Company Quick10K Filing
Quick10K
Jakroo
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
8-K 2019-08-19 Other Events
8-K 2019-02-13 Regulation FD, Exhibits
8-K 2019-01-30 Officers
8-K 2018-10-18 Accountant, Exhibits
CVET Covetrus 1,567
AMPY Amplify Energy 130
ELRE Yinfu Gold 89
SRRE Sunrise Real Estate Group 0
ECRD Ecard 0
TCKI Turnkey Capital 0
WRAP Wrap Technologies 0
RDGA Ridgefield Acquisition 0
LBSR Liberty Star Uranium & Metals 0
FHL Futu 0
JAKRO 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Jakroo Earnings 2019-06-30

JAKRO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2019

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _________

 

Commission file number 333-217412

 

JAKROO INC.

(Exact name of registrant as specified in its charter)

 

Nevada   81-1565811
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

5906 Stoneridge Mall Road

Pleasanton, CA 94588

(Address of principal executive offices, including zip code)

 

(800) 485-7067

(Registrant’s telephone number, including area code)

 

N/A
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

[  ] Large accelerated filer [  ] Accelerated filer
[  ] Non-accelerated filer [X] Smaller reporting company
    [X] Emerging growth company

 

If an emerging growth company indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

As of August 13, 2019, the registrant had 31,777,110 shares of common stock outstanding.

 

 

 

   
 

 

JAKROO INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2019

TABLE OF CONTENT

 

    PAGE
PART I. FINANCIAL INFORMATION 1
     
Item 1. Financial Statements: 1
     
  Balance Sheets as of June 30, 2019 and December 31, 2018 (unaudited) 1
     
  Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited) 2
     
  Statements of Stockholders’ Equity for the Six Months Ended June 30, 2019 and 2018 (unaudited) 3
     
  Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited) 4
     
  Notes to Consolidated Financial Statements (unaudited) 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
     
Item 4. Controls and Procedures 22
     
PART II. OTHER INFORMATION 22
     
Item 1. Legal Proceedings 22
     
Item 1A. Risk Factors 22
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
     
Item 3. Defaults Upon Senior Securities 23
     
Item 4. Mine Safety Disclosures 23
     
Item 5. Other Information 23
     
Item 6. Exhibits 23
     
Signatures   24

 

   
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Jakroo Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

 

   June 30, 2019   December 31, 2018 
ASSETS          
Current Assets          
Cash and cash equivalents  $2,946,876   $1,799,132 
Accounts receivable   97,365    60,151 
Inventories   1,606,674    1,859,669 
Prepaid expenses and other current assets   276,707    329,414 
Total Current Assets   4,927,622    4,048,366 
           
Property and equipment, net   3,216,883    3,136,902 
Right-of-use assets – operating leases   776,875    - 
TOTAL ASSETS  $8,921,380   $7,185,268 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities          
Accounts payable  $360,595   $462,717 
Due to related parties   -    36,426 
Advance from customers   265,114    122,597 
Mortgage payable – current portion   73,964    72,697 
Operating lease liabilities – current portion   124,008    - 
Other current liabilities   427,260    199,675 
Total Current Liabilities   1,250,941    894,112 
           
Mortgage payable   1,781,025    1,818,379 
Operating lease liabilities   652,867    - 
Total Liabilities   3,684,833    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 June 30, 2019 and December 31, 2018, respectively   31,777    31,489 
Additional paid-in capital   1,136,141    855,938 
Statutory reserve   136,652    136,652 
Retained earnings   3,787,213    3,358,766 
Accumulated other comprehensive loss   (328,785)   (326,648)
Total Jakroo Inc. Stockholders’ Equity   4,762,998    4,056,197 
Non-controlling interest   473,549    416,580 
Total Stockholders’ Equity   5,236,547    4,472,777 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $8,921,380   $7,185,268 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 1 
 

 

Jakroo Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
Revenues  $3,458,508   $3,671,637   $5,930,140   $6,333,834 
Cost of revenues   1,483,877    1,472,866    2,634,203    2,746,307 
Gross profit   1,974,631    2,198,771    3,295,937    3,587,527 
Selling, general and administrative expense   1,370,222    1,509,345    2,707,387    2,862,940 
Income from operations   604,409    689,426    588,550    724,587 
Interest expense, net of interest income   (18,212)   (18,994)   (36,203)   (37,971)
Income before income tax provision   586,197    670,432    552,347    686,616 
Income tax provision   50,983    167,177    66,693    173,126 
NET INCOME   535,214    503,255    485,654    513,490 
Less: Income attributable to non-controlling interest   63,478    53,029    57,207    58,115 
NET INCOME ATTRIBUTABLE TO JAKROO INC.   471,736    450,226    428,447    455,375 
                     
OTHER COMPREHENSIVE INCOME (LOSS):                    
Foreign currency translation adjustment   (74,381)   (207,286)   (2,375)   (79,407)
COMPREHENSIVE INCOME   460,833    295,969    483,279    434,083 
Less: Comprehensive income attributable to non-controlling interest   56,041    32,301    56,969    50,174 
COMPREHENSIVE INCOME ATTRIBUTABLE TO JAKROO INC.  $404,792   $263,668   $426,310   $383,909 
                     
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC   31,777,110    31,288,650    31,711,405    31,288,650 
EARNING PER SHARE – BASIC  $0.01   $0.01   $0.01   $0.01 
                     
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED   33,792,891    32,499,210    33,727,186    32,499,210 
EARNING PER SHARE – DILUTED  $0.01   $0.01   $0.01   $0.01 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 2 
 

 

Jakroo Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

   Jakroo Inc. Stockholders’ Equity         
                       Accumulated             
           Additional           Other       Non-   Total 
   Common Stock   Paid   Statutory   Retained   Comprehensive       controlling   Stockholders’ 
   Shares   Amount   in Capital   Reserve   Earnings   Income/(loss)   Total   Interest   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 
Share-based compensation             104,424                   104,424         104,424 
Net income                       471,736         471,736    63,478    535,214 
Foreign currency translation adjustment                            (66,944)   (66,944)   (7,437)   (74,381)
Balance as of June 30, 2019   31,777,110   $31,777   $1,136,141   $136,652   $3,787,213   $(328,785)  $4,762,998   $473,549   $5,236,547 

 

 

   Jakroo Inc. Stockholders’ Equity         
   Common Stock   Additional Paid in    Statutory   Retained   Accumulated Other Comprehensive       Non-controlling   Total Stockholders’ 
   Shares   Amount   Capital   Reserve   Earnings   Income/(loss)   Total   Interest   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 March 31, 2018   31,288,650    31,289    721,158    136,652    3,028,322    (11,504)   3,905,917    399,418    4,305,335 
Share-based compensation             28,119                   28,119         28,119 
Net income                       450,226         450,226    53,029    503,255 
Foreign currency translation adjustment                            (186,558)   (186,558)   (20,728)   (207,286)
Balance as of June 30, 2018   31,288,650   $31,289   $749,277   $136,652   $3,478,548   $(198,062)  $4,197,704   $431,719   $4,629,423 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 3 
 

 

Jakroo Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   Six Months   Six Months 
   Ended   Ended 
   June 30, 2019   June 30, 2018 
Cash Flows From Operating Activities:          
Net income  $485,654   $513,490 
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation   98,837    71,124 
Loss on disposal of property and equipment   123    - 
Share based compensation   130,492    55,924 
Deferred taxes   -    42,235 
Changes in operating assets and liabilities:          
Accounts receivable   (36,941)   (168,859)
Inventories   253,392    287,216 
Prepaid expenses and other current assets   52,941    (235,166)
Accounts payable   (102,044)   161,358 
Advance from customers   140,570    (291,578)
Other current liabilities   186,500    187,238 
Income tax payable   40,618    59,690 
Net cash provided by operating activities   1,250,142    682,672 
           
Cash Flows from Investing Activities:          
Acquisition of property and equipment   (180,200)   (45,976)
Net cash used in investing activities   (180,200)   (45,976)
           
Cash Flows from Financing Activities:          
Payment to related parties   (36,872)   - 
Repayment of mortgage loan   (36,087)   (34,677)
Proceeds from issuance of common stock   149,999    - 
Net cash provided by (used in) financing activities   77,040    (34,677)
           
Effect of exchange rate changes on cash and cash equivalents   762    (70,134)
Net increase in cash and cash equivalents   1,147,744    531,885 
Cash and cash equivalents, beginning of period   1,799,132    2,350,930 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $2,946,876   $2,882,815 
           
Supplemental disclosure of cash flow information:          
Cash paid during the periods for :          
Income taxes  $26,075   $70,077 
Interest  $37,559   $38,969 
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 statements.

 

 4 
 

 

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 June 30, 2019 and the results of operations and cash flows for the periods ended June 30, 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 and six months ended June 30, 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.

 

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.

 

 5 
 

 

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:

 

   June 30, 2019   December 31, 2018 
Raw materials  $999,301   $1,124,729 
Finished goods   607,373    734,940 
Total inventories  $1,606,674   $1,859,669 

 

4. Operating leases

 

As of June 30, 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 June 30, 2019, the Company recognized additional operating liabilities of $776,875 and Right-of-use assets of $776,875 based on the present value of the remaining minimum rental payments under the current leasing standards for existing operating leases.

 

   June 30, 2019 
Operating lease Right-of-use assets  $776,875 
      
Operating lease liabilities     
Current portion of long-term debt   124,008 
Long-term debt   652,867 
Total operating lease liabilities  $776,875 

 

 6 
 

 

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  $36,610 
2020   75,466 
2021   78,757 
2022   81,978 
2023   85,330 
Thereafter   1,496,848 
   $1,854,989 

 

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.

 

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, par value $0.001 per 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.

 

 

 7 
 

 

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% ~ 155.00%;
     
  Risk-free interest rate 0.83% ~ 2.27%;
     
  Expected term (year) 4 ~ 5;
     
  Exercise price $0.17 ~ $0.75.

 

The estimated fair value of the total granted stock options on the grant date was $1,775,079, among which $56,509 was recorded in the expense of year 2017 and $1,718,570 is being amortized over 48 months period. Total amortization of stock-based compensation expense was $130,492 and $55,924 for the six months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 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   1,910,000    1,267,430    0.75    4 
Exercised   -    -    -    - 
Cancelled/Forfeited   -    -    -    - 
Expired   -    -    -    - 
Options outstanding at June 30, 2019   5,445,500   $1,718,687   $0.38    3.75 

 

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   1,910,000    0.75 
Vested   (1,241,378)   0.39 
Forfeited or exercised   -    - 
Non-vested at June 30, 2019   2,196,372   $0.55 

 

 8 
 

 

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 six months ended June 30, 2018. This expense is attributable to the Company being in a net deferred tax asset position at the time of remeasurement. This amount can be seen on the rate reconciliation as an adjustment to deferred tax asset.

 

The Company’s Chinese operations are subject to Chinese tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. In addition, Rider Sportsfashion (Langfang) Limited (“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:

 

  

Six Months Ended

June 30,

 
   2019   2018 
Tax at U.S. Federal statutory rate  $115,993   $144,190 
U.S. State tax   5,965    17,736 
Tax rate difference between U.S. and foreign operations   (52,638)   (1,524)
Change of valuation allowance   4,538    24,397 
Permanent difference   (7,165)   (25,160)
Rate change   -    13,487 
Effective tax expense  $66,693   $173,126 

 

 9 
 

 

The components of the provision for income taxes consisted of the following:

 

  

Six Months Ended

June 30,

 
   2019   2018 
Current        
Federal  $-   $21,733 
State   1,600    9,149 
Other foreign countries   65,093    100,009 
    66,693    130,891 
Deferred          
Federal   -    20,232 
State   -    8,516 
Other foreign countries   -    - 
Rate change   -    13,487 
    -    42,235 
Provision for income tax  $66,693   $173,126 

 

The Company had approximately $545,000 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 $545,000, approximately $411,000 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, $19,000 can be carried forward for a period of twenty years from the year of the initial loss and $80,000 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 June 30, 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 six months ended June 30, 2019 and 2018, and no provision for interest and penalties is deemed necessary as of June 30, 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, 2020. Rent expenses incurred to Ms. Wei Tan were approximately $18,000 for the six months ended June 30, 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. $30,000 and $20,000 were paid in the six months ended June 30, 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 January, 2019.

 

 10 
 

 

10. Segment Data and Related Information

 

The Company’s operating segments are based on how the Chief Operating Decision Maker (“CODM”) makes decisions about allocating resources and assessing performance. As such, the CODM receives discrete financial information for the Company’s principal business by geographic region based on the Company’s strategy to develop its own brand recognition. These geographic regions include North America, China and Europe. Each geographic segment operates exclusively in one industry: the development, marketing and distribution of branded performance apparel.

 

The revenues, income (loss) before income taxes, and total assets associated with the Company’s segments are summarized in the following tables. Revenues represent sales to external customers for each segment. In addition to revenues, income (loss) before income taxes is a primary financial measure used by the Company to evaluate the performance of each segment. Intercompany balances were eliminated.

 

  

Three Months Ended

June 30

  

Six Months Ended

June 30

 
   2019   2018   2019   2018 
Revenues                
North America  $2,552,602   $2,711,840   $3,987,857   $4,309,904 
China   816,224    807,889    1,739,056    1,785,196 
Europe   89,682    151,908    203,227    238,734 
Total revenues  $3,458,508   $3,671,637   $5,930,140   $6,333,834 

 

  

Three Months Ended

June 30

  

Six Months Ended

June 30

 
   2019   2018   2019   2018 
Income (loss) before income taxes                    
North America  $296,087   $415,357   $140,090   $345,572 
China   275,875    267,715    383,781    383,244 
Europe   14,235    (12,640)   28,476    (42,200)
Total Income before income taxes  $586,197   $670,432   $552,347   $686,616 

 

   June 30, 2019   December 31, 2018 
Total Assets          
North America  $4,787,348   $3,478,158 
China   3,963,761    3,661,428 
Europe   170,271    45,682 
Total Assets  $8,921,380   $7,185,268 

 

11. 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.

 

 11 
 

 

 

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 and elsewhere in this report 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 are subject to significant 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 “SEC”). 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.

 

Readers are advised to review the “Risk Factors” section of the Company’s Annual Report on Form 10-K, filed with the SEC on April 2, 2019, for a fuller recitation of the risks that may impact the outcome of the Company’s forward-looking statements.

 

Overview

 

We specialize in the design, manufacture and direct sale of customized technical endurance apparel for the cycling, triathlon, running and Nordic skiing markets across Asia, Europe and North America. Our made-to-order, just-in-time (“JIT”) process vertically integrates design, sales and distribution of sporting apparel products.

 

The chart below illustrates the Company’s current organizational structure:

 

 

 12 
 

 

For the purpose of streamlining its manufacturing operations in China, Rider Sportsfashion (LangFang) took over the operations of Dachang Branch and Garment Processing Branch. The deregistration process for these branches was completed in December 2017 and April 2018, respectively.

 

Our global sporting apparel business is currently comprised of three core business units: inline retail, which consists of products produced and sold as part of a collection (“Inline”), OEM contract manufacturing (“OEM”) and custom order (“Custom Order”). Our Inline, OEM and Custom Order businesses currently account for 12%, 13% and 75%, respectively, of our sales revenue for the six months ended June 30, 2019, comparing with 14%, 12%, and 74% for the six months ended June 30, 2018.

 

The two primary sales channels for our Inline Retail and Custom Order Retail business are direct sale and wholesale. Direct sale currently generates 83% of our worldwide sales revenues for the six months ended June 30, 2019. Under the direct sale model, 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 or submit design requests to our Pro designers and place purchase orders. Wholesale currently represents 17% of our revenue for the six months ended June 30, 2019. We act as both retailer and wholesaler of our products through our e-commerce platform as well as through large online retailers such as TMall in China. Sales through both channels are executed with payments made directly to us online prior to the production and shipment of products.

 

In order to target customers in major markets, we have established sales offices in the United States, Canada, Austria, and China that provide localized sales, marketing and customer service support to our regional markets. As of the date of the report, we have approximately 183 employees worldwide.

 

During the six months ended June 30, 2019, our California based design team created 9,327 Pro Custom designs, compared to 11,368 Pro Custom designs during the same period in 2018, representing a 18% decrease in Pro Design requests. We attribute the decrease in pro design projects to a combination of an impact of our search engine page rank due to periodic changes in Google’s ranking algorithm and a higher than expected shift by some customers from our pro design service to the new Jakroo DesignLab (formerly known as Jakroo Express) self-design platform. Using Jakroo DesignLab, customers are able to create their own designs without the assistance of a Pro Designer. We recorded 1640 new user sign-ups during the six months ended June 30, 2019 compared to 100 new user sign-ups during the six months of 2018 representing a 16 time increase in new customer acquisition. We anticipate that the number of new user sign-ups on the Jakroo DesignLab 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 7.0% during the six months ended June 30, 2019 as compared to the same period in 2018. The increase can be attributed to investment in our social media and display marketing campaigns focused on increasing awareness for the Jakroo brand.

 

During the quarter ended June 30, 2019, our new customer sales decreased 18% while our number of returning customer sales increased 7%, compared to the same period in 2018. This resulted in a decrease in revenue from our Custom Order segment of approximately 7.7% across our North American and European operating segments compared to the same period in 2018. We attribute the decrease in revenue to a slowdown in consumer demand as a result of slower than expected new customer growth in 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 June 30, 2019, we processed approximately 20,758 micro-production lots with a total production quantity of 54,343 units, compared to 20,554 lots and 58,343 units respectively during the same period in 2018. 99% of these products were produced and shipped in 14 days or less and 74% were produced and shipped in 7 days or less for the second quarter 2019 compared to 98% of products produced in 14 days or less and 59% 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.

 

 13 
 

 

Our operating segments include North America, China and Europe.

 

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 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

 

Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 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:

 

   Six Months Ended June 30, 
   2019   2018 
         
Revenues  $5,930,140   $6,333,834 
Cost of revenues   2,634,203    2,746,307 
Gross profit   3,295,937    3,587,527 
Selling, general and administrative expense   2,707,387    2,862,940 
Interest expense, net of interest income   36,203    37,971 
Income before income taxes   552,347    686,616 
Income tax expense   66,693    173,126 
Net income  $485,654   $513,490 

 

 14 
 

 

As a percentage of net revenues   Six Months Ended June 30,  
    2019     2018  
             
Revenues     100.00 %     100.00 %
Cost of revenues     44.42       43.36  
Gross profit     55.58       56.64  
Selling, general and administrative expense     45.65       45.20  
Interest expenses, net of interest income     0.61       0.60  
Income before income taxes     9.32       10.84  
Income tax expense     1.12       2.73  
Net income     8.20 %     8.11 %

 

Revenues

 

Net revenues decreased approximately $403,694, or 6.4%, to $5.93 million in the six months ended June 30, 2019 from $6.33 million in the same period in 2018. Net revenues by business units are summarized below:

 

   Six Months Ended June 30, 
   2019   2018   $ Change   % Change 
OEM  $743,473   $773,091   $(29,618)   (3.83)%
INLINE   724,607    910,126    (185,519)   (20.38)%
CUSTOM ORDERS   4,462,060    4,650,617    (188,557)   (4.05)%
Total Revenues  $5,930,140   $6,333,834   $(403,694)   (6.37)%

 

The decrease in net revenue was driven by decreases across all business units, with our Inline business unit revenue decreasing the most, by $185,519 or 20.4%. 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 decreased $188,557, or 4.1%, to approximately $4.46 million for the six months ended June 30, 2019 from approximately $4.65 million during the same period in 2018. Our Custom Order unit accounted for approximately 75.2% and 73.4% of total revenue for the six months ended June 30, 2019 and 2018, respectively. During the six months ended June 30, 2019, Custom Order sales in North America experienced a decline of approximately 5.4% compared to the same period in 2018. The decrease was partially caused by the severe cold weather condition in North America in the first quarter 2019 which caused a carry-over effect entering the second quarter in 2019. Custom Order Sales in Europe decreased 14.9% during the six months ended June 30, 2019 compared to the same period in 2018 as a result of slower new customer acquisition. Revenue generated from Custom Orders sales in China increased 38.3% for the six months ended June 30, 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 six months ended June 30, 2019, our total cost of revenues amounted to approximately $2.63 million, or 44.4% of total revenues, as compared to approximately $2.75 million, or 43.4% of net revenues in the six months ended June 30, 2018. The increase in cost of revenues as a percentage of total revenue was primarily driven by an increase of the cost of revenue for our OEM unit. The cost of revenue as a percentage of total revenue for our OEM unit increased by 12.4% to 62.0% for the six months ended June 30, 2019, compared to 49.6% for the same period in 2018. The increase in cost of revenues as a percentage of total revenue for our OEM was primarily driven by lower order volume by our OEM customers and increase of manufacturing and material costs in the six months ended June 30, 2019. The cost of revenue as percentage of total revenue for our Inline and Customer Order units was relatively stable with less than 1% decrease for the six months ended June 30, 2019.

 

 15 
 

 

Gross profit

 

Gross profit decreased by $291,590, or 8.1%, to approximately $3.30 million for the six months ended June 30, 2019 from approximately $3.59 million for the same period in 2018. Gross profit as a percentage of net revenues, or gross margin, decreased by 1.0% to approximately 55.6% in the six months ended June 30, 2019 compared to approximately 56.6% in the same period in 2018. The decrease in gross margin percentage was primarily driven by the increase of cost of revenue for our OEM unit and the decrease of Customer 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 six months ended June 30, 2019, selling, general and administrative expenses decreased by $155,553 to approximately $2.71 million from approximately $2.86 million for the same period in 2018. As a percentage of net revenues, selling, general and administrative expenses increased by 0.5% to 45.7% in the six months ended June 30, 2019 from 45.2% for the same period in 2018. The increase in percentage was primarily attributable to a decrease of net revenue for the six months ended June 30, 2019.

 

Provision for income taxes

 

Provision for income taxes decreased $106,433 to $66,693 in the six months ended June 30, 2019 from $173,126 during the same period in 2018. The decrease is line with the reduction of the income tax rate of Chinese operations starting from 2019 and decrease of income before taxes for the six months ended June 30, 2019.

 

Other Comprehensive Income (loss)/Foreign Currency Translation Adjustment

 

Other comprehensive income (loss)/foreign currency translation adjustment changed $77,032 to a loss of $2,375 in six months ended June 30, 2019 from a loss of $79,407 in the same period of 2018. These changes were primarily attributable to the increase in the US Dollar to RMB exchange rate in the six months ended June 30, 2019 as compared to the same period in 2018.

 

Three Months Ended June 30, 2019 compared to Three Months Ended June 30, 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

June 30,

 
   2019   2018 
         
Revenues  $3,458,508   $3,671,637 
Cost of revenues   1,483,877    1,472,866 
Gross profit   1,974,631    2,198,771 
Selling, general and administrative expense   1,370,222    1,509,345 
Interest expense, net of interest income   18,212    18,994 
Income before income taxes   586,197    670,432 
Income tax expense   50,983    167,177 
Net income  $535,214   $503,255 

 

As a percentage of net revenues   Three Months Ended
June 30,
 
    2019     2018  
             
Revenues     100.00 %     100.00 %
Cost of revenues     42.91       40.11  
Gross profit     57.09       59.89  
Selling, general and administrative expense     39.62       41.11  
Interest expense, net of interest income     0.53       0.52  
Income before income taxes     16.94       18.26  
Income tax expense     1.47       4.55  
Net income     15.47 %     13.71 %

 

 16 
 

 

Revenues

 

Net revenues decreased $213,129, or 5.8%, to $3.46 million in the three months ended June 30, 2019 from $3.67 million in the same period in 2018. Net revenues by business units are summarized below:

 

    Three Months Ended June 30,  
    2019     2018     $ Change     % Change  
OEM   $ 127,588     $ 31,225     $ 96,363       308.61 %
INLINE     518,736       624,098       (105,362)       (16.88) %
CUSTOM ORDER     2,812,184       3,016,314       (204,130)       (6.77) %
Total Revenues   $ 3,458,508     $ 3,671,637     $ (213,129)       (5.80) %

 

The decrease in net revenue was the effect of a decrease of Inline and Custom Orders revenue of $105,362 and $204,130, respectively, in the three months ended June 30, 2019 compared to the same period in 2018. We attribute these results largely to increased competition on the e-commerce platforms such as TMall and JD.com in China for our Inline unit and negative effect of the severe weather condition in North America in the first quarter 2019 with a carry-over effect entering the second quarter 2019 for our Customer Order unit. OEM revenue increased $96,363, or 308.6%, to $127,588 in the three months ended June 30, 2019 from $31,225 for the same period in 2018 due to additional orders from OEM customers in the three months ended June 30, 2019.

 

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 June 30, 2019, our total cost of revenues amounted to approximately $1.48 million or approximately 42.9% of total revenues, as compared to approximately $1.47 million or approximately 40.1% of total revenues in the three months ended June 30, 2018. The increase of 2.8% in cost of revenues as a percentage of total revenue was primarily driven by a decrease of Custom Order sales which have a higher gross margin.

 

Gross profit

 

Gross profit decreased $224,140, or 10.2%, to $1.97 million for the three months ended June 30, 2019 from $2.20 million for the same period in 2018. Gross profit as a percentage of net revenues, or gross margin, decreased by 2.8% to 57.1% in the three months ended June 30, 2019 compared to 59.9% in the same period in 2018. The decrease in gross margin percentage was primarily driven by a decrease of Custom Order sales which have a higher gross margin.

 

Selling, general and administrative expenses

 

Our selling, general and administrative expenses decreased $139,123, or 9.2%, to $1.37 million in the three months ended June 30, 2019 from $1.51 million in same period of 2018. As a percentage of net revenues, selling, general and administrative expenses decreased to 39.6% in the second quarter of 2019 from 41.1% in the same period in 2018. The decrease in percentage was primarily attributable to decrease of marketing related costs and reduction of labor costs due to the departure of two employees in Europe.

 

 17 
 

 

Provision for income taxes

 

Provision for income taxes decreased $116,194 to $50,983 in the three months ended June 30, 2019 from $167,177 during the same period in 2018. The decrease is line with the reduction of the income tax rate of Chinese operations starting from 2019 and decrease of income before taxes for the three months ended June 30, 2019.

 

Other Comprehensive Income (Loss)/Foreign Currency Translation Adjustment

 

Other comprehensive income (loss)/foreign currency translation adjustment changed $132,905 to a loss of $74,381 in the three months ended June 30, 2019 from a loss of $207,286 during 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 June 30, 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.

 

Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018

 

Revenues by segment are summarized below:

 

    Six Months Ended June 30,  
    2019     2018     $ Change     % Change  
North America   $ 3,987,857     $ 4,309,904     $ (322,047)       (7.47) %
China     1,739,056       1,785,196       (46,140)       (2.58) %
Europe     203,227       238,734       (35,507)       (14.87) %
Total revenues   $ 5,930,140     $ 6,333,834     $ (403,694)       (6.37) %

 

Net revenues from our North America operating segment decreased by $322,047, or 7.5%, to approximately $3.99 million in the six months ended June 30, 2019 from approximately $4.31 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 six months ended June 30, 2019. Net revenues in China in USD decreased by $46,140, or 2.6%, to $1.74 million in the six months ended June 30, 2019 from $1.79 million during the same period in 2018. This decrease was primarily due to a negative exchange rate impact on our revenue of Inline business units in China. The revenue from China in RMB increased by 3.7% as compared to the same period in 2018, but the increase was offset by 6.3% as a result of lower USD converted from RMB due to an RMB depreciation that occurred during the six months ended June 30, 2019, compared with the same period in 2018. Net revenue generated from the European market shows a decrease of $35,507, or 14.9%, to $203,227 in the three months ended June 30, 2019 from $238,734 during the same period in 2018. This decrease was primarily caused by realignment of Europe business operation and slower acquisition of new customers.

 

Income (loss) before income taxes by segment is summarized below:

 

    Six Months Ended June 30,  
    2019     2018     $ Change     % Change  
North America   $ 140,090     $ 345,572     $ (205,482)       (59.46) %
China     383,781       383,244       537       0.14 %
Europe     28,476       (42,200 )     70,676       (167.48) %
Total income before income taxes   $ 552,347     $ 686,616     $ (134,269)       (19.56) %

 

Our North America operating segment shows a decrease of operating income of $205,482, or 59.5%, to $140,090 for the six months ended June 30, 2019 from a $345,572 operating income during the same period in 2018. The decrease of the operating income was primarily due to a decrease of $322,047, or 7.5%, in net revenue, increases of amortization and maintenance expenses related to our Jakroo e-commerce platform, and increase of $74,568 stock option based compensation for the six months ended June 30, 2019 compared to the same period in 2018.

 

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Our China operating segment shows a slight increase of operating income of $537, or 0.1%, to $383,781 for the six months ended June 30, 2019 from $383,244 in the same period in 2018. The increase of operating income was primarily due to the reduction of the marketing costs related to advertising and trade shows while offsetting by the negative impact from exchange rate conversion.

 

Our Europe operating segment shows an operating income of $28,476 for the six months ended June 30, 2019 from a $42,200 operating loss in the same period in 2018. The turnaround from operating losses to operating income in the six months ended June 30, 2019 was primarily attributed to a reduction of labor costs resulted from the departure of employees.

 

Three Months Ended June 30, 2019 compared to Three Months Ended June 30, 2018

 

Revenues by segment are summarized below:

 

    Three Months Ended June 30,  
    2019     2018     $ Change     % Change  
North America   $ 2,552,602     $ 2,711,840     $ (159,238)       (5.87) %
China     816,224       807,889       8,335       1.03 %
Europe     89,682       151,908       (62,226)       (40.96) %
Total revenues   $ 3,458,508     $ 3,671,637     $ (213,129)       (5.80) %

 

Net revenues in our North America operating segment decreased $159,238 or 5.9%, to $2.55 million in the three months ended June 30, 2019 from $2.71 million in the same period of 2018. The decrease was primarily due to a decrease of revenue of our Custom Order business for $159,238, or 5.9% to approximately $2.55 million for the three months ended June 30, 2019, compared with approximately $2.71 million for the same period in 2018 in North America. Net revenues in China in USD increased by $8,335, or 1.0% to $816,224 in the three months ended June 30, 2019 from $807,889 in the same period of 2018. The increase in the US Dollar to RMB exchange rate in the three months ended June 30, 2019 also had a negative impact on net revenue in China. The revenue from China in RMB increased by 8.0% as compared to the same period in 2018, but 7% of the increase was offset by lower USD converted from RMB due to an RMB depreciation that occurred during the quarter ended June 30, 2019, compared with the same period in 2018. Net revenue generated from the European market decreased by $62,226 to $89,682 in the three months ended June 30, 2019 from $151,908 in the same period of 2018 as a result of realignment of the Europe business operation.

 

Income (loss) before income taxes by segment is summarized below:

 

    Three Months Ended June 30,  
    2019     2018     $ Change     % Change  
North America   $ 296,087     $ 415,357     $ (119,270)       (28.72) %
China     275,875       267,715       8,160       3.05 %
Europe     14,235       (12,640 )     26,875       212.62 %
Total income before income taxes   $ 586,197     $ 670,432     $ (84,235)       (12.56) %

 

Our North America operating segment shows a decrease of operating income of $119,270, or 28.7%, to $296,087 in the three months ended June 30, 2019 from $415,357 for the same period in 2018. The change is due to:

 

  A decrease of net revenue of $159,238, or 5.9% for this segment in the three months ended June 30, 2019 compared to the same period in 2018;
     
  Increase of amortization and maintenance expenses related to our Jakroo e-commerce platform; and
     
  Increase of stock option based compensation.

 

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Our China operating segment shows an increase of income before taxes for $8,160, or 3.1%, from $267,715 in the three months ended June 30, 2018 to $275,875 for the same period in 2019. The increase of operating income is primarily driven by an increase of revenue for this segment during the three months ended June 30, 2019 compared to the same period in 2018 and improvement of production efficiency leading to lower average production costs per unit while offsetting by the negative impact from exchange rate conversion.

 

Our Europe operating segment showed an increase of operating income of $26,875, or 212.6%, for the three months ended June 30, 2019 from $12,640 operating loss in the same period of 2018. The turnaround from operating losses to operating income in the three months ended June 30, 2019 was primarily attributed to a reduction of labor costs resulted from the departure of employees in the second quarter of 2019.

 

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 primarily 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 will have adequate sources of liquidity over the longer 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, on terms acceptable to us or at all, to grow or maintain our business. Also, to the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to existing stockholders.

 

If adequate funds are not available when needed, we may be required to significantly reduce or refocus our operations.

 

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:

 

Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2018

 

    Six Months Ended June 30,  
    2019     2018  
             
Net cash provided by (used in):                
Operating activities   $ 1,250,142     $  682,672  
Investing activities     (180,200 )     (45,976 )
Financing activities     77,040       (34,677 )
Effect of exchange rate changes on cash and cash equivalents     762       (70,134 )
Net increase in cash and cash equivalents   $ 1,147,744     $ 531,885  

 

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.

 

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Cash flows provided by operating activities increased by $567,470, or 83.1% to approximately $1.25 million for the six months ended June 30, 2019 from $682,672 of cash flows provided by operating activities 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 $535,137, offset by a decrease in net income of $27,836, and an increase resulting from adjustments to net income for non-cash items, which increased $60,169 in the six months ended June 30, 2019 compared to the same period in 2018.

 

Investing Activities

 

Cash used in investing activities increased $134,224, or 291.9%, to $180,200 in the six months ended June 30, 2019 from $45,976 in the same period in 2018, primarily due to higher capital expenditure related to the proprietary Jakroo e-commerce platform. Total capital expenditure was $180,200 and $45,976 in the six months ended June 30, 2019 and 2018, respectively.

 

Financing Activities

 

Financing activities during the six months ended June 30, 2019 consisted primarily of cash repayment to related parties of $36,872 and repayment of our mortgage loan for $36,087. We also received cash of $149,999 from private issuances of common stock in the six months ended June 30, 2019.

 

Repayment of our mortgage loan was $36,087 for the six months ended June 30, 2019, compared with $34,677 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 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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company, and therefore, we are not required to provide information required by this Item of Form 10-Q.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that is designed to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedure include, without limitations, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, an evaluation was completed by our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019. Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II-OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

As of June 30, 2019, we are not presently a party to any lawsuits or claims that we believe could have a materially adverse effect on our financial condition or results of operations.

 

Item1A. Risk Factors.

 

Factors that could cause our actual results to differ materially from those in this report are any of the risks described in the Annual Report on Form 10-K for the year ended December 31, 2018. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.

 

As of the date of this report, there have been no material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018. except we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits.

 

No.   Description
31.1   Certification of Principal Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Furnished herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

  JAKROO INC.
     
Date: August 14, 2019 By: /s/ Weidong (Wayne) Du
  Name: Weidong (Wayne) Du
  Title: Chief Executive Officer
     
Date: August 14, 2019 By: /s/ David Wang
  Name: David Wang
  Title: Chief Financial Officer

 

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