ITEM
1. FINANCIAL STATEMENTS
Jakroo
Inc. and Subsidiaries
Consolidated
Balance Sheets <Unaudited>
|
|
|
September
30,
2018
|
|
|
December 31,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,847,994
|
|
|
$
|
2,350,930
|
|
Accounts
receivable
|
|
|
71,272
|
|
|
|
53,026
|
|
Inventories
|
|
|
1,425,346
|
|
|
|
1,549,996
|
|
Prepaid
expenses and other current assets
|
|
|
342,392
|
|
|
|
452,715
|
|
Total
current assets
|
|
|
4,687,004
|
|
|
|
4,406,667
|
|
Property
and equipment, net
|
|
|
3,107,544
|
|
|
|
2,854,802
|
|
TOTAL
ASSETS
|
|
$
|
7,794,548
|
|
|
$
|
7,261,469
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
346,085
|
|
|
$
|
245,396
|
|
Advance
from customers
|
|
|
123,825
|
|
|
|
653,305
|
|
Mortgage
payable – current portion
|
|
|
71,974
|
|
|
|
69,898
|
|
Other
current liabilities
|
|
|
599,193
|
|
|
|
296,723
|
|
Total
current liabilities
|
|
|
1,141,077
|
|
|
|
1,265,322
|
|
Mortgage
payable
|
|
|
1,836,877
|
|
|
|
1,891,019
|
|
Total
liabilities
|
|
|
2,977,954
|
|
|
|
3,156,341
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Jakroo
Inc. Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 10,000,000 shares authorized; None issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock,
$0.001 par value, 100,000,000 shares authorized, 31,488,650 and 31,288,650 shares issued and outstanding as of September 30,
2018 and December 31, 2017, respectively
|
|
|
31,489
|
|
|
|
31,289
|
|
Additional
paid in capital
|
|
|
827,506
|
|
|
|
693,352
|
|
Statutory
reserve
|
|
|
136,652
|
|
|
|
136,652
|
|
Retained
earnings
|
|
|
3,686,963
|
|
|
|
3,023,173
|
|
Accumulated
other comprehensive loss
|
|
|
(312,927
|
)
|
|
|
(126,596
|
)
|
Total
Jakroo Inc. Stockholders’ equity
|
|
|
4,369,683
|
|
|
|
3,757,870
|
|
Non-controlling
interests
|
|
|
446,911
|
|
|
|
347,258
|
|
Total
Stockholders’ Equity
|
|
|
4,816,594
|
|
|
|
4,105,128
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
7,794,548
|
|
|
$
|
7,261,469
|
|
The
accompanying Notes are an integral part of these consolidated financial statements
Jakroo
Inc. and Subsidiaries
Consolidated
Statements of Comprehensive Income <Unaudited>
|
|
Three
Months Ended
September 30
|
|
|
Nine
Months Ended
September 30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,960,810
|
|
|
$
|
2,584,757
|
|
|
$
|
9,294,644
|
|
|
$
|
7,769,040
|
|
Cost
of revenues
|
|
|
1,160,119
|
|
|
|
1,035,712
|
|
|
|
3,906,426
|
|
|
|
3,259,882
|
|
Gross
profit
|
|
|
1,800,691
|
|
|
|
1,549,045
|
|
|
|
5,388,218
|
|
|
|
4,509,158
|
|
Selling,
general and administrative expense
|
|
|
1,455,529
|
|
|
|
1,432,903
|
|
|
|
4,318,469
|
|
|
|
3,905,769
|
|
Income
from operations
|
|
|
345,162
|
|
|
|
116,142
|
|
|
|
1,069,749
|
|
|
|
603,389
|
|
Interest
(expense) income
|
|
|
(18,757
|
)
|
|
|
(667
|
)
|
|
|
(56,728
|
)
|
|
|
1,265
|
|
Income
before income taxes
|
|
|
326,405
|
|
|
|
115,475
|
|
|
|
1,013,021
|
|
|
|
604,654
|
|
Income
tax provision
|
|
|
90,036
|
|
|
|
30,076
|
|
|
|
263,162
|
|
|
|
212,723
|
|
NET
INCOME
|
|
|
236,369
|
|
|
|
85,399
|
|
|
|
749,859
|
|
|
|
391,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Income attributable to non-controlling interest
|
|
|
27,954
|
|
|
|
12,930
|
|
|
|
86,069
|
|
|
|
50,160
|
|
NET
INCOME ATTRIBUTABLE TO JAKROO INC.
|
|
|
208,415
|
|
|
|
72,469
|
|
|
|
663,790
|
|
|
|
341,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(127,627
|
)
|
|
|
63,145
|
|
|
|
(207,034
|
)
|
|
|
149,216
|
|
COMPREHENSIVE
INCOME
|
|
|
108,742
|
|
|
|
148,544
|
|
|
|
542,825
|
|
|
|
541,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Comprehensive income attributable to non-controlling interest
|
|
|
15,192
|
|
|
|
19,245
|
|
|
|
65,366
|
|
|
|
65,082
|
|
COMPREHENSIVE
INCOME ATTRIBUTABLE TO JAKROO INC.
|
|
$
|
93,550
|
|
|
$
|
129,299
|
|
|
$
|
477,459
|
|
|
$
|
476,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC
|
|
|
31,455,317
|
|
|
|
30,808,650
|
|
|
|
31,344,206
|
|
|
|
30,803,931
|
|
EARNING
PER SHARE – BASIC
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED
|
|
|
32,590,217
|
|
|
|
32,019,210
|
|
|
|
32,479,106
|
|
|
|
32,014,491
|
|
EARNING
PER SHARE – DILUTED
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
The
accompanying Notes are an integral part of these consolidated financial statements.
Jakroo
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows <Unaudited>
|
|
Nine
Months
Ended
September
30,
2018
|
|
|
Nine
Months
Ended
September
30,
2017
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
749,859
|
|
|
$
|
391,931
|
|
Adjustments
to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
102,456
|
|
|
|
98,051
|
|
Gain
on disposal of property and equipment
|
|
|
-
|
|
|
|
(2,584
|
)
|
Share based
compensation
|
|
|
84,354
|
|
|
|
83,105
|
|
Deferred
taxes
|
|
|
42,235
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(19,904
|
)
|
|
|
(55,804
|
)
|
Inventories
|
|
|
49,418
|
|
|
|
36,254
|
|
Prepaid
expenses and other current assets
|
|
|
53,595
|
|
|
|
(80,263
|
)
|
Accounts
payable
|
|
|
117,059
|
|
|
|
52,860
|
|
Advance
from customers
|
|
|
(527,517
|
)
|
|
|
(425,023
|
)
|
Other
current liabilities
|
|
|
251,341
|
|
|
|
116,338
|
|
Income
tax payable
|
|
|
79,676
|
|
|
|
48,243
|
|
Net
cash provided by operating activities
|
|
|
982,572
|
|
|
|
263,108
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(337,226
|
)
|
|
|
(2,611,376
|
)
|
Collection
of loan to officer
|
|
|
-
|
|
|
|
74,198
|
|
Proceeds
received from sale of equipment
|
|
|
-
|
|
|
|
3,022
|
|
Net
cash used in investing activities
|
|
|
(337,226
|
)
|
|
|
(2,534,156
|
)
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from related parties
|
|
|
-
|
|
|
|
97,009
|
|
Proceeds
from mortgage loan
|
|
|
-
|
|
|
|
2,040,000
|
|
Repayment
of mortgage loan
|
|
|
(52,066
|
)
|
|
|
(62,002
|
)
|
Proceeds
from issuance of common stock
|
|
|
50,000
|
|
|
|
44,936
|
|
Net
cash provided by (used in) financing activities
|
|
|
(2,066
|
)
|
|
|
2,119,943
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(146,216
|
)
|
|
|
100,049
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
497,064
|
|
|
|
(51,056
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
2,350,930
|
|
|
|
2,777,957
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
2,847,994
|
|
|
$
|
2,726,901
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the periods for :
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
133,219
|
|
|
$
|
155,487
|
|
Interest
|
|
$
|
58,403
|
|
|
$
|
13,546
|
|
Non-cash
investing and financing activities
Non-controlling
interest contribution of intangible assets
|
|
$
|
34,287
|
|
|
$
|
-
|
|
The
accompanying Notes are an integral part of these consolidated financial statement.
Jakroo
Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
(unaudited)
1.
Description of business
Jakroo
Inc. and its subsidiaries, which are controlled through a series of variable interest agreements, design, manufacture and sell
customized technical endurance apparel for the cycling, triathlon, running and Nordic skiing markets. Jakroo Inc. and its consolidated
subsidiaries and variable interest entities (“VIE”) are referred to collectively herein as the “Company.”
In February 2018, the Company and an
individual investor founded Designlab.ai Corp., a California corporation (“Designlab”), which primarily focuses on
research and development of automation processes in designing and manufacturing customized technical endurance apparel by using
current artificial intelligence technologies. The Company owns 70% of Designlab’s common stock by investing $80,000
while the individual investor owns 30% of Designlab’s common stock by contributing technical know-how in artificial intelligence.
2.
Basis of Presentation and Summary of Significant Accounting Policies
Basis
of Presentation and Consolidation
The
unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission (the
“SEC”). Certain information and footnote disclosures normally included in financial statements have been condensed
or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, the unaudited consolidated financial
statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2018 and the results
of operations and cash flows for the periods ended September 30, 2018 and 2017. The financial data and other information disclosed
in these notes to the interim financial statements related to these periods are unaudited. The results for the three and nine
months ended September 30, 2018 are not necessarily indicative of the results to be expected for any subsequent periods or for
the entire year. The balance sheet on December 31, 2017 has been derived from the audited financial statements at that date. These
unaudited financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto
for the year ended December 31, 2017 as included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2017 filed with the SEC on April 2, 2018.
The
accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”), and include the accounts of the Company, its subsidiaries and entities controlled
through VIE agreements. All intercompany balances and transactions have been eliminated in consolidation.
Certain
amounts have been reclassified to conform to current year presentation.
Revenue Recognition
The Company adopted the new accounting
standard, ASC 606, Revenue from Contracts with Customers, and all the related amendments (new revenue standard) to all contracts
using the modified retrospective method beginning on January 1, 2018. The adoption will not result in an adjustment to the retained
earnings as of December 31, 2017. The comparative information will not be restated and will continue to be reported under the
accounting standards in effect for those periods. The adoption of the new revenue standard will have no impact on either reported
sales to customers or net earnings. The Company will continue to recognize revenue from product sales as goods are shipped or
delivered to the customer, as control of goods occurs at the same time.
Recently
Issued Accounting Standards
From
time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard bodies that
may have an impact on the Company’s accounting and reporting. The Company believes that any recently issued accounting pronouncements
and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting
or reporting or that such impact will not be material to its financial position, results of operations, and cash flows when implemented.
3.
Inventories
Inventories
consisted of the following:
|
|
September
30,
2018
|
|
|
December 31,
2017
|
|
Raw
materials
|
|
$
|
1,037,600
|
|
|
$
|
903,421
|
|
Finished
goods
|
|
|
387,746
|
|
|
|
646,575
|
|
Total
inventories
|
|
$
|
1,425,346
|
|
|
$
|
1,549,996
|
|
4.
Mortgage payable
The
Company entered into a mortgage loan from a bank in the principle amount of $2,040,000 on January 9, 2017, of which $51,000 is
interest free and the balance of $1,989,000 bears an annual interest rate of 3.96%. The loan has a ten year term with monthly
installments of $12,274 including interest. The final payment of approximately $1,224,000 including interest will be made on January
15, 2027. The mortgage loan is collateralized by the Company’s land and building in the United States.
Principal
payments on mortgage payable are due as follows:
Year
ending December 31:
|
|
|
|
2018
|
|
$
|
17,775
|
|
2019
|
|
|
72,697
|
|
2020
|
|
|
75,466
|
|
2021
|
|
|
78,757
|
|
2022
|
|
|
81,978
|
|
Thereafter
|
|
|
1,582,178
|
|
|
|
$
|
1,908,851
|
|
5.
Equity Incentive Plan
On
January 5, 2017, the Company’s Board of Directors (the “Board of Directors”) adopted the Jakroo Inc. 2016 Equity
Incentive Plan (the “Plan”). The Plan was adopted to retain and provide incentives for employees, officers and directors,
and to align stockholder and employee interests. The participants of the Plan include the Company’s employees who were previously
determined by the Board of Directors.
On January 5, 2017,
the Company signed stock option agreements with certain participants and granted options thereunder to purchase
a total of 3,492,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) to
such participants. The vesting period of the stock options was four years starting from the date of grant. The exercise
price is $0.17 per share. These options will expire ten years from the date of grant, subject to earlier termination
as set forth in the Plan and the option agreement.
On
August 16, 2017, the Company granted stock options under the Plan to two independent directors to purchase an aggregate of 480,000
shares of Common Stock at a price of $0.25 per share, which vested immediately. These options will be exercisable for a period
of five years commencing six months from the date of grant on a cashless exercise basis.
The
Company assessed the fair value of the total granted stock options on the grant date using a Black-Scholes Stock Option Pricing
Model. Significant assumptions used in calculating the fair value of options are as follows:
|
●
|
Expected
volatility 54.00% ~ 68.58%;
|
|
|
|
|
●
|
Risk-free
interest rate 0.83% ~ 1.24%;
|
|
|
|
|
●
|
Expected
term (year) 4 ~ 5;
|
|
|
|
|
●
|
Exercise
price $0.17 ~ $0.25.
|
The
estimated fair value of the total granted stock options on the grant date was $507,649, among which $56,509 was recorded in the
expense of year 2017 and $451,140 is being amortized over 48 months period. For the nine months ended September 30, 2018 and 2017,
total amortization of stock-based compensation expense was $84,354 and $83,105, respectively. For the three months ended September
30, 2018 and 2017, total amortization of stock-based compensation expenses was $28,430 and $28,431, respectively.
A
summary of the changes in stock options outstanding under the Plan is presented below:
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Term
|
|
Options
outstanding at December 31, 2017
|
|
|
3,972,000
|
|
|
$
|
507,649
|
|
|
$
|
0.18
|
|
|
|
3
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
(218,250
|
)
|
|
|
(28,196
|
)
|
|
|
0.17
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
outstanding at September 30, 2018
|
|
|
3,753,750
|
|
|
$
|
479,453
|
|
|
$
|
0.18
|
|
|
|
3
|
|
A
summary of the status of non-vested options is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Non-vested
at December 31, 2017
|
|
|
2,619,000
|
|
|
$
|
0.17
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(873,000
|
)
|
|
|
0.17
|
|
Forfeited
or exercised
|
|
|
(218,250
|
)
|
|
|
0.17
|
|
Non-vested
at September 30, 2018
|
|
|
1,527,750
|
|
|
$
|
0.17
|
|
On September 1, 2018, an employee of the
Company voluntarily resigned her position. An option to purchase an aggregate of 436,500 shares granted to the employee
in January 2017. As of the last day of her employment, 218,250 shares were vested. The vested shares can be exercised by the employee
during the period from September 1, 2018 to November 30, 2018. The remaining unvested 218,250 options were forfeited.
6.
Stockholders’ Equity
Common
Share Issuances
In
August 2018, the Company issued 200,000 shares of common stock to one investor for cash consideration of $50,000.
7.
Provision for Income Taxes
The
Company has operations in four tax jurisdictions - the United States, China, Canada and Austria.
The
Company’s U.S. operations are subject to income tax according to U.S. tax law.
The U.S. Tax Cuts and Jobs Act (the “Tax
Act”) was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. Effective
in 2018, the Tax Act reduces the U.S. statutory corporate tax rate from 35% to 21% and creates new taxes on certain foreign-sourced
earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base
erosion tax, respectively. The Tax Act requires the Company to pay U.S. income taxes on accumulated foreign subsidiary
earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current
assets and 8% on the remaining earnings. The Company’s deferred tax assets and liabilities were remeasured to reflect the
reduction in the U.S. corporate income tax rate from 35% to 21%, resulting in a deferred tax expense of $13,487 for the nine months
ended September 30, 2018. This expense is attributable to the Company being in a net deferred tax asset position at the time of
remeasurement. This amount can be seen on the rate reconciliation as an adjustment to deferred tax asset.
The Company’s Chinese operations are
subject to Chinese tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate
tax adjustments. In addition, Rider Sportsfashion (Langfang) Limited, the Company’s Chinese subsidiary controlled
through VIE agreements, is subject to 15% of income tax rate from 2017 to 2019.
The Company’s Canadian operation
is subject to a 26% profit tax based on its taxable net profit in Canada.
The Company’s Austria subsidiary is
subject to a 25% profit tax based on its taxable net profit in Austria.
The
reconciliation of income tax at the U.S. statutory rate of 21% and 35% in 2018 and 2017, to the Company’s effective tax
rate is as follows:
|
|
Nine
Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Tax
at U.S. Federal statutory rate
|
|
$
|
212,734
|
|
|
$
|
182,385
|
|
U.S.
State tax
|
|
|
29,483
|
|
|
|
16,757
|
|
Tax
rate difference between U.S. and foreign operations
|
|
|
(1,496
|
)
|
|
|
(41,667
|
)
|
Change
of valuation allowance
|
|
|
36,550
|
|
|
|
60,684
|
|
Permanent
difference
|
|
|
(27,596
|
)
|
|
|
(5,436
|
)
|
Rate
change
|
|
|
13,487
|
|
|
|
-
|
|
Effective
tax
|
|
$
|
263,162
|
|
|
$
|
212,723
|
|
The
provisions for income taxes are summarized as follows;
|
|
Nine
Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
49,638
|
|
|
$
|
46,363
|
|
State
|
|
|
20,895
|
|
|
|
16,757
|
|
Other
foreign countries
|
|
|
150,394
|
|
|
|
149,603
|
|
|
|
|
220,927
|
|
|
|
212,723
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
20,232
|
|
|
|
-
|
|
State
|
|
|
8,516
|
|
|
|
-
|
|
Other
foreign countries
|
|
|
-
|
|
|
|
-
|
|
Rate
change
|
|
|
13,487
|
|
|
|
-
|
|
|
|
|
42,235
|
|
|
|
-
|
|
Provision
for income tax
|
|
$
|
263,162
|
|
|
$
|
212,723
|
|
The
Company had approximately $488,000 net operating loss carryforwards available in the U.S., China, and Austria to reduce future
taxable income which will begin to expire from 2037 for U.S. tax purposes and from 2022 for China’s income tax purpose.
Of the total of net operating loss of $488,000, approximately $399,000 was incurred by our company in Austria since it started
business in early 2016. The net operating loss of the Company’s wholly-foreign owned Chinese subsidiary (“WFOE”)
could be carried forward for a period of not more than five years from the year of the initial loss pursuant to relevant Chinese
tax laws and regulations. The net operating loss from the Company’s Austrian operations can be carried forward
with no time limit from the year of the initial loss pursuant to relevant Austria tax laws and regulations. Management believes
that, except for Rider Sportsfashion LLC (the Company’s U.S. subsidiary), it is more likely than not that the deferred
tax assets cannot be utilized in the future because there will not be significant future earnings from the entity which generated
the net operating loss. Therefore, the Company has recorded a valuation allowance on its deferred tax assets for all periods
presented except for the operating loss occurred by Rider Sportsfashion LLC in the year ended December 31, 2017. Accordingly,
the Company recorded a deferred tax asset of $nil as of September 30, 2018, and $42,235 as of December 31, 2017.
As
of September 30, 2018 and December 31, 2017, the Company has no material unrecognized tax benefits which would favorably affect
the effective income tax rate in future periods and does not believe that there will be any significant increases or decreases
of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been
imposed on the Company during the nine months ended September 30, 2018 and 2017, and no provision for interest and penalties is
deemed necessary as of September 30, 2018 and December 31, 2017.
8.
Related Party Transactions and Balances
(1)
Kustellar LLC, an entity co-owned by Mr. Weidong Du and Ms. Wei Tan, each a stockholder and director of the Company, provides
accounting consulting service to the Company. The Company was billed by Kustellar LLC $nil and $11,555 for the nine months ended
September 30, 2018 and 2017, respectively; and paid $nil and $31,928 in the nine months ended September 30, 2018 and 2017, respectively.
(2) The WFOE and Rider Sportsfashion
Ltd. (the Company’s Chinese VIE) leased office space from Ms. Wei Tan in China for approximately $3,000
per month. The lease expires on May 14, 2019. Rent expenses incurred to Ms. Wei Tan was approximately $27,000 and $27,000 for
the nine months ended September 30, 2018 and 2017, respectively.
(3)
On June 5, 2015, the Company signed a loan agreement with an officer to advance $75,000 at an annual interest rate of 2.5% with
payment of a minimum of $200 per month and due on May 31, 2017. The loan was paid in full in April 2017 and the balance of such
loan was zero as of September 30, 2018 and December 31, 2017.
(4)
In April 2018, Designlab entered a Master Agreement and License Agreement with R2.ai, Inc., a Silicon Valley based Company
specialized in artificial intelligence for internal-use software development. The individual investor of Designlab is also a
majority shareholder of R2.ai, Inc.. Total agreed contract price is $80,000, which is scheduled to be paid
by installment payments based on the software development milestones. $20,000 was paid in the nine months ended September
30, 2018.
9.
Segment Data and Related Information
The
Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about
allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company’s
principal business by geographic region based on the Company’s strategy to develop its own brand recognition. These geographic
regions include North America, China and Europe. Each geographic segment operates exclusively in one industry: the development,
marketing and distribution of branded performance apparel.
The
revenues, income (loss) before income taxes, and total assets associated with the Company’s segments are summarized in the
following tables. Revenues represent sales to external customers for each segment. In addition to revenues, income (loss) before
income taxes is a primary financial measure used by the Company to evaluate the performance of each segment. Intercompany balances
were eliminated.
|
|
Three
Months Ended
September 30
|
|
|
Nine
Months Ended
September
30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
2,162,830
|
|
|
$
|
1,902,442
|
|
|
$
|
6,472,734
|
|
|
$
|
5,526,383
|
|
China
|
|
|
653,156
|
|
|
|
578,084
|
|
|
|
2,438,352
|
|
|
|
1,936.266
|
|
Europe
|
|
|
144,824
|
|
|
|
104,231
|
|
|
|
383,558
|
|
|
|
306,391
|
|
Total
revenues
|
|
$
|
2,960,810
|
|
|
$
|
2,584,757
|
|
|
$
|
9,294,644
|
|
|
$
|
7,769,040
|
|
|
|
Three
Months Ended
September 30
|
|
|
Nine
Months Ended
September
30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Income
(loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
155,611
|
|
|
$
|
36,752
|
|
|
$
|
501,183
|
|
|
$
|
391,922
|
|
China
|
|
|
183,651
|
|
|
|
95,181
|
|
|
|
566,895
|
|
|
|
308,478
|
|
Europe
|
|
|
(12,857
|
)
|
|
|
(16,458
|
)
|
|
|
(55,057
|
)
|
|
|
(95,746
|
)
|
Total
Income before income taxes
|
|
$
|
326,405
|
|
|
$
|
115,475
|
|
|
$
|
1,013,021
|
|
|
$
|
604,654
|
|
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
4,112,548
|
|
|
$
|
3,958,690
|
|
China
|
|
|
3,522,137
|
|
|
|
3,248,199
|
|
Europe
|
|
|
159,863
|
|
|
|
54,580
|
|
Total
Assets
|
|
$
|
7,794,548
|
|
|
$
|
7,261,469
|
|
10.
Subsequent Events.
The
Company has evaluated subsequent events that have occurred after the date of the balance sheet through the date of issuance of
these consolidated financial statements and determined that no subsequent event requires recognition or disclosure to the consolidated
financial statements.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
interim condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form
10-Q.
Certain
statements in this section contain “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. All statements contained in this report and not clearly historical in nature are forward-looking, and the
words “may,” “will,” “should,” “could,” “would,” “expects,”
“plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,”
“intends,” “potential,” and similar expressions (as well as other words or expressions referencing future
events, conditions or circumstances) generally are intended to identify forward-looking statements. Any statements in this report
that are not historical facts are forward-looking statements. Actual results may differ materially from those projected or implied
in any forward-looking statements. Such statements involve risks and uncertainties, including but not limited to those relating
to product and customer demand, market acceptance of our products, the ability to create new products, the ability to achieve
a sustainable profitable business, the effect of economic conditions, the ability to protect our intellectual property rights,
competition from other providers and products, risks in product development, our ability to raise capital to fund continuing operations,
and other factors discussed from time to time in our filings with the Securities and Exchange Commission. The Company undertakes
no obligation to update or revise any forward-looking statement for events or circumstances after the date on which such statement
is made except as required by law. Amounts in this section are in thousands, unless otherwise indicated.
Overview
We
specialize in the design, manufacture and direct sale of customized technical endurance apparel for the cycling, triathlon, running
and Nordic skiing markets across Asia, Europe and North America. Our made-to-order, just-in-time (“JIT”) process vertically
integrates design, sales and distribution of sporting apparel products.
The
chart below illustrates the Company’s current organizational structure:
For
the purpose of streamlining its manufacturing operations in China, Rider Sportsfashion (LangFang) took over the operations of
Dachang Branch and Garment Processing Branch. The deregistration process for these branches was completed in December 2017 and
April 2018, respectively.
Our
global sporting apparel business is currently comprised of three core business units: inline retail, which consists of products
produced and sold as part of a collection (“Inline”), OEM contract manufacturing (“OEM”) and custom order.
(“Custom Order”). Our Inline, OEM and Custom Order businesses currently account for 16%, 10% and 74%, respectively,
of our sales revenue for the nine months ended September 30, 2018, comparing with 15%, 9%, and 76% for the nine months ended September
30, 2017.
The
two primary sales channels for our Inline retail and Custom Order retail business are direct sale and wholesale. Direct sale currently
generates 87% of our worldwide sales revenues (84% for the nine months ended September 30, 2017). Under the direct sale model,
we sell and fulfill our products directly to end users through our Jakroo e-commerce platform. The Jakroo platform allows
customers to easily log onto our platform, complete their designs or submit design requests to our Pro designers and place purchase
orders. Wholesale represented 13% of our revenue for the nine months ended September 30, 2018 (compared to 16% for the nine months
ended September 30, 2017). We act as both retailer and wholesaler of our products through our e-commerce platform as well as through
large online retailers such as TMall in China. Sales through both channels are executed with payments made directly to us online
prior to the production and shipment of products.
In
order to target customers in major markets, we have established sales offices in the United States, Canada, Austria, and
China that provide localized sales, marketing and customer service support to our regional markets. As of the date of the
report, we have approximately 183 employees worldwide.
The
purchase of our 6,300 square feet U.S. headquarters facility in Pleasanton, California in the first quarter of 2017 was the first
step in further strengthening our sales, marketing and innovation teams. During the nine months ended September 30, 2018, our
design team created 20,917 custom designs, compared to 19,173 custom designs during the same period in 2017, representing a 9%
increase in customer design requests. We continue to invest in our 3D design workflows in order to gain greater efficiencies and
to improve the end-user experience. Site visits across our .com, .ca and .eu domains rose modestly during the nine months ended
September 30, 2018, compared to the same period last year. The slightly lower rate of increase of site visits can be attributed
to changes in Google’s search algorithms. However, despite this, the quality of our leads has improved, leading to stronger
conversion to sale rates. Overall the continual increase in leads can be attributed, in part, to our investments in athlete and
high profile team sponsorships, and user experience improvements made to our websites beginning from the latter half of 2017.
During
the quarter ended September 30, 2018, our new customer acquisition decreased 6% while our number of returning customers increased
35%, compared to the same quarter last year. This resulted in an aggregate revenue growth of 18% across our North American and
European operating segments compared to the same period last year. We attribute the revenue growth to the introduction of new
product, increased customer loyalty, improvements to our lead conversion funnel and our ability to consistently maintain a delivery
timeline of 2 weeks or less.
We lease a 64,000 square feet manufacturing facility at the border of Beijing and Hebei province in China. The
facility has annual capacity to produce 500,000 jerseys and manufactures all of our products. We consider our centralized
manufacturing facility both a competitive advantage and a key driver behind our ability to maintain exceptionally high levels
of quality and industry leading short delivery times. During the quarter ended September 30, 2018, we processed approximately
17,000 micro-production lots with a total production quantity of 43,000 units, compared to 15,000 lots and 39,000 units
respectively during the same period 2017. 100% of these products were produced and shipped in 14 days or less and 51% were
produced and shipped in 7 days or less for the third quarter 2018 compared to 100% of products produced in 14 days or less
and 50% produced and shipped in 7 days or less during the same period of 2017. During both fiscal periods, the average
production lot quantity of 3pcs remained constant.
We
believe there is an increasing recognition of the health benefits of an active lifestyle through cycling, triathlon and running.
We believe this trend provides us with an expanding potential consumer base for our products. We also believe there continues
to be an increasing number of individuals participating in cycling, triathlon and running activities, thus creating an increased
demand for athletic apparel from leisure, pre-athlete and amateur participants. We plan to continue to grow our business over
the long term through increased sales of our apparel via our made-to-order, JIT process, and our expansion in international markets.
Although
we believe these trends will facilitate our growth, we also face potential challenges that could limit our ability to take advantage
of these opportunities, including, among other things, the risk of general economic or market conditions that could affect consumer
spending and the financial health of our retail customers. In addition, we may not be able to effectively manage our growth as
our business becomes a larger and more complex global business. We may not consistently be able to anticipate consumer preferences
or develop new and innovative products that meet changing consumer needs and preferences in a timely manner. Furthermore, our
industry is very competitive, and competition pressures could cause us to reduce the prices of our products or otherwise affect
our profitability.
General
Revenues
are comprised of the sales of our technical endurance apparel products, which include OEM, inline collection and custom made to
order, with the latter category assuming the highest percentage of sales of the three segments.
Cost
of revenues consists primarily of fabrics, other raw materials, overhead, manufacturing costs, inbound raw material freight and
outbound duty and freight costs required to make our products floor-ready to customer specifications.
Our
selling, general and administrative expenses consist of costs related to marketing, selling, product innovation, supply chain
and corporate services. Personnel costs are included in these categories based on each employee’s function. Personnel costs
include salaries, stock-based compensation, benefits and incentives.
Results
of Operations
Nine
Months Ended September 30, 2018 compared to Nine Months Ended September 30, 2017
The
following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage
of net revenues:
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,294,644
|
|
|
$
|
7,769,040
|
|
Cost
of revenues
|
|
|
3,906,426
|
|
|
|
3,259,882
|
|
Gross
profit
|
|
|
5,388,218
|
|
|
|
4,509,158
|
|
Selling,
general and administrative expense
|
|
|
4,318,469
|
|
|
|
3,905,769
|
|
Interest
expense (income), net
|
|
|
56,728
|
|
|
|
(1,265
|
)
|
Income
before income taxes
|
|
|
1,013,021
|
|
|
|
604,654
|
|
Income
tax expense
|
|
|
263,162
|
|
|
|
212,723
|
|
Net
income
|
|
$
|
749,859
|
|
|
$
|
391,931
|
|
As
a percentage of net revenues
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Cost
of revenues
|
|
|
42.03
|
|
|
|
41.96
|
|
Gross
profit
|
|
|
57.97
|
|
|
|
58.04
|
|
Selling,
general and administrative expense
|
|
|
46.46
|
|
|
|
50.28
|
|
Interest
expenses (income), net
|
|
|
0.61
|
|
|
|
(0.02
|
)
|
Income
before income taxes
|
|
|
10.90
|
|
|
|
7.78
|
|
Income
tax expense
|
|
|
2.83
|
|
|
|
2.74
|
|
Net
income
|
|
|
8.07
|
%
|
|
|
5.04
|
%
|
Revenues
Net
revenues increased approximately $1.52 million, or 19.6%, to $9.29 million in the nine months ended September 30, 2018 from $7.77
million in the same period in 2017. Net revenues by business units are summarized below:
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$
Change
|
|
|
%
Change
|
|
OEM
|
|
$
|
936,462
|
|
|
$
|
680,628
|
|
|
$
|
255,834
|
|
|
|
37.59
|
|
INLINE
|
|
|
1,488,445
|
|
|
|
1,171,788
|
|
|
|
316,657
|
|
|
|
27.02
|
|
CUSTOM
ORDERS
|
|
|
6,869,737
|
|
|
|
5,916,624
|
|
|
|
953,113
|
|
|
|
16.11
|
|
Total
Revenues
|
|
$
|
9,294,644
|
|
|
$
|
7,769,040
|
|
|
$
|
1,525,604
|
|
|
|
19.64
|
|
While
the increase in net revenue was driven by increases across all business units, our Custom Order and OEM business units’
revenues increased $953,113 or 16.1% and $255,834 or 37.6%, respectively. Revenue growth of Custom Order and OEM business units
accounted for approximately 79.2% of the total revenue growth for the nine months ended September 30, 2018. Inline revenue increased
$316,657, or 27.0%, to $1,488,445 for the nine months ended September 30, 2018 from $1,171,788 during the same period in 2017.
We attribute these results largely to our investments in customer acquisition and retention programs implemented, beginning in
the fourth quarter of 2017.
Cost
of revenues
For
the nine months ended September 30, 2018, our total cost of revenues amounted to approximately $3.91 million or 42.03% of total
revenues, as compared to approximately $3.26 million or 41.96% of total revenues in the nine months ended September 30, 2017.
The slight increase in cost of revenues as a percentage of total revenue was primarily due to an increase of outbound freight
costs associated with shipping goods to customers as cost of goods sold.
Gross
profit
Gross
profit increased $879,060, or 19.5%, to $5.39 million for the nine months ended September 30, 2018 from $4.51 million for the
same period in 2017. Gross profit as a percentage of net revenues, or gross margin, decreased slightly to 57.97% in the nine months
ended September 30, 2018 compared to 58.04% in the same period in 2017. The decrease in gross margin percentage was primarily
driven by an increase in cost of revenue by less than 1% to 42.03% comparing to 41.96% during the same period in 2017.
Selling,
general and administrative expenses
Our
selling, general and administrative expenses consist of costs related to marketing, selling, new product development, auditing
and legal services. For the nine months ended September 30, 2018, selling, general and administrative expenses increased $412,700,
or 10.6%, to $4.32 million from $3.91 million for the same period in 2017. The changes were primarily attributable to the follows:
|
●
|
We
continue to invest in our sales offices in the U.S., Europe, Canada, and China to strengthen our customer service and increase
brand awareness through advertising, promotion, and sponsorship in the respective markets.
|
|
|
|
|
●
|
We
continue to invest in product development and technology infrastructure.
|
|
●
|
We
continue to invest in our employees, the most valuable assets of the company. In addition to the share based-compensation
plan, we made a strategic hire to lead our Product R&D in the fourth quarter of 2017 and implemented a more competitive
performance based compensation plan beginning January 1, 2018.
|
|
|
|
|
●
|
In
2017, we relocated our U.S. office to the newly purchased property. The related expenses, including interest, depreciation,
property tax, and others, increased in the nine months ended September 30, 2018 compared with the same period in 2017.
|
As
a percentage of net revenues, selling, general and administrative expenses decreased to 46.5% in the nine months ended September
30, 2018 from 50.3% for the same period in 2017. The revenue growth in the nine months ended September 30, 2018 led to an improved
ratio between the selling, general and administrative expenses and the net revenue.
Provision
for income taxes
Provision
for income taxes increased $50,439, or 23.7%, to $263,162 in the nine months ended September 30, 2018 from $212,723 during the
same period in 2017. The increase was line with the increase of $408,367, or 67.5%, in the income before taxes to $1.01 million
from $604,654 for the same period in 2017. Our effective tax rate was 25.98% for the nine months ended September 30, 2018 as compared
to 35.2% for the same period in 2017.
Other
comprehensive income (loss)/Foreign currency translation adjustment
Other
comprehensive income (loss)/foreign currency translation adjustment changed $356,250 to a loss of $207,034 in the nine months
ended September 30, 2018 from an income of $149,216 in the same period of 2017. These changes were primarily attributable to the
decrease in the US Dollar to RMB exchange rate in the nine months ended September 30, 2018 as compared to the same period in 2017.
Three
Months Ended September 30, 2018 compared to Three Months Ended September 30, 2017
The
following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage
of net revenues:
|
|
Three
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,960,810
|
|
|
$
|
2,584,757
|
|
Cost
of revenues
|
|
|
1,160,119
|
|
|
|
1,035,712
|
|
Gross
profit
|
|
|
1,800,691
|
|
|
|
1,549,045
|
|
Selling,
general and administrative expense
|
|
|
1,455,529
|
|
|
|
1,432,903
|
|
Interest
expense (income), net
|
|
|
18,757
|
|
|
|
667
|
|
Income
before income taxes
|
|
|
326,405
|
|
|
|
115,475
|
|
Income
tax expense
|
|
|
90,036
|
|
|
|
30,076
|
|
Net
income
|
|
$
|
236,369
|
|
|
$
|
85,399
|
|
As
a percentage of net revenues
|
|
Three
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Cost
of revenues
|
|
|
39.18
|
|
|
|
40.07
|
|
Gross
profit
|
|
|
60.82
|
|
|
|
59.93
|
|
Selling,
general and administrative expense
|
|
|
49.16
|
|
|
|
55.43
|
|
Interest
expense (income), net
|
|
|
0.63
|
|
|
|
0.03
|
|
Income
before income taxes
|
|
|
11.03
|
|
|
|
4.47
|
|
Income
tax expense
|
|
|
3.04
|
|
|
|
1.17
|
|
Net
income
|
|
|
7.99
|
%
|
|
|
3.30
|
%
|
Revenues
Net
revenues increased $376,053, or 14.6%, to $2.96 million in the three months ended September 30, 2018 from $2.58 million in the
same period in 2017. Net revenues by business units are summarized below:
|
|
Three
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$
Change
|
|
|
%
Change
|
|
OEM
|
|
$
|
163,371
|
|
|
$
|
116,516
|
|
|
$
|
46,855
|
|
|
|
40.21
|
%
|
INLINE
|
|
|
578,319
|
|
|
|
434,379
|
|
|
|
143,940
|
|
|
|
33.14
|
%
|
CUSTOM
|
|
|
2,219,120
|
|
|
|
2,033,862
|
|
|
|
185,258
|
|
|
|
9.11
|
%
|
Total
Revenues
|
|
$
|
2,960,810
|
|
|
$
|
2,584,757
|
|
|
$
|
376,053
|
|
|
|
14.55
|
%
|
The
increase in net revenue was the effect of an increase of Inline and Custom Orders revenue of $143,940 and $185,258, respectively,
in the three months ended September 30, 2018 compared to the same period in 2017. We attribute these results largely to our investments
in customer acquisition and retention programs implemented, beginning from the fourth quarter of 2017. OEM revenue increased $46,855,
or 40.21%, to $163,371 from $116,516 for the same period in 2017.
Cost
of revenues
For
the three months ended September 30, 2018, our total cost of revenues amounted to approximately $1.16 million or approximately
39.2% of total revenues, as compared to approximately $1.04 million or approximately 40.1% of total revenues in the three months
ended September 30, 2017. The increase in cost of revenues as a percentage of total revenue was primarily due to an increase of
outbound freight costs associated with shipping goods to customers as cost of goods sold.
Gross
profit
Gross
profit increased $251,646, or 16.2%, to $1.80 million for the three months ended September 30, 2018 from $1.55 million for the
same period in 2017. Gross profit as a percentage of net revenues, or gross margin, increased by less than 1% to 60.8% in the
three months ended September 30, 2018 compared to 60.0% in the same period in 2017. The increase in gross margin percentage was
primarily driven by a decrease in cost of revenue by approximately 0.9% to 39.2% compared to 40.1% during the same period in 2017.
Selling,
general and administrative expenses
Our
selling, general and administrative expenses increased $22,626, or 1.6%, to $1.46 million in the three months ended September
30, 2018 from $1.43 million in same period of 2017. As a percentage of net revenues, selling, general and administrative expenses
decreased to 49.2% in the third quarter of 2018 from 55.4% in the same period in 2017. The decrease in percentage was primarily
attributable to an increase of $376,053, or 14.6%, in net revenue for the three months ended September 30, 2018 compared to the
same period in 2017 while selling, general and administrative expenses are relatively stable for the periods.
Provision
for income taxes
Provision
for income taxes increased $59,960 to $90,036 in the three months ended September 30, 2018 from $30,076 during the same period
in 2017. The increase was line with the increase of $210,930, or 182.7%, in the income before taxes to $326,405 from $115,475
for the same period in 2017. Our effective tax rate was 28% in the three months ended September 30, 2018 as compared to 26% in
the same period of 2017.
Other
comprehensive income (loss)/Foreign currency translation adjustment
Other
comprehensive income (loss)/foreign currency translation adjustment changed $190,772 to a loss of $127,627 in the three months
ended September 30, 2018 from an income of $63,145 during the same period in 2017. These changes were primarily attributable to
the decrease in the US Dollar to RMB exchange rate in the three months ended September 30, 2018 as compared to the same period
in 2017.
Segment
Results of Operation
The
net revenues and operating income associated with our segments are summarized in the following tables.
Nine
Months Ended September 30, 2018 compared to Nine Months Ended September 30, 2017
Revenues
by segment are summarized below:
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$
Change
|
|
|
%
Change
|
|
North
America
|
|
$
|
6,472,734
|
|
|
$
|
5,526,383
|
|
|
$
|
946,351
|
|
|
|
17.12
|
|
China
|
|
|
2,438,352
|
|
|
|
1,936,266
|
|
|
|
502,086
|
|
|
|
25.93
|
|
Europe
|
|
|
383,558
|
|
|
|
306,391
|
|
|
|
77,167
|
|
|
|
25.19
|
|
Total
revenues
|
|
$
|
9,294,644
|
|
|
$
|
7,769,040
|
|
|
$
|
1,525,604
|
|
|
|
19.64
|
|
Net
revenues in our North America operating segment increased $946,351, or 17.1%, to $6.47 million in the nine months ended September
30, 2018 from $5.53 million in the same period of 2017. It was primarily due to the increase of revenue of our Custom Order business.
Net revenues in China increased $502,086, or 25.9%, to $2.44 million in nine months ended September 30, 2018 from $1.94 million
in the same period of 2017. This increase was primarily due to an increase of revenue from our OEM business in China. It is our
strategy to shift our capacity from OEM with lower margin to higher margin business unit Custom Orders. Revenue generated from
the European market showed an increase of $77,167, or 25.2%, to $383,558 in the nine months ended September 30, 2018 from $306,391
in the same period of 2017. During the next three months, as a result of divestment in our sponsored team partnerships and transition
into the slower fall and winter seasons we expect revenues to remain at par or at a slight decline with the same period of 2017.
Income
(loss) before income taxes
by segment is summarized below:
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$
Change
|
|
|
%
Change
|
|
North
America
|
|
$
|
501,183
|
|
|
$
|
391,922
|
|
|
$
|
109,261
|
|
|
|
27.88
|
|
China
|
|
|
566,895
|
|
|
|
308,478
|
|
|
|
258,417
|
|
|
|
83.77
|
|
Europe
|
|
|
(55,057
|
)
|
|
|
(95,746
|
)
|
|
|
40,689
|
|
|
|
(42.50
|
)
|
Total
income before income taxes
|
|
$
|
1,013,021
|
|
|
$
|
604,654
|
|
|
$
|
408,367
|
|
|
|
67.54
|
|
Our
North America operating segment shows an increase of operating income of $109,261, or 27.9%, to $501,183 for the nine months ended
September 30, 2018 from $391,922 in the same period of 2017. The change in the operating income was primarily driven by the following:
|
●
|
An
increase in net revenue of $946,351, or 17.1%, for this segment in the nine months ended September 30, 2018 compared to the
same period in 2017;
|
|
|
|
|
●
|
Expansion
of our sales team in North America; and
|
|
|
|
|
●
|
A
decrease in sponsorships, discounts and marketing related costs.
|
Our
China operating segment showed an increase of operating income of $258,417, or 83.8%, to $566,895 for the nine months ended September
30, 2018 from $308,478 in the same period of 2017. This was mainly due to the increase of OEM orders and Inline orders and improvement
of production efficiency leading to lower average production costs per unit.
Our
Europe business segment showed a decrease of the operating loss of $40,689, or 42.5%, to $55,057 for the nine months ended September
30, 2018 from a $95,746 operating loss in the same period in 2017. Our revenue generated by the European market has continued
to rise and generated an increase in gross profit which has led to less loss in the nine months ended September 30, 2018. The
reduction in operating losses for the period was primarily due to an increase of revenue, better marketing strategy with lower
discount to customers and the termination of our sponsorship agreement with a continental cycling team in Austria.
Three
Months Ended September 30, 2018 compared to Three Months Ended September 30, 2017
Revenues
by segment are summarized below:
|
|
Three
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$
Change
|
|
|
%
Change
|
|
North
America
|
|
$
|
2,162,830
|
|
|
$
|
1,902,442
|
|
|
$
|
260,388
|
|
|
|
13.69
|
|
China
|
|
|
653,156
|
|
|
|
578,084
|
|
|
|
75,072
|
|
|
|
12.99
|
|
Europe
|
|
|
144,824
|
|
|
|
104,231
|
|
|
|
40,593
|
|
|
|
38.95
|
|
Total
revenues
|
|
$
|
2,960,810
|
|
|
$
|
2,584,757
|
|
|
$
|
376,053
|
|
|
|
14.55
|
|
Net
revenues in our North America operating segment increased $260,388, or 13.7%, to $2.16 million in the three months ended September
30, 2018 from $1.90 million in the same period of 2017. The increase was primarily due to an increase of revenue of our Custom
Order business. Net revenues in China increased $75,072, or 13.0% to $653,156 in the three months ended September 30, 2018 from
$578,084 in the same period of 2017. This increase was primarily due to an increase of revenue in our Inline business in China.
Net revenue generated from the European market increased by $40,593, or 39.0%, to $144,824 in the three months ended September
30, 2018 from $104,231 in the same period of 2017 as a result of reduction of discounts offered to the customer.
Income
(loss) before income taxes
by segment is summarized below:
|
|
Three
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$
Change
|
|
|
%
Change
|
|
North
America
|
|
$
|
155,611
|
|
|
$
|
36,752
|
|
|
$
|
118,859
|
|
|
|
323.41
|
|
China
|
|
|
183,651
|
|
|
|
95,181
|
|
|
|
88,470
|
|
|
|
92.95
|
|
Europe
|
|
|
(12,857
|
)
|
|
|
(16,458
|
)
|
|
|
3,601
|
|
|
|
(21.88
|
)
|
Total
income before income taxes
|
|
$
|
326,405
|
|
|
$
|
115,475
|
|
|
$
|
210,930
|
|
|
|
182.66
|
|
Our
North America operating segment shows an increase of operating income of $118,859, or 323.4%, to $155,611 in the three months
ended September 30, 2018 from $36,752 for the same period in 2017. The change is due to:
|
●
|
An
increase of net revenue of $260,388, or 13.7% for this segment in the three months ended September 30, 2018 compared to the
same period in 2017;
|
|
|
|
|
●
|
A
positive result from the increase in marketing and promotional efforts; and
|
|
|
|
|
●
|
Increased
custom order revenue with higher profit margin
|
Our
China operating segment showed an increase of $88,470, or 93.0%, from $95,181 in the three months ended September 30, 2018 to
$183,651 for the same period in 2017. The increase of our operating income is primarily driven by an increase of $75,072, or 13.0%,
in revenue for this segment during three months ended September 30, 2018 compared to the same period in 2017 and the improvement
of production efficiency leading to lower average production costs per unit.
Our
Europe operating segment showed a decrease of operating loss of $3,601, or 21.9%, to $12,857 for the three months ended September
30, 2018 from $16,458 operating loss in the same period of 2017. Our revenue generated by the European market has continued to
rise. As a result, we experienced and generated an increase in gross profit which has led to less loss occurred in the three months
ended September 30, 2018. The reduction in operating losses for the period was primarily due to an increase of revenue, reduction
of customer discounts, and the termination of our sponsorship agreement with a continental cycling team in Austria.
Liquidity
and Capital Resources
Our
cash requirements have principally been for working capital and capital expenditures. We fund our working capital, inventory and
capital investments from cash flows from operating activities and cash and cash equivalents on hand. Our working capital requirements
generally reflect the growth in our business. Our capital investments have included purchasing factory machinery, leasehold improvements
for our offices and factory, land and building, and making investments and improvements in information technology systems.
We
believe our cash, cash equivalents on hand and cash from operations are adequate to meet our liquidity needs and capital expenditure
requirements for at least the next 12 months. Although we believe we have adequate sources of liquidity over the long term, an
economic recession, a slow growth period, a decrease in demand for our products, or the need for liquidity to engage in strategic
opportunities could adversely affect our business and liquidity or increase our need for liquidity. If and when needed, no assurances
can be given that funding will be available to us on acceptable terms, if at all. In addition, instability in or a tightening
of the capital markets could adversely affect our ability to obtain additional capital, on terms acceptable to us or at all, to
grow our business.
Cash
Flows
The
following table presents the major components of net cash flows used in and provided by operating, investing and financing activities
for the periods presented:
Nine
Months Ended September 30, 2018 compared to Nine Months Ended September 30, 2017
|
|
Nine
Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
982,572
|
|
|
$
|
263,108
|
|
Investing
activities
|
|
|
(337,226
|
)
|
|
|
(2,534,156
|
)
|
Financing
activities
|
|
|
(2,066
|
)
|
|
|
2,119,943
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(146,216
|
)
|
|
|
100,049
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
497,064
|
|
|
$
|
(51,056
|
)
|
Operating
Activities
Operating
activities consisted primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items
included depreciation and amortization, share-based compensation, and deferred taxes. In addition, operating cash flows included
the effect of changes in operating assets and liabilities, principally inventories, accounts receivable, income taxes payable,
prepaid expenses and other assets, accounts payable, advance from customers, and accrued expenses.
Cash
flows provided by operating activities increased $719,464, or 273.4%, to $982,572 for the nine months ended September 30, 2018
from $263,108 of cash flows provided by operating activities during the same period in 2017. The increase in cash from operating
activities was due to increased net cash flows from operating assets and liabilities of $311,063, an increase in net income of
$357,928, and an increase resulting from adjustments to net income for non-cash items, which increased $50,473 in the nine months
ended September 30, 2018 compared to the same period in 2017.
Investing
Activities
Cash
used in investing activities decreased approximately $2.20 million, or 86.7%, to $337,226 in the nine months ended September 30,
2018 from $2.53 million in the same period in 2017, primarily due to lower capital expenditure. For the nine months ended September
30, 2017, total capital expenditure was primarily used for a purchase of land and building in the U.S. in the amount of $2.61
million offset by the repayment of a loan received from an officer in the amount $74,198 and $3,022 proceeds received from sale
of equipment.
Total
capital expenditure was $337,226 and $2.53 million in the nine months ended September 30, 2018 and 2017, respectively.
Financing
Activities
Financing
activities during the nine months ended September 30, 2017 consisted primarily of $97,009 of proceeds received from related parties,
a mortgage loan of $2.04 million for the purchase of land and building in the U.S. and repayment of the mortgage of $62,002. The
Company also received cash of $44,936 from issuances of common stock in the nine months ended September 30, 2017.
The
Company’s repayment of its mortgage loan was $52,066 in the nine months ended September 30, 2018, compared to $62,002 for
the same period in 2017. The company also received cash of $50,000 from issuances of common stock in the nine months ended September
30, 2018.
Off-Balance
Sheet Arrangements
In
connection with various contracts and agreements, we have agreed to indemnify counterparties against certain third party claims
relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not
apply in situations in which our counterparties are grossly negligent, engage in willful misconduct or act in bad faith. Based
on our historical experience and the estimated probability of future loss, we have determined the fair value of such indemnifications
is not material to our financial position or results of operations.
Recently
Issued Accounting Standards
From
time to time, new accounting pronouncements are issues by the Financial Accounting Standards Board or other standard bodies that
may have an impact on the Company’s accounting and reporting. The Company believes that any recently issued accounting pronouncements
and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting
or reporting or that such impact will not be material to its financial position, results of operations, and cash flows when implemented.