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 (known as JIT) manufacturing
process and vertical integration of design, sales and distribution minimizes risk, provides autonomous control of quality across
all stages of our vertically integrated supply chain and maximizes value to our customers.
In
1996, Weidong “Wayne” Du, our Chief Executive Officer conceived of the idea of manufacturing sublimated sportswear
while working as an agent serving European customers for a Chinese trading company. Sublimation is a computerized printing process
that uses heat to transfer dye onto the fabric. In 2003, Mr. Du founded Rider Sportsfashion Ltd in Beijing, China to handle original
equipment manufacturing (or OEM) of sublimated cycling apparel. In 2006, the Jakroo® brand was launched and focused on the
manufacture and sale of cycling apparel products within the domestic Chinese market.
In
2008 we formed Rider Sportsfashion LLC, and in 2010 we shifted our strategy toward customization and began marketing our products
in the U.S. through our home base in Pleasanton, California. In 2014, we established Jakroo Canada Inc., based in Vancouver, British
Columbia, to oversee marketing, sales and distribution in the Canadian market. Soon thereafter, in 2015, we established Jakroo
GmbH, based in Dornbirn, Austria, to manage marketing, sales and distribution in the European market. Within the U.S. and Canadian
markets, the brand is considered to be among the top custom cycling wear brands along with Champion System, Hincapie, Voler, Pactimo
and Louis Garneau. While the competitive landscape across Europe varies greatly by region, we consider brands such as Castelli,
Bio Racer, Santini, Owayo and Cuore to be our primary competitors. The Jakroo® brand is among the top three selling cycling
apparel brands on China’s largest e-commerce platforms, TMALL. Among cycling enthusiasts, Jakroo ranks among the most popular
cycling apparel brands in the Chinese market alongside the likes of Santic, Sobike and CCN, all of which are Chinese domestic
brands.
Our
global business is currently comprised of three core business units: (1) Inline Retail, which consists of products produced and
sold as part of a collection; (2) OEM contract manufacturing; and (3) Custom Order. We will continue to maintain the current business
‘mix’ of business, although we expect our OEM business, which currently represents 10% of sales, to account for a
lower percentage of our total business at some point in the foreseeable future. We expect Inline Retail to remain stable around
17% and Custom Order is expected to expand slightly higher from its current 73% share.
We
have two primary sales channels for our Inline and Custom Order businesses: (1) direct to consumer sales through our website,
which represents 88% of total revenues and (2) wholesale, defined as sales to retail shops, promotional distributors and event
organizers, which represents, 12% of total revenues for these two channels. Both channels are sold exclusively online through
our e-commerce websites or, in the case of China, through large online retailers such as TMALL. Over 98% of our business from
these channels is executed with payments made to us online in advance of production and shipment of goods.
Our
value proposition is based on fast delivery, no minimum purchase requirements and free design. We currently offer a two-week turnaround
time and offer customers two pathways for design: (1) Do it yourself (or DIY), through the exclusive
Jakroo Express
™
design application and; (2)
Jakroo Pro Custom
, a free professional design service offered through the Jakroo website. We
believe that the combination of these novel offerings provides us with a distinct competitive advantage.
Market
Overview & Opportunity
Overview
According to a 2018
report issued by Analytical Research Cognizance, the global Cycling Apparel market size was $3.050 billion in 2017 and is forecast
to $5.050 billion in 2025, growing at a CAGR of 6.5% from 2018.
1
According
to the Sports & Fitness Industry Association (SFIA), participation in running, cycling and hiking in 2015 reached 140 million
people worldwide.
2
Participation in cycling as a pastime in the U.S. was estimated at 67 million in 2014, as noted
by the online statistics site, Statista.
3
This indicates a large potential market for cycling gear. With the inclusion
of running and triathlon, we expect to see continued growth in the endurance sports participation, particularly in the youth and
women’s segments. According to USA Triathlon, female participation in triathlons has grown from 27% of all participants
in 2000 to more than 37% in 2014.
In
China, the concept of cycling as a component of a healthy lifestyle has increased as a growing middle class has begun participating
in cycling for recreation. In 2014, Ji Cheng, nicknamed the “breakaway killer” for his skill in controlling the speed
of the peloton (i.e., the main group of riders in a cycling road race), was the first Chinese cyclist in the history of the Tour
de France.
A
2015 survey entitled “Millennial Consumer Trends” by Elite Daily of more than 1,300 millennials (those born
between 1980-1996) reports that more than 42% of those surveyed are deeply interested in helping companies develop future products
and services, and 62% of millennials say that if a brand engages with them on social networks, they are more likely to become
a loyal customer.
4
We
believe that these trends, coupled with the rapidly growing direct-to-consumer e-commerce and product personalization markets,
will create significant opportunities for companies like Jakroo that are equipped with the information and manufacturing architecture
to support the new era of “social” commerce.
Customization
is the Future
While
gathering data to quantify the potential market size for a new product or service can be challenging, a 2013 report by Forbes
magazine cites a Bain survey of more than 1,000 online shoppers among whom, although only 10% had tried online customization options,
25-30% expressed interest in doing so. While it is difficult to quantify the potential of customization, if 25% of sales from
the $2.5 billion cycling apparel market were customized, that would equate to $625 million per year.
5
Customization
will also create distinct advantages for companies to differentiate their products from their competitors at a time when the Internet
is making it easier for customers to easily compare prices and products with standard features or options.
Within
the wholesale markets, the ability to extend customization to a re-seller can provide a competitive advantage through the offering
of novel versions of a company’s products, thus allowing the retailer to minimize high capital investments in inventory
and avoid deep discounting which can arise as a result of overstocking on a particular item or from price wars among competitors
of similar products.
1
“Global Cycling Apparel Market Size, Share 2018 by Demand, Trending Factors , Suppliers, Type, Production,
Application and Sales Price, Forecast by 2025,” Reuters, Nov. 14, 2018,
https://www.reuters.com/brandfeatures/venture-capital/article?id=62505.
2
SFIA survey.
3
“
Number of Cyclists/Bike Riders Report,” Statista 2016. http://www.statista.com/statistics/227415/number-of-cyclists-and-bike-riders-usa/
4
“
Millennial Consumer Trends,” Elite Daily Survey 2015.
5
“
Having It Their Way: The Big Opportunity in Personalized Products,” Forbes, Nov. 5, 2013.
Developments
in the fields of 3D fashion design, DIY design applications and apparel centric wearables will expedite the acceptance and growth
of personalization, creating new value and new market opportunities. Personalization now extends beyond ascetic design and is
quickly becoming an integral part of the customers sizing and fit options during purchase. We anticipate that existing companies
that fail to reengineer their offerings will suffer either a significant competitive disadvantage or be forced to exit the market
altogether. We believe that our highly customized information architecture, vertical integration and JIT manufacturing infrastructure
will position Jakroo to assume a leadership position within our target markets.
The
Evolution of E-commerce
According
to a report by Statista, the number of online shoppers in the U.S. is projected to reach 230 million by 2021. This represents
a 20% increase from the 191 million recorded in 2013.
6
Net sales for Amazon alone reached $177 billion for the 2017.
E-commerce sales in China are projected to exceed $400 billion by the end of 2016. Market research firm eMarketer projects e-commerce
sales will eclipse $3.5 trillion within the next five years. The web is projected to account for 7.3% of global retail sales this
year and grow to 12.4% by 2019, according to eMarketer.
7
As more than 95% of our sales are derived through e-commerce,
we will continue to invest heavily in digital advertising to direct online shoppers to our customized design center and online
shops. This investment includes upgrading our existing e-commerce architecture and adding new features to improve the overall
user experience and enhance brand loyalty.
Companies
such as Facebook and Twitter are making significant investments in social commerce as community and social engagement play a larger
role in consumer purchasing decisions. Additionally, the gap between search and purchase domains is quickly fading. In a 2015
Surveta survey of 2,000 consumers, 44% of respondents stated they go direct to Amazon to start their product searches compared
to 34% who start on a Search engine such as Google, Bing or Yahoo.
8
Jakroo’s business is poised to leverage this
trend through its direct to consumer sales channel across the Jakroo group of e-commerce shopping sites as well as its sales through
sites such as TMALL. In fact, since 2016, we have been leveraging these trends through investing in digital advertising on the
Facebook platform. In 2018, we will begin selling our inline retail products on the Amazon platform in an effort to expand revenues
and build brand awareness. While the immediate benefit will from using the Amazon platform will be the revenues earned from those
sales, we expect to achieve additional benefits as this provides us with an additional means through of introducing customers
to our custom order business through interaction with us and ongoing marketing campaigns.
Competitive
Strengths
We
believe that the following key competitive strengths differentiate us from our competitors and are critical to our continuing
success:
Lean
Manufacturing & Vertical Integration
We
own and operate all facets of our design, manufacturing and sales process. This vertical integration allows us complete control
over our quality assurance of products and services, user experience and brand. Unlike many of our competitors who rely on contract
manufacturing, direct ownership of the manufacturing facility allows us to tightly control production timelines, quality control
and delivery.
6
“Number of digital shoppers in the United States from 2016 to 2021,” Statista. 2016.
https://www.statista.com/statistics/183755/number-of-us-internet-shoppers-since-2009/
7
“
Global e-commerce sales set to grow 25% in 2015” Matt Lindner, Internet Retailer July 2015.
https://www.internetretailer.com/2015/07/29/global-e-commerce-set-grow-25-2015
8
“
Amazon Commands Nearly Half Of Consumers’ First Product Search, BloomReach Study Finds”. 2015. Forbes”
http://www.forbes.com/sites/fionabriggs/2015/10/06/amazon-commands-nearly-half-of-consumers-first-product-search-bloomreach-study-finds/#a3ef0627b779
Our
production facility, which had been located in the Tongzhou District of Beijing and was recently relocated to a newly built facility
on the border of Beijing and Hebei Province, has been producing technical endurance apparel for more than 13 years. This extensive
experience has allowed us to develop specially engineered processes that have been optimized to produce and deliver a high capacity
of small quantity orders ranging from 1 piece to 25 pieces, on average, within 10 days, which is a substantially quicker turnaround
than our competitors based on delivery times posted on their websites.
In
2018, within our Custom Order segment, we completed 57,532 production lots (also known as work orders) with a total quantity of
152,775 pieces resulting in an average production lot size of 3 pieces. Additionally, 80% of orders were delivered to customers
in less than two-weeks and 62% were delivered to customers in less than 10 days.
While
consistently delivering the value proposition of either short delivery times or low minimum orders can pose logistical challenges,
Jakroo has mastered both through developing a specialized work process and complex manufacturing system. More importantly, Jakroo
has developed the ability to scale those processes without degradation of quality or compromising timelines. We believe this combination
is novel to Jakroo in the technical endurance sports apparel industry and allows us a significant competitive advantage.
Integrated
Information Systems
Our
core information system is built on a robust, cloud-based consolidated financial platform and ecommerce module. This allows us
to easily deploy and manage localized subsidiary companies and e-commerce platforms across our online properties while effectively
addressing local tax compliance requirements, language and currency. We’ve made significant investments in customization
of the platform to meet our particular requirements and create a compelling proprietary service for our customers.
We’ve
developed a proprietary, comprehensive design architecture using 3D modeling and, in partnership with external vendors, reengineered,
from the ground up, our new
Express by Jakroo
, the industry’s most advanced self-design and e-commerce platform
that provides a rich user experience for the customer and utilizes back-end efficiencies by our production team.
In
the spring of 2016, we implemented our make-to-order production module in order to further streamline the item configuration process
and achieve greater efficiencies with raw material asset management, production scheduling and cost accounting.
In
the fall of 2018, we commenced development and subsequent beta-testing our new personal fit program designed to match customers
with the best size and fit for their apparel. With this program, customers provide selected body measurements which are then used
to customize the clothing patterns to achieve optimal size and fit preference. We expect to release this program to mainstream
customers during the second quarter of 2019. We believe this will have a positive impact on our bottom line through reducing costs
associated with customer returns and exchanges and provide the customer with an improved, less stressful online shopping experience.
Global
presence
The
current competitive landscape within the endurance sports apparel market varies significantly based on region. Many of the incumbent
brands in the U.S. have minimal or no presence in the primary European or Asian markets. On the other hand, a handful of European
brands have, through years of investment, gained market awareness across North America and Asia. Very few Chinese domestic brands,
however, have any reasonable brand awareness in either Europe or North America. We are working to change that.
In
addition to our operating headquarters in Pleasanton, California, we have fully functional operating subsidiaries in Beijing,
China, Vancouver, British Columbia and Dornbirn, Austria that provide sales, marketing and customer service support to our regional
markets. This allows us to provide superior localized support to our regional customers while building brand loyalty therein.
With
our current established presence in each of the core markets and our proven business model, we believe we are positioned to take
a leadership position in the endurance sports apparel market. Our plan is to continue to establish and grow subsidiary offices
and joint venture operations in key regions around the globe as part of our commitment to building trust, premium customer service
and brand loyalty.
Significant
Design & Shopping Experience
With
the use of proprietary and highly customized customer relationship management and design applications, we are able to offer our
customers two options for their design experience. Our proprietary
Express by Jakroo
DIY application was built to specification
using state of the art technology and proprietary know-how to allow customers to design on a 99% true to size 3D model and easily
purchase anytime. Unlike similar services offered by our competitors, which provide conceptual mock ups and require significant
back-end interaction with designers and sales persons to process the order, designs created using
Express by Jakroo
are
transferred directly to the production floor with minimal human interaction and enter the production process upon the customer’s
placement of the order.
Customers
who elect to use our
Pro Custom
service will enjoy the benefits of having a trained professional designer create their
design according to specification. The customer is able to participate in the design editing process through an interactive online
review/approval system. Unlike many of our competitors, who typically charge a design set-up fee and require several days to prepare
the artwork, we offer this service free of charge and provide the designs within 48 hours of design request.
Since
2013, we have created more than 150,000 unique products and published more than 15,000 online custom storefronts on the Jakroo
e-commerce platform. These semi-private webpages, hosting the customer’s customized products, allow the customer to order
at their convenience 24/7 and share their store with friends, family and team members. Our custom e-commerce platform has been
engineered to facilitate the particular requirements of each customer, including flexible ordering dates, order windows, individual
shipping and sharing of stores and products.
Through
our online account center, customers can review pending design approvals, track the status of all of their designs as they progress
through the design process, as well as submit new design requests.
Based
on more than 5,400 individual customer reviews which we solicited through direct feedback requests since 2013, over 92% of respondents
rated their overall experience with Jakroo as positive and more than 96% of respondents indicated they were either very satisfied
or “blown away” by the quality of our products.
By
addressing the ongoing challenges faced by our traditional retailing competitors with forecasting and carrying inventory, we provide
a competitive offering by maintaining a full service ‘hands-free’ custom online storefront option. This allows retailers
who use our system to offer a broad selection of highly customizable products to their customers without having to purchase or
carry the inventory in advance. Orders are made-to-order and shipped directly to the customer from our production facility in
Beijing. The combination of made-to-order, JIT and custom commerce provides retailers the ability to better differentiate their
offerings in a highly competitive marketplace.
Our
Growth Strategy
Customer
Acquisition
We
acquire the majority of our direct customers online through Search Engine Marketing (SEM) and display marketing campaigns on Google,
Bing and social websites such as Facebook and Instagram. In China, comprehensive platforms such as WeChat, and Weibo play an important
role in our customer acquisition, engagement and social commerce strategies. We will continue to invest in advertising and marketing
to strengthen brand awareness in key markets.
Globally,
sponsorship of organized race events and charity rides also plays a key role for customer acquisition, along with sponsorship
of influential cycling teams and athletes to establish brand credibility. We currently sponsor several high-profile Gran Fondo
cycling and triathlon events across Canada, and California. During 2017 and 2018, we sponsored the UnitedHeathcare Pro Cycling
Team, a U.S. based pro-continental team with global recognition among the competitive cycling community. In 2019, we were
named the official clothing supplier for the USA CRITS, one of largest and longest running Criterium race series in the United
States.
Vertical
and Lateral Expansion
In
the near-term, we will continue our focus on the endurance sports apparel market. We define this market as products used for cycling,
triathlon, running and Nordic skiing. We aim to strengthen our brand and gain share within these core markets through: (1) investing
in new product development and technologies geared toward improving the customer experience and reducing delivery times; (2) expanding
geographically through establishing subsidiary companies and/or partnerships in key regions across the globe; and (3) making deeper
investments in marketing partnerships and advertising.
We
have experienced operational growth since 2011 and we plan to continue our international expansion across Europe and the Asia-Pacific
regions. During 2018, we entered into sales agent agreements with independent contractors in the United Kingdom and Australia
as a first step to gain market awareness in those regions. Additional opportunities for growth will focus on lateral expansion
into related product or sport categories that can benefit from customization. Examples of such categories include high school
and collegiate level volleyball, soccer and wrestling teams.
In
2018, 88% of Jakroo’s sales within the North American and European markets came from the Cycling product category, 4.8%
from Triathlon and the remainder were shared between Running and Nordic. 77% of total revenues were generated through our direct-to-consumer
channel and 23% through resellers. In 2017, 89% of Jakroo’s sales within the North American market came from the Cycling
product category, 6% from Triathlon and the remainder were shared between Running and Nordic. We’ve acquired more than 49,000
paying customers since 2013 and have acquired more than 10,000 new customers each year during 2017 and 2018. We will continue
to invest in technologies aimed at improving the end-user customer experience and monetizing new leads through expediting the
design-to-sale process.
Currently,
approximately 82% of total domestic revenues in China come from our Inline retail product collection while the remaining 18% arise
from the Custom product category. We plan to continue to drive growth within the custom product channel through investments in
marketing and front-end systems. We will transition our make-to-stock production into micro-production lots (quantities of less
than 50 pieces) to improve inventory turnover and net margins.
Our
Wholesale channel, defined as retail shops and promotional goods distributors, represents 23% of total revenues across North America.
For the period from January 2017 to December 2018, we had more than 750 paying customers with the median order value of $1,400
and average order value of $4,200. We will continue to invest in service offerings and technology platforms that provide competitive
advantages for retailers.
We
launched our new state of the art Design and E-commerce center in the third quarter of 2018 which employs some of the latest technologies
emerging from the 3D parametric design and machine learning fields.
Increased
Margins and Return on Invested Capital
Our
made-to-order, JIT business model mitigates the need to carry inventory, thus freeing up capital to be used for investments in
future expansion. Customers pay for goods in advance of production, which allows receivables to be as low as 0.5% of total revenue.
North America continues to be our fastest growing market as we continue to establish the Jakroo brand across the East Coast. Looking
forward, however, we expect our newly founded European operations to generate a significant portion of global sales over the next
three years.
Losses
in 2017 were the result of one-time costs associated with the relocation and purchase of our new office in Pleasanton, California
and amortization costs related to our stock-based compensation plan. Increases in revenue across our North American and European
operating units in 2018 can be attributed to the combination of marketing investments made throughout the trailing 12 months,
new product introductions and a shortening of our delivery times, which further strengthened our competitive advantage. Revenue
growth in China in 2018 was a result of increased sales in our OEM segment. Improvements in net profit for North America
in 2018 can be attributed to a reduction in sponsorship expenses in the latter half of 2018 and an increase in overall
revenue from our Custom Order business. Net income improvement in China in 2018 was due to an increase in overall order
volume and production efficiencies achieved through the investment in 3D design and pattern software and advanced cutting equipment.
As we continually
seek to improve design applications and deployment of our advanced Production Module, we expect to be able to reduce raw
material waste and increase front-end efficiencies associated with customer service resulting in greater operating margins.
Overview
of Our Company
Our
Core Values
Our
respect for our employees and community, and our emphasis on continuous improvement and social responsibility, are all borne from
our core values of
community, teamwork, integrity and innovation
. We believe our employees are our greatest asset to help
us build lasting value for all of Jakroo’s stockholders, including our customers.
Compliance
and Sustainability
We
maintain an ongoing commitment to the environment and our products are OEKO-TEX® certified. OEKO-TEX® Standard 100 is
an independent test and certification system for all types of textiles tested for harmful substances – from threads and
fabrics to the ready-to-use items that are available for purchase in stores.
In
our commitment to ensuring safe and healthy working conditions for our employees and community at large, our production facility
in China was fully audited and certified by a globally recognized environmental compliance auditor in September of 2015 through
the Business Social Compliance Initiative (BSCI) that audits and certifies working conditions and environmental performance in
a company’s global supply chains. Proposition 65 compliance is ongoing for the materials and fabrics used in products sold
in California.
Experienced
Management Team
The
senior management team at Jakroo and its subsidiaries is comprised of individuals with extensive backgrounds in the sports apparel
and manufacturing industries. Our senior operations team also has extensive experience in brand management and market development
within the sports apparel industry. Jakroo’s management team is described in more detail beginning on page 49 in
the Management section below.
Employees
As
of the date of this report, we employed approximately 178 employees as follows:
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Rider
Sportsfashion LLC
: 17 full time employees, 3 part-time employee, 3 independent contractors
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Jakroo
Canada Inc
.: 5 full time employees
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Jakroo
GmbH
: 2 full-time employees
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Rider
Sportsfashion Ltd
: 29 full-time employees
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Rider
Sportsfashion (Langfang) Ltd
: 124 full-time employees
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We
consider our relationships with our employees to be good. None of our employees is covered by collective bargaining agreements.
Proprietary
Rights
Each of the “J”
logo and “Jakroo” mark has been registered as a service mark or trademark within the United States Patent and Trademark
Office. In addition, we have obtained trademarks in Australia, Benelux Union (Belgium, Netherland and Luxembourg), Canada,
Mainland China, Denmark, Finland, Hong Kong, Taiwan, Malaysia, France, Thailand, Japan, Germany, Korea, Norway, Sweden, Spain,
Switzerland and the United Kingdom. Additional registrations of our trademarks in secondary product categories have been registered
or are in process of being registered within the respective Trademark offices in the primary countries in which we do business.
RISK
FACTORS
An
investment in our common stock is highly speculative and involves a high degree of risk. You should carefully consider the following
risk factors in evaluating our business before investing. No purchase of our common stock should be made by any person who is
not in a position to lose the entire amount of his or her investment. The order of the following risk factors is presented arbitrarily.
You should not conclude the significance of a risk factor based on the order of presentation. Our business and operations could
be seriously harmed as a result of any of these risks.
Risks
Related to Our Business
We
are a relatively early stage company with a limited operating history as a manufacturer and seller of sporting apparel
products. Our limited operating history may not provide an adequate basis to judge our future prospects and results of operations.
We
are a relatively early-stage company with a limited operating history. Our first operating subsidiary, Rider Sports Fashion
Limited (“Rider Beijing”) was established in Beijing in March 2003 to engage in cycling apparel development, production
and sales. In 2007, we established our manufacturing subsidiary. As part of our international expansion and in response to international
customer demands, we established our U.S. subsidiary in 2008 and our subsidiaries in Canada and Austria in 2014 and 2015, respectively.
Despite our continuous growth, we have limited experience and operating history in the sporting apparel industry. Our limited
history may not provide a meaningful basis for investors to evaluate our business, financial performance and prospects.
Any
disruption of our supply chain could have an adverse impact on our net sales and profitability.
We
rely on third party suppliers for fabrics, accessories and printing paper and machines that are essential to our product manufacturing.
We cannot predict when, or the extent to which, we will experience a disruption in our supply chain. Any such disruption could
negatively impact our ability to market and sell our products and serve our customers, which could adversely impact our net sales
and profitability.
Based
on our past business practice, we place purchase orders or enter into short term agreements with our raw material suppliers. Without
long term supply agreements, any of our current suppliers may discontinue selling to us at any time. Changes in the commercial
practices or financial condition of any of our key suppliers could also negatively impact our results. If we lose one or more
key suppliers and are unable to promptly find alternative suppliers who are willing and able to provide equally appealing raw
materials or manufacturing machines at comparable prices, we may not be able to deliver quality products that satisfy the requirements
of our customers.
We
also are subject to risks, such as the price and availability of raw materials and fabrics, labor disputes, union organizing activity,
strikes, inclement weather, natural disasters, war and terrorism and adverse general, economic and political conditions that might
limit our suppliers’ ability to provide us with quality merchandise on a timely and cost-efficient basis. We may not be
able to develop relationships with new suppliers, and materials from alternative sources, if any, may be of a lesser quality and
more expensive than those we currently purchase. Any delay or failure in offering products to our customers could have a material
adverse impact on our net sales and profitability.
Our
operating results can be adversely affected by changes in the cost or availability of raw materials.
Pricing
and availability of raw materials for use in our businesses can be volatile due to numerous factors beyond our control, including
general, domestic and international economic conditions, labor costs, production levels, competition, consumer demand, import
duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials
for us, and may therefore have a material adverse effect on our business, results of operations and financial condition.
During
periods of rising prices of raw materials, there can be no assurance that we will be able to pass any portion of such increases
on to customers. Conversely, when raw material prices decline, customer demands for lower prices could result in lower sales prices
and, to the extent we have existing inventory, lower margins. We currently do not hedge against our exposure to changing raw material
prices. As a result, fluctuations in raw material prices could have a material adverse effect on our business, results of operations
and financial condition.
Supply
shortages or changes in availability for any particular type of raw material can delay production or cause increases in the cost
of manufacturing our products. We may be negatively affected by changes in availability and pricing of raw materials, which could
negatively impact our results of operations.
Our
sales may fluctuate and historical sales revenue may not be a meaningful indicator of future performance.
Our
product sales may vary from quarter to quarter and year to year, and an unanticipated decline in net sales may cause the price
of our common stock to fluctuate significantly. A number of factors have historically affected, and will continue to affect, our
sales revenue, including:
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consumer
preferences, buying trends and overall economic trends;
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our
ability to identify and respond effectively to local and regional trends and customer preferences;
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our
ability to provide quality customer service that will increase our conversion of shoppers into paying customers;
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competition
in any of the regional markets we operate;
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changes
in our product mix; and
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changes
in pricing.
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Our
online retail custom order and inline retail segments are affected by general economic conditions in our markets and ongoing economic
and financial uncertainties may cause a decline in consumer spending that may adversely affect our business, operations, liquidity,
financial results and stock price.
Our
custom order and internet retail segments are the core of our business, contributing to more than 90% of our sales revenue
in fiscal year 2018. Both segments are retail-based and depend on consumer discretionary spending. As a result, we may be adversely
affected if our customers reduce, delay or forego their purchases of our products as a result of continued job losses, bankruptcies,
higher consumer debt and interest rates, higher energy and fuel costs, reduced access to credit, falling home prices, lower consumer
confidence, uncertainty or changes in tax policies and tax rates and uncertainties due to national or international security concerns.
Decreases in sales or online customer traffic will negatively affect our financial performance, and a prolonged period of depressed
consumer spending could have a material adverse effect on our business. Promotional activities and decreased demand for consumer
products could affect profitability and margins. In addition, adverse economic conditions may result in an increase in our operating
expenses due to, among other things, higher costs of labor, energy, equipment and facilities. Any of the foregoing factors could
have a material adverse effect on our business, results of operations and financial condition and could adversely affect our stock
price.
Our
results of operations could be materially harmed if we are unable to accurately forecast demand for our products.
We
often place orders for raw materials with our suppliers before our customers’ orders are firm. Therefore, if we fail to
accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver to our customers.
Factors that could affect our ability to accurately forecast demands for our products include:
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an
increase or decrease in consumer demands for our products or for products of our competitors;
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our
failure to accurately predict customer acceptance of new products;
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new
product introductions by competitors;
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unanticipated
changes in general market conditions or other factors, which may result in cancellations of orders or a reduction or increase
in the rate of reorders placed by retailers;
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weak
economic conditions or consumer confidence, which could reduce demand for discretionary items such as our products; and
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terrorism
or acts of war, or the threat of terrorism or acts of war, which could adversely affect consumer confidence and spending or
interrupt production and distribution of product and raw materials.
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Inventory
levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices,
which could have an adverse effect on our business, results of operations, and financial condition. On the other hand, if we underestimate
the demands for our products, our manufacturing facilities may not be able to produce products to meet customer requirements,
and this could result in delays in the shipment of products and lost revenues, as well as damage to our reputation and customer
relationships. There can be no assurance that we will be able to successfully manage inventory levels to exactly meet future order
and reorder requirements.
Expanding
our brand into new territories may be difficult and expensive, and if we are unable to successfully expand into these territories
as expected, our brand may be adversely affected, and we may not achieve our planned sales growth.
Our
growth strategy includes continuous expansion of our brand into new territories in North America, Europe and Asia. Products that
we introduce into these new markets may not be successful with the consumers we target. Our brand may also fall out of favor with
our current customer base as we expand our products into new markets. In addition, if we are unable to anticipate, identify or
react appropriately to evolving consumer preferences, our sporting apparel sales may not grow as fast as we plan or may decline
and our brand image may suffer.
Achieving
market acceptance for new products will likely require us to exert substantial product development and marketing efforts, which
could result in a material increase in selling, general and administrative expenses, both in absolute dollars and as a percentage
of revenue. There can be no assurance that we will have the resources necessary to undertake these efforts or that these efforts
will sufficiently increase our sporting apparel sales. Material increases in our selling and general and administrative expenses
could adversely impact our results of operations.
Changes
in the retail industry and markets for consumer products affecting our customers or retail practices could negatively impact existing
customer relationships and our results of operations.
While
the majority of our products are sold directly to consumers, a portion of our products are sold to resellers and distribution
agents. A significant deterioration in the financial condition of these wholesale customers could have a material adverse effect
on our sales and profitability. As a result, we periodically monitor and evaluate the credit status of these wholesale customers
and attempt to adjust sales terms as appropriate. Despite these efforts, a bankruptcy filing by a key customer could have a material
adverse effect on our business, results of operations, and financial condition. We do not monitor the credit status of our retail
customers or direct customer database.
Failure
to maintain our reputation and brand image could negatively impact our business.
Our
brand has received a certain level of recognition in China, North America and Europe. Our success depends on our ability to maintain
and enhance our brand image and reputation. We could be adversely affected if our brand is tarnished or receives negative publicity.
In addition, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine
consumer confidence in us, and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or
not material to our operations.
In
addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing
media and internet environment, including our reliance on online advertising. Negative posts or comments about us on social networking
websites could seriously damage our reputation and brand image. If we do not maintain, extend and expand our brand image, our
product sales, financial condition or results of operations could be materially and adversely affected.
Our
core information technology platform is operated by a third party and any failure in maintenance or security of this platform
could have adverse consequences on our business.
Our
core information technology platform runs on Oracle’s NetSuite ERP platform. This includes, all customer management (CRM),
manufacturing and resource planning (ERP) and e-commerce processes. All application data, and servers and functionality are outside
of our direct ownership and control. As a global service provider, Oracle is fully responsible for the maintenance and security
of their platform. Additionally, all related customer payment processing is managed by PCI compliant third party processors and
payment gateways such as Merchante Solutions, Cybersource, Altapay and Stripe. As such, we do not store any customer data on our
computer systems. Should any of those systems become compromised, our business would be adversely affected until remedied.
Failure
to adequately protect or enforce our intellectual property rights could adversely affect our business.
We
utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an
important factor in creating a market for our goods, in identifying us and in distinguishing our goods from the goods of others.
We consider our “Jakroo®” series trademarks to be among our most valuable assets, and we have registered these
trademarks in 20 countries and jurisdictions.
We
believe that our trademarks, copyrights and other intellectual property rights are important to our brand, our success and our
competitive position. In the future, we may encounter counterfeit reproductions of our products or that otherwise infringe on
our intellectual property rights. If we are unsuccessful in challenging a party’s products on the basis of trademark or
other intellectual property infringement, continued sales of these products could adversely affect our sales and our brand and
result in the shift of consumer preference away from our products.
The
actions we take to establish and protect trademarks and other intellectual property rights may not be adequate to prevent imitation
of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights.
In
addition, the laws of certain foreign countries may not protect or allow enforcement of intellectual property rights to the same
extent as the laws of the United States. We may face significant expenses and liabilities in connection with the protection of
our intellectual property rights outside the United States, and if we are unable to successfully protect our rights or resolve
intellectual property conflicts with others, our business or financial condition may be adversely affected.
Third
parties may claim that we are infringing their intellectual property rights, and these claims may be costly to defend, may require
us to pay licensing fees, damages, or other amounts, and may prevent, or otherwise impose limitations on the manufacture, distribution
or sale of our products.
From
time to time, third parties may claim that we are infringing on their intellectual property rights, and we may be found to infringe
those intellectual property rights. While we do not believe that any of our products infringe the valid intellectual property
rights of third parties, we may be unaware of the intellectual property rights of others that may cover some of our current or
planned new products. If we are forced to defend against third party claims, whether or not the claims are resolved in our favor,
we could encounter expensive and time consuming litigation which could divert our management and key personnel from business operations.
If we are found to be infringing on the intellectual property rights of others, we may be required to pay damages or ongoing royalty
payments, or comply with other unfavorable terms. Additionally, if we are found to be infringing on the intellectual property
rights of others, we may not be able to obtain license agreements on terms acceptable to us, and this may prevent us from manufacturing,
marketing or selling our products. Thus, these third party claims may significantly reduce the sales of our products or increase
our cost of goods sold. Any reductions in sales or cost increases could be significant, and could have a material and adverse
effect on our business.
Our
products are used for inherently risky sports activities and could give rise to product liability or product warranty claims and
other loss contingencies, which could affect our earnings and financial condition.
Many
of our products are used in applications and situations that involve certain levels of risk of personal injury. As a result, we
may be exposed to product liability claims by the nature of the products we produce. Exposure occurs if one of our products is
alleged to have resulted in bodily injury or other adverse effects. Any such product liability claim may include allegations of
defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product or activities associated with
the product, negligence, strict liability, and a breach of warranties. Although we maintain product liability insurance in amounts
that we believe are reasonable, there can be no assurance that we will be able to maintain such insurance on acceptable terms,
if at all, in the future or that product liability claims will not exceed the amount of insurance coverage. Additionally, we do
not maintain product recall insurance. As a result, product recalls or product liability claims could have a material adverse
effect on our business, results of operations and financial condition.
As
a manufacturer and distributor of consumer products, we are subject to the Consumer Products Safety Act, which empowers the Consumer
Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances,
the Consumer Products Safety Commission could require us to repurchase or recall one or more of our products. Additionally, laws
regulating certain consumer products exist in some cities and states, as well as in other countries in which we sell our products,
and more restrictive laws and regulations may be adopted in any of these jurisdictions in the future. Any repurchase or recall
of our products could be costly to us and could damage our reputation. If we were required to remove, or we voluntarily removed,
our products from the market, our reputation could be tarnished and we might have large quantities of finished products that we
could not sell.
We
spend substantial resources ensuring compliance with governmental and other applicable standards. However, compliance with these
standards does not necessarily prevent individual or class action lawsuits, which can entail significant cost and risk. We do
not maintain insurance against many types of claims involving alleged defects in our products that do not involve personal injury
or property damage. As a result, these types of claims could have a material adverse effect on our business, results of operations
and financial condition.
Our
success is dependent on retaining key personnel who would be difficult to replace.
Our
success depends largely on the continued services of our key management members. In particular, our success depends on the continued
efforts of Mr. Weidong Du, our Chief Executive Officer, President and Director, has been instrumental in developing our business
model and are crucial to our business development. There can be no assurance that Mr. Du will continue in his present capacities
for any particular period of time. The loss of the services of Mr. Du could materially and adversely affect our business development.
Derek Wiseman, our Chief Operating Officer, also plays a significant role in our business operations, particularly expansion of
our customer base in North America and Europe. David Wang, our Chief Financial Officer, plays a significant role in our accounting
and public company reporting matters. In addition, we rely on officers and directors of our operating subsidiaries for key aspects
of our operations, including sales, product design, manufacturing and quality control. The loss of these key employees would negatively
affect our ability to manufacture quality sporting apparel, maintain existing customers, capture new market share and generate
sales revenue.
The
legal requirements associated with being a public company, including those contained in and issued under the Sarbanes-Oxley Act,
may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management
of our business and our ability to obtain listing of our common stock
.
We
may be unable to attract and retain qualified officers and directors necessary to provide for our effective management because
of the rules and regulations that govern publicly listed companies, including, but not limited to, certifications by principal
executive officers. Currently, our officers do not have extensive experience in operating a U.S. public company. Moreover, the
actual and perceived personal risks associated with compliance with the Sarbanes-Oxley Act and other public company requirements
may deter qualified individuals from accepting roles as directors and executive officers. At present, we do not maintain an independent
board of directors. Further, the requirements for board or committee membership, particularly with respect to an individual’s
independence and level of experience in finance and accounting matters, may make it difficult to attract and retain qualified
board members going forward. If we are unable to attract and retain qualified officers and directors, the management of our business
and our ability to obtain or retain the listing of our common stock on any stock exchange (assuming we are able to obtain such
listing) could be adversely affected.
If
we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results
accurately or prevent fraud. Any inability to report and file our financial results accurately and timely could harm our business
and adversely impact the trading price of our common stock
.
We
are required to establish and maintain internal controls over financial reporting, disclosure controls and to comply with other
requirements of the Sarbanes-Oxley Act and the rules promulgated by the U.S. Securities and Exchange Commission (or the SEC) thereunder.
Our senior management, which currently consists of Mr. Weidong Du, Mr. David Wang and Mr. Derek Wiseman, cannot guarantee that
our internal controls and disclosure procedures will prevent all possible errors or all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of
controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can
provide absolute assurance that all control issues and instances oFf fraud, if any, within our company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more
persons, or by management’s override of the controls. The design of any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions
or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be detected.
Our
compliance with complicated U.S. regulations concerning corporate governance and public disclosure will result in additional expenses.
Moreover, our ability to comply with all applicable laws, rules and regulations is uncertain given our management’s relative
inexperience with operating U.S. public companies.
As
a public company, we will be faced with expensive, complicated and evolving disclosure, governance and compliance laws, regulations
and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd–Frank
Wall Street Reform and Consumer Protection Act. New or changing laws, regulations and standards are subject to varying interpretations
in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with
evolving laws, regulations and standards of a U.S. public company are likely to continue to result in increased general and administrative
expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Moreover,
our officers and directors do not have extensive experience in operating a U.S. public company, which makes our ability to comply
with applicable laws, rules and regulations uncertain. Our failure to comply with all laws, rules and regulations applicable to
U.S. public companies could subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and
stock price.
As
an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements, which could
leave our shareholders without information or rights available to shareholders of more mature companies.
For
as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (which
we refer to herein as the JOBS Act), we have elected to take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not “emerging growth companies” including, but not limited
to:
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not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
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taking
advantage of an extension of time to comply with new or revised financial accounting standards;
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reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
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exemptions
from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden
parachute payments not previously approved.
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We
expect to take advantage of these reporting exemptions until we are no longer an “emerging growth company.” Because
of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders
of more mature companies.
Because
we have elected to use the extended transition period for complying with new or revised accounting standards for an “emerging
growth company,” our financial statements may not be comparable to companies that comply with public company effective dates.
We
have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1)
of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective
dates for public and private companies until those standards apply to private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with public company effective dates. Consequently, our financial statements
may not be comparable to companies that comply with public company effective dates. As such, investors may have difficulty evaluating
or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact
on the value and liquidity of shares of our common stock.
Risks
Related to Our Industry
Intense
competition in the sporting goods industry could limit our growth and reduce our profitability.
The
sporting goods manufacturing and retail market in general is highly fragmented and intensely competitive. In each of the three
geographic areas in which we operate, we compete directly with a number of brand name cycling apparel manufacturers, some of whom
are top ranking brands in their respective geographic markets. In particular, we primarily compete with domestic Chinese brands
in the China market, including Champion System, Santic, Sobike and CCN, and we compete with top cycling apparel brands in the
North America and European markets. Some of our competitors have a large base of direct consumer and reseller accounts, greater
financial resources and mature commercial infrastructures. In addition, if our competitors reduce their prices, it may be difficult
for us to reach our net sales goals without reducing our prices. As a result of this competitive environment, we may also need
to spend more on advertising and promotion than we anticipate. If we are unable to compete effectively, our operating results
will suffer.
Seasonal
fluctuations in the sales of sporting goods could cause our annual operating results to suffer significantly.
We
experience seasonal fluctuations in our net sales and operating results. Summer and fall are the peak selling season of our products
during which time we generate more sales revenue. If we miscalculate the demand for our products generally or for our product
mix during the peak season, our net sales could decline, resulting in excess inventory, which could harm our financial performance.
Because a substantial portion of our operating income is derived from our net sales during the peak season, a shortfall in expected
net sales during that time could cause our annual operating results to suffer significantly.
If
we fail to anticipate changes in consumer preferences, we may experience lower net sales, higher inventory markdowns and lower
margins.
Our
products must appeal to a broad range of consumers whose preferences can only be predicted to a certain degree. These preferences
are also subject to change. Our success depends upon our ability to anticipate and respond in a timely manner to trends in sporting
apparel and accessories in general and cycling apparel in particular. If we fail to identify and respond to these changes, our
net sales may decline.
Risks
Associated with Our International Operations
Our
operations in international markets, and earnings in those markets, may be affected by legal, regulatory, political and economic
risks.
Our
operations in international markets, and earnings in those markets, may be affected by legal, regulatory, political and economic
risks. Our ability to maintain the current level of operations in our existing international markets and to capitalize on growth
in existing and new international markets is subject to risks associated with international operations. These include the burdens
of complying with a variety of foreign laws and regulations, unexpected changes in regulatory requirements, new tariffs or other
barriers to some international markets.
We
cannot predict whether quotas, duties, taxes, exchange controls or other restrictions will be imposed by the United States, China,
the European Union or other countries upon the import or export of our products in the future, or what effect any of these actions
would have on our business, financial condition or results of operations. We cannot predict whether there might be changes in
our ability to repatriate earnings or capital from international jurisdictions. Changes in regulatory and geopolitical policies
and other factors may adversely affect our business or may require us to modify our current business practices.
Approximately
53.7% of our sales for the year ended December 31, 2018 were earned in international markets. We are exposed to risks of
changes in U.S. policy for companies having business operations outside the United States, which could have a material adverse
effect on our business, results of operations and financial condition.
We
use foreign suppliers for a significant portion of our raw materials and our manufacturing facility is located in China, which
poses risks to our business operations.
Our
products are manufactured at our facility in China. Any of the following could materially and adversely affect our ability to
produce or deliver our products and, as a result, have a material adverse effect on our business, financial condition and results
of operations:
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political
or labor instability in countries where our facilities, contractors, and suppliers are located;
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political
or military conflict, which could cause a delay in the transportation of raw materials and products to us and an increase
in transportation costs;
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heightened
terrorism security concerns, which could subject imported or exported goods to additional, more frequent or more lengthy inspections,
leading to delays in deliveries or impoundment of goods for extended periods or could result in decreased scrutiny by customs
officials for counterfeit goods, leading to lost sales, increased costs for our anti-counterfeiting measures and damage to
the reputation of our brands;
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imposition
of regulations and quotas relating to imports and our ability to adjust timely to changes in trade regulations, which, among
other things, could limit our ability to produce products in cost-effective countries that have the labor and expertise needed;
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imposition
of duties, taxes and other charges on imports; and
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imposition
or the repeal of laws that affect intellectual property rights.
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Our
business is subject to foreign, national, state and local laws and regulations for environmental, employment, safety and other
matters. The costs of compliance with, or the violation of, such laws and regulations by us could have an adverse effect on our
business, results of operations and financial condition.
Numerous
governmental agencies in the United States and in other countries in which we have operations, enforce comprehensive national,
state, and local laws and regulations on a wide range of environmental, employment, health, safety and other matters. We could
be adversely affected by costs of compliance or violations of those laws and regulations. In addition, the costs of raw materials
purchased by us from our suppliers could increase due to the costs of compliance by those entities. Further, violations of such
laws and regulations could affect the availability of inventory, thereby affecting our net sales.
Changes
in foreign, cultural, political, and financial market conditions could impair our international operations and financial performance.
The
economies of foreign countries important to our operations, including countries in Asia and Europe, could suffer slower economic
growth or economic, social and/or political instability or hyperinflation in the future. International operations, including manufacturing
and sales (and the international operations of our customers), are subject to inherent risks which could adversely affect us,
including, among other things:
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protectionist
policies restricting or impairing the manufacturing, sales or import and export of our products;
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new
restrictions on access to markets;
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lack
of developed infrastructure;
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inflation
or recession;
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devaluations
or fluctuations in the value of currencies;
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changes
in and the burdens and costs of compliance with a variety of foreign laws and regulations, including tax laws, accounting
standards, environmental laws and occupational health and safety laws;
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social,
political or economic instability;
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acts
of war and terrorism;
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natural
disasters or other crises;
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reduced
protection of intellectual property rights in some countries;
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increases
in duties and taxation; and
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restrictions
on transfer of funds and/or exchange of currencies; expropriation of assets; and other adverse changes in policies, including
monetary, tax and/or lending policies, relating to foreign investment or foreign trade by our host countries.
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Should
any of these risks occur, our ability to sell our products or repatriate profits could be impaired and we could experience a loss
of sales and profitability from our international operations, which could have a material adverse impact on our business and financial
conditions.
Risks
Associated With Doing Business in China
Changes
in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition
and results of operations and may result in our inability to sustain our growth and expansion strategies.
A
portion of our operations, including manufacturing and sales, are conducted in the PRC and a significant percentage of our revenue
is sourced from the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by
economic, political and legal developments in the PRC.
The
PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented
measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets,
and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in
China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry
development by imposing industrial policies. The PRC government also exercises significant control over China’s economic
growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating
financial services and institutions and providing preferential treatment to particular industries or companies.
While
the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and
among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide
the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on
us. Our financial condition and results of operation could be materially and adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past
certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased
economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse
effect on our businesses, financial condition and results of operations.
If
relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price
may decrease
.
At various times during
recent years, the U.S and China have had significant disagreements over political and economic issues. In particular, during
2018, the U.S. and China have escalated tensions over trade issues, which has made an adverse impact on the economic relations
between the countries as well as the world economy. Controversies may arise in the future between these two countries that
may affect our economic outlook both in the U.S and in China. Any political or trade controversies between the U.S and China,
whether or not directly related to our business, could reduce the price of our common stock and also make our business more
difficult to operate as we are a U.S public company, have a substantial international operation as well as key facilities in China.
Future
inflation in China may inhibit the profitability of our business in China.
In
the past, the Chinese economy experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead
to growth in the money supply and rising inflation. If prices for our services and products rise at a rate that is insufficient
to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to
the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability
of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls
on credit and/or prices, or to take other action, which could inhibit economic activity in China and thereby harm the market for
our services and products.
The
fluctuation of the Renminbi may have a material adverse effect on your investment.
The
exchange rates between the Renminbi and the U.S. dollar and other foreign currencies are affected by, among other things, changes
in China’s political and economic conditions. As we rely on dividends and other fees paid to us by our subsidiary and affiliated
consolidated entities in China, any significant revaluation of the Renminbi could adversely affect our cash flows, revenues, earnings
and financial position, and the value of, and any dividends payable on, shares of our common stock in foreign currency terms.
To the extent that we need to convert U.S. dollars we received from our financing into Renminbi for our operations, appreciation
of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common
stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the
U.S. dollar amount available to us. In addition, since our functional and reporting currency is the U.S. dollar while the functional
currency of our subsidiary and consolidated affiliated entities in China is Renminbi, appreciation or depreciation in the value
of the Renminbi relative to the U.S. dollar would have a positive or negative effect on our reported financial results, which
might not reflect any underlying change in our business, financial condition or results of operations..
Restrictions
on currency exchange may limit our ability to receive and use our revenue effectively.
A
portion of our revenue is denominated in Renminbi. Renminbi is currently convertible under the “current account,”
which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,”
which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest
entity. Currently, Jakroo (Beijing) Sports Consulting Co., Ltd (“Jakroo Beijing”), our major PRC subsidiary, which
is a wholly-foreign owned enterprise, may purchase foreign currency for settlement of “current account transactions,”
including payment of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”)
by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our
ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future
revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize
revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our
shareholders, including holders of our common stock. Foreign exchange transactions under the capital account remain subject to
limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could
affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the variable interest
entity.
Our
subsidiaries and affiliated entities in China are subject to restrictions on making dividends and other payments to us.
We
are a holding company, and we rely on dividends and other equity distributions paid by our PRC subsidiary for our cash and financing
requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any
debt we may incur. If our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict
its ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require Jakroo Beijing
to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated variable interest
entities in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us.
Under PRC laws and
regulations, Jakroo Beijing is a wholly foreign-owned enterprise in China. As such, Jakroo Beijing may pay dividends only out
of its accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, according
to the Detailed Rules for the Implementation of the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises
(2014 Revision), or Implementation Rules, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated
after-tax profits each year, if any, to fund certain statutory reserve funds until the aggregate amount of such funds reaches
50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits
based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are
not distributable as cash dividends.
On March 15, 2019,
the National People’s Congress issued the Foreign Investment Law of the People’s Republic of China, or Foreign Investment
Law, which will take effect since January 1, 2020. The Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises
shall be repealed at the effective date of the Foreign Investment Law, and the Implementation Rules will no longer be applicable
from the same date. However, there are substantial uncertainties regarding the interpretation and application of current and future
PRC laws, regulations and rules. It is uncertain whether any new PRC laws or regulations relating to making dividends by PRC subsidiary
will be adopted or if adopted, what they would provide.
Any limitation on the
ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability
to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct
our business.
Uncertainties with respect
to the PRC legal system could have a material adverse effect on us.
The PRC legal system
is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil law system may
be cited as reference but have limited precedential value. Since 1979, newly introduced PRC laws and regulations have significantly
enhanced the protections available relating to foreign investments in China. Nonetheless, since these laws and regulations are
relatively new and the PRC legal system continues to evolve rapidly, the interpretations of such laws and regulations may not
always be consistent and enforcement of these laws and regulations involves significant uncertainties, any of which could limit
the available legal protections.
In addition, the PRC
administrative and judicial authorities have significant discretion in interpreting, implementing or enforcing statutory rules
and contractual terms, and it may be more difficult to predict the outcome of administrative and judicial proceedings and the
level of legal protection we may enjoy in the PRC than under some more developed legal systems. These uncertainties may affect
our decisions on the policies and actions to be taken to comply with PRC laws and regulations, and may affect our ability to enforce
our contractual or tort rights. In addition, the regulatory uncertainties may be exploited through unmerited legal actions or
threats in an attempt to extract payments or benefits from us. Such uncertainties may therefore increase our operating expenses
and costs, and materially and adversely affect our business and results of operations.
Furthermore, the PRC
legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or
at all, and could have a retroactive effect. As a result, we might not be aware of our violation of any of these policies and
rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual,
property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment
in China could adversely affect our business and impede our ability to continue our operations.
The PRC’s legal and
judicial system may not adequately protect our business and operations and the rights of foreign investors.
The PRC legal and judicial
system may negatively impact foreign investors. In 1982, the National People’s Congress amended the Constitution of China
to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors in the PRC. However,
the PRC’s system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary and enforcement
of existing laws is inconsistent. As a result, it may be impossible to obtain swift and equitable enforcement of laws that do
exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC’s legal system
is based on the civil law regime, that is, it is based on written statutes. A decision by one judge does not set a legal precedent
that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied to reflect
domestic political changes.
The promulgation of
new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors.
There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting the
PRC’s political, economic or social life, will not affect the PRC government’s ability to continue to support and
pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.
We may be required to obtain
prior approval of the China Securities Regulatory Commission (“CSRC”) of the listing and trading of our common stock.
On August 8, 2006,
six PRC regulatory authorities, including the CSRC, jointly promulgated the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the 2006 M&A Rules, which were later amended on June 22, 2009. According to the 2006
M&A Rules, an offshore special purpose vehicle, or SPV, refers to an overseas company controlled directly or indirectly by
domestic companies or individuals for purposes of overseas listing of equity interests in domestic companies (defined as enterprises
in the PRC other than foreign-invested enterprises). The 2006 M&A Rules require that the overseas listing by the SPV must
be approved by the CSRC. However, the applicability of the 2006 M&A Rules with respect to CSRC approval is unclear. Accordingly,
the application of the 2006 M&A Rules to the contractual arrangements of our corporate structure, including the VIE structure,
remains unclear.
We believe that the
2006 M&A Rules do not require us to obtain prior CSRC approval for the listing and trading of our common stock in the U.S.,
given that (i) our PRC subsidiary was incorporated as a wholly foreign-owned enterprise by means of direct investment rather than
by merger or acquisition by our company of the equity interest or assets of any “domestic company” as defined under
the 2006 M&A Rules, and no provision in the 2006 M&A Rules classifies the contractual arrangements between our company,
our PRC subsidiary and any of our consolidated affiliated entities as a type of acquisition transaction falling under the 2006
M&A Rules.
Nonetheless, in the
event the CSRC subsequently determines that its prior approval is required, we could face regulatory actions or other sanctions
from the CSRC or other PRC regulatory agencies. These regulatory agencies could impose fines and penalties on our operations,
limit our operating privileges, delay or restrict our sending of the proceeds from our financing outside of China into that jurisdiction,
or take other actions that could have an adverse effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our common stock. Consequently, if you engage in market trading or other activities
in anticipation of and prior to settlement and delivery, you do so at the risk that such settlement and delivery might not occur.
We cannot predict when
the CSRC will promulgate additional rules or other guidance, if at all. Moreover, the implementing rules or guidance, to the extent
issued, could fail to resolve current ambiguities under the 2006 M&A Rules. Uncertainties or negative publicity regarding
the 2006 M&A Rules could have an adverse effect on the trading price of our common stock.
Certain PRC regulations, including
the M&A Rules and national security regulations, may require a complicated review and approval process which could make it
more difficult for us to pursue growth through acquisitions in China.
The M&A Rules established
additional procedures and requirements that could make merger and acquisition activities in China by foreign investors more time-consuming
and complex. For example, the MOFCOM must be notified in the event a foreign investor takes control of a PRC domestic enterprise.
In addition, certain acquisitions of domestic companies by offshore companies that are related to or affiliated with the same
entities or individuals of the domestic companies, are subject to approval by the MOFCOM. In addition, the Implementing Rules
Concerning Security Review on Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the MOFCOM in August
2011, require that mergers and acquisitions by foreign investors in “any industry with national security concerns”
be subject to national security review by the MOFCOM. In addition, any activities attempting to circumvent such review process,
including structuring the transaction through a proxy or contractual control arrangement, are strictly prohibited.
There is significant
uncertainty regarding the interpretation and implementation of these regulations relating to merger and acquisition activities
in China. In addition, complying with these requirements could be time-consuming, and the required notification, review or approval
process may materially delay or affect our ability to complete merger and acquisition transactions in China. As a result, our
ability to seek growth through acquisitions may be materially and adversely affected.
In addition, if the
MOFCOM determines that we should have obtained its approval for our entry into contractual arrangements with our affiliated entities,
we may be required to file for remedial approvals. There is no assurance that we would be able to obtain such approval from the
MOFCOM. We may also be subject to administrative fines or penalties by the MOFCOM that may require us to limit our business operations
in the PRC, delay or restrict the conversion and remittance of our funds in foreign currencies into the PRC or take other actions
that could have a material and adverse effect on our business, financial condition and results of operations.
PRC regulation of loans and
direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital
contributions to our PRC subsidiary and affiliated entities, which could harm our liquidity and our ability to fund and expand
our business.
We are an offshore
holding company conducting our operations in China through our PRC subsidiary. We may make loans to our PRC subsidiary and PRC
consolidated VIE subject to the approval from governmental authorities and limitations in loan size, or we may make additional
capital contributions to our PRC subsidiary.
Any loans to our PRC
subsidiary, which is treated as a foreign-invested enterprise under PRC law, are subject to PRC regulations and foreign exchange
loan registrations. For example, loans by us to our PRC subsidiary to finance its activities cannot exceed statutory limits and
must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory limit for
the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved
by the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company. We
may also decide to finance our PRC subsidiary by means of capital contributions. Our capital contributions to our PRC subsidiary
must be approved by the Ministry of Commerce or its local counterpart. We cannot assure you that we will be able to complete the
necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary registration
or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiary may be negatively affected,
which could adversely affect our PRC subsidiary’s liquidity and its ability to fund its working capital and expansion projects
and meet its obligations and commitments.
On August 29, 2008,
SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment
and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by
a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used.
SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise
may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used
for equity investments within the PRC unless otherwise provided by law. In addition, SAFE strengthened its oversight of the flow
and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB
capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds
of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. On July
4, 2014, SAFE issued the Circular of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative
Method of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched the pilot
administration reform regarding conversion of foreign currency registered capitals of foreign-invested enterprises in 16 pilot
areas. According to SAFE Circular 36, some of the restrictions under SAFE Circular 142 will not apply to the settlement of the
foreign exchange capitals of an ordinary foreign-invested enterprise in the pilot areas, and such foreign-invested enterprise
is permitted to use Renminbi converted from its foreign-currency registered capital to make equity investments in the PRC within
and in accordance with the authorized business scope of such foreign-invested enterprises, subject to certain registration and
settlement procedure as set forth in SAFE Circular 36. As this circular is relatively new, there remains uncertainty as to its
interpretation and application and any other future foreign exchange related rules. On March 30, 2015, SAFE promulgated the Circular
on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or
SAFE Circular 19, to expand the reform nationwide. SAFE Circular 19 came into force and replaced both SAFE Circular 142 and SAFE
Circular 36 on June 1, 2015. However, SAFE Circular 19 continues to prohibit a foreign-invested enterprise from, among other things,
using RMB funds converted from its foreign exchange capitals for expenditure beyond its authorized business scope, providing entrusted
loans or repaying loans between non-financial enterprises.
SAFE promulgated the
Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management
Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE
Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital
of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated
enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and
SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from
this offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business
in China.
On December 26, 2017,
China’s National Development and Reform Commission, or the NDRC, issued the Management Rules for Overseas Investment by
Enterprises, or the NDRC Order 11. On February 11, 2018, the Catalog on Overseas Investment in Sensitive Industries (2018 Edition),
or the Sensitive Industries List, was promulgated. “Overseas investment” as defined in the NDRC Order 11 refers to
the investment activities conducted by an enterprise located in the territory of China either directly or through an overseas
enterprise under its control by making investment with assets and equities or providing financing or guarantee in order to obtain
overseas ownership, control, management rights and other related interests. Overseas investment by a Chinese individual through
overseas enterprises under his/her control is also subject to the NDRC Order 11. According to the NDRC Order 11, (i) direct overseas
investment by Chinese enterprises or indirect overseas investment by Chinese enterprises or individuals in sensitive industries
or sensitive countries and regions requires prior approval by the NDRC; (ii) direct overseas investment by Chinese enterprises
in non-sensitive industries and non-sensitive countries and regions requires prior filing with the NDRC; and (iii) indirect overseas
investment of over US$300 million by Chinese enterprises or individuals in non-sensitive industries and non-sensitive countries
and regions requires reporting with the NDRC. Uncertainties remain with respect to the application of the NDRC Order 11. We are
not sure if Jakroo Inc. were to use a portion of the proceeds raised from this offering to fund investments in and acquisitions
of complementary business and assets outside of China, such use of U.S. dollars funds held outside of China would be subject to
the NDRC Order 11. As the NDRC Order 11 was only recently issued, there are very few interpretations, implementation guidances
or precedents to follow in practice. We will continue to monitor any new rules, interpretation and guidance promulgated by the
NDRC and communicate with the NDRC and its local branches to seek their opinions, when necessary. If it turns out that the NDRC
Order 11 applies to our use of proceeds from the offering mentioned above and we fail to obtain the approval, complete the filing
or report our overseas investment using the offering proceeds, as the case may be, in a timely manner as provided under the NDRC
Order 11, we may be forced to suspend or cease our investment, or be subject to penalties or other liabilities, which may materially
and adversely affect our business, financial condition and prospects.
Violations of these
Circulars could result in severe monetary or other penalties. These circulars may significantly limit our ability to use RMB converted
from the net proceeds of financing activities outside of China to fund the establishment of new entities in China by our PRC subsidiary,
to invest in or acquire any other PRC companies through our PRC subsidiary, or to establish new consolidated VIEs in the PRC.
In light of the various
requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we
cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals
on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or PRC consolidated VIE or with respect
to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals,
our ability to use the proceeds from financing outside of the PRC and to capitalize or otherwise fund our PRC operations may be
negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
A failure by the beneficial
owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict our ability
to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability under PRC law.
On July 4, 2014, SAFE
promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment
through Special Purpose Vehicles, or SAFE Circular 37, which replaced the former Notice on Relevant Issues Concerning Foreign
Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles
(generally known as SAFE Circular 75) promulgated by SAFE on October 21, 2005. On February 13, 2015, SAFE further promulgated
the Circular on Further Simplifying and Improving the Administration of Foreign Exchange Concerning Direct Investment, or SAFE
Circular 13, which took effect on June 1, 2015. This SAFE Circular 13 has amended SAFE Circular 37 by requiring PRC residents
or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control
of an offshore entity established for the purpose of overseas investment or financing.
These SAFE circulars
require PRC residents to register with qualified banks in connection with their direct establishment or indirect control of an
offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or
equity interests in domestic enterprises or offshore assets or interests being deemed a “special purpose vehicle”
pursuant to SAFE Circular 37. These circulars further require amendment to the registration in the event of any significant changes
with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC residents, share transfer
or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose
vehicle fails to complete the required SAFE registration, the PRC subsidiary of that special purpose vehicle may be prohibited
from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities,
and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore,
failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for
evasion of foreign exchange controls.
Mr. Weidong Du, Ms.
Wei Tan, Mr. Guichun Liu, Ms. Wen Li and Mr. Hao Wang, who directly or indirectly hold our shares and who are known to us as PRC
residents, have completed the initial SAFE foreign exchange registrations to reflect our corporate restructuring. Mr. Weidong
Du and Ms. Wei Tan have become the United States citizens since September 2018. We have informed Mr. Weidong Du and Ms. Wei Tan
to notify the foreign exchange registration authority of the change of their nationality and qo through relevant formalities in
accordance with the requirements of the registration authority if necessary. However, we may not at all times be fully aware or
informed of the identities of all our shareholders or beneficial owners who are required to make such registrations, and we may
not always be able to compel them to comply with all relevant foreign exchange regulations.
As a result, we cannot
assure you that all of our shareholders or beneficial owners who are PRC residents will at all times comply with, or in the future
make or obtain any applicable registrations or approvals required by all relevant foreign exchange regulations. The failure or
inability of such individuals to comply with the registration procedures set forth in these regulations may subject us to fines
or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiary’s ability to distribute
dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from making distributions or paying
dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely
affected.
Furthermore, as these
foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving,
it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted,
amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business
operations or future strategy. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the
owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and
registrations required by the foreign exchange regulations.
You may face difficulties
in protecting your interests and exercising your rights as our stockholder since we conduct a portion of our operations in China
and other foreign locations.
We conduct a material
portion of our operations in China through Rider Beijing, our consolidated VIE in China. Because of this, it may be difficult
for you to conduct due diligence on our company and business. In addition, a portion of our assets are located outside of the
U.S. As a result, our public stockholders may have more difficulty in protecting their interests through actions against us than
would stockholders of a corporation doing business entirely or predominantly within the United States.
The enforcement of the PRC
Labor Contract Law in the PRC may adversely affect our business and our results of operations.
The PRC Labor Contract
Law became effective and was implemented on January 1, 2008, which was amended on December 28, 2012. It has reinforced the protection
of employees who, under the PRC Labor Contract Law, have the right, among others, to have written labor contracts, to enter into
labor contracts with no fixed terms under certain circumstances or to receive overtime wages. Further, it requires certain terminations
be based on the mandatory requirement age. In the event we decide to significantly change or decrease our workforce, the Labor
Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or
in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.
As a result of these
laws and regulations designed to enhance labor protection, we expect our labor costs will continue to increase. In addition, as
the interpretation and implementation of these laws and regulations are still evolving, our employment practice may not at all
times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur significant liabilities
in connection with labor disputes or investigations, our business and results of operations may be adversely affected.
Any failure to comply with
PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants
or us to fines and other legal or administrative sanctions.
In February 2012, SAFE
promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock
Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007. Pursuant to these rules,
PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any
stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through
a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures.
In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock
options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens
or who have resided in the PRC for a continuous period of not less than one year and who are granted options or other awards under
our equity incentive plan will be subject to these regulations when we become a U.S. listed company. Failure to complete the SAFE
registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into
our PRC subsidiary and limit our PRC subsidiary’ ability to distribute dividends to us. We also face regulatory uncertainties
that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under
PRC law.
We may be treated as a resident
enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on
our global income.
Under the PRC Enterprise
Income Tax Law and its implementing rules, enterprises established under the laws of jurisdictions outside of China with “de
facto management bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject
to the PRC enterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a
managing body that exercises substantive and overall management and control over the production and business, personnel, accounting
books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled
Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82,
on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body”
of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises
controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth
in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management
body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they
are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise
income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as
a result of our global income being taxed under the Enterprise Income Tax Law.
We believe that none
of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise
is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term
“de facto management body.” If the PRC tax authorities determine that we or any of our subsidiaries outside of China
is a PRC resident enterprise for PRC enterprise income tax purposes, then our company or such subsidiary could be subject to PRC
tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject
to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident
enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our securities may be subject
to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject
to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC
stockholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and
the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment
in our securities.
We and our shareholders face
uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to
a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.
On February 3, 2015,
the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by
Non-PRC Resident Enterprises, or Bulletin 7, which replaced or supplemented previous rules under the Notice on Strengthening Administration
of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration
of Taxation, on December 10, 2009. Pursuant to this Bulletin, an “indirect transfer” of assets, including equity interests
in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC
taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding
payment of PRC enterprise income tax. As a result, gains derived from such an indirect transfer may be subject to PRC enterprise
income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China,
immoveable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their
transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining
whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration
include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether
the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly
derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have
a real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business
model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax
situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer
of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment
or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where
the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise,
which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of
10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the
party who is obligated to make the transfer payments has the withholding obligation. Where the payer fails to withhold any or
withholds insufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory
time limit. Late payments of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions
of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public
stock exchange.
On October 17, 2017,
SAT issued a Public Notice of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT
Public Notice 37, which, among others, repealed the Circular 698 on December 1, 2017. SAT Public Notice 37 further details and
clarifies the tax withholding methods in respect of income of non-resident enterprises under Circular 698. And certain rules stipulated
in Bulletin 7 are replaced by SAT Public Notice 37. Where the non-resident enterprise fails to declare the tax payable pursuant
to Article 39 of the Enterprise Income Tax Law, the tax authority may order it to pay the tax due within required time limits,
and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority;
however, if the non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do
so within required time limits, it shall be deemed that such enterprise has paid the tax in time.
We face uncertainties
as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such
as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to withholding
obligations if our company is transferee in such transactions, under SAT Public Notice 37 and Bulletin 7. For transfer of shares
in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be required to expend valuable resources
to comply with SAT Public Notice 37 and Bulletin 7 or to request the relevant transferors from whom we purchase taxable assets
to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have an
adverse effect on our financial condition and results of operations.
There is uncertainty
as to the application of Bulletin 7, or previous rules under Circular 698. As Bulletin 7 was recently promulgated, it is not clear
how it will be implemented. Bulletin 7 may be determined by the tax authorities to be applicable to our offshore restructuring
transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved.
Furthermore, we, our non-resident enterprises and PRC subsidiaries may be required to spend valuable resources to comply with
Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our previous and
future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial
condition and results of operations.
Enhanced scrutiny over acquisition
transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.
The PRC tax authorities
have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity
interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular
698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which
became effective in February 2015.
Under Circular 698,
where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident
enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise,
being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use
of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject
to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests
in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has
the power to make a reasonable adjustment to the taxable income of the transaction.
In February 2015, the
SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax
regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect
transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore
transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how
to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and
sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee
(or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an
“indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas
holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the
taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle,
the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose
and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect
transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer
is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident
enterprise.
On October 17, 2017,
SAT issued a Public Notice of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT
Public Notice 37, which, among others, repealed the Circular 698 on December 1, 2017. SAT Public Notice 37 further details and
clarifies the tax withholding methods in respect of income of non-resident enterprises under Circular 698. And certain rules stipulated
in SAT Public Notice 7 are replaced by SAT Public Notice 37. Where the non-resident enterprise fails to declare the tax payable
pursuant to Article 39 of the Enterprise Income Tax Law, the tax authority may order it to pay the tax due within required time
limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority;
however, if the non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do
so within required time limits, it shall be deemed that such enterprise has paid the tax in time.
We face uncertainties
on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving
the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such
non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC
subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of
being subject to filing obligations or being taxed, under Circular 59, Circular 698, Circular 7 and SAT Public Notice 37, and
may be required to expend valuable resources to comply with Circular 59, Circular 698, Circular 7 and SAT Public Notice 37 or
to establish that we and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse
effect on our financial condition and results of operations.
The PRC tax authorities
have the discretion under SAT Circular 59, Circular 698, Circular 7 and SAT Public Notice 37 to make adjustments to the taxable
capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although
we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future
that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income
Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular
698, Circular 7 and SAT Public Notice 37, our income tax costs associated with such potential acquisitions will be increased,
which may have an adverse effect on our financial condition and results of operations.
Risks Relating to Our Corporate
Structure
Our corporate structure
and, in particular, our variable interest entity contracts (the “VIE Contractual Agreements”) are subject to significant
risks, as set forth in the following risk factors.
We depend upon the VIE Contractual
Agreements in conducting our business in the PRC, which may not be as effective as direct ownership.
Although a substantial
majority of our revenue has historically been generated by our PRC subsidiaries, we have relied and expect to continue to rely
on contractual arrangements with Rider Beijing and its shareholders to operate our business. Such contractual arrangements include:
(i) an Exclusive Technical Consulting and Service Agreement; (ii) an Exclusive Call Option Agreement; (iii) a Business Operation
Agreement; (iv) an Equity Pledge Agreement; and (v) Powers of Attorney granted by each of Rider Beijing’s shareholders.
These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE.
If we had direct ownership
of Rider Beijing, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Rider
Beijing, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However,
under the current contractual arrangements, we rely on the performance by our VIE and its shareholders of their obligations under
the contracts to exercise control over our VIE. However, the shareholders of our VIE may not act in the best interests of our
company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend
to operate our business through the contractual arrangements with our VIE. We may replace the shareholders of our VIE at any time
pursuant to our contractual arrangements with it and its shareholders. However, if any dispute relating to these contracts or
the replacement of the shareholders remains unresolved, we will have to enforce our rights under these contracts through the operations
of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements
with our VIE may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership
would be.
Contractual arrangements entered
into by our subsidiary and our PRC operating affiliate may be subject to scrutiny by the PRC tax authorities. Such scrutiny may
lead to additional tax liability and fines, which would hinder our ability to achieve or maintain profitability.
Under PRC laws and
regulations, transactions between related parties should be conducted on an arm’s-length basis and may be subject to audit
or challenge by the PRC tax authorities. We could face material adverse tax consequences if the PRC tax authorities determine
that the contractual arrangements among our subsidiary in the PRC, our affiliated entities and the shareholder of Rider Beijing
are not conducted on an arm’s-length basis and adjust the income of our affiliated entities through the transfer pricing
adjustment. A transfer pricing adjustment could, among other things, result in, for PRC tax purposes, increased tax liabilities
of our affiliated entities. In addition, the PRC tax authorities may require us to disgorge our prior tax benefits, and require
us to pay additional taxes for prior tax years and impose late payment fees and other penalties on our affiliated entities for
underpayment of prior taxes. We cannot assure you that such penalties will not be imposed on us in the future. Our net income
may be harmed if the tax liabilities of our affiliated entities materially increase or if they are found to be subject to additional
tax obligations, late payment fees or other penalties.
PRC laws and regulations governing
our businesses and the validity of certain of our contractual arrangements are uncertain. In addition, changes in such PRC laws
and regulations may materially and adversely affect our business.
There are substantial
uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws
and regulations governing our business, and the enforcement and performance of our contractual arrangements with Rider Beijing
and its shareholders. Although the primary business of Rider Beijing is not within the category in which foreign investment is
currently restricted or prohibited, the uncertainty of PRC regulations and governmental policies affecting foreign ownership may
result in us being required to hold (or, conversely, being prohibited from holding), directly or indirectly, a given percentage
of Rider Beijing’s equity interests. Our contractual arrangements with Rider Beijing and its shareholders, which allow us
to substantially control Rider Beijing through Jakroo (Beijing) Sports Consulting Co., Ltd, are governed by Chinese law. We cannot
assure you, however, that we will be able to enforce these contracts. If we are unable to enforce these contracts, we could be
required to deconsolidate Rider Beijing and its subsidiaries from our financial results.
In addition, Chinese
laws and regulations limiting foreign ownership of domestic companies are relatively new and may be subject to change, and their
official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations
or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing
and proposed future businesses may also be applied retroactively.
Although we believe
we comply and will continue to comply with current PRC regulations, we cannot assure you that the PRC government would agree that
these operating arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If the PRC government determines that we do not comply with
applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict
our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which
we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or
enforcement actions against us that could be harmful to our business.
Our
current corporate structure and business operations may be affected by the newly enacted
Foreign Investment Law.
On March 15, 2019,
the National People’s Congress approved the Foreign Investment Law, which will take effect on January 1, 2020. Since it
is relatively new, uncertainties exist in relation to its interpretation and implementation. The Foreign Investment Law does not
explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as
foreign invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all
provision under definition of “foreign investment” that includes investments made by foreign investors in China through
other means as provided by laws, administrative regulations or the State Council. Therefore it still leaves leeway for future
laws, administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign
investment. Therefore, there can be no assurance that our control over our VIE through contractual arrangements will not be deemed
as foreign investment in the future.
The Foreign Investment
Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries
specified as either “restricted” or “prohibited” from foreign investment in a “negative list”
that is yet to be published. It is unclear whether the “negative list” to be published will differ from the current
Special Administrative Measures for Market Access of Foreign Investment (Negative List). The Foreign Investment Law provides that
foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry
clearance and other approvals from relevant PRC government authorities. If our control over our VIE through contractual arrangements
are deemed as foreign investment in the future, and any business of our VIE is “restricted” or “prohibited”
from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the
Foreign Investment Law, the contractual arrangements that allow us to have control over our VIE may be deemed as invalid and illegal,
and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have
a material adverse effect on our business operation.
Furthermore, if future
laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual
arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all.
Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially
and adversely affect our current corporate structure and business operations.
If any of our affiliated entities
becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy the assets held by such
entity, which could materially and adversely affect our business, financial condition and results of operations.
We currently conduct
our operations in China through contractual arrangements with our affiliated entities. As part of these arrangements, a substantial
portion of our assets that are important to the operation of our business are held by our affiliated entities. If any of these
entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable
to continue some or all of our business activities, which could materially and adversely affect our business, financial condition
and results of operations. If any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its
equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our
ability to operate our business and could materially and adversely affect our business, our ability to generate revenue and the
market price of our common stock.
Any
failure by our consolidated variable interest entity or its shareholders to perform their obligations under our contractual arrangements
with them would have a material adverse effect on our business.
If
our consolidated variable interest entity or its shareholders fail to perform their respective obligations under the contractual
arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also
have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages,
which we cannot assure you will be effective under PRC laws. For example, if the shareholders of Rider Beijing were to refuse
to transfer their equity interest in Rider Beijing to us or our designee if we exercise the purchase option pursuant to these
contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel
them to perform their contractual obligations.
All
the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration
in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in
accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as
the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements.
Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated
variable interest entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the
ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators
are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by
a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing
parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require
additional expense and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant
delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control
over our consolidated variable interest entity, and our ability to conduct our business may be negatively affected.
If
the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entity do not comply
with applicable PRC laws and regulations, or if these regulations or the interpretation of existing regulations change in the
future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Details
of the VIE Agreements are set out under the caption “Corporate History and Structure – VIE Agreements” above.
There are risks involved with the operation of our business in reliance on the VIE Agreements, including the risk that the VIE
Agreements may be determined by PRC regulators or courts to be unenforceable. Our PRC counsel has provided a legal opinion that
the VIE Agreements are binding and enforceable under PRC law, but has further advised that if the VIE Agreements were for any
reason determined to be in breach of any existing or future PRC laws or regulations, the relevant regulatory authorities would
have broad discretion in dealing with such breach, including:
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Imposing
economic penalties;
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Discontinuing
or restricting our operations;
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Imposing
conditions or requirements of the VIE Agreements with which we may not be able to comply;
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Requiring
our company to restructure the relevant ownership structure or operations;
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Taking
other regulatory or enforcement actions that could adversely affect our company’s business; and
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Revoking
the business licenses and/or the licenses or certificates of Rider Sportsfashion and/or other VIE Agreements.
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Any
of these actions could adversely affect our ability to manage, operate and gain the financial benefits of Rider Sportsfashion,
which would have a material adverse effect on our business, financial condition and results of operations.
The
shareholders of our consolidated variable interest entity may have potential conflicts of interest with us, which may materially
and adversely affect our business and financial condition.
The
equity interests of Rider Beijing are held by Mr. Weidong Du, Ms. Wei Tan, certain key employees of our operating subsidiaries.
Their interests in Rider Beijing may differ from the interests of our company as a whole. These shareholders may breach, or cause
our consolidated variable interest entity to breach, the existing contractual arrangements we have with them and our consolidated
variable interest entity, which would have a material adverse effect on our ability to effectively control our consolidated variable
interest entity and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with
Rider Beijing to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual
arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders
will act in the best interests of our company or such conflicts will be resolved in our favor.
Currently,
we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except
that we could exercise our purchase option under the exclusive call option agreement with these shareholders to request them to
transfer all of their equity interests in Rider Beijing to a PRC entity or individual designated by us, to the extent permitted
by PRC laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Rider Beijing, we would
have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty
as to the outcome of any such legal proceedings.
Risks
Relating to Our Common Stock
Our
majority stockholders control our company for the foreseeable future, including the outcome of matters requiring shareholder approval.
Mr.
Weidong Du, our Chief Executive Officer, President and director and Mr. David Wang, Treasurer and director, have over 83% beneficial
ownership of our company, through Kustellar LLC, which is beneficially owned by Mr. Du and Ms. Tan. As a result, such individuals
will have the ability, acting together, to control the election of our directors and the outcome of corporate actions requiring
shareholder approval, such as: (i) a merger or a sale of our company, (ii) a sale of all or substantially all of our assets, and
(iii) amendments to our articles of incorporation and bylaws. This concentration of voting power and control could have a significant
effect in delaying, deferring or preventing an action that might otherwise be beneficial to our other shareholders and be disadvantageous
to our shareholders with interests different from those individuals. Certain of these individuals also have significant control
over our business, policies and affairs as officers or directors of our company. Therefore, you should not invest in reliance
on your ability to have any control over our company.
No active public market for our
common stock currently exists, and an active trading market may not ever develop or be sustained.
An investment in our company
will likely require a long-term commitment, with no certainty of return. Our common stock is currently quoted on the OTCQB
Market. There has been extremely limited trading in our common stock. In addition, there is a risk that we will not
be able to have our stock listed or quoted on a more established market, and even if we are able to do so (of which no assurance
can be given), we cannot predict whether an active market for our common stock will ever develop in the future. In the absence
of an active trading market:
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investors
may have difficulty buying and selling or obtaining market quotations;
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market
visibility for shares of our common stock may be limited; and
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a
lack of visibility for shares of our common stock may have a depressive effect on the market price for shares of our common
stock.
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Moreover, the OTCQB
Market is a relatively unorganized, inter-dealer, over-the-counter markets that provide significantly less liquidity than
any tier of the NASDAQ or the New York Stock Exchange. No assurances can be given that our common stock will be traded on a senior
market like NASDAQ or the New York Stock Exchange. In this event, there would be a highly illiquid market for our common stock
and you may be unable to dispose of your common stock at desirable prices or at all. Moreover, there is a risk that our common
stock could be delisted from the OTCQB Market, in which case it might be listed on OTC Pink, which is even more illiquid
than the OTCQB Market.
The
lack of an active market impairs your ability to sell your shares of our common stock at the time you wish to sell them or at
a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares of our
common stock. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares
of our common stock and may impair our ability to expand our operations through acquisitions by using our shares as consideration.
We
may require additional funding in order to progress our business in the future. If we are unable to raise additional capital,
we could be forced to delay, reduce or eliminate portions of our business.
We may require an additional
infusion of funds in the future to maintain and grow our business or pursue mergers, acquisitions, strategic partnership or other
opportunities. Should we require additional funds, we will be subject to the risk that we will be unable to raise
sufficient capital on acceptable terms, or at all. If such financing is not available on satisfactory terms, or is not available
at all, we may be required to delay, scale back or eliminate the development of business opportunities and our operations and
financial condition may be adversely affected to a significant extent. In the event we were to experience an economic recession
or a slow growth period, such an event could adversely affect our business, liquidity and future growth. In addition, should we
experience instability in or a tightening of the capital markets, such an event could adversely affect our ability to obtain additional
capital to grow our business on terms acceptable to us or at all.
Raising
additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies
or product candidates.
We
may need to raise funding in the future to maintain and grow our business. If we raise additional capital by issuing equity securities,
the percentage and/or economic ownership of our existing stockholders may be reduced, and accordingly these stockholders may experience
substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those
of our common stock.
Debt
financing, if obtained, may involve agreements that include liens on our assets, covenants limiting or restricting our ability
to take specific actions, such as incurring additional debt, increases in our expenses and requirements that our assets be provided
as a security for such debt. Debt financing would also be required to be repaid regardless of our operating results.
Even if an active trading market for
our common stock develops, the market price for our common stock may be volatile.
Even if an active trading
market for our common stock develops, of which no assurance can be given, the market price for our common stock may be volatile
and subject to wide fluctuations due to factors such as:
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the
perception of U.S. investors and regulators of U.S. listed Chinese companies;
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actual
or anticipated fluctuations in our quarterly operating results;
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changes
in financial estimates by securities research analysts;
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negative
publicity, studies or reports;
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our
capability to match and compete with technology innovations in the industry;
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changes
in the economic performance or market valuations of other companies in the same industry;
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announcements
by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition
or departure of key personnel;
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fluctuations
of exchange rates between RMB and the U.S. Dollar; and
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general
economic or political conditions in or influencing China.
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In
addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
Our common stock is and may continue
to be thinly traded, and as a result you may be unable to sell at or near ask prices or at all if you need to
sell your shares to raise money or otherwise desire to liquidate your shares.
Our
common stock presently is an may continue to be “thinly-traded,” meaning that the number of persons
interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. This
situation may be attributable to a number of factors, including the fact that we are relatively unknown to stock analysts, stock
brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company
such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence,
there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an
adverse effect on share price. Broad or active public trading market for our common stock may not develop or be sustained.
Our
common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations
that may make it more difficult to sell.
Our
common stock, which are currently quoted for trading on the OTCQB Market, may be considered to be a “penny stock”
if it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the
Exchange Act, as amended. Our common stock may be a “penny stock” if it meets one or more of the following conditions:
(i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange;
(iii) it is not quoted on the Nasdaq Capital Market or, even if so, has a price of less than $5.00 per share; or (iv) is issued
by a company that has been in business less than three years with net tangible assets less than $5 million. The principal result
or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common
stock will be subject to the “penny stock” regulations set forth in Rules 15g-2 through 15g-9 promulgated under the
Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business
days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers
in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to: (i) obtain from the investor information concerning his or her financial
situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions
in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth
the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement
from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and
investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common
stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
FINRA
sales practice requirements may also limit your ability to buy and sell shares of our common stock, which could depress the price
of shares of our common stock.
FINRA
rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending
that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers,
broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and
investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability
such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell
shares of our common stock, have an adverse effect on the market for shares of our common stock, and thereby depress price of
our common stock.
You
may face significant restrictions on the resale of your shares of our common stock due to state “blue sky” laws.
Each
state has its own securities laws, often called “blue sky” laws, which (1) limit sales of securities to a state’s
residents unless the securities are registered in that state or qualify for an exemption from registration, and (2) govern the
reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state,
there must be a registration in place to cover the transaction, or it must be exempt from registration. The applicable broker-dealer
must also be registered in that state.
We
do not know whether our securities will be registered or exempt from registration under the laws of any state. A determination
regarding registration will be made by those broker-dealers, if any, who agree to serve as market makers for our common stock.
We have not yet applied to have our securities registered in any state. There may be significant state blue sky law restrictions
on the ability of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market
for our common stock to be limited, as you may be unable to resell your shares without the significant expense of state registration
or qualification.
Volatility
in our common stock price may subject us to securities litigation.
The
market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share
price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have
often initiated securities class action litigation against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs
and liabilities and could divert management’s attention and resources.
We
are not likely to pay cash dividends in the foreseeable future.
We
currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not
expect to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we determine
to pay dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from Rider Beijing.
Rider Beijing may, from time to time, be subject to restrictions on its ability to make distributions to us, including restrictions
on the conversion of RMB into U.S. dollars or other hard currency and other regulatory restrictions.