ITEM
1. FINANCIAL STATEMENTS
Jakroo
Inc. and Subsidiaries
Consolidated
Balance Sheets <Unaudited>
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,447,379
|
|
|
$
|
2,350,930
|
|
Accounts
receivable
|
|
|
78,373
|
|
|
|
53,026
|
|
Inventories
|
|
|
1,323,268
|
|
|
|
1,549,996
|
|
Prepaid
expenses and other current assets
|
|
|
351,823
|
|
|
|
452,715
|
|
Total
current assets
|
|
|
4,200,843
|
|
|
|
4,406,667
|
|
Property
and equipment, net
|
|
|
2,867,703
|
|
|
|
2,854,802
|
|
TOTAL
ASSETS
|
|
$
|
7,068,546
|
|
|
$
|
7,261,469
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
379,540
|
|
|
$
|
245,396
|
|
Advance
from customers
|
|
|
281,533
|
|
|
|
653,305
|
|
Mortgage
payable – current portion
|
|
|
70,591
|
|
|
|
69,898
|
|
Other
current liabilities
|
|
|
158,685
|
|
|
|
296,723
|
|
Total
current liabilities
|
|
|
890,349
|
|
|
|
1,265,322
|
|
Mortgage
payable
|
|
|
1,872,862
|
|
|
|
1,891,019
|
|
Total
liabilities
|
|
|
2,763,211
|
|
|
|
3,156,341
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Jakroo
Inc. Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 10,000,000 shares authorized; None issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized, 31,288,650 and 31,288,650 shares issued and outstanding as of March
31, 2018 and December 31, 2017, respectively
|
|
|
31,289
|
|
|
|
31,289
|
|
Additional
paid in capital
|
|
|
721,158
|
|
|
|
693,352
|
|
Statutory
reserve
|
|
|
136,652
|
|
|
|
136,652
|
|
Retained
earnings
|
|
|
3,028,322
|
|
|
|
3,023,173
|
|
Accumulated
other comprehensive loss
|
|
|
(11,504
|
)
|
|
|
(126,596
|
)
|
Total
Jakroo Inc. Stockholders’ equity
|
|
|
3,905,917
|
|
|
|
3,757,870
|
|
Non-controlling
interests
|
|
|
399,418
|
|
|
|
347,258
|
|
Total
Stockholders’ Equity
|
|
|
4,305,335
|
|
|
|
4,105,128
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
7,068,546
|
|
|
$
|
7,261,469
|
|
The
accompanying Notes are an integral part of these consolidated financial statements
Jakroo
Inc. and Subsidiaries
Consolidated
Statements of Comprehensive Income (Loss) <Unaudited>
|
|
Three
Months Ended
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,662,197
|
|
|
$
|
2,102,976
|
|
Cost
of revenues
|
|
|
1,273,441
|
|
|
|
1,023,171
|
|
Gross
profit
|
|
|
1,388,756
|
|
|
|
1,079,805
|
|
Selling,
general and administrative expense
|
|
|
1,353,595
|
|
|
|
1,160,034
|
|
Income
(loss) from operations
|
|
|
35,161
|
|
|
|
(80,229
|
)
|
Interest
(expense) income
|
|
|
(18,977
|
)
|
|
|
1,212
|
|
Income
(loss) before income taxes
|
|
|
16,184
|
|
|
|
(79,017
|
)
|
Income
tax provision (benefit)
|
|
|
5,949
|
|
|
|
(2,739
|
)
|
NET
INCOME (LOSS)
|
|
|
10,235
|
|
|
|
(76,278
|
)
|
Less:
Income (loss) attributable to non-controlling interest
|
|
|
5,086
|
|
|
|
(3,459
|
)
|
NET
INCOME (LOSS) ATTRIBUTABLE TO JAKROO INC.
|
|
|
5,149
|
|
|
|
(72,819
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
127,879
|
|
|
|
32,557
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
138,114
|
|
|
|
(43,721
|
)
|
|
|
|
|
|
|
|
|
|
Less:
Comprehensive income (loss) attributable to non-controlling interest
|
|
|
17,873
|
|
|
|
(203
|
)
|
COMPREHENSIVE
INCOME (LOSS) ATTRIBUTABLE TO JAKROO INC.
|
|
$
|
120,241
|
|
|
$
|
(43,518
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC
|
|
|
31,288,650
|
|
|
|
30,787,659
|
|
EARNING
(LOSS) PER SHARE – BASIC
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED
|
|
|
32,499,210
|
|
|
|
30,787,659
|
|
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 Cash Flows <Unaudited>
|
|
Three
Months Ended
March
31, 2018
|
|
|
Three
Months Ended
March
31, 2017
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
10,235
|
|
|
$
|
(76,278
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
38,593
|
|
|
|
32,412
|
|
Share based
compensation
|
|
|
27,806
|
|
|
|
26,556
|
|
Deferred
taxes
|
|
|
1,489
|
|
|
|
(31,650
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(24,712
|
)
|
|
|
(147,765
|
)
|
Inventories
|
|
|
282,376
|
|
|
|
206,025
|
|
Prepaid
expenses and other current assets
|
|
|
111,034
|
|
|
|
146,056
|
|
Accounts
payable
|
|
|
123,634
|
|
|
|
20,486
|
|
Advance
from customers
|
|
|
(384,158
|
)
|
|
|
(279,965
|
)
|
Other
current liabilities
|
|
|
(143,736
|
)
|
|
|
(76,560
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
42,561
|
|
|
|
(180,683
|
)
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(7,935
|
)
|
|
|
(2,565,780
|
)
|
Net
cash used in investing activities
|
|
|
(7,935
|
)
|
|
|
(2,565,780
|
)
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Payment
to related parties
|
|
|
-
|
|
|
|
(19,193
|
)
|
Proceeds
from mortgage loan
|
|
|
-
|
|
|
|
2,040,000
|
|
Repayment
of mortgage loan
|
|
|
(17,464
|
)
|
|
|
(17,000
|
)
|
Proceeds
from issuance of common stock
|
|
|
-
|
|
|
|
44,936
|
|
Net
cash provided by (used in) financing activities
|
|
|
(17,464
|
)
|
|
|
2,048,743
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
79,287
|
|
|
|
32,438
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
96,449
|
|
|
|
(665,282
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
2,350,930
|
|
|
|
2,777,957
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
2,447,379
|
|
|
$
|
2,112,675
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the periods for :
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
46,881
|
|
|
$
|
85,335
|
|
Interest
|
|
$
|
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 (the “Company”), 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.
As
used herein, the term “Common Stock” means the Company’s common stock, par value $0.001 per share.
In
February 2018, the Company and an individual investor founded Designlab.ai Corp., a California corporation (“Designlab”),
which is primarily focused 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
Basis
of Presentation and Consolidation
The
unaudited consolidated financial statements of the Company 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.
Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant
to the Securities and Exchange Commission’s rules and regulations. 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 of the Company as of March 31, 2018
and the results of operations and cash flows of the Company for the periods ended March 31, 2018 and 2017. The financial data
and other information disclosed in these notes to the interim financial statements related to these periods are unaudited. The
results for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for any subsequent
periods or for the entire year. The balance sheet on December 31, 2017 has been derived from the audited financial statements
at that date. These unaudited financial statements should be read in conjunction with our audited consolidated financial statements
and notes thereto for the year ended December 31, 2017 as included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2017 filed with the U.S. Securities and Exchange Commission (“SEC”) on April 2, 2018.
The
accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”), and include the accounts of the Company, its subsidiaries and entities controlled
through VIE agreements. All intercompany balances and transactions have been eliminated in consolidation.
Certain
amounts have been reclassified to conform to current year presentation.
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, 2018
|
|
|
December
31, 2017
|
|
Raw
materials
|
|
$
|
888,097
|
|
|
$
|
903,421
|
|
Finished
goods
|
|
|
435,171
|
|
|
|
646,575
|
|
Total
inventories
|
|
$
|
1,323,268
|
|
|
$
|
1,549,996
|
|
4.
Mortgage payable
The
Company entered into a mortgage loan from a bank in the principle amount of $2,040,000 on January 9, 2017, of which $51,000 is
interest free and the balance of $1,989,000 bears an annual interest rate of 3.96%. The loan has a ten year term with monthly
installments of $12,274 including interest. The final payment of approximately $1,224,000 including interest will be made on January
15, 2027. The mortgage loan is collateralized by land and building the Company purchased in January 2017 in the United States.
Principal
payments on mortgage payable are due as follows:
Year
ending December 31:
|
|
|
|
2018
|
|
$
|
52,377
|
|
2019
|
|
|
72,697
|
|
2020
|
|
|
75,466
|
|
2021
|
|
|
78,757
|
|
2022
|
|
|
81,978
|
|
Thereafter
|
|
|
1,582,178
|
|
|
|
$
|
1,943,453
|
|
5.
Stock Option Plan
On
January 5, 2017, the Company’s Board of Directors adopted a stock option plan. This plan was intended 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 to purchase a total of 3,492,000 shares of Common
Stock to the participants. The vesting period of the stock options was four years starting from the grant date. The exercise price
is $0.17 per share. The options will expire ten years from the grant date, subject to earlier termination as set forth in the
option plan and the option agreement. On August 16, 2017, the Company granted stock options 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. The options will be exercisable
for a period of five years commencing six months from the date of grant on a cashless exercise basis.
The
Company assessed the fair value of the total granted stock options on the grant date using a Black-Scholes Stock Option Pricing
Model. Significant assumptions used in calculating fair value of options are as follows:
|
●
|
Expected
volatility 54.00% ~ 68.58%;
|
|
|
|
|
●
|
Risk-free
interest rate 0.83% ~ 1.24%;
|
|
|
|
|
●
|
Expected
term (year) 4 ~ 5;
|
|
|
|
|
●
|
Exercise
price $0.17 ~ $0.25.
|
The
estimated fair value of the total granted stock options on the grant date was $507,649, among which $56,509 was recorded in the
expense of year 2017 and $451,140 is being amortized over 48 months period. For the quarter ended March 31, 2018 and 2017, total
amortization of stock-based compensation expense was $27,806 and $26,556, respectively.
A
summary of the changes in stock options outstanding under the Company’s equity incentive 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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
outstanding at March 31, 2018
|
|
|
3,972,000
|
|
|
$
|
507,649
|
|
|
$
|
0.18
|
|
|
|
3
|
|
A
summary of the status of non-vested options is as follows:
|
|
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
Non-vested
at December 31, 2017
|
|
|
2,619,000
|
|
|
$
|
0.17
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(873,000
|
)
|
|
|
0.17
|
|
Forfeited
or exercised
|
|
|
-
|
|
|
|
-
|
|
Non-vested
at March 31, 2018
|
|
|
1,746,000
|
|
|
$
|
0.17
|
|
6.
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 (Tax Act) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law.
Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced
earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base
erosion tax, respectively. The Tax Act requires us 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 tax at a statutory rate of 25% on income reported in the statutory financial
statements after appropriate tax adjustments. In addition, Rider Langfang is subject to 15% of income tax rate from 2017 to 2019.
The
Company’s Canada operation is subject to a 26% profit tax based on its taxable net profit. The Company’s Austria subsidiary
is subject to a 25% profit tax based on its taxable net profit.
The
reconciliation of income tax expense (benefit) at the U.S. statutory rate of 21% and 35% in 2018 and 2017, to the Company’s
effective tax rate is as follows:
|
|
Three
Months Ended
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
U.S.
Federal statutory rate
|
|
$
|
3,399
|
|
|
$
|
(27,656
|
)
|
U.S.
State tax
|
|
|
(3,555
|
)
|
|
|
-
|
|
Tax
rate difference between U.S. and foreign operations
|
|
|
(7,769
|
)
|
|
|
(3,671
|
)
|
Change
of valuation allowance
|
|
|
16,368
|
|
|
|
25,317
|
|
Permanent
difference
|
|
|
(15,981
|
)
|
|
|
3,271
|
|
Rate
change
|
|
|
13,487
|
|
|
|
-
|
|
Effective
tax rate
|
|
$
|
5,949
|
|
|
$
|
(2,739
|
)
|
The
provisions for income taxes are summarized as follows
|
|
Three
Months Ended
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Other
foreign countries
|
|
|
4,460
|
|
|
|
28,911
|
|
|
|
|
4,460
|
|
|
|
28,911
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(8,443
|
)
|
|
|
(31,650
|
)
|
State
|
|
|
(3,555
|
)
|
|
|
-
|
|
Other
foreign countries
|
|
|
-
|
|
|
|
-
|
|
Rate
change
|
|
|
13,487
|
|
|
|
-
|
|
|
|
|
1,489
|
|
|
|
(31,650
|
)
|
Provision
for income tax (benefit)
|
|
$
|
5,949
|
|
|
$
|
(2,739
|
)
|
The
Company had approximately $586,000 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 income tax purpose. Of the total
of net operating loss of $586,000, approximately $373,000 was incurred by our company in Austria since it started business in
early 2016. The net operating loss of the Company’s Chinese subsidiary (the “WFOE”) could be carried forward
for a period of not more than five years from the year of the initial loss pursuant to relevant PRC tax laws and regulations.
The net operating loss from Austrian operations can be carried forward with no time limit from the year of the initial loss pursuant
to relevant Austria tax laws and regulations. Management believes that, except for Rider Sportsfashion LLC, 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 recorded a valuation allowance on its deferred tax assets
for all period presented except for the operating loss occurred by Rider Sportsfashion LLC in the year ended December 31, 2017
and three months ended March 31, 2018. Accordingly, the Company recorded a deferred tax asset of $40,747 as of March 31, 2018,
and $42,235 as of December 31, 2017.
As
of March 31, 2018 and December 31, 2017, the Company has no material unrecognized tax benefits which would favorably affect the
effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of
unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed
on the Company during the quarters ended March 31, 2018 and 2017, and no provision for interest and penalties is deemed necessary
as of March 31, 2018 and December 31, 2017.
7.
Related Party Transactions and Balances
(1)
Kustellar LLC, an entity co-owned by Mr. Weidong Du and Ms. Wei Tan, each a stockholder and director of the Company, provides
accounting consulting service to the Company. The Company was billed by Kustellar LLC $nil for the three months ended March 31,
2018 and 2017, respectively; and paid $nil and $20,373 in the three months ended March 31, 2018 and 2017, respectively.
(2)
The WFOE and an entity controlled by the Company through Variable Interest Entity (“VIE”) agreements leased office
space from Ms. Wei Tan in China for approximately $3,000 per month. The lease expires on May 14, 2018. Rent expense incurred to
Ms. Wei Tan was approximately $9,000 for the quarters ended March 31, 2018 and 2017, respectively.
(3)
On June 5, 2015, the Company signed a loan agreement with an officer to advance $75,000 at an annual interest rate of 2.5% with
payment of a minimum of $200 per month and due on May 31, 2017. The loan receivable was paid in full in April 2017 and the balance
was zero of March 31, 2018 and December 31, 2017.
8.
Segment Data and Related Information
The
Company’s operating segments are based on how the Company’s 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,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
1,598,064
|
|
|
$
|
1,356,754
|
|
China
|
|
|
977,307
|
|
|
|
671,446
|
|
Europe
|
|
|
86,826
|
|
|
|
74,776
|
|
Total
revenues
|
|
$
|
2,662,197
|
|
|
$
|
2,102,976
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Income
(loss) before income taxes
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
(69,785
|
)
|
|
$
|
(92,772
|
)
|
China
|
|
|
115,529
|
|
|
|
75,187
|
|
Europe
|
|
|
(29,560
|
)
|
|
|
(61,432
|
)
|
Total
Income (loss) before income taxes
|
|
$
|
16,184
|
|
|
$
|
(79,017
|
)
|
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
3,948,317
|
|
|
$
|
3,958,690
|
|
China
|
|
|
2,996,644
|
|
|
|
3,248,199
|
|
Europe
|
|
|
123,585
|
|
|
|
54,580
|
|
Total
Assets
|
|
$
|
7,068,546
|
|
|
$
|
7,261,469
|
|
9.
Subsequent Events.
The
Company has evaluated subsequent events that have occurred after the date of the balance sheet through the date of issuance of
these consolidated financial statements and determined that no subsequent event requires recognition or disclosure to the consolidated
financial statements.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
interim condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form
10-Q.
Certain
statements in this section contain “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. All statements contained in this report and not clearly historical in nature are forward-looking, and the
words “may,” “will,” “should,” “could,” “would,” “expects,”
“plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,”
“intends,” “potential,” and similar expressions (as well as other words or expressions referencing future
events, conditions or circumstances) generally are intended to identify forward-looking statements. Any statements in this report
that are not historical facts are forward-looking statements. Actual results may differ materially from those projected or implied
in any forward-looking statements. Such statements involve risks and uncertainties, including but not limited to those relating
to product and customer demand, market acceptance of our products, the ability to create new products, the ability to achieve
a sustainable profitable business, the effect of economic conditions, the ability to protect our intellectual property rights,
competition from other providers and products, risks in product development, our ability to raise capital to fund continuing operations,
and other factors discussed from time to time in our filings with the Securities and Exchange Commission. The Company undertakes
no obligation to update or revise any forward-looking statement for events or circumstances after the date on which such statement
is made except as required by law. Amounts in this section are in thousands, unless otherwise indicated.
Overview
We
specialize in the design, manufacture and direct sale of customized technical endurance apparel for the cycling, triathlon, running
and Nordic skiing markets across Asia, Europe and North America. Our made-to-order, just-in-time (“JIT”) process vertically
integrates design, sales and distribution of sporting apparel products.
Our
global sporting apparel business is currently comprised of three core business units: inline, 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 11%, 28% and 61%, respectively,
of our sales revenue for the three months ended March 31, 2018, comparing with 10%, 24%, and 66% for the three months ended March
31, 2017.
The
two primary sales channels for our Inline and Custom Order businesses are direct sale and wholesale. Direct sale currently generates
69% of our worldwide sales revenues (71% for the three months ended March 31, 2017). Under the direct sale model, within North
America and Europe, we sell our products directly to end users through our Jakroo e-commerce platform. The Jakroo platform allows
customers to easily log onto our platform, complete their designs and place purchase orders. Wholesale currently represents 31%
of our revenue for the three months ended March 31, 2018 (29% for the three months ended March 31, 2017). We act as both retailer
and wholesaler of our products through our e-commerce platform. In China, we collaborate with large online retailers such as TMall
and JD.com to sell our inline collections to the consumer. Sales through both channels are executed with payments made directly
to us online prior to the 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 182 employees worldwide.
The
purchase of our new 6,300 square feet U.S. headquarters facility in Pleasanton, California in the first quarter of 2017 was the
first step in further strengthening our sales, marketing and innovation teams. During the first three months ended March 31, 2018,
our design team created 5,456 custom designs, compared to 4,302 custom designs during the same period in 2017, representing a
27% increase in customer design requests. We continue to invest in our 3D design workflows in order to gain greater efficiencies
and to improve the end-user experience. Site visits across our .com, .ca and .eu domains rose 50% during the first quarter of
2018, compared to the same period last year. We attribute these results, in part, to our investments in athlete and high profile
team sponsorships throughout 2017, and user experience improvements made to our websites beginning from the latter half of 2017
which we believe have helped elevate the credibility of the brand among our core audience.
During
the first three months, ended March 31, 2018, our new customer acquisition increased 18% and our repeat purchase rate increased
48%. This resulted in an aggregate growth of 25% across our North American and European operating segments compared to the same
period last year. Additionally, over the previous six months ending March 31, 2018, we achieved a NPS or net promoter score of
66, based on customer feedback, which represents increasingly strong customer loyalty according to current NPS calculation methodology.
We attribute these positive indicators to the introduction of new product, improvements to our website UX and our ability to consistently
maintain a delivery timeline of 2 weeks or less.
We
currently lease a 64,000 square feet manufacturing facility at the border of Beijing and Hebei province in China. The facility
has annual capacity to produce 500,000 jerseys and manufactures all of our products. We consider our centralized manufacturing
facility both a competitive advantage and a key driver behind our ability to maintain exceptionally high levels of quality and
industry leading short delivery times. During the first quarter of 2018, we processed approximately 12,000 micro-production lots
with a total production quantity of 30,778 units. 99% of these products were produced and shipped in 14 days or less and 83% were
produced and shipped in 7 days or less.
We
believe there is an increasing recognition of the health benefits of an active lifestyle through cycling, triathlon and running.
We believe this trend provides us with an expanding potential consumer base for our products. We also believe there continues
to be an increasing number of individuals participating in cycling, triathlon and running activities, thus creating an increased
demand for athletic apparel from leisure, pre-athlete and amateur participants. We plan to continue to grow our business over
the long term through increased sales of our apparel via our made-to-order, JIT process, and our expansion in international markets.
Although
we believe these trends will facilitate our growth, we also face potential challenges that could limit our ability to take advantage
of these opportunities, including, among other things, the risk of general economic or market conditions that could affect consumer
spending and the financial health of our retail customers. In addition, we may not be able to effectively manage our growth as
our business becomes a larger and more complex global business. We may not consistently be able to anticipate consumer preferences
or develop new and innovative products that meet changing consumer needs and preferences in a timely manner. Furthermore, our
industry is very competitive, and competition pressures could cause us to reduce the prices of our products or otherwise affect
our profitability.
General
Revenues
are comprised of the sales of our technical endurance apparel products, which include OEM, inline collection and custom made to
order, with the latter category assuming the highest percentage of sales of the three segments.
Cost
of revenues consists primarily of fabrics, other raw materials, overhead, manufacturing costs, inbound raw material freight and
outbound duty and freight costs required to make our products floor-ready to customer specifications.
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, 2018 compared to Three Months Ended March 31, 2017
The
following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage
of net revenues:
|
|
Three
Months Ended
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,662,197
|
|
|
$
|
2,102,976
|
|
Cost
of revenues
|
|
|
1,273,441
|
|
|
|
1,023,171
|
|
Gross
profit
|
|
|
1,388,756
|
|
|
|
1,079,805
|
|
Selling,
general and administrative expense
|
|
|
1,353,595
|
|
|
|
1,160,034
|
|
Interest
expense (income), net
|
|
|
18,977
|
|
|
|
(1,212)
|
|
Income
(loss) before income taxes
|
|
|
16,184
|
|
|
|
(79,017)
|
|
Income
tax expense (benefit)
|
|
|
5,949
|
|
|
|
(2,739)
|
|
Net
income (loss)
|
|
$
|
10,235
|
|
|
$
|
(76,278)
|
|
As
a percentage of net revenues
|
|
Three
Months Ended
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Cost
of revenues
|
|
|
47.83
|
|
|
|
48.65
|
|
Gross
profit
|
|
|
52.17
|
|
|
|
51.35
|
|
Selling,
general and administrative expense
|
|
|
50.85
|
|
|
|
55.16
|
|
Interest
expense (income), net
|
|
|
0.71
|
|
|
|
(0.05)
|
|
Income
(loss) before income taxes
|
|
|
0.61
|
|
|
|
(3.76)
|
|
Income
tax expense (benefit)
|
|
|
0.22
|
|
|
|
(0.13)
|
|
Net
income (loss)
|
|
|
0.39
|
%
|
|
|
(3.63)
|
%
|
Revenues
Net
revenues increased approximately $560,000, or 27%, to $2.66 million in the three months ended March 31, 2018 from $2.10 million
in the same period in 2017. Net revenues by business units are summarized below:
|
|
Three
Months Ended
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
$
Change
|
|
|
%
Change
|
|
OEM
|
|
$
|
741,866
|
|
|
$
|
503,107
|
|
|
$
|
238,759
|
|
|
|
47.46
|
%
|
Inline
|
|
|
286,028
|
|
|
|
201,217
|
|
|
|
84,811
|
|
|
|
42.15
|
%
|
Custom
Orders
|
|
|
1,634,303
|
|
|
|
1,398,652
|
|
|
|
235,651
|
|
|
|
16.85
|
%
|
Total
Revenues
|
|
$
|
2,662,197
|
|
|
$
|
2,102,976
|
|
|
$
|
559,221
|
|
|
|
26.59
|
%
|
While
the increase in net sales was driven by increases across all business units, our Custom Order and OEM business units’ revenues
increased approximately $236,000 or 17% and approximately $239,000 or 47% respectively. Combined, this represents 85% of the total
revenue growth for the three months ended March 31, 2018. Inline revenue increased approximately $85,000, or 42%, to $286,000
for the three months ended March 31, 2018 from $201,000 during the same period in 2017. We attribute these results largely to
our investments in customer acquisition and retention programs implemented, beginning from the fourth quarter of 2017.
Gross
profit
Gross
profit increased approximately $309,000, or 29%, to $1.39 million for the three months ended March 31, 2018 from $1.08 million
for the same period in 2017. Gross profit as a percentage of net revenues, or gross margin, increased by 1% to 52% in the three
months ended March 31, 2018 compared to 51% in the same period in 2017. The increase in gross margin percentage was primarily
driven by a decline in cost of revenue by 1% to 48%, comparing to 49% during the same period in 2017.
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, 2018, our total cost of revenues amounted to $1.27 million, or 48% of total revenues, as compared
to $1.02 million, or 49% of total revenues in the three months ended March 31, 2017. 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.
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, 2018, selling, general and administrative expenses increased $0.19 million
to $1.35 million from $1.16 million for the same period in 2017. As a percentage of net revenues, selling, general and administrative
expenses decreased to 50.9% in the three months ended March 31, 2018 from 55.2% for the same period in 2017. These changes were
primarily attributable to the follows:
|
●
|
We
continue to invest in our sales offices in the U.S., Europe, Canada, and China to strengthen our customer service and increase
brand awareness through advertising, promotion, and sponsorship in the respective markets.
|
|
●
|
We
continue to invest in product development and technology infrastructure. The costs associated with the development of new
products was $21,000 for the three months ended March 31, 2018.
|
|
●
|
We
continue to invest in our employees, the most valuable assets of the company. In addition to the share based-compensation
plan, we made a strategic hire to lead our Product R&D in the fourth quarter of 2017 and implemented a more competitive
performance based compensation plan beginning January 1, 2018.
|
|
●
|
In
2017, we relocated our US office to the newly purchase property. The related expenses, including interest, depreciation, property
tax, and others were increased in the three months ended March 31, 2018 compared with the same period in 2017.
|
|
●
|
Our
net revenue increased approximately $560,000, or 27%, to $2.66 million in the three months ended March 31, 2018.
|
Provision
for income taxes
Provision
for income taxes increased approximately $9,000 to $6,000 income tax expense in the three months ended March 31, 2018 from
$3,000 income tax credit during the same period in 2017. The increase is line with the increase of operating income in
three months ended March 31, 2018 compared to the same period in 2017. Our effective tax rate was 36.76% for the three months
ended March 31, 2018 as compared to 3.47% for the same period in 2017.
Other
Comprehensive Income (loss)/Foreign Currency Translation Adjustment
Other
comprehensive income (loss)/foreign currency translation adjustment changed approximately $95,000 to an income of $128,000 in
three months ended March 31, 2018 from $33,000 in the same period of 2017. These changes were primarily attributable to the more
decrease in the US Dollar to RMB exchange rate in the three months ended March 2018 as compared to the same period in 2017.
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, 2018 compared to Three Months Ended March 31, 2017
Revenues
by segment are summarized below:
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
$
Change
|
|
|
%
Change
|
|
North
America
|
|
$
|
1,598,064
|
|
|
$
|
1,356,754
|
|
|
$
|
241,310
|
|
|
|
17.79%
|
|
China
|
|
|
977,307
|
|
|
|
671,446
|
|
|
|
305,861
|
|
|
|
45.55%
|
|
Europe
|
|
|
86,826
|
|
|
|
74,776
|
|
|
|
12,050
|
|
|
|
16.11%
|
|
Total
revenues
|
|
$
|
2,662,197
|
|
|
$
|
2,102,976
|
|
|
$
|
559,221
|
|
|
|
26.59%
|
|
Net
revenues from our North America operating segment increased $0.24 million, or 17.8%, to $1.60 million in three months ended March
31, 2018 from $1.36 million during the same period in 2017. This is attributed to the increase of revenue from our Custom Order
business. Net revenues in China increased approximately $306,000, or 45.6%, to $977,000 in three months ended March 31, 2018 from
$671,000 during the same period of 2017. This increase was primarily due to an increase of revenue from our OEM and Inline business
in China. Net revenue generated from the European market shows an increase of approximately $12,000 to $87,000 in the three months
ended March 31, 2018 from $75,000 during the same period in 2017. We expect that revenue generated from sales in the European
market will continue to rise in future.
Income
(loss) before income taxes
by segment is summarized below:
|
|
Three
Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
$
Change
|
|
|
%
Change
|
|
North
America
|
|
$
|
(69,785
|
)
|
|
$
|
(92,772
|
)
|
|
$
|
22,987
|
|
|
|
24.78
|
%
|
China
|
|
|
115,529
|
|
|
|
75,187
|
|
|
|
40,342
|
|
|
|
53.66
|
%
|
Europe
|
|
|
(29,560
|
)
|
|
|
(61,432
|
)
|
|
|
31,872
|
|
|
|
51.88
|
%
|
Total
Income (loss) before income taxes
|
|
$
|
16,184
|
|
|
$
|
(79,017
|
)
|
|
$
|
95,201
|
|
|
|
120.48
|
%
|
Our
North America operating segment shows a decrease of operating loss of approximately $23,000, or 25%, for the three months ended
March 31, 2018 from a $93,000 operating loss during the same period in 2017. The decrease of the operating loss is primarily driven
by an increase of approximately $241,000 in revenue for this segment during three months ended March 31, 2018 compared to the
same period in 2017.
Our
China operating segment shows an increase of operating income of approximately $40,000, or 53.7%, to $116,000 for the three months
ended March 31, 2018 from $75,000 in the same period in 2017. The increase of operating income is primarily driven by an increase
of approximately $306,000 in revenue for this segment during three months ended March 31, 2018 compared to the same period in
2017.
Our
Europe operating segment shows a decrease of operating loss of approximately $32,000, or 51.9%, for the three months ended March
31, 2018 from a $61,000 operating loss in the same period in 2017. The reduction in operating losses for the period was primarily
due to the termination of our sponsorship agreement with a continental cycling team in Austria.
Liquidity
and Capital Resources
Our
cash requirements have principally been for working capital and capital expenditures. We fund our working capital, inventory and
capital investments from cash flows from operating activities, 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, 2018 compared to Three Months Ended March 31, 2017
|
|
Three
Months Ended
March
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
42,561
|
|
|
$
|
(180,683)
|
|
Investing
activities
|
|
|
(7,935)
|
|
|
|
(2,565,780
|
)
|
Financing
activities
|
|
|
(17,464)
|
|
|
|
2,048,743
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
79,287
|
|
|
|
32,438
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
96,449
|
|
|
$
|
(665,282)
|
|
Operating
Activities
Operating
activities consisted primarily of net income adjusted for certain non-cash items. Adjustments to net income for non-cash items
included depreciation and amortization, share-based compensation, and deferred taxes. In addition, operating cash flows included
the effect of changes in operating assets and liabilities, principally inventories, accounts receivable, income taxes payable,
prepaid expenses and other assets, accounts payable, advance from customers, and accrued expenses.
Cash
flows provided by operating activities increased approximately $223,000 to $43,000 for the three months ended March 31, 2018 from
$181,000 of cash used by operating activities during the same period in 2017. The increase in cash from operating activities was
due to increased net cash flows from operating assets and liabilities of $96,000, an increase in net income of $87,000, and increase
resulting from adjustments to net income for non-cash items, which increased $40,000 in the three months ended March 31, 2018
compared to the same period in 2017.
Investing
Activities
Cash
used in investing activities decreased $2.6 million to $8,000 in the three months ended March 31, 2018 from $2.6 million in the
same period in 2017, primarily due to lower capital expenditure. Total capital expenditure was $8,000 and $2.6 million in the
three months ended March 31, 2018 and 2017, respectively. The Company purchased land and building for $2.6 million in the three
months ended March 31, 2017.
Financing
Activities
Financing
activities during the three months ended March 31, 2017 consisted primarily of cash repayment to related parties of $19,193, a
mortgage loan of $2 million for the purchase of land and building in the U.S. and repayment of the mortgage of $17,000. The Company
also received cash of $44,936 from issuances of common stock in the three months ended March 31, 2017.
The
Company’s repayment of its mortgage loan was $17,464 in the three months ended March 31, 2018, compared with $17,000 for
the same period in 2017.
Off-Balance
Sheet Arrangements
In
connection with various contracts and agreements, we have agreed to indemnify counterparties against certain third party claims
relating to the infringement of intellectual property rights and other items. Generally, such indemnification obligations do not
apply in situations in which our counterparties are grossly negligent, engage in willful misconduct or act in bad faith. Based
on our historical experience and the estimated probability of future loss, we have determined the fair value of such indemnifications
is not material to our financial position or results of operations.
Recently
Issued Accounting Standards
From
time to time, new accounting pronouncements are issues by the Financial Accounting Standards Board or other standard bodies that
may have an impact on the Company’s accounting and reporting. The Company believes that any recently issued accounting pronouncements
and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting
or reporting or that such impact will not be material to its financial position, results of operations, and cash flows when implemented.