ITEM
1. FINANCIAL STATEMENTS
Jakroo
Inc. and Subsidiaries
Consolidated
Balance Sheets <Unaudited>
|
|
|
June 30,
2018
|
|
|
December 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,882,815
|
|
|
$
|
2,350,930
|
|
Accounts receivable
|
|
|
215,192
|
|
|
|
53,026
|
|
Inventories
|
|
|
1,252,678
|
|
|
|
1,549,996
|
|
Prepaid expenses and other current assets
|
|
|
637,583
|
|
|
|
452,715
|
|
Total current assets
|
|
|
4,988,268
|
|
|
|
4,406,667
|
|
Property and equipment, net
|
|
|
2,860,590
|
|
|
|
2,854,802
|
|
TOTAL ASSETS
|
|
$
|
7,848,858
|
|
|
$
|
7,261,469
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
398,420
|
|
|
$
|
245,396
|
|
Advance from customers
|
|
|
365,647
|
|
|
|
653,305
|
|
Mortgage payable – current portion
|
|
|
71,251
|
|
|
|
69,898
|
|
Other current liabilities
|
|
|
529,128
|
|
|
|
296,723
|
|
Total current liabilities
|
|
|
1,364,446
|
|
|
|
1,265,322
|
|
Mortgage payable
|
|
|
1,854,989
|
|
|
|
1,891,019
|
|
Total liabilities
|
|
|
3,219,435
|
|
|
|
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 shares issued and outstanding
|
|
|
31,289
|
|
|
|
31,289
|
|
Additional paid in capital
|
|
|
749,277
|
|
|
|
693,352
|
|
Statutory reserve
|
|
|
136,652
|
|
|
|
136,652
|
|
Retained earnings
|
|
|
3,478,548
|
|
|
|
3,023,173
|
|
Accumulated other comprehensive loss
|
|
|
(198,062
|
)
|
|
|
(126,596
|
)
|
Total Jakroo Inc. Stockholders’ equity
|
|
|
4,197,704
|
|
|
|
3,757,870
|
|
Non-controlling interests
|
|
|
431,719
|
|
|
|
347,258
|
|
Total Stockholders’ Equity
|
|
|
4,629,423
|
|
|
|
4,105,128
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
7,848,858
|
|
|
$
|
7,261,469
|
|
The
accompanying Notes are an integral part of these consolidated financial statements
Jakroo
Inc. and Subsidiaries
Consolidated
Statements of Comprehensive Income <Unaudited>
|
|
Three Months Ended
June 30
|
|
|
Six Months Ended
June 30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,671,637
|
|
|
$
|
3,081,307
|
|
|
$
|
6,333,834
|
|
|
$
|
5,184,283
|
|
Cost of revenues
|
|
|
1,472,866
|
|
|
|
1,200,999
|
|
|
|
2,746,307
|
|
|
|
2,224,170
|
|
Gross profit
|
|
|
2,198,771
|
|
|
|
1,880,308
|
|
|
|
3,587,527
|
|
|
|
2,960,113
|
|
Selling, general and administrative expense
|
|
|
1,509,345
|
|
|
|
1,312,832
|
|
|
|
2,862,940
|
|
|
|
2,472,866
|
|
Income from operations
|
|
|
689,426
|
|
|
|
567,476
|
|
|
|
724,587
|
|
|
|
487,247
|
|
Interest (expense) income
|
|
|
(18,994
|
)
|
|
|
720
|
|
|
|
(37,971
|
)
|
|
|
1,932
|
|
Income
before income taxes
|
|
|
670,432
|
|
|
|
568,196
|
|
|
|
686,616
|
|
|
|
489,179
|
|
Income
tax provision
|
|
|
167,177
|
|
|
|
185,386
|
|
|
|
173,126
|
|
|
|
182,647
|
|
NET INCOME
|
|
|
503,255
|
|
|
|
382,810
|
|
|
|
513,490
|
|
|
|
306,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Income attributable to non-controlling interest
|
|
|
53,029
|
|
|
|
40,689
|
|
|
|
58,115
|
|
|
|
37,230
|
|
NET INCOME ATTRIBUTABLE TO JAKROO INC.
|
|
|
450,226
|
|
|
|
342,121
|
|
|
|
455,375
|
|
|
|
269,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(207,286
|
)
|
|
|
53,514
|
|
|
|
(79,407
|
)
|
|
|
86,071
|
|
COMPREHENSIVE INCOME
|
|
|
295,969
|
|
|
|
436,324
|
|
|
|
434,083
|
|
|
|
392,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive income attributable to non-controlling interest
|
|
|
32,301
|
|
|
|
46,040
|
|
|
|
50,174
|
|
|
|
45,837
|
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO JAKROO INC.
|
|
$
|
263,668
|
|
|
$
|
390,284
|
|
|
$
|
383,909
|
|
|
$
|
346,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC
|
|
|
31,288,650
|
|
|
|
30,808,650
|
|
|
|
31,288,650
|
|
|
|
30,799,296
|
|
EARNING PER SHARE – BASIC
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED
|
|
|
32,499,210
|
|
|
|
32,019,210
|
|
|
|
32,499,210
|
|
|
|
32,009,856
|
|
EARNING PER SHARE – DILUTED
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
The
accompanying Notes are an integral part of these consolidated financial statements.
Jakroo Inc. and Subsidiaries
Consolidated Statements of
Cash Flows <Unaudited>
|
|
Six
Months Ended
June
30, 2018
|
|
|
Six
Months Ended
June
30, 2017
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
513,490
|
|
|
$
|
306,532
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
71,124
|
|
|
|
63,768
|
|
Gain on disposal of property and equipment
|
|
|
-
|
|
|
|
(1,907
|
)
|
Share based compensation
|
|
|
55,924
|
|
|
|
54,674
|
|
Deferred taxes
|
|
|
42,235
|
|
|
|
(4,097
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(168,859
|
)
|
|
|
(81,341
|
)
|
Inventories
|
|
|
287,216
|
|
|
|
91,819
|
|
Prepaid expenses and other current assets
|
|
|
(235,166
|
)
|
|
|
154,148
|
|
Accounts payable
|
|
|
161,358
|
|
|
|
35,582
|
|
Advance from customers
|
|
|
(291,578
|
)
|
|
|
(302,784
|
)
|
Other current liabilities
|
|
|
187,238
|
|
|
|
78,479
|
|
Income tax payable
|
|
|
59,690
|
|
|
|
109,169
|
|
Net cash provided by operating activities
|
|
|
682,672
|
|
|
|
504,042
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(45,976
|
)
|
|
|
(2,601,311
|
)
|
Collection of loan to officer
|
|
|
-
|
|
|
|
74,198
|
|
Proceeds received from sale of equipment
|
|
|
-
|
|
|
|
2,343
|
|
Net cash used in investing activities
|
|
|
(45,976
|
)
|
|
|
(2,524,770
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from related parties
|
|
|
-
|
|
|
|
70,219
|
|
Proceeds from mortgage loan
|
|
|
-
|
|
|
|
2,040,000
|
|
Repayment of mortgage loan
|
|
|
(34,677
|
)
|
|
|
(42,500
|
)
|
Proceeds from issuance of common stock
|
|
|
-
|
|
|
|
44,936
|
|
Net cash provided by (used in) financing activities
|
|
|
(34,677
|
)
|
|
|
2,112,655
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(70,134
|
)
|
|
|
57,904
|
|
Net increase in cash and cash equivalents
|
|
|
531,885
|
|
|
|
149,831
|
|
Cash and cash equivalents, beginning of period
|
|
|
2,350,930
|
|
|
|
2,777,957
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
2,882,815
|
|
|
$
|
2,927,788
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the periods for :
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
70,077
|
|
|
$
|
199,634
|
|
Interest
|
|
$
|
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 statement.
Jakroo
Inc. and Subsidiaries
Notes
to the Consolidated Financial Statements
(unaudited)
1.
Description of business
Jakroo Inc. and its subsidiaries, which are
controlled through a series of variable interest agreements, design, manufacture and sell customized technical endurance apparel
for the cycling, triathlon, running and Nordic skiing markets. When used herein, unless the context specifically requires otherwise,
the term “Company” means Jakroo Inc. and its subsidiaries.
In
February 2018, Jakroo Inc. 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. Jakroo Inc. 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
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 U.S. 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, 2018 and the results of operations and cash flows for the periods ended June
30, 2018 and 2017. The financial data and other information disclosed in these notes to the interim financial statements related
to these periods are unaudited. The results for the three and six months ended June 30, 2018 are not necessarily indicative of
the results to be expected for any subsequent periods or for the entire year. The balance sheet on December 31, 2017 has been
derived from the audited financial statements at that date. These unaudited financial statements should be read in conjunction
with our audited consolidated financial statements and notes thereto for the year ended December 31, 2017 as included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on April 2, 2018.
The
accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”), and include the accounts of the Company, its subsidiaries and entities controlled
through VIE agreements. All intercompany balances and transactions have been eliminated in consolidation.
Certain
amounts have been reclassified to conform to current year presentation.
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,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
844,923
|
|
|
$
|
903,421
|
|
Finished goods
|
|
|
407,755
|
|
|
|
646,575
|
|
Total inventories
|
|
$
|
1,252,678
|
|
|
$
|
1,549,996
|
|
4.
Mortgage payable
The
Company entered into a mortgage loan from Bank of America 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
|
|
|
$
|
35,164
|
|
2019
|
|
|
|
72,697
|
|
2020
|
|
|
|
75,466
|
|
2021
|
|
|
|
78,757
|
|
2022
|
|
|
|
81,978
|
|
Thereafter
|
|
|
|
1,582,178
|
|
|
|
|
$
|
1,926,240
|
|
5.
Equity Incentive Plan
On January 5, 2017, the Company’s
Board of Directors (the “Board of Directors”) adopted the Jakroo Inc. 2016 Equity Incentive Plan (the
“Plan”). The Plan was adopted to retain and provide incentives for employees, officers and directors,
and to align stockholder and employee interests. The participants of the Plan include the Company’s employees who
were previously determined by the Board of Directors.
On January 5, 2017, the Company signed stock
option agreements with each participant and granted options 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 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. These options will
expire ten years from the Grant Date, subject to earlier termination as set forth in the Plan and the option agreement.
On August 16, 2017, the Company granted incentive stock options under the Plan to two independent
directors to purchase an aggregate of 480,000 shares of Common Stock at a price of $0.25 per share, which vested
immediately. These options will be exercisable for a period of five years commencing six months from the date of
grant on a cashless exercise basis.
The
Company assessed the fair value of the total granted stock options on the grant date using a Black-Scholes Stock Option Pricing
Model. Significant assumptions used in calculating 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 six months ended June 30, 2018 and 2017,
total amortization of stock-based compensation expense was $55,924 and $54,674, respectively.
A
summary of the changes in stock options outstanding under the Plan is presented below:
|
|
Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Weighted
Average
Exercise Price
|
|
|
Remaining Contractual Term
|
|
Options outstanding at December 31, 2017
|
|
|
3,972,000
|
|
|
$
|
507,649
|
|
|
$
|
0.18
|
|
|
|
3
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding at June 30, 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 June 30, 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 (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 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 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 tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
In addition, Rider Sportsfashion (Langfang) Limited, the Company’s subsidiary controlled through VIE agreements,
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 at the U.S. statutory rate of 21% and 35% in 2018 and 2017, to the Company’s effective tax rate is
as follows:
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
U.S. Federal statutory rate
|
|
$
|
144,190
|
|
|
$
|
126,070
|
|
U.S. State tax
|
|
|
17,736
|
|
|
|
12,623
|
|
Tax rate difference between U.S. and foreign operations
|
|
|
(1,524
|
)
|
|
|
(5,647
|
)
|
Change of valuation allowance
|
|
|
24,397
|
|
|
|
41,929
|
|
Permanent difference
|
|
|
(25,160
|
)
|
|
|
7,672
|
|
Rate change
|
|
|
13,487
|
|
|
|
-
|
|
Effective tax rate
|
|
$
|
173,126
|
|
|
$
|
182,647
|
|
The
provisions for income taxes are summarized as follows;
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
21,733
|
|
|
$
|
36,802
|
|
State
|
|
|
9,149
|
|
|
|
12,623
|
|
Other foreign countries
|
|
|
100,009
|
|
|
|
137,319
|
|
|
|
|
130,891
|
|
|
|
186,744
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
20,232
|
|
|
|
-
|
|
State
|
|
|
8,516
|
|
|
|
-
|
|
Other foreign countries
|
|
|
-
|
|
|
|
(4,097
|
)
|
Rate change
|
|
|
13,487
|
|
|
|
-
|
|
|
|
|
42,235
|
|
|
|
(4,097
|
)
|
Provision for income tax
|
|
$
|
173,126
|
|
|
$
|
182,647
|
|
The
Company had approximately $460,000 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 $460,000, approximately $386,000 was incurred by our company in Austria since it started business in
early 2016. The net operating loss of the Company’s wholly-owned 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. Accordingly, the Company recorded a deferred tax asset of $nil as of June 30, 2018, and $42,235 as of
December 31, 2017.
As
of June 30, 2018 and December 31, 2017, the Company has no material unrecognized tax benefits which would favorably affect the
effective income tax rate in future periods and does not believe that there will be any significant increases or decreases of
unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed
on the Company during the six months ended June 30, 2018 and 2017, and no provision for interest and penalties is deemed necessary
as of June 30, 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 and $11,555 for the six months ended
June 30, 2018 and 2017, respectively; and paid $nil and $20,373 in the six months ended June 30, 2018 and 2017, respectively.
(2)
The WFOE and an entity controlled by the Company through VIE agreements leased office space from Ms. Wei Tan in China for approximately
$3,000 per month. The lease expires on May 14, 2019. Rent expense incurred to Ms. Wei Tan was approximately $18,000 and $18,000
for the six months ended June 30, 2018 and 2017, respectively.
(3)
On June 5, 2015, the Company signed a loan agreement with an officer to advance $75,000 at an annual interest rate of 2.5% with
payment of a minimum of $200 per month and due on May 31, 2017. The loan receivable was paid in full in April 2017 and the balance
was zero of June 30, 2018 and December 31, 2017.
(4)
In April 2018, Designlab entered a Master Agreement and License Agreement with a company for internal-use software development.
The company is a California corporation. The individual investor of Designlab is also a majority shareholder of the corporation.
Total agreed contact price is $80,000 which is scheduled to be paid by installment payments based on the software development
milestones. $20,000 was paid in the six months ended June 30, 2018.
8.
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
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,711,840
|
|
|
$
|
2,267,187
|
|
|
$
|
4,309,904
|
|
|
$
|
3,623,941
|
|
China
|
|
|
807,889
|
|
|
|
686,736
|
|
|
|
1,785,196
|
|
|
|
1,358,182
|
|
Europe
|
|
|
151,908
|
|
|
|
127,384
|
|
|
|
238,734
|
|
|
|
202,160
|
|
Total revenues
|
|
$
|
3,671,637
|
|
|
$
|
3,081,307
|
|
|
$
|
6,333,834
|
|
|
$
|
5,184,283
|
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended
June 30
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
415,357
|
|
|
$
|
447,942
|
|
|
$
|
345,572
|
|
|
$
|
355,170
|
|
China
|
|
|
267,715
|
|
|
|
138,110
|
|
|
|
383,244
|
|
|
|
213,297
|
|
Europe
|
|
|
(12,640
|
)
|
|
|
(17,856
|
)
|
|
|
(42,200
|
)
|
|
|
(79,288
|
)
|
Total Income before income taxes
|
|
$
|
670,432
|
|
|
$
|
568,196
|
|
|
$
|
686,616
|
|
|
$
|
489,179
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Total Assets
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
4,790,831
|
|
|
$
|
3,958,690
|
|
China
|
|
|
2,852,009
|
|
|
|
3,248,199
|
|
Europe
|
|
|
206,018
|
|
|
|
54,580
|
|
Total Assets
|
|
$
|
7,848,858
|
|
|
$
|
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 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, 2018, 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:
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.
(“CUSTOMORDER”). Our Inline, OEM and Custom order businesses currently account for 14%, 12% and 74%, respectively,
of our sales revenue for the six months ended June 30, 2018, comparing with 14%, 11%, and 75% for the six months ended June 30,
2017.
The
two primary sales channels for our Inline Retail and Custom Order Retail business are direct sale and wholesale. Direct sale currently
generates 85% of our worldwide sales revenues (82% for the six months ended June 30, 2017). 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 15% of our revenue for the six months ended June 30, 2018 (18% for the six months ended June 30, 2017). We
act as both retailer and wholesaler of our products through our e-commerce platform as well as through large online retailers
such as TMall in China. Sales through both channels are executed with payments made directly to us online prior to the production
and shipment of products.
In
order to target customers in major markets, we have established sales offices in the United States, Canada, Austria, and China
that provide localized sales, marketing and customer service support to our regional markets. As of the date of the report, we
have approximately 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 six months ended June 30, 2018, our
design team created 11,313 custom designs, compared to 9,251 custom designs during the same period in 2017, representing a 22%
increase in customer design requests. We continue to invest in our 3D design workflows in order to gain greater efficiencies and
to improve the end-user experience. Site visits across our .com, .ca and .eu domains rose modestly during the six months ended
June 30, 2018, compared to the same period last year. The slightly lower rate of increase of site visits can be attributed to
changes in Google’s search algorithms. However, despite this, the quality of our leads has improved, leading to stronger
conversion to sale rates. Overall the continual increase in leads can be attributed, in part, to our investments in athlete and
high profile team sponsorships, and user experience improvements made to our websites beginning from the latter half of 2017.
During
the second quarter ended June 30, 2018, our new customer acquisition increased 13% and our repeat purchase rate increased 33%,
compared to the same quarter last year. This resulted in an aggregate revenue growth of 20% across our North American and European
operating segments compared to the same period last year. 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 second quarter of 2018, we processed approximately 21,000 micro-production lots
with a total production quantity of 58,000 units, which represents an increase of 75% and 89%, respectively, compared to the first
quarter 2018. 98% of these products were produced and shipped in 14 days or less and 59% were produced and shipped in 7 days or
less for the second quarter 2018.
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.
Critical
Accounting Policies
See Note 2 of
the Notes to Audited Financial Statements and section titled Management’s Discussion and Analysis – Significant Accounting
Policies included in our Annual Report for the year ended December 31, 2017 for a summary of significant accounting policies and
information on recently issued accounting pronouncements.
Results
of Operations
Six
Months Ended June 30, 2018 compared to Six Months Ended June 30, 2017
The
following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage
of net revenues:
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,333,834
|
|
|
$
|
5,184,283
|
|
Cost of revenues
|
|
|
2,746,307
|
|
|
|
2,224,170
|
|
Gross profit
|
|
|
3,587,527
|
|
|
|
2,960,113
|
|
Selling, general and administrative expense
|
|
|
2,862,940
|
|
|
|
2,472,866
|
|
Interest expense (income), net
|
|
|
37,971
|
|
|
|
(1,932
|
)
|
Income before income taxes
|
|
|
686,616
|
|
|
|
489,179
|
|
Income tax expense
|
|
|
173,126
|
|
|
|
182,647
|
|
Net income
|
|
$
|
513,490
|
|
|
$
|
306,532
|
|
As a percentage of net revenues
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Cost of revenues
|
|
|
43.36
|
|
|
|
42.90
|
|
Gross profit
|
|
|
56.64
|
|
|
|
57.10
|
|
Selling, general and administrative expense
|
|
|
45.20
|
|
|
|
47.70
|
|
Interest expenses (income), net
|
|
|
0.60
|
|
|
|
(0.04
|
)
|
Income before income taxes
|
|
|
10.84
|
|
|
|
9.44
|
|
Income tax expense
|
|
|
2.73
|
|
|
|
3.52
|
|
Net income
|
|
|
8.11
|
%
|
|
|
5.92
|
%
|
Revenues
Net
revenues increased approximately $1.15 million, or 22.2%, to $6.33 million in the six months ended June 30, 2018 from $5.18 million
in the same period in 2017. Net revenues by business units are summarized below:
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
OEM
|
|
$
|
773,091
|
|
|
$
|
564,112
|
|
|
$
|
208,979
|
|
|
|
37.05
|
|
INLINE
|
|
|
910,126
|
|
|
|
737,409
|
|
|
|
172,717
|
|
|
|
23.42
|
|
CUSTOM ORDERS
|
|
|
4,650,617
|
|
|
|
3,882,762
|
|
|
|
767,855
|
|
|
|
19.78
|
|
Total Revenues
|
|
$
|
6,333,834
|
|
|
$
|
5,184,283
|
|
|
$
|
1,149,551
|
|
|
|
22.17
|
|
While
the increase in net revenue was driven by increases across all business units, our Custom Order and OEM business units’
revenues increased $767,855 or 19.8% and $208,979 or 37.1%, respectively. Revenue growth of Custom Order and OEM business units
accounted for approximately 85.0% of the total revenue growth for the six months ended June 30, 2018. Inline revenue increased
$172,717, or 23.4%, to $910,126 for the six months ended June 30, 2018 from $737,409 during the same period in 2017. We attribute
these results largely to our investments in customer acquisition and retention programs implemented, beginning in the fourth quarter
of 2017.
Gross
profit
Gross
profit increased $627,414, or 21.2%, to $3.59 million for the six months ended June 30, 2018 from $2.96 million for the same period
in 2017. Gross profit as a percentage of net revenues, or gross margin, decreased less than 1% to 56.6 % in the six months ended
June 30, 2018 comparing to 57.1% in the same period in 2017. The decrease in gross margin percentage was primarily driven by an
increase in cost of revenue by less than 1% to 43.4% comparing to 42.9% 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 six months ended June 30, 2018, our total cost of revenues amounted to approximately $2.75 million or 43.4% of total revenues,
as compared to approximately $2.22 million or 42.9% of total revenues in the six months ended June 30, 2017. The slight increase
in cost of revenues as a percentage of total revenue was primarily due to increase of outbound freight costs associated with shipping
goods to customers as cost of goods sold.
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, 2018, selling, general and administrative expenses increased $390,074, or
15.8%, to $2.86 million from $2.47 million for the same period in 2017. As a percentage of net revenues, selling, general and
administrative expenses decreased to 45.2% in the six months ended June 30, 2018 from 47.7% 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.
|
|
|
|
|
●
|
We
continue to invest in our employees, the most valuable assets of the company. In addition to the share based- compensation
plan, we made a strategic hire to lead our Product R&D in the fourth quarter of 2017 and implemented a more competitive
performance based compensation plan beginning January 1, 2018.
|
|
|
|
|
●
|
In
2017, we relocated our U.S. office to the newly purchased property. The related expenses, including interest, depreciation,
property tax, and others, increased in the six months ended June 30, 2018 compared with the same period in 2017.
|
Provision
for income taxes
Provision
for income taxes decreased $9,521 to $173,126 in the six months ended June 30, 2018 from $182,647 during the same period in 2017.
The decrease is line with the reduction of the US statutory tax rate from 35% to 21% from 2018. Our effective tax rate was 25.21%
for the
six
months ended
June 30
, 2018
as compared to37.34% for the same period in 2017.
Other
Comprehensive Income (loss)/Foreign Currency Translation Adjustment
Other
comprehensive income (loss)/foreign currency translation adjustment changed $165,478 to a loss of $79,407 in six
months ended June 30, 2018 from an income of $86,071 in the same period of 2017. These changes were primarily attributable to
the decrease in the US Dollar to RMB exchange rate in the six months ended June 30, 2018 as compared to the same period in 2017.
Three
Months Ended June 30, 2018 compared to Three Months Ended June 30, 2017
The
following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage
of net revenues:
|
|
Three Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,671,637
|
|
|
$
|
3,081,307
|
|
Cost of revenues
|
|
|
1,472,866
|
|
|
|
1,200,999
|
|
Gross profit
|
|
|
2,198,771
|
|
|
|
1,880,308
|
|
Selling, general and administrative expense
|
|
|
1,509,345
|
|
|
|
1,312,832
|
|
Interest expense (income), net
|
|
|
18,994
|
|
|
|
(720
|
)
|
Income before income taxes
|
|
|
670,432
|
|
|
|
568,196
|
|
Income tax expense
|
|
|
167,177
|
|
|
|
185,386
|
|
Net income
|
|
$
|
503,255
|
|
|
$
|
382,810
|
|
As a percentage of net revenues
|
|
Three Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Cost of revenues
|
|
|
40.11
|
|
|
|
38.98
|
|
Gross profit
|
|
|
59.89
|
|
|
|
61.02
|
|
Selling, general and administrative expense
|
|
|
41.11
|
|
|
|
42.60
|
|
Interest expense (income), net
|
|
|
0.52
|
|
|
|
(0.02
|
)
|
Income before income taxes
|
|
|
18.26
|
|
|
|
18.44
|
|
Income tax expense
|
|
|
4.55
|
|
|
|
6.02
|
|
Net income
|
|
|
13.71
|
%
|
|
|
12.42
|
%
|
Revenues
Net
revenues increased $590,330, or 19.2%, to $3.67 million in the three months ended June 30, 2018 from $3.08 million in the same
period in 2017. Net revenues by business units are summarized below:
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
OEM
|
|
$
|
31,225
|
|
|
$
|
61,007
|
|
|
$
|
(29,782
|
)
|
|
|
(48.82
|
)%
|
INLINE
|
|
|
624,098
|
|
|
|
536,191
|
|
|
|
87,907
|
|
|
|
16.39
|
%
|
CUSTOM
|
|
|
3,016,314
|
|
|
|
2,484,109
|
|
|
|
532,205
|
|
|
|
21.42
|
%
|
Total Revenues
|
|
$
|
3,671,637
|
|
|
$
|
3,081,307
|
|
|
$
|
590,330
|
|
|
|
19.16
|
%
|
The
increase in net revenue was the effect of an increase of Inline and Custom Orders revenue of $87,907 and $532,205, respectively,
in the three months ended June 30, 2018 compared to the same period in 2017. We attribute these results largely to our investments
in customer acquisition and retention programs implemented, beginning from the fourth quarter of 2017. OEM revenue decreased $29,782,
or 48.8%, to $31,225 from $61,007 for the same period in 2017. We continue to shift our capacity to our Custom Order business
from the lower margin OEM business.
Gross
profit
Gross
profit increased $318,463, or 16.9%, to $2.20 million for the three months ended June 30, 2018 from $1.88 million for the same
period in 2017. Gross profit as a percentage of net revenues, or gross margin, decreased by 1.1% to 59.9 % in the three months
ended June 30, 2018 compared to 61.0% in the same period in 2017. The decrease in gross margin percentage was primarily driven
by an increase in cost of revenue by approximately 1.1% to 40.1% compared to 39.0% 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 June 30, 2018, our total cost of revenues amounted to approximately $1.47 million or approximately 40.1%
of total revenues, as compared to approximately $1.20 million or approximately 39.0% of total revenues in the three months ended
June 30, 2017. The increase in cost of revenues as a percentage of total revenue was primarily due to increase of outbound freight
costs associated with shipping goods to customers as cost of goods sold.
Selling,
general and administrative expenses
Our
selling, general and administrative expenses increased $196,513, or 15.0%, to $1.51 million in the three months ended June 30,
2018 from $1.31 million in same period of 2017. As a percentage of net revenues, selling, general and administrative expenses
decreased to 41.1% in the second quarter of 2018 from 42.6% in the same period in 2017. The decrease in percentage was primarily
attributable to an increase of $590,330 in net revenue for the three months ended June 30, 2018 comparing to the same period in
2017 while selling, general and administrative expenses are relatively stable for the periods.
Provision
for income taxes
Provision
for income taxes decreased $18,209 to $167,177 in the three months ended June 30, 2018 from $185,386 during the same period in
2017. The decrease is line with the reduction of the US statutory tax rate from 35% to 21% beginning from January 1, 2018. Our
effective tax rate was 25% in the three months ended June 30, 2018 as compared to 33% in the same period of 2017.
Other
Comprehensive Income (Loss)/Foreign Currency Translation Adjustment
Other
comprehensive income (loss)/foreign currency translation adjustment changed $261,000 to a loss of $207,000 in the three months
ended June 30, 2018 from an income of $54,000 during the same period in 2017. These changes were primarily attributable to the
decrease in the US Dollar to RMB exchange rate in the three months ended June 30, 2018 as compared to the same period in 2017.
Segment
Results of Operation
The
net revenues and operating income associated with our segments are summarized in the following tables.
Six
Months Ended June 30, 2018 compared to Six Months Ended June 30, 2017
Revenues
by segment are summarized below:
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
North America
|
|
$
|
4,309,904
|
|
|
$
|
3,623,941
|
|
|
$
|
685,963
|
|
|
|
18.93
|
|
China
|
|
|
1,785,196
|
|
|
|
1,358,182
|
|
|
|
427,014
|
|
|
|
31.44
|
|
Europe
|
|
|
238,734
|
|
|
|
202,160
|
|
|
|
36,574
|
|
|
|
18.09
|
|
Total revenues
|
|
$
|
6,333,834
|
|
|
$
|
5,184,283
|
|
|
$
|
1,149,551
|
|
|
|
22.17
|
|
Net
revenues in our North America operating segment increased $685,963, or 18.9%, to $4.31 million in the six months ended June 30,
2018 from $3.62 million in the same period of 2017. It is primarily due to the increase of revenue of our Custom Order business.
Net revenues in China increased $427,014, or 31.4%, to $1.79 million in six months ended June 30, 2018 from $1.36 million in the
same period of 2017. This increase was primarily due to an increase of revenue from our OEM business in China. It is our strategy
to shift our capacity from OEM with lower margin to higher margin business unit, Custom Orders. Revenue generated from the European
market showed an increase of $36,574, or 18.1%, to $239,000 in the six months ended June 30, 2018 from $202,000 in the same period
of 2017. During the next 6 months, as a result of our divestment in our sponsored team partnership and transition into the slower
Fall & Winter season we expect revenues to remain at par with the same period of 2017,
Income
(loss) before income taxes
by segment is summarized below:
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
North America
|
|
$
|
345,572
|
|
|
$
|
355,170
|
|
|
$
|
(9,598
|
)
|
|
|
(2.70
|
)
|
China
|
|
|
383,244
|
|
|
|
213,297
|
|
|
|
169,947
|
|
|
|
79.68
|
|
Europe
|
|
|
(42,200
|
)
|
|
|
(79,288
|
)
|
|
|
37,088
|
|
|
|
(46.78
|
)
|
Total income before income taxes
|
|
$
|
686,616
|
|
|
$
|
489,179
|
|
|
$
|
197,437
|
|
|
|
40.36
|
|
Our
North America operating segment shows a decrease of operating income of $9,598, or 2.7%, to $346,000 for the six months ended
June 30, 2018 from $355,000 in the same period of 2017. The change in the operating income was primarily driven by the following:
|
●
|
An increase in net
revenue of $686,000, or 18.9%, for this segment in six months ended June 30, 2018 compared to the same period in 2017;
|
|
|
|
|
●
|
Expansion of our
sales team in North America; and
|
|
|
|
|
●
|
Increased marketing
and promotional costs.
|
Our
China operating segment showed an increase of operating income of $169,947, or 79.7%, to $383,000 for the six months ended June
30, 2018 from $213,000 in the same period of 2017. This was mainly due to the increase of OEM orders and Inline orders and improvement
of production efficiency leading to lower average production costs per unit.
Our
Europe business segment showed a decrease of operating loss of $37,088, or 46.8%, to $42,000 for the six months ended June 30,
2018 from a $79,000 operating loss in the same period in 2017. Our revenue generated by the European market has continued to rise
and generated an increase in gross profit which has led to less loss in the six months ended June 30, 2018. The reduction in operating
losses for the period was primarily due to an increase of revenue, better marketing strategy with lower discount to customers
and the termination of our sponsorship agreement with a continental cycling team in Austria.
Three
Months Ended June 30, 2018 compared to Three Months Ended June 30, 2017
Revenues
by segment are summarized below:
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
North America
|
|
$
|
2,711,840
|
|
|
$
|
2,267,187
|
|
|
$
|
444,653
|
|
|
|
19.61
|
|
China
|
|
|
807,889
|
|
|
|
686,736
|
|
|
|
121,153
|
|
|
|
17.64
|
|
Europe
|
|
|
151,908
|
|
|
|
127,384
|
|
|
|
24,524
|
|
|
|
19.25
|
|
Total revenues
|
|
$
|
3,671,637
|
|
|
$
|
3,081,307
|
|
|
$
|
590,330
|
|
|
|
19.16
|
|
Net
revenues in our North America operating segment increased $444,653 or 19.6%, to $2.71 million in three months ended June 30, 2018
from $2.27 million in the same period of 2017. The increase was primarily due to an increase of revenue of our Custom Order business.
Net revenues in China increased $121,153, or 17.6% to $808,000 in the three months ended June 30, 2018 from $687,000 in the same
period of 2017. This increase was primarily due to an increase of revenue in our Inline business in China. Net revenue generated
from the European market increased by $24,524 to $151,908 in the three months ended June 30, 2018 from $127,000 in the same period
of 2017 as a result of reduction of discounts offered to the customer.
Income
(loss) before income taxes
by segment is summarized below:
|
|
Three Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
$ Change
|
|
|
% Change
|
|
North America
|
|
$
|
415,357
|
|
|
$
|
447,942
|
|
|
$
|
(32,585
|
)
|
|
|
(7.27
|
)
|
China
|
|
|
267,715
|
|
|
|
138,110
|
|
|
|
129,605
|
|
|
|
93.84
|
|
Europe
|
|
|
(12,640
|
)
|
|
|
(17,856
|
)
|
|
|
5,216
|
|
|
|
(29.21
|
)
|
Total income before income taxes
|
|
$
|
670,432
|
|
|
$
|
568,196
|
|
|
$
|
102,236
|
|
|
|
17.99
|
|
Our
North America operating segment shows a decrease of operating income of $32,585, or 7.3%, to $415,357 in the three months ended
June 30, 2018 from $447,942 for the same period in 2017. The change is due to:
|
●
|
An increase of net
revenue of $445,000, or 19.6% for this segment in three months ended June 30, 2018 compared to the same period in 2017;
|
|
|
|
|
●
|
An increase in marketing
and promotional costs; and
|
|
|
|
|
●
|
Continued expansion
of our sales team in North America and a resulting increase the salary.
|
Our
China operating segment showed an increase of $129,605, or 93.8%, from $138,110 in the three months ended June 30, 2017 to $268,000
for the same period in 2018. The increase of operating income is primarily driven by an increase of $121,153 in revenue for this
segment during three months ended June 30, 2018 compared to the same period in 2017 and improvement of production efficiency leading
to lower average production costs per unit.
Our
Europe operating segment showed a decrease of operating loss of $5,216, or 29.2%, for the three months ended June 30, 2018 from
$18,000 operating loss in the same period of 2017. Our revenue generated by the European market has continued to rise and generated
an increase in gross profit which has led to less loss occurred in the three months ended June 30, 2018.The reduction in operating
losses for the period was primarily due to an increase of revenue, better marketing strategy with lower discount to customers
and the termination of our sponsorship agreement with a continental cycling team in Austria.
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, t
o 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, 2018 compared to Six Months Ended June 30, 2017
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
682,672
|
|
|
$
|
504,042
|
|
Investing activities
|
|
|
(45,976
|
)
|
|
|
(2,524,770
|
)
|
Financing activities
|
|
|
(34,677
|
)
|
|
|
2,112,655
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(70,134
|
)
|
|
|
57,904
|
|
Net increase in cash and cash equivalents
|
|
$
|
531,885
|
|
|
$
|
149,831
|
|
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 $178,630, or 35.4% to $683,000 for the six months ended June 30, 2018 from $504,000
of cash flows provided by operating activities during the same period in 2017. The increase in cash from operating activities
was due to decreased net cash flows from operating assets and liabilities of $85,000, an increase in net income of $207,000, and
increase resulting from adjustments to net income for non-cash items, which increased $57,000 in the six months ended June 30,
2018 compared to the same period in 2017.
Investing
Activities
Cash
used in investing activities decreased approximately $2.5 million, or 98.2%, to $46,000 in the six months ended June 30, 2018
from $2.5 million in the same period in 2017, primarily due to lower capital expenditure.
For
the six months ended June 30, 2017, t
otal capital expenditure was primarily used for a purchase of land and building in
the U.S. in the amount of $2.6 million offset by the repayment of a loan received from an officer in the amount $74,000.
Total
capital expenditure was $45,976 and $2.6 million in the six months ended June 30, 2018 and 2017, respectively.
Financing
Activities
Financing activities during
the six months ended June 30, 2017 consisted primarily of $70,134 of proceeds received from related parties, a mortgage loan of
$2 million for the purchase of land and building in the U.S. and repayment of the mortgage of $42,500. The Company also received
cash of $44,936 from issuances of the Company’s common stock, par value $0.001 per share (the “Common Stock”)
in the six months ended June 30, 2017.
The
Company’s repayment of its mortgage loan was $34,677 in the six months ended June 30, 2018, compared to $42,500 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.