UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

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

 

For the fiscal year ended December 31, 2018

 

[  ] 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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

5906 Stoneridge Mall Road

Pleasanton, CA

  94588
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (800) 485-7067

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of exchange on which registered
None   N/A

 

Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.001

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [X] No [  ]

 

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, if any, 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 and post such files) Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition 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 [  ]   Smaller reporting company [X]
         
      Emerging growth company [X]

 

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]

 

The registrant’s common stock began being quoted on the OTCs Market on April 30, 2018. As of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, there were no trading activities of the registrant’s securities were on the OTCQB Markets or any other exchange.

 

As of March 30, 2019, there were 31,777,110 shares of company common stock issued and outstanding.

 

Documents Incorporated By Reference – None.

 

 

 

 

 

 

Jakroo Inc.

Annual Report on Form 10-K

For the fiscal year ended December 31, 2018

TABLE OF CONTENTS

 

    Page
Number
Cautionary Note on Forward-Looking Statements  
     
PART I  
     
Item 1. Business 1
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 36
Item 2. Description of Property 36
Item 3. Legal Proceedings 36
Item 4. Mine Safety Disclosure 36
     
PART II  
     
Item 5. Market for Common Equity and Related Stockholder Matters 37
Item 6. Selected Financial Data 38
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 47
Item 8. Financial Statements 47
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 47
Item 9A. Controls and Procedures 48
Item 9B. Other Information 48
     
PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 49
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 56
Item 13. Certain Relationships and Related Transactions, and Director Independence 57
Item 14. Principal Accountant Fees and Services 58
     
PART IV  
     
Item 15. Exhibits, Financial Statement Schedules 59
Item 16. Form 10-K Summary 60

 

Unless we have indicated otherwise, or the context otherwise requires, references in this report to the “Company,” “we,” “us” and “our” or similar terms refer to Jakroo Inc., a Nevada corporation and, unless the context otherwise requires, all of its subsidiaries or deemed controlled entities.

 

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K and the documents we have filed with the SEC that are incorporated by reference or otherwise referred to herein contain “forward-looking statements”, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve significant risks and uncertainties. Any statements contained, or incorporated by reference, in this report that are not statements of historical fact may be forward-looking statements. When we use the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and other similar terms and phrases, including references to assumptions, we are identifying forward-looking statements. Forward-looking statements involve risks and uncertainties which may cause our actual results, performance or achievements to be materially different from those expressed or implied by those forward-looking statements.

 

A variety of factors, some of which are outside our control, may cause our operating results to fluctuate significantly. They include:

 

  our ability to establish our business model and generate revenue and profit;
     
  our ability to expand our business model beyond engaging in activities on behalf of related parties;
     
  our ability to manage or expand operations and to fill customers’ orders on time;
     
  our ability to maintain adequate control of our expenses and internal accounting processes generally as we seek to grow;
     
  our ability to establish or protect our intellectual property;
     
  the impact of significant government regulations in China;
     
  our ability to implement marketing and sales strategies and adapt and modify them as needed; and
     
  our implementation of required financial, accounting and disclosure controls and procedures and related corporate governance policies.

 

The foregoing does not represent an exhaustive list of risks that may impact upon the forward-looking statements used herein or in the documents incorporated by reference herein. Please see the section entitled “Risk Factors” of this report for additional risks which could adversely impact our business and financial performance and related forward-looking statements.

 

Moreover, new risks regularly emerge, and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report and the documents we have filed with the SEC.

 

 

 

 

PART I

 

Item 1. Business.

 

We specialize in the design, manufacture and direct sale of customized technical endurance apparel for the cycling, triathlon, running and Nordic skiing markets across Asia, Europe and North America. Our made-to-order, just-in-time (known as JIT) manufacturing process and vertical integration of design, sales and distribution minimizes risk, provides autonomous control of quality across all stages of our vertically integrated supply chain and maximizes value to our customers.

 

In 1996, Weidong “Wayne” Du, our Chief Executive Officer conceived of the idea of manufacturing sublimated sportswear while working as an agent serving European customers for a Chinese trading company. Sublimation is a computerized printing process that uses heat to transfer dye onto the fabric. In 2003, Mr. Du founded Rider Sportsfashion Ltd in Beijing, China to handle original equipment manufacturing (or OEM) of sublimated cycling apparel. In 2006, the Jakroo® brand was launched and focused on the manufacture and sale of cycling apparel products within the domestic Chinese market.

 

In 2008 we formed Rider Sportsfashion LLC, and in 2010 we shifted our strategy toward customization and began marketing our products in the U.S. through our home base in Pleasanton, California. In 2014, we established Jakroo Canada Inc., based in Vancouver, British Columbia, to oversee marketing, sales and distribution in the Canadian market. Soon thereafter, in 2015, we established Jakroo GmbH, based in Dornbirn, Austria, to manage marketing, sales and distribution in the European market. Within the U.S. and Canadian markets, the brand is considered to be among the top custom cycling wear brands along with Champion System, Hincapie, Voler, Pactimo and Louis Garneau. While the competitive landscape across Europe varies greatly by region, we consider brands such as Castelli, Bio Racer, Santini, Owayo and Cuore to be our primary competitors. The Jakroo® brand is among the top three selling cycling apparel brands on China’s largest e-commerce platforms, TMALL. Among cycling enthusiasts, Jakroo ranks among the most popular cycling apparel brands in the Chinese market alongside the likes of Santic, Sobike and CCN, all of which are Chinese domestic brands.

 

Our global business is currently comprised of three core business units: (1) Inline Retail, which consists of products produced and sold as part of a collection; (2) OEM contract manufacturing; and (3) Custom Order. We will continue to maintain the current business ‘mix’ of business, although we expect our OEM business, which currently represents 10% of sales, to account for a lower percentage of our total business at some point in the foreseeable future. We expect Inline Retail to remain stable around 17% and Custom Order is expected to expand slightly higher from its current 73% share.

 

We have two primary sales channels for our Inline and Custom Order businesses: (1) direct to consumer sales through our website, which represents 88% of total revenues and (2) wholesale, defined as sales to retail shops, promotional distributors and event organizers, which represents, 12% of total revenues for these two channels. Both channels are sold exclusively online through our e-commerce websites or, in the case of China, through large online retailers such as TMALL. Over 98% of our business from these channels is executed with payments made to us online in advance of production and shipment of goods.

 

Our value proposition is based on fast delivery, no minimum purchase requirements and free design. We currently offer a two-week turnaround time and offer customers two pathways for design: (1) Do it yourself (or DIY), through the exclusive Jakroo Express ™ design application and; (2) Jakroo Pro Custom , a free professional design service offered through the Jakroo website. We believe that the combination of these novel offerings provides us with a distinct competitive advantage.

 

  1  
 

 

Market Overview & Opportunity

 

Overview

 

According to a 2018 report issued by Analytical Research Cognizance, the global Cycling Apparel market size was $3.050 billion in 2017 and is forecast to $5.050 billion in 2025, growing at a CAGR of 6.5% from 2018. 1

 

According to the Sports & Fitness Industry Association (SFIA), participation in running, cycling and hiking in 2015 reached 140 million people worldwide. 2 Participation in cycling as a pastime in the U.S. was estimated at 67 million in 2014, as noted by the online statistics site, Statista. 3 This indicates a large potential market for cycling gear. With the inclusion of running and triathlon, we expect to see continued growth in the endurance sports participation, particularly in the youth and women’s segments. According to USA Triathlon, female participation in triathlons has grown from 27% of all participants in 2000 to more than 37% in 2014.

 

In China, the concept of cycling as a component of a healthy lifestyle has increased as a growing middle class has begun participating in cycling for recreation. In 2014, Ji Cheng, nicknamed the “breakaway killer” for his skill in controlling the speed of the peloton (i.e., the main group of riders in a cycling road race), was the first Chinese cyclist in the history of the Tour de France.

 

A 2015 survey entitled “Millennial Consumer Trends” by Elite Daily of more than 1,300 millennials (those born between 1980-1996) reports that more than 42% of those surveyed are deeply interested in helping companies develop future products and services, and 62% of millennials say that if a brand engages with them on social networks, they are more likely to become a loyal customer. 4

 

We believe that these trends, coupled with the rapidly growing direct-to-consumer e-commerce and product personalization markets, will create significant opportunities for companies like Jakroo that are equipped with the information and manufacturing architecture to support the new era of “social” commerce.

 

Customization is the Future

 

While gathering data to quantify the potential market size for a new product or service can be challenging, a 2013 report by Forbes magazine cites a Bain survey of more than 1,000 online shoppers among whom, although only 10% had tried online customization options, 25-30% expressed interest in doing so. While it is difficult to quantify the potential of customization, if 25% of sales from the $2.5 billion cycling apparel market were customized, that would equate to $625 million per year. 5

 

Customization will also create distinct advantages for companies to differentiate their products from their competitors at a time when the Internet is making it easier for customers to easily compare prices and products with standard features or options.

 

Within the wholesale markets, the ability to extend customization to a re-seller can provide a competitive advantage through the offering of novel versions of a company’s products, thus allowing the retailer to minimize high capital investments in inventory and avoid deep discounting which can arise as a result of overstocking on a particular item or from price wars among competitors of similar products.

 

1 “Global Cycling Apparel Market Size, Share 2018 by Demand, Trending Factors , Suppliers, Type, Production, Application and Sales Price, Forecast by 2025,” Reuters, Nov. 14, 2018,

https://www.reuters.com/brandfeatures/venture-capital/article?id=62505.

2 SFIA survey.

3 “ Number of Cyclists/Bike Riders Report,” Statista 2016. http://www.statista.com/statistics/227415/number-of-cyclists-and-bike-riders-usa/

4 “ Millennial Consumer Trends,” Elite Daily Survey 2015.

5 “ Having It Their Way: The Big Opportunity in Personalized Products,” Forbes, Nov. 5, 2013.

 

  2  
 

 

Developments in the fields of 3D fashion design, DIY design applications and apparel centric wearables will expedite the acceptance and growth of personalization, creating new value and new market opportunities. Personalization now extends beyond ascetic design and is quickly becoming an integral part of the customers sizing and fit options during purchase. We anticipate that existing companies that fail to reengineer their offerings will suffer either a significant competitive disadvantage or be forced to exit the market altogether. We believe that our highly customized information architecture, vertical integration and JIT manufacturing infrastructure will position Jakroo to assume a leadership position within our target markets.

 

The Evolution of E-commerce

 

According to a report by Statista, the number of online shoppers in the U.S. is projected to reach 230 million by 2021. This represents a 20% increase from the 191 million recorded in 2013. 6 Net sales for Amazon alone reached $177 billion for the 2017. E-commerce sales in China are projected to exceed $400 billion by the end of 2016. Market research firm eMarketer projects e-commerce sales will eclipse $3.5 trillion within the next five years. The web is projected to account for 7.3% of global retail sales this year and grow to 12.4% by 2019, according to eMarketer. 7 As more than 95% of our sales are derived through e-commerce, we will continue to invest heavily in digital advertising to direct online shoppers to our customized design center and online shops. This investment includes upgrading our existing e-commerce architecture and adding new features to improve the overall user experience and enhance brand loyalty.

 

Companies such as Facebook and Twitter are making significant investments in social commerce as community and social engagement play a larger role in consumer purchasing decisions. Additionally, the gap between search and purchase domains is quickly fading. In a 2015 Surveta survey of 2,000 consumers, 44% of respondents stated they go direct to Amazon to start their product searches compared to 34% who start on a Search engine such as Google, Bing or Yahoo. 8 Jakroo’s business is poised to leverage this trend through its direct to consumer sales channel across the Jakroo group of e-commerce shopping sites as well as its sales through sites such as TMALL. In fact, since 2016, we have been leveraging these trends through investing in digital advertising on the Facebook platform. In 2018, we will begin selling our inline retail products on the Amazon platform in an effort to expand revenues and build brand awareness. While the immediate benefit will from using the Amazon platform will be the revenues earned from those sales, we expect to achieve additional benefits as this provides us with an additional means through of introducing customers to our custom order business through interaction with us and ongoing marketing campaigns.

 

Competitive Strengths

 

We believe that the following key competitive strengths differentiate us from our competitors and are critical to our continuing success:

 

Lean Manufacturing & Vertical Integration

 

We own and operate all facets of our design, manufacturing and sales process. This vertical integration allows us complete control over our quality assurance of products and services, user experience and brand. Unlike many of our competitors who rely on contract manufacturing, direct ownership of the manufacturing facility allows us to tightly control production timelines, quality control and delivery.

 

6 “Number of digital shoppers in the United States from 2016 to 2021,” Statista. 2016.

https://www.statista.com/statistics/183755/number-of-us-internet-shoppers-since-2009/

7 “ Global e-commerce sales set to grow 25% in 2015” Matt Lindner, Internet Retailer July 2015.

https://www.internetretailer.com/2015/07/29/global-e-commerce-set-grow-25-2015

8 “ Amazon Commands Nearly Half Of Consumers’ First Product Search, BloomReach Study Finds”. 2015. Forbes” http://www.forbes.com/sites/fionabriggs/2015/10/06/amazon-commands-nearly-half-of-consumers-first-product-search-bloomreach-study-finds/#a3ef0627b779

 

  3  
 

 

Our production facility, which had been located in the Tongzhou District of Beijing and was recently relocated to a newly built facility on the border of Beijing and Hebei Province, has been producing technical endurance apparel for more than 13 years. This extensive experience has allowed us to develop specially engineered processes that have been optimized to produce and deliver a high capacity of small quantity orders ranging from 1 piece to 25 pieces, on average, within 10 days, which is a substantially quicker turnaround than our competitors based on delivery times posted on their websites.

 

In 2018, within our Custom Order segment, we completed 57,532 production lots (also known as work orders) with a total quantity of 152,775 pieces resulting in an average production lot size of 3 pieces. Additionally, 80% of orders were delivered to customers in less than two-weeks and 62% were delivered to customers in less than 10 days.

 

While consistently delivering the value proposition of either short delivery times or low minimum orders can pose logistical challenges, Jakroo has mastered both through developing a specialized work process and complex manufacturing system. More importantly, Jakroo has developed the ability to scale those processes without degradation of quality or compromising timelines. We believe this combination is novel to Jakroo in the technical endurance sports apparel industry and allows us a significant competitive advantage.

 

Integrated Information Systems

 

Our core information system is built on a robust, cloud-based consolidated financial platform and ecommerce module. This allows us to easily deploy and manage localized subsidiary companies and e-commerce platforms across our online properties while effectively addressing local tax compliance requirements, language and currency. We’ve made significant investments in customization of the platform to meet our particular requirements and create a compelling proprietary service for our customers.

 

 

 

We’ve developed a proprietary, comprehensive design architecture using 3D modeling and, in partnership with external vendors, reengineered, from the ground up, our new Express by Jakroo , the industry’s most advanced self-design and e-commerce platform that provides a rich user experience for the customer and utilizes back-end efficiencies by our production team.

 

In the spring of 2016, we implemented our make-to-order production module in order to further streamline the item configuration process and achieve greater efficiencies with raw material asset management, production scheduling and cost accounting.

 

In the fall of 2018, we commenced development and subsequent beta-testing our new personal fit program designed to match customers with the best size and fit for their apparel. With this program, customers provide selected body measurements which are then used to customize the clothing patterns to achieve optimal size and fit preference. We expect to release this program to mainstream customers during the second quarter of 2019. We believe this will have a positive impact on our bottom line through reducing costs associated with customer returns and exchanges and provide the customer with an improved, less stressful online shopping experience.

 

Global presence

 

The current competitive landscape within the endurance sports apparel market varies significantly based on region. Many of the incumbent brands in the U.S. have minimal or no presence in the primary European or Asian markets. On the other hand, a handful of European brands have, through years of investment, gained market awareness across North America and Asia. Very few Chinese domestic brands, however, have any reasonable brand awareness in either Europe or North America. We are working to change that.

 

  4  
 

 

In addition to our operating headquarters in Pleasanton, California, we have fully functional operating subsidiaries in Beijing, China, Vancouver, British Columbia and Dornbirn, Austria that provide sales, marketing and customer service support to our regional markets. This allows us to provide superior localized support to our regional customers while building brand loyalty therein.

 

With our current established presence in each of the core markets and our proven business model, we believe we are positioned to take a leadership position in the endurance sports apparel market. Our plan is to continue to establish and grow subsidiary offices and joint venture operations in key regions around the globe as part of our commitment to building trust, premium customer service and brand loyalty.

 

Significant Design & Shopping Experience

 

With the use of proprietary and highly customized customer relationship management and design applications, we are able to offer our customers two options for their design experience. Our proprietary Express by Jakroo DIY application was built to specification using state of the art technology and proprietary know-how to allow customers to design on a 99% true to size 3D model and easily purchase anytime. Unlike similar services offered by our competitors, which provide conceptual mock ups and require significant back-end interaction with designers and sales persons to process the order, designs created using Express by Jakroo are transferred directly to the production floor with minimal human interaction and enter the production process upon the customer’s placement of the order.

 

 

 

Customers who elect to use our Pro Custom service will enjoy the benefits of having a trained professional designer create their design according to specification. The customer is able to participate in the design editing process through an interactive online review/approval system. Unlike many of our competitors, who typically charge a design set-up fee and require several days to prepare the artwork, we offer this service free of charge and provide the designs within 48 hours of design request.

 

Since 2013, we have created more than 150,000 unique products and published more than 15,000 online custom storefronts on the Jakroo e-commerce platform. These semi-private webpages, hosting the customer’s customized products, allow the customer to order at their convenience 24/7 and share their store with friends, family and team members. Our custom e-commerce platform has been engineered to facilitate the particular requirements of each customer, including flexible ordering dates, order windows, individual shipping and sharing of stores and products.

 

  5  
 

 

 

 

Through our online account center, customers can review pending design approvals, track the status of all of their designs as they progress through the design process, as well as submit new design requests.

 

Based on more than 5,400 individual customer reviews which we solicited through direct feedback requests since 2013, over 92% of respondents rated their overall experience with Jakroo as positive and more than 96% of respondents indicated they were either very satisfied or “blown away” by the quality of our products.

 

By addressing the ongoing challenges faced by our traditional retailing competitors with forecasting and carrying inventory, we provide a competitive offering by maintaining a full service ‘hands-free’ custom online storefront option. This allows retailers who use our system to offer a broad selection of highly customizable products to their customers without having to purchase or carry the inventory in advance. Orders are made-to-order and shipped directly to the customer from our production facility in Beijing. The combination of made-to-order, JIT and custom commerce provides retailers the ability to better differentiate their offerings in a highly competitive marketplace.

 

Our Growth Strategy

 

Customer Acquisition

 

We acquire the majority of our direct customers online through Search Engine Marketing (SEM) and display marketing campaigns on Google, Bing and social websites such as Facebook and Instagram. In China, comprehensive platforms such as WeChat, and Weibo play an important role in our customer acquisition, engagement and social commerce strategies. We will continue to invest in advertising and marketing to strengthen brand awareness in key markets.

 

Globally, sponsorship of organized race events and charity rides also plays a key role for customer acquisition, along with sponsorship of influential cycling teams and athletes to establish brand credibility. We currently sponsor several high-profile Gran Fondo cycling and triathlon events across Canada, and California. During 2017 and 2018, we sponsored the UnitedHeathcare Pro Cycling Team, a U.S. based pro-continental team with global recognition among the competitive cycling community. In 2019, we were named the official clothing supplier for the USA CRITS, one of largest and longest running Criterium race series in the United States.

 

Vertical and Lateral Expansion

 

In the near-term, we will continue our focus on the endurance sports apparel market. We define this market as products used for cycling, triathlon, running and Nordic skiing. We aim to strengthen our brand and gain share within these core markets through: (1) investing in new product development and technologies geared toward improving the customer experience and reducing delivery times; (2) expanding geographically through establishing subsidiary companies and/or partnerships in key regions across the globe; and (3) making deeper investments in marketing partnerships and advertising.

 

  6  
 

 

We have experienced operational growth since 2011 and we plan to continue our international expansion across Europe and the Asia-Pacific regions. During 2018, we entered into sales agent agreements with independent contractors in the United Kingdom and Australia as a first step to gain market awareness in those regions. Additional opportunities for growth will focus on lateral expansion into related product or sport categories that can benefit from customization. Examples of such categories include high school and collegiate level volleyball, soccer and wrestling teams.

 

In 2018, 88% of Jakroo’s sales within the North American and European markets came from the Cycling product category, 4.8% from Triathlon and the remainder were shared between Running and Nordic. 77% of total revenues were generated through our direct-to-consumer channel and 23% through resellers. In 2017, 89% of Jakroo’s sales within the North American market came from the Cycling product category, 6% from Triathlon and the remainder were shared between Running and Nordic. We’ve acquired more than 49,000 paying customers since 2013 and have acquired more than 10,000 new customers each year during 2017 and 2018. We will continue to invest in technologies aimed at improving the end-user customer experience and monetizing new leads through expediting the design-to-sale process.

 

Currently, approximately 82% of total domestic revenues in China come from our Inline retail product collection while the remaining 18% arise from the Custom product category. We plan to continue to drive growth within the custom product channel through investments in marketing and front-end systems. We will transition our make-to-stock production into micro-production lots (quantities of less than 50 pieces) to improve inventory turnover and net margins.

 

Our Wholesale channel, defined as retail shops and promotional goods distributors, represents 23% of total revenues across North America. For the period from January 2017 to December 2018, we had more than 750 paying customers with the median order value of $1,400 and average order value of $4,200. We will continue to invest in service offerings and technology platforms that provide competitive advantages for retailers.

 

We launched our new state of the art Design and E-commerce center in the third quarter of 2018 which employs some of the latest technologies emerging from the 3D parametric design and machine learning fields.

 

Increased Margins and Return on Invested Capital

 

Our made-to-order, JIT business model mitigates the need to carry inventory, thus freeing up capital to be used for investments in future expansion. Customers pay for goods in advance of production, which allows receivables to be as low as 0.5% of total revenue. North America continues to be our fastest growing market as we continue to establish the Jakroo brand across the East Coast. Looking forward, however, we expect our newly founded European operations to generate a significant portion of global sales over the next three years.

 

  7  
 

 

 

 

Losses in 2017 were the result of one-time costs associated with the relocation and purchase of our new office in Pleasanton, California and amortization costs related to our stock-based compensation plan. Increases in revenue across our North American and European operating units in 2018 can be attributed to the combination of marketing investments made throughout the trailing 12 months, new product introductions and a shortening of our delivery times, which further strengthened our competitive advantage. Revenue growth in China in 2018 was a result of increased sales in our OEM segment. Improvements in net profit for North America in 2018 can be attributed to a reduction in sponsorship expenses in the latter half of 2018 and an increase in overall revenue from our Custom Order business. Net income improvement in China in 2018 was due to an increase in overall order volume and production efficiencies achieved through the investment in 3D design and pattern software and advanced cutting equipment.

 

As we continually seek to improve design applications and deployment of our advanced Production Module, we expect to be able to reduce raw material waste and increase front-end efficiencies associated with customer service resulting in greater operating margins.

 

Overview of Our Company

 

Our Core Values

 

Our respect for our employees and community, and our emphasis on continuous improvement and social responsibility, are all borne from our core values of community, teamwork, integrity and innovation . We believe our employees are our greatest asset to help us build lasting value for all of Jakroo’s stockholders, including our customers.

 

Compliance and Sustainability

 

We maintain an ongoing commitment to the environment and our products are OEKO-TEX® certified. OEKO-TEX® Standard 100 is an independent test and certification system for all types of textiles tested for harmful substances – from threads and fabrics to the ready-to-use items that are available for purchase in stores.

 

In our commitment to ensuring safe and healthy working conditions for our employees and community at large, our production facility in China was fully audited and certified by a globally recognized environmental compliance auditor in September of 2015 through the Business Social Compliance Initiative (BSCI) that audits and certifies working conditions and environmental performance in a company’s global supply chains. Proposition 65 compliance is ongoing for the materials and fabrics used in products sold in California.

 

Experienced Management Team

 

The senior management team at Jakroo and its subsidiaries is comprised of individuals with extensive backgrounds in the sports apparel and manufacturing industries. Our senior operations team also has extensive experience in brand management and market development within the sports apparel industry. Jakroo’s management team is described in more detail beginning on page 49 in the Management section below.

 

  8  
 

 

Employees

 

As of the date of this report, we employed approximately 178 employees as follows:

 

  Rider Sportsfashion LLC : 17 full time employees, 3 part-time employee, 3 independent contractors
     
  Jakroo Canada Inc .: 5 full time employees
     
  Jakroo GmbH : 2 full-time employees
     
  Rider Sportsfashion Ltd : 29 full-time employees
     
  Rider Sportsfashion (Langfang) Ltd : 124 full-time employees

 

We consider our relationships with our employees to be good. None of our employees is covered by collective bargaining agreements.

 

Proprietary Rights

 

Each of the “J” logo and “Jakroo” mark has been registered as a service mark or trademark within the United States Patent and Trademark Office. In addition, we have obtained trademarks in Australia, Benelux Union (Belgium, Netherland and Luxembourg), Canada, Mainland China, Denmark, Finland, Hong Kong, Taiwan, Malaysia, France, Thailand, Japan, Germany, Korea, Norway, Sweden, Spain, Switzerland and the United Kingdom. Additional registrations of our trademarks in secondary product categories have been registered or are in process of being registered within the respective Trademark offices in the primary countries in which we do business.

 

  9  
 

 

Item 1A. Risk Factors

 

RISK FACTORS

 

An investment in our common stock is highly speculative and involves a high degree of risk. You should carefully consider the following risk factors in evaluating our business before investing. No purchase of our common stock should be made by any person who is not in a position to lose the entire amount of his or her investment. The order of the following risk factors is presented arbitrarily. You should not conclude the significance of a risk factor based on the order of presentation. Our business and operations could be seriously harmed as a result of any of these risks.

 

Risks Related to Our Business

 

We are a relatively early stage company with a limited operating history as a manufacturer and seller of sporting apparel products. Our limited operating history may not provide an adequate basis to judge our future prospects and results of operations.

 

We are a relatively early-stage company with a limited operating history. Our first operating subsidiary, Rider Sports Fashion Limited (“Rider Beijing”) was established in Beijing in March 2003 to engage in cycling apparel development, production and sales. In 2007, we established our manufacturing subsidiary. As part of our international expansion and in response to international customer demands, we established our U.S. subsidiary in 2008 and our subsidiaries in Canada and Austria in 2014 and 2015, respectively. Despite our continuous growth, we have limited experience and operating history in the sporting apparel industry. Our limited history may not provide a meaningful basis for investors to evaluate our business, financial performance and prospects.

 

Any disruption of our supply chain could have an adverse impact on our net sales and profitability.

 

We rely on third party suppliers for fabrics, accessories and printing paper and machines that are essential to our product manufacturing. We cannot predict when, or the extent to which, we will experience a disruption in our supply chain. Any such disruption could negatively impact our ability to market and sell our products and serve our customers, which could adversely impact our net sales and profitability.

 

Based on our past business practice, we place purchase orders or enter into short term agreements with our raw material suppliers. Without long term supply agreements, any of our current suppliers may discontinue selling to us at any time. Changes in the commercial practices or financial condition of any of our key suppliers could also negatively impact our results. If we lose one or more key suppliers and are unable to promptly find alternative suppliers who are willing and able to provide equally appealing raw materials or manufacturing machines at comparable prices, we may not be able to deliver quality products that satisfy the requirements of our customers.

 

We also are subject to risks, such as the price and availability of raw materials and fabrics, labor disputes, union organizing activity, strikes, inclement weather, natural disasters, war and terrorism and adverse general, economic and political conditions that might limit our suppliers’ ability to provide us with quality merchandise on a timely and cost-efficient basis. We may not be able to develop relationships with new suppliers, and materials from alternative sources, if any, may be of a lesser quality and more expensive than those we currently purchase. Any delay or failure in offering products to our customers could have a material adverse impact on our net sales and profitability.

 

Our operating results can be adversely affected by changes in the cost or availability of raw materials.

 

Pricing and availability of raw materials for use in our businesses can be volatile due to numerous factors beyond our control, including general, domestic and international economic conditions, labor costs, production levels, competition, consumer demand, import duties and tariffs and currency exchange rates. This volatility can significantly affect the availability and cost of raw materials for us, and may therefore have a material adverse effect on our business, results of operations and financial condition.

 

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During periods of rising prices of raw materials, there can be no assurance that we will be able to pass any portion of such increases on to customers. Conversely, when raw material prices decline, customer demands for lower prices could result in lower sales prices and, to the extent we have existing inventory, lower margins. We currently do not hedge against our exposure to changing raw material prices. As a result, fluctuations in raw material prices could have a material adverse effect on our business, results of operations and financial condition.

 

Supply shortages or changes in availability for any particular type of raw material can delay production or cause increases in the cost of manufacturing our products. We may be negatively affected by changes in availability and pricing of raw materials, which could negatively impact our results of operations.

 

Our sales may fluctuate and historical sales revenue may not be a meaningful indicator of future performance.

 

Our product sales may vary from quarter to quarter and year to year, and an unanticipated decline in net sales may cause the price of our common stock to fluctuate significantly. A number of factors have historically affected, and will continue to affect, our sales revenue, including:

 

  consumer preferences, buying trends and overall economic trends;
     
  our ability to identify and respond effectively to local and regional trends and customer preferences;
     
  our ability to provide quality customer service that will increase our conversion of shoppers into paying customers;
     
  competition in any of the regional markets we operate;
     
  changes in our product mix; and
     
  changes in pricing.

 

Our online retail custom order and inline retail segments are affected by general economic conditions in our markets and ongoing economic and financial uncertainties may cause a decline in consumer spending that may adversely affect our business, operations, liquidity, financial results and stock price.

 

Our custom order and internet retail segments are the core of our business, contributing to more than 90% of our sales revenue in fiscal year 2018. Both segments are retail-based and depend on consumer discretionary spending. As a result, we may be adversely affected if our customers reduce, delay or forego their purchases of our products as a result of continued job losses, bankruptcies, higher consumer debt and interest rates, higher energy and fuel costs, reduced access to credit, falling home prices, lower consumer confidence, uncertainty or changes in tax policies and tax rates and uncertainties due to national or international security concerns. Decreases in sales or online customer traffic will negatively affect our financial performance, and a prolonged period of depressed consumer spending could have a material adverse effect on our business. Promotional activities and decreased demand for consumer products could affect profitability and margins. In addition, adverse economic conditions may result in an increase in our operating expenses due to, among other things, higher costs of labor, energy, equipment and facilities. Any of the foregoing factors could have a material adverse effect on our business, results of operations and financial condition and could adversely affect our stock price.

 

Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.

 

We often place orders for raw materials with our suppliers before our customers’ orders are firm. Therefore, if we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver to our customers. Factors that could affect our ability to accurately forecast demands for our products include:

 

  an increase or decrease in consumer demands for our products or for products of our competitors;

 

  our failure to accurately predict customer acceptance of new products;
     
  new product introductions by competitors;
     
  unanticipated changes in general market conditions or other factors, which may result in cancellations of orders or a reduction or increase in the rate of reorders placed by retailers;
     
  weak economic conditions or consumer confidence, which could reduce demand for discretionary items such as our products; and
     
  terrorism or acts of war, or the threat of terrorism or acts of war, which could adversely affect consumer confidence and spending or interrupt production and distribution of product and raw materials.

 

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Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on our business, results of operations, and financial condition. On the other hand, if we underestimate the demands for our products, our manufacturing facilities may not be able to produce products to meet customer requirements, and this could result in delays in the shipment of products and lost revenues, as well as damage to our reputation and customer relationships. There can be no assurance that we will be able to successfully manage inventory levels to exactly meet future order and reorder requirements.

 

Expanding our brand into new territories may be difficult and expensive, and if we are unable to successfully expand into these territories as expected, our brand may be adversely affected, and we may not achieve our planned sales growth.

 

Our growth strategy includes continuous expansion of our brand into new territories in North America, Europe and Asia. Products that we introduce into these new markets may not be successful with the consumers we target. Our brand may also fall out of favor with our current customer base as we expand our products into new markets. In addition, if we are unable to anticipate, identify or react appropriately to evolving consumer preferences, our sporting apparel sales may not grow as fast as we plan or may decline and our brand image may suffer.

 

Achieving market acceptance for new products will likely require us to exert substantial product development and marketing efforts, which could result in a material increase in selling, general and administrative expenses, both in absolute dollars and as a percentage of revenue. There can be no assurance that we will have the resources necessary to undertake these efforts or that these efforts will sufficiently increase our sporting apparel sales. Material increases in our selling and general and administrative expenses could adversely impact our results of operations.

 

Changes in the retail industry and markets for consumer products affecting our customers or retail practices could negatively impact existing customer relationships and our results of operations.

 

While the majority of our products are sold directly to consumers, a portion of our products are sold to resellers and distribution agents. A significant deterioration in the financial condition of these wholesale customers could have a material adverse effect on our sales and profitability. As a result, we periodically monitor and evaluate the credit status of these wholesale customers and attempt to adjust sales terms as appropriate. Despite these efforts, a bankruptcy filing by a key customer could have a material adverse effect on our business, results of operations, and financial condition. We do not monitor the credit status of our retail customers or direct customer database.

 

Failure to maintain our reputation and brand image could negatively impact our business.

 

Our brand has received a certain level of recognition in China, North America and Europe. Our success depends on our ability to maintain and enhance our brand image and reputation. We could be adversely affected if our brand is tarnished or receives negative publicity. In addition, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine consumer confidence in us, and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.

 

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In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing media and internet environment, including our reliance on online advertising. Negative posts or comments about us on social networking websites could seriously damage our reputation and brand image. If we do not maintain, extend and expand our brand image, our product sales, financial condition or results of operations could be materially and adversely affected.

 

Our core information technology platform is operated by a third party and any failure in maintenance or security of this platform could have adverse consequences on our business.

 

Our core information technology platform runs on Oracle’s NetSuite ERP platform. This includes, all customer management (CRM), manufacturing and resource planning (ERP) and e-commerce processes. All application data, and servers and functionality are outside of our direct ownership and control. As a global service provider, Oracle is fully responsible for the maintenance and security of their platform. Additionally, all related customer payment processing is managed by PCI compliant third party processors and payment gateways such as Merchante Solutions, Cybersource, Altapay and Stripe. As such, we do not store any customer data on our computer systems. Should any of those systems become compromised, our business would be adversely affected until remedied.

 

Failure to adequately protect or enforce our intellectual property rights could adversely affect our business.

 

We utilize trademarks on nearly all of our products and believe that having distinctive marks that are readily identifiable is an important factor in creating a market for our goods, in identifying us and in distinguishing our goods from the goods of others. We consider our “Jakroo®” series trademarks to be among our most valuable assets, and we have registered these trademarks in 20 countries and jurisdictions.

 

We believe that our trademarks, copyrights and other intellectual property rights are important to our brand, our success and our competitive position. In the future, we may encounter counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. If we are unsuccessful in challenging a party’s products on the basis of trademark or other intellectual property infringement, continued sales of these products could adversely affect our sales and our brand and result in the shift of consumer preference away from our products.

 

The actions we take to establish and protect trademarks and other intellectual property rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights.

 

In addition, the laws of certain foreign countries may not protect or allow enforcement of intellectual property rights to the same extent as the laws of the United States. We may face significant expenses and liabilities in connection with the protection of our intellectual property rights outside the United States, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition may be adversely affected.

 

Third parties may claim that we are infringing their intellectual property rights, and these claims may be costly to defend, may require us to pay licensing fees, damages, or other amounts, and may prevent, or otherwise impose limitations on the manufacture, distribution or sale of our products.

 

From time to time, third parties may claim that we are infringing on their intellectual property rights, and we may be found to infringe those intellectual property rights. While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may be unaware of the intellectual property rights of others that may cover some of our current or planned new products. If we are forced to defend against third party claims, whether or not the claims are resolved in our favor, we could encounter expensive and time consuming litigation which could divert our management and key personnel from business operations. If we are found to be infringing on the intellectual property rights of others, we may be required to pay damages or ongoing royalty payments, or comply with other unfavorable terms. Additionally, if we are found to be infringing on the intellectual property rights of others, we may not be able to obtain license agreements on terms acceptable to us, and this may prevent us from manufacturing, marketing or selling our products. Thus, these third party claims may significantly reduce the sales of our products or increase our cost of goods sold. Any reductions in sales or cost increases could be significant, and could have a material and adverse effect on our business.

 

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Our products are used for inherently risky sports activities and could give rise to product liability or product warranty claims and other loss contingencies, which could affect our earnings and financial condition.

 

Many of our products are used in applications and situations that involve certain levels of risk of personal injury. As a result, we may be exposed to product liability claims by the nature of the products we produce. Exposure occurs if one of our products is alleged to have resulted in bodily injury or other adverse effects. Any such product liability claim may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product or activities associated with the product, negligence, strict liability, and a breach of warranties. Although we maintain product liability insurance in amounts that we believe are reasonable, there can be no assurance that we will be able to maintain such insurance on acceptable terms, if at all, in the future or that product liability claims will not exceed the amount of insurance coverage. Additionally, we do not maintain product recall insurance. As a result, product recalls or product liability claims could have a material adverse effect on our business, results of operations and financial condition.

 

As a manufacturer and distributor of consumer products, we are subject to the Consumer Products Safety Act, which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances, the Consumer Products Safety Commission could require us to repurchase or recall one or more of our products. Additionally, laws regulating certain consumer products exist in some cities and states, as well as in other countries in which we sell our products, and more restrictive laws and regulations may be adopted in any of these jurisdictions in the future. Any repurchase or recall of our products could be costly to us and could damage our reputation. If we were required to remove, or we voluntarily removed, our products from the market, our reputation could be tarnished and we might have large quantities of finished products that we could not sell.

 

We spend substantial resources ensuring compliance with governmental and other applicable standards. However, compliance with these standards does not necessarily prevent individual or class action lawsuits, which can entail significant cost and risk. We do not maintain insurance against many types of claims involving alleged defects in our products that do not involve personal injury or property damage. As a result, these types of claims could have a material adverse effect on our business, results of operations and financial condition.

 

Our success is dependent on retaining key personnel who would be difficult to replace.

 

Our success depends largely on the continued services of our key management members. In particular, our success depends on the continued efforts of Mr. Weidong Du, our Chief Executive Officer, President and Director, has been instrumental in developing our business model and are crucial to our business development. There can be no assurance that Mr. Du will continue in his present capacities for any particular period of time. The loss of the services of Mr. Du could materially and adversely affect our business development. Derek Wiseman, our Chief Operating Officer, also plays a significant role in our business operations, particularly expansion of our customer base in North America and Europe. David Wang, our Chief Financial Officer, plays a significant role in our accounting and public company reporting matters. In addition, we rely on officers and directors of our operating subsidiaries for key aspects of our operations, including sales, product design, manufacturing and quality control. The loss of these key employees would negatively affect our ability to manufacture quality sporting apparel, maintain existing customers, capture new market share and generate sales revenue.

 

The legal requirements associated with being a public company, including those contained in and issued under the Sarbanes-Oxley Act, may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management of our business and our ability to obtain listing of our common stock .

 

We may be unable to attract and retain qualified officers and directors necessary to provide for our effective management because of the rules and regulations that govern publicly listed companies, including, but not limited to, certifications by principal executive officers. Currently, our officers do not have extensive experience in operating a U.S. public company. Moreover, the actual and perceived personal risks associated with compliance with the Sarbanes-Oxley Act and other public company requirements may deter qualified individuals from accepting roles as directors and executive officers. At present, we do not maintain an independent board of directors. Further, the requirements for board or committee membership, particularly with respect to an individual’s independence and level of experience in finance and accounting matters, may make it difficult to attract and retain qualified board members going forward. If we are unable to attract and retain qualified officers and directors, the management of our business and our ability to obtain or retain the listing of our common stock on any stock exchange (assuming we are able to obtain such listing) could be adversely affected.

 

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If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud. Any inability to report and file our financial results accurately and timely could harm our business and adversely impact the trading price of our common stock .

 

We are required to establish and maintain internal controls over financial reporting, disclosure controls and to comply with other requirements of the Sarbanes-Oxley Act and the rules promulgated by the U.S. Securities and Exchange Commission (or the SEC) thereunder. Our senior management, which currently consists of Mr. Weidong Du, Mr. David Wang and Mr. Derek Wiseman, cannot guarantee that our internal controls and disclosure procedures will prevent all possible errors or all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances oFf fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management’s override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

 

Our compliance with complicated U.S. regulations concerning corporate governance and public disclosure will result in additional expenses. Moreover, our ability to comply with all applicable laws, rules and regulations is uncertain given our management’s relative inexperience with operating U.S. public companies.

 

As a public company, we will be faced with expensive, complicated and evolving disclosure, governance and compliance laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and the Dodd–Frank Wall Street Reform and Consumer Protection Act. New or changing laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards of a U.S. public company are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

 

Moreover, our officers and directors do not have extensive experience in operating a U.S. public company, which makes our ability to comply with applicable laws, rules and regulations uncertain. Our failure to comply with all laws, rules and regulations applicable to U.S. public companies could subject us or our management to regulatory scrutiny or sanction, which could harm our reputation and stock price.

 

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As an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements, which could leave our shareholders without information or rights available to shareholders of more mature companies.

 

For as long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (which we refer to herein as the JOBS Act), we have elected to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to:

 

  not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;
     
  taking advantage of an extension of time to comply with new or revised financial accounting standards;
     
  reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
     
  exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

 

We expect to take advantage of these reporting exemptions until we are no longer an “emerging growth company.” Because of these lessened regulatory requirements, our shareholders would be left without information or rights available to shareholders of more mature companies.

 

Because we have elected to use the extended transition period for complying with new or revised accounting standards for an “emerging growth company,” our financial statements may not be comparable to companies that comply with public company effective dates.

 

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. Consequently, our financial statements may not be comparable to companies that comply with public company effective dates. As such, investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of shares of our common stock.

 

Risks Related to Our Industry

 

Intense competition in the sporting goods industry could limit our growth and reduce our profitability.

 

The sporting goods manufacturing and retail market in general is highly fragmented and intensely competitive. In each of the three geographic areas in which we operate, we compete directly with a number of brand name cycling apparel manufacturers, some of whom are top ranking brands in their respective geographic markets. In particular, we primarily compete with domestic Chinese brands in the China market, including Champion System, Santic, Sobike and CCN, and we compete with top cycling apparel brands in the North America and European markets. Some of our competitors have a large base of direct consumer and reseller accounts, greater financial resources and mature commercial infrastructures. In addition, if our competitors reduce their prices, it may be difficult for us to reach our net sales goals without reducing our prices. As a result of this competitive environment, we may also need to spend more on advertising and promotion than we anticipate. If we are unable to compete effectively, our operating results will suffer.

 

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Seasonal fluctuations in the sales of sporting goods could cause our annual operating results to suffer significantly.

 

We experience seasonal fluctuations in our net sales and operating results. Summer and fall are the peak selling season of our products during which time we generate more sales revenue. If we miscalculate the demand for our products generally or for our product mix during the peak season, our net sales could decline, resulting in excess inventory, which could harm our financial performance. Because a substantial portion of our operating income is derived from our net sales during the peak season, a shortfall in expected net sales during that time could cause our annual operating results to suffer significantly.

 

If we fail to anticipate changes in consumer preferences, we may experience lower net sales, higher inventory markdowns and lower margins.

 

Our products must appeal to a broad range of consumers whose preferences can only be predicted to a certain degree. These preferences are also subject to change. Our success depends upon our ability to anticipate and respond in a timely manner to trends in sporting apparel and accessories in general and cycling apparel in particular. If we fail to identify and respond to these changes, our net sales may decline.

 

Risks Associated with Our International Operations

 

Our operations in international markets, and earnings in those markets, may be affected by legal, regulatory, political and economic risks.

 

Our operations in international markets, and earnings in those markets, may be affected by legal, regulatory, political and economic risks. Our ability to maintain the current level of operations in our existing international markets and to capitalize on growth in existing and new international markets is subject to risks associated with international operations. These include the burdens of complying with a variety of foreign laws and regulations, unexpected changes in regulatory requirements, new tariffs or other barriers to some international markets.

 

We cannot predict whether quotas, duties, taxes, exchange controls or other restrictions will be imposed by the United States, China, the European Union or other countries upon the import or export of our products in the future, or what effect any of these actions would have on our business, financial condition or results of operations. We cannot predict whether there might be changes in our ability to repatriate earnings or capital from international jurisdictions. Changes in regulatory and geopolitical policies and other factors may adversely affect our business or may require us to modify our current business practices.

 

Approximately 53.7% of our sales for the year ended December 31, 2018 were earned in international markets. We are exposed to risks of changes in U.S. policy for companies having business operations outside the United States, which could have a material adverse effect on our business, results of operations and financial condition.

 

We use foreign suppliers for a significant portion of our raw materials and our manufacturing facility is located in China, which poses risks to our business operations.

 

Our products are manufactured at our facility in China. Any of the following could materially and adversely affect our ability to produce or deliver our products and, as a result, have a material adverse effect on our business, financial condition and results of operations:

 

  political or labor instability in countries where our facilities, contractors, and suppliers are located;
     
  political or military conflict, which could cause a delay in the transportation of raw materials and products to us and an increase in transportation costs;
     
  heightened terrorism security concerns, which could subject imported or exported goods to additional, more frequent or more lengthy inspections, leading to delays in deliveries or impoundment of goods for extended periods or could result in decreased scrutiny by customs officials for counterfeit goods, leading to lost sales, increased costs for our anti-counterfeiting measures and damage to the reputation of our brands;

 

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  imposition of regulations and quotas relating to imports and our ability to adjust timely to changes in trade regulations, which, among other things, could limit our ability to produce products in cost-effective countries that have the labor and expertise needed;
     
  imposition of duties, taxes and other charges on imports; and
     
  imposition or the repeal of laws that affect intellectual property rights.

 

Our business is subject to foreign, national, state and local laws and regulations for environmental, employment, safety and other matters. The costs of compliance with, or the violation of, such laws and regulations by us could have an adverse effect on our business, results of operations and financial condition.

 

Numerous governmental agencies in the United States and in other countries in which we have operations, enforce comprehensive national, state, and local laws and regulations on a wide range of environmental, employment, health, safety and other matters. We could be adversely affected by costs of compliance or violations of those laws and regulations. In addition, the costs of raw materials purchased by us from our suppliers could increase due to the costs of compliance by those entities. Further, violations of such laws and regulations could affect the availability of inventory, thereby affecting our net sales.

 

Changes in foreign, cultural, political, and financial market conditions could impair our international operations and financial performance.

 

The economies of foreign countries important to our operations, including countries in Asia and Europe, could suffer slower economic growth or economic, social and/or political instability or hyperinflation in the future. International operations, including manufacturing and sales (and the international operations of our customers), are subject to inherent risks which could adversely affect us, including, among other things:

 

  protectionist policies restricting or impairing the manufacturing, sales or import and export of our products;
     
  new restrictions on access to markets;
     
  lack of developed infrastructure;
     
  inflation or recession;
     
  devaluations or fluctuations in the value of currencies;
     
  changes in and the burdens and costs of compliance with a variety of foreign laws and regulations, including tax laws, accounting standards, environmental laws and occupational health and safety laws;
     
  social, political or economic instability;
     
  acts of war and terrorism;
     
  natural disasters or other crises;
     
  reduced protection of intellectual property rights in some countries;
     
  increases in duties and taxation; and
     
  restrictions on transfer of funds and/or exchange of currencies; expropriation of assets; and other adverse changes in policies, including monetary, tax and/or lending policies, relating to foreign investment or foreign trade by our host countries.

 

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Should any of these risks occur, our ability to sell our products or repatriate profits could be impaired and we could experience a loss of sales and profitability from our international operations, which could have a material adverse impact on our business and financial conditions.

 

Risks Associated With Doing Business in China

 

Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth and expansion strategies.

 

A portion of our operations, including manufacturing and sales, are conducted in the PRC and a significant percentage of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.

 

The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.

 

While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.

 

If relations between the United States and China worsen, investors may be unwilling to hold or buy our stock and our stock price may decrease .

 

At various times during recent years, the U.S and China have had significant disagreements over political and economic issues. In particular, during 2018, the U.S. and China have escalated tensions over trade issues, which has made an adverse impact on the economic relations between the countries as well as the world economy. Controversies may arise in the future between these two countries that may affect our economic outlook both in the U.S and in China. Any political or trade controversies between the U.S and China, whether or not directly related to our business, could reduce the price of our common stock and also make our business more difficult to operate as we are a U.S public company, have a substantial international operation as well as key facilities in China.

 

Future inflation in China may inhibit the profitability of our business in China.

 

In the past, the Chinese economy experienced periods of rapid expansion and high rates of inflation. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our services and products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may have an adverse effect on profitability. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China and thereby harm the market for our services and products.

 

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The fluctuation of the Renminbi may have a material adverse effect on your investment.

 

The exchange rates between the Renminbi and the U.S. dollar and other foreign currencies are affected by, among other things, changes in China’s political and economic conditions. As we rely on dividends and other fees paid to us by our subsidiary and affiliated consolidated entities in China, any significant revaluation of the Renminbi could adversely affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, shares of our common stock in foreign currency terms. To the extent that we need to convert U.S. dollars we received from our financing into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common stock or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In addition, since our functional and reporting currency is the U.S. dollar while the functional currency of our subsidiary and consolidated affiliated entities in China is Renminbi, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would have a positive or negative effect on our reported financial results, which might not reflect any underlying change in our business, financial condition or results of operations..

 

Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.

 

A portion of our revenue is denominated in Renminbi. Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or variable interest entity. Currently, Jakroo (Beijing) Sports Consulting Co., Ltd (“Jakroo Beijing”), our major PRC subsidiary, which is a wholly-foreign owned enterprise, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”) by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our common stock. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing for our subsidiaries and the variable interest entity.

 

Our subsidiaries and affiliated entities in China are subject to restrictions on making dividends and other payments to us.

 

We are a holding company, and we rely on dividends and other equity distributions paid by our PRC subsidiary for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require Jakroo Beijing to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated variable interest entities in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us.

 

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Under PRC laws and regulations, Jakroo Beijing is a wholly foreign-owned enterprise in China. As such, Jakroo Beijing may pay dividends only out of its accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, according to the Detailed Rules for the Implementation of the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises (2014 Revision), or Implementation Rules, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

 

On March 15, 2019, the National People’s Congress issued the Foreign Investment Law of the People’s Republic of China, or Foreign Investment Law, which will take effect since January 1, 2020. The Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises shall be repealed at the effective date of the Foreign Investment Law, and the Implementation Rules will no longer be applicable from the same date. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. It is uncertain whether any new PRC laws or regulations relating to making dividends by PRC subsidiary will be adopted or if adopted, what they would provide.

 

Any limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

Uncertainties with respect to the PRC legal system could have a material adverse effect on us.

 

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions in a civil law system may be cited as reference but have limited precedential value. Since 1979, newly introduced PRC laws and regulations have significantly enhanced the protections available relating to foreign investments in China. Nonetheless, since these laws and regulations are relatively new and the PRC legal system continues to evolve rapidly, the interpretations of such laws and regulations may not always be consistent and enforcement of these laws and regulations involves significant uncertainties, any of which could limit the available legal protections.

 

In addition, the PRC administrative and judicial authorities have significant discretion in interpreting, implementing or enforcing statutory rules and contractual terms, and it may be more difficult to predict the outcome of administrative and judicial proceedings and the level of legal protection we may enjoy in the PRC than under some more developed legal systems. These uncertainties may affect our decisions on the policies and actions to be taken to comply with PRC laws and regulations, and may affect our ability to enforce our contractual or tort rights. In addition, the regulatory uncertainties may be exploited through unmerited legal actions or threats in an attempt to extract payments or benefits from us. Such uncertainties may therefore increase our operating expenses and costs, and materially and adversely affect our business and results of operations.

 

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and could have a retroactive effect. As a result, we might not be aware of our violation of any of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, and any failure to respond to changes in the regulatory environment in China could adversely affect our business and impede our ability to continue our operations.

 

The PRC’s legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.

 

The PRC legal and judicial system may negatively impact foreign investors. In 1982, the National People’s Congress amended the Constitution of China to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors in the PRC. However, the PRC’s system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary and enforcement of existing laws is inconsistent. As a result, it may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC’s legal system is based on the civil law regime, that is, it is based on written statutes. A decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied to reflect domestic political changes.

 

The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting the PRC’s political, economic or social life, will not affect the PRC government’s ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.

 

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We may be required to obtain prior approval of the China Securities Regulatory Commission (“CSRC”) of the listing and trading of our common stock.

 

On August 8, 2006, six PRC regulatory authorities, including the CSRC, jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the 2006 M&A Rules, which were later amended on June 22, 2009. According to the 2006 M&A Rules, an offshore special purpose vehicle, or SPV, refers to an overseas company controlled directly or indirectly by domestic companies or individuals for purposes of overseas listing of equity interests in domestic companies (defined as enterprises in the PRC other than foreign-invested enterprises). The 2006 M&A Rules require that the overseas listing by the SPV must be approved by the CSRC. However, the applicability of the 2006 M&A Rules with respect to CSRC approval is unclear. Accordingly, the application of the 2006 M&A Rules to the contractual arrangements of our corporate structure, including the VIE structure, remains unclear.

 

We believe that the 2006 M&A Rules do not require us to obtain prior CSRC approval for the listing and trading of our common stock in the U.S., given that (i) our PRC subsidiary was incorporated as a wholly foreign-owned enterprise by means of direct investment rather than by merger or acquisition by our company of the equity interest or assets of any “domestic company” as defined under the 2006 M&A Rules, and no provision in the 2006 M&A Rules classifies the contractual arrangements between our company, our PRC subsidiary and any of our consolidated affiliated entities as a type of acquisition transaction falling under the 2006 M&A Rules.

 

Nonetheless, in the event the CSRC subsequently determines that its prior approval is required, we could face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies could impose fines and penalties on our operations, limit our operating privileges, delay or restrict our sending of the proceeds from our financing outside of China into that jurisdiction, or take other actions that could have an adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that such settlement and delivery might not occur.

 

We cannot predict when the CSRC will promulgate additional rules or other guidance, if at all. Moreover, the implementing rules or guidance, to the extent issued, could fail to resolve current ambiguities under the 2006 M&A Rules. Uncertainties or negative publicity regarding the 2006 M&A Rules could have an adverse effect on the trading price of our common stock.

 

Certain PRC regulations, including the M&A Rules and national security regulations, may require a complicated review and approval process which could make it more difficult for us to pursue growth through acquisitions in China.

 

The M&A Rules established additional procedures and requirements that could make merger and acquisition activities in China by foreign investors more time-consuming and complex. For example, the MOFCOM must be notified in the event a foreign investor takes control of a PRC domestic enterprise. In addition, certain acquisitions of domestic companies by offshore companies that are related to or affiliated with the same entities or individuals of the domestic companies, are subject to approval by the MOFCOM. In addition, the Implementing Rules Concerning Security Review on Mergers and Acquisitions by Foreign Investors of Domestic Enterprises, issued by the MOFCOM in August 2011, require that mergers and acquisitions by foreign investors in “any industry with national security concerns” be subject to national security review by the MOFCOM. In addition, any activities attempting to circumvent such review process, including structuring the transaction through a proxy or contractual control arrangement, are strictly prohibited.

 

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There is significant uncertainty regarding the interpretation and implementation of these regulations relating to merger and acquisition activities in China. In addition, complying with these requirements could be time-consuming, and the required notification, review or approval process may materially delay or affect our ability to complete merger and acquisition transactions in China. As a result, our ability to seek growth through acquisitions may be materially and adversely affected.

 

In addition, if the MOFCOM determines that we should have obtained its approval for our entry into contractual arrangements with our affiliated entities, we may be required to file for remedial approvals. There is no assurance that we would be able to obtain such approval from the MOFCOM. We may also be subject to administrative fines or penalties by the MOFCOM that may require us to limit our business operations in the PRC, delay or restrict the conversion and remittance of our funds in foreign currencies into the PRC or take other actions that could have a material and adverse effect on our business, financial condition and results of operations.

 

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans or additional capital contributions to our PRC subsidiary and affiliated entities, which could harm our liquidity and our ability to fund and expand our business.

 

We are an offshore holding company conducting our operations in China through our PRC subsidiary. We may make loans to our PRC subsidiary and PRC consolidated VIE subject to the approval from governmental authorities and limitations in loan size, or we may make additional capital contributions to our PRC subsidiary.

 

Any loans to our PRC subsidiary, which is treated as a foreign-invested enterprise under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiary to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company. We may also decide to finance our PRC subsidiary by means of capital contributions. Our capital contributions to our PRC subsidiary must be approved by the Ministry of Commerce or its local counterpart. We cannot assure you that we will be able to complete the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our PRC subsidiary may be negatively affected, which could adversely affect our PRC subsidiary’s liquidity and its ability to fund its working capital and expansion projects and meet its obligations and commitments.

 

On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless otherwise provided by law. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of SAFE Circular 142 could result in severe monetary or other penalties. On July 4, 2014, SAFE issued the Circular of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative Method of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched the pilot administration reform regarding conversion of foreign currency registered capitals of foreign-invested enterprises in 16 pilot areas. According to SAFE Circular 36, some of the restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of an ordinary foreign-invested enterprise in the pilot areas, and such foreign-invested enterprise is permitted to use Renminbi converted from its foreign-currency registered capital to make equity investments in the PRC within and in accordance with the authorized business scope of such foreign-invested enterprises, subject to certain registration and settlement procedure as set forth in SAFE Circular 36. As this circular is relatively new, there remains uncertainty as to its interpretation and application and any other future foreign exchange related rules. On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE Circular 19, to expand the reform nationwide. SAFE Circular 19 came into force and replaced both SAFE Circular 142 and SAFE Circular 36 on June 1, 2015. However, SAFE Circular 19 continues to prohibit a foreign-invested enterprise from, among other things, using RMB funds converted from its foreign exchange capitals for expenditure beyond its authorized business scope, providing entrusted loans or repaying loans between non-financial enterprises.

 

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in China.

 

On December 26, 2017, China’s National Development and Reform Commission, or the NDRC, issued the Management Rules for Overseas Investment by Enterprises, or the NDRC Order 11. On February 11, 2018, the Catalog on Overseas Investment in Sensitive Industries (2018 Edition), or the Sensitive Industries List, was promulgated. “Overseas investment” as defined in the NDRC Order 11 refers to the investment activities conducted by an enterprise located in the territory of China either directly or through an overseas enterprise under its control by making investment with assets and equities or providing financing or guarantee in order to obtain overseas ownership, control, management rights and other related interests. Overseas investment by a Chinese individual through overseas enterprises under his/her control is also subject to the NDRC Order 11. According to the NDRC Order 11, (i) direct overseas investment by Chinese enterprises or indirect overseas investment by Chinese enterprises or individuals in sensitive industries or sensitive countries and regions requires prior approval by the NDRC; (ii) direct overseas investment by Chinese enterprises in non-sensitive industries and non-sensitive countries and regions requires prior filing with the NDRC; and (iii) indirect overseas investment of over US$300 million by Chinese enterprises or individuals in non-sensitive industries and non-sensitive countries and regions requires reporting with the NDRC. Uncertainties remain with respect to the application of the NDRC Order 11. We are not sure if Jakroo Inc. were to use a portion of the proceeds raised from this offering to fund investments in and acquisitions of complementary business and assets outside of China, such use of U.S. dollars funds held outside of China would be subject to the NDRC Order 11. As the NDRC Order 11 was only recently issued, there are very few interpretations, implementation guidances or precedents to follow in practice. We will continue to monitor any new rules, interpretation and guidance promulgated by the NDRC and communicate with the NDRC and its local branches to seek their opinions, when necessary. If it turns out that the NDRC Order 11 applies to our use of proceeds from the offering mentioned above and we fail to obtain the approval, complete the filing or report our overseas investment using the offering proceeds, as the case may be, in a timely manner as provided under the NDRC Order 11, we may be forced to suspend or cease our investment, or be subject to penalties or other liabilities, which may materially and adversely affect our business, financial condition and prospects.

 

Violations of these Circulars could result in severe monetary or other penalties. These circulars may significantly limit our ability to use RMB converted from the net proceeds of financing activities outside of China to fund the establishment of new entities in China by our PRC subsidiary, to invest in or acquire any other PRC companies through our PRC subsidiary, or to establish new consolidated VIEs in the PRC.

 

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In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or PRC consolidated VIE or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds from financing outside of the PRC and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

A failure by the beneficial owners of our shares who are PRC residents to comply with certain PRC foreign exchange regulations could restrict our ability to distribute profits, restrict our overseas and cross-border investment activities and subject us to liability under PRC law.

 

On July 4, 2014, SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which replaced the former Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles (generally known as SAFE Circular 75) promulgated by SAFE on October 21, 2005. On February 13, 2015, SAFE further promulgated the Circular on Further Simplifying and Improving the Administration of Foreign Exchange Concerning Direct Investment, or SAFE Circular 13, which took effect on June 1, 2015. This SAFE Circular 13 has amended SAFE Circular 37 by requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

 

These SAFE circulars require PRC residents to register with qualified banks in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests being deemed a “special purpose vehicle” pursuant to SAFE Circular 37. These circulars further require amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC residents, share transfer or exchange, merger, division or other material events. In the event that a PRC resident holding interests in a special purpose vehicle fails to complete the required SAFE registration, the PRC subsidiary of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.

 

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Mr. Weidong Du, Ms. Wei Tan, Mr. Guichun Liu, Ms. Wen Li and Mr. Hao Wang, who directly or indirectly hold our shares and who are known to us as PRC residents, have completed the initial SAFE foreign exchange registrations to reflect our corporate restructuring. Mr. Weidong Du and Ms. Wei Tan have become the United States citizens since September 2018. We have informed Mr. Weidong Du and Ms. Wei Tan to notify the foreign exchange registration authority of the change of their nationality and qo through relevant formalities in accordance with the requirements of the registration authority if necessary. However, we may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners who are required to make such registrations, and we may not always be able to compel them to comply with all relevant foreign exchange regulations.

 

As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents will at all times comply with, or in the future make or obtain any applicable registrations or approvals required by all relevant foreign exchange regulations. The failure or inability of such individuals to comply with the registration procedures set forth in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

 

Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations.

 

You may face difficulties in protecting your interests and exercising your rights as our stockholder since we conduct a portion of our operations in China and other foreign locations.

 

We conduct a material portion of our operations in China through Rider Beijing, our consolidated VIE in China. Because of this, it may be difficult for you to conduct due diligence on our company and business. In addition, a portion of our assets are located outside of the U.S. As a result, our public stockholders may have more difficulty in protecting their interests through actions against us than would stockholders of a corporation doing business entirely or predominantly within the United States.

 

The enforcement of the PRC Labor Contract Law in the PRC may adversely affect our business and our results of operations.

 

The PRC Labor Contract Law became effective and was implemented on January 1, 2008, which was amended on December 28, 2012. It has reinforced the protection of employees who, under the PRC Labor Contract Law, have the right, among others, to have written labor contracts, to enter into labor contracts with no fixed terms under certain circumstances or to receive overtime wages. Further, it requires certain terminations be based on the mandatory requirement age. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost-effective manner, thus materially and adversely affecting our financial condition and results of operations.

 

As a result of these laws and regulations designed to enhance labor protection, we expect our labor costs will continue to increase. In addition, as the interpretation and implementation of these laws and regulations are still evolving, our employment practice may not at all times be deemed in compliance with the new laws and regulations. If we are subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected.

 

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who are granted options or other awards under our equity incentive plan will be subject to these regulations when we become a U.S. listed company. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.

 

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We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.

 

Under the PRC Enterprise Income Tax Law and its implementing rules, enterprises established under the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantive and overall management and control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law.

 

We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that we or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then our company or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our securities may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC stockholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in our securities.

 

We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.

 

On February 3, 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7, which replaced or supplemented previous rules under the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009. Pursuant to this Bulletin, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such an indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immoveable properties located in China, and equity investments in PRC resident enterprises, in respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have a real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immoveable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payer fails to withhold any or withholds insufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the statutory time limit. Late payments of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.

 

On October 17, 2017, SAT issued a Public Notice of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, which, among others, repealed the Circular 698 on December 1, 2017. SAT Public Notice 37 further details and clarifies the tax withholding methods in respect of income of non-resident enterprises under Circular 698. And certain rules stipulated in Bulletin 7 are replaced by SAT Public Notice 37. Where the non-resident enterprise fails to declare the tax payable pursuant to Article 39 of the Enterprise Income Tax Law, the tax authority may order it to pay the tax due within required time limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority; however, if the non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it shall be deemed that such enterprise has paid the tax in time.

 

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to withholding obligations if our company is transferee in such transactions, under SAT Public Notice 37 and Bulletin 7. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be required to expend valuable resources to comply with SAT Public Notice 37 and Bulletin 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have an adverse effect on our financial condition and results of operations.

 

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There is uncertainty as to the application of Bulletin 7, or previous rules under Circular 698. As Bulletin 7 was recently promulgated, it is not clear how it will be implemented. Bulletin 7 may be determined by the tax authorities to be applicable to our offshore restructuring transactions or sale of the shares of our offshore subsidiaries where non-resident enterprises, being the transferors, were involved. Furthermore, we, our non-resident enterprises and PRC subsidiaries may be required to spend valuable resources to comply with Bulletin 7 or to establish that we and our non-resident enterprises should not be taxed under Bulletin 7, for our previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.

 

Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

 

The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which became effective in February 2015.

 

Under Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.

 

In February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.

 

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On October 17, 2017, SAT issued a Public Notice of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, which, among others, repealed the Circular 698 on December 1, 2017. SAT Public Notice 37 further details and clarifies the tax withholding methods in respect of income of non-resident enterprises under Circular 698. And certain rules stipulated in SAT Public Notice 7 are replaced by SAT Public Notice 37. Where the non-resident enterprise fails to declare the tax payable pursuant to Article 39 of the Enterprise Income Tax Law, the tax authority may order it to pay the tax due within required time limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority; however, if the non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it shall be deemed that such enterprise has paid the tax in time.

 

We face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed, under Circular 59, Circular 698, Circular 7 and SAT Public Notice 37, and may be required to expend valuable resources to comply with Circular 59, Circular 698, Circular 7 and SAT Public Notice 37 or to establish that we and our non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

The PRC tax authorities have the discretion under SAT Circular 59, Circular 698, Circular 7 and SAT Public Notice 37 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular 698, Circular 7 and SAT Public Notice 37, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.

 

Risks Relating to Our Corporate Structure

 

Our corporate structure and, in particular, our variable interest entity contracts (the “VIE Contractual Agreements”) are subject to significant risks, as set forth in the following risk factors.

 

We depend upon the VIE Contractual Agreements in conducting our business in the PRC, which may not be as effective as direct ownership.

 

Although a substantial majority of our revenue has historically been generated by our PRC subsidiaries, we have relied and expect to continue to rely on contractual arrangements with Rider Beijing and its shareholders to operate our business. Such contractual arrangements include: (i) an Exclusive Technical Consulting and Service Agreement; (ii) an Exclusive Call Option Agreement; (iii) a Business Operation Agreement; (iv) an Equity Pledge Agreement; and (v) Powers of Attorney granted by each of Rider Beijing’s shareholders. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE.

 

If we had direct ownership of Rider Beijing, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Rider Beijing, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, we rely on the performance by our VIE and its shareholders of their obligations under the contracts to exercise control over our VIE. However, the shareholders of our VIE may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our VIE. We may replace the shareholders of our VIE at any time pursuant to our contractual arrangements with it and its shareholders. However, if any dispute relating to these contracts or the replacement of the shareholders remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and courts and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with our VIE may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

 

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Contractual arrangements entered into by our subsidiary and our PRC operating affiliate may be subject to scrutiny by the PRC tax authorities. Such scrutiny may lead to additional tax liability and fines, which would hinder our ability to achieve or maintain profitability.

 

Under PRC laws and regulations, transactions between related parties should be conducted on an arm’s-length basis and may be subject to audit or challenge by the PRC tax authorities. We could face material adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among our subsidiary in the PRC, our affiliated entities and the shareholder of Rider Beijing are not conducted on an arm’s-length basis and adjust the income of our affiliated entities through the transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in, for PRC tax purposes, increased tax liabilities of our affiliated entities. In addition, the PRC tax authorities may require us to disgorge our prior tax benefits, and require us to pay additional taxes for prior tax years and impose late payment fees and other penalties on our affiliated entities for underpayment of prior taxes. We cannot assure you that such penalties will not be imposed on us in the future. Our net income may be harmed if the tax liabilities of our affiliated entities materially increase or if they are found to be subject to additional tax obligations, late payment fees or other penalties.

 

PRC laws and regulations governing our businesses and the validity of certain of our contractual arrangements are uncertain. In addition, changes in such PRC laws and regulations may materially and adversely affect our business.

 

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, and the enforcement and performance of our contractual arrangements with Rider Beijing and its shareholders. Although the primary business of Rider Beijing is not within the category in which foreign investment is currently restricted or prohibited, the uncertainty of PRC regulations and governmental policies affecting foreign ownership may result in us being required to hold (or, conversely, being prohibited from holding), directly or indirectly, a given percentage of Rider Beijing’s equity interests. Our contractual arrangements with Rider Beijing and its shareholders, which allow us to substantially control Rider Beijing through Jakroo (Beijing) Sports Consulting Co., Ltd, are governed by Chinese law. We cannot assure you, however, that we will be able to enforce these contracts. If we are unable to enforce these contracts, we could be required to deconsolidate Rider Beijing and its subsidiaries from our financial results.

 

In addition, Chinese laws and regulations limiting foreign ownership of domestic companies are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

 

Although we believe we comply and will continue to comply with current PRC regulations, we cannot assure you that the PRC government would agree that these operating arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. If the PRC government determines that we do not comply with applicable law, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business.

 

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Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.

 

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which will take effect on January 1, 2020. Since it is relatively new, uncertainties exist in relation to its interpretation and implementation. The Foreign Investment Law does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign invested enterprises if they are ultimately “controlled” by foreign investors. However, it has a catch-all provision under definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or the State Council. Therefore it still leaves leeway for future laws, administrative regulations or provisions of the State Council to provide for contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that our control over our VIE through contractual arrangements will not be deemed as foreign investment in the future.

 

The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries specified as either “restricted” or “prohibited” from foreign investment in a “negative list” that is yet to be published. It is unclear whether the “negative list” to be published will differ from the current Special Administrative Measures for Market Access of Foreign Investment (Negative List). The Foreign Investment Law provides that foreign-invested entities operating in “restricted” or “prohibited” industries will require market entry clearance and other approvals from relevant PRC government authorities. If our control over our VIE through contractual arrangements are deemed as foreign investment in the future, and any business of our VIE is “restricted” or “prohibited” from foreign investment under the “negative list” effective at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual arrangements that allow us to have control over our VIE may be deemed as invalid and illegal, and we may be required to unwind such contractual arrangements and/or restructure our business operations, any of which may have a material adverse effect on our business operation.

 

Furthermore, if future laws, administrative regulations or provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure and business operations.

 

If any of our affiliated entities becomes the subject of a bankruptcy or liquidation proceeding, we may lose the ability to use and enjoy the assets held by such entity, which could materially and adversely affect our business, financial condition and results of operations.

 

We currently conduct our operations in China through contractual arrangements with our affiliated entities. As part of these arrangements, a substantial portion of our assets that are important to the operation of our business are held by our affiliated entities. If any of these entities goes bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If any of our affiliated entities undergoes a voluntary or involuntary liquidation proceeding, its equity owner or unrelated third-party creditors may claim rights relating to some or all of these assets, which would hinder our ability to operate our business and could materially and adversely affect our business, our ability to generate revenue and the market price of our common stock.

 

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Any failure by our consolidated variable interest entity or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

 

If our consolidated variable interest entity or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of Rider Beijing were to refuse to transfer their equity interest in Rider Beijing to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

 

All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expense and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated variable interest entity, and our ability to conduct our business may be negatively affected.

 

If the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entity do not comply with applicable PRC laws and regulations, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Details of the VIE Agreements are set out under the caption “Corporate History and Structure – VIE Agreements” above. There are risks involved with the operation of our business in reliance on the VIE Agreements, including the risk that the VIE Agreements may be determined by PRC regulators or courts to be unenforceable. Our PRC counsel has provided a legal opinion that the VIE Agreements are binding and enforceable under PRC law, but has further advised that if the VIE Agreements were for any reason determined to be in breach of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such breach, including:

 

  Imposing economic penalties;
     
  Discontinuing or restricting our operations;
     
  Imposing conditions or requirements of the VIE Agreements with which we may not be able to comply;
     
  Requiring our company to restructure the relevant ownership structure or operations;
     
  Taking other regulatory or enforcement actions that could adversely affect our company’s business; and
     
  Revoking the business licenses and/or the licenses or certificates of Rider Sportsfashion and/or other VIE Agreements.

 

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Any of these actions could adversely affect our ability to manage, operate and gain the financial benefits of Rider Sportsfashion, which would have a material adverse effect on our business, financial condition and results of operations.

 

The shareholders of our consolidated variable interest entity may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The equity interests of Rider Beijing are held by Mr. Weidong Du, Ms. Wei Tan, certain key employees of our operating subsidiaries. Their interests in Rider Beijing may differ from the interests of our company as a whole. These shareholders may breach, or cause our consolidated variable interest entity to breach, the existing contractual arrangements we have with them and our consolidated variable interest entity, which would have a material adverse effect on our ability to effectively control our consolidated variable interest entity and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with Rider Beijing to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

 

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the exclusive call option agreement with these shareholders to request them to transfer all of their equity interests in Rider Beijing to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Rider Beijing, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

Risks Relating to Our Common Stock

 

Our majority stockholders control our company for the foreseeable future, including the outcome of matters requiring shareholder approval.

 

Mr. Weidong Du, our Chief Executive Officer, President and director and Mr. David Wang, Treasurer and director, have over 83% beneficial ownership of our company, through Kustellar LLC, which is beneficially owned by Mr. Du and Ms. Tan. As a result, such individuals will have the ability, acting together, to control the election of our directors and the outcome of corporate actions requiring shareholder approval, such as: (i) a merger or a sale of our company, (ii) a sale of all or substantially all of our assets, and (iii) amendments to our articles of incorporation and bylaws. This concentration of voting power and control could have a significant effect in delaying, deferring or preventing an action that might otherwise be beneficial to our other shareholders and be disadvantageous to our shareholders with interests different from those individuals. Certain of these individuals also have significant control over our business, policies and affairs as officers or directors of our company. Therefore, you should not invest in reliance on your ability to have any control over our company.

 

No active public market for our common stock currently exists, and an active trading market may not ever develop or be sustained.

 

An investment in our company will likely require a long-term commitment, with no certainty of return. Our common stock is currently quoted on the OTCQB Market. There has been extremely limited trading in our common stock. In addition, there is a risk that we will not be able to have our stock listed or quoted on a more established market, and even if we are able to do so (of which no assurance can be given), we cannot predict whether an active market for our common stock will ever develop in the future. In the absence of an active trading market:

 

  investors may have difficulty buying and selling or obtaining market quotations;
  market visibility for shares of our common stock may be limited; and
  a lack of visibility for shares of our common stock may have a depressive effect on the market price for shares of our common stock.

 

Moreover, the OTCQB Market is a relatively unorganized, inter-dealer, over-the-counter markets that provide significantly less liquidity than any tier of the NASDAQ or the New York Stock Exchange. No assurances can be given that our common stock will be traded on a senior market like NASDAQ or the New York Stock Exchange. In this event, there would be a highly illiquid market for our common stock and you may be unable to dispose of your common stock at desirable prices or at all. Moreover, there is a risk that our common stock could be delisted from the OTCQB Market, in which case it might be listed on OTC Pink, which is even more illiquid than the OTCQB Market.

 

The lack of an active market impairs your ability to sell your shares of our common stock at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares of our common stock. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares of our common stock and may impair our ability to expand our operations through acquisitions by using our shares as consideration.

 

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We may require additional funding in order to progress our business in the future. If we are unable to raise additional capital, we could be forced to delay, reduce or eliminate portions of our business.

 

We may require an additional infusion of funds in the future to maintain and grow our business or pursue mergers, acquisitions, strategic partnership or other opportunities. Should we require additional funds, we will be subject to the risk that we will be unable to raise sufficient capital on acceptable terms, or at all. If such financing is not available on satisfactory terms, or is not available at all, we may be required to delay, scale back or eliminate the development of business opportunities and our operations and financial condition may be adversely affected to a significant extent. In the event we were to experience an economic recession or a slow growth period, such an event could adversely affect our business, liquidity and future growth. In addition, should we experience instability in or a tightening of the capital markets, such an event could adversely affect our ability to obtain additional capital to grow our business on terms acceptable to us or at all.

 

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

 

We may need to raise funding in the future to maintain and grow our business. If we raise additional capital by issuing equity securities, the percentage and/or economic ownership of our existing stockholders may be reduced, and accordingly these stockholders may experience substantial dilution. We may also issue equity securities that provide for rights, preferences and privileges senior to those of our common stock.

 

Debt financing, if obtained, may involve agreements that include liens on our assets, covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, increases in our expenses and requirements that our assets be provided as a security for such debt. Debt financing would also be required to be repaid regardless of our operating results.

 

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Even if an active trading market for our common stock develops, the market price for our common stock may be volatile.

 

Even if an active trading market for our common stock develops, of which no assurance can be given, the market price for our common stock may be volatile and subject to wide fluctuations due to factors such as:

 

  the perception of U.S. investors and regulators of U.S. listed Chinese companies;
     
  actual or anticipated fluctuations in our quarterly operating results;
     
  changes in financial estimates by securities research analysts;
     
  negative publicity, studies or reports;
     
  our capability to match and compete with technology innovations in the industry;
     
  changes in the economic performance or market valuations of other companies in the same industry;
     
  announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
     
  addition or departure of key personnel;
     
  fluctuations of exchange rates between RMB and the U.S. Dollar; and
     
  general economic or political conditions in or influencing China.

 

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.

 

Our common stock is and may continue to be thinly traded, and as a result you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

 

Our common stock presently is an may continue to be “thinly-traded,” meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of factors, including the fact that we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Broad or active public trading market for our common stock may not develop or be sustained.

 

Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.

 

Our common stock, which are currently quoted for trading on the OTCQB Market, may be considered to be a “penny stock” if it does not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Exchange Act, as amended. Our common stock may be a “penny stock” if it meets one or more of the following conditions: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a “recognized” national exchange; (iii) it is not quoted on the Nasdaq Capital Market or, even if so, has a price of less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million. The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15g-2 through 15g-9 promulgated under the Exchange Act. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to: (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

 

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FINRA sales practice requirements may also limit your ability to buy and sell shares of our common stock, which could depress the price of shares of our common stock.

 

FINRA rules require broker-dealers to have reasonable grounds for believing that an investment is suitable for a customer before recommending that investment to the customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status and investment objectives, among other things. Under interpretations of these rules, FINRA believes that there is a high probability such speculative low-priced securities will not be suitable for at least some customers. Thus, FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell shares of our common stock, have an adverse effect on the market for shares of our common stock, and thereby depress price of our common stock.

 

You may face significant restrictions on the resale of your shares of our common stock due to state “blue sky” laws.

 

Each state has its own securities laws, often called “blue sky” laws, which (1) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (2) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or it must be exempt from registration. The applicable broker-dealer must also be registered in that state.

 

We do not know whether our securities will be registered or exempt from registration under the laws of any state. A determination regarding registration will be made by those broker-dealers, if any, who agree to serve as market makers for our common stock. We have not yet applied to have our securities registered in any state. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our securities. You should therefore consider the resale market for our common stock to be limited, as you may be unable to resell your shares without the significant expense of state registration or qualification.

 

Volatility in our common stock price may subject us to securities litigation.

 

The market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

 

We are not likely to pay cash dividends in the foreseeable future.

 

We currently intend to retain any future earnings for use in the operation and expansion of our business. Accordingly, we do not expect to pay any cash dividends in the foreseeable future, but will review this policy as circumstances dictate. Should we determine to pay dividends in the future, our ability to do so will depend upon the receipt of dividends or other payments from Rider Beijing. Rider Beijing may, from time to time, be subject to restrictions on its ability to make distributions to us, including restrictions on the conversion of RMB into U.S. dollars or other hard currency and other regulatory restrictions.

 

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Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Description of Property.

 

Our corporate headquarters are located in Pleasanton, California, where we own and operate 6,500 square feet of office space. In addition, we lease the following properties:

 

  Jakroo Canada Inc. (Leased): 2323 Quebec Street, Units 220, 222, Vancouver, Canada, V5T4S7
     
  Jakroo GmbH. (Leased): Hintere Achmuhlerstrasse, 1, 6850 Dornbirn, Austria
     
  Rider Sportsfashion Ltd (Leased): Room 509, Building C Topbox, No 69 Beichen West Street, Beijing 100029
     
  Rider Sportsfashion (Langfang) Limited (Leased): Da Dong Guan Duan, South Chang Tan Road, Da Chang, Lang Fang, Hebei Province, China

 

Our production facilities are a newly built, 64,000 sq. ft. factory located on the border of Beijing and Hebei Province. The facility has an annual capacity to produce 500,000 jerseys. The lease on this property expires in December 2026.

 

Item 3. Legal Proceedings.

 

On January 12, 2017, we filed a lawsuit against the Trademark Review and Adjudication Board of State Administration For Industry & Commerce of the People’s Republic of China (“the Defendant”) with the Beijing Intellectual Property Court, requesting revocation of the verdict (Shangping Zi [2016] .0000098608) made by the Defendant concerning the No. 11757369 “捷酷 JAKROO” trademark’s invalid declaration application. At the same time, we requested the Defendant make the re-ruling of the invalid declaration application of “捷酷 JAKROO” trademark. On January 12, 2017, the Beijing Intellectual Property Court accepted the case. In June 2018, upon its review of the case, the Beijing Intellectual Property Court dismissed the case. We do not plan to appeal to a higher court and do not believe that the ultimate resolution of this matter has a material adverse effect on our financial position or on our results of operation.

 

Other than the proceeding disclosed herein, we are currently not subject to any material legal proceedings. However, we may from time to time become a party to various legal proceedings arising in the ordinary course of business.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock is currently quoted on the OTCQB Market.

 

As of March 30, 2019, we had approximately 70 holders of record of our common stock. No cash dividends have been paid on the common stock to date. We currently intend to retain earnings for further business development and do not expect to pay cash dividends in the foreseeable future.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information as of the date of this report with respect to the shares of our common stock that may be issued under our existing equity compensation plan.

 

Plan category   Number of securities to be issued upon exercise of outstanding options, warrants and rights     Weighted
average exercise price of outstanding options, warrants and rights
    Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column  
                         
Equity compensation plans approved by security holders (1)    

 

3,535,500

  $ 0.18       11,464,500  

 

(1) The 2016 Equity Incentive Plan was amended by the Board of Directors and approved by a majority of our stockholders on February 13, 2019.

 

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Item 6. Selected Financial Data.

 

We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.

 

Item 7. 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 consolidated financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control. Please see “Cautionary Note Regarding Forward-Looking Statements” for further information to consider when reviewing this discussion and analysis.

 

Overview

 

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

 

The chart below illustrates our current corporate 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 (“Custom Order”). Our Inline, OEM and Customer Order businesses currently account for 17%, 10% and 73%, respectively, of our sales revenue for the year ended December 31, 2018, comparing with 18%, 8%, and 74% for the year ended December 31, 2017.

 

The two primary sales channels for our Inline and Custom Order business are direct to consumer (“DTC”), and wholesale. DTC currently generates 88% of our sales revenues (84% for the year ended December 31, 2017). Under the DTC model, we sell and fulfill our products directly to end consumers exclusively online through e-commerce platforms. In China, DTC sales are processed through online retailers such as TMall and JD.com. Sales in North America and Europe are processed through our proprietary Jakroo e-commerce and licensed e-commerce systems. The Jakroo platform allows customers to easily log onto our platform, complete their designs or submit design requests to our Pro designers and place purchase orders. Wholesale represented 12% of our revenue for the year ended December 31, 2018 compared to 16% for the year ended December 31, 2017. We act as both retailer and wholesaler of our products through our proprietary Jakroo e-commerce platform as well as through large online retailers in China. Sales through both channels are executed with payments made directly to us online prior to the production and shipment of products.

 

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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 178 employees worldwide.

 

The purchase of our 6,300 square feet U.S. headquarters facility in Pleasanton, California in the first quarter of 2017 was a major step in further strengthening our sales, marketing and innovation teams. During the year ended December 31, 2018, our design team created 19,054 custom designs, compared to 19,411 custom designs in the year ended December 31, 2017, representing a 2% decrease in customer design requests. The slight decrease in custom designs can be attributed to the combination of implementing stricter design user requirements for requesting a design and the introduction of our new self-design center in the latter half of the fourth quarter of 2018. 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 57% during the year ended December 31, 2018, compared to the year ended December 31, 2017. The increase in site visits can be attributed primarily to deeper investments in search engine and social media marketing. The implementation of stricter user requirements for starting designs has resulted in improved design work flows and stronger conversion to sale rates.

 

During the year ended December 31, 2018, our new customer acquisition increased 6% while our number of returning customers increased 160%, compared to the last year. This resulted in an aggregate revenue growth of 16% across our North American and European operating segments compared to the year ended December 31, 2017. We attribute the revenue growth to the introduction of new products, implementation of customer activation strategies, improvements to our lead conversion funnel and our ability to consistently maintain a delivery timeline of 2 weeks or less.

 

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 we manufacture all of our products at the facility. 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 year ended December 31, 2018, we processed approximately 57,500 Custom Order micro-production lots with a total production quantity of 153,000 units, compared to 50,500 lots and 135,000 units respectively in the year ended December 31, 2017. 97% of these products were produced and shipped in 14 days or less and 62% were produced and shipped in 7 days or less for the year ended December 31, 2018, compared to 98% of products produced in 14 days or less and 43% produced and shipped in 7 days or less during the year ended December 31, 2017. During both fiscal years, the average production lot quantity of 3 pcs remained constant for the Custom Order products.

 

Our operating segments include North America, China and Europe.

 

We believe there is increasing recognition of the health benefits of an active lifestyle through cycling, triathlon and running. We believe this trend provides us with an expanding potential consumer base for our products. We also believe there continues to be an increasing number of individuals participating in cycling, triathlon and running activities, thus creating an increased demand for athletic apparel from leisure, pre-athlete and amateur participants. We plan to continue to grow our business over the long term through increased sales of our apparel via our made-to-order, JIT process, and our expansion in international markets.

 

Although we believe these trends will facilitate our growth, we also face potential challenges that could limit our ability to take advantage of these opportunities, including, among other things, the risk of general economic or market condition 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.

 

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.

 

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Results of Operations

 

Year ended December 31, 2018 compared to year ended December 31, 2017

 

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues:

 

    Year Ended December 31  
    2018     2017  
             
Revenues   $ 10,975,325     $ 9,470,585  
Cost of revenues     4,520,316       4,024,722  
Gross profit     6,455,009       5,445,863  
Selling, general and administrative expense     5,795,445       5,477,053  
Interest expense (income), net     73,101       32,162  
Income/(loss) before income taxes     586,463       (63,352 )
Income tax expense     193,606       159,534  
Net income/(loss)   $ 392,857     $ (222,886 )

 

As a percentage of net revenues   Year Ended December 31  
    2018     2017  
             
Revenues     100.00 %     100.00 %
Cost of revenues     41.19       42.50  
Gross profit     58.81       57.50  
Selling, general and administrative expense     52.80       57.83  
Interest expense (income), net     0.67       0.34  
Income /(loss) before income taxes     5.34       (0.67 )
Income tax expense     1.76       1.68  
Net income/(loss)     3.58 %     (2.35 )%

 

Revenues

 

Net revenues increased approximately $1.50 million, or 15.9%, to approximately $10.98 million for the year ended December 31, 2018 from approximately $9.47 million in 2017. Net revenues by business units are summarized below:

 

    Year Ended December 31  
    2018     2017     $ Change     % Change  
OEM   $ 1,084,645     $ 749,718     $ 334,927       44.67 %
INLINE     1,896,562       1,751,125       145,437       8.31 %
CUSTOM ORDERS     7,994,118       6,969,742       1,024,376       14.70 %
Total Revenues   $ 10,975,325     $ 9,470,585     $ 1,504,740       15.89 %

 

The increase in net revenue was driven by increases across all business units. Our OEM business unit’s revenue increased $334,927, or 44.7%, to approximately $1.08 million in the year ended December 31, 2018 from $749,718 in 2017. Our Inline unit’s revenue increased $145,437, or 8.3%, to approximately $1.90 million in the year ended December 31, 2018 from $1.75 million in 2017. Our Custom Order unit’s revenue increased approximately $1.02 million, or 14.7%, to approximately $7.99 million from approximately $6.97 million in 2017. Our Custom Order unit accounted for approximately 72.9% of the total revenue and 68.1% of total revenue growth for the year ended December 31, 2018. We attribute the increase in net revenue largely to the follows:

 

  An increase of production capacity by investment in new 3D fashion design software, sublimation printing, heat transfer equipment and advanced automatic cutting machine;
  Our investments in customer acquisition and retention programs implemented, beginning in the fourth quarter of 2017; and
  Our focus on the growth of Custom Order sales by continuing to improve our core propositions to the customers and investing in widespread marketing efforts.

  

Cost of revenues

 

Cost of revenue for our products includes the expenses incurred from our purchase of raw materials, direct labor fees and manufacturing overhead.

 

For the year ended December 31, 2018, our total cost of revenues amounted to approximately $4.52 million or 41.2% of total revenues, as compared to approximately $4.02 million or 42.5% of total revenues in 2017. The slight decrease in cost of revenue as a percentage of total revenue was primarily due to the increase of Custom Order sales which has a higher gross margin.

 

Gross profit

 

Gross profit increased approximately $1.01 million, or 18.5%, to approximately $6.46 million for the year ended December 31, 2018 from approximately $5.45 million in 2017. Gross profit as a percentage of net revenues, or gross margin, increased by 1.3% to approximately 58.8% in the year ended December 31, 2018 compared to 57.5% in 2017. The increase in gross margin percentage was primarily driven by the increase of Custom Orders sales which has a higher gross margin.

 

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Selling, general and administrative expenses

 

Our selling, general and administrative expenses consist of costs related to marketing, selling, new product development, auditing and legal services. For the year ended December 31, 2018, selling, general and administrative expenses increased $318,392, or 5.8%, to approximately $5.80 million from approximately $5.48 million in 2017. The changes were primarily attributable to the increase of the professional fees incurred in connection with the listing of our common stock on the OTCQB Market. The professional fees were approximately $118,000 more in 2018 compared to 2017. In addition, we continue to invest in product development, technology infrastructure and our employees, which we believe to be our most valuable assets.

 

As a percentage of net revenues, selling, general and administrative expenses decreased by 5.0% to 52.8% in the year ended December 31, 2018 from 57.8% in 2017. The net revenue growth and a decrease in online advertising costs in the year ended December 31, 2018 led to an improved ratio between the selling, general and administrative expenses and the net revenue.

 

Provision for income taxes

 

Provision for income taxes increased $34,072, or 21.4%, to $193,606 in the year ended December 31, 2018 from $159,534 in 2017. The increase was primarily due to the increase of taxable income in China in the year ended December 31, 2018 as compared to 2017.

 

Other Comprehensive Income (loss)/Foreign Currency Translation Adjustment

 

Other comprehensive income (loss)/foreign currency translation adjustment changed $419,743 to a loss of $222,280 in the year ended December 31, 2018 from an income of $197,463 in 2017. These changes were primarily attributable to the decrease in the US Dollar to RMB exchange rate in the year ended December 31, 2018 as compared to 2017.  

  

Segment Results of Operation

 

The net revenues and operating income associated with our segments are summarized in the following tables.

 

Year ended December 31, 2018 compared to year ended December 31, 2017

 

Revenues by segment are summarized below:

 

    Year Ended December 31  
    2018     2017     $ Change     % Change  
North America   $ 7,494,100     $ 6,512,530     $ 981,570       15.07 %
China     3,061,969       2,623,422       438,547       16.72 %
Europe     419,256       334,633       84,623       25.29 %
Total revenues   $ 10,975,325     $ 9,470,585     $ 1,504,740       15.89 %

 

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Net revenues in our North America operating segment increased $981,570, or 15.1%, to approximately $7.49 million in 2018 from approximately $6.51 million in 2017. It was primarily due to the increase of revenue of our Custom Order business. Net revenues in China increased $438,547, or 16.7%, to approximately $3.06 million in 2018 from approximately $2.62 million in 2017. This increase was primarily due to an increase of revenue from our OEM business in China. Revenue generated from the European market shows an increase of $84,623, or 25.3%, to $419,256 in 2018 from $334,633 in 2017. This increase was mainly driven by the better marketing strategy with lower discount to customers.

 

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

 

    Year Ended December 31  
    2018     2017     $ Change     % Change  
North America   $ 34,181     $ (125,571 )   $ 159,752       127.22 %
China     648,509       209,546       438,963       209.48 %
Europe     (96,227 )     (147,327 )     51,100       (34.68 )%
Total Income (loss) before income taxes   $ 586,463     $ (63,352 )   $ 649,815       1,025.72 %

 

Our North America operating segment experienced an increase of operating income of $159,752, or 127.2%, to $34,181 income in 2018, compared with loss of $125,571 in 2017. The change in the operating income was primarily driven by the follows:

 

  An increase in net revenue of $981,570, or 15.1%, for this segment in 2018 compared to 2017 and the increase was all from Custom Order unit with higher profit margin; and
  A decrease of $133,609 in advertising costs including advertisement, promotion and sponsorships.

 

Our China operating segment shows an increase of operating income of $438,963, or 209.5%, to $648,509 in 2018 from $209,546 in 2017. The increase was primarily due to the increase of sales orders from all channels, and an improvement of production efficiency gained through the capital investment in advanced 3D fashion design software, sublimation printing, heat transfer equipment, and advanced automatic fabric cutting machine that lead to lower average production costs per unit.

 

Our Europe business segment showed a decrease of the operating loss of $51,100, or 34.7%, to $96,227 in 2018 from a $147,327 operating loss in 2017. Our revenue generated from the European market has continued to rise and generated an increase in gross profit which has led to less loss in 2018. The reduction in operating losses in 2018 was primarily due to an increase of revenue, better marketing strategy with lower discount to customers and the divestment in our sponsorship agreement with a continental cycling team in Austria.

 

Liquidity and Capital Resources

 

Our cash requirements have principally been for working capital and capital expenditures. We fund our working capital, inventory and capital investments from cash flows from operating activities, cash and cash equivalents on hand. Our working capital requirements generally reflect the growth in our business. Our capital investments have included purchasing factory machinery, leasehold improvements for our offices and factory, land and building, and making investments and improvements in information technology systems.

 

We believe that 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 that we have adequate sources of liquidity over the long term, an economic recession, a slow growth period, a decrease in demand for our products, or the need for liquidity to engage in strategic opportunities could adversely affect our business and liquidity or increase our need for liquidity. If and when needed, no assurances can be given that funding will be available to us on acceptable terms, if at all. In addition, instability in or a tightening of the capital markets could adversely affect our ability to obtain additional capital to grow our business on terms acceptable to us or at all.

 

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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:

 

Cash flows for y ear ended December 31, 2018 compared to year ended December 31, 2017

 

    Year Ended December 31  
    2018     2017  
             
Net cash provided by (used in):                
Operating activities   $ (14,753 )   $ 9,790  
Investing activities     (414,990 )     (2,664,101 )
Financing activities     17,961       2,087,264  
Effect of exchange rate changes on cash and cash equivalents     (140,016 )     140,020  
Net decrease in cash and cash equivalents   $ (551,798 )   $ (427,027 )

 

Operating Activities

 

Operating activities consisted primarily of net income/(loss) adjusted for certain non-cash items. Adjustments to net income for non-cash items included depreciation and amortization, share based compensation, inventory markdown, defer tax, and gain/(loss) on disposals of property and equipment. In addition, operating cash flows included the effect of changes in operating assets and liabilities, principally inventories, accounts receivable, income taxes payable, prepaid expenses and other assets, accounts payable, advance from customers, and accrued expenses.

 

Cash flows provided by operating activities decreased $24,543, or 250.7%, to $14,753 used in operating activities in 2018 from $9,790 provided by operating activities in 2017. The decrease in cash from operating activities was due to decreased net cash flows from operating assets and liabilities of $668,753, offset by an increase in net income of $615,743, and an increase resulting from adjustments to net income/(loss) for non-cash items, which increased $28,467 in 2018 compared to 2017.

 

Investing Activities

 

Cash used in investing activities decreased approximately $2.25 million, or 84.4%, to $414,990 in 2018 from $2.66 million in 2017, primarily due to lower capital expenditures. For 2017, total capital expenditure was primarily used for a purchase of land and building in the amount of $2.74 million offset by the collection of a loan from an officer in the amount $74,198 and $2,378 proceeds received from sale of equipment in 2017.

 

Total capital expenditure was $414,990 and approximately $2.74 million in 2018 and 2017, respectively.

 

Financing Activities

 

Financing activities during 2017 consisted primarily of $38,589 of payments paid to related parties, a mortgage loan of $2.04 million for the purchase of land and building in the U.S. and repayment of the mortgage of $79,083. We also received cash of $164,936 from issuances of common stock in 2017.

 

Financing activities during 2018 consisted primarily of $37,802 of proceeds received from related parties and repayment of the mortgage of $69,841. We also received cash of $50,000 from issuances of common stock 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.

 

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Significant Accounting Policies

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosures of contingent assets and liabilities. Actual results could be significantly different from these estimates. We believe the following discussion addresses the critical accounting policies that are necessary to understand and evaluate our reported financial results.

 

Our significant accounting policies are described in Note 2 of our audited consolidated financial statements. The SEC suggests companies provide additional disclosure on those accounting policies considered most critical. The SEC considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgments and estimates on the part of management in its application. Our estimates are often based on complex judgments, probabilities and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. It is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

 

Recognition of Revenues

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) , that replaces existing revenue recognition guidance. The new standard requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new accounting standard, Topic 606, Revenue from Contracts with Customers, and all the related amendments (new revenue standard) to all contracts using the modified retrospective method beginning on January 1, 2018. In accordance with Topic 606, the Company recognizes revenue using the following five-step approach:

 

1. Identify the contract with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price of the contract.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when the performance obligations are met or delivered.

 

Product revenue is recognized when the Company satisfies its performance obligation by transferring promised goods to a customer. Revenue is measured at the transaction price, which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods to the customer. Generally, the Company recognizes revenue from product sales when goods are delivered to the customer, as control of goods occurs at the same time.

 

The Company utilized the modified retrospective approach when reviewing its current accounting policies to identify potential differences that would result from applying the new requirements to its customer contracts. This approach includes the evaluation of sales terms, performance obligations, variable consideration, and costs to obtain and fulfill contracts. Based on the Company’s review, management did not need to record a cumulative effect adjustment to retained earnings as of the date of initial application and application of this guidance did not have a material impact on its consolidated financial statements for the years ended December 31, 2018 and 2017, respectively.

 

As part of the adoption of Topic 606, see Note 13 to the Consolidated Financial Statements for further disaggregation of revenue.

 

Allowance for Doubtful Accounts

 

We make ongoing estimates relating to the collectability of accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the reserve, we consider historical levels of credit losses and significant economic developments within the retail environment that could impact the ability of its customers to pay outstanding balances and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because we cannot predict future changes in the financial stability of its customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine a smaller or larger reserve is appropriate, it would record a benefit or charge to selling, general and administrative expenses in the period in which such a determination was made. As of December 31, 2018 and 2017, the allowance for doubtful accounts was nil.

 

Inventories

 

Inventories consist of raw materials and finished goods. Inventories are valued at the lower of cost or net realizable value. We determine cost by applying the weighted average method. We periodically review inventories for obsolescence and any inventories identified as obsolete are written down or written off. Although we believe that the assumptions we use to estimate inventory write-downs are reasonable, future changes in these assumptions could provide a significantly different result.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary.

 

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Assessing whether deferred tax assets are realizable requires significant judgment. We consider all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent we believe it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against our deferred tax assets, which increase income tax expense in the period when such a determination is made.

 

Income taxes include the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions, or obtaining new information on particular tax positions may cause a change to the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of income.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The significant areas requiring the use of management estimates include, but are not limited to, the allowance for doubtful accounts receivable, inventory mark down allowance, estimated useful life and residual value of property, plant and equipment, impairment of long-lived assets, provision for staff benefits, recognition and measurement of deferred income taxes and valuation allowance for deferred tax assets. Certain estimates, including evaluating the collectability of receivables and the fair market value of inventory, could be affected by external conditions, including those unique to our industry, and general economic condition. It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. We re-evaluate all of our accounting estimates at least quarterly based on these conditions and record adjustments when necessary.

 

Stock Based Compensation

 

We recognize compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options; the expense is recognized over the service period for awards expected to vest. Share-based payments to consultants, service providers and other non-employees are accounted for in accordance with ASC Topic 718, ASC Topic 505, “Equity Payments to Non-Employees” or other applicable authoritative guidance. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider a number of factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

 

Recently Issued Accounting Standards

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments made to nonemployees so the accounting for such payments is substantially the same as those made to employees. Under this ASU, share based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to Accounting Standards Codification (“ASC”) 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We do not believe the adoption of this ASU will have a material effect on our consolidated financial statements or related disclosure.

 

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In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This guidance is effective for all entities for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The amendments in ASU 2018-02 should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We are currently evaluating the potential impact of adopting this new standard on our consolidated statements and related disclosure.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term. ASU 2016-02 requires classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. We have is currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statement presentation or disclosure.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a “smaller reporting company” as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.

 

Item 8. Financial Statements and Supplementary Data.

 

Our Financial Statements and Notes thereto and the report of Prager Metis CPAs, LLC, our independent registered public accounting firm, are set forth beginning on page F-1 of this report.

 

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

 

On October 15, 2018 (the “Resination Date”), Paritz & Company, P.A. (“Paritz”) resigned as the independent registered public accounting firm for Jakroo Inc., followed by Paritz’s merger with Prager Metis CPAs, LLC (“Prager Metis”). On October 15, 2018, we engaged Prager Metis as its new independent registered public accounting firm. The change of our independent registered public accounting firm from Paritz to Prager Metis was approved unanimously by our board of directors.

 

The audit reports of Paritz and Prager Metis CPAs, LLC on our financial statements for the two most recent fiscal years did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

 

During the two most recent fiscal years and through the Resignation Date, there were (i) no disagreements between our company and Paritz on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreement, if not resolved to the satisfaction of Paritz, would have caused Paritz to make reference thereto in their reports on the consolidated financial statements for such years, and (ii) no reportable events as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

 

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Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, at December 31, 2018, such disclosure controls and procedures were effective.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Controls

 

Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our Chief Executive Officer and Chief Financial Officer have concluded that, based on their evaluation as of the end of the period covered by this report, our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of the year ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting

 

As required by the SEC rules and regulations for the implementation of Section 404 of the Sarbanes-Oxley Act, our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:

 

  (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company,
     
  (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and
     
  (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect errors or misstatements in our financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting at December 31, 2018. In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013) . Based on our assessments and those criteria, management determined that we maintained effective internal control over financial reporting at December 31, 2018.

 

Item 9B. Other Information.

 

None.

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Our directors and executive officers and their ages as of the date of this report are as follows:

 

Name   Age   Position
Weidong (Wayne) Du   50   Chief Executive Officer, President and Chairman of Board
David Wang   68   Chief Financial Officer
Wei Tan (1)   49   Treasurer and Director
Derek Wiseman (3)   54   Chief Operating Officer, Secretary and Director
Steven Schuster (1)(2)(3)   64   Independent Director
Merry Tang (1)(2)(3)   58   Independent Director

 

(1) Member of the audit committee

(2) Member of the compensation committee

(3) Member of nominating and corporate governance committee

 

Weidong (Wayne) Du

 

Wayne Du is co-founder of our Company and has been serving as our Chief Executive Officer, President and director of our Board since its inception. Mr. Du’s primary responsibilities include defining our global marketing, sales and finance strategies, establishing company-wide policies and overall management. As one of the pioneer entrepreneurs in the Chinese cycling apparel industry, Mr. Du has more than 20 years of experience in the endurance apparel industry. Mr. Du founded our first operating entity, Rider Beijing, in 2003 and has been leading the global expansion of our Company to various regions of Asia and the world since then. Mr. Du has served as the Managing Director of Rider Canada and Rider Austria since their inceptions and the Chief Executive Officer of Rider US since June 2008. Mr. Du holds a Bachelor of Economics degree from Zhongnan University of Finance and Economics in China. In considering Mr. Du’s eligibility to serve on the Board, the Board considered Mr. Du’s leadership, extensive experience in the sporting apparel industry and familiarity with our business.

 

David Wang

 

David Wang has been serving as our Chief Financial Officer since January 2019. Mr. Wang has more than 25 years of experience in tax compliance, financial reporting and business consulting. He also been serving as Chief Financial Officer of Rider Sportsfashion LLC, our U.S. operating subsidiary (“Jakroo US”), since January 2019 and also served as a financial consultant to Jakroo US from 2011 to 2018. Mr. Wang started his public accounting practice as a sole practitioner in 1993 to assist small and medium sized businesses in different industries. Prior to starting his own business, Mr. Wang served as a senior accountant position at an accounting firm and a senior tax auditor at a government agency between 1987 and 1993. Mr. Wang received his Bachelor’s degree in Business Administration, Accounting Option from California State University, East Bay. He is a certified public accountant.

 

Wei Tan

 

Wei Tan is co-founder of our Company and currently serving as our Treasurer and director of our Board. As one of our founders, Ms. Tan has served in various accounting and finance managerial positions at our operating subsidiaries since the founding of our subsidiary, Rider Beijing, in 2003. She has served as the Financial Director of Rider US since June 2013, where she manages its accounting and budgets and also developed its financial monitoring and reporting systems. Ms. Tan holds a Bachelor of Economics degree from Zhongnan University of Finance and Economics in China. In considering Ms. Tan’s eligibility to serve on the Board, the Board considered Ms. Tan’s leadership, extensive accounting and financial control background, as well as experience in the sporting apparel industry.

 

Derek Wiseman

 

Derek Wiseman is the Secretary and Chief Operating Officer of our Company and a director of our Board. Mr. Wiseman has also taken various executive positions at our operating subsidiaries. He has served as the Chief Operating Officer of Rider US since June 2010. As Chief Operating Officer of Rider US, Mr. Wiseman oversees all operational and technology infrastructure for the organization including talent acquisition, provides programmatic leadership and input for all strategic plan implementation and scoping out the next level of information technology and financial systems to support the growth of specific programs and the organization overall. Mr. Wiseman has served as the Managing Director of Rider Canada and Rider Austria since 2014 and 2015, respectively. At Rider Canada and Rider Austria, Mr. Wiseman manages the forecasting, budgeting and financial planning of these subsidiaries. Mr. Wiseman brings over 20 years of experience in the Action Sports, Athletic and Outdoor industries. Prior to joining Rider US, Mr. Wiseman held various consulting, senior management and executive roles with Gyminee (now DailyBurn), Zamberlan S.r.l., an Italian footwear company, and Phenix Co. Ltd, a Japanese sportswear company. Mr. Wiseman holds a Bachelor’s degree in Theological Studies from Briercrest College & Seminary. In considering Mr. Wiseman’s eligibility to serve on the Board, the Board considered his deep understanding of our business operations, experience in the sporting apparel industry and experience in managing operations in multiple countries and geographic areas.

 

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Steven W. Schuster

 

Steven W. Schuster has been serving as an independent director of our company since August 2017. Mr. Schuster has been engaged in the practice of corporate and securities law for over 35 years. He has been a partner at McLaughlin & Stern LLP, a New York City based law firm, since 1995 and is currently serving as Chair of the firm’s Corporate and Securities department and Chair of the firm’s China Practice. Mr. Schuster previously served as an independent director of Tower Group, Inc., a Nasdaq listed insurance company from 1996 to 2014 and an independent director of Resonant Software Inc., a private company in the software industry from 2010 to 2017. Mr. Schuster received his B.A. from Harvard University in 1976 and his J.D. from New York University in 1980. In considering Mr. Schuster’s eligibility to serve on the Board, the Board considered his prior directorship at public companies, background in corporate governance and extensive experience working with multinational companies in a wide range of industries.

 

Merry Tang

 

Merry Tang, CPA and MA, has been serving as an independent director of our company since August 2017. She is currently a principal of GTZY CPA Group, LLC, a PCAOB registered accounting firm, providing accounting, auditing, taxation, and business consulting services. Prior to forming GZTY CPA Group, LLC, Ms. Tang served as a managing director at GTA International, LLC and partner at Tang & Company, PC — both U.S.-based consulting and CPA firms offering services in risk assessment, audit engagements and Sarbanes-Oxley related documentation to leading banks, financial service providers and telecommunications firms from 2006 to 2008. She also served as a senior auditor in PricewaterhouseCoopers, LLC from 2004 to 2006. Ms. Tang has served on the board of directors of other public companies as an independent director. She has been an independent director of the Ever-glory International Group, Inc., a retailer of branded fashion apparel and a leading global apparel supply chain solution provider since August 2011, and an independent director of China Sunergy Co., Ltd., a specialized manufacturer of solar cell and module products in China since June 2008. Ms. Tang graduated from the Central University of Economics and Finance, Beijing, China with a Bachelor Degree in Finance and Banking in 1983 and a Master’s Degree in Finance in 1986. She also received her Master’s Degree in Accounting from the State University of New York at Albany in 1993. In considering Ms. Tang’s eligibility to serve on the Board, the Board considered Ms. Tang’s extensive accounting and financial control background, experience in risk management as well as directorship at public companies.

 

Family Relationship

 

Mr. Weidong (Wayne) Du, our Chief Executive Officer and director, is the husband of Ms. Wei Tan, our Treasurer and director. Mr. Du and Ms. Tan are the principal shareholders of our company through their entity Kustellar LLC.

 

Director Letter Agreement

 

We have entered into a letter agreement (the “Letter Agreement”) with each of Mr. Steven Schuster and Ms. Merry Tang. Pursuant to the Letter Agreement, each of Mr. Schuster and Ms. Tang will be entitled to a cash compensation of $12,000 per year, payable quarterly, and an incentive stock option to purchase 240,000 shares of our common stock at a purchase price of $0.25 per share. The option vests immediately upon grant and will be exercisable for a period of five years on a cashless exercise basis starting from six months from the date of grant.

 

Board Committees and Director Independence

 

Our Board has determined that our directors Steven Schuster and Merry Tang are independent under applicable SEC rules. Our Board has established three standing committees — Audit, Compensation, and Nominating and Corporate Governance committees. We intend to adopt a charter for each of these committees.

 

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Audit Committee

 

Our board of directors has an Audit Committee, composed of Messrs. Schuster, Tang, and Tan. Mr. Schuster and Ms. Tang are independent directors and Ms. Tan is a non-independent director. Ms. Tang serves as chairman of the committee. The board of directors has determined that Ms. Tang is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.

 

Our Audit Committee oversees our corporate accounting, financial reporting practices and the audits of financial statements. The Audit Committee:

 

  evaluates the independence and performance of, and assesses the qualifications of, our independent auditor and engages such independent auditor;
     
  approves the plan and fees for the annual audit, quarterly reviews, tax and other audit-related services and approves in advance any non-audit service and fees therefor to be provided by the independent auditor;
     
  monitors the independence of the independent auditor and the rotation of partners of the independent auditor on our engagement team as required by law;
     
  reviews the financial statements to be included in our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and reviews with management and the independent auditors the results of the annual audit and reviews of our quarterly financial statements;
     
  oversees all aspects of our systems of internal accounting and financial reporting control and corporate governance functions on behalf of the board; and
     
  provides oversight assistance in connection with legal, ethical and risk management compliance programs established by management and the board, including compliance with requirements of Sarbanes-Oxley and makes recommendations to the board of directors regarding corporate governance issues and policy decisions.

 

We will adopt an Audit Committee charter which will be reviewed annually.

 

Compensation Committee

 

Our board of directors has a Compensation Committee composed of Messrs. Schuster and Tang, each of whom are independent directors. Mr. Schuster serves as the chairman of the committee. Our Compensation Committee reviews or recommends the compensation arrangements for our management and employees and also assists the board of directors in reviewing and approving matters such as company benefit and insurance plans, including monitoring the performance thereof.

 

We will adopt a Compensation Committee charter which will be reviewed annually.

 

Nominating and Corporate Governance Committee

 

Our board of directors has a Nominating and Corporate Governance Committee composed of Messrs. Schuster, Tang and Wiseman. Mr. Schuster and Ms. Tang are independent directors and Mr. Wiseman is a non-independent director. Mr. Wiseman serves as the chairman of the committee. The Nominating and Corporate Governance Committee is charged with the responsibility of reviewing our corporate governance policies and with proposing potential director nominees to the board of directors for consideration. The Nominating and Corporate Governance Committee will consider director nominees recommended by security holders.

 

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We will adopt a Nominating and Corporate Governance Committee charter which will be reviewed annually.

 

Code of Business Conduct and Ethics and Insider Trading Policy

 

We have adopted a code of business conduct and ethics in January 2019, a copy of which is filed as Exhibit 14.1 to this report.

 

Compensation Committee Interlocks and Insider Participation

 

Other than our subsidiaries, our officers and directors do not currently serve, or in the past year has not served, as a member of the compensation committee or director (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more executive officers serving on our Board.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Our officers and directors are not required to file reports pursuant to section 16 of the Exchange Act.

 

Item 11. Executive Compensation.

 

The following table sets forth all compensation paid to our named executive officers at the end of the fiscal years ended December 31, 2018 and 2017. Individuals we refer to as our “named executive officers” include our Chief Executive Officer and our most highly compensated executive officers whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended December 31, 2018.

 

Name and principal position   Year     Salary ($)     Bonus ($)     Stock Awards ($)     Option Awards ($)     Non- Equity Incentive Plan Compensation ($)     Nonqualified Deferred Compensation Earnings ($)     All Other Compensation ($)     Total ($)  
                                                       
Weidong (Wayne) Du
Chief Executive Officer,
  2017       146,447       33,006           -         -             -              -       5,150       184,603  
President, and Director(1)   2018       160,869       38,173       -       -       -       -       -       199,042  
                                                                       
David Wang
Chief Financial Officer
  2017       -       -       -       -       -       -       -       -  
    2018       -       -       -       -       -       -       -       -  
                                                                       
Derek Wiseman
Chief Operating Officer,
  2017       125,140       23,075       -         42,294       -       -       18,888       209,397  
Secretary and Director (2)   2018       140,249       29,977       -       42,294       -       -       3,776       216,296  

   

  (1) Consists of Mr. Du’s compensation from Jakroo Inc.’s operating subsidiaries, Rider US and Rider Beijing.
  (2) Consists of Mr. Wiseman’s compensation from Jakroo Inc.’s operating subsidiary, Rider US.

 

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Employment Agreements and Potential Payments upon Termination

 

As of the date of this report, David Wang has entered into an employment agreement with Jakroo U.S., in January 2019, pursuant to which he is entitled to a monthly salary of $4,000 and an option to purchase 80,000 shares of our common stock.

 

2016 Equity Inventive Plan

 

On January 5, 2017, our Board of Directors and a majority of the holders of our then outstanding shares of common stock adopted the Jakroo Inc. 2016 Equity Incentive Plan (the “2016 Plan”), which sets forth the terms for the grant of stock awards to our employees. There were 3,535,500 shares of common stock reserved for issuance under the 2016 Plan for the year ended December 31, 2018. On February 13, 2019, our Board of Directors and a majority of the holders of our then outstanding shares of common stock approved an amendment to the our 2016 Plan to increase the number of shares of common stock reserved and available for issuance under the 2016 Plan to 15,000,000 shares of common stock.

 

Plan Category   Number of securities to be issued upon exercise of outstanding options, warrants and rights     Weighted-average exercise price of outstanding options, warrants and rights     Number of securities remaining available for issuance  
Equity compensation plans approved by security holders     3,535,500     $        0.18       11,464,500  
Total    

3,535,500

    $ 0.18       11,464,500  

 

The purpose our 2016 Plan is to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons in our development and financial achievements. The 2016 Plan will be administered by a committee or, in the absence of a committee, by the full Board of Directors which may determine, among other things, (a) the terms and conditions of any option or stock purchase rights granted, including the exercise price and the vesting schedule, (b) the persons who are to receive options and stock purchase rights and (c) the number of shares subject to each option and stock purchase right. The 2016 Equity Incentive Plan provides for the grant of (i) “incentive” options (qualified under Section 422 of the Internal Revenue Code of 1986, as amended) to employees of our Company and (ii) non-qualified options to directors and consultants of our Company.

 

In connection with the administration of our 2016 Equity Incentive Plan, our Board of Directors, or the relevant committee, will:

 

  determine which employees and other persons will be granted awards under our 2016 Plan;
     
  grant the awards to those selected to participate;
     
  determine the exercise price for options; and
     
  prescribe any limitations, restrictions and conditions placed upon any awards, including vesting conditions of awards.

 

The 2016 Plan provides that in the event of a change of control event, the Board of Directors will have the discretion to determine whether and to what extent to accelerate vesting, exercise or payment of an award.

 

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In addition, our Board of Directors may amend the 2016 Plan at any time. However, without stockholder approval, our 2016 Plan may not be amended in a manner that would:

 

  increase the number of shares available for issuance under the 2016 Plan;
     
  materially modify the requirements for eligibility for participation in the 2016 Plan;
     
  materially increase the benefits to participants provided by our 2016 Plan; or
     
  otherwise disqualify our 2016 Plan for coverage under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended.

 

Awards previously granted under our 2016 Plan may not be impaired or affected by any amendment of our 2016 Plan, without the consent of the affected grantees.

 

Outstanding Equity Awards at December 31, 2018 and December 31, 2017

 

The following table sets forth information concerning outstanding stock options for each named executive officer and director as of December 31, 2018.

 

Name   Option Awards  
    Number of securities underlying unexercised options(#) exercisable     Number of securities underlying unexercised options (#) unexercisable     Equity incentive plan awards: Number of securities underlying unexercised unearned
options (#)
    Option exercise price ($)     Option expiration date  
Weidong (Wayne) Du     -       -              -       -       -  
David Wang     -       -       -       -       -  
Derek Wiseman     654,750       654,750       -       0.16       01/04/2027  
Steven Schuster     240,000       -       -       0.25       08/15/2022  
Merry Tang     240,000       -       -       0.25       08/15/2022  

 

The following table sets forth information concerning outstanding stock options for each named executive officer and director as of December 31, 2017.

 

Name   Option Awards  
    Number of securities underlying unexercised options(#) exercisable     Number of securities underlying unexercised options (#) unexercisable     Equity incentive plan awards: Number of securities underlying unexercised unearned
options (#)
    Option exercise price ($)     Option expiration date  
Weidong (Wayne) Du     -       -               -       -       -  
Wei Tan     -       -       -                  
Derek Wiseman     654,750       654,750       -       0.16       01/04/2027  
Steven Schuster     240,000       -       -       0.25       08/15/2022  
Merry Tang     240,000       -       -       0.25       08/15/2022  

 

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Option Exercises and Stock Vested

 

There were no options exercised by the executive officers or directors during the years ended December 31, 2018 and 2017.

 

Pension Benefits

 

None of our employees participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us. Our Compensation Committee may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in our company’s best interest.

 

Non-Qualified Deferred Compensation

 

None of our employees participate in or have account balances in non-qualified defined contribution plans or other non-qualified deferred compensation plans maintained by us. Our Compensation Committee may elect to provide our officers and other employees with non-qualified defined contribution or other non-qualified compensation benefits in the future if it determines that doing so is in our company’s best interest.

 

Compensation of Directors

 

The following table sets forth all compensation paid to our Board members during the year ended December 31, 2018:

 

Name   Fees
Earned or
Paid in
Cash ($)
    Stock
Awards
($)
    Option
Awards
($)
    Non-Equity
Incentive Plan
Compensation
($)
    Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)
    All Other
Compensation
($)
    Total ($)  
Weidong (Wayne) Du     -            -           -               -               -                -       -  
Wei Tan     -       -       -       -       -       -       -  
Derek Wiseman     -       -       -       -       -       -       -  
Steven Schuster   $ 9,000       -       -       -       -       -     $ 9,000  
Merry Tang   $ 9,000       -       -       -       -       -     $ 9,000  

 

The following table sets forth all compensation paid to our Board members during the year ended December 31, 2017:

 

Name   Fees
Earned or
Paid in
Cash ($)
    Stock
Awards
($)
    Option
Awards
($)
    Non-Equity
Incentive Plan
Compensation
($)
    Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)
    All Other
Compensation
($)
    Total ($)  
Weidong (Wayne) Du     -            -            -                -              -               -       -  
Wei Tan     -       -       -       -       -       -       -  
Derek Wiseman     -       -       -       -       -       -       -  
Steven Schuster   $ 9,000       -       -       -       -       -     $ 9,000  
Merry Tang   $ 9,000       -       -       -       -       -     $ 9,000  

 

None of our directors has received any compensation for their services as a director of our company or any of our subsidiaries or VIE entities for the fiscal year ended December 31, 2016.

 

  55  
 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth certain information concerning the ownership of the our common stock as of the date of this report with respect to: (i) each person known to us to be the beneficial owner of more than five percent of our common stock; (ii) all directors; (iii) all named executive officers; and (iv) all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC that deem shares to be beneficially owned by any person who has voting or investment power with respect to such shares. Shares of common stock subject to options or warrants that are exercisable as of the date of this report or are exercisable within 60 days of such date are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of calculating the percentage ownership of such person but are not treated as outstanding for the purpose of calculating the percentage ownership of any other person.

 

Name and Address of beneficial owner (1)   Amount and nature of beneficial
ownership of
Common Stock (2)
   

Percentage of

outstanding

Common Stock (3)

 
Weidong (Wayne) Du (4)     25,899,000       81.5 %
Wei Tan (4)     25,899,000       81.5 %
Derek Wiseman (5)     684,750       2.2 %
Steven Schuster (7)     240,000       *  
Merry Tang (8)     240,000       *  
David Wang (9)     -       *  
All directors and executive officers as a group (6 persons)     27,063,750          
                 
Other 5% Stockholders                
Kustellar LLC (6)     25,899,000       81.5 %

 

* Less than 1%

 

(1) Unless otherwise indicated, the business address of each of the individuals is 5906 Stone Ridge Mall Road, Pleasanton, CA 94588.
(2) Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights.

 

  56  
 

 

(3) The percentage of class is based on 31,777,110 shares of common stock issued and outstanding as of the date of this report.
(4) Mr. Du and Ms. Tan are husband and wife. Their shares are held by Kustellar LLC, a California limited liability company of which Mr. Du and Ms. Tan jointly own 100% of the equity interests.
(5) Consists of 30,000 shares of common stock and options to purchase 654,750 shares of common stock which were awarded to Mr. Wiseman under the Jakroo Inc. 2016 Equity Incentive Plan.
(6) Mr. Du and Ms. Tan jointly own 100% of the equity interests of Kustellar LLC. Mr. Du is the sole manager of Kustellar LLC and has voting and dispositive power over the shares held by Kustellar LLC.
(7) Mr. Schuster has been granted an incentive stock option to purchase 240,000 shares of common stock, which is exercisable until August 2022.
(8) Ms. Tang has been granted an incentive stock option to purchase 240,000 shares of common stock, which is exercisable until August 2022.
(9) As part of his employment agreement entered into with us in January 2019, Mr. Wang was granted an option to purchase 80,000 shares of our common stock.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Below are descriptions of all transactions since January 1, 2018, or which are currently being proposed, to which we were a party or will be a party, in which:

 

  the amounts involved exceeded or will exceed the lesser of $120,000 and 1% of the average of our total assets at year-end for the last two completed fiscal years; and
     
  any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest.

 

Kustellar LLC, an entity co-owned by Mr. Weidong Du and Ms. Wei Tan, each a stockholder and director of our company, provides accounting consulting service to our company. We were billed by Kustellar LLC $nil and $11,555 for the years ended December 31, 2018 and 2017, respectively; and paid $nil and $31,928 in the years ended December 31, 2018 and 2017, respectively.

 

The WFOE and Rider Sportsfashion Ltd. (our Chinese VIE) leased office space from Ms. Wei Tan in China for approximately $3,000 per month. The lease expires on May 14, 2019. Rent expenses incurred to Ms. Wei Tan were approximately $36,000 for the years ended December 31, 2018 and 2017, respectively.

 

On June 5, 2015, we signed a loan agreement with our Chief Operating 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 was paid in full in April 2017 and the balance of such loan was zero as of December 31, 2018 and 2017, respectively.

 

In April 2018, Designlab entered a Master Agreement and License Agreement with R2.ai, Inc., a Silicon Valley-based company specializing 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. $20,000 was paid in the year ended December 31, 2018.

 

In 2018, Mr. Weidong Du and Ms. Wei Tan, each a stockholder and director of our company, were paid in advance for business travel relating to our company. In 2018, we did not reimburse Mr. Weidong Du and Ms. Wei Tan for these amounts. As of December 31, 2018, we had total $36,426 payable to Mr. Weidong Du and Ms. Wei Tan.

 

  57  
 

 

Item 14. Principal Accountant Fees and Services.

 

Audit Fees. The aggregate fees billed by Paritz & Company, P.A. for professional services rendered for the audit of our annual financial statements, review of the financial information included in our Forms 10-Q for the respective periods and other required filings with the SEC for the year ended December 31, 2017 totaled $71,855.

 

The aggregate fees billed by Prager Metis for professional services rendered for the audit of our annual financial statements, review of the financial information included in our Forms 10-Q for the respective periods and other required filings with the SEC for the year ended December 31, 2018 totaled $65,000.

 

Audit-Related Fees. Audit-related services consist of fees for assurance and related services that are reasonably related to performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards. There were no fees billed by Paritz & Company, P.A and Prager Metis, respectively, for audit-related services rendered during the last two fiscal years.

 

Tax Fees. Tax services consist of fees for the preparation of federal and state tax returns. There were no fees billed by Paritz & Company, P.A and Prager Metis for tax services rendered during the last two fiscal years.

 

All Other Fees. None.

 

  58  
 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

The following exhibits are filed with this report.

 

Exhibit No.   Description
3.1   Articles of Incorporation of the Company (1)
3.2   Bylaws of the Company (1)
3.3   Certificate of Amendment to Articles of Incorporation (1)
10.1   Business Operation Agreement, dated December 15, 2016, by and among Jakroo (Beijing) Sports Consulting Co., Ltd., Rider Sportsfashion Limited and Shareholders of Rider Sportsfashion Limited (1)
10.2   Equity Pledge Agreement, dated December 15, 2016, by and among Jakroo (Beijing) Sports Consulting Co., Ltd., Rider Sportsfashion Limited and Shareholders of Rider Sportsfashion Limited (1)
10.3   Exclusive Call Option Agreement, dated December 15, 2016, by and among Jakroo (Beijing) Sports Consulting Co., Ltd., Rider Sportsfashion Limited and Shareholders of Rider Sportsfashion Limited (1)
10.4   Exclusive Technical Consulting and Service Agreement, dated December 15, 2016, by and between Jakroo (Beijing) Sports Consulting Co., Ltd., Rider Sportsfashion Limited (1)
10.5   Form of Power of Attorney (1)
10.6   Form of Custom Processing Framework Agreement (1)
10.7   Form of OEM Cooperation Agreement (1)
10.8   Tmall Sales Authorization Agreement, dated January 22, 2016, by and between First Branch of Rider Sportsfashion Limited and Hangzhou Fengxue Outdoor Products Co., Ltd. (1)
10.9   Agency Agreement, dated April 22, 2016, by and between Rider Sportsfashion Limited and Wuchang Longqi Bicycle Operation Department. (1)
10.10   Sales Contract, dated October 17, 2014, by and between Rider Sportsfashion Limited and Beijing Fortuna Digital Graphics Co., Ltd. (1)
10. 11   Lease Agreement, dated February 25, 2014, by and between Hongzhang Zhao and Rider Sportsfashion Limited. (1)
10.12   Lease Agreement, dated October 18, 2016, by and between Sonxiang Zhou and Rider Sportsfashion Limited. (1)
10.13   Jakroo Inc. 2016 Equity Incentive Plan. (1)
10.14   Subscription Agreement, dated April 25, 2016, by and between the Company and Kustellar LLC. (1)
10.15   Subscription Agreement, dated April 22, 2016, by and between the Company and Custom Apparel Limited. (1)
10.16   Share Purchase Agreement, dated May 30, 2016, by and among Jakroo Inc., Kurstellar LLC, Custom Apparel Limited, Rider Sportsfashion Limited, the founders of Rider Sportsfashion Limited and London Financial Group Ltd. (1)
10.17   Supplemental Agreement, dated November 18, 2016, by and among Jakroo Inc., Kurstellar LLC, Custom Apparel Limited, Rider Sportsfashion Limited, the founders of Rider Sportsfashion Limited and London Financial Group Ltd. (1)
10.18   Form of Subscription Agreement in connection with the January 2017 Regulation D offering. (1)
10.19   Form of Subscription Agreement in connection with January 2017 Regulation S offering. (1)
10.20   Amendment No. 1 to Jakroo Inc. 2016 Equity Incentive Plan. (2)
14.1   Code of Ethics*
21.1   Subsidiaries of the Registrant (1)
31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. #
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. #

 

  59  
 

 

101.ins   XBRL Instance Document
     
101.sch   XBRL Taxonomy Extension Schema Document
     
101.cal   XBRL Taxonomy Calculation Linkbase Document
     
101.def   XBRL Taxonomy Definition Linkbase Document
     
101.lab   XBRL Taxonomy Label Linkbase Document
     
101.pre   XBRL Taxonomy Presentation Linkbase Document

 

* Filed herewith
   
# Furnished herewith
   
(1)

Previously filed with Form S-1, dated April 21, 2017.

   
(2) Previously filed with Form 8-K, dated March 4, 2019.

 

Item 16. Form 10-K Summary

 

We have elected not to include a summary pursuant to this Item 16.

 

  60  
 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  JAKROO INC.
     
Date: April 1, 2019 By: /s/ Weidong (Wayne) Du
  Name: Weidong (Wayne) Du
  Title: President and Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ David Wang
  Name: David Wang
  Title: Chief Financial Officer
    (Principal Accounting Officer)

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Person   Capacity   Date
         
/s/ Weidong (Wayne) Du   Chief Executive Officer, President   April 1, 2019
Weidong (Wayne) Du   and Chairman of Board    
         
/s/ David Wang   Chief Financial Officer   April 1, 2019
David Wang        
         
/s/ Wei Tan   Treasurer and Director   April 1, 2019
Wei Tan        
         
/s/ Derek Wiseman   Chief Operating Officer, Secretary and Director   April 1, 2019
Derek Wiseman        
         
/s/ Steven Schuster   Director   April 1, 2019
Steven Schuster        
         
/s/ Merry Tang   Director   April 1, 2019
Merry Tang        

 

  61  
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To Stockholders and the Board of Directors

of Jakroo Inc.

5906 Stoneridge Mall Road

Pleasanton, CA 94588

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Jakroo Inc. (the “Company”) as of December 31, 2018, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2018 and related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Prager Metis CPAs, LLC

 

We have served as the Company’s auditor since 2018

 

Hackensack, New Jersey

April 1, 2019

 

  F- 1  
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Jakroo Inc.

5906 Stoneridge Mall Road

Pleasanton, CA 94588

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Jakroo Inc. (the “Company”) as of December 31, 2017, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2017 and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

PARITZ SIG.JPG

 

We have served as the Company’s auditor since 2015.

 

Hackensack, NJ

April 2, 2018

 

  F- 2  
 

 

Jakroo Inc. and Subsidiaries

Consolidated Balance Sheets

 

    December 31, 2018     December 31, 2017  
ASSETS                
Current assets:                
Cash and cash equivalents   $ 1,799,132     $ 2,350,930  
Accounts receivable     60,151       53,026  
Inventories     1,859,669       1,549,996  
Prepaid expenses and other current assets     329,414       452,715  
Total current assets     4,048,366       4,406,667  
Property and equipment, net     3,136,902       2,854,802  
TOTAL ASSETS   $ 7,185,268     $ 7,261,469  
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 462,717     $ 245,396  
Due to related parties     36,426       -  
Advance from customers     122,597       653,305  
Mortgage payable – current portion     72,697       69,898  
Other current liabilities     199,675       296,723  
Total current liabilities     894,112       1,265,322  
Mortgage payable     1,818,379       1,891,019  
Total liabilities     2,712,491       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, 31,488,650 and 31,288,650 shares issued and outstanding as of December 31, 2018 and 2017, respectively     31,489       31,289  
Additional paid in capital     855,938       693,352  
Statutory reserve     136,652       136,652  
Retained earnings     3,358,766       3,023,173  
Accumulated other comprehensive loss     (326,648 )     (126,596 )
Total Jakroo Inc. Stockholders’ equity     4,056,197       3,757,870  
Non-controlling interests     416,580       347,258  
Total Stockholders’ Equity     4,472,777       4,105,128  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 7,185,268     $ 7,261,469  

 

The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.

 

  F- 3  
 

 

Jakroo Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (loss)

 

    Year Ended December 31,  
    2018     2017  
             
Revenues   $ 10,975,325     $ 9,470,585  
Cost of revenues     4,520,316       4,024,722  
Gross profit     6,455,009       5,445,863  
Selling, general and administrative expense     5,795,445       5,477,053  
Income (loss) from operations     659,564       (31,190 )
Interest expense, net of interest income     (73,101 )     (32,162 )
Income (loss) before income taxes     586,463       (63,352 )
Income taxes     193,606       159,534  
NET INCOME/(LOSS)     392,857       (222,886 )
                 
Less: Income attributable to non-controlling interest     57,264       586  
NET INCOME/(LOSS) ATTRIBUTABLE TO JAKROO INC.     335,593       (223,472 )
                 
OTHER COMPREHENSIVE INCOME/(LOSS):                
Foreign currency translation adjustment     (222,280 )     197,463  
COMPREHENSIVE INCOME/(LOSS)     170,577       (25,423 )
                 
Less: Comprehensive income attributable to non-controlling interest     35,036       20,332  
COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO JAKROO INC.   $ 135,541     $ (45,755 )
                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC     31,380,705       30,898,157  
EARNING/(LOSS) PER SHARE – BASIC   $ 0.01     $ (0.01 )
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED     33,049,913       30,898,157  
EARNING/(LOSS) PER SHARE – DILUTED   $ 0.01     $ (0.01 )

 

The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.

 

  F- 4  
 

 

Jakroo Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

 

    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, 2016     30,604,425     $ 30,604     $ 361,057     $ 136,652     $ 3,246,645     $ (304,313 )   $ 3,470,645     $ 326,926     $ 3,797,571  
Issuance of common stock for cash     684,225       685       164,251       -       -       -       164,936       -       164,936  
Share-based compensation     -       -       168,044       -       -       -       168,044       -       168,044  
Net income (loss)     -       -       -       -       (223,472 )     -       (223,472 )     586       (222,886 )
Foreign currency translation adjustment     -       -       -       -       -       177,717       177,717       19,746       197,463  
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     -       -       -       -       -       -       -       34,286       34,286  
Issuance of common stock for cash     200,000       200       49,800       -       -       -       50,000       -       50,000  
Share-based compensation     -       -       112,786       -       -       -       112,786       -       112,786  
                                                                         
Net income     -       -       -       -       335,593       -       335,593       57,264       392,857  
Foreign currency translation adjustment     -       -       -       -       -       (200,052 )     (200,052 )     (22,228 )     (222,280 )
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  

 

The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.

 

  F- 5  
 

 

Jakroo Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

    December 31, 2018     December 31,  2017  
Cash Flows From Operating Activities:                
Net Income/(Loss)   $ 392,857     $ (222,886 )
Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities                
Depreciation     151,013       128,273  
Gain on disposal of property and equipment     -       (1,934 )
Share based compensation     112,786       168,044  
Inventory markdown     22,011       47,430  
Deferred taxes     42,235       (42,235 )
Changes in operating assets and liabilities:                
Accounts receivable     (9,659 )     (6,820 )
Inventories     (419,692 )     (17,219 )
Prepaid expenses and other current assets     64,638       (60,075 )
Accounts payable     234,716       (139,171 )
Advance from customers     (521,477 )     86,484  
Other current liabilities     (44,850 )     56,180  
Income tax payable     (39,331 )     13,719  
Net cash provided by (used in) operating activities     (14,753 )     9,790  
Cash Flows from Investing Activities:                
Collection of loan to officer     -       74,198  
Acquisition of property and equipment     (414,990 )     (2,740,677 )
Proceeds received from sale of equipment     -       2,378  
Net cash used in investing activities     (414,990 )     (2,664,101 )
Cash Flows from Financing Activities:                
Proceeds from (Payment to) related parties     37,802       (38,589 )
Proceeds from mortgage loan     -       2,040,000  
Repayment of mortgage loan     (69,841 )     (79,083 )
Proceeds from issuance of common stock     50,000       164,936  
Net cash provided by financing activities     17,961       2,087,264  
Effect of exchange rate changes on cash and cash equivalents     (140,016 )     140,020  
Net decrease in cash and cash equivalents     (551,798 )     (427,027 )
Cash and cash equivalents, beginning of year     2,350,930       2,777,957  
CASH AND CASH EQUIVALENTS, END OF YEAR   $ 1,799,132     $ 2,350,930  
Supplemental disclosure of cash flow information:                
Cash paid during the years for:                
Income taxes   $ 192,356     $ 188,463  
Interest   $ 77,451     $ 33,289  
Non-cash investing and financing activities                
Non-controlling interest contribution of intangible assets   $ 34,286     $ -  

 

The accompanying Notes to the Consolidated Financial Statements are an integral part of this statement.

 

  F- 6  
 

 

Jakroo Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Jakroo Inc. was incorporated in the State of Nevada on January 25, 2016. 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.”

 

On October 28, 2016, Jakroo Inc. established a wholly owned subsidiary, Jakroo (Beijing) Sports Consulting Co. Ltd. (the “WFOE”), in China. On December 15, 2016, the WFOE and the shareholders of Rider Sportsfashion Ltd. (the “Rider”), entered into a series of variable interest entity agreements (the “VIE Agreements”). Through the VIE Agreements, the WFOE obtained control over Rider which allows it to receive 90% of the net profits or absorb net losses derived from the business operations of Rider.

 

Rider is a company incorporated in China specializing in the design, manufacture and sale of customized technical endurance apparel for the cycling, triathlon, running and Nordic skiing markets. Rider was founded in Beijing in 2003. In 2008, its wholly owned subsidiary, Rider Sportsfashion LLC, was established in Pleasanton, California and its wholly owned subsidiaries, Jakroo Canada Inc., in Canada and Jakroo GmbH in Rankweil, Austria were established in 2014 and 2015, respectively. In March 2017, Rider established its wholly owned subsidiary, Rider Sportsfashion (Langfang) Limited (“Rider Langfang”) in China, with the primary function of product manufacturing, of which the production function was previously undertaken by our subsidiary Garment Processing Branch of Rider Sportsfashion Limited.

 

The VIE Agreements are comprised of a series of agreements, including an Equity Pledge Agreement, an Exclusive Technical Consulting and Service Agreement, a Business Operation Agreement, an Exclusive Call Option Agreement and Power of Attorney through which the WFOE has the right to advise, consult, manage and operate the Company for an annual consulting service fee in the amount of 90% of the Company’s operating revenue. Shareholders have pledged their right, title and equity interests in the Company as security for the WFOE to collect consulting services fees provided to the Company through an Equity Pledge Agreement. In order to further reinforce the WFOE’s rights to control and operate the Company, the Company’s stockholders have granted the WFOE an exclusive right and option to acquire all of their equity interests in the Company through an Exclusive Call Option Agreement.

 

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.

 

Since the shareholders who control Rider are the ultimate stockholders who control the Company and WFOE, the consolidated financial statements are based on the entities under common control. The consolidated financial statements are prepared as if the reorganization structure was completed at the beginning of the periods presented.

 

2. Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

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.

 

Recognition of Revenues

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) , that replaces existing revenue recognition guidance. The new standard requires companies to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, Topic 606 requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted the new accounting standard, Topic 606, Revenue from Contracts with Customers, and all the related amendments (new revenue standard) to all contracts using the modified retrospective method beginning on January 1, 2018. In accordance with Topic 606, the Company recognizes revenue using the following five-step approach:

 

1. Identify the contract with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price of the contract.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when the performance obligations are met or delivered.

 

Product revenue is recognized when the Company satisfies its performance obligation by transferring promised goods to a customer. Revenue is measured at the transaction price, which is based on the amount of consideration that the Company expects to receive in exchange for transferring the promised goods to the customer. Generally, the Company recognizes revenue from product sales when goods are delivered to the customer, as control of goods occurs at the same time.

 

The Company utilized the modified retrospective approach when reviewing its current accounting policies to identify potential differences that would result from applying the new requirements to its customer contracts. This approach includes the evaluation of sales terms, performance obligations, variable consideration, and costs to obtain and fulfill contracts. Based on the Company’s review, management did not need to record a cumulative effect adjustment to retained earnings as of the date of initial application and application of this guidance did not have a material impact on its consolidated financial statements for the years ended December 31, 2018 and 2017, respectively.

 

As part of the adoption of Topic 606, see Note 13 to the Consolidated Financial Statements for further disaggregation of revenue.

 

  F- 7  
 

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less. The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. Cash accounts are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on such cash.

 

Deposits in banks in the PRC are not insured by any government entity or agency, and are consequently exposed to risk of loss. The Company believes the probability of a bank failure causing loss to the Company is remote.

 

Allowance for Doubtful Accounts

 

The Company makes ongoing estimates relating to the collectability of accounts receivable and maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. In determining the amount of the reserve, the Company considers historical levels of credit losses and significant economic developments within the retail environment that could impact the ability of its customers to pay outstanding balances and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Because the Company cannot predict future changes in the financial stability of its customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event the Company determines a smaller or larger reserve is appropriate, it would record a benefit or charge to selling, general and administrative expense in the period in which such a determination was made. As of December 31, 2018 and 2017, the allowance for doubtful accounts was nil.

 

Inventories

 

Inventories consist of raw materials and finished goods. Inventories are valued at the lower of cost or net realizable value. We determine cost on the basis of the weighted average method. The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are written down or written off. Although we believe that the assumptions we use to estimate inventory write-downs are reasonable, future changes in these assumptions could provide a significantly different result.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by valuation allowances when necessary.

 

Assessing whether deferred tax assets are realizable requires significant judgment. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance. The ultimate realization of deferred tax assets is often dependent upon future taxable income and therefore can be uncertain. To the extent the Company believes it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against the Company’s deferred tax assets, which increase income tax expense in the period when such a determination is made.

 

Income taxes include the amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position. Settlements with tax authorities, the expiration of statutes of limitations for particular tax positions, or obtaining new information on particular tax positions may cause a change to the effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes on the consolidated statements of comprehensive income (loss).

 

  F- 8  
 

 

Property and Equipment

 

Property and equipment are stated at cost, including the cost of internal labor for software customized for internal use, less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold and tenant improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. The Company periodically reviews assets’ estimated useful lives based upon actual experience and expected future utilization. A change in useful life is treated as a change in accounting estimate and is applied prospectively.

 

Upon retirement or disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in selling, general and administrative expenses for that period. Major additions and betterments are capitalized to the asset accounts while maintenance and repairs, which do not improve or extend the lives of assets, are expensed as incurred.

 

Stock Based Compensation

 

The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the date of grant using the Black-Scholes method for stock options; the expense is recognized over the service period for awards expected to vest. Share-based payments to consultants, service providers and other non-employees are accounted for under in accordance with ASC Topic 718, ASC Topic 505, “Equity Payments to Non-Employees” or other applicable authoritative guidance. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider a number of factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

 

Statutory Reserve