ITEM
1. FINANCIAL STATEMENTS
Jakroo
Inc. and Subsidiaries
Consolidated
Balance Sheets (Unaudited)
|
|
March
31,
2019
|
|
|
December
31, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,996,465
|
|
|
$
|
1,799,132
|
|
Accounts receivable
|
|
|
112,392
|
|
|
|
60,151
|
|
Inventories
|
|
|
1,748,022
|
|
|
|
1,859,669
|
|
Prepaid expenses
and other current assets
|
|
|
265,644
|
|
|
|
329,414
|
|
Total current assets
|
|
|
4,122,523
|
|
|
|
4,048,366
|
|
Property and equipment, net
|
|
|
3,178,099
|
|
|
|
3,136,902
|
|
Right-of-use
assets – operating leases
|
|
|
808,333
|
|
|
|
-
|
|
TOTAL
ASSETS
|
|
$
|
8,108,955
|
|
|
$
|
7,185,268
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
396,045
|
|
|
$
|
462,717
|
|
Due to related parties
|
|
|
-
|
|
|
|
36,426
|
|
Advance from customers
|
|
|
223,362
|
|
|
|
122,597
|
|
Mortgage payable – current portion
|
|
|
73,221
|
|
|
|
72,697
|
|
Operating lease liabilities –
current portion
|
|
|
148,838
|
|
|
|
-
|
|
Other current
liabilities
|
|
|
151,576
|
|
|
|
199,675
|
|
Total current liabilities
|
|
|
993,042
|
|
|
|
894,112
|
|
Mortgage payable
|
|
|
1,799,698
|
|
|
|
1,818,379
|
|
Operating lease
liabilities
|
|
|
644,925
|
|
|
|
-
|
|
Total
liabilities
|
|
|
3,437,665
|
|
|
|
2,712,491
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Jakroo Inc. Stockholders’
equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000
shares authorized; None issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value, 100,000,000 shares authorized,
31,777,110 and 31,488,650 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
|
|
|
31,777
|
|
|
|
31,489
|
|
Additional paid in capital
|
|
|
1,031,717
|
|
|
|
855,938
|
|
Statutory reserve
|
|
|
136,652
|
|
|
|
136,652
|
|
Retained earnings
|
|
|
3,315,477
|
|
|
|
3,358,766
|
|
Accumulated other
comprehensive loss
|
|
|
(261,841
|
)
|
|
|
(326,648
|
)
|
Total Jakroo Inc.
Stockholders’ equity
|
|
|
4,253,782
|
|
|
|
4,056,197
|
|
Non-controlling
interests
|
|
|
417,508
|
|
|
|
416,580
|
|
Total
Stockholders’ Equity
|
|
|
4,671,290
|
|
|
|
4,472,777
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
8,108,955
|
|
|
$
|
7,185,268
|
|
The
accompanying Notes are an integral part of these consolidated financial statements
Jakroo
Inc. and Subsidiaries
Consolidated
Statements of Comprehensive Income (Unaudited
)
|
|
Three
Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,471,632
|
|
|
$
|
2,662,197
|
|
Cost of revenues
|
|
|
1,150,326
|
|
|
|
1,273,441
|
|
Gross profit
|
|
|
1,321,306
|
|
|
|
1,388,756
|
|
Selling,
general and administrative expense
|
|
|
1,337,165
|
|
|
|
1,353,595
|
|
Income (loss) from
operations
|
|
|
(15,859
|
)
|
|
|
35,161
|
|
Interest
expense, net of interest income
|
|
|
(17,991
|
)
|
|
|
(18,977
|
)
|
Income (loss) before
income taxes
|
|
|
(33,850
|
)
|
|
|
16,184
|
|
Income
tax provision
|
|
|
15,710
|
|
|
|
5,949
|
|
NET INCOME (LOSS)
|
|
|
(49,560
|
)
|
|
|
10,235
|
|
Less: Income
(loss) attributable to non-controlling interest
|
|
|
(6,271
|
)
|
|
|
5,086
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO JAKROO INC.
|
|
|
(43,289
|
)
|
|
|
5,149
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE
INCOME:
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment
|
|
|
72,006
|
|
|
|
127,879
|
|
COMPREHENSIVE INCOME
|
|
|
22,446
|
|
|
|
138,114
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive
income attributable to non-controlling interest
|
|
|
928
|
|
|
|
17,873
|
|
COMPREHENSIVE
INCOME ATTRIBUTABLE TO JAKROO INC.
|
|
$
|
21,518
|
|
|
$
|
120,241
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING – BASIC
|
|
|
31,642,495
|
|
|
|
31,288,650
|
|
EARNING (LOSS)
PER SHARE – BASIC
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING – DILUTED
|
|
|
31,642,495
|
|
|
|
32,499,210
|
|
EARNING (LOSS)
PER SHARE – DILUTED
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
The
accompanying Notes are an integral part of these consolidated financial statements.
Jakroo Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (Unaudited)
|
|
Jakroo
Inc. Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional Paid in Capital
|
|
|
Statutory Reserve
|
|
|
Retained Earnings
|
|
|
Other Comprehensive Income/(loss)
|
|
|
Total
|
|
|
Non-controlling Interest
|
|
|
Total
Stockholders’ Equity
|
|
Balance as of December 31, 2018
|
|
|
31,488,650
|
|
|
$
|
31,489
|
|
|
$
|
855,938
|
|
|
$
|
136,652
|
|
|
$
|
3,358,766
|
|
|
$
|
(326,648
|
)
|
|
$
|
4,056,197
|
|
|
$
|
416,580
|
|
|
$
|
4,472,777
|
|
Issuance of common stock for cash
|
|
|
288,460
|
|
|
|
288
|
|
|
|
149,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,999
|
|
|
|
|
|
|
|
149,999
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
26,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,068
|
|
|
|
|
|
|
|
26,068
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,289
|
)
|
|
|
|
|
|
|
(43,289
|
)
|
|
|
(6,271
|
)
|
|
|
(49,560
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,807
|
|
|
|
64,807
|
|
|
|
7,199
|
|
|
|
72,006
|
|
Balance as of March 31, 2019
|
|
|
31,777,110
|
|
|
$
|
31,777
|
|
|
$
|
1,031,717
|
|
|
$
|
136,652
|
|
|
$
|
3,315,477
|
|
|
$
|
(261,841
|
)
|
|
$
|
4,253,782
|
|
|
$
|
417,508
|
|
|
$
|
4,671,290
|
|
|
|
Jakroo Inc. Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional Paid in Capital
|
|
|
Statutory Reserve
|
|
|
Retained Earnings
|
|
|
Other Comprehensive Income/(loss)
|
|
|
Total
|
|
|
Non-controlling Interest
|
|
|
Total
Stockholders’ Equity
|
|
Balance as of December 31, 2017
|
|
|
31,288,650
|
|
|
$
|
31,289
|
|
|
$
|
693,352
|
|
|
$
|
136,652
|
|
|
$
|
3,023,173
|
|
|
$
|
(126,596
|
)
|
|
$
|
3,757,870
|
|
|
$
|
347,258
|
|
|
$
|
4,105,128
|
|
Contribution from non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
34,287
|
|
|
|
34,287
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
27,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,806
|
|
|
|
|
|
|
|
27,806
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,149
|
|
|
|
|
|
|
|
5,149
|
|
|
|
5,086
|
|
|
|
10,235
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,092
|
|
|
|
115,092
|
|
|
|
12,787
|
|
|
|
127,879
|
|
Balance as of Marc
h 31, 2018
|
|
|
31,288,650
|
|
|
$
|
31,289
|
|
|
$
|
721,158
|
|
|
$
|
136,652
|
|
|
$
|
3,028,322
|
|
|
$
|
(11,504
|
)
|
|
$
|
3,905,917
|
|
|
$
|
399,418
|
|
|
$
|
4,305,335
|
|
The accompanying Notes
are an integral part of these consolidated financial statements
Jakroo
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (Unaudited)
|
|
Three
Months Ended
March
31, 2019
|
|
|
Three
Months Ended
March
31, 2018
|
|
Cash Flows From Operating
Activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(49,560
|
)
|
|
$
|
10,235
|
|
Adjustments to reconcile
net income (loss) to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
48,778
|
|
|
|
38,593
|
|
Loss on disposal of property and equipment
|
|
|
123
|
|
|
|
-
|
|
Share based compensation
|
|
|
26,068
|
|
|
|
27,806
|
|
Deferred taxes
|
|
|
-
|
|
|
|
1,489
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(52,352
|
)
|
|
|
(24,712
|
)
|
Inventories
|
|
|
148,837
|
|
|
|
282,376
|
|
Prepaid expenses and other current assets
|
|
|
54,628
|
|
|
|
111,034
|
|
Accounts payable
|
|
|
(73,747
|
)
|
|
|
123,634
|
|
Advance from customers
|
|
|
100,057
|
|
|
|
(384,158
|
)
|
Other current liabilities
|
|
|
(58,797
|
)
|
|
|
(101,162
|
)
|
Income tax payable
|
|
|
6,773
|
|
|
|
(42,574
|
)
|
Net
cash provided by operating activities
|
|
|
150,808
|
|
|
|
42,561
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
Acquisition of
property and equipment
|
|
|
(83,531
|
)
|
|
|
(7,935
|
)
|
Net
cash used in investing activities
|
|
|
(83,531
|
)
|
|
|
(7,935
|
)
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
Payment to related parties
|
|
|
(37,055
|
)
|
|
|
-
|
|
Repayment of mortgage loan
|
|
|
(18,157
|
)
|
|
|
(17,464
|
)
|
Proceeds from
issuance of common stock
|
|
|
149,999
|
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
94,787
|
|
|
|
(17,464
|
)
|
Effect of exchange
rate changes on cash and cash equivalents
|
|
|
35,269
|
|
|
|
79,287
|
|
Net increase in cash
and cash equivalents
|
|
|
197,333
|
|
|
|
96,449
|
|
Cash and cash
equivalents, beginning of period
|
|
|
1,799,132
|
|
|
|
2,350,930
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
1,996,465
|
|
|
$
|
2,447,379
|
|
Supplemental disclosure
of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the periods for :
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
8,794
|
|
|
$
|
46,881
|
|
Interest
|
|
$
|
18,666
|
|
|
$
|
19,360
|
|
Non-cash investing
and financing activities
|
|
|
|
|
|
|
|
|
Non-controlling
interest contribution of intangible assets
|
|
$
|
-
|
|
|
$
|
34,287
|
|
The
accompanying Notes are an integral part of these consolidated financial statement.
Jakroo
Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
(unaudited)
1.
Description of business
Jakroo
Inc. and its subsidiaries, which are controlled through a series of variable interest agreements, design, manufacture and sell
customized technical endurance apparel for the cycling, triathlon, running and Nordic skiing markets. Jakroo Inc. and its consolidated
subsidiaries and variable interest entities (“VIE”) are referred to collectively herein as the “Company.”
In
February 2018, the Company and an individual investor founded Designlab.ai Corp., a California corporation (“Designlab”),
which primarily focuses on research and development of automation processes in designing and manufacturing customized technical
endurance apparel by using current artificial intelligence technologies. The Company owns 70% of Designlab’s common stock
by investing $80,000 while the individual investor owns 30% of Designlab’s common stock by contributing technical know-how
in artificial intelligence.
2.
Basis of Presentation and Summary of Significant Accounting Policies.
Basis
of Presentation and Consolidation
The
unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission (the
“SEC”). Certain information and footnote disclosures normally included in financial statements have been condensed
or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, the unaudited consolidated financial
statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial position as of March 31, 2019 and the results of
operations and cash flows for the periods ended March 31, 2019 and 2018. The financial data and other information disclosed in
these notes to the interim financial statements related to these periods are unaudited. The results for the three months ended
March 31, 2019 are not necessarily indicative of the results to be expected for any subsequent periods or for the entire year.
The balance sheet on December 31, 2018 has been derived from the audited financial statements at that date. These unaudited financial
statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended
December 31, 2018 as included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with
the SEC on April 1, 2019.
The
accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”), and include the accounts of the Company, its subsidiaries and entities controlled
through VIE agreements. All intercompany balances and transactions have been eliminated in consolidation.
Certain
amounts have been reclassified to conform to current year presentation.
Leases
In
February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires
lessees to recognize leases on balance sheet and disclose key information about the leasing arrangements. The new standard establishes
a right-of-use model (“ROU”) that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases
with a term longer than 12 months.
The
new standard is effective for us on January 1, 2019, with early adoption permitted. An entity may choose to use either (1) its
effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial
application. The Company adopted the new standard on January 1, 2019 and use the effective date as our date of initial application.
Consequently, financial information is not provided for the dates and periods before January 1, 2019. The new standard provides
a number of optional expedients in transition. The Company elected the package of practical expedients which permits us not to
reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
The
new standard has a material effect on our financial statements. The most significant effects are related to the recognition of
new ROU assets and lease liabilities on our balance sheet for our real estate operating leases. The Company has historically entered
into a number of lease arrangements under which we are the lessee. Specifically, we have office and manufacturing facilities under
the real estate operating leases in China, Canada and Austria. All of these operating leases are under fixed rental payments with
agreed annual increases.
Recently
Issued Accounting Standards
From
time to time, new accounting pronouncements are issues by the Financial Accounting Standards Board or other standard bodies that
may have an impact on the Company’s accounting and reporting. The Company believes that any recently issued accounting pronouncements
and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting
or reporting or that such impact will not be material to its financial position, results of operations, and cash flows when implemented.
3.
Inventories
Inventories
consisted of the following:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
Raw materials
|
|
$
|
1,014,516
|
|
|
$
|
1,124,729
|
|
Finished goods
|
|
|
733,506
|
|
|
|
734,940
|
|
Total inventories
|
|
$
|
1,748,022
|
|
|
$
|
1,859,669
|
|
4.
Operating leases
As
of March 31, 2019, the Company had four real estate operating leases for our office and manufacturing facilities under the terms
from one year to ten years. The operating lease for our office facilities in China is an annual lease and the lessor is a related
party. The Company made an accounting policy election not to recognize lease asset and liability for this lease after examining
the criteria established for leases with related parties with 12 months or shorter. For all other three real estate operation
leases, the Company adopted the new standard to recognize lease assets and liabilities.
As
of March 31, 2019, the Company recognized additional operating liabilities of $793,763 and Right-of-use assets of $808,333
based on the present value of the remaining minimum rental payments under the current leasing standards for existing operating
leases.
|
|
March
31, 2019
|
|
Operating lease Right-of-use
assets
|
|
$
|
808,333
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
|
|
Current portion
of long-term debt
|
|
|
148,838
|
|
Long-term
debt
|
|
|
644,925
|
|
Total operating
lease liabilities
|
|
$
|
793,763
|
|
5.
Mortgage payable
The
Company entered into a mortgage loan from a bank in the principal amount of $2,040,000 on January 9, 2017, of which $51,000 is
interest free and the balance of $1,989,000 bears an annual interest rate of 3.96%. The loan has a ten year term with monthly
installments of $12,274 including interest. The final payment of approximately $1,224,000 including interest will be made on January
15, 2027. The mortgage loan is collateralized by the Company’s land and building in the United States.
Principal
payments on mortgage payable are due as follows:
Year ending December 31:
|
|
|
|
2019
|
|
$
|
54,540
|
|
2020
|
|
|
75,466
|
|
2021
|
|
|
78,757
|
|
2022
|
|
|
81,978
|
|
2023
|
|
|
85,330
|
|
Thereafter
|
|
|
1,496,848
|
|
|
|
$
|
1,872,919
|
|
6.
Equity Incentive Plan
On
January 5, 2017, the Company’s Board of Directors (the “Board of Directors”) adopted the Jakroo Inc. 2016 Equity
Incentive Plan (the “Plan”). The Plan was adopted to retain and provide incentives for employees, officers and directors,
and to align stockholder and employee interests. The participants of the Plan include the Company’s employees who were previously
determined by the Board of Directors.
On
January 5, 2017, the Company signed stock option agreements with certain participants and granted options thereunder to purchase
a total of 3,492,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) to
such participants. The vesting period of the stock options was four years starting from the date of grant. The exercise price
is $0.17 per share. These options will expire ten years from the date of grant, subject to earlier termination as set forth in
the Plan and the option agreement.
On
August 16, 2017, the Company granted stock options under the Plan to two independent directors to purchase an aggregate of 480,000
shares of Common Stock at a price of $0.25 per share, which vested immediately. These options will be exercisable for a period
of five years commencing six months from the date of grant on a cashless exercise basis.
On
September 1, 2018, an employee of the Company voluntarily resigned her position. An option to purchase an aggregate of 436,500
shares was granted to the employee in January 2017. As of the last day of her employment, 218,250 shares were vested. The vested
shares were not exercised by the employee during the period from September 1, 2018 to November 30, 2018. As of December 31, 2018,
218,250 shares were forfeited and the remaining 218,250 shares were cancelled.
In
February 2019, the Company adopted an amendment to the Plan authorizing an increase in the number of authorized shares of the
Common Stock under the Plan to 15,000,000 shares of Common Stock of the Company and updating certain provisions of the Plan to
account for recent regulatory developments.
The
Company assessed the fair value of the total granted stock options on the grant date using a Black-Scholes Stock Option Pricing
Model. Significant assumptions used in calculating the fair value of options are as follows:
|
●
|
Expected
volatility 54.00% ~ 68.58%;
|
|
|
|
|
●
|
Risk-free
interest rate 0.83% ~ 1.24%;
|
|
|
|
|
●
|
Expected
term (year) 4 ~ 5;
|
|
|
|
|
●
|
Exercise
price $0.17 ~ $0.25.
|
The
estimated fair value of the total granted stock options on the grant date was $507,649, among which $56,509 was recorded in the
expense of year 2017 and $451,140 is being amortized over 48 months period. Total amortization of stock-based compensation expense
was $26,068 and $27,806 for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31,
2019, the amortization of stock-based compensation expense was reduced for the forfeited shares proportionately.
A
summary of the changes in stock options outstanding under the Plan is presented below:
|
|
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
Weighted
Average Exercise Price
|
|
|
Remaining
Contractual Term
|
|
Options outstanding at December 31, 2017
|
|
|
3,972,000
|
|
|
$
|
507,649
|
|
|
$
|
0.18
|
|
|
|
3
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
(436,500
|
)
|
|
|
(56,392
|
)
|
|
|
0.17
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding at December 31, 2018
|
|
|
3,535,500
|
|
|
|
451,257
|
|
|
|
0.18
|
|
|
|
2
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding at March 31,
2019
|
|
|
3,535,500
|
|
|
$
|
451,257
|
|
|
$
|
0.18
|
|
|
|
1.75
|
|
A
summary of the status of non-vested options is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Non-vested at December 31, 2017
|
|
|
2,619,000
|
|
|
$
|
0.17
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(873,000
|
)
|
|
|
0.17
|
|
Forfeited or
exercised
|
|
|
(218,250
|
)
|
|
|
0.17
|
|
Non-vested at December 31, 2018
|
|
|
1,527,750
|
|
|
|
0.17
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(763,878
|
)
|
|
|
0.17
|
|
Forfeited or
exercised
|
|
|
-
|
|
|
|
-
|
|
Non-vested at March 31, 2019
|
|
|
763,872
|
|
|
$
|
0.17
|
|
7.
Stockholders’ Equity
Common
Share Issuances
In
January 2019, the Company issued 288,460 shares of Common Stock to an unaffiliated investor for cash consideration of $149,999.
8.
Provision for Income Taxes
The
Company has operations in four tax jurisdictions: the United States, China, Canada and Austria.
The
Company’s U.S. operations are subject to income tax according to U.S. tax law.
The
U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduces significant
changes to U.S. income tax law. Effective in 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created
new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible
low-taxed income tax and the base erosion tax, respectively. The Tax Act requires the Company to pay U.S. income taxes on accumulated
foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain
other net current assets and 8% on the remaining earnings. The Company’s deferred tax assets and liabilities were remeasured
to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, resulting in a deferred tax expense of $13,487
for the three months ended March 31, 2018. This expense is attributable to the Company being in a net deferred tax asset position
at the time of remeasurement. This amount can be seen on the rate reconciliation as an adjustment to deferred tax asset.
The
Company’s Chinese operations are subject to Chinese tax at a statutory rate of 25% on income reported in the statutory financial
statements after appropriate tax adjustments. In addition, Rider Sportsfashion (Langfang) Limited (“Rider Langfang”),
the Company’s Chinese subsidiary controlled through VIE agreements, is subject to 15% income tax rate from 2017 to 2018.
From 2019, income tax rate for the Company’s Chinese operations (other than Rider Langfang) changed to 5% and the income
tax rate of Rider Langfang changed to 3%.
The
Company’s Canadian operation is subject to a 26% profit tax based on its taxable net profit in Canada.
The
Company’s Austria subsidiary is subject to a 25% profit tax based on its taxable net profit in Austria.
The
reconciliation of income tax at the U.S. statutory rate of 21% in 2019 and 2018, to the Company’s effective tax rate is
as follows:
|
|
Three
Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Tax at U.S. Federal statutory
rate
|
|
$
|
(7,109
|
)
|
|
$
|
3,399
|
|
U.S. State tax
|
|
|
(10,246
|
)
|
|
|
(3,555
|
)
|
Tax rate difference between U.S. and
foreign operations
|
|
|
(17,857
|
)
|
|
|
(7,769
|
)
|
Change of valuation allowance
|
|
|
44,336
|
|
|
|
16,368
|
|
Permanent difference
|
|
|
6,586
|
|
|
|
(15,981
|
)
|
Rate change
|
|
|
-
|
|
|
|
13,487
|
|
Effective tax
|
|
$
|
15,710
|
|
|
$
|
5,949
|
|
The
components of the provision for income taxes consisted of the following:
|
|
Three
Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Other
foreign countries
|
|
|
15,710
|
|
|
|
4,460
|
|
|
|
|
15,710
|
|
|
|
4,460
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
(8,443
|
)
|
State
|
|
|
-
|
|
|
|
(3,555
|
)
|
Other foreign countries
|
|
|
-
|
|
|
|
-
|
|
Rate change
|
|
|
-
|
|
|
|
13,487
|
|
|
|
|
-
|
|
|
|
1,489
|
|
Provision for
income tax
|
|
$
|
15,710
|
|
|
$
|
5,949
|
|
The
Company had approximately $759,000 net operating loss carryforwards available in the U.S., China, and Austria to reduce future
taxable income which will begin to expire from 2037 for U.S. tax purposes and from 2022 for China’s income tax purpose.
Of the total of net operating loss of $759,000, approximately $426,000 was incurred by the Company in Austria since it started
operating in Austria in early 2016. The net operating loss of the Company’s wholly-foreign owned Chinese subsidiary (“WFOE”)
could be carried forward for a period of not more than five years from the year of the initial loss pursuant to relevant Chinese
tax laws and regulations. The net operating loss from the Company’s Austrian operations can be carried forward with no time
limit from the year of the initial loss pursuant to relevant Austria tax laws and regulations. Of the net operating loss from
the Company’s US operations, $77,000 can be carried forward for a period of twenty years from the year of the initial loss
and $201,000 can be carried forward with no time limit from the year of the initial loss pursuant to relevant US laws and regulations.
Management believes that it is more likely than not that the deferred tax assets cannot be utilized in the future because there
will not be significant future earnings from the entity which generated the net operating loss. Therefore, the Company has recorded
a 100% valuation allowance on its deferred tax assets for all periods presented.
As
of March 31, 2019 and December 31, 2018, the Company has no material unrecognized tax benefits which would favorably affect the
effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of
unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed
on the Company during the three months ended March 31, 2019 and 2018, and no provision for interest and penalties is deemed necessary
as of March 31, 2019 and December 31, 2018.
9.
Related Party Transactions and Balances
(1)
The WFOE and Rider Sportsfashion Ltd. (the Company’s Chinese VIE) leased office space from Ms. Wei Tan in China for approximately
$3,000 per month. The lease expires on May 14, 2019. Rent expenses incurred to Ms. Wei Tan were approximately $9,000 for the three
months ended March 31, 2019 and 2018, respectively. This is a real estate operating lease with a related party for 12-months.
The Company made an accounting policy election not to recognize lease asset and liability for this lease after examining the criteria
established for leases with related parties with 12 months or shorter.
(2)
In April 2018, Designlab entered a Master Agreement and License Agreement with R2.ai, Inc., a Silicon Valley based Company specialized
in artificial intelligence for internal-use software development. The individual investor of Designlab is also a majority shareholder
of R2.ai, Inc. Total contract price is $80,000, which is scheduled to be paid by installment payments based on the software development
milestones. No payment was paid in the three months ended March 31, 2019 and 2018, respectively.
(3)
In 2018, Mr. Weidong Du and Ms. Wei Tan, each a stockholder and director of the Company, paid in advance business travel for the
Company. As of December 31, 2018, the Company had total $36,426 payable to Mr. Weidong Du and Ms. Wei Tan, which was paid in full
in the three months ended March 31, 2019.
10.
Segment Data and Related Information
The
Company’s operating segments are based on how its Chief Operating Decision Maker (“CODM”) makes decisions about
allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company’s
principal business by geographic region based on the Company’s strategy to develop its own brand recognition. These geographic
regions include North America, China and Europe. Each geographic segment operates exclusively in one industry: the development,
marketing and distribution of branded performance apparel.
The
revenues, income (loss) before income taxes, and total assets associated with the Company’s segments are summarized in the
following tables. Revenues represent sales to external customers for each segment. In addition to revenues, income (loss) before
income taxes is a primary financial measure used by the Company to evaluate the performance of each segment. Intercompany balances
were eliminated.
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,435,255
|
|
|
$
|
1,598,064
|
|
China
|
|
|
922,832
|
|
|
|
977,307
|
|
Europe
|
|
|
113,545
|
|
|
|
86,826
|
|
Total revenues
|
|
$
|
2,471,632
|
|
|
$
|
2,662,197
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Income (loss) before
income taxes
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
(155,997
|
)
|
|
$
|
(69,785
|
)
|
China
|
|
|
107,906
|
|
|
|
115,529
|
|
Europe
|
|
|
14,241
|
|
|
|
(29,560
|
)
|
Total Income
(loss) before income taxes
|
|
$
|
(33,850
|
)
|
|
$
|
16,184
|
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,835,031
|
|
|
$
|
3,478.158
|
|
China
|
|
|
4,148,884
|
|
|
|
3,661,428
|
|
Europe
|
|
|
125,040
|
|
|
|
45,682
|
|
Total Assets
|
|
$
|
8,108,955
|
|
|
$
|
7,185,268
|
|
11.
Subsequent Events.
On
April 2, 2019, the Company signed stock option agreements with certain participants and granted options under the Plan to
purchase a total of 1,910,000 shares of Common Stock share to such participants. The vesting period of the stock options was
four years starting from the date of grant. The exercise price is $0.75 per share. These options will expire ten years
from the date of grant, subject to earlier termination as set forth in the Plan and the option agreement.
The
Company has evaluated subsequent events that have occurred after the date of the balance sheet through the date of issuance of
these consolidated financial statements and determined that no other subsequent event requires recognition or disclosure to the
consolidated financial statements.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
interim condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form
10-Q.
Certain
statements in this section contain “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. All statements contained in this report and not clearly historical in nature are forward-looking, and the
words “may,” “will,” “should,” “could,” “would,” “expects,”
“plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,”
“intends,” “potential,” and similar expressions (as well as other words or expressions referencing future
events, conditions or circumstances) generally are intended to identify forward-looking statements. Any statements in this report
that are not historical facts are forward-looking statements. Actual results may differ materially from those projected or implied
in any forward-looking statements. Such statements involve risks and uncertainties, including but not limited to those relating
to product and customer demand, market acceptance of our products, the ability to create new products, the ability to achieve
a sustainable profitable business, the effect of economic conditions, the ability to protect our intellectual property rights,
competition from other providers and products, risks in product development, our ability to raise capital to fund continuing operations,
and other factors discussed from time to time in our filings with the Securities and Exchange Commission. We undertake
no obligation to update or revise any forward-looking statement for events or circumstances after the date on which such statement
is made except as required by law. Amounts in this section are in thousands, unless otherwise indicated.
Overview
We
specialize in the design, manufacture and direct sale of customized technical endurance apparel for the cycling, triathlon, running
and Nordic skiing markets across Asia, Europe and North America. Our made-to-order, just-in-time (“JIT”) process vertically
integrates design, manufacturing, sales and distribution of sporting apparel products.
The
chart below illustrates our company’s current organizational structure:
For
the purpose of streamlining its manufacturing operations in China, Rider Sportsfashion (LangFang) took over the operations of
two other branches. The deregistration process for these two branches was completed in December 2017 and April 2018, respectively.
Our
global sporting apparel business is currently comprised of three core business units: inline retail, which consists of products
produced and sold as part of a collection (“Inline”), OEM contract manufacturing (“OEM”) and custom order.
(“Custom Order”). Our Inline, OEM and Custom Order businesses currently account for 8%, 25% and 67%, respectively,
of our sales revenue for the three months ended March 31, 2019, comparing with 11%, 28%, and 61% for the three months ended March
31, 2018.
The
two primary sales channels for our Inline and Custom Order business are direct to consumer (“DTC”), and wholesale.
DTC currently generates 71% of our revenues for the three months ended March 31, 2019, compared to 69% for the three months ended
March 31, 2018. Under the DTC model, we sell and fulfill our products directly to end consumers exclusively online through e-commerce
platforms. In China, DTC sales are processed through online retailers such as TMall and JD.com. Sales in North America and Europe
are processed through our proprietary Jakroo e-commerce and licensed e-commerce systems. The Jakroo e-commerce platform allows
customers to easily log onto our platform, complete their designs or submit design requests to our Pro designers and place purchase
orders. Wholesale represented 29% of our revenue for the three months ended December 31, 2019 compared to 31% for the three months
ended March 31, 2018. We act as both retailer and wholesaler of our products through our proprietary Jakroo e-commerce platform
as well as through large online retailers in China. Sales through both channels are executed with payments made directly to us
online prior to the production and shipment of products.
In
order to target customers in major markets, we have established sales offices in the United States, Canada, Austria, and China
that provide localized sales, marketing and customer service support to our regional markets. As of the date of the report, we
have approximately 186 employees worldwide.
The
purchase of our 6,300 square feet U.S. headquarters facility in Pleasanton, California in the first quarter of 2017 was a major
step in further strengthening our sales, marketing and innovation teams. During the three months ended March 31, 2019, our California
based design team created 4,803 Pro Custom designs, compared to 5,456 Pro Custom designs during the same period in 2018, representing
a 12% decrease in Pro Design requests. We attribute the decrease in pro design projects to a combination of inclement
weather conditions across our core markets and a shift by some customers from utilizing our pro design service to utilizing the
new Jakroo Express self-design platform. During the latter half of October 2018, we launched a beta version of our new Jakroo
Express Design Center and subsequently released the platform to live at the end of December 2018. Using Jakroo Express, customers
are able to create their own designs without the assistance of a Pro Designer. We recorded 645 new user sign-ups during the three
months ended March 31, 2019 compared to 50 new user sign-ups during the same period in 2018 on the previous platform representing
a 1190% increase in new customer acquisition. We anticipate that the number of new user sign-ups on the Jakroo Express platform
will continue to grow as we target certain customer personas that prefer a self-directed design experience. New user visits across
our US, Canadian, and European informational websites increased 6.7% during the three months ended March 31, 2019 as compared
to the same period in 2018. The increase can be attributed to investments in our social media and search engine marketing campaigns
focused on increasing awareness for the Jakroo brand.
During
the quarter ended March 31, 2019, our new customer sales decreased 3.8% while our number of returning customer sales increased
8%, compared to the same period in 2018. This resulted in a decrease in revenue from our Custom Order segment of approximately
2.6% across our North American and European operating segments compared to the same period last year. We attribute the decrease
in revenue to a slowdown in consumer demand as a result of inclement weather affecting much of our core markets across the United
States and Canada.
We
lease a 64,000 square feet manufacturing facility at the border of Beijing and Hebei province in China. The facility has annual
capacity to produce 500,000 jerseys and manufactures all of our products. We consider our centralized manufacturing facility both
a competitive advantage and a key driver behind our ability to maintain high quality and industry leading short delivery times.
During the quarter ended March 31, 2019, we processed approximately 11,978 micro-production lots with a total production quantity
of 29,321 units, compared to 11,726 lots and 30,778 units respectively during the same period in 2018. 96% of these products were
produced and shipped in 14 days or less and 61% were produced and shipped in 7 days or less for the first quarter 2019 compared
to 99% of products produced in 14 days or less and 83% produced and shipped in 7 days or less during the same period in 2018.
During both fiscal periods, the average production lot quantity of 3pcs remained constant.
Our
operating segments include North America, China and Europe.
We
believe there is increasing recognition of the health benefits of an active lifestyle through cycling, triathlon and running.
We believe this trend provides us with an expanding potential consumer base for our products. We also believe there continues
to be an increasing number of individuals participating in cycling, triathlon and running activities, thus creating an increased
demand for athletic apparel from leisure, pre-athlete and amateur participants. We plan to continue to grow our business over
the long term through increased sales of our apparel via our made-to-order, JIT process, and our expansion in international markets.
Although
we believe these trends will facilitate our growth, we also face potential challenges that could limit our ability to take advantage
of these opportunities, including, among other things, the risk of general economic or market conditions that could affect consumer
spending and the financial health of our retail customers. In addition, we may not be able to effectively manage our growth as
our business becomes a larger and more complex global business. We may not consistently be able to anticipate consumer preferences
or develop new and innovative products that meet changing consumer needs and preferences in a timely manner. Furthermore, our
industry is very competitive, and competition pressures could cause us to reduce the prices of our products or otherwise affect
our profitability.
General
Revenues
are comprised of the sales of our technical endurance apparel products, which include OEM, inline collection and custom made to
order, with the custom made to order assuming the highest percentage of sales of the three segments.
Cost
of revenues consists primarily of fabrics, other raw materials, overhead, manufacturing costs, inbound raw material freight and
outbound duty and freight costs required to make our products floor-ready to customer specifications.
We
include outbound freight costs associated with shipping goods to customers as cost of goods sold.
Our
selling, general and administrative expenses consist of costs related to marketing, selling, product innovation, supply chain
and corporate services. Personnel costs are included in these categories based on each employee’s function. Personnel costs
include salaries, benefits and incentives.
Results
of Operations
Three
Months Ended March 31, 2019 compared to Three Months Ended March 31, 2018
The
following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage
of net revenues:
|
|
Three
Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,471,632
|
|
|
$
|
2,662,197
|
|
Cost of revenues
|
|
|
1,150,326
|
|
|
|
1,273,441
|
|
Gross profit
|
|
|
1,321,306
|
|
|
|
1,388,756
|
|
Selling, general and administrative
expense
|
|
|
1,337,165
|
|
|
|
1,353,595
|
|
Interest expense,
net of interest income
|
|
|
17,991
|
|
|
|
18,977
|
|
Income (loss) before
income taxes
|
|
|
(33,850
|
)
|
|
|
16,184
|
|
Income tax expense
|
|
|
15,710
|
|
|
|
5,949
|
|
Net
income (loss)
|
|
$
|
(49,560
|
)
|
|
$
|
10,235
|
|
As
a percentage of net revenues
|
|
Three
Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Cost of revenues
|
|
|
46.54
|
|
|
|
47.83
|
|
Gross profit
|
|
|
53.46
|
|
|
|
52.17
|
|
Selling, general and administrative
expense
|
|
|
54.10
|
|
|
|
50.85
|
|
Interest expense,
net of interest income
|
|
|
0.73
|
|
|
|
0.71
|
|
Income (loss) before
income taxes
|
|
|
(1.37
|
)
|
|
|
0.61
|
|
Income tax expense
|
|
|
0.64
|
|
|
|
0.22
|
|
Net
income (loss)
|
|
|
(2.01
|
)%
|
|
|
0.39
|
%
|
Revenues
Net
revenues decreased by $190,565, or 7.2%, to approximately $2.47 million in the three months ended March 31, 2019 from approximately
$2.66 million in the same period in 2018. Net revenues by business units are summarized below:
|
|
Three
Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
$
Change
|
|
|
%
Change
|
|
OEM
|
|
$
|
615,885
|
|
|
$
|
741,866
|
|
|
$
|
(125,981
|
)
|
|
|
(16.98
|
)%
|
Inline
|
|
|
205,871
|
|
|
|
286,028
|
|
|
|
(80,157
|
)
|
|
|
(28.02
|
)%
|
Custom Order
|
|
|
1,649,876
|
|
|
|
1,634,303
|
|
|
|
15,573
|
|
|
|
0.95
|
%
|
Total
Revenues
|
|
$
|
2,471,632
|
|
|
$
|
2,662,197
|
|
|
$
|
(190,565
|
)
|
|
|
(7.16
|
)%
|
The
decrease in net revenue was primarily driven by decreases in our OEM and Inline business units’ revenues which decreased
by $125,981 or 17.0% and $80,157 or 28.0%, respectively. We attribute the decrease in our OEM and Inline business units’
net revenue largely to the reduced orders from OEM customers and increased competition on the e-commerce platforms such as TMall
and JD.com in China.
Our
Custom Order unit’s revenue increased slightly by $15,573, or 1.0%, to approximately $1.65 million for the three months
ended March 31, 2019 from approximately $1.63 million during the same period in 2018. Our Custom Order unit accounted for approximately
66.8% and 61.4% of total revenue for the three months ended March 31, 2019 and 2018, respectively. During the three months ended
March 31, 2019, Custom Order sales in North America experienced a decline of approximately 4.6% compared to the same period in
2018. Custom Order Sales in Europe increased 30% during the three months ended March 31, 2019 compared to the same period in 2018
as a result of new customer acquisition. Revenue generated from Custom Orders sales in China increased 133% for the three months
ended March 31, 2019 compared to the same period in 2018 primarily due to the implementation of promotional campaigns and a new
personal fit service which is designed to improve the online ordering process and provide a better fitting product.
Cost
of Revenues
Cost
of revenues for our products includes the expenses incurred from our purchase of raw materials, direct labor fees and manufacturing
overhead.
For
the three months ended March 31, 2019, our total cost of revenues amounted to approximately $1.15 million, or 46.5% of total revenues,
as compared to approximately $1.27 million, or 47.8% of net revenues in the three months ended March 31, 2018. The decrease in
cost of revenues as a percentage of total revenue was primarily driven by an increase of Custom Order sales which have a higher
gross margin. The Customer Order revenue as percentage of net revenue increased 5.4% to 66.8% for the three months ended March
31, 2019, compared to 61.4% for the same period in 2018.
Gross
profit
Gross
profit decreased by $67,450, or 4.9%, to approximately $1.32 million for the three months ended March 31, 2019 from approximately
$1.39 million for the same period in 2018. Gross profit as a percentage of net revenues, or gross margin, increased by 1.3% to
approximately 53.5% in the three months ended March 31, 2019 compared to approximately 52.2% in the same period in 2018. The increase
in gross margin percentage was primarily driven by the increase of Custom Order sales which have a higher gross margin.
Selling,
general and administrative expenses
Our
selling, general and administrative expenses consist of costs related to marketing, selling, new product development and auditing
and legal services. For the three months ended March 31, 2019, selling, general and administrative expenses slightly decreased
by $16,430 to approximately $1.34 million from approximately $1.35 million for the same period in 2018. As a percentage of net
revenues, selling, general and administrative expenses increased by 3.2% to 54.1% in the three months ended March 31, 2019 from
50.9% for the same period in 2018. The increase was primarily attributable to a decrease of net revenue for the three months ended
March 31, 2019.
Provision
for income taxes
Provision
for income taxes increased $9,761 to $15,710 in the three months ended March 31, 2019 from $5,949 during the same period in 2018.
The increase is directly attributed to the income taxes paid in China and Canada in the three months ended March 31, 2019 compared
to the same period in 2018.
Other
Comprehensive Income (loss)/Foreign Currency Translation Adjustment
Other
comprehensive income foreign currency translation adjustment changed $55,873 to an income of $72,006 in the three months ended
March 31, 2019 from an income of $127,879 in the same period in 2018. These changes were primarily attributable to the increase
in the US Dollar to RMB exchange rate in the three months ended March 2019 as compared to the same period in 2018.
Segment
Results of Operation
The
revenues and income (loss) before income taxes associated with our segments are summarized in the following tables.
Three
Months Ended March 31, 2019 compared to Three Months Ended March 31, 2018
Revenues
by segment are summarized below:
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
$
Change
|
|
|
%
Change
|
|
North America
|
|
$
|
1,435,255
|
|
|
$
|
1,598,064
|
|
|
$
|
(162,809
|
)
|
|
|
(10.19
|
)%
|
China
|
|
|
922,832
|
|
|
|
977,307
|
|
|
|
(54,475
|
)
|
|
|
(5.57
|
)%
|
Europe
|
|
|
113,545
|
|
|
|
86,826
|
|
|
|
26,719
|
|
|
|
30.77
|
%
|
Total
revenues
|
|
$
|
2,471,632
|
|
|
$
|
2,662,197
|
|
|
$
|
(190,565
|
)
|
|
|
(7.16
|
)%
|
Net
revenues from our North America operating segment decreased by $162,809, or 10.2%, to approximately $1.44 million in the three
months ended March 31, 2019 from approximately $1.60 million during the same period in 2018. The decrease was primarily attributed
to the realignment of OEM business to China after the first quarter of 2018 and the decrease of revenue from our Custom Order
business due to the severe weather condition in North America in the three months ended March 31, 2019. Net revenues in China
decreased by $54,475, or 5.6%, to $922,832 in the three months ended March 31, 2019 from $977,307 during the same period in 2018.
This decrease was primarily due to a decrease of revenue from our OEM and Inline business units in China. Net revenue generated
from the European market shows an increase of $26,719 to $113,545, or 30.8%, in the three months ended March 31, 2019 from $86,826
during the same period in 2018. This increase was primarily driven by the better marketing strategy with lower discount to customers.
Income
(loss) before income taxes by segment is summarized below:
|
|
Three
Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
$
Change
|
|
|
%
Change
|
|
North America
|
|
$
|
(155,997
|
)
|
|
$
|
(69,785
|
)
|
|
$
|
(86,212
|
)
|
|
|
(123.54
|
)%
|
China
|
|
|
107,906
|
|
|
|
115,529
|
|
|
|
(7,623
|
)
|
|
|
(6.60
|
)%
|
Europe
|
|
|
14,241
|
|
|
|
(29,560
|
)
|
|
|
43,801
|
|
|
|
148.18
|
%
|
Total Income
(loss) before income taxes
|
|
$
|
(33,850
|
)
|
|
$
|
16,184
|
|
|
$
|
(50,034
|
)
|
|
|
(309.16
|
)%
|
Our
North America operating segment shows an increase of operating loss of $86,212, or 123.5%, to $155,997 for the three months ended
March 31, 2019 from a $69,785 operating loss during the same period in 2018. The increase of the operating loss was primarily
due to a decrease of $162,809, or 10.2%, in net revenue and increases of amortization and maintenance expenses related to our
Jakroo e-commerce platform for the three months ended March 31, 2019 compared to the same period in 2018.
Our
China operating segment shows a decrease of operating income of $7,623, or 6.6%, to $107,906 for the three months ended March
31, 2019 from $115,529 in the same period in 2018. The decrease of operating income are primarily due to a decrease of $54,475,
or 5.6%, in revenue in this segment during three months ended March 31, 2019 compared to the same period in 2018 and effects of
the increase in the US Dollar to RMB exchange rate in the three months ended March 2019 as compared to the same period in 2018.
Our
Europe operating segment shows an operating income of $14,241 for the three months ended March 31, 2019 from a $29,560 operating
loss in the same period in 2018. The turnaround from operating losses to operating income in the three months ended March, 31,
2019 was primarily attributed to an increase of revenue and better marketing strategy with lower discount to customers.
Liquidity
and Capital Resources
Our
cash requirements have principally been for working capital and capital expenditures. We fund our working capital, inventory and
capital investments from cash flows from operating activities, cash and cash equivalents on hand. Our working capital requirements
generally reflect the growth in our business. Our capital investments have included purchasing factory machinery, leasehold improvements
for our offices and factory, land and building, and making investments and improvements in information technology systems.
We
believe our cash, cash equivalents on hand and cash from operations are adequate to meet our liquidity needs and capital expenditure
requirements for at least the next 12 months. Although we believe we have adequate sources of liquidity over the long term, an
economic recession, a slow growth period, decrease in demand for our products, or the need for liquidity to engage in strategic
opportunities could adversely affect our business and liquidity or increase our need for liquidity. If and when needed, no assurances
can be given that funding will be available to us on acceptable terms, if at all. In addition, instability in or a tightening
of the capital markets could adversely affect our ability to obtain additional capital to grow our business on terms acceptable
to us or at all.
Cash
Flows
The
following table presents the major components of net cash flows used in and provided by operating, investing and financing activities
for the periods presented:
Three
Months Ended March 31, 2019 compared to Three Months Ended March 31, 2018
|
|
Three
Months Ended
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
150,808
|
|
|
$
|
42,561
|
|
Investing activities
|
|
|
(83,531
|
)
|
|
|
(7,935
|
)
|
Financing activities
|
|
|
94,787
|
|
|
|
(17,464
|
)
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
35,269
|
|
|
|
79,287
|
|
Net increase
in cash and cash equivalents
|
|
$
|
197,333
|
|
|
$
|
96,449
|
|
Operating
Activities
Operating
activities consisted primarily of net income (loss) adjusted for certain non-cash items. Adjustments to net income for non-cash
items included depreciation and amortization, share-based compensation, deferred taxes and loss on disposals of property and equipment.
In addition, operating cash flows included the effect of changes in operating assets and liabilities, principally inventories,
accounts receivable, income taxes payable, prepaid expenses and other assets, accounts payable, advance from customers, and accrued
expenses.
Cash
flows provided by operating activities increased by $108,247 to $150,808 for the three months ended March 31, 2019 from $42,561
during the same period in 2018. The increase in cash from operating activities was due to increased net cash flows from operating
assets and liabilities of $160,961, a decrease in net income of $59,795, and an increase resulting from adjustments to net income
for non-cash items, which increased by $7,081 in the three months ended March 31, 2019 compared to the same period in 2018.
Investing
Activities
Cash
used in investing activities increased by $75,596 to $83,531 in the three months ended March 31, 2019 from $7,935 in the same
period in 2018, primarily due to higher capital expenditure related to the proprietary Jakroo e-commerce platform. Total capital
expenditure was $83,531 and $7,935 in the three months ended March 31, 2019 and 2018, respectively.
Financing
Activities
Financing
activities during the three months ended March 31, 2019 consisted primarily of cash repayment to related parties of $37,055, repayment
of the mortgage for $18,157. We also received cash of $149,999 from private issuances of Common Stock
in the three months ended March 31, 2019.
Repayment of mortgage loan was $18,157 in the three months ended March 31, 2019, compared with $17,464 for the same period in 2018.
Off-Balance
Sheet Arrangements
In
connection with various contracts and agreements, we have agreed to indemnify counterparties against certain third party claims
relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not
apply in situations in which our counterparties are grossly negligent, engage in willful misconduct or act in bad faith. Based
on our historical experience and the estimated probability of future loss, we have determined the fair value of such indemnifications
is not material to our financial position or results of operations.
Recently
Issued Accounting Standards
From
time to time, new accounting pronouncements are issues by the Financial Accounting Standards Board or other standard bodies that
may have an impact on our accounting and reporting. We believe that any recently issued accounting pronouncements
and other authoritative guidance for which the effective date is in the future either will not have an impact on our accounting
or reporting or that such impact will not be material to our financial position, results of operations, and cash flows
when implemented.