ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Special Note Regarding Forward Looking Statements
This report contains forward-looking statements that are
contained principally in the sections entitled Our Business, Risk Factors,
and Managements Discussion and Analysis of Financial Condition and Results of
Operations. These statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements. These risks and
uncertainties include, but are not limited to, the factors described in the
section captioned Risk Factors above. In some cases, you can identify
forward-looking statements by terms such as anticipates, believes, could,
estimates, expects, intends, may, plans, potential, predicts,
projects, should, would and similar expressions intended to identify
forward-looking statements. Forward-looking statements reflect our current views
with respect to future events and are based on assumptions and subject to risks
and uncertainties. Given these uncertainties, you should not place undue
reliance on these forward-looking statements. These forward-looking statements
include, among other things, statements relating to:
-
our expectations regarding growth in the motor sports market;
-
our expectation regarding increasing demand for protective equipment used
in the motor sports market;
-
our belief that we will be able to effectively compete with our
competitors and increase our market share;
-
our expectations with respect to increased revenue growth and our ability
to achieve profitability resulting from increases in our production volumes;
and
-
our future business development, results of operations and financial
condition.
Also, forward-looking statements represent our estimates and
assumptions only as of the date of this quarterly report. You should read this
quarterly report and the documents that we reference and filed as exhibits to
the quarterly report completely and with the understanding that our actual
future results may be materially different from what we expect. Except as
required by law, we assume no obligation to update any forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new
information becomes available in the future.
Use of Certain Defined Terms
Except as otherwise indicated by the context, references in
this quarterly report to:
-
Leatt, we, us, our, the Registrant or the Company are to the
combined business of Leatt Corporation, a Nevada corporation, its South
African branch, Leatt SA, and its direct, wholly-owned subsidiaries, Two
Eleven, Leatt New Zealand and Three Eleven;
-
Leatt SA are to the Companys branch office known as Leatt Corporation
(Incorporated in the State of Nevada) incorporated under the laws of South
Africa with registration number: 2007/032780/10;
-
Leatt USA are to Leatt USA, LLC, a Nevada Limited Liability Company;
-
Leatt New Zealand are to Leatt New Zealand Limited, a New Zealand
Company;
-
NZD are to the legal currency of New Zealand. For all NZD amounts
reported, the dollar amount has been calculated on the basis that $1=NZD1.4093
for its June 30, 2016 balance sheet.
-
PRC, and China are to the Peoples Republic of China;
-
Two Eleven refers to Two Eleven Distribution, LLC, a California limited
liability company;
-
Three Eleven are to Three Eleven Distribution (Pty) Limited, a South
African Company;
-
Securities Act are to the Securities Act of 1933, as amended, and to
Exchange Act are to Securities Exchange Act of 1934, as amended;
-
South Africa are to the Republic of South Africa;
-
U.S. dollar, $ and US$ are to the legal currency of the United
States.
-
Xceed Holdings refers to Xceed Holdings cc., a close corporation
incorporated under the laws of South Africa, and wholly-owned by The Leatt
Family Trust, of which Dr. Christopher J. Leatt, the Companys chairman, is a
Trustee and Beneficiary; and
-
ZAR refers to the South African Rand, the legal currency of South
Africa. For all ZAR amounts reported, the dollar amount has been calculated on
the basis that $1 = ZAR15.0113 for its June 30, 2016 balance sheet
.
Overview of our Business
Leatt designs, develops, markets and distributes personal
protective equipment for participants in all forms of motor sports and leisure
activities, including riders of motorcycles, bicycles, snowmobiles and ATVs, as
well as racing car drivers. The Company sells its products to customers
worldwide through a global network of distributors and retailers. Leatt also
acts as the original equipment manufacturer for neck braces sold by other
international brands.
The Companys flagship products are based on the Leatt-Brace®
system, a patented injection molded neck protection system owned by Xceed
Holdings, designed to prevent potentially devastating injuries to the cervical
spine and neck. The Company has the exclusive global manufacturing,
distribution, sale and use rights to the Leatt-Brace®, pursuant to a license
agreement between the Company and Xceed Holdings, a company owned and controlled by
the Companys Chairman and founder, Dr. Christopher Leatt. The Company also has
the right to use apparatus embodying, employing and containing the Leatt-Brace®
technology and has designed, developed, marketed and distributed other personal
protective equipment using this technology, as well as its own developed
technology, including the Companys expanding range of body protection and
helmet products which it markets under the Leatt Protection Range brand.
- 11 -
The Companys research and development efforts are conducted at
its research facilities, located at its executive headquarters in Cape Town,
South Africa. The Company employs 4 full-time employees who are dedicated
exclusively to research, development, and testing. The Company also utilizes
consultants, academic institutions and engineering companies as independent
contractors or consultants, from time to time, to assist it with its research
and development efforts. Leatt products have been tested and reviewed internally
and by external bodies. All Leatt products are compliant with applicable
European Union directives, or CE certified, where appropriate. Certain products,
such as the MRX PRO Head and Neck Restraint System, have been certified by SFI
Foundation (USA) and the Moto GPX was tested by BMW Motorrad (Germany) and
reviewed by KTM (Austria). The Company is also in discussions with governing and
racing bodies, such as the Fédération Internationale de l'Automobile (FIA), the
Fédération Internationale de Motocyclisme (FIM) and the National Association for
Stock Car Auto Racing (NASCAR), to have the Leatt-Brace® accredited by these
bodies.
Our products are manufactured in China under outsource
manufacturing arrangements with third-party manufacturers located there. The
Company utilizes outside consultants and its own employees to ensure the quality
of its products through regular on-site product inspections. Products purchased
through international sales are usually shipped directly from our manufacturers
warehouses or points of dispatch to customers or their import agents.
Leatt earns revenues through the sale of its products through
approximately 60 distributors worldwide, who in turn sell its products to
retailers. Leatt distributors are required to follow certain standard business
terms and guidelines for the sale and distribution of Leatt products. Two Eleven
and Leatt SA directly distribute Leatt products to retailers in the United
States and South Africa, respectively.
Principal Factors Affecting Our
Financial Performance
We believe that the following factors will continue to
affect our financial performance:
-
Global Economic Fragility and Currency Fluctuations
A
portion of our revenues are earned in international markets and the ongoing
turmoil in the global economy, especially in Europe, including the recent
decision of United Kingdom (UK) voters to leave the European Union (EU), may
have an impact on our business and our financial condition. This economic
turmoil has led to continued currency weakness in our international markets
against a strengthening U.S. Dollar, resulting in declining revenues from
sales in those markets. We may face more challenges from currency moves as the
UK moves forward with plans to exit the EU and if economic conditions do not
otherwise improve. These economic conditions impact levels of consumer
spending in international markets, which have declined and may remain so for
the foreseeable future. If demand for our products fluctuates as a result of
these economic conditions or otherwise, our revenue and gross margin will
continue to be harmed. Management continues to monitor currency fluctuations
globally and evaluate marketing and sales strategies accordingly.
-
Fuel Prices
Significant fluctuations in fuel prices
could have both a positive and negative effect on our business and operations.
A significant portion of our revenue is derived from international sales and
significant fluctuations in world fuel prices could significantly increase the
price of shipping or transporting our products which we may not be able to
pass on to our customers. On the other hand, fluctuations in fuel prices lead
to higher commuter costs which may encourage the increased use of motorcycles
and bicycles as alternative modes of transportation and lead to an increase in
the market for our protection products.
-
Product Liability Litigation
We face an inherent business
risk of exposure to product liability claims arising from the claimed failure
of our products to help prevent the types of personal injury or death against
which they are designed to help protect. Therefore, we have acquired very
costly product liability insurance worldwide. We have not experienced any
material uninsured losses due to product liability claims, but it is possible
that we could experience material losses in the future. After a two-week trial
in the United States District Court for the Northern District of Ohio
(Eastern) ending on April 17, 2014, a federal jury returned a defense verdict
for the Company in the first Leatt- Brace® product liability lawsuit to be
tried in the United States. The plaintiffs in that case had alleged that
defective product design and failure to warn had caused a then
fifteen-year-old motocross rider, to suffer multiple mid-thoracic spine
fractures, causing immediate and permanent paraplegia, when he crashed at a
relatively low speed on February 13, 2011. When the accident occurred, he was
wearing a helmet and other safety gear from several different companies,
including the Company's acclaimed Leatt-Brace®. The Company produced evidence
at trial showing that his thoracic paraplegia was an unavoidable consequence
of his fall, not the result of wearing a Leatt- Brace®, and that the neck
brace likely saved his life (or saved him from quadriplegia) by
preventing cervical spine injury. The Company
had maintained from the onset that this and a small handful of other lawsuits
are without merit and that it will vigorously defend itself in each case. In
this case, the plaintiffs subsequently appealed the courts decision and the
parties reached an amicable settlement. Although we carry product liability
insurance, a successful claim brought against us could significantly harm our
business and financial condition and have an adverse impact on our ability to
renew our product liability insurance or secure new coverage.
- 12 -
-
Protection of Intellectual Property
We believe that the
continued success of our business is dependent on our intellectual property
portfolio consisting of globally registered trademarks, design patents and
utility patents related to the Leatt-Brace®. We believe that a loss of these
rights would harm or cause a material disruption to our business and, our
corporate strategy is to aggressively take legal action against any violators
of our intellectual property rights, regardless of where they may be. From
time to time, we have had to enforce our intellectual property rights through
litigation and we may be required to do so in the future. Such litigation may
result in substantial costs and could divert resources and management
attention from the operations of our business.
Results of Operations
The following summary of our results of operations should be
read in conjunction with our financial statements and the notes thereto for the
three- and six-month periods ended June 30, 2016 and 2015 included herein. The
following tables set forth key components of our results of operations for the
periods indicated, both in dollars and as a percentage of sales revenue and key
components of our revenue for the periods indicated in dollars and percentages.
Three Months Ended June 30, 2016 compared to the Three
Months Ended June 30, 2015
The following table summarizes the results of our operations
during the three-month periods ended June 30, 2016 and 2015 and provides
information regarding the dollar and percentage increase or (decrease) in such
periods:
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$ Increase
|
|
|
Increase
|
|
Item
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
$
|
3,693,915
|
|
$
|
5,193,056
|
|
|
$
|
(1,499,141
|
)
|
|
-29%
|
|
COST OF REVENUES
|
|
1,710,012
|
|
|
2,361,827
|
|
|
$
|
(651,815
|
)
|
|
-28%
|
|
GROSS PROFIT
|
|
1,983,903
|
|
|
2,831,229
|
|
|
$
|
(847,326
|
)
|
|
-30%
|
|
PRODUCT ROYALTY INCOME
|
|
39,649
|
|
|
20,668
|
|
|
$
|
18,981
|
|
|
92%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Wages
|
|
523,912
|
|
|
542,467
|
|
|
$
|
(18,555
|
)
|
|
-3%
|
|
Commissions and Consulting
|
|
133,921
|
|
|
151,468
|
|
|
$
|
(17,547
|
)
|
|
-12%
|
|
Professional Fees
|
|
70,659
|
|
|
246,392
|
|
|
$
|
(175,733
|
)
|
|
-71%
|
|
Advertising and Marketing
|
|
352,801
|
|
|
363,313
|
|
|
$
|
(10,512
|
)
|
|
-3%
|
|
Office Rent and Expenses
|
|
62,962
|
|
|
62,543
|
|
|
$
|
419
|
|
|
1%
|
|
Research and Development Costs
|
|
338,244
|
|
|
293,666
|
|
|
$
|
44,578
|
|
|
15%
|
|
Bad Debt Expense (Recovery)
|
|
(25,384
|
)
|
|
19,461
|
|
|
$
|
(44,845
|
)
|
|
-230%
|
|
General and Administrative
|
|
514,852
|
|
|
489,116
|
|
|
$
|
25,736
|
|
|
5%
|
|
Depreciation
|
|
106,481
|
|
|
91,473
|
|
|
$
|
15,008
|
|
|
16%
|
|
Total Operating Expenses
|
|
2,078,448
|
|
|
2,259,899
|
|
|
$
|
(181,451
|
)
|
|
-8%
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
(54,896
|
)
|
|
591,998
|
|
|
$
|
(646,894
|
)
|
|
-109%
|
|
Other Income
|
|
70,750
|
|
|
7,539
|
|
|
$
|
63,211
|
|
|
838%
|
|
INCOME (LOSS) BEFORE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAXES
|
|
15,854
|
|
|
599,537
|
|
|
$
|
(583,683
|
)
|
|
-97%
|
|
Income Taxes
|
|
27,310
|
|
|
175,600
|
|
|
$
|
(148,290
|
)
|
|
-84%
|
|
NET INCOME (LOSS)
|
$
|
(11,456
|
)
|
$
|
423,937
|
|
|
$
|
(435,393
|
)
|
|
-103%
|
|
- 13 -
Revenues
We earn revenues from the sale of our
protective gear, comprising of neck braces, body armor, helmets and other
products, parts and accessories both in the United States and abroad. Revenues
for the three months ended June 30, 2016 were $3.7 million, a 29% decrease,
compared to revenues of $5.2 million for the quarter ended June 30, 2015.
Revenues from sales to international customers were $1.83 million and $3.4
million, or 50% and 66% of revenues, respectively, for the three months ended
June 30, 2016 and 2015. This decrease in revenues is primarily attributable to a
$1.16 million decrease in neck brace sales and a $0.65 million decrease in body
armor sales, that was partially offset by a $0.37 million increase in helmet
sales.
The following table sets forth our revenues by product line for
the three months ended June 30, 2016 and 2015:
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
% of Revenues
|
|
|
2015
|
|
|
% of Revenues
|
|
Neck braces
|
$
|
1,300,052
|
|
|
35%
|
|
$
|
2,465,036
|
|
|
48%
|
|
Body armor
|
|
1,790,425
|
|
|
49%
|
|
|
2,443,161
|
|
|
47%
|
|
Helmets
|
|
374,659
|
|
|
10%
|
|
|
-
|
|
|
0%
|
|
Other products, parts and accessories
|
|
228,779
|
|
|
6%
|
|
|
284,859
|
|
|
5%
|
|
|
$
|
3,693,915
|
|
|
100%
|
|
$
|
5,193,056
|
|
|
100%
|
|
Sales of our flagship neck brace accounted for $1.3 million and
$2.47 million, or 35% and 48% of our revenues for the quarters ended June 30,
2016 and 2015, respectively. A 65% decrease in Neck brace sales volumes to our
customers outside of the United States was the primary reason for the 47%
decrease in neck brace revenues during the second quarter of 2016. This decrease
is attributable to a 100% decrease in the volume of neck braces sold to our OEM
customers outside of the United States during the second quarter of 2016, as
well as the continued strengthening of the US dollar against the local
currencies of our customers in Australasia and Europe when compared to the
comparative period.
Our body armor products are comprised of chest protectors, full
upper body protectors, upper body protection vests, back protectors, knee braces
and knee and elbow guards. Body armor sales accounted for $1.79 million and
$2.44 million, or 49% and 47% of our revenues for the quarters ended June 30,
2016 and 2015, respectively. The 27% decrease in body armor revenues was
primarily the result of a 72% decrease in the volume of C-Frame knee braces
shipped to our customers globally, when compared to the 2016 period. Initial
stocking shipments of our C-Frame knee brace to our international customers were
made during the third quarter of 2014 with further stocking shipments made in
the first and second quarters of 2015. The strengthening of the US dollar
discussed above has resulted in decreased sales and consequently increased
inventory levels of C-Frame knee braces at the distributor level.
Our Helmets accounted for $0.37 million, or 10% of our revenues
for the three months ended June 30, 2016. The 100% increase in Helmet revenues
is due to the continuation of the initial shipment of our GPX 5.5 Composite and
GPX 6.5 Carbon helmets that first shipped to our customers in the United States
and abroad during the fourth quarter of 2015. Additionally, we shipped DBX 6.0
Carbon helmets and DBX 5.0 Composite helmets to our international customers and
in the United States during the second quarter of 2016.
Our other products, parts and accessories are comprised of
aftermarket support items required primarily to replace worn or damaged parts
through our global distribution network, as well as clothing, outerwear and
accessories that include hats, jackets, bags, hydration kits and cooling
garments. Other products, parts and accessories sales accounted for $0.23
million and $0.28 million, or 6% and 5% of our revenues for the quarters ended
June 30, 2016 and 2015, respectively. The decrease in revenues from the sale of
other products, parts and accessories is primarily due to a decrease in the
volume of spare part units sold abroad during the period.
Cost of Revenues and Gross Profit
Cost of revenues for
the quarters ended June 30, 2016 and 2015 were $1.7 million and $2.4 million,
respectively. Gross Profit for the quarters ended June 30, 2016 and 2015 were
$1.98 million and $2.83 million, respectively, or 54% and 55% of revenues
respectively. Our
neck brace
products continue to generate a
higher gross margin than our other product categories. Neck brace revenues
accounted for 35% and 48% of our revenues for the quarters ended June 30, 2016
and 2015 respectively.
Product Royalty Income
Product royalty income is
earned on sales to distributors that have royalty agreements in place, as well
as on sales of licensed products by third parties that have licensing agreements
in place. Product royalty income for the quarters ended June 30, 2016 and 2015
were $39,649 and $20,668, respectively. The 92% increase in product royalty
income is due to an increase in the sale of licensed products by licensees in
the 2016 period.
Salaries and Wages
Salaries and wages for the quarters
ended June 30, 2016 and 2015 were $523,912 and $ 542,467, respectively. This 3%
decrease in salaries and wages during the 2016 period was primarily due to the
restructuring of our operational functions in the United States.
- 14 -
Commissions and Consulting Expense
During the quarters
ended June 30, 2016 and 2015, commissions and consulting expenses were $133,921
and $151,468, respectively. This 12% decrease in commissions and consulting
expenses is primarily the result of lower commissions paid to sales
representatives in both the United States and abroad as a result of the
decreased sales revenues discussed above.
Professional Fees
Professional fees consist of costs
incurred for audit, tax and regulatory filings, as well as patent protection and
product liability litigation expenses incurred as the Company continues to
expand. Professional fees for the quarters ended June 30, 2016 and 2015 were
$70,659 and $246,392, respectively. This 71% decrease in professional fees is
primarily due to decreased spending on product liability litigation during the
2016 period.
Advertising and Marketing
The Company places paid
advertising in various motorsport magazines and online media, and sponsors a
number of events, teams and individuals to increase product and brand
visibility. Advertising and marketing expenses for the quarters ended June 30,
2016 and 2015 were $352,801 and $363,313, respectively. The 3% decrease in
advertising and marketing expenditures during the 2016 period is primarily due
to a continued focus on improving the efficacy of its global athlete sponsorship
programs.
Office Rent and Expenses
Office rent and expenses for
the quarters ended June 30, 2016 and 2015 remained flat at $62,962 and $62,543,
respectively.
Research and Development Costs
These costs consist of
the salaries of personnel who are directly involved in the research and
development of innovative products, as well as the direct costs associated with
developing these products. Research and development costs for the quarters ended
June 30, 2016 and 2015, increased to $338,244, from $293,666, during the same
2015 quarter. The 15% increase in research and development costs is a result of
costs incurred to widen the Companys product range, as well as the employment
of additional design and development resources.
Bad Debt Expense (Recovery)
Bad Debt Expense
(Recovery) for the quarters ended June 30, 2016 and 2015 were ($25,384) and
$19,461, respectively. This 230% decrease in Bad Debt Expense (Recovery) is
primarily the result of the write off of a portion of unrecoverable debt owed to
Two Eleven during the 2015 comparative period.
General and Administrative Expenses
General and
administrative expenses consist of insurance, travel, merchant fees, telephone,
office and computer supplies. General and administrative expenses for the
quarters ended June 30, 2016 and 2015 were $514,852 and $489,116, respectively.
The 5% increase in general and administrative expenses is primarily as a result
of increased travel costs incurred by the Company's sales and marketing team in
the United States in connection with travel activities designed to improve the
Company's dealer merchandising and event presence.
Depreciation Expense
Depreciation Expense for
the quarters ended June 30, 2016 and 2015 were $106,481 and $ 91,473,
respectively. This 16% increase in depreciation is primarily as a result of the
addition of molds and tooling required for the production of the Companys
widening product range.
Total Operating Expenses
Total operating expenses
decreased by $181,451, to $2.08 million in the three months ended June 30, 2016,
or 8%, compared to $2.26 million in the 2015 period. This decrease is primarily
due to decreased professional fees and salaries and wages that were partially
offset by an increase in research and development costs and increased general
and administrative costs.
Net income (loss)
The net loss after income
taxes for the quarter ended June 30, 2016 was ($11,456) as opposed to a net
income after income taxes of $423,937 for the quarter ended June 30, 2015. This
decrease in net income (loss) is primarily due to the decrease in revenues
discussed above.
Six Months Ended June 30, 2016 Compared to the Six Months
Ended June 30, 2015
The following table summarizes the results of our operations
during the six-month periods ended June 30, 2016 and 2015 and provides
information regarding the dollar and percentage increase or (decrease) in such
periods:
- 15 -
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
Percentage
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$ Increase
|
|
|
Increase
|
|
Item
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
REVENUES
|
$
|
8,521,407
|
|
$
|
9,214,511
|
|
|
$
|
(693,104
|
)
|
|
-8%
|
|
COST OF REVENUES
|
|
4,023,669
|
|
|
4,206,022
|
|
|
$
|
(182,353
|
)
|
|
-4%
|
|
GROSS PROFIT
|
|
4,497,738
|
|
|
5,008,489
|
|
|
$
|
(510,751
|
)
|
|
-10%
|
|
PRODUCT ROYALTY INCOME
|
|
53,531
|
|
|
72,201
|
|
|
$
|
(18,670
|
)
|
|
-26%
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Wages
|
|
1,205,214
|
|
|
1,148,645
|
|
|
$
|
56,569
|
|
|
5%
|
|
Commissions and Consulting
|
|
299,992
|
|
|
337,376
|
|
|
$
|
(37,384
|
)
|
|
-11%
|
|
Professional Fees
|
|
252,318
|
|
|
461,165
|
|
|
$
|
(208,847
|
)
|
|
-45%
|
|
Advertising and Marketing
|
|
714,394
|
|
|
624,755
|
|
|
$
|
89,639
|
|
|
14%
|
|
Office Rent and
Expenses
|
|
127,152
|
|
|
123,051
|
|
|
$
|
4,101
|
|
|
3%
|
|
Research and Development Costs
|
|
681,059
|
|
|
586,383
|
|
|
$
|
94,676
|
|
|
16%
|
|
Bad Debt Expense
(Recovery)
|
|
(22,557
|
)
|
|
19,461
|
|
|
$
|
(42,018
|
)
|
|
-216%
|
|
General and Administrative
|
|
961,798
|
|
|
914,332
|
|
|
$
|
47,466
|
|
|
5%
|
|
Depreciation
|
|
210,998
|
|
|
184,276
|
|
|
$
|
26,722
|
|
|
15%
|
|
Total Operating Expenses
|
|
4,430,368
|
|
|
4,399,444
|
|
|
$
|
30,924
|
|
|
1%
|
|
INCOME FROM OPERATIONS
|
|
120,901
|
|
|
681,246
|
|
|
$
|
(560,345
|
)
|
|
-82%
|
|
Other Income
|
|
68,809
|
|
|
7,981
|
|
|
$
|
60,828
|
|
|
762%
|
|
INCOME BEFORE INCOME TAXES
|
|
189,710
|
|
|
689,227
|
|
|
$
|
(499,517
|
)
|
|
-72%
|
|
Income Taxes
|
|
88,186
|
|
|
211,185
|
|
|
$
|
(122,999
|
)
|
|
-58%
|
|
NET INCOME
|
$
|
101,524
|
|
$
|
478,042
|
|
|
$
|
(376,518
|
)
|
|
-79%
|
|
Revenues
Revenues for the six-month periods ended June
30, 2016 were $8.5 million, an 8% decrease, compared to revenues of $9.2 million
for the quarter ended June 30, 2015. Revenues associated with international
customers were $4.8 million and $5.9 million, or 56% and 64% of revenues,
respectively, for the six months ended June 30, 2016 and 2015. This decrease in
revenues is attributable to a $1.36 million decrease in neck brace sales and a
$0.48 million decrease in body armor sales, which was partially offset by a
$1.18 million increase in helmet sales.
The following table sets forth our revenues by product line for
the six months ended June 30, 2016 and 2015:
|
|
Six
Months Ended June 30,
|
|
|
|
2016
|
|
|
% of Revenues
|
|
|
2015
|
|
|
% of Revenues
|
|
Neck braces
|
$
|
2,893,782
|
|
|
34%
|
|
$
|
4,254,644
|
|
|
46%
|
|
Body armor
|
|
3,980,901
|
|
|
47%
|
|
|
4,458,073
|
|
|
48%
|
|
Helmets
|
|
1,183,214
|
|
|
14%
|
|
|
-
|
|
|
0%
|
|
Other products, parts and accessories
|
|
463,510
|
|
|
5%
|
|
|
501,794
|
|
|
6%
|
|
|
$
|
8,521,407
|
|
|
100%
|
|
$
|
9,214,511
|
|
|
100%
|
|
Sales of our flagship neck brace accounted for $2.89 million
and $4.25 million, or 34% and 46% of our revenues for the six-month periods
ended June 30, 2016 and 2015, respectively. A 49% decrease in Neck brace sales
volumes to our customers outside of the United States was the primary reason for
the 32% decrease in neck brace revenues during the six months ended June 30,
2016. This decrease is attributable to a 100% decrease in the volumes of neck
braces sold to our OEM customers outside of the United States during the six
months ended June 30, 2016, as well as the continued strengthening of the US
dollar against the local currencies of our customers in Australasia and Europe
when compared to the comparative prior period.
Body armor sales accounted for $3.98 million and $4.46
million, or 47% and 48% of our revenues for the six-month periods ended June 30,
2016 and 2015, respectively. The 11% decrease in body armor revenues was
primarily the result of a 67% decrease in the volume of C-Frame knee braces
shipped to our customers globally. Initial stocking shipments of our C-Frame
knee brace to our international customers were made during the third quarter of
2014, with further stocking shipments made in the first and second quarters of
2015. The strengthening of the US dollar discussed above has resulted in
decreased sales and consequently increased inventory levels of C-Frame knee
braces at the distributor level. Management continues to monitor currency
fluctuations globally and evaluate marketing and sales strategies
accordingly.
Our Helmets accounted for $1.18 million, or 14% of our revenues
for the six months ended June 30, 2016. The 100% increase in Helmet revenues is
due to the continuation of the initial shipment of our GPX 5.5 Composite and GPX
6.5 Carbon helmets that first shipped to our customers in the United States and
abroad during the fourth quarter of 2015. Additionally, we shipped the DBX 6.0
Carbon helmets and DBX 5.0 Composite helmets to our international customers and
in the United States during the first half of 2016.
Other products, parts and accessories sales accounted for $0.46
million and $0.50 million, or 5% and 6% of our revenues for the six-month
periods ended June 30, 2016 and 2015, respectively. The decrease in revenues
from the sale of other products, parts and accessories is primarily due to a
decrease in the volume of spare parts units sold abroad during the period.
Cost of Revenues and Gross Profit
Cost of revenues for
the six-months ended June 30, 2016 and 2015 were $4.0 million and $4.2 million,
respectively. Gross Profit for the six-month periods ended June 30, 2016 and
2015 were $4.5 million and $5.0 million, respectively, or 53% and 54% of
revenues, respectively. However, our
neck brace
products continue
to generate a higher gross margin than our other product categories. Neck brace
revenues accounted for 34% and 46% of our revenues for the six months ended June
30, 2016 and 2015, respectively.
- 16 -
Product Royalty Income
Product royalty income is
earned on sales to distributors that have royalty agreements in place, as well
as on sales of licensed products by third parties that have licensing agreements
in place. Product royalty income for the six-month periods ended June 30, 2016
and 2015 were $53,531 and $72,201, respectively. The 26% decrease in product
royalty income is due to a decrease in the sale of licensed products by
licensees in the 2016 period.
Salaries and Wages
Salaries and wages for the
six-month periods ended June 30, 2016 and 2015 were $1,205,214 and $1,148,645,
respectively. This 5% increase in salaries and wages during the 2016 period was
primarily due to the vesting of share options issued to key personnel during the
six-month period ended June 30, 2016.
Commissions and Consulting Expense
During the
six-month periods ended June 30, 2016 and 2015, commissions and consulting
expenses were $299,992 and $337,376, respectively. This 11% decrease in
commissions and consulting expenses is primarily the result of lower commissions
paid to sales representatives in both the United States and abroad as a result
of the decreased sales revenues discussed above.
Professional Fees
Professional fees consist of costs
incurred for audit, tax and regulatory filings, as well as patent protection and
product liability litigation expenses incurred as the Company continues to
expand. Professional fees for the six-month periods ended June 30, 2016 and 2015
were $252,318 and $461,165, respectively. This 45% decrease in professional fees
is primarily due to decreased spending on product liability litigation during
the 2016 period.
Advertising and Marketing
The Company places paid
advertising in various motorsport magazines and online media, and sponsors a
number of events, teams and individuals to increase product and brand
visibility. Advertising and marketing expenses for the six-months ended June 30,
2016 and 2015 were $714,394 and $624,755, respectively. The 14% increase in
advertising and marketing expenditures during the 2016 period is primarily due
to the Company's continued implementation of sponsorship, advertising and
marketing campaigns designed to promote the Company's widening product
categories and brand.
Office Rent and Expenses
Office rent and expenses for
the six-month periods ended June 30, 2016 and 2015 remained flat at $127,152 and
$123,051, respectively.
Research and Development Costs
These costs consist of
the salaries of personnel who are directly involved in the research and
development of innovative products, as well as the direct costs associated with
developing these products. Research and development costs for the six-month
periods ended June 30, 2016 and 2015, increased to $681,059, from $586,383,
during the same 2015 period. The 16% increase in research and development costs
is a result of costs incurred to widen the Companys product range, as well as
the employment of additional design and development resources.
Bad Debt Expense (Recovery)
Bad Debt Expense
(Recovery) for the six-month periods ended June 30, 2016 and 2015 were ($22,557)
and $19,461, respectively. This 216% decrease in Bad Debt Expense (Recovery) is
primarily the result of the write off of a portion of unrecoverable debt owed to
Two Eleven during the 2015 comparative period.
General and Administrative Expenses
General and
administrative expenses consist of insurance, travel, merchant fees, telephone,
office and computer supplies. General and administrative expenses for the
six-month periods ended June 30, 2016 and 2015 were $961,798 and $ 914,332,
respectively. The 5% increase in general and administrative expenses is
primarily as a result of increased travel expenditure required in the
development of the Company's growing product range as well as in order to
continue the activation of the Company's store merchandising and event presence
in the United States.
Depreciation Expense
Depreciation Expense for the
six-month periods ended June 30, 2016 and 2015 were $210,998 and $ 184,276,
respectively. This 15% increase in depreciation is primarily as a result of the
addition of molds and tooling required for the production of the Companys
widening product range.
Total Operating Expenses
Total operating expenses
increased by $30,924, to $4.43 million in the six month periods ended June 30,
2016, or 1%, compared to $4.40 million in the 2015 period. This increase is
primarily due to increased research and development and advertising and
marketing costs and were partially offset by decreased professional fees
discussed above.
Net income
The net income after income taxes for the
six-month periods ended June 30, 2016 was $101,524 as opposed to a net income
after income taxes of $478,042 for the six-month periods ended June 30, 2015.
This decrease in net income is primarily due to decreased revenues discussed
above.
Liquidity and Capital Resources
At June 30, 2016, we had cash and cash equivalents of $1
million and $0.06 million of short-term investments. The following table sets
forth a summary of our cash flows for the periods indicated:
- 17 -
|
|
June
30,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash provided by
operating activities
|
$
|
331,894
|
|
$
|
949,764
|
|
Net cash used in investing activities
|
$
|
(52,641
|
)
|
$
|
(53,680
|
)
|
Net cash used in financing
activities
|
$
|
(348,014
|
)
|
$
|
(334,557
|
)
|
Effect of exchange rate changes on cash and
cash equivalents
|
$
|
14,770
|
|
$
|
(67,271
|
)
|
Net increase (decrease) in
cash and cash equivalents
|
$
|
(53,991
|
)
|
$
|
494,256
|
|
Cash and cash equivalents at the beginning of
period
|
$
|
1,054,750
|
|
$
|
724,707
|
|
Cash and cash equivalents at the end of period
|
$
|
1,000,759
|
|
$
|
1,218,963
|
|
Cash decreased by $53,991, or 5%, for the six months ended June
30, 2016. The primary sources of cash for the six months ended June 30, 2016
were a net income of $101,524, decreased accounts receivables of $846,161, and
decreased prepaid expenses and other current assets of $363,114. The primary
uses of cash for the six months ended June 30, 2016 were decreased accounts
payable and accrued expenses of $1,055,229 and the repayment of a short-term
loan amounting to $387,014. As of June 30, 2016, we did not have any credit
facilities or significant amounts owed to third party lenders.
The Company is currently meeting its working capital needs
through cash on hand as well as internally generated cash from operations.
Management believes that its current cash and cash equivalent balances, along
with the net cash generated by operations are sufficient to meet its anticipated
operating cash requirements for at least the next twelve months. There are
currently no plans for any major capital expenditures in the next twelve months.
Our long-term financing requirements depend on our growth strategy, which
relates primarily to our desire to increase revenue both in the U.S. and abroad.
Obligations under Material Contracts
Pursuant to our Licensing Agreement with Xceed Holdings, a
company owned and controlled by Dr. Christopher Leatt, our founder and chairman,
we pay Xceed Holdings, 4% of all neck brace sales revenue billed and received by
the Company on a quarterly basis, based on sales of the previous quarter. In
addition, pursuant to a separate license agreement between the Company and Mr.
J. P. De Villiers, our former director, the Company is obligated to pay a
royalty fee of 1% of all our billed and received neck brace sales revenue, in
quarterly installments, based on sales of the previous quarter, to a trust that
is beneficially owned and controlled by Mr. De Villiers.
Pursuant to a Premium Finance Agreement, dated October 19,
2015, between the Company and AFCO Acceptance Corporation AFCO, the Company is
obligated to pay AFCO an aggregate sum of $ 852,081 in eleven payments of
$71,952, at an annual interest rate of 2.897%, commencing on November 1, 2015
and ending on September 1, 2016. Any late payment during the term of the
agreement will be assessed a late penalty of 5% of the payment amount due, and
in the event of default AFCO has the right to accelerate the payment due under
the agreement. As of June 30, 2016, the Company had not defaulted on its payment
obligations under this agreement.
Pursuant to a Premium Finance Agreement, dated May 9, 2016,
between the Company and AFCO, the Company is obligated to pay AFCO an aggregate
sum of $59,120 in eleven payments of $5,375 at a 3.397% annual interest rate,
commencing on June 1, 2016 and ending on April 1, 2017. Any late payment during
the term of the agreement will be assessed a late penalty of 5% of the payment
amount due, and in the event of default AFCO has the right to accelerate the
payment due under the agreement. As of June 30, 2016, the Company had not
defaulted on its payment obligations under this agreement.
On July 8, 2015, the Company entered into a consulting
agreement with Innovate Services Limited, or Innovate, a Seychelles limited
company in which, Dr. Leatt is an indirect beneficiary. Pursuant to the terms of
the Consulting Agreement, Innovate has agreed to serve as the Companys
exclusive research, development and marketing consultant, in exchange for a
monthly fee of $35,639; provided that Dr. Leatt personally performs the services
to be performed by Innovate under the Agreement, pursuant to a separate employment agreement between Innovate and Dr. Leatt. The
parties further agreed that all intellectual property generated in connection
with the services provided under the Consulting Agreement will be the sole
property of the Company. The Consulting Agreement was effective as of May 15,
2015, and will continue unless terminated by either party in accordance with its
terms. Either party has the right to terminate the Consulting Agreement upon 6
months' prior written notice, except that the Consulting Agreement may be
terminated immediately without notice if the services to be performed under the
Consulting Agreement cease to be performed by Dr. Leatt, or for any other
material breach of the Agreement. The parties have agreed to settle any dispute
under the Consulting Agreement through arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association (AAA), and
that the resulting arbitration award will be final and binding on both parties
and will not be subject to any appeal. The foregoing description does not
purport to be a complete statement of the parties rights and obligations under
the Consulting Agreement and the transactions contemplated thereby or a complete
explanation of the materials thereof.
- 18 -
Critical Accounting Policies
Our discussion and analysis of financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements 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 financial statements and the reported revenues and expenses
during the reporting period. We have identified the following as the items that
require the most significant judgment and often involve complex estimation:
revenue recognition, estimating allowances for doubtful accounts receivable,
inventory valuation, impairment of long-lived assets and accounting for income
taxes.
Revenue and Cost Recognition
- All manufacturing
of Leatt-Brace products is performed by third party subcontractors in China. The
Company's products are sold worldwide to a global network of distributors and
dealers, and directly to consumers when there are no dealers or distributors in
their geographic area (collectively the "customers"). Revenues from product
sales are recognized when earned, net of applicable provisions for discounts and
returns and allowances in the event of product defect. Revenue is considered to
be realized or realizable and earned when all of the following criteria are met:
title and risk of loss have passed to the customer, persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed and determinable
and collectability is reasonably assured. Our distributor payment terms range
from pre-payment in full to 60 days after shipment and subsequent sales of our
products by distributors have no effect on the amount and timing of payments due
to us. Furthermore, products purchased by distributors may not be returned to us
in the event that any such distributor relationship is terminated.
Since the Company (through its wholly-owned subsidiary) serves
as the distributor of Leatt products in the United States, the Company records
its revenue and related cost of revenue for its product sales in the United
States upon shipment of the merchandise to the dealer or to the ultimate
consumer when there is no dealer in the geographic area and the sales order was
received directly from, and paid by, the ultimate consumer. Since the Company
(through its South African branch) serves as the distributor of Leatt products
in South Africa, the Company records its revenue and related cost of revenue for
its product sales in South Africa upon shipment of the merchandise from the
branch to the dealer. International sales (other than in South Africa) are
generally drop-shipped directly from the third party manufacturer to the
international distributors.
Revenue and related cost of revenue is recognized at the time
of shipment from the manufacturer's port when the shipping terms are Free On
Board ("FOB") shipping point. Cost and Freight ("CFR") or Cost and Insurance to
named place ("CIP\") as legal title and risk of loss to the product pass to the
distributor. Sales to all customers (distributors, dealers and consumers) are
generally final; however, in limited instances, product may be returned due to
product quality issues. Historically, returns due to product quality issues have
not been material and there have been no distributor terminations that resulted
in product returns. Cost of revenues also includes royalty fees associated with
sales of Leatt-Brace products. Product royalty income is recorded as the
underlying product sales occur, in accordance with the related licensing
arrangements.
Allowance for Doubtful Accounts Receivable
-
Accounts receivable consist of amounts due to the Company from normal
business activities. Credit is granted to substantially all distributors on an
unsecured basis. We continuously monitor collections and payments from customers
and maintain an allowance for doubtful accounts receivable based upon historical
experience and any specific customer collection issues that have been
identified. In determining the amount of the allowance, we are required to make
certain estimates and assumptions. Accounts receivable balances that are still
outstanding after we have used reasonable collection efforts are written off as
uncollectible. While such credit losses have historically been minimal, within
our expectations and the provisions established, we cannot guarantee that we
will continue to experience the same credit loss rates that we have in the past.
A significant change in the liquidity or financial position of any of our
significant customers could have a material adverse effect on the collectability
of our accounts receivable and our future operating results.
Inventory Valuation
Inventory is stated at the
lower of cost or market. Cost is determined using the first-in first-out (FIFO)
method. Inventory consists primarily of finished goods. Shipping and handling
costs are included in the cost of inventory. In assessing the inventory value,
we make estimates and judgments regarding reserves required for product
obsolescence, aging of inventory and other issues potentially affecting the
saleable condition of products. In performing such evaluations, we utilize
historical experience as well as current market information. The reserve for
obsolescence as of the six-month periods ended June 30, 2016 and 2015 was
$173,695 and $322,355, respectively.
Impairment of Long-Lived Assets
Our
long-lived assets include property and equipment. We evaluate our long-lived
assets for recoverability whenever events or changes in circumstances indicate
that an asset may be impaired. In evaluating an asset for recoverability, we
estimate the future cash flow expected to result from the use of the asset and
eventual disposition. If the expected future undiscounted cash flow is less than
the carrying amount of the asset, an impairment loss, equal to the excess of the
carrying amount over the fair value of the asset, is recognized. We have
determined there was no impairment charge during the six-month periods ended
June 30, 2016 and 2015.
Income Taxes
- As part of the process of
preparing our consolidated financial statements, we are required to estimate our
income tax provision (benefit) in each of the jurisdictions in which we operate.
This process involves estimating our current income tax provision (benefit)
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheets. We regularly evaluate our ability to recover the reported amount of our
deferred income taxes considering several factors, including our estimate of the
likelihood of the Company generating sufficient taxable income in future years
during the period over which the temporary differences reverse.
- 19 -
Recent Accounting Pronouncements
See Note 8, Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements for a full description of recent
accounting pronouncements, including the respective dates of adoption, or
expected adoption and effects of our consolidated financial position, results of
operations and cash flows.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on its financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to its stockholders.