JRSIS HEALTH CARE CORPORATION The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of such financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate these estimates, including those related to useful lives of real estate assets, bad debts, impairment, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates. The analysis set forth below is provided pursuant to applicableSEC regulations and is not intended to serve as a basis for projections of future events. See "Cautionary Statement Regarding Forward Looking Statements" above.
Critical Accounting Policies and Management Estimates
In preparing our financial statements we are required to formulate accounting policies regarding valuation of our assets and liabilities and to develop estimates of those values. In our preparation of the financial statements for the year endedDecember 31, 2020 , there were two estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results, as follows:
? The determination, as set forth in Note 3 to our Financial Statements, that
the
warranted an allowance for doubtful accounts of
was based on our review of the statement from
Management Center, Generally, the Center sets for each hospital an insurance
claim limit, even though the hospital is not permitted to refuse to receive
patients. If the hospital receive too many patients, it will exceed the claim
limit, and record an excess insurance claim. The Center will pay part of the
excess insurance claim from an insurance regulatory fund that is shared among
all local hospital that have excess insurance claims, but full reimbursement
is not assured. In accordance with the principle of prudence, the Company made
a determination that any excess insurance claim outstanding for more than two
years without reimbursement should be treated as a doubtful account. As of
without reimbursement was $3,300,027 , which was treated as a bad debt.
? The determination to record depreciation of our principal medical property and
equipment over an average useful life of approximately twenty years. (A
quantification of that depreciation is set forth in Note 6 to our Financial
Statements.) The determination was based primarily on our expectation that the
useful life of our hospital facilities would exceed thirty years, based on the
experience of comparable facilities in our location.
15
Results of Operations for the Years Ended
The following table shows key components of the results of operations during the
years ended
For the Year Ended
December 31, Change
2020 2019 $ %
Revenue:
Medicine $ 9,400,113 $ 10,778,239 $ 1,378,126 (13 %)
Patient services 26,306,084 20,685,194 (5,620,890 ) 27 %
Total revenue 35,706,197 31,463,433 (4,242,764 ) 13 %
Operating costs and expenses:
Cost of medicine sold 6,796,711 7,835,364 (1,038,653 ) (13 %)
Medical consumables 8,338,807 4,671,611 3,667,196 78 %
Salaries and benefits 8,374,223 7,502,622 871,601 12 %
Office supplies 1,630,623 1,614,261 16,362 1 %
Vehicle expenses 233,720 312,857 (79,137 ) (25 %)
Utilities expenses 624,352 576,804 47,548 8 %
Rentals and leases 223,949 124,763 99,186 79 %Advertising and promotion expenses 130,246 53,449
76,797 144 %
Interest expense 1,137,445 1,112,000 25,445 2 %
Professional fee 109,562 337,260 (227,698 ) (68 %)Convertible notes expense (322,363 ) 332,067
(654,430 ) (197 %)
Warrant expense 139,467 110,840 28,627 26 %
Depreciation 2,696,065 2,212,022 484,043 22 %Total operating costs and expenses 30,112,807 26,795,920 3,316,887 12 % Earnings from operations before other income and income taxes 5,593,390 4,667,513 925,877 20 % Other income(expenses) (396,497 ) (2,741,155 ) (2,344,658 ) (86 %) Earnings from operations before income taxes 5,196,893 1,926,358 3,270,535 170 % Income tax 1,369,615 657,699 711,916 108 % Net income 3,827,278 1,268,659 2,558,619 202 % Other comprehensive income:
Foreign currency translation adjustment 1,611,738 (361,125 ) (1,972,863 ) (546 %) Comprehensive income$ 5,439,016 $ 907,534
$ 4,531,482 499 % Revenue Operating revenue for the year endedDecember 31, 2020 , which resulted primarily from medicine (i.e. pharmaceuticals) revenue and patient services revenue, was$35,706,197 , an increase of 13% as compared with the operating revenue of$31,463,433 for the year endedDecember 31, 2019 . Revenue from the sale of medicine decreased by 13%, while revenue from provision of patient services grew by 27%. The increase in patient service revenue occurred despite the fact that the number of treated inpatients decreased by 29% to 14,649 patients, 6,002 less than the 20,651 patients treated in 2019. However, as the spread of COVID-19 through the population of theCity of Harbin in 2020 resulted in patients with complex and life-threatening situations, the per capita medical expenses of inpatients increased to$1,151 in 2020,$387 or 51% more than the per capita medical expenses of inpatients in 2019. That 51% increase in per capita expense yielded only a 27% increase in patient service revenue, however, because the quarantines related to the pandemic prevented much of the elective medical
procedures from occurring. Operating costs and expenses Total operating costs and expenses were$ 30,112,807 for the year endedDecember 31, 2020 , an increase of$ 3,316,887 or 12% as compared to$ 26,795,920 for 2019. Since revenue increased by only 13% year-to-year, The 12% increase in operating costs and expenses correlated with the 13% increase in revenue. The primary components of the$3,316,887 increase in costs and expenses were:
?
expenses attributable to medical consumables was primarily related to the 51%
increase in per capita medical expenses, as COVID-19 patients required more
intensive treatment. Medical consumables mainly consist of materials
expenses, medical repair expenses and test reagents. The largest components of
the increase was the increase in materials expenses of
increase in inspection expenses of $448,620 .
?
salaries, partially offset by a
This 12% increase in our labor costs was primarily caused by the revenue
increase attributable to the hospitals, as we incurred labor costs in
preparation for full scale operations of our branch hospitals.
?
attributable to the expansion of our operations during 2020.
16
?
because we increased the book value of our property and equipment as a result
of additional property and equipment placed in service by
2019 and by $ 9,276,833 during 2020, which led to a 22% increase in
depreciation during 2020.
Partially offsetting the factors listed above was a$1,038,653 decrease in the cost of medicine. As our sales of medicine decreased by 13%, the cost of the medicine sold decreased by 13%. The decrease was attributable to both Western medicine and Chinese traditional medicines. After taking these factors into account, we reported$5,593,390 in Earnings from Operations during 2020, compared to$4,667,513 during 2019, which represented$925,877 or a 20% increase. Other Income (expenses) Other Income (expenses) for the year endedDecember 31, 2020 mainly consisted of a$389,940 increase in our allowance for doubtful accounts. The reasons for the increase was set forth above under "Critical Accounting Policies and Management Estimates". As ofDecember 31, 2020 , the amount of excess insurance claims that are recorded on our books as bad debts was$3,300,027 . After taking other income (expenses) into account, the Company recorded Earnings before Income Taxes of$5,196,893 in 2020, an increase of$3,270,535 or 170% over Earnings before Income Taxes recorded in 2019, when we reduced our recorded Earnings by recording a bad debt expense of$2,700,035 related to excess insurance claims. Income taxes
Corporate Income Tax (CIT) is determined under the Provisional Regulations of
PRC Concerning Income Tax on Enterprises promulgated by the PRC, income tax is
payable by enterprises at a rate of 25% of their taxable income.
The following table shows the components of the allowance for PRC income tax
recorded for 2020:
Amounts
Income tax expense $ -
Income tax: 2020 deferred 1,369,615
Tax expense from continuing operation
Amounts
Reconciliation:
Income tax at statutory rate $ 1,369,615
Tax expense from continuing operation
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 thanRMB5 million . Depreciation for tax purposes is not required. Basis differences between tax and GAAP for depreciation of property and equipment exist because in 2020 the Company purchased Eligible Equipment forRMB42.13 million , which produced$1,369,615 in deferred income tax, representing the difference between PRC tax treatment and GAAP treatment of taxation arising from equipment acquisition. Net Income After deducting other income and expenses as well as the provision for income tax, the Company's net income for the year endedDecember 31, 2020 was$3,827,278 , representing an increase of$2,558,619 or 202% from the$1,268,659 recorded for the year endedDecember 31, 2019 . The increase in net income for the year endedDecember 31, 2020 was primarily due to aforementioned changes in operating revenue and expenses. 17
Liquidity and Capital Resources
Our cash flows for the past two years are summarized below:
The Year Ended December 31,
2020 2019
Net cash provided by operating activities 10,643,017 11,847,403
Net cash used in investing activities (8,271,723 ) (3,962,588 )
Net cash used in financing activities (3,430,093 ) (6,108,976 )
Effect of exchange rate fluctuation on cash and cash equivalents (67,503 ) (61,160 )
Net increase(decrease) in cash and cash equivalents (1,126,302 ) 1,714,679
Cash and cash equivalents, beginning of period 1,971,129 256,450
Cash and cash equivalents, ending of period $ 844,827$ 1,971,129
As of
Net Cash Provided by Operating Activities
The primary reasons that cash provided by operations so far exceeded our net
income of
? Our accounts receivable balance was reduced by$492,436 , including the$575,638 increase in our allowance for doubtful accounts. ? Our net income was reduced by a depreciation charge of$2,696,065 and a$1,137,445 accrual of interest. ? We increased our accounts payable account by$2,802,124 . ? We increased our deferred tax payable account by$1,369,615 . At the same time, despite the$10,643,017 in cash provided by operations, our balance sheet atDecember 31, 2020 showed a working capital deficit of$3,877,411 , representing an increase of$2,475,862 from our working capital deficit atDecember 31, 2019 . The increase in our working capital deficit was primarily attributable to: ? our expenditure of$8,271,723 on fixed assets during 2020; and
? our use of
capital lease obligations.
Cash flow from operating activities during the year ended of December 31, 2020
substantially exceeded net income, primarily because of an increase in the
Company's accounts payable balance by $2,802,124 and an increase in the deferred
tax payable balance by $1,369,615 . These items do not necessarily represent
patterns that will be repeated: the Company's ability to defer satisfaction of
its payables without injuring its relations with vendors is limited; the surge
in 2020 revenue leading to increased deposits received by $71,508 reflects in
part delivery of medical procedures that were delayed by the pandemic. It is the
case, therefore, that the Company's ability to generate cash from operating
activities during the year of 2020 despite the increment in its profitability
may not be replicable in the future operation.
Net cash used in investing activities for the year endedDecember 31, 2020 was$8,271,723 , compared to net cash used in investing activities of$3,962,588 for the year endedDecember 31, 2019 . The cash used in investing activities for 2020 increased comparing with 2019 and was mainly due to increment in purchase of medical equipment and payment of construction in progress by$3,558,182 which increased to$8,271,723 in 2020 from$4,713,541 in 2019.
Net Cash Provided by Financing Activities
Net cash used in financing activities for the year endedDecember 31, 2020 was$3,430,093 , as compared to net cash used in financing activities of$6,108,976 for the year endedDecember 31, 2019 . The cash used in financing activities for 2020 decreased when comparing with 2019 and was mainly due to reduction of payment on capital lease obligation by$3,707,735 which reduced to$4,387,588 in 2020 from$8,095,323 in 2019. Although our current resources and cash flows are adequate to pay our current ongoing obligations, we anticipate that our future liquidity requirements will arise from the need to fund our growth and future capital expenditures. The primary sources of funding for such growth requirements are expected to be additional funds raised from the sale of equity and/or debt financing. However, we can provide no assurances that we will be able to obtain additional financing on terms satisfactory to us. 18
Trends, Events and Uncertainties
Many residents of theCity of Harbin , where all of our operations are located, have contracted COVID-19 during the current pandemic. As a result, the national and local government have imposed serious restrictions on business operations within the City, including mandatory quarantines. The quarantines have preventedJiarun Hospital from carrying on its normal operations.The China Ministry of Health , as well as other related agencies, may change the prices we can charge for medical services, drugs and medications. We cannot predict the impact of these proposed changes since the changes are not fully defined and we do not know whether such changes will ever be implemented or
when they may take effect.
We plan to acquire other hospitals and companies involved in the healthcare industry in the PRC using cash and shares of our common stock. Substantial capital may be needed for these acquisitions and we may need to raise additional funds through the sale of our common stock, debt financing or other arrangements. We do not have any commitments or arrangements from any person to provide us with any additional capital. Additional capital may not be available to us, or if available, on acceptable terms, in which case we would not be able to acquire other hospitals or businesses in the healthcare industry. Other than the factors listed above we do not know of any trends, events or uncertainties that have had or are reasonably expected to have a material impact on our net sales or revenues or income from continuing operations. Our business is not seasonal in nature.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet items reasonably likely to have a material effect on our financial condition.
Recent Accounting Pronouncements
Recent accounting pronouncements issued by the FASB, the AICPA or the
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