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. |
|
● |
Harbin Jiarun
Hospital Co., Ltd Harbin New District Branch (“New District Branch”), which was incorporated in Harbin City, Heilongjiang
Province, China in April 2021. New District Branch is a private hospital serving patients on a municipal and county level and providing
both Western and Chinese medical practices to the residents of Harbin. |
30%
of the equity in Jiarun is held by Junsheng Zhang, and is therefore a non-controlling interest (“NCI”), accounted for pursuant
to ASC 810-10-45, which states that the ownership interest in the subsidiary that is held by owners other than the parent is a non-controlling
interest. According to the supplemental agreement signed between Junsheng Zhang and Runteng on June 1, 2013, the comprehensive income
from Jiarun would be attributable to retained earnings and non-controlling interest for 70% and 30% respectively, from July 1, 2013.
NOTE
2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES
A.
Basis of presentation
The
consolidated financial statements have been prepared in accordance with the United States generally accepted accounting principles (“U.S.
GAAP”).
B.
Principles of consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company transactions and balances
have been eliminated in consolidation. Non-controlling interests represent the equity interest in Jiarun that is not attributable to
the Company. Non-controlling interest is reported in the consolidated financial position within equity, separate from the Company’s
equity. Net income or loss and comprehensive income or loss are attributed to the Company’s and the non-controlling interest.
C.
Use of estimates
The
preparation of audited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the reporting periods. Management makes these estimates using the
best information available at the time the estimates are made; however actual results could differ from those estimates. Significant
items subject to such estimates and assumptions include valuation allowances for receivables and recoverability of carrying amount and
the estimated useful lives of long-lived assets. These estimates are often based on complex judgments and assumptions that management
believes to be reasonable but are inherently uncertain and unpredictable. Actual results could differ from these estimates.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
D.
Functional currency and foreign currency translation
JRSS
and JHCL’s functional currency is the United States dollar (“US$”). Runteng’s functional currency is the Hong
Kong dollar (“HK$”). The functional currency of Jiarun is the Renminbi (“RMB”).
The
Company’s reporting currency is US$. Assets and liabilities of Runteng and Jiarun are translated at the current exchange rate at
the balance sheet dates, revenues and expenses are translated at the average exchange rates during the reporting periods, and equity
accounts are translated at historical rates. Translation adjustments are reported in other comprehensive income.
The
exchange rates used for foreign currency translation are as follows:
| |
| |
| For the Year Ended December 31, | |
| |
| |
| 2021 | | |
| 2020 | |
| |
| |
| (USD to RMB/USD to HKD) | | |
| (USD to RMB/USD to HKD) | |
Assets and liabilities | |
period end exchange rate | |
| 6.3588 / 7.7971 | | |
| 6.5326 / 7.7527 | |
Revenue and expenses | |
period average | |
| 6.4499 / 7.7723 | | |
| 6.6020 / 7.7561 | |
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, 2021 and 2020,
no customer accounted for more than 10% of net revenue. As of December 31, 2021 and 2020, four and three customers accounted for more
than 5% of net accounts receivable, respectively. For those credit sales, the Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and,
as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
F.
Cash and cash equivalents
Cash
and cash equivalents include all cash, deposits in banks and other liquid investments with initial maturities of three months or less.
G.
Accounts receivable
Accounts
receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed.
The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on aging data, historical collection experience, customer specific
facts and economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted
and the potential for recovery is considered remote.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
H.
Inventories
Inventories,
consisting principally of medicines, are stated at the lower of cost or market using the first-in, first-out method (“FIFO”).
This policy requires the Company to make estimates regarding the market value of inventory, including an assessment of excess or obsolete
inventory. The Company determines excess or obsolete inventory based on an estimate of the future demand and estimated selling prices
for its products.
I.
Construction in progress
Construction
in progress represents the new hospital painting and decoration costs. And all direct costs relating to the polishing and decoration
are capitalized as construction in progress. No depreciation is recorded in respect of construction in progress.
J.
Property and equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations when incurred, while additions and
betterments are capitalized. Depreciation is recorded on a straight-line basis reflective of the useful lives of the assets. When assets
are retired or disposed, the asset’s original cost and related accumulated depreciation are eliminated from accounts and any gain
or loss is reflected in income.
The
estimated useful lives for property and equipment categories are as follows:
Buildings and
improvement |
|
10-40 years |
Medical equipment |
|
5-15 years |
Transportation instrument |
|
5-10 years |
Office equipment |
|
5-10 years |
Electronic equipment |
|
5-10 years |
Software |
|
5-10 years |
K.
Leases
In
February 2016, the FASB issued ASU 2016-02–Leases (Topic 842), which increases transparency and comparability among organizations
by recognizing right-of-use (“ROU”) lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. The ASU maintains a distinction between finance leases and operating leases, which is substantially similar
to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. Retaining
this distinction allows the recognition, measurement and presentation of expenses and cash flows arising from a lease to remain similar
to the previous accounting treatment. A lessee is permitted to make an accounting policy election by class of underlying asset to exclude
from balance sheet recognition any lease assets and lease liabilities with a term of 12 months or less, and instead to recognize lease
expense on a straight-line basis over the lease term. For both financing and operating leases, the ROU asset and lease liability is initially
measured at the present value of the lease payments in the consolidated balance sheet. In July 2018, the FASB issued ASU 2018-11 which
provides entities with the option to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment
to the opening balance of retained earnings in the period of adoption, if necessary. As discussed in Note 8, we adopted ASU 2016-02–Leases
(Topic 842) effective January 1, 2019 utilizing the transition option provided by ASU 2018-11.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
L.
Fair Value Measurement
The
Company applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial
liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements.
ASC 820 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
Fair
value is defined as the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. In determining the fair value for the assets and liabilities required or permitted
to be recorded, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions
that market participants would use when pricing the asset or liability.
ASC
820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value
hierarchy are as follows:
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level
2: Quoted prices in markets that are not active, or inputs that is observable, either directly or indirectly, for substantially the full
term of the asset or liability;
Level
3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported
by little or no market activity).
The
following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair
value on a recurring basis:
| |
Carrying Value at December 31, | | |
Fair Value Measurement at December 31, 2021 | |
| |
2021 | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Warrant liability | |
$ | 7 | | |
$ | - | | |
$ | - | | |
$ | 7 | |
A
summary of changes in Warrant liability for the period ended December 31, 2021 was as follows:
Balance at January 1, 2020 | |
$ | 1,149 | |
Change in fair value of warrant liability | |
| (1,142 | ) |
Balance at December 31, 2021 | |
| 7 | |
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:
| |
December 31, 2021 | |
Warrants | |
Auctus | |
Market price per share (USD/share) | |
$ | 0.2275 | |
Exercise price (USD/share) | |
| 0.60 | |
Risk free rate | |
| 0.379 | % |
Dividend yield | |
| - | |
Expected term/Contractual life (years) | |
| 0.58 | |
Expected volatility | |
| 41.06 | % |
Cash
and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the accompanying consolidated financial
statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s
capital lease obligations also approximates carrying value as they bear interest at current market rates.
M.
Segment and geographic information
The
Company is operating in one segment in accordance with the accounting guidance FASB ASC topic 280, “Segment Reporting”. The
company’s revenues are from customers in People’s Republic of China (“PRC”). All assets of the company are located
in PRC.
N.
Revenue recognition
The
Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that economic benefits will flow to the
entity, and specific criteria have been met for each of the Company’s activities as described below.
Medicine
sales
Revenue
from the sale of medicine is recognized when it is both earned and realized. The Company’s policy is to recognize the sale of medicine
when the title of the medicine, ownership and risk of loss have transferred to the purchasers, and collection of the sales proceeds is
reasonably assured, all of which generally occur when the patient receives the medicine.
Given
the nature of this revenue source of the Company’s business and the applicable rules guiding revenue recognition, the revenue recognition
practices for the sale of medicine do not contain estimates that materially affect results of operations nor does the Company have any
policy for return of products.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Patient
Services
In
accordance with the medical licenses under which Jiarun operates, the scope of its approved medical patient service includes medical
consulting, surgery, obstetrics and gynecology, pediatrics, anesthesia, clinic laboratory, medical imaging, and traditional Chinese medicine.
Patient
service revenue is recognized when it is both earned and realized. The Company’s policy is to recognize patient service revenue
when the medical service has been provided to the patient and collection of the revenue is reasonably assured.
The
Company provides services to both patients covered by social insurance and patients who are not covered by social insurance. The Company
charges the same rates for patient services regardless of the coverage by social insurance.
Patients
who are not covered by social insurance are liable for the total cost of medical treatment.
| ● | For
out-patient medical services, revenue is recognized when the Company provides medical service to the patient. The Company collects payment
before the patient leaves the hospital. |
| ● | For
in-patient medical services, when a patient checks into the hospital, the Company estimates the approximate fee the patient will spend
in the hospital based on patient’s symptoms. At that time, the Company collects the estimated fees from the patient and records
the payment as deposits received. |
During
the in-patient services period, the Company recognizes revenue when the patient service is provided and deducts the cost of service from
the deposit received. The Company records these transactions based on daily reports generated by the respective medical department. When
medical services exceed patient deposits received the Company records revenue and accounts receivable when the patient services are provided.
When
a patient checks out from the hospital, the Company calculates and determines the remaining deposit, if any, and refunds the unused portion
of the deposit to the patients. In the case where the patient has a balance in accounts receivable, accounts receivable are required
to be paid in full at checkout.
Patients
covered by social insurance will receive a portion or full medical services reimbursed or paid by the social insurance agencies via prepaid
cards or insurance claim settlement process.
Settlement
process
The
Company is a registered medical service vendor under the state social insurance system for various social insurance agencies; the insurance
agencies include “Social Medical Insurance funded by PRC and Heilongjiang Province” and “Heilongjiang Province New
Rural Cooperative Medical Care System”. The Company utilizes an online system maintained by the social insurance agencies for patients
who are covered by social insurance agencies.
| ● | The
Company records patients’ information in the social insurance system at check in. The system determines the covered portion and
amounts based on the information input to the system. |
| ● | At
the time of check out, the Company collects payment for services the patients are liable for and records accounts receivable from the
social insurance agencies for the portion of services covered by the social insurances. In the case that the patients have made payment
during the in-patient services period, the Company refunds any amount in excess of the portion they are liable for. |
| ● | The
Company is responsible for submitting supporting documents of patient services provided to the social insurance agencies for their review.
The Company is also required to reconcile its records with the social insurance agencies once a month. Once the social insurance agencies
approve the reconciliation, the insurance agencies will settle the accounts receivable balance in the next month following the approval. |
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
O.
Income taxes
The
Company has adopted FASB ASC Topic 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,
deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods
in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.
In
July 2006, the FASB issued FIN 48 (ASC 740-10), Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109
(ASC 740), which requires income tax positions to meet a more-likely-than-not recognition threshold to be recognized in the financial
statements. Under FIN 48 (ASC 740-10), tax positions that previously failed to meet the more-likely-than-not threshold should be recognized
in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold
is no longer met.
The
application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations
themselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court
rulings. Therefore, the actual liability may be materially different from our estimates, which could result in the need to record additional
tax liabilities or potentially reverse previously recorded tax liabilities or deferred tax asset valuation allowance.
As
a result of the implementation of FIN 48 (ASC 740-10), the Company made a comprehensive review of its portfolio of tax positions in accordance
with recognition standards established by FIN 48 (ASC 740-10). The Company recognized no material adjustments to liabilities or shareholder’s
equity as a result of the implementation. The adoption of FIN 48 did not have a material impact on the Company’s unaudited consolidated
financial statements.
Enterprise
income tax is determined under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC, income
tax is payable by enterprises at a rate of 25% of their taxable income.
P.
Earnings per share
Basic
earnings per common share is computed by using net income divided by the weighted average number of shares of common stock outstanding
for the periods presented. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of
common stock, common stock equivalents and potentially dilutive securities outstanding for the periods presented.
Q.
Reclassification
The
comparative figures have been reclassified to conform to current year presentation.
R.
Recently adopted accounting pronouncements
The
FASB has issued Accounting Standards Update (ASU) No. 2019-01, Leases (Topic 842): Codification Improvements. The new ASU aligns the
guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance.
As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that
may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences,
the definition of fair value (in Topic 820, Fair Value Measurement) should be applied.
The
ASU also requires lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal
payments received under leases” within investing activities.
Finally,
the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts
the new leases standard.
We
do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on
the consolidated financial position, statements of operations and cash flows.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
3. ACCOUNTS RECEIVABLE, NET
| |
December 31 | |
| |
2021 | | |
2020 | |
Accounts receivable | |
$ | 10,934,280 | | |
$ | 7,691,679 | |
Less: allowance for doubtful debts | |
| 3,390,247 | | |
| 3,300,027 | |
| |
$ | 7,544,033 | | |
$ | 4,391,652 | |
The
Company recorded $nil and $389,940 in bad debts in other income(expense) during the years ended December 31, 2021 and 2020. The increase
in our allowance for doubtful debts represents 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, 2021 and 2020, inventories consist of the following:
| |
December 31 | |
| |
2021 | | |
2020 | |
Western medicine | |
$ | 830,422 | | |
$ | 720,622 | |
Chinese herbal medicine | |
| 202,274 | | |
| 32,840 | |
Medical material | |
| 732,326 | | |
| 697,535 | |
Other material | |
| 6,136 | | |
| 7,220 | |
| |
$ | 1,771,158 | | |
$ | 1,458,217 | |
NOTE
5. PREPAYMENT
At
December 31, 2021 and 2020, prepayment consists of the following:
| |
December 31 | |
| |
2021 | | |
2020 | |
Deposits on medical equipment | |
$ | 624,691 | | |
$ | 173,438 | |
Heating fees | |
| 184,765 | | |
| 78,356 | |
Deposits on lease | |
| 1,936,367 | | |
| - | |
Others | |
| 66,333 | | |
| 374,128 | |
| |
$ | 2,812,156 | | |
$ | 625,922 | |
NOTE
6. PROPERTY AND EQUIPMENT
At
December 31, 2021 and 2020, property and equipment, at cost, consist of:
| |
December 31, | |
| |
2021 | | |
2020 | |
Transportation equipment | |
$ | 1,548,978 | | |
$ | 1,263,860 | |
Medical equipment | |
| 28,308,857 | | |
| 24,234,134 | |
Electrical equipment | |
| 2,418,966 | | |
| 2,300,036 | |
Office equipment and other | |
| 1,451,612 | | |
| 1,354,139 | |
Buildings | |
| 28,908,532 | | |
| 28,139,226 | |
Software | |
| 203,478 | | |
| 198,063 | |
Total fixed assets at cost | |
| 62,840,423 | | |
| 57,489,458 | |
Accumulated depreciation | |
| (13,703,422 | ) | |
| (10,213,582 | ) |
Total fixed assets, net | |
$ | 49,137,001 | | |
$ | 47,275,876 | |
Reclass to Right-of-use assets | |
| (15,974,184 | ) | |
| (15,820,452 | ) |
Depreciation
expense was $3,313,827 and $2,696,065 for the years ended December 31, 2021 and 2020, 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”), an unrelated 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
$1.7 million for the decoration of its outpatient building and the two Branch Hospitals. During the year ended December 31, 2020, the
Company paid approximately $2.2 million for the decoration of its New District Branch hospital. 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 $461,331 and $452,205 as of December
31, 2021 and 2020. The long-term deferred expenses were $2,117,763 and $2,510,460 as of December 31, 2021 and 2020.
The
Company recorded consulting fees of $nil and $36,546, and decoration fees of $458,006 and $447,457 for the year ended December 31, 2021
and 2020, 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 $1,100,837) 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, May 25, 2019 and 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.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
8. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (Continued)
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.
On
June 16, 2021 Jiarun entered into a finance lease agreement for the acquisition of medical equipment from GE with a net value of $2,524,061.
Operating
lease
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 make lease payments of approximately $41,607 per year for 5 years. This office is used for outpatient services
by 2nd Branch Hospital.
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 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 $193,433 per year for 3 years.
This office is used for the operations of Nanjing Road Branch.
In
January 2021 JRSS leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from January
2021, JRSS is committed to lease expense payments of approximately $864,943 per year for 10 years. This office is used for the operations
of the New District Branch.
In
June 2021 JRSS leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from July 2021,
JRSS is committed to lease expense payments of approximately $125,810 per year for 3 years. This office is used for the operations of
the New District Branch.
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 $22.34
million and $23.06 million, respectively, as of December 31, 2021.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
8. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (Continued)
As
of December 31, 2021, the Company has the following amounts recorded on the Company’s unaudited condensed consolidated balance
sheet:
| |
December 31, 2021 | |
Assets | |
| |
Operating lease assets | |
$ | 6,363,333 | |
Finance lease assets | |
| 15,974,184 | |
Total | |
$ | 22,337,517 | |
Liabilities | |
| | |
Current | |
| | |
Operating lease liabilities | |
| 812,843 | |
Finance lease liabilities | |
| 1,864,113 | |
Long-term | |
| | |
Operating lease liabilities | |
| 5,550,490 | |
Finance lease liabilities | |
| 14,830,409 | |
Total | |
$ | 23,057,855 | |
The
future minimum lease payments for annual capital lease obligation as of December 31, 2021 are as follows:
Year | |
Amounts | |
2022 | |
$ | 1,864,113 | |
2023 | |
| 1,942,380 | |
2024 | |
| 858,951 | |
Thereafter | |
| 12,029,078 | |
Total | |
$ | 16,694,522 | |
The
Company recorded finance interest lease fees of $1,131,153 and $1,071,804 for the year ended December 31, 2021 and 2020.
Future
annual minimum lease payments for non-cancellable operating leases are as follows:
Year ending December 31 | |
Amount $ | |
2022 | |
| 812,843 | |
2023 | |
| 683,327 | |
2024 | |
| 643,421 | |
Thereafter | |
| 4,223,742 | |
Total | |
| 6,363,333 | |
The
Company recorded operating lease expense of $1,155,662 and $223,949 for the years ended December 31, 2021 and 2020.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
8. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (Continued)
At
December 31, 2021 right-of-use assets consist of:
| |
December 31, 2021 | |
| |
Operating leases | | |
Finance leases | | |
Total | |
Lease assets | |
$ | 7,145,240 | | |
$ | 16,870,036 | | |
$ | 24,015,276 | |
Accumulated amortization | |
| (781,907 | ) | |
| (895,852 | ) | |
| (1,677,759 | ) |
Total right-of-use assets, net | |
$ | 6,363,333 | | |
$ | 15,974,184 | | |
$ | 22,337,517 | |
The
Company recorded finance lease amortization expense of $895,852 and $1,116,430 in depreciation and amortization for the year ended December
31, 2021 and 2020 respectively. For the year ended December 31, 2021, the amount of depreciation and amortization was $3,313,827, which
included general property and equipment depreciation of $2,414,963.
The
Company recorded operating lease expense of $1,155,662 and $223,949 for the years ended December 31, 2021 and 2020, including operating
lease amortization expense of $781,907 and $192,779 for the years ended December 31, 2021 and 2020, 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.
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,
2021, the Company marked to market the fair value of the Auctus Fund warrant liability and determined a fair value of $7. The Company
recorded an income(loss) from issuance expense and change in fair value of warrant liability of $1,142 and $(139,467) for the year ended
December 31, 2021. 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 41.06%, (3) weighted average risk-free interest rate of 0.379%, (4)
expected life of 0.58 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, 2021 and 2020.
As
of December 31, 2021 and 2020 NCI in the consolidated balance sheet was $11,034,278 and $9,802,677, respectively. For the year ended
December 31, 2021, the comprehensive income attributable to shareholders’ equity and NCI is $2,888,726 and $1,231,601, respectively.
For the year ended December 31, 2020, the comprehensive income attributable to shareholders’ equity and NCIs is $3,804,952 and
$1,634,064, respectively.
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
11. REVENUE
The
Company’s revenue consists of medicine sales and patient care revenue.
| |
For the Year Ended December 31, | |
| |
2021 | | |
2020 | |
Medicine: | |
| | |
| |
Western medicine | |
$ | 9,040,020 | | |
$ | 7,239,395 | |
Chinese medicine | |
| 956,497 | | |
| 864,533 | |
Herbal medicine | |
| 1,509,524 | | |
| 1,296,185 | |
Total medicine | |
$ | 11,506,041 | | |
$ | 9,400,113 | |
| |
| | | |
| | |
Patient services: | |
| | | |
| | |
Medical consulting | |
$ | 14,125,638 | | |
$ | 12,619,561 | |
Medical treatment | |
| 17,511,450 | | |
| 12,287,228 | |
Others | |
| 1,248,042 | | |
| 1,399,295 | |
Total patient services | |
$ | 32,885,130 | | |
$ | 26,306,084 | |
| |
| | | |
| | |
| |
$ | 44,391,171 | | |
$ | 35,706,197 | |
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 2021:
| |
Amounts | |
Loss before income tax | |
$ | (104,777 | ) |
Tax rate at 21% | |
| (22,003 | ) |
Disallowed tax losses | |
| 22,003 | |
Income tax expense | |
$ | - | |
BVI
JHCL
was incorporated in the BVI and, under the current laws of the BVI, it is not subject to income tax.
Hong
Kong
Runteng was
incorporated in Hong Kong and is subject to Hong Kong profits tax. Runteng is subject to Hong Kong taxation on its activities conducted
in Hong Kong and income arising in or derived from Hong Kong. The applicable statutory tax rate is 16.5%.
The
following table shows the components of the allowance for Hong Kong income tax recorded for 2021:
| |
Amounts | |
Loss before income tax | |
$ | (166 | ) |
Tax rate at 16.5% | |
| (27 | ) |
Disallowed tax losses | |
| 27 | |
Income tax expense | |
$ | - | |
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
12. INCOME TAX EXPENSE (Continued)
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 2021:
| |
Amounts | |
| |
| |
Income tax expense | |
$ | 447,309 | |
Income tax: 2021 deferred | |
| 733,811 | |
Tax expense from continuing operation | |
$ | 1,181,120 | |
| |
Amounts | |
Reconciliation: | |
| | |
Income tax at statutory rate | |
$ | 1,181,120 | |
Tax expense from continuing operation | |
$ | 1,181,120 | |
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 2021 the Company purchased Eligible Equipment for RMB27.75
million, which produced $733,811 in deferred income tax, representing the difference between PRC tax treatment and GAAP treatment of
taxation arising from equipment acquisition.
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
JRSIS
HEALTH CARE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS
IN USD)
NOTE
13. RELATED PARTY TRANSACTIONS (Continued)
Amount
due from related parties
Amount
due from related parties consisted of the following as of the periods indicated:
| |
December 31, | |
Name of related parties | |
2021 | | |
2020 | |
Harbin Baiyi Real Estate Development Co., Ltd, | |
$ | 337,519 | | |
$ | - | |
Heilongjiang Province Runjia Medical Equipment Co., Ltd | |
| 78 | | |
| - | |
| |
$ | 337,597 | | |
$ | - | |
Amount
due from Baiyi mainly represented the deposit for the new hospital New District Branch building decoration. The Company had paid a deposit
of $337,519 in 2021.
Amount
due to related parties
Amount
due to related parties consisted of the following as of the periods indicated:
| |
December 31, | |
Name of related parties | |
2021 | | |
2020 | |
Harbin Jiarun Pharmacy Co., Ltd | |
$ | 952 | | |
$ | 33,624 | |
Heilongjiang Province Runjia Medical Equipment Co., Ltd | |
| - | | |
| 1,761 | |
Jiarun Super Market Co., Ltd. | |
| 290 | | |
| 282 | |
Harbin Baiyi Real Estate Development Co., Ltd | |
| - | | |
| 114,584 | |
Junsheng Zhang | |
| - | | |
| 12,670 | |
| |
$ | 1,242 | | |
$ | 162,921 | |
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
in 2020.
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)
NOTE
13. RELATED PARTY TRANSACTIONS (Continued)
Related
parties’ transactions
Purchase of medicine, medical material and decoration
service from related parties consisted of the following for the periods indicated:
| |
For the Year ended December 31, | |
Name of related parties | |
2021 | | |
2020 | |
Harbin Jiarun Pharmacy Co., Ltd | |
$ | 15,541 | | |
$ | 33,624 | |
Harbin Baiyi Real Estate Development Co., Ltd | |
| 465,892 | | |
| - | |
Heilongjiang Province Runjia Medical Equipment Co., Ltd | |
| 189 | | |
| - | |
Jiarun Super Market Co., Ltd. | |
| 140 | | |
| 282 | |
| |
$ | 481,762 | | |
$ | 33,906 | |
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, 2021, the Company had deposits for capital leases and capital lease
obligations of $471,787 and $13,182,148, respectively. As of December 31, 2020, the Company had deposits for capital leases and capital
lease obligations of $459,232 and $12,831,348, respectively.
NOTE
14. BASIC AND DILUTED EARNINGS PER SHARE
Basic
net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income
per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during
the period. Potential common shares comprise shares issuable upon the exercise of share-based awards, using the treasury stock method.
The reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income from continuing
operations is shown as follows:
| |
December 31 | |
| |
2021 | | |
2020 | |
Numerator: | |
| | |
| |
Net income available to common stockholders | |
$ | 2,232,261 | | |
$ | 2,679,095 | |
Denominator: | |
| | | |
| | |
Basic weighted-average number of shares outstanding | |
| 18,451,588 | | |
| 18,060,070 | |
Diluted weighted-average number of shares outstanding | |
| 18,661,588 | | |
| 18,270,070 | |
Net income per share: | |
| | | |
| | |
Basic | |
$ | 0.1210 | | |
$ | 0.1483 | |
Diluted | |
| 0.1196 | | |
| 0.1466 | |
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, 2021 and 2020.
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, 2021and 2020.
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 second quarter of 2021, the Company issued 382,238 shares to Auctus Fund, LLC. The shares were issued upon conversion by Auctus Fund
of debt arising under the Promissory Note Auctus Fund purchased from the Company in July 2019. The sale was exempt from registration
pursuant to Section 4(a)(2) of the Securities Act of 1933.
NOTE
17. GOING CONCERN
As
reflected in the accompanying consolidated financial statements, the Company had a $1,877,296 negative retained earnings or accumulated
deficit as of December 31, 2021; in addition, the Company’s total current liabilities exceeded its current assets by $3,733,571.
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
COVID-19 pandemic has had a significant adverse impact and created many uncertainties related to our business, and we expect that it
will continue to do so. The Company is experiencing challenges in sales and has suffered a significant decrease in revenues which has
increased financial uncertainty. Our future business outlook and expectations are very uncertain due to the impact of the COVID-19 pandemic
and are very difficult to quantify. It is difficult to assess or predict the impact of this unprecedented event on our business, financial
results or financial condition.
Except
for the above matter, the Management of the Company determined that there were no material reportable subsequent events required
to be disclosed or because of which adjustments are needed.