After deducting other income and expenses as well as the provision for income tax, the Company’s net income for the year ended December 31, 2020 was $3,827,278, representing an increase of $2,558,619 or 202% from the $1,268,659 recorded for the year ended December 31, 2019. The increase in net income for the year ended December 31, 2020 was primarily due to aforementioned changes in operating revenue and expenses.
Liquidity and Capital Resources
Our cash flows for the past two years are summarized below:
As of December 31, 2020, the Company had $844,827 of cash and cash equivalents, a decrease of $1,126,302 from our cash balance at December 31, 2019. The decrease occurred because our operations during 2020 yielded $10,643,017 in cash.
Net Cash Provided by Operating Activities
The primary reasons that cash provided by operations so far exceeded our net income of $3,827,278 in 2020 were:
● Our accounts receivable balance was reduced by $492,436, including the $575,638 increase in our allowance for doubtful accounts.
● Our net income was reduced by a depreciation charge of $2,696,065 and a $1,137,445 accrual of interest.
● We increased our accounts payable account by $2,802,124.
● We increased our deferred tax payable account by $1,369,615.
At the same time, despite the $10,643,017 in cash provided by operations, our balance sheet at December 31, 2020 showed a working capital deficit of $3,877,411, representing an increase of $2,475,862 from our working capital deficit at December 31, 2019. The increase in our working capital deficit was primarily attributable to:
● our expenditure of $8,271,723 on fixed assets during 2020; and
● our use of $3,430,093 in cash for financing activities, primarily payments on capital lease obligations.
Cash flow from operating activities during the year ended of December 31, 2020 substantially exceeded net income, primarily because of an increase in the Company’s accounts payable balance by $2,802,124 and an increase in the deferred tax payable balance by $1,369,615. 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 2020 revenue leading to increased deposits received by $71,508 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 year of 2020 despite the increment in its profitability may not be replicable in the future operation.
Net Cash Used in Investing Activities
Net cash used in investing activities for the year ended December 31, 2020 was $8,271,723, compared to net cash used in investing activities of $3,962,588 for the year ended December 31, 2019. The cash used in investing activities for 2020 increased comparing with 2019 and was mainly due to increment in purchase of medical equipment and payment of construction in progress by $3,558,182 which increased to $8,271,723 in 2020 from $4,713,541 in 2019.
Net Cash Provided by Financing Activities
Net cash used in financing activities for the year ended December 31, 2020 was $3,430,093, as compared to net cash used in financing activities of $6,108,976 for the year ended December 31, 2019. The cash used in financing activities for 2020 decreased when comparing with 2019 and was mainly due to reduction of payment on capital lease obligation by $3,707,735 which reduced to $4,387,588 in 2020 from $8,095,323 in 2019.
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
Many residents of the City of Harbin, where all of our operations are located, have contracted COVID-19 during the current pandemic. As a result, the national and local government have imposed serious restrictions on business operations within the City, including mandatory quarantines. The quarantines have prevented Jiarun Hospital from carrying on its normal operations.
The China Ministry of Health, as well as other related agencies, may change the prices 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 or the SEC did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To: the Board of Directors and Stockholders of
JRSIS Health Care Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of JRSIS Health Care Corporation and subsidiaries (“the Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income and comprehensive income, change in stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of JRSIS Health Care Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 17 to the financial statements, the Company has a significant accumulated deficit and negative working capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of accounts receivable - and bad debt allowances
As described in Note 3 to the consolidated financial statements, substantially all of the Company’s accounts receivable are related to providing healthcare services to patients whose costs are primarily paid by central and provincial governmental authorities, managed health care plans, and related commercial insurance companies, and workers’ compensation and employer sponsored programs. As of December 31, 2020, the accounts receivable balance of the Company approximately totaled $7.7 million. The Company reports accounts receivable at an amount equal to the consideration that the management expects to be received in exchange for providing healthcare services to its patients, which is estimated using contractual provisions associated with specific facts and economic conditions, historical reimbursement rates, and an analysis of past reimbursement experience to estimate contractual allowances.
The principal considerations for our determination that performing procedures relating to the valuation of accounts receivable and bad debt allowances to be a critical audit matter are that there was significant judgment by management in estimating net accounts receivable at an amount equal to the actual consideration management expects to be received. This resulted in significant auditor judgment and effort in performing procedures and evaluating the audit evidence obtained in relation to the valuation of accounts receivable and bad debt allowances.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s valuation of accounts receivable, including controls over the estimate of bad debt allowances. These procedures also included, among others: (i) evaluating management’s process for developing the estimate for bad debt allowances, (ii) testing the completeness, accuracy, and relevance of the underlying data used to estimate bad debt allowances, including historical billing and reimbursement data. (iii) testing on subsequent settlements on the accounts receivable, (iv) evaluating the reasonableness of the factors included in considering probable claim losses derived from aged uncollectible insurance claim, changes in economic conditions that may not be captured in the quantitatively derived results, and other relevant factors.
/s/ Centurion ZD CPA & Co.
Centurion ZD CPA & Co.
We have served as the Company’s auditor since 2015.
Hong Kong, China
April 15, 2021
JRSIS HEALTH CARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN USD, EXCEPT SHARES)
See notes to consolidated financial statements
JRSIS HEALTH CARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(AMOUNTS IN USD, EXCEPT SHARES)
See notes to consolidated financial statements
JRSIS HEALTH CARE CORPORATION
CONSOLIDATED STATEMENT OF SHARESHOLDERS’ EQUITY
(AMOUNTS IN USD, EXCEPT SHARES)
See notes to consolidated financial statements
JRSIS HEALTH CARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN USD, EXCEPT SHARES)
See notes to consolidated financial statements
JRSIS HEALTH CARE CORPORATION
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:
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:
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:
A summary of changes in Warrant liability for the period ended December 31, 2020 was as follows:
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:
A summary of changes in Convertible Note for the year ended December 31, 2020 was as follows:
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
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:
NOTE 5. PREPAYMENT
At December 31, 2020 and 2019, prepayment consists of the following:
NOTE 6. PROPERTY AND EQUIPMENT
At December 31, 2020 and 2019, property and equipment, at cost, consist of:
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:
The future minimum lease payments for annual capital lease obligation as of December 31, 2020 are as follows:
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:
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:
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.
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:
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:
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:
Reconciliation:
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:
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:
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:
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.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that the material information required to be disclosed by us in our periodic reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, under the supervision of and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020, as required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2020 as a result of the material weaknesses discussed in “Management’s Report on Internal Control over Financial Reporting” below. Our management considers our internal control over financial reporting to be an integral part of our disclosure controls and procedures.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. The Company’s management is also required to assess and report on the effectiveness of the Company’s internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of the Company’s financial reporting for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect the Company’s transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of the Company’s financial statements and that receipts and expenditures of Company assets are made in accordance with management authorization; and (iii) provide reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Our management, under the supervision of and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of December 31, 2020 as required by Rules 13a-15(c) and 15d-15(c) under the Exchange Act. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013 Framework), including the following five framework components: i) control environment, ii) risk assessment, iii) control activities, iv) information and communications, and v) monitoring. Management determined that the following material weakness in our internal control over financial reporting.
●Inadequate and ineffective controls over accounting for income taxes. We did not have adequate design or operation of controls that provide reasonable assurance that the accounting for income taxes, including the related financial statement disclosures, were in accordance with U.S. GAAP. Specifically, we did not have sufficient technical expertise in the income tax function to provide adequate review and control with respect to the (a) identification and ongoing evaluation of uncertain tax positions in foreign tax jurisdictions; (b) complete and accurate recording of deferred tax assets and liabilities due to differences in accounting treatment for book and tax purposes; and (c) complete and accurate recording of inputs to the consolidated income tax provision and related accruals.
This material weakness resulted in post-closing adjustments to deferred income tax assets and liabilities, income taxes receivable, and income tax expense, which were corrected by management prior to the issuance of the Company’s consolidated financial statements included herein.
Remediation Plans
Management is committed to remediating the material weakness in a timely fashion. We have begun the process of executing remediation plans that address the material weakness in internal control over financial reporting relating to accounting for income taxes. Specifically, we hired internal personnel dedicated to managing the income tax function to enhance our expertise in determining the appropriate accounting for material and complex tax transactions. In addition, management’s planned actions to further address the material weakness include:
●Review of tax accounting process to identify and implement enhanced tax accounting processes and related internal control procedures;
●Enhancement of our process and internal controls related to the preparation of tax accounting position papers documenting our analysis and conclusions for all technical tax accounting matters, and
●Establish training and education programs for financial personnel responsible for income tax accounting.
The Audit Committee has directed management to develop a plan and timetable for the implementation of the foregoing remedial measures (to the extent not completed yet) and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of the Company’s internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.
Management believes the measures described above and others that will be implemented will remediate the control deficiencies identified and will strengthen our internal control over financial reporting. Management is committed to continuous improvement of the Company’s internal control processes and will continue to diligently review our financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, we may take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above. We expect these remedial actions and/or other actions related to this material weakness to be effectively implemented in 2021 in order to successfully remediate the material weakness reported within this Form 10-K by December 31, 2021.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm as we are a smaller reporting company and not required to provide such an attestation report.
Our management will continue to monitor and evaluate the effectiveness of its disclosure controls and procedures, as well as its internal control over financial reporting, on an ongoing basis, and is committed to taking further action and implementing additional improvements, as necessary and as funds allow. However, our management cannot guarantee that the measures taken or any future measures will remediate the material weaknesses identified or that any additional material weaknesses or significant deficiencies will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting. Notwithstanding the material weaknesses described above, our management believes that there are no material inaccuracies or omissions of material fact and, to the best of its knowledge, believes that the consolidated financial statements included in this annual report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
Changes in Internal Control over Financial Reporting
No changes in the Company’s internal control over financial reporting have come to management’s attention during the Company’s last quarter that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth certain information concerning our directors and executive officers:
Junsheng Zhang, was co-founder of our operating subsidiary, Jiarun Hospital, in 2006, and has managed Jiarun Hospital since that date. He has also served as Chairman and President of JRSIS Health Care Corporation since it was founded in 2013. From 1990 to 2011, Mr. Zhang was employed by medical suppliers, first as General Manager of Dongtai Medical Ltd., then as CEO of Dahua Medical Ltd. Mr. Zhang earned a Bachelor Degree and an EMBA degree from Peking University. He was appointed to serve on the JRSIS Board to provide his familiarity with the operations of JRSIS and his experience in the management of medical enterprises. Mr. Zhang is the spouse of Lihua Sun, our Chief Executive Officer, and father of Xuewei Zhang, our Chief Financial Officer.
Lihua Sun was co-founder of our operating subsidiary, Jiarun Hospital, in 2006, and has served in its management since that date. She has also served as Chief Executive Officer of JRSIS Health Care Corporation since it was founded in 2013. Prior to joining Jiarun Hospital, Ms. Sun was employed as General Manager of Ankang Medicine in Harbin City, and as a Director of Heilongjiang Dahua Medicine Co., Ltd. Ms. Sun was appointed to serve on the JRSIS Board to provide her familiarity with the operations of JRSIS and her experience in the management of medical enterprises. Ms. Sun is the spouse of Junsheng Zhang, our Chairman and President, and mother of Xuewei Zhang, our Chief Financial Officer.
Xuewei Zhang was first employed as finance manager of Jiarun Hospital in 2009, and has served as Chief Financial Officer of JRSIS Health Care Corporation since it was founded in 2013. Ms. Zhang earned a bachelor degree from the University of Exeter. Ms. Zhang was appointed to serve on the JRSIS Board to provide her familiarity with the financial operations of Jiarun Hospital. Ms. Zhang is the daughter of Junsheng Zhang, our Chairman and President, and of Lihua Sun, our Chief Executive Officer.
Yanhui Xing has been employed since 2010 as Assistant CEO of Eden Hall Global Capital Co., Ltd., a financial advisory firm located in Hong Kong. From 2003 to 2010, Ms. Xing held various positions in financial management, primarily in New Zealand. Prior to that period, Ms. Xing served for three years in an international accounting firm. She earned a Masters Degree in Banking and a Bachelors Degree in Accounting. Ms. Xing was appointed to serve on the JRSIS Board to provide her experience in financial management.
Yanming Zhang has been employed since 2018 as a budget officer by China Construction Second Engineering. From 2017 to 2018 he was employed as a communications specialist by the Harbin Acheng District Justice Bureau. In 2018 Mr. Zhang earned a Bachelors Degree from the China University of Geosciences. Mr. Zhang was appointed to serve on the JRSIS Board of Directors to provide his experience with China’s legal system.
Dianjun Mu was most recently employed by Tonghe County People’s Hospital, where he worked from 1998 to 2019 as Chief Financial Officer, from 1993 to 1998 as Chief of Internal Medicine, and from 1989 to 1991 as a physician. Mr. Mu earned a medical degree from Mudanjiang Medical University in 1989, and studied accounting at the Harbin Medical University from 1991 to 1993.
Suya Li has been employed in administration of Jiarun Hospital since 2016. From 2012 to 2016 Ms. Li was employed as Chief Operating Officer of Heilongjiang Victoria Maternity Hospital. From 2001 to 2011, Ms. Li was employed as Branch Secretary by the Harbin City Health Supervision Institute. Ms. Li earned a Bachelors Degree in 2001 from the Harbin Medical University.
Legal Proceedings Involving Officers and Directors
To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:
● Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
● Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
● Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
● Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
● Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
During the 2020 fiscal year, our Board of Directors had one meeting, including meetings that were held by means of a conference telephone call. The Board of Directors also acted by unanimous written consent on several occasions.
Board Committees
Audit Committee
Our Audit Committee was established in September 2018 and currently is comprised of Mr. Dianjun Mu, Ms. Xuewei Zhang and Mr. Yanming Zhang. Mr. Dianjun Mu serves as chairperson of the Audit Committee. Our Board has determined that Mr. Dianjun Mu is an “audit committee financial expert” as defined by the regulations promulgated by the SEC, by reason of his experience as a Supervisor for a firm of certified public accountants in the PRC. Mr. Dianjun Mu and Mr. Yanming Zhang are “independent” directors, as defined in the OTCQX Rules of U.S. Companies.
The purpose of the Audit Committee is to assist the Board in monitoring the integrity of the annual, quarterly and other financial statements of the Company, the independent auditor’s qualifications and independence, the performance of the Company’s independent auditors and the compliance by the Company with legal and regulatory requirements. The Audit Committee also reviews and approves all related-party transactions.
Compensation Committee
We do not presently have a compensation committee. Our Board of Directors currently acts as our compensation committee.
Nominating Committee
We do not presently have a nominating committee. Our Board of Directors currently acts as our nominating committee.
Code of Ethics
We do not presently have a code of ethics. However, we intend to adopt such a code of ethics in the future.
Item 11.
Item 11. Executive Compensation.
Executive Compensation
The following table sets forth information with respect to compensation paid by us to our Chief Executive Officer for services during the fiscal years ended December 31, 2020, 2019 and 2018. There was no executive officer to whom we paid or accrued amounts in excess of $100,000 as compensation for services during 2020.
Amounts of compensation for 2020, 2019 and 2018, reported in the table above, represent accrued compensation. The manner and timing of payments of the accrued compensation will depend on the future financial conditions of the Company.
Outstanding Equity Awards
No individual grants of stock options or other equity incentive awards have been made to any executive officer or any director since our inception.
Employment Contracts, Termination of Employment, Change-in-Control Arrangements
We have not entered into any employment or other contracts or arrangements with our executive officers. There are no compensation plans or arrangements, including payments to be made by us, with respect to our officers, directors or consultants that would result from the resignation, retirement or any other termination of such directors, officers or consultants from us. There are no arrangements for directors, officers, employees or consultants that would result from a change-in-control.
Compensation of Directors
We have no formal plan for compensating our directors for their services in their capacity as directors. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our Board of Directors. The Board of Directors may award special remuneration to any director undertaking any special services on behalf of JRSIS Health Care Corporation other than services ordinarily required of a director. To date, we have paid no compensation to any person for services as a member of the Company’s Board of Directors.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information regarding our shares of common stock beneficially owned as of the date hereof for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants or otherwise. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.
For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days as of the date hereof. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership.
The percentage ownership information shown in the table below is calculated based on 18,246,331 shares of our common stock issued and outstanding.
As a result of the ownership by our Chairman of 73.40% of the outstanding shares, our Chairman will have significant influence to:
● Elect or defeat the election of our directors;
● Amend or prevent amendment of our articles of incorporation or bylaws;
● Effect or prevent a merger, sale of assets or other corporate transaction; and
● Affect the outcome of any other matter submitted to the stockholders for vote.
Moreover, because of the significant ownership position held by our insiders, new investors will not be able to effect a change in the Company’s business or management, and therefore, shareholders would be subject to decisions made by management and the majority shareholders.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
There have been no transactions since the beginning of the 2020 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under “Executive Compensation”), except as follows:
In 2013 our subsidiary, Jiarun, leased its hospital building complex from Harbin Baiyi Real Estate Development Co., Ltd., which is owned by Junsheng Zhang, the Company’s Chairman of the Board. Pursuant to the Lease, Jiarun paid Harbin Baiyi Real Estate Development Co., Ltd. a rental fee of RMB7,000,000 (US$1,004,593) in September 2020 for the period from that date through August 31, 2021.
During 2020 Jiarun purchased pharmaceuticals and medical equipment from companies owned by Junsheng Zhang, the Company’s Chairman of the Board. The aggregate purchase price accrued during 2020 was $33,906.
Independent Directors
Based upon information submitted by Mr. Dianjun Mu and Mr. Yanming Zhang, the Board has determined that each of them is “independent”, as defined in the OTCQX Rules of U.S. Companies. No director will be considered “independent” unless the Board affirmatively determines that the director has no direct or indirect relationship with the Company that, in the opinion of the Company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Item 14.
Item 14. Principal Accounting Fees and Services.
We were billed by our independent public accounting firm, Centurion ZD CPA & Co. for the following professional services it performed for us during the years ended December 31, 2020 and 2019 as set forth in the table below.
Our Board of Directors pre-approves all audit and non-audit services performed by the Company’s auditor and the fees to be paid in connection with such services.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
(1)Incorporated by reference to the same exhibit filed with our registration statement on Form S1, as amended (File No. 333-194359).
*Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Junsheng Zhang
President, Chairman of the Board and Director
April 15, 2021
Junsheng Zhang
/s/ Lihua Sun
Chief Executive Officer and Director
April 15, 2021
Lihua Sun
/s/ Xuewei Zhang
Chief Financial Officer and Director
April 15, 2021
Xuewei Zhang
/s/ Yanhui Xing
Director
April 15, 2021
Yanhui Xing
/s/ Yanming Zhang
Director
April 15, 2021
Yanming Zhang
/s/ Dianjun Mu
Director
April 15, 2021
Dianjun Mu