ITEM 1. FINANCIAL STATEMENTS.
LEATT CORPORATION
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CONSOLIDATED FINANCIAL STATEMENTS
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FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
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Page(s)
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Financial Statements
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Consolidated Balance Sheets
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4
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Consolidated Statements of Operations and
Comprehensive Income
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5
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Consolidated Statement of Changes in Stockholders' Equity
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6
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Consolidated Statements of Cash Flows
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7
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Notes to Consolidated Financial Statements
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8 - 11
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3
LEATT CORPORATION
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CONSOLIDATED BALANCE SHEETS
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ASSETS
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March 31, 2017
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December 31, 2016
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|
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Unaudited
|
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Audited
|
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Current Assets
|
|
|
|
|
|
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Cash and cash equivalents
|
$
|
1,143,509
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|
$
|
1,103,003
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|
Short-term investments
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|
58,201
|
|
|
58,196
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|
Accounts receivable
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|
2,964,288
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2,217,840
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|
Inventory
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|
3,512,369
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|
|
4,578,125
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|
Payments in advance
|
|
746,979
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|
|
569,498
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Income tax refunds receivable
|
|
-
|
|
|
83,567
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|
Prepaid expenses and other current assets
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461,428
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|
847,032
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Total current assets
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8,886,774
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9,457,261
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Property and equipment, net
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1,184,818
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1,190,688
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Deferred tax asset
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170,300
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108,300
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|
|
|
|
|
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Other Assets
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|
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Deposits
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25,494
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24,892
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Intangible assets
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72,716
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69,133
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Total other assets
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98,210
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94,025
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|
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Total Assets
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$
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10,340,102
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$
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10,850,274
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|
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LIABILITIES AND
STOCKHOLDERS' EQUITY
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Current Liabilities
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Accounts payable and accrued expenses
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$
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2,187,020
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$
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3,021,618
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Income taxes payable
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|
64,391
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|
-
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Short term loan, net of finance charges
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300,773
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542,532
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Total current
liabilities
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2,552,184
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3,564,150
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|
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Deferred tax liabilities
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65,400
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65,400
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Commitments and contingencies
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Stockholders' Equity
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Preferred stock, $.001 par value, 1,120,000
shares authorized, 120,000 shares
issued and outstanding
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3,000
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3,000
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Common stock, $.001 par value,
28,000,000 shares authorized, 5,362,992
and 5,362,992 shares issued and outstanding
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130,053
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130,053
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Additional paid - in capital
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7,646,807
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7,469,694
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Accumulated other
comprehensive loss
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(557,362
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)
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(610,083
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)
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Retained earnings
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500,020
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228,060
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Total
stockholders' equity
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7,722,518
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7,220,724
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Total Liabilities and Stockholders' Equity
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$
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10,340,102
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$
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10,850,274
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4
LEATT CORPORATION
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CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
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Three Months Ended
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March 31
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2017
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2016
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Unaudited
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Unaudited
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Revenues
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$
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5,817,769
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$
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4,827,492
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Cost of Revenues
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2,907,670
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2,313,657
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Gross Profit
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2,910,099
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2,513,835
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Product Royalty Income
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10,956
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13,882
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Operating Expenses
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Salaries and wages
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759,243
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681,302
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Commissions and consulting expenses
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153,048
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166,071
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Professional fees
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310,791
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181,659
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Advertising and marketing
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401,554
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361,593
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Office rent and expenses
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66,051
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64,190
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Research and development costs
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323,243
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342,815
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Bad debt expense (recovery)
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(4,641
|
)
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2,827
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General and administrative expenses
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401,413
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446,946
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Depreciation
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88,965
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|
|
104,517
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Total operating
expenses
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2,499,667
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2,351,920
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Income from Operations
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421,388
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175,797
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|
|
|
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Other Expenses
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Interest and other income, net
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(2,988
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)
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|
(1,941
|
)
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Total other expenses
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(2,988
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)
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(1,941
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)
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Income Before Income Taxes
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418,400
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173,856
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Income Taxes
|
|
146,440
|
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|
60,876
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|
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Net Income Available to Common Shareholders
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$
|
271,960
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$
|
112,980
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|
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Net Income per Common Share
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Basic
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$
|
0.05
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$
|
0.02
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Diluted
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$
|
0.05
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$
|
0.02
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Weighted Average Number of Common Shares
Outstanding
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Basic
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5,362,992
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5,233,272
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Diluted
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5,499,103
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5,545,027
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Comprehensive Income
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Net Income
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$
|
271,960
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$
|
112,980
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Other comprehensive income,
net of $0 and $0 deferred income taxes in 2017 and 2016
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|
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|
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Foreign currency translation
|
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52,721
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|
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23,049
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|
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|
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Total Comprehensive Income
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$
|
324,681
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$
|
136,029
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5
LEATT CORPORATION
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
|
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31,
2017
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Accumulated
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Other
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Preferred Stock A
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Common Stock
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Additional
|
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Comprensive
|
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Retained
|
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Shares
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Amount
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Shares
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Amount
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Paid
- In Capital
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Loss
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Earnings
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Total
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Balance, January 1, 2017
|
|
120,000
|
|
$
|
3,000
|
|
|
5,362,992
|
|
$
|
130,053
|
|
$
|
7,469,694
|
|
$
|
(610,083
|
)
|
$
|
228,060
|
|
$
|
7,220,724
|
|
Compensation cost recognized in connection with stock
options
|
|
-
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|
|
-
|
|
|
-
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|
|
-
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|
177,113
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|
|
-
|
|
|
-
|
|
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177,113
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Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
271,960
|
|
|
271,960
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|
Foreign currency translation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
52,721
|
|
|
-
|
|
|
52,721
|
|
Balance, March 31, 2017
|
|
120,000
|
|
$
|
3,000
|
|
|
5,362,992
|
|
$
|
130,053
|
|
$
|
7,646,807
|
|
$
|
(557,362
|
)
|
$
|
500,020
|
|
$
|
7,722,518
|
|
6
LEATT CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
|
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
271,960
|
|
$
|
112,980
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
88,965
|
|
|
104,517
|
|
Deferred income tax
|
|
(62,000
|
)
|
|
-
|
|
Stock-based compensation
|
|
177,113
|
|
|
155,742
|
|
Inventory reserve
|
|
117,039
|
|
|
8,089
|
|
Bad debt
|
|
(6,717
|
)
|
|
-
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
Accounts receivable
|
|
(739,731
|
)
|
|
475,585
|
|
Inventory
|
|
948,717
|
|
|
216,935
|
|
Payments in advance
|
|
(177,481
|
)
|
|
(128,435
|
)
|
Prepaid expenses
and other current assets
|
|
385,604
|
|
|
242,714
|
|
Income tax refunds receivable
|
|
83,567
|
|
|
-
|
|
Other
receivables
|
|
-
|
|
|
30,000
|
|
Deposits
|
|
(602
|
)
|
|
(211
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
(834,598
|
)
|
|
(492,863
|
)
|
Income taxes
payable
|
|
64,391
|
|
|
(139,150
|
)
|
Net cash provided
by operating activities
|
|
316,227
|
|
|
585,903
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(61,267
|
)
|
|
(12,037
|
)
|
Increase in short-term investments, net
|
|
(5
|
)
|
|
(8
|
)
|
Net cash used in investing activities
|
|
(61,272
|
)
|
|
(12,045
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Repayments of short-term loan, net
|
|
(241,759
|
)
|
|
(217,511
|
)
|
Net cash used in financing activities
|
|
(241,759
|
)
|
|
(217,511
|
)
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash
equivalents
|
|
27,310
|
|
|
5,628
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
40,506
|
|
|
361,975
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning
|
|
1,103,003
|
|
|
1,054,750
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - ending
|
$
|
1,143,509
|
|
$
|
1,416,725
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
3,443
|
|
$
|
3,483
|
|
Cash paid for income taxes
|
$
|
60,482
|
|
$
|
200,027
|
|
|
|
|
|
|
|
|
Other noncash investing and financing
activities
|
|
|
|
|
|
|
Common stock issued for services
|
$
|
177,113
|
|
$
|
155,742
|
|
Common stock issued in
exchange for a receivable
|
$
|
-
|
|
$
|
39,000
|
|
7
LEATT CORPORATION
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
Note 1 - Basis of presentation
The consolidated balance sheet as of December 31, 2016 was
audited and appears in the Form 10-K filed by the Company with the Securities
and Exchange Commission on March 29, 2017. The consolidated balance sheet as of
March 31, 2017 and the consolidated statements of operations and comprehensive
income for the three months ended March 31, 2017 and 2016, changes in
stockholders equity for the three months ended March 31, 2017, cash flows for
the three months ended March 31, 2017 and 2016, and the related information
contained in these notes have been prepared by management without audit. In the
opinion of management, all adjustments (which include only normal recurring
items) necessary to present fairly the financial position, results of operations
and cash flows in conformity with generally accepted accounting principles as of
March 31, 2017 and for all periods presented have been made. Interim operating
results are not necessarily indicative of operating results for a full year.
Certain information and note disclosures normally included in
the Companys annual financial statements prepared in accordance with U.S.
generally accepted accounting principles have been condensed or omitted. While
management of the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 2016 as
filed with the Securities and Exchange Commission in the Companys Form 10-K.
Note 2 - Inventory
Inventory is stated at the lower of cost or net realizable
value. 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, the Company must
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, the Company
utilizes historical experience as well as current market information. The
reserve for obsolescence as of the three months ended March 31, 2017 and 2016,
was $283,146 and $168,804, respectively.
Note 3 - Intangible Assets
The Companys intangible assets consist of acquired patents
with an indefinite useful life and are thus not amortized. Intangible assets are
carried at cost less impairment. Amortization expense for the three months ended
March 31, 2017 was zero. There was no impairment of intangible assets at March
31, 2017.
Note 4 - Short-term Loan
The Company carries two product liability insurance policies;
one with a U.S. insurance carrier and a second with a South African insurance
carrier. The Company finances payment of its short-term insurance premiums over
the period of coverage, which is generally twelve months. The U.S. short-term
loan is payable in monthly installments of $58,921 over an eleven-month period
at an APR of 3.397% and the South African short-term loan is payable in monthly
installments of $1,813 over a ten-month period at a flat interest rate of 4.10%
.
The Company also carries directors and officers liability
insurance. The Company finances payment of its short-term insurance premiums
over the period of coverage, which is generally twelve months. The short-term
loan is payable in eleven payments of $5,375 at a 3.397% annual interest
rate.
In addition, the Company carries Network Security/Privacy
insurance. The Company finances payment of its short-term insurance premiums
over the period of coverage over six months. The short-term loan is payable in
five payments of $ 1,453 at a 3.397% annual interest rate.
Note 5- Income Taxes
The Company uses the asset and liability approach to account
for income taxes. Deferred tax assets and liabilities are determined based on
the differences between the financial statement carrying amounts and the income
tax basis of assets and liabilities. A valuation allowance is applied against
any net deferred tax asset if, based on available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. The
provision for income taxes included taxes currently payable, if any, plus the
net change during the period in deferred tax assets and liabilities recorded by
the Company.
8
The Company applies the provisions of FASB ASC Topic 740-10,
Accounting for Uncertainty in Income Taxes (Standard), which provides that the
tax effects from an uncertain tax position can be recognized in the consolidated
financial statements only if the position is more likely than not of being
sustained upon an examination by tax authorities. An uncertain income tax
position will not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, the standard provides guidance on derecognition,
classification, interest and penalties; accounting in interim periods,
disclosure and transition, and any amounts when incurred would be recorded under
these provisions.
The Companys practice is to recognize interest and/or
penalties related to income tax matters in income tax expense. As of March 31,
2017, the Company has no unrecognized tax benefits.
Note 6 - Net Income Per Share of Common Stock
Basic net income per common share is computed using the
weighted-average number of common shares outstanding during the period. Diluted
net income per share is computed using the weighted-average number of common
stock shares and dilutive potential common shares outstanding during the period.
For the three months ended March 31, 2017, the Company had 473,000 potential
common shares, consisting of 120,000 preferred shares, options to purchase
30,000 shares, outstanding that were dilutive, and options to purchase 323,000
shares that were anti-dilutive and therefore, not included in diluted net income
per share.
Note 7 Common Stock
Stock-based compensation expense related to vested stock
options during the quarter ended March 31, 2017 was $177,113. As of March 31,
2017 there was $255,893 of unrecognized compensation costs related to unvested
stock options, which is expected to be recognized over a 3 year vesting period.
Note 8 Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In July 2015, the FASB issued Accounting Standards Update
(ASU) 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory, which applies to inventory that is measured using first-in,
first-out (FIFO) or average cost. This ASU simplifies the subsequent measurement
of inventories by replacing the lower of cost or market test with a lower of
cost or net realizable value test. The ASU is effective for annual periods
beginning after December 15, 2016. Early adoption is permitted. The Company
adopted the new standard on January 1, 2017. The adoption of this ASU did not
have a material impact on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09 Improvements to
Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 amends the
guidance on several aspects of accounting for share-based payment transactions,
including income tax consequences, classification of awards as either equity or
liabilities, accounting for forfeitures, and classification on the statement of
cash flows. The ASU is effective for annual periods beginning after December 15,
2016, and interim periods within those annual periods. The Company adopted the
new standard on January 1, 2017. The Company elected to apply the amendments
related to the classification of excess tax benefits on the statement of cash
flows on a prospective basis, and prior periods were not adjusted. The adoption
of this ASU did not have a material impact on the consolidated financial
statements.
Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU 2017-01, Clarifying the
Definition of a Business, which further clarifies the definition of a business
in an effort to assist entities in evaluating whether a set of transferred
assets constitutes a business. Under this new guidance, if substantially all of
the fair value of gross assets acquired is concentrated in a single asset or
similar asset group, the set of transferred assets would not meet the definition
of a business and no further evaluation is necessary. If this threshold is not
met, the entity would then evaluate whether the set of transferred assets and
activities meets the requirement that a business include, at a minimum, an input
and a process that together have the ability to create an output. This guidance
is effective for annual and quarterly periods beginning after December 15, 2017,
with early adoption permitted. The Company expects to adopt the ASU beginning
January 1, 2018.
In January 2017, the FASB issued ASU 2017-04, Intangibles -
Goodwill and Other: Simplifying the Test for Goodwill Impairment, which
simplifies the subsequent measurement of goodwill by eliminating the requirement
to calculate the implied fair value of goodwill. Rather, the goodwill impairment
is calculated by comparing the fair value of a reporting unit to its carrying
value, and an impairment loss is recognized for the amount by which the
carrying amount exceeds the fair value, limited to the total goodwill allocated
to the reporting unit. All reporting units apply the same impairment test under
the new standard. The Company is required to adopt this ASU for its annual and
any interim goodwill impairment tests in fiscal years beginning after December
15, 2019 on a prospective basis. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after January 1,
2017. The Company does not expect this new guidance will have a material impact
on the consolidated financial statements.
9
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers, (ASU 2014-09). ASU 2014-09, as amended, outlines a
new, single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. This new revenue
recognition model provides a five-step analysis in determining when and how
revenue is recognized. The new model will require an entity to recognize revenue
when it transfers promised goods or services to customers in an amount that
reflects what it expects in exchange for the goods or services. On August 12,
2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date". The amendments in this update defers the
effective date of Update 2014-09 for all entities by one year. The ASU, as
amended, is effective for the first interim period within an annual period
beginning after December 15, 2017, and early adoption is not permitted. The new
guidance allows for two methods of adoption: (a) full retrospective adoption,
meaning that the standard is applied to all periods presented, or (b) modified
retrospective adoption, meaning that the cumulative effect of applying the new
guidance is recognized as an adjustment to the opening retained earnings balance
for the year of implementation. The Company plans to adopt the new revenue
standard effective January 1, 2018, on a modified retrospective method with the
cumulative effect of the change reflected in retained earnings as of January 1,
2018, and not restate prior periods. The Company continues to monitor FASB
activity to assess certain interpretative issues and the associated
implementation of the new standard. The Company is in the process of reviewing
its revenue arrangements, which are expected to include product sales and
royalty payments, and is not yet able to estimate the anticipated impact to the
consolidated financial statements from the implementation of the new standard as
the Company continues to interpret the principles of the new standard.
In February 2016, the FASB issued ASU No. 2016-02, Leases
(Topic 842). This ASU is a comprehensive new lease standard that amends various
aspects of existing accounting guidance for leases. The core principle of this
ASU will require lessees to present the assets and liabilities that arise from
leases on their balance sheets. The ASU is effective for public companies for
annual and interim reporting periods beginning after December 15, 2018. Early
adoption is permitted. The Company is evaluating the new standard to determine
the impact on the Companys consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes
- Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). The
ASU clarifies the accounting for the current and deferred income taxes for an
intra-entity transfer of an asset other than inventory. The ASU is effective for
the Company in the first quarter of 2018, with early adoption permitted, and is
to be applied using a modified retrospective approach. The Company is evaluating
the new standard to determine the impact on the Companys consolidated financial
statements.
In November 2016, the FASB issued ASU 2016-18, Statement of
Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues
Task Force). The ASU requires the statement of cash flows to explain the change
during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts
generally described as restricted cash and restricted cash equivalents are to be
included with cash and cash equivalents when reconciling the beginning of period
and end of period amounts shown on the statement of cash flows. The ASU is
effective for the Company for annual reporting periods beginning after December
15, 2017 and is required to be adopted using a retrospective approach, if
applicable, with early adoption permitted. The adoption of this ASU will not
have a material impact on the Companys consolidated financial statements.
Note 9 - Litigation
In the ordinary course of business, the Company is involved in
various legal proceedings involving product liability and personal injury and
intellectual property litigation. The Company is insured against loss for
certain of these matters. The Company will record contingent liabilities
resulting from asserted and unasserted claims against it when it is probable
that the liability has been incurred and the amount of the loss is reasonably
estimable. The Company will disclose contingent liabilities when there is a
reasonable possibility that the ultimate loss will exceed the recorded
liability. While the outcome of currently pending litigation is not yet
determinable, the ultimate exposure with respect to these matters cannot be
ascertained. However, based on the information currently available to the
Company, the Company does not expect that any liabilities or costs that might be
incurred to resolve these matters will have a material adverse effect on the
financial condition, results of operations, liquidity or cash flows of the
Company.
10
Note 10 Subsequent Events
The company has evaluated all subsequent events through the
date the financial statements were released.
Two Eleven, our California subsidiary, renewed their lease
agreement for their current premises. The lease agreement leases a 14,101-
square foot space in Santa Clarita, California, pursuant to a lease agreement
between Two Eleven and Harold & Bonnie Peace Trust, dated March 30, 2017.
Two Eleven uses approximately 9% of the office space for executive offices and
the remaining 91% of the space for warehousing. The new lease agreement, dated
March 30, 2017, calls for a monthly base rent in the amount of $ 10,216
beginning May 1, 2017 for a period of five years until April 30, 2022, with a
maximum annual increase of 3%.
11
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 annual report. You should read this
annual report and the documents that we reference and filed as exhibits to the
annual 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 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;
-
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 = ZAR12.9748 for its March 31, 2017 balance sheet
.
Overview of our Business
We were incorporated in the State of Nevada on March 11, 2005
under the name Treadzone, Inc. We were a shell company with little or no
operations until March 1, 2006, when we acquired 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. On May
25, 2005, we changed our name to Leatt Corporation in connection with our
anticipated acquisition of the Leatt-Brace® rights. 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. 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.
12
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 new body protection products which
it markets under the Leatt Protection Range brand.
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 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
The ongoing turmoil in the global
economy, especially in the U.S. and Europe, may have an impact on our business
and our financial condition, and we may face challenges if economic conditions
do not improve. These economic conditions impact levels of consumer spending,
which have deteriorated and may remain depressed for the foreseeable future.
If demand for our products fluctuates as a result of these economic conditions
or otherwise, our revenue and gross margin could be harmed.
-
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.
13
-
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.
-
Fluctuations in Foreign Currencies
We are exposed to
foreign exchange risk as our revenues and consolidated results of operations
may be affected by fluctuations in foreign currency as we translate these
currencies into U.S. dollars when we consolidate our financial results. While
our reporting currency is the U.S. Dollar, a portion of our consolidated
revenues are denominated in South African Rand, or ZAR, certain of our assets
are denominated in ZAR, and our research and marketing operations in South
Africa utilize South African labor sources. A decrease in the value of the
U.S. dollar in relation to the ZAR could increase our cost of doing business
in South Africa. If the ZAR depreciates against the U.S. Dollar, the value of
our ZAR revenues, earnings and assets as expressed in our U.S. Dollar
financial statements will decline. We have not entered into any hedging
transactions in an effort to reduce our exposure to foreign exchange risk.
Furthermore since 59% of our sales is derived outside the U.S. where the U.S.
dollar is not the primary currency, significant fluctuations in exchange rates
such as the strengthening of the dollar versus our customers local currency
can adversely affect our ability to remain competitive in those areas.
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-month periods ended March 31, 2017 and 2016 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 March 31, 2017 compared to the Three
Months Ended March 31, 2016
The following table summarizes the results of our operations
during the three-month periods ended March 31, 2017 and 2016 and provides
information regarding the dollar and percentage increase or (decrease) in such
periods:
14
|
|
Three Months Ended March 31,
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Increase
|
|
|
Increase
|
|
Item
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
$
|
5,817,769
|
|
$
|
4,827,492
|
|
$
|
990,277
|
|
|
21%
|
|
COST OF REVENUES
|
|
2,907,670
|
|
|
2,313,657
|
|
$
|
594,013
|
|
|
26%
|
|
GROSS PROFIT
|
|
2,910,099
|
|
|
2,513,835
|
|
$
|
396,264
|
|
|
16%
|
|
PRODUCT ROYALTY INCOME
|
|
10,956
|
|
|
13,882
|
|
$
|
(2,926
|
)
|
|
-21%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Wages
|
|
759,243
|
|
|
681,302
|
|
$
|
77,941
|
|
|
11%
|
|
Commissions and Consulting
|
|
153,048
|
|
|
166,071
|
|
$
|
(13,023
|
)
|
|
-8%
|
|
Professional Fees
|
|
310,791
|
|
|
181,659
|
|
$
|
129,132
|
|
|
71%
|
|
Advertising and Marketing
|
|
401,554
|
|
|
361,593
|
|
$
|
39,961
|
|
|
11%
|
|
Office Rent and Expenses
|
|
66,051
|
|
|
64,190
|
|
$
|
1,861
|
|
|
3%
|
|
Research and Development Costs
|
|
323,243
|
|
|
342,815
|
|
$
|
(19,572
|
)
|
|
-6%
|
|
Bad Debt Expense (Recovery)
|
|
(4,641
|
)
|
|
2,827
|
|
$
|
(7,468
|
)
|
|
-264%
|
|
General and Administrative
|
|
401,413
|
|
|
446,946
|
|
$
|
(45,533
|
)
|
|
-10%
|
|
Depreciation
|
|
88,965
|
|
|
104,517
|
|
$
|
(15,552
|
)
|
|
-15%
|
|
Total Operating Expenses
|
|
2,499,667
|
|
|
2,351,920
|
|
$
|
147,747
|
|
|
6%
|
|
INCOME FROM OPERATIONS
|
|
421,388
|
|
|
175,797
|
|
$
|
245,591
|
|
|
140%
|
|
Other Expenses
|
|
(2,988
|
)
|
|
(1,941
|
)
|
$
|
(1,047
|
)
|
|
54%
|
|
INCOME BEFORE INCOME TAXES
|
|
418,400
|
|
|
173,856
|
|
$
|
244,544
|
|
|
141%
|
|
Income Taxes
|
|
146,440
|
|
|
60,876
|
|
$
|
85,564
|
|
|
141%
|
|
NET INCOME
|
$
|
271,960
|
|
$
|
112,980
|
|
$
|
158,980
|
|
|
141%
|
|
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 internationally.
Revenues for the three months ended March 31, 2017 were $5.82 million, a 21%
increase, compared to revenues of $4.83 million for the quarter ended March 31,
2016. Revenues associated with international customers were $3.99 million and
$2.96 million, or 69% and 61% of revenues, respectively, for the three months
ended March 31, 2017 and 2016. The increase in worldwide revenues is primarily
attributable to a $0.42 million increase in neck brace sales, a $0.56 million
increase in body armor sales and a $0.2 million increase in sales of other
products, parts and accessories that was partially offset by a $0.20 million
decrease in helmet sales.
The following table sets forth our revenues by product line for
the three months ended March 31, 2017 and 2016:
|
|
|
|
|
Three months ended March 31,
|
|
|
|
|
|
|
2017
|
|
|
% of Revenues
|
|
|
2016
|
|
|
% of Revenues
|
|
Neck braces
|
$
|
2,010,574
|
|
|
35%
|
|
$
|
1,593,731
|
|
|
33%
|
|
Body armor
|
|
2,753,522
|
|
|
47%
|
|
|
2,190,476
|
|
|
45%
|
|
Helmets
|
|
611,252
|
|
|
10%
|
|
|
808,555
|
|
|
17%
|
|
Other Products, Parts and Accessories
|
|
442,421
|
|
|
8%
|
|
|
234,730
|
|
|
5%
|
|
|
$
|
5,817,769
|
|
|
100%
|
|
$
|
4,827,492
|
|
|
100%
|
|
Sales of our flagship neck brace accounted for $2.01 million
and $1.59 million, or 35% and 33% of our revenues for the quarters ended March
31, 2017 and 2016, respectively. The 26% increase in neck brace revenues was due
to an increase in the volume of neck braces sold to our customers both in the
United States and abroad.
15
Our body armor products are comprised of chest protectors, full
upper body protectors, upper body protection vests, back protectors, knee
braces, gloves and knee and elbow guards. Body armor sales accounted for $2.75
million and $2.19 million, or 47% and 45% of our revenues for the quarters ended
March 31, 2017 and 2016, respectively. The 26% increase in body armor revenues
was primarily due to a 26% increase in the volume of upper body protectors sold
globally during the period. Additionally, sales of the Companys C- Frame knee
brace line increased significantly in the United States and abroad due to the
introduction of the C-Frame Pro Knee Brace.
Our Helmets accounted for $0.61 million and $0.81 million, 10%
and 17% of our revenues for the quarters ended March 31, 2017 and 2016. Although
the Company successfully shipped initial shipments of our DBX All Mountain
helmet, the 24% decrease in Helmet revenues is due to the initial stocking
shipments of our GPX 5.5 Composite, GPX 6.5 Carbon, DBX 6.0 Carbon helmets and
DBX 5.0 Composite helmets to our international customers during the first
quarter of 2016.
Our other products, parts and accessories are comprised of
apparel, 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 $0.44
million and $0.23 million, or 8% and 5% of our revenues for the quarters ended
March 31, 2017 and 2016, respectively. The increase in revenues from the sale of
other products, parts and accessories is primarily due to the inclusion of our
GPX and DBX apparel lines designed for off-road motorcycle and bicycle use
respectively.
Cost of Revenues and Gross Profit
Cost of revenues for
the quarters ended March 31, 2017 and 2016 were $2.91 million and $2.31 million,
respectively. Gross Profit for the quarters ended March 31, 2017 and 2016 were
$2.91 million and $2.51 million, respectively, or 50% and 52% of revenues
respectively. Body armor and other products, parts and accessories continue to
generate a lower gross margin than our neck brace and helmet products. Body
armor and other products, parts and accessory revenues combined accounted for
55% and 50% of our revenues for the quarters ended March 31, 2017 and 2016
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 March 31, 2017 and 2016
were $10,956 and $13,882, respectively. The 21% decrease in product royalty
income is due to a decrease in the sale of licensed products by licensees in the
2017 period.
Salaries and Wages
Salaries and wages for the quarters
ended March 31, 2017 and 2016 were $759,243 and $681,302, respectively. This 11%
increase in salaries and wages during the 2017 period was primarily due to the
employment of additional sales and marketing personnel based in Europe as well
as the vesting of share options issued to key personnel during the three-month
period ended March 31, 2017.
Commissions and Consulting Expense
During the quarters
ended March 31, 2017 and 2016, commissions and consulting expenses were $153,048
and $166,071, respectively. This 8% decrease in commissions and consulting
expenses is primarily due to the restructuring of commissions paid to the
Company's internal and external US sales staff.
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 March 31, 2017 and 2016 were
$310,791 and $181,659, respectively. This 71% increase in professional fees is
primarily due to increased spending on product liability litigation during the
2017 period.
Advertising and Marketing
The Company places paid
advertising in various motor sport 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 March 31,
2017 and 2016 were $401,554 and $361,593, respectively. The 11% increase in
advertising and marketing expenditures during the 2017 period is primarily due
to the Companys continued implementation of both cash and product sponsorship
as well as marketing campaigns designed to promote the Company's widening
product range.
Office Rent and Expenses
Office rent and expenses for
the quarters ended March 31, 2017 and 2016 were $66,051 and $64,190,
respectively and in line with lease escalation clauses in the leases.
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
March 31, 2017 and 2016, decreased to $323,243, from $342,815, during the same
2016 quarter. The 6% decrease in research and development costs is a result of
extensive helmet development costs incurred to extend the Companys growing
product range during the first quarter of 2016.
16
Bad Debt Expense / (Recovery)
Bad Debt Expense
/ Recovery for the quarters ended March 31, 2017 and 2016 was ($4,641) and
$2,827, respectively. This decrease in Bad Debt Expense is primarily the result
of the recovery of a previously unrecoverable debt in the 2017 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 March 31, 2017 and 2016 were $401,413 and $446,946, respectively.
The 10% decrease in general and administrative expenses is primarily as a result
of a decrease in product liability insurance premiums.
Depreciation Expense
Depreciation Expense for
the quarters ended March 31, 2017 and 2016 was $88,965 and $104,517,
respectively. This 15% decrease in depreciation is primarily as a result of
certain assets being fully depreciated during the period as they had reached the
end of their economic useful lives.
Total Operating Expenses
Total operating expenses
increased by $147,747, to $2,499,667, in the three months ended March 31, 2017,
or 6%, compared to $2,351,920 in the 2016 period. This increase is primarily due
to increased professional fees, as well as increased salaries and wages, which
were partially offset by decreased general and administrative costs as discussed
above.
Net Income
The net income after income taxes for the
quarter ended March 31, 2017 was $271,960 as opposed to a net income after
income taxes of $112,980 for the quarter ended March 31, 2016. This 141%
increase in net income is due to increased revenues that were partially offset
by increased operating expenses discussed above.
Liquidity and Capital Resources
At March 31, 2017, we had cash and cash equivalents of $1.14
and $0.06 million of short-term investments. The following table sets forth a
summary of our cash flows for the periods indicated:
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities
|
$
|
316,227
|
|
$
|
585,903
|
|
Net cash used in investing activities
|
$
|
(61,272
|
)
|
$
|
(12,045
|
)
|
Net cash used in financing activities
|
$
|
(241,759
|
)
|
$
|
(217,511
|
)
|
Effect of exchange rate changes on cash and cash
equivalents
|
$
|
27,310
|
|
$
|
5,628
|
|
Net increase in cash and cash equivalents
|
$
|
40,506
|
|
$
|
361,975
|
|
Cash and cash equivalents at the beginning of period
|
$
|
1,103,003
|
|
$
|
1,054,750
|
|
Cash and cash equivalents at the end of period
|
$
|
1,143,509
|
|
$
|
1,416,725
|
|
Cash increased by $40,506, or 4%, for the three months ended
March 31, 2017. The primary sources of cash for the three months ended March 31,
2017 were a net income of $271,960, decreased inventory of $948,717, and
decreased prepaid expenses and other current assets of $385,604. The primary
uses of cash for the three months ended March 31, 2017 were decreased accounts
payable and accrued expenses of $834,598, increased accounts receivable of
$739,731 and the repayment of a short-term loan amounting to $241,759. As of
March 31, 2017, 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 domestically as well as
internationally.
Obligations under Material Contracts
Pursuant to our Licensing Agreement with Xceed Holdings, a
company owned and controlled by Dr. Christopher Leatt, our founder, chairman and
head of research and development, 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.
17
Pursuant to a Premium Finance Agreement, dated October 13,
2016, between the Company and AFCO Acceptance Corporation AFCO, the Company is
obligated to pay AFCO an aggregate sum of $637,260 in eleven payments of
$58,921, at an annual interest rate of 3.397%, commencing on November 1, 2016
and ending on September 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 March 31, 2017, 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 March 31, 2017, the Company had not
defaulted on its payment obligations under this agreement.
On July 8, 2015, the Company entered a consulting agreement
with Innovate Services Limited, or Innovate, a Seychelles limited company in
which, Dr. Christopher Leatt, the Companys founder, chairman and executive
director of research and development 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 detailed explanation
of the material provisions thereof. The foregoing description is qualified in
its entirety by reference to the Consulting Agreement filed as Exhibit 10.1 to
the Companys report on Form 8-K filed on July 8, 2015.
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.
18
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 net realizable value. 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 three-month periods ended March 31, 2017 and 2016 was
$283,146 and $168,804, 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 three-month periods ended
March 31, 2017 and 2016.
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.
Recent Accounting Pronouncements
See Note 8, Recent Accounting Pronouncements 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.
19