JRSIS HEALTH CARE Corp - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 000-56013

JRSIS HEALTH CARE CORPORATION.  

(Exact name of Registrant as specified in its charter)

No. 38 South Street 

Hulan District, Harbin City, 

Heilongjiang Province, China 150025

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of the date of filing of this report, there were outstanding 18,628,569 shares of the issuer’s common stock, par value $0.001 per share.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X, Rule 10-01(c) Interim Financial Statements, and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. Operating results for the nine months ended September 30, 2021 are not necessarily indicative of the results that can be expected for the year ended December 31, 2021.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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 OPERATIONS AND COMPREHENSIVE INCOME 

(AMOUNTS IN USD, EXCEPT SHARES) (UNAUDITED)

See notes to consolidated financial statements

JRSIS HEALTH CARE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ 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:

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 nine months ended September 30, 2021 and 2020, no customer accounted for more than 10% of net revenue. As of September 30, 2021 and December 31, 2020, three and three customers, respectively, each accounted for more than 5% of net accounts receivable. 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. As a consequence, the Company 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. 

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. 

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

I. Construction in progress

Construction in progress represents the new hospital painting and decoration costs. All direct costs relating to the polishing and decoration are capitalized as construction in progress. No depreciation is provided 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.

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:

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 nine months ended September 30, 2021 was as follows:

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:

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.

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.

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.

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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.

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.

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

NOTE 2. SUMMARIES OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. 

NOTE 3. ACCOUNTS RECEIVABLE, NET

The Company experienced $ nil bad debts during nine months ended September 30, 2021 and 2020. The allowances for doubtful debts as of September 30, 2021 and December 31, 2020 were taken by the Company to reflect excess insurance claims submitted by the Company to the Harbin Medical Insurance Management Centre that have remained unreimbursed for over two years.

NOTE 4. INVENTORIES

At September 30, 2021 and December 31, 2020, inventories consist of the following:

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

NOTE 5. PREPAYMENT

At September 30, 2021 and December 31, 2020 prepayment consists of the following:

NOTE 6. PROPERTY AND EQUIPMENT

At September 30, 2021 and December 31, 2020, property and equipment, at cost, consist of:

The Company recorded depreciation expense of $837,917 and $649,726, $2,449,963 and $1,808,738 for the three and nine months ended September 30, 2021 and 2020, respectively.

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 portion of the prepaid consulting and decoration fees were recorded as deferred expenses of $454,244 and $452,205 as of September 30, 2021 and December 31, 2020. The long-term deferred expenses were $2,199,591 and $2,510,460 as of September 30, 2021 and December 31, 2020.

The Company recorded consulting fee of $nil and $5,012 for the three months ended September 30, 2021 and 2020, and decoration fees of $114,174 and $106,715 for the three months ended September 30, 2021 and 2020, respectively. The Company recorded consulting fee of $nil and $32,869 for the nine months ended September 30, 2021 and 2020, and decoration fees of $342,406 and $316,705 for the nine months ended September 30, 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.

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

NOTE 8. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES (Continued)

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:

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 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 net value of $2,485,290 medical equipments from GE.

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 1^st 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.

In January 2021 JHCC leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from January 2021, JHCC is committed to make lease payments of approximately $848,000 per year for 5 years. This office is used by 3^rd Branch Hospital.

In June 2021 JHCC leased office space under non-cancellable operating lease agreements. Under terms of the lease agreement, from June 2021, JHCC is committed to make lease payments of approximately $123,600 per year for 3 years. This office is used by 3^rd Branch Hospital

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 $20.23 million and $20.74 million, respectively, as of September 30, 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 September 30, 2021, 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 September 30, 2021 are as follows:

The Company recorded finance lease fees of $254,479 and $275,126 for the three months ended September 30, 2021 and 2020, respectively, and recorded finance interest lease fees of $822,113 and $816,509 for the nine months ended September 30, 2021 and 2020, respectively.

Future annual minimum lease payments, for non-cancellable operating leases are as follows:

The company has recorded operating lease expense of $293,149 and $27,900 for three months ended September 30, 2021 and 2020, and recorded operating lease expense of $740,613 and $81,764 for nine months ended September 30, 2021 and 2020 respectively

At September 30, 2021 right-of-use assets consist of:

The Company recorded finance lease amortization expense of $254,479 and $275,126 in depreciation and amortization for the three months ended September 30, 2021 and 2020, respectively, and recorded finance lease amortization expense of $822,113 and $816,509 in depreciation and amortization for the nine months ended September 30, 2021 and 2020, respectively. For the three and nine months ended September 30, 2021, the amount of depreciation and amortization was $837,917 and $2,449,963, which included general property and equipment depreciation of $654,569 and $1,606,461.

The Company recorded operating lease expense of $352,600 and $73,174 for the three months ended September 30, 2021 and 2020, and recorded operating lease expense of $902,327 and $159,782 for the nine months ended September 30, 2021 and 2020, including operating lease amortization expense of $293,149 and $27,900 for the three months ended September 30, 2021 and 2020, and $740,613 and $81,764 for the nine months ended September 30, 2021 and 2020, respectively. 

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

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 September 30, 2021, the Company marked to market the fair value of the Auctus Fund warrant liability and determined a fair value of $2,785. The Company recorded a loss from issuance expense and change in fair value of warrant liability of $1,636 and $181,136 for nine months ended September 30, 2021 and 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 47.23%, (3) weighted average risk-free interest rate of 0.211%, (4) expected life of 0.83 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 recognized. The Company holds a 70% equity interest in Jiarun as of September 30, 2021 and December 31, 2020.

As of September 30, 2021 and December 31, 2020, NCI on the consolidated balance sheet was $10,618,829 and $9,802,677, respectively, representing the 30% of Jiarun that is owned by Junsheng Zhang.

For the three months ended September 30, 2021, the comprehensive income attributable to shareholders’ equity and NCI is $375,833 and $173,017 respectively. For the nine months ended September 30, 2021, the comprehensive income attributable to shareholders’ equity and NCI is $1,649,813 and $816,152, respectively.

For the three months ended September 30, 2020, the comprehensive income attributable to shareholders’ equity and NCI is $1,414,844 and $565,116 respectively. For the nine months ended September 30, 2020, the comprehensive income attributable to shareholders’ equity and NCI is $1,574,442 and $716,916, respectively.

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

NOTE 11. REVENUE

The Company’s revenue consists of pharmaceuticals 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 at a 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 nine months ended September 30, 2021:

BVI

JHCL was incorporated in the BVI and, under the current laws of the BVI, it is not subject to income tax.

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

NOTE 12. INCOME TAX EXPENSE (Continued)

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 nine months ended September 30, 2021:

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 nine months ended September 30, 2021:

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 condition that the unit price of each item of equipment or machinery is individually less than RMB5 million. Depreciation for tax purposes is not required. Basis differences between tax and GAAP for depreciation of property and equipment exist because in the first nine months of 2021 the Company purchased Eligible Equipment for RMB 23.8 million, with $673,561 deferred income tax, creating differences between the tax treatment mandated by the Chinese government and GAAP tax treatment.

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

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:

Amounts due to related parties

Amounts 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 three companies.

Amounts due to Junsheng Zhang represented amounts paid by Mr. Zhang for the operation of the company.

Related parties’ transactions

Purchase of pharmaceuticals 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 a new hospital building from Harbin Baiyi Real Estate Development Co., Ltd, which is owned by Junsheng Zhang, a related party. As of September 30, 2021, the Company has balance of deposits for capital leases and capital lease obligations of $464,540 and $12,518,359, 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.

JRSIS HEALTH CARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN USD)

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 September 30, 2021 or December 31, 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 September 30, 2021 and December 31, 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 for services. These issuances were made pursuant to SEC Regulation S during 2021, 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 $2,747,015 negative retained earnings or accumulated deficit as of September 30, 2021; in addition, the Company’s total current liabilities exceeded its current assets by $5,547,105. 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. 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward Looking Statements

The discussion contained in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases like “anticipate,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “target,” “expects,” “management believes,” “we believe,” “we intend,” “we may,” “we will,” “we should,” “we seek,” “we plan,” the negative of those terms, and similar words or phrases.    We base these forward-looking statements on our expectations, assumptions, estimates and projections about our business and the industry in which we operate as of the date of this Form 10-Q. These forward-looking statements are subject to a number of risks and uncertainties that cannot be predicted, quantified or controlled and that could cause actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. The “Risk Factors” section in our Annual Report on Form 10-K describes factors, among others, that could contribute to or cause these differences. Actual results may vary materially from those anticipated, estimated, projected or expected should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect. Because the factors discussed in the Risk Factors section of our Form 10-K could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any such forward-looking statement. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this Form 10-Q.

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted 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.

Overview

Harbin Jiarun Hospital Company Limited (“Jiarun”) was established in Harbin in the Province of Heilongjiang of the People’s Republic of China (“PRC”) by the owner Junsheng Zhang on February 17, 2006.

Harbin Jiarun Hospital Co., Ltd Nanjing Road Branch (“NRB Hospital”) was established in Harbin in the Province of Heilongjiang of the People’s Republic of China (“PRC”) by Jiarun on October 30, 2017.

Harbin Jiarun Hospital Co., Ltd 2nd Branch (“2nd Branch Hospital”) was established in Harbin in the Province of Heilongjiang of the People’s Republic of China (“PRC”) by Jiarun on November 2, 2017.

Harbin Jiarun Hospital Co., Ltd Harbin New District Branch (“3rd Branch Hospital”), a third hospital branch of Jiarun, was incorporated in Harbin City of Heilongjiang, China in April 2021.

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 specializes in the areas of Pediatrics, Dermatology, ENT, Traditional Chinese Pharmaceuticals (TCM), Ophthalmology, Internal Pharmaceuticals Dentistry, General Surgery, Rehabilitation Science, Gynecology and General Medical Services.

On November 20, 2013, Junsheng Zhang, the senior officer of Jiarun Hospital, established JRSIS Health Care Corporation, a Florida corporation (“JHCC” or the “Company”). On February 25, 2013, the officer of Jiarun Hospital established JRSIS Health Care Limited (“JHCL”), a wholly owned subsidiary of the Company, and on September 17, 2012, the officer of Jiarun Hospital established Runteng Medical Group Co., Ltd (“Runteng”), a wholly owned subsidiary of JHCL. Runteng, a Hong Kong registered Investment Company, holds a 70% ownership interest in Harbin Jiarun Hospital Company Ltd, a Heilongjiang registered company.

On December 20, 2013, the Company acquired 100% of the issued and outstanding capital stock of JRSIS Health Care Limited, a privately held Limited Liability Company registered in the British Virgin Islands, for 12,000,000 shares of our common stock. JHCL, through its wholly owned subsidiary, Runteng Medical Group Co., Ltd, holds majority ownership in Jiarun, a company duly incorporated, organized and validly existing under the laws of China. As the parent company, JHCC rely on Jiarun to conduct 100% of our businesses and operations.

We have two sources of patient revenues: in-patient service revenues and out-patient service revenues. In addition to providing services to our patients, we also sell pharmaceuticals to our patients. Revenues from such sales are included in either our in-patient service revenues or our out-patient service revenues. Our revenues come from individuals as well as third-party payers, including PRC government programs and insurance providers, under which the hospital is paid based upon local government established charges. Revenue from the sale of pharmaceuticals is recognized when it is both earned and realized. The Company’s policy is to recognize the sale of pharmaceuticals when the title to the pharmaceuticals, ownership and risk of loss have transferred to the purchasers, and collection of the sales proceeds is reasonably assured, all of which generally occur when the patient receives the pharmaceuticals. Patient service revenue is recognized when it is both earned and realized. The Company’s policy is to recognize patient service revenue when the medical service has been provided to the patient and collection of the revenue is reasonably assured. 

Critical Accounting Policies and Management Estimates

In preparing our financial statements we are required to formulate accounting policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for the periods ended September 30, 2021, there were two estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results, as follows:

Results of Operations

The following table shows key components of the results of operations during three months ended September 30, 2021 and 2020: 

The following table shows key components of the results of operations during nine months ended September 30, 2021 and 2020: 

Revenue

Operating revenue for the three and nine months ended September 30, 2021, which resulted primarily from pharmaceuticals revenue and patient services revenue, was $12,158,880 and $31,225,714, an increase of 21% and 36% as compared with the operating revenue of $10,016,085 and $23,020,445 for the three and nine months ended September 30, 2020. Revenue from the sale of pharmaceuticals increased by 37%, while revenue from provision of patient services increased by 35% for the nine months ended September 30, 2021. The year-to-year increase was primarily a result of the partial alleviation of restrictions imposed by government agencies in 2020 on business operations within Harbin City in order to control the spread of COVID-19 in 2020. These restrictions limited our ability to perform non-emergency medical services, which caused the number of treated inpatients during the first nine months of 2020 to fall by 35% to 9,874 patients, compared with the 15,292 patients treated at Jiarun Hospital in the first nine months of 2019. During the first nine months of 2021, however, restrictions on business operations in Harbin City were reduced, resulting in an increase in patients treated at Jiarun Hospital by 14% to 11,300, compared with the 9,874 patients treated at Jiarun Hospital in the first nine months of 2020.

It is noteworthy that Jiarun Hospital served 3,992 fewer patients in the nine months ended September 30, 2021 than it served during the comparable pre-COVID period: the nine months ended September 30, 2019. However, revenue from patient services was 53% greater in the first nine months of 2021 than in the first nine months of 2019. The increase in per-patient revenue from 2019 to 2021 reflects upgrades in the variety and quality of services provided by Jiarun Hospital, as well as government-approved increases in allowable fee rates.

Operating Costs and Expenses

Total operating costs and expenses were $11,424,455 and $28,352,372 for the three and nine months ended September 30, 2021, an increase of $3,284,135 or 40% as compared to $8,140,320 for the third quarter of 2020, and an increase of $8,237,935 or 41% as compared to $20,114,437 for the first nine months of 2020. The 40% increase in operating expenses for the three months ended September 30, 2021 exceeded the 21% increase in revenue in that quarter, with the result that pre-tax operating income decreased by 61% for the quarter. However, since revenue increased by 36% nine months - to- nine months, the increase of 41% in operating costs and expenses caused only a 2% reduction in the profitability of the Company’s operations for the first nine months of 2021. The primary reasons that operating costs grew faster than revenue were:

Income Taxes

Corporate Income Tax (CIT) is determined under the Provisional Regulations of PRC Concerning Income Tax on Enterprises promulgated by the PRC. Income tax is payable by enterprises at a rate of 25% of their taxable income.

According to the PRC “Notice on Preferential Corporate Income Tax (CIT) Treatment for Eligible Equipment or Machinery (Cai Shui [2018] No. 54)”, a 100% immediate tax deduction for CIT purposes is allowed for purchases of equipment on the condition that the unit price of each item of equipment or machinery is individually less than RMB5 million. Depreciation for tax purposes is not required. Basis differences between tax and GAAP for depreciation of property and equipment exist because in the first half year of 2021 the Company purchased Eligible Equipment for RMB 23.8 million, with $673,561 deferred income tax, creating differences between the tax treatment mandated by the Chinese government and GAAP tax treatment.

Income from operations and net income

Income from Operations was $2,873,342 for the nine months ended September 30, 2021, as compared with operating income of $2,906,018 for the nine months ended September 30, 2020. After deducting other income and expenses as well as the provision for income tax, the Company’s net income for the nine months ended September 30, 2021 was $2,060,504, representing an increase of $310,019 or 18%, from $1,750,485 recorded for the nine months ended September 30, 2020. The increase occurred, despite lower pre-tax income, because the Company recorded a 32% lower allowance for income tax, despite recording pre-tax income that was only 2% lower than was recorded in the prior year period.

Our major net income was produced by Jiarun. Because we own only 70% of the equity interest in Jiarun (the other 30% being owned by our Chairman, Junsheng Zhang), we reduced our net income for the nine months period ended September 30, 2021 and 2020 by an allocation to the “non-controlling interests” of $697,962 and $537,804, respectively, before recognizing net income attributable to the Company. After those allocations, our net income attributable to the Company for the nine months ended September 30, 2021 and 2020 was $1,362,542 ($0.074 per share) and $1,212,681 ($0.067 per share), respectively.

Foreign Currency Translation Adjustment.

Our reporting currency is the U.S. dollar. Our local currency, Renminbi (RMB), is our functional currency. Results of operations and cash flows are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. For the nine months ended September 30, 2021 and 2020, foreign currency translation adjustments of $405,461 (of which $118,190 was attributable to the non-controlling interest) and $(540,973) (of which $(179,112) was attributable to the non-controlling interest), respectively, have been reported as other comprehensive income (loss) in the consolidated statements of operations and comprehensive income.

Liquidity and Capital Resources

As of September 30, 2021, the Company had $527,642 of cash and cash equivalents, a decrease of $317,186 from our cash balance at December 31, 2020. The decrease was primarily caused by our investing activities, particularly the expansion of our facilities, which used $6,444,421 of cash during the first nine months year of 2021.

Our working capital deficit at September 30, 2021 was $5,547,105, an increase of $1,669,694 from our deficit of $3,877,411 in working capital at December 31, 2020. The deficit increases primarily due to our ongoing use of cash from operations to fund the expansion of our facilities.

Our working capital deficit limits our ability to finance expansion. It is noteworthy, however, that our current liabilities include $1,533,565 in amounts due to related parties, all of which is owed to our Chairman, Junsheng Zhang, and $3,305.236 representing the current portion of our lease obligations, most of which is also owed to Chairman Zhang. We believe, therefore, that our liquidity is adequate to continue operations at our current level and fund a modest expansion program.

Although our current resources and cash flows are adequate to pay our current ongoing obligations, we anticipate that our future liquidity requirements will arise from the need to fund our growth and future capital expenditures. The primary sources of funding for such growth requirements are expected to be additional funds raised from the sale of equity and/or debt financing. However, we can provide no assurances that we will be able to obtain additional financing on terms satisfactory to us. 

Cash Flows and Capital Resources 

Our cash flows for the first nine months of 2021 and 2020 are summarized below:  

Net Cash Provided by Operating Activities

For the nine months ended September 30, 2021, we had positive cash flow from operating activities of $7,378,481, an increase of $129,341 from $7,507,822 for the nine months ended September 30, 2020. In addition to the $2,060,504 in net income during the 2021 period, cash flow from operations was increased by non-cash expenses: $2,449,963 depreciation and $1,076,691 imputed interest expense. The major sources of cash flow from operations, however, were an increase in accounts payable by $3,455,082 and a reduction of our inventory balance by $268,905. These were partially offset by the $547,667 increase in prepayment, $1,465,861 increase in amount due to related parties; and $2,970,050 increase in net accounts receivable.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2021 was $6,444,421, compared to net cash used in investing activities of $6,390,591 for the nine months ended September 30, 30, 2020. The cash used in investing activities for the nine months ended September 30, 2021 and 2020 was mainly used for the purchase of medical equipment and payment of Construction in progress relating to the opening of our new 3rd Branch Hospital.

Net Cash Used in Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2021 was $1,260,015, as compared to net cash used in financing activities of $1,528,349 for nine months ended September 30, 2020. The cash used in financing activities for the nine months ended September 30, 2021 was mainly due to payment of finance lease and interest expenses, while for the nine months ended September 30, 2020 cash was also used to satisfy convertible notes we had sold.

Although our current resources and cash flows are adequate to pay our current ongoing obligations, we anticipate that our future liquidity requirements will arise from the need to fund our growth and future capital expenditures. The primary sources of funding for such growth requirements are expected to be additional funds raised from the sale of equity and/or debt financing. However, we can provide no assurances that we will be able to obtain additional financing on terms satisfactory to us.

Trends, Events and Uncertainties

The COVID-19 pandemic has had a significant adverse impact and created many uncertainties related to our business, and we expect that it will continue to do so. The Company is experiencing challenges in sales and has suffered a significant decrease in revenues which has increased financial uncertainty. Our future business outlook and expectations are very uncertain due to the impact of the COVID-19 pandemic and are very difficult to quantify. It is difficult to assess or predict the impact of this unprecedented event on our business, financial results or financial condition.

The China Ministry of Health, as well as other related agencies, may change the monetary amounts we can charge for medical services, drugs and medications. We cannot predict the impact of these proposed changes since the changes are not fully defined and we do not know whether such changes will ever be implemented or when they may take effect.

We plan to acquire other hospitals and companies involved in the healthcare industry in the PRC using cash and shares of our common stock. Substantial capital may be needed for these acquisitions and we may need to raise additional funds through the sale of our common stock, debt financing or other arrangements. We do not have any commitments or arrangements from any person to provide us with any additional capital. Additional capital may not be available to us, or if available, on acceptable terms, in which case we would not be able to acquire other hospitals or businesses in the healthcare industry.

Other than the factors listed above we do not know of any trends, events or uncertainties that have had or are reasonably expected to have a material impact on our net sales or revenues or income from continuing operations. Our business is not seasonal in nature.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet items reasonably likely to have a material effect on our financial condition.

Recent Accounting Pronouncements

Recent accounting pronouncements issued by the FASB, the AICPA and the 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company”, we are not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluations of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of September 30, 2021. Based on this evaluation, Management determined that the following material weakness existed in our internal control over financial reporting

The aforesaid weakness in our internal controls was identified in connection with the preparation of our financial statements for the year ended December 31, 2019. At that time, management adopted a remediation plan. The interference in our business operations caused by restrictions on business activities related to the COVID-19 pandemic has delayed our ability to implement the remediation plan.

Changes in Internal Control over Financial Reporting

During the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company has no knowledge of existing or pending legal proceedings against the Company, nor is the Company involved as a plaintiff in any proceeding or pending litigation. There are no proceedings in which any of the Company’s directors, officers or any of their respective affiliates, or any beneficial stockholder, is an adverse party or has a material interest adverse to our interest.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2020, filed on April 15, 2021.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Unregistered sales of equity securities

The Company did not effect any sales of unregistered securities during the third quarter of fiscal 2021.

(b) Purchases of equity securities

The Company did not repurchase any of its equity securities that were registered under Section 12 of the Securities Exchange Act during the third quarter of fiscal 2021.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None,

ITEM 6. EXHIBITS

INDEX TO EXHIBITS

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

JRSIS HEALTH CARE CORPORATION. (Registrant)

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