LEATT CORPORATION
CONSOLIDATED BALANCE
SHEETS
ASSETS
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Unaudited
|
|
|
Audited
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,234,872
|
|
$
|
1,103,003
|
|
Short-term investments
|
|
58,213
|
|
|
58,196
|
|
Accounts receivable
|
|
2,953,495
|
|
|
2,217,840
|
|
Inventory
|
|
6,234,692
|
|
|
4,578,125
|
|
Payments in advance
|
|
415,181
|
|
|
569,498
|
|
Income tax refunds
receivable
|
|
159,730
|
|
|
83,567
|
|
Prepaid expenses and other current
assets
|
|
330,137
|
|
|
847,032
|
|
Total current
assets
|
|
11,386,320
|
|
|
9,457,261
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
2,031,355
|
|
|
1,190,688
|
|
Deferred tax asset
|
|
108,300
|
|
|
108,300
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
Deposits
|
|
25,172
|
|
|
24,892
|
|
Intangible assets
|
|
69,807
|
|
|
69,133
|
|
Total other
assets
|
|
94,979
|
|
|
94,025
|
|
|
|
|
|
|
|
|
Total Assets
|
$
|
13,620,954
|
|
$
|
10,850,274
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
$
|
5,606,448
|
|
$
|
3,021,618
|
|
Income tax payable
|
|
140,980
|
|
|
-
|
|
Short term loan, net of finance
charges
|
|
58,759
|
|
|
542,532
|
|
Total current liabilities
|
|
5,806,187
|
|
|
3,564,150
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
65,400
|
|
|
65,400
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
Preferred stock, $.001 par
value, 1,120,000 shares authorized,
120,000 shares issued and outstanding
|
|
3,000
|
|
|
3,000
|
|
Common stock,
$.001 par value, 28,000,000 shares
authorized,
5,366,382 and
5,362,992 shares issued and outstanding
|
|
130,053
|
|
|
130,053
|
|
Additional paid - in capital
|
|
7,646,807
|
|
|
7,469,694
|
|
Accumulated
other comprehensive loss
|
|
(602,739
|
)
|
|
(610,083
|
)
|
Retained earnings
|
|
572,246
|
|
|
228,060
|
|
Total stockholders' equity
|
|
7,749,367
|
|
|
7,220,724
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders' Equity
|
$
|
13,620,954
|
|
$
|
10,850,274
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
1
LEATT CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
5,455,088
|
|
$
|
4,631,557
|
|
$
|
14,783,154
|
|
$
|
13,152,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
2,914,008
|
|
|
2,183,072
|
|
|
7,566,816
|
|
|
6,206,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
2,541,080
|
|
|
2,448,485
|
|
|
7,216,338
|
|
|
6,946,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Royalty Income
|
|
39,396
|
|
|
16,224
|
|
|
90,313
|
|
|
69,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
562,803
|
|
|
548,829
|
|
|
1,877,560
|
|
|
1,754,043
|
|
Commissions and consulting expenses
|
|
109,217
|
|
|
144,480
|
|
|
388,538
|
|
|
444,472
|
|
Professional fees
|
|
88,901
|
|
|
110,700
|
|
|
519,673
|
|
|
363,018
|
|
Advertising and marketing
|
|
449,176
|
|
|
502,522
|
|
|
1,258,511
|
|
|
1,216,916
|
|
Office rent and expenses
|
|
68,423
|
|
|
66,593
|
|
|
201,101
|
|
|
193,745
|
|
Research and development costs
|
|
321,443
|
|
|
402,924
|
|
|
966,841
|
|
|
1,083,983
|
|
Bad debt expense (recovery)
|
|
7,956
|
|
|
16,216
|
|
|
8,606
|
|
|
(6,341
|
)
|
General and administrative expenses
|
|
419,052
|
|
|
505,194
|
|
|
1,254,542
|
|
|
1,466,992
|
|
Depreciation
|
|
131,374
|
|
|
103,586
|
|
|
322,829
|
|
|
314,584
|
|
Total operating
expenses
|
|
2,158,345
|
|
|
2,401,044
|
|
|
6,798,201
|
|
|
6,831,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
422,131
|
|
|
63,665
|
|
|
508,450
|
|
|
184,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expenses), net
|
|
(95
|
)
|
|
(3,270
|
)
|
|
(5,650
|
)
|
|
65,539
|
|
Total other income
(expenses)
|
|
(95
|
)
|
|
(3,270
|
)
|
|
(5,650
|
)
|
|
65,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
422,036
|
|
|
60,395
|
|
|
502,800
|
|
|
250,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
128,747
|
|
|
21,139
|
|
|
158,614
|
|
|
109,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Shareholders
|
$
|
293,289
|
|
$
|
39,256
|
|
$
|
344,186
|
|
$
|
140,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.05
|
|
$
|
0.01
|
|
$
|
0.06
|
|
$
|
0.03
|
|
Diluted
|
$
|
0.05
|
|
$
|
0.01
|
|
$
|
0.06
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
5,366,382
|
|
|
5,345,312
|
|
|
5,364,718
|
|
|
5,283,059
|
|
Diluted
|
|
5,547,683
|
|
|
5,483,774
|
|
|
5,546,019
|
|
|
5,421,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
$
|
293,289
|
|
$
|
39,256
|
|
$
|
344,186
|
|
$
|
140,780
|
|
Other comprehensive income,
net of $0 and $0 deferred
income
taxes in 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
(49,044
|
)
|
|
78,818
|
|
|
7,344
|
|
|
110,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income
|
$
|
244,245
|
|
$
|
118,074
|
|
$
|
351,530
|
|
$
|
251,517
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
2
LEATT CORPORATION
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred Stock A
|
|
|
Common Stock
|
|
|
Paid - In
|
|
|
Comprensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
177,113
|
|
|
-
|
|
|
-
|
|
|
177,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised on a cashless basis
|
|
-
|
|
|
-
|
|
|
3,390
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
344,186
|
|
|
344,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,344
|
|
|
-
|
|
|
7,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017
|
|
120,000
|
|
$
|
3,000
|
|
|
5,366,382
|
|
$
|
130,053
|
|
$
|
7,646,807
|
|
$
|
(602,739
|
)
|
$
|
572,246
|
|
$
|
7,749,367
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
LEATT CORPORATION
CONSOLIDATED STATEMENTS OF CASH
FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND
2016
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
Net income
|
$
|
344,186
|
|
$
|
140,780
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
322,829
|
|
|
314,584
|
|
Stock-based compensation
|
|
177,113
|
|
|
155,742
|
|
Other income
|
|
-
|
|
|
(73,533
|
)
|
Bad debts
|
|
5,737
|
|
|
(13,369
|
)
|
Inventory reserve
|
|
116,769
|
|
|
26,385
|
|
Gain on
sale of property and equipment
|
|
(3,061
|
)
|
|
-
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
Accounts receivable
|
|
(741,392
|
)
|
|
(343,125
|
)
|
Inventory
|
|
(1,773,336
|
)
|
|
230,302
|
|
Payments in advance
|
|
154,317
|
|
|
(323,623
|
)
|
Prepaid expenses
and other current assets
|
|
516,895
|
|
|
578,386
|
|
Income tax refunds receivable
|
|
(76,163
|
)
|
|
-
|
|
Other receivables
|
|
-
|
|
|
90,000
|
|
Deposits
|
|
(280
|
)
|
|
(8,361
|
)
|
(Increase) Decrease in:
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
2,584,830
|
|
|
(89,935
|
)
|
Income taxes
payable
|
|
140,980
|
|
|
(162,413
|
)
|
Net cash provided by operating activities
|
|
1,769,424
|
|
|
521,820
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(1,158,507
|
)
|
|
(93,763
|
)
|
Proceeds from
sale of property and equipment
|
|
3,125
|
|
|
-
|
|
Increase in short-term
investments, net
|
|
(17
|
)
|
|
(18
|
)
|
Net cash used in investing activities
|
|
(1,155,399
|
)
|
|
(93,781
|
)
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
-
|
|
|
39,000
|
|
Repayments of
short-term loan, net
|
|
(483,773
|
)
|
|
(620,003
|
)
|
Net
cash used in financing activities
|
|
(483,773
|
)
|
|
(581,003
|
)
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash
equivalents
|
|
1,617
|
|
|
51,632
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
131,869
|
|
|
(101,332
|
)
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning
|
|
1,103,003
|
|
|
1,054,750
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - ending
|
$
|
1,234,872
|
|
$
|
953,418
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
10,597
|
|
$
|
10,467
|
|
Cash paid for income taxes
|
$
|
87,207
|
|
$
|
271,737
|
|
|
|
|
|
|
|
|
Other noncash investing and financing
activities
|
|
|
|
|
|
|
Common stock
issued for services
|
$
|
177,113
|
|
$
|
155,742
|
|
Cancellation of common shares as
settlement of a legal matter
|
$
|
-
|
|
$
|
(73,533
|
)
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
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
September 30, 2017 and the consolidated statements of operations and
comprehensive income for the three and nine months ended September 30, 2017 and
2016, changes in stockholders equity for the nine months ended September 30,
2017, cash flows for the nine months ended September 30, 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 September 30, 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 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, 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 nine months ended September 30, 2017 and 2016 was $282,876 and
$186,899 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 nine months ended
September 30, 2017 was zero. There was no impairment of intangible assets at
September 30, 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 $1,740 over a ten-month period at a flat interest rate of 4.10%
. The Company repaid the U.S. short-term loan in full on September 1, 2017.
The Company also carries directors and officers liability
insurance and several other insurance policies. 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
$8,315 at a 3.900% 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. The Company repaid the
U.S. short-term loan in full on September 1, 2017
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.
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.
5
The Companys practice is to recognize interest and/or
penalties related to income tax matters in income tax expense. As of September
30, 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 weightedaverage number of common
stock shares and dilutive potential common shares outstanding during the period.
As of September 30, 2017, the Company had 636,000 potential common shares,
consisting of 120,000 preferred shares and options to purchase 193,000 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
During the nine months ended September 30, 2017, 169,000 stock
options were granted at an exercise price of $1.60 per share, exercisable over a
10-year period. The fair value of the stock options granted was estimated at the
date of grant using the Black Sholes option-pricing model. Based on the list of
assumptions presented below, the fair value of the options granted during the
nine months ended September 30, 2017, was $0.60.
Expected term in years
|
10 years
|
Risk-free interest rate
|
2.78%
|
Expected volatility
|
21.73%
|
Expected dividend yield
|
0.00%
|
The expected volatility was determined with reference to the
historical volatility of the Company's stock. The Company uses historical data
to estimate option exercise and employee termination within the valuation model.
The expected term of options granted represents the period of time that the
options granted are expected to be outstanding. The risk-free interest rate for
periods within the contractual life of the option is based on the U.S. Treasury
rate in effect at the time of grant.
Stock-based compensation expense related to vested stock
options during the nine months ended September 30, 2017 was $177,113. As
of September 30, 2017, there was $357,293 of unrecognized compensation costs
related to unvested stock options, which is expected to be recognized over a
3-year vesting period.
On May 22, 2017, the Company issued 3,390 shares of common
stock to employees who exercised employee stock options in a cashless exercise.
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 May 2017, the FASB issued ASU 2017-09, Compensation Stock
Compensation (Topic 718): Scope of Modification Accounting, which clarifies
when to account for a change to the terms or conditions of a share-based payment
award as a modification. Under the new guidance, modification accounting is
required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. If an award is not probable of vesting at the time a change is made, the new guidance clarifies that no new measurement date will be required if there is no change
to the fair value, vesting conditions, and classification. This ASU will be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company
does not expect this standard to have a material impact on its financial statements.
6
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.
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 has performed an initial review of its revenue arrangements, which include product sales and royalty payments, and
based upon that initial review, and the interpretive guidance that has been issued and examined, the adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
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 Company’s 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 Company’s 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 Company’s consolidated financial statements.
7
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.
Note 10 – Subsequent Events
The Company has evaluated all subsequent events through the date the financial statements were released.
The Company entered into a Premium Finance Agreement with AFCO Acceptance Corporation “AFCO” dated October 16, 2017, to finance its U.S. short-term insurance over the period of coverage. The Company is obligated to pay AFCO an aggregate
sum of $593,400 in eleven payments of $55,071, at an annual interest rate of $4.15% commencing on November 1, 2017 and ending on September 1, 2018. 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.
8
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 in our latest annual report on Form 10-K filed
with the SEC. 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 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 = ZAR13.5156 for its September 30, 2017 balance
sheet
.
9
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. 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 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).
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. Additionally, Two Eleven sells products
directly to customers via Leatts online store.
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 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 would 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.
10
-
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 64% 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- and nine-month periods ended September 30, 2017 and 2016 included herein.
Three Months Ended September 30, 2017 compared to the
Three Months Ended September 30, 2016
11
The following table summarizes the results of our operations
during the three-month periods ended September 30, 2017 and 2016 and provides
information regarding the dollar and percentage increase or (decrease) in such
periods:
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$ Increase
|
|
|
Increase
|
|
Item
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
$
|
5,455,088
|
|
$
|
4,631,557
|
|
|
$
|
823,531
|
|
|
18%
|
|
COST OF REVENUES
|
|
2,914,008
|
|
|
2,183,072
|
|
|
$
|
730,936
|
|
|
33%
|
|
GROSS PROFIT
|
|
2,541,080
|
|
|
2,448,485
|
|
|
$
|
92,595
|
|
|
4%
|
|
PRODUCT ROYALTY INCOME
|
|
39,396
|
|
|
16,224
|
|
|
$
|
23,172
|
|
|
143%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Wages
|
|
562,803
|
|
|
548,829
|
|
|
$
|
13,974
|
|
|
3%
|
|
Commissions and Consulting
|
|
109,217
|
|
|
144,480
|
|
|
$
|
(35,263
|
)
|
|
-24%
|
|
Professional Fees
|
|
88,901
|
|
|
110,700
|
|
|
$
|
(21,799
|
)
|
|
-20%
|
|
Advertising and Marketing
|
|
449,176
|
|
|
502,522
|
|
|
$
|
(53,346
|
)
|
|
-11%
|
|
Office Rent and Expenses
|
|
68,423
|
|
|
66,593
|
|
|
$
|
1,830
|
|
|
3%
|
|
Research and Development Costs
|
|
321,443
|
|
|
402,924
|
|
|
$
|
(81,481
|
)
|
|
-20%
|
|
Bad Debt Expense
|
|
7,956
|
|
|
16,216
|
|
|
$
|
(8,260
|
)
|
|
-51%
|
|
General and Administrative
|
|
419,052
|
|
|
505,194
|
|
|
$
|
(86,142
|
)
|
|
-17%
|
|
Depreciation
|
|
131,374
|
|
|
103,586
|
|
|
$
|
27,788
|
|
|
27%
|
|
Total Operating Expenses
|
|
2,158,345
|
|
|
2,401,044
|
|
|
$
|
(242,699
|
)
|
|
-10%
|
|
INCOME FROM OPERATIONS
|
|
422,131
|
|
|
63,665
|
|
|
$
|
358,466
|
|
|
563%
|
|
Other Expenses
|
|
(95
|
)
|
|
(3,270
|
)
|
|
$
|
(3,365
|
)
|
|
-103%
|
|
INCOME BEFORE INCOME TAXES
|
|
422,036
|
|
|
60,395
|
|
|
$
|
361,641
|
|
|
599%
|
|
Income Taxes
|
|
128,747
|
|
|
21,139
|
|
|
$
|
107,608
|
|
|
509%
|
|
NET INCOME
|
$
|
293,289
|
|
$
|
39,256
|
|
|
$
|
254,033
|
|
|
647%
|
|
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 September 30, 2017 were $5.46 million, an 18%
increase, compared to revenues of $4.63 million for the quarter ended September
30, 2016. Revenues associated with international customers were $3.87 million
and $2.70 million, or 71% and 58% of revenues, respectively, for the three
months ended September 30, 2017 and 2016. This increase in worldwide revenues is
primarily attributable to a $0.57 million increase in helmet sales, a $0.45
million increase in body armor sales and a $0.58 million increase in sales of
other products, parts and accessories that were partially offset by a $0.78
million decrease in neck brace sales.
The following table sets forth our revenues by product line for
the three months ended September 30, 2017 and 2016:
|
|
Three months ended September 30
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2017
|
|
|
Revenues
|
|
|
2016
|
|
|
Revenues
|
|
Neck braces
|
$
|
1,091,601
|
|
|
20%
|
|
$
|
1,875,724
|
|
|
40%
|
|
Body armor
|
|
2,680,405
|
|
|
49%
|
|
|
2,228,104
|
|
|
48%
|
|
Helmets
|
|
648,313
|
|
|
12%
|
|
|
74,879
|
|
|
2%
|
|
Other Products, Parts and Accessories
|
|
1,034,769
|
|
|
19%
|
|
|
452,850
|
|
|
10%
|
|
|
$
|
5,455,088
|
|
|
100%
|
|
$
|
4,631,557
|
|
|
100%
|
|
Sales of our flagship neck brace accounted for $1.09 million
and $1.88 million, or 20% and 40% of our revenues for the quarters ended
September 30, 2017 and 2016, respectively. The 42% decrease in neck brace
revenues is primarily attributable to a 39% decrease in the volume of neck
braces sold to our customers worldwide.
12
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 $2.68 million and $2.22 million, or
49% and 48% of our revenues for the quarters ended September 30, 2017 and 2016, respectively. The 20% increase in body armor revenues was primarily the result of an increase in sales of the Company’s C-Frame knee brace line due to continued
demand for the C-Frame Pro knee brace both in the United States and abroad.
Our helmets accounted for $0.65 million or 12% of our revenues for the three months ended September 30, 2017 as compared to $0.07 million or 2% of our revenues for the same 2016 period. The $0.57 million increase in helmet sales is
primarily the result of the initial shipment of our highly anticipated DBX 3.0 Enduro helmet for bicycle use.
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 $1.03 million and 0.45 million, or 19% and 10% of our revenues for the quarters ended September 30, 2017 and 2016, respectively. The
129% increase in revenues from the sale of other products, parts and accessories is primarily due to increased sales volume of our GPX and DBX apparel designed for off-road motorcycle and bicycle use respectively.
Cost of Revenues and Gross Profit
– Cost of revenues for the quarters ended September 30, 2017 and 2016 were $2.91 million and $2.18 million, respectively. Gross Profit for the quarters ended September 30, 2017 and 2016 were
$2.54 million and $2.45 million, respectively, or 47% and 53% of revenues, respectively. Our
neck brace
products continue to generate a higher gross profit margin than our other product categories. Neck brace revenues accounted
for 20% and 40% of our revenues for the quarters ended September 30, 2017 and 2016 respectively. Additionally, while revenues associated with international customers were 71% and 58% of our revenues for the three months ended September 30, 2017 and
2016 respectively, revenue associated with international customers continue to generate a lower gross profit margin than dealer direct sales in the United States.
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 September 30, 2017 and 2016 were $39,396 and $16,224, respectively. The 143% increase in product royalty income is due to an increase in the sale of licensed products by licensees in the 2017 period.
Salaries and Wages
– Salaries and wages for the quarters ended September 30, 2017 and 2016 were $562,803 and $548,829, respectively. This 3% increase in salaries and wages during the 2017 period was primarily due to the
employment of additional sales and marketing personnel in the United States.
Commissions and Consulting Expense
– During the quarters ended September 30, 2017 and 2016, commissions and consulting expenses were $109,217 and $144,480, respectively. This 24% decrease in commissions and consulting expenses
is primarily due to the restructuring of commissions paid to the Company’s US sales representatives.
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 September 30, 2017 and 2016 were $88,901 and $110,700, respectively. This 20% decrease in professional fees is primarily due to decreased spending on corporate legal expenditures during the 2017 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 September 30, 2017 and 2016 were $449,176 and $502,522, respectively. The 11% decrease in advertising and marketing expenditures during the 2017 period is primarily due to earlier timing of the production and
implementation of global marketing campaigns designed to support and promote the Company’s widening product range and target market reach during the 2017 period.
Office Rent and Expenses
– Office rent and expenses for the quarters ended September 30, 2017 and 2016 were $68,423 and $66,593, respectively. This 3% increase in office rent and expenses during the 2017 period is in line with
lease escalation clauses for the Company’s worldwide facilities.
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 September 30, 2017 and 2016, decreased to $321,443, from $402,924, during the same 2016 quarter. The 20% decrease in research and development costs is primarily due to a restructuring of
the salaries paid to personnel in the research and development department.
13
Bad Debt Expense
Bad Debt Expense for the
quarters ended September 30, 2017 and 2016 were $7,956 and $16,216,
respectively. This decrease in Bad Debt Expense is the result of the write off
of higher value unrecoverable debts owing to the Company during the 2016
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 September 30, 2017 and 2016 were $419,052 and $505,194,
respectively. The 17% decrease in general and administrative expenses is
primarily due to a decrease in product liability insurance premiums.
Depreciation Expense
Depreciation Expense for
the quarters ended September 30, 2017 and 2016 were $131,374 and $103,586,
respectively. This 27% increase in depreciation is primarily due to the addition
of moulds and tooling utilized in the production of the Companys widening
product range.
Total Operating Expenses
Total operating expenses
decreased by $242,699, to $2.16 million in the three months ended September 30,
2017, or 10%, compared to $2.40 million in the 2016 period. This decrease is
primarily due to decreased general and administrative costs, research and
development costs and advertising and marketing costs discussed above.
Net Income
The net income after income taxes for the
quarter ended September 30, 2017 was $293,289 as opposed to a net income of
$39,256 for the quarter ended September 30, 2016. This increase in net income is
primarily due to the increase in revenues and decrease in operating costs
discussed above.
Nine Months Ended September 30, 2017 Compared to the Nine
Months Ended September 30, 2016
The following table summarizes the results of our operations
during the nine-month periods ended September 30, 2017 and 2016 and provides
information regarding the dollar and percentage increase or (decrease) in such
periods:
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$Increase
|
|
|
Increase
|
|
Item
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
$
|
14,783,154
|
|
$
|
13,152,964
|
|
|
$
|
1,630,190
|
|
|
12%
|
|
COST OF REVENUES
|
|
7,566,816
|
|
|
6,206,741
|
|
|
$
|
1,360,075
|
|
|
22%
|
|
GROSS PROFIT
|
|
7,216,338
|
|
|
6,946,223
|
|
|
$
|
270,115
|
|
|
4%
|
|
PRODUCT ROYALTY INCOME
|
|
90,313
|
|
|
69,755
|
|
|
$
|
20,558
|
|
|
29%
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Wages
|
|
1,877,560
|
|
|
1,754,043
|
|
|
$
|
123,517
|
|
|
7%
|
|
Commissions and Consulting
|
|
388,538
|
|
|
444,472
|
|
|
$
|
(55,934
|
)
|
|
-13%
|
|
Professional Fees
|
|
519,673
|
|
|
363,018
|
|
|
$
|
156,655
|
|
|
43%
|
|
Advertising and Marketing
|
|
1,258,511
|
|
|
1,216,916
|
|
|
$
|
41,595
|
|
|
3%
|
|
Office Rent and Expenses
|
|
201,101
|
|
|
193,745
|
|
|
$
|
7,356
|
|
|
4%
|
|
Research and Development Costs
|
|
966,841
|
|
|
1,083,983
|
|
|
$
|
(117,142
|
)
|
|
-11%
|
|
Bad Debt Expense (Recovery)
|
|
8,606
|
|
|
(6,341
|
)
|
|
$
|
14,947
|
|
|
236%
|
|
General and Administrative
|
|
1,254,542
|
|
|
1,466,992
|
|
|
$
|
(212,450
|
)
|
|
-14%
|
|
Depreciation
|
|
322,829
|
|
|
314,584
|
|
|
$
|
8,245
|
|
|
3%
|
|
Total Operating Expenses
|
|
6,798,201
|
|
|
6,831,412
|
|
|
$
|
(33,211
|
)
|
|
0%
|
|
INCOME FROM OPERATIONS
|
|
508,450
|
|
|
184,566
|
|
|
$
|
323,884
|
|
|
175%
|
|
Other Income (Expenses)
|
|
(5,650
|
)
|
|
65,539
|
|
|
$
|
(71,189
|
)
|
|
-109%
|
|
INCOME BEFORE INCOME TAXES
|
|
502,800
|
|
|
250,105
|
|
|
$
|
252,695
|
|
|
101%
|
|
Income Taxes
|
|
158,614
|
|
|
109,325
|
|
|
$
|
49,289
|
|
|
45%
|
|
NET INCOME
|
$
|
344,186
|
|
$
|
140,780
|
|
|
$
|
203,406
|
|
|
144%
|
|
14
Revenues
Revenues of the nine-month period ended
September 30, 2017 were $14.78 million, a 12% increase, compared to revenues of
$13.16 million for the period ended September 30, 2016. Revenues associated with
international customers were $9.48 million and $7.50 million, or 64% and 57% of
revenues, respectively, for the nine months ended September 30, 2017 and 2016.
The increase in worldwide revenues is attributable to a $1 million increase in
body armor sales, a $0.84 million increase in other products, parts and
accessory sales and a $0.28 million increase in helmet sales, which was
partially offset by a $0.57 million decrease in neck brace sales.
The following table sets forth our revenues by product line for
the nine months ended September 30, 2017 and 2016:
|
|
Nine months ended September 30
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2017
|
|
|
Revenues
|
|
|
2016
|
|
|
Revenues
|
|
Neck braces
|
$
|
4,197,565
|
|
|
28%
|
|
$
|
4,769,506
|
|
|
36%
|
|
Body armor
|
|
7,287,339
|
|
|
49%
|
|
|
6,209,004
|
|
|
47%
|
|
Helmets
|
|
1,540,803
|
|
|
11%
|
|
|
1,258,093
|
|
|
10%
|
|
Other Products, Parts and Accessories
|
|
1,757,447
|
|
|
12%
|
|
|
916,361
|
|
|
7%
|
|
|
$
|
14,783,154
|
|
|
100%
|
|
$
|
13,152,964
|
|
|
100%
|
|
Sales of our flagship neck brace accounted for $4.20 million
and $4.77 million, or 28% and 36% of our revenues for the nine-month periods
ended September 30, 2017 and 2016, respectively. A 14% decrease in neck brace
sales volumes to our customers in the United States during the 2017 period was
the primary reason for the overall 12% decrease in neck brace revenues during
the nine months ended September 30, 2017.
Body armor sales accounted for $7.29
million and $6.21
million, or 49% and 47% of our revenues for the nine-month period ended
September 30, 2017 and 2016, respectively. The 17% increase in body armor
revenues was primarily the result of an increase in sales of the Companys
C-Frame knee brace line due to continued worldwide demand for the C-Frame Pro
knee brace.
Our helmets accounted for $1.54
million, or 11% of our
revenues for the nine months ended September 30, 2017, as compared to $1.26
million, or 10% of our revenues for the nine months ended September 30, 2016.
The 22% increase in helmet revenues is primarily due to initial shipments of our
DBX 3.0 All Mountain and DBX 3.0 Enduro helmets for bicycle use during the first
nine months of 2017.
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 including hats, jackets, bags, hydration kits and cooling
garments. Other products, parts and accessories sales accounted for $1.76
million and $0.92 million, or 12% and 7% of our revenues for the nine months
ended September 30, 2017 and 2016, respectively. The 92% increase in revenues
from the sale of other products, parts and accessories is primarily due to the
successful market acceptance and resultant increased sales volume of our GPX and
DBX apparel designed for off-road motorcycle and bicycle use, respectively.
Cost of Revenues and Gross Profit
Cost of revenues for
the nine-month periods ended September 30, 2017 and 2016 were $7.57
million and
$6.21 million, respectively. Gross Profit for the
nine-month periods ended September 30, 2917 and 2016 were $7.22
and $6.95
million, respectively, or 49% and
53% of revenues respectively. Our neck
brace products continue to generate a higher gross margin than our other product
categories. Neck brace revenues accounted for 28% and 36% of our revenues for
the nine months ended September 30, 2017 and 2016, respectively. Additionally,
while revenues associated with international customers were 64% and 57% of our
revenues for the nine months ended September 30, 2017 and 2016, respectively,
revenue associated with international customers continue to generate a lower
gross margin than dealer direct sales in the United States.
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 nine-month periods ended September 30,
2017 and 2016 were $90,313
and $69,755, respectively. The 29% increase in
product royalty income is due to an increase in the sale of licensed products by
licensees in the 2017 period.
Salaries and Wages
Salaries and wages for the
nine-month period ended September 30, 2017 and 2016 were $1,877,560 and
$1,754,043, respectively. This 7% increase in salaries and wages during the 2017
period was due the employment of additional sales and marketing personnel in the
United States.
15
Commissions and Consulting Expense
– During the nine-month periods ended September 30, 2017 and 2016, commissions and consulting expenses were $388,538 and $444,472, respectively. This 13% decrease in commission and consulting
expenditure is primarily the result of the restructuring of the Company’s US sales representative structure.
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 nine-month periods ended September 30, 2017 and 2016 were $519,673
and $363,018, respectively. This 43% 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 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 nine-month periods ended September 30, 2017 and 2016 were $1,258,511
and $1,216,916, respectively. The 3% increase in advertising and marketing expenditures during the 2017 period is primarily due to the production
and implementation of marketing campaigns designed to globally support and promote the Company’s widening product range, target market reach and brand awareness.
Office Rent and Expenses
– Office rent and expenses for the nine-month periods ended September 30, 2017 and 2016 were $201,101
and $193,745, respectively. The 4% increase in office rent and expenses during the 2017 period
is in line with lease escalation clauses for the Company’s worldwide facilities.
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 nine-month period ended September 30, 2017 decreased to $966,841, from $1,083,983, during the same 2016 period. The 11% decrease in research and development costs is primarily due to a restructuring of
the salaries paid to personnel in the research and development department.
Bad Debt Expense (Recovery)
– Bad Debt Expense (Recovery) for the nine-month periods ended September 30, 2017 and 2016 were $8,606 and ($6,341), respectively. This increase in Bad Debt Expense (Recovery) is primarily the result
of the recovery of previously unrecoverable debts during the 2016 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 nine-month periods ended
September 30, 2017 and 2016 were $1,254,542
and $1,466,992, respectively. The 14% 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 nine-month periods ended September 30, 2017 and 2016 were $322,829
and $314,584, respectively. This 3% increase in depreciation is primarily due to the addition of
moulds and tooling utilized in the production of the Company’s widening product range. This additional depreciation was partially offset by certain assets that were fully depreciated during the period as they had reached the end of their
economic lives.
Total Operating Expenses
– Total operating expenses decreased by $33,211, to $6.80 million
in the nine months ended September 30, 2017, or 0.5%, compared to $6.83 million in the 2016 period. This decrease is primarily
due to decreased general and administrative and research and development costs that were partially offset by increased professional fees and salaries and wages discussed above.
Net income
– Net income after income taxes for the nine-month period ended September 30, 2017 was $344,186
as opposed to a net income after income taxes of $140,780 for the nine-month period ended September 30, 2016. This
increase in net income is primarily due to the increased revenues and decreased operating expenses discussed above.
Liquidity and Capital Resources
At September 30, 2017, we had cash and cash equivalents of $1.23 million and $0.58 million of short-term investments. The following table sets forth a summary of our cash flows for the periods indicated:
16
|
|
|
September 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Net cash provided by operating activities
|
$
|
1,769,424
|
|
$
|
521,820
|
|
|
Net cash used in investing activities
|
$
|
(1,155,399
|
)
|
$
|
(93,781
|
)
|
|
Net cash used in financing activities
|
$
|
(483,773
|
)
|
$
|
(581,003
|
)
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
$
|
1,617
|
|
$
|
51,632
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
$
|
131,869
|
|
$
|
(101,332
|
)
|
|
Cash and cash equivalents at the beginning of period
|
$
|
1,103,003
|
|
$
|
1,054,750
|
|
|
Cash and cash equivalents at the end of period
|
$
|
1,234,872
|
|
$
|
953,418
|
|
Cash increased by $131,869, or 12%, for the nine months ended
September 30, 2017. The primary uses of cash for the nine months ended September
30, 2017 were increased inventory of $1.77 million, increased accounts
receivables of $741,392, capital expenditures of $1.16 million and the repayment
of the short-term loan amount of $483,773. The primary sources of cash for the
nine months ended September 30, 2017 were increased accounts payable and accrued
expenses of $2.58 million, and increased prepaid expenses and other current
assets of $516,895. As of September 30, 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 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.
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.
On October 13, 2016, the Company entered into a Premium Finance
Agreement with AFCO Acceptance Corporation AFCO to finance its U.S. short-term
insurance over the period of coverage. The Company was 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 was to be assessed a late
penalty of 5% of the payment amount due, and in the event of default AFCO had
the right to accelerate the payment due under the agreement. This agreement was
paid in full on September 1, 2017. On October 16, 2017, the Company entered into
a new Premium Finance Agreement with AFCO to finance its U.S. short-term
insurance over the period of coverage. The Company is obligated to pay AFCO an
aggregate sum of $593,400 in eleven payments of $55,071, at an annual interest
rate of $4.15%, commencing on November 1, 2017 and ending on September 1, 2018.
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.
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Pursuant to a Premium Finance Agreement, dated March 30, 2017, between the Company and AFCO, the Company is obligated to pay AFCO an aggregate sum of $7,195 in five payments of $1,453 at a 3.397% annual interest rate, commencing on May 1,
2017 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 September 30, 2017, the Company had not defaulted on its payment obligations under this agreement. This agreement was paid in full
on September 1, 2017.
Pursuant to a Premium Finance Agreement, dated May 22, 2017, between the Company and AFCO, the Company is obligated to pay AFCO an aggregate sum of $89,708 in eleven payments of $8,315 at a 3.900% annual interest rate, commencing on June 1,
2017 and ending on April 1, 2018. 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 September 30, 2017, the Company had not defaulted on its payment obligations under this agreement.
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.
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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 nine-month periods ended September 30, 2017 and 2016 was $282,876 and $186,899, 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 nine months ended September 30, 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, “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.