Leatt Corp.: Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10−Q

(Mark One)

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

For the quarterly period ended: June 30, 2013

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File No. 000-54693

LEATT CORPORATION
(Exact name of registrant as specified in its charter)

Nevada 20-2819367
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)  

50 Kiepersol Drive, Atlas Gardens, Contermanskloof Road,
Durbanville, Western Cape, South Africa, 7441
(Address of principal executive offices)

+(27) 21-557-7257
(Registrant’s telephone number, including area code)

__________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]    No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [_]    No [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [_] Accelerated filer [_]
Non-accelerated filer (Do not check if a smaller reporting company) [_] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [_]    No [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of August 9, 2013 is as follows:

Class of Securities Shares Outstanding
Common Stock, $0.001 par value 5,200,623



LEATT /CORPORATION
 
Quarterly Report on Form 10-Q
Three Months Ended June 30, 2013

TABLE OF CONTENTS

PART I 1
FINANCIAL INFORMATION 1
      ITEM 1. FINANCIAL STATEMENTS. 1
      ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8
      ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 17
      ITEM 4. CONTROLS AND PROCEDURES. 17
PART II 18
OTHER INFORMATION 18
      ITEM 1. LEGAL PROCEEDINGS. 18
      ITEM 1A. RISK FACTORS. 19
      ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 19
      ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 19
      ITEM 4. MINE SAFETY DISCLOSURES. 19
      ITEM 5. OTHER INFORMATION. 19
      ITEM 6. EXHIBITS. 19

- i -


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

LEATT CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2013 AND 2012

  Page(s)
Financial Statements  
      Consolidated Balance Sheets 2
      Consolidated Statements of Operations and Comprehensive Loss 3
      Consolidated Statement of Changes in Stockholders' Equity 4
      Consolidated Statements of Cash Flows 5
      Notes to Consolidated Financial Statements 6 - 7

- 1 -


   
LEATT CORPORATION
CONSOLIDATED BALANCE SHEETS
 
ASSETS

 

  June 30 2013     December 31 2012  

 

  Unaudited     Audited  

Current Assets

           

 Cash and cash equivalents

$  631,420   $  667,671  

 Short-term investments

  311,495     311,263  

 Accounts receivable

  2,798,478     3,532,811  

 Inventory

  3,305,045     3,770,932  

 Payments in advance

  120,579     168,710  

 Deferred tax asset

  47,000     47,000  

 Prepaid expenses and other current assets

  352,961     874,113  

   Total current assets

  7,566,978     9,372,500  

 

           

Property and equipment, net

  874,270     1,127,707  

 

           

Other Assets

           

 Deposits

  41,622     44,495  

 Intangible assets

  95,615     111,358  

   Total other assets

  137,237     155,853  

 

           

Total Assets

$  8,578,485   $  10,656,060  

 

           

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

           

Current Liabilities

           

   Accounts payable and accrued expenses

$  2,062,801   $  2,000,554  

   Income taxes payable

  113,501     115,000  

   Short term loan, net of finance charges

  307,908     837,721  

       Total current liabilities

  2,484,210     2,953,275  

 

           

Deferred tax liabilities

  37,029     38,000  

 

           

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, 5,200,623 shares issued and outstanding

  130,008     130,008  

   Additional paid - in capital

  7,302,352     7,302,352  

   Accumulated other comprehensive income (loss)

  (52,299 )   164,235  

   Retained earnings (accumulated deficit)

  (1,325,815 )   65,190  

       Total stockholders' equity

  6,057,246     7,664,785  

 

           

Total Liabilities and Stockholders' Equity

$  8,578,485   $  10,656,060  

See accompanying notes to consolidated financial statements

- 2 -



LEATT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

  Three Months Ended     Six Months Ended  

 

  June 30     June 30  

 

  2013     2012     2013     2012  

 

  Unaudited     Unaudited     Unaudited     Unaudited  

 

                       

Revenues

$  3,616,598   $  4,469,733   $  6,864,645   $  7,792,428  

 

                       

Cost of Revenues

  1,830,720     1,941,179     3,483,754     3,398,360  

 

                       

Gross Profit

  1,785,878     2,528,554     3,380,891     4,394,068  

 

                       

Product Royalty Income

  142,224     39,258     179,686     73,433  

 

                       

Operating Expenses

                       

   Salaries and wages

  552,501     555,524     1,131,641     1,066,540  

   Commissions and consulting expenses

  159,996     111,392     283,169     248,070  

   Professional fees

  451,516     311,751     816,111     553,752  

   Advertising and marketing

  403,688     307,691     730,325     539,080  

   Office rent and expenses

  59,411     62,001     132,814     140,333  

   Research and development costs

  276,747     255,993     565,605     521,455  

   Bad debt expense (recovery)

  -     (123,838 )   -     (123,838 )

   General and administrative expenses

  559,511     527,920     1,100,684     1,046,243  

   Depreciation

  97,429     108,551     191,455     215,894  

      Total operating expenses

  2,560,799     2,116,985     4,951,804     4,207,529  

 

                       

Income (Loss) from Operations

  (632,697 )   450,827     (1,391,227 )   259,972  

 

                       

Other Income

                       

   Interest and other income, net

  (2,647 )   31,605     1,142     49,368  

       Total other income

  (2,647 )   31,605     1,142     49,368  

 

                       

Income (Loss) Before Income Taxes

  (635,344 )   482,432     (1,390,085 )   309,340  

 

                       

Income Taxes

  920     105,000     920     105,960  

 

                       

Net Income (Loss) Available to

                       

Common Shareholders

$  (636,264 ) $  377,432   $  (1,391,005 ) $  203,380  

 

                       

Net Income (Loss) per Common Share

                       

   Basic

$  (0.12 ) $  0.07   $  (0.27 ) $  0.04  

   Diluted

$  (0.12 ) $  0.07   $  (0.27 ) $  0.04  

Weighted Average Number of Common Shares Outstanding

               

   Basic

  5,200,623     5,200,623     5,200,623     5,200,623  

   Diluted

  5,200,623     5,200,623     5,200,623     5,200,623  

 

                       

Comprehensive Income (Loss)

                       

   Net Income (Loss)

$  (636,264 ) $  377,432   $  (1,391,005 ) $  203,380  

   Other comprehensive income (loss), net of $-0- deferred income taxes

               

         Foreign currency translation

  (101,109 )   (136,971 )   (216,534 )   (8,662 )

 

                       

         Total Comprehensive Income (Loss)

$  (737,373 ) $  240,461   $  (1,607,539 ) $  194,718  

See accompanying notes to consolidated financial statements

- 3 -



LEATT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2013

 

                                Accumulated     Retained        

 

                                Other     Earnings        

 

  Preferred Stock A     Common Stock     Additional     Comprehensive     (Accumulated        

 

  Shares     Amount     Shares     Amount     Paid - In Capital     Income (Loss)     Deficit)     Total  

 

                                               

Balance, January 1, 2013

  120,000   $  3,000     5,200,623   $  130,008   $  7,302,352   $  164,235   $  65,190   $  7,664,785  

 

                                               

Net loss

  -     -     -     -     -     -     (1,391,005 )   (1,391,005 )

 

                                               

Foreign currency translation adjustment

  -     -     -     -     -     (216,534 )   -     (216,534 )

 

                                               

Balance, June 30, 2013

  120,000   $  3,000     5,200,623   $  130,008   $  7,302,352   $  (52,299 ) $  (1,325,815 ) $  6,057,246  

See accompanying notes to consolidated financial statements

- 4 -



LEATT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012

    2013     2012  
             
Cash flows from operating activities            
   Net income (loss) $  (1,391,005 ) $  203,380  
   Adjustments to reconcile net income (loss) to net cash provided by operating activities:        
      Depreciation   191,455     215,894  
      Deferred income taxes   (971 )   (132 )
      Stock-based compensation   -     10,325  
      (Gain) loss on sale of property and equipment   366     (5,706 )
   (Increase) decrease in:            
      Accounts receivable   734,333     516,933  
      Inventory   465,887     377,013  
      Payments in advance   48,131     34,709  
      Prepaid expenses and other current assets   521,152     518,341  
      Deposits   2,873     (30 )
   Increase (decrease) in:            
      Accounts payable and accrued expenses   62,247     (904,196 )
      Income taxes payable   (1,499 )   (44,991 )
      Customer deposits   -     (265 )
         Net cash provided by operating activities   632,969     921,275  
             
Cash flows from investing activities            
   Capital expenditures   (51,316 )   (94,201 )
   Proceeds from sale of property and equipment   2,844     5,706  
   Increase in short-term investments, net   (232 )   (387 )
         Net cash used in investing activities   (48,704 )   (88,882 )
             
Cash flows from financing activities            
   Repayments of short-term loan, net   (529,813 )   (528,866 )
         Net cash used in financing activities   (529,813 )   (528,866 )
             
Effect of exchange rates on cash and cash equivalents   (90,703 )   11,189  
             
Net (decrease) increase in cash and cash equivalents   (36,251 )   314,716  
             
Cash and cash equivalents - beginning of period   667,671     1,084,806  
             
Cash and cash equivalents - end of period $  631,420   $  1,399,522  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:            
   Cash paid for interest $  7,994   $  27  
   Cash paid for income taxes $  2,419   $  960  
             
   Other noncash investing and financing activities            
      Common stock issued for services $  -   $  10,325  

See accompanying notes to consolidated financial statements

- 5 -



LEATT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Basis of presentation

The consolidated balance sheet as of December 31, 2012 was audited and appears in the Form 10-K filed by the Company with the Securities and Exchange Commission on March 28, 2013. The consolidated balance sheet as of June 30, 2013 and the consolidated statements of operations and comprehensive loss for the three months and six months ended June 30, 2013 and 2012, changes in stockholders’ equity for the six months ended June 30, 2013, cash flows for the six months ended June 30, 2013 and 2012, 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 June 30, 2013 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 Company’s 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, 2012 as filed with the Securities and Exchange Commission in the Company’s 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. There was no reserve for obsolescence for the six months ended June 30, 2013.

Note 3 - Intangible Assets

The Company’s 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 six months ended June 30, 2013 was zero. There was no impairment of intangible assets at June 30, 2013.

Note 4 - Short-term Loan

The Company carries product liability insurance policies with a U.S. and South African-based insurance carrier. 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 monthly installments of $94,316 over an 11 month period at an APR of 2.647% .

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.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2013, the Company has no unrecognized tax benefits and the Company currently has no federal or state tax examinations in progress.

- 6 -


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 and six months ended June 30, 2013, the Company had 328,000 potential common shares, consisting of 120,000 preferred shares and 208,000 stock options, outstanding that were anti-dilutive and therefore not included in diluted net income per share.

Note 7 – 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 8 – Reclassifications

Certain reclassifications have been made to previously reported financial statement amounts to conform with the current year presentation.

Note 9 – Subsequent Events

The company has evaluated all subsequent events through the date the financial statements were released.

- 7 -


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly report on Form 10-Q contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Our Business,” “Risk Factors,” and “Management’s 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:

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 registration statement to:

Overview

Leatt designs, develops, markets and distributes personal protective equipment for participants in all forms of motor sports and leisure activities, including riders of motorcycles, bicycles, snowmobiles and ATVs, as well as racing car drivers. The Company sells its products to customers worldwide through a global network of distributors and retailers. Leatt also acts as the original equipment manufacturer for neck braces sold by other international brands.

 - 8 -


The Company’s 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 Company’s 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 Company’s new body protection products which it markets under the Leatt Protection Range brand.

The Company’s research and development efforts are conducted at its research facilities, located at its executive headquarters in Cape Town, South Africa. The Company employs 6 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 R, have been certified by SFI Foundation (USA) and the Moto GPX was tested by BMW Motorrad (Germany) and reviewed by KTM (Austria). The Company is also in discussions with governing and racing bodies, such as the FIA, the FIM and 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:

- 9 -


Results of Operations

The following summary of our results of operations should be read in conjunction with our financial statements and the notes thereto for the three and six month periods ended June 30, 2013 and 2012 included herein. The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of sales revenue and key components of our revenue for the periods indicated in dollars and percentages.

Three Months Ended June 30, 2013 compared to the Three Months Ended June 30, 2012

The following table summarizes the results of our operations during the quarters ended June 30, 2013 and 2012 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

 

  Three Months Ended June 30,           Percentage  

 

  2013     2012   $ Increase     Increase  

Item

              (Decrease)     (Decrease)  

 

                       

REVENUES

$ 3,616,598   $ 4,469,733   $  (853,135 )   -19%  

COST OF REVENUES

  1,830,720     1,941,179   $  (110,459 )   -6%  

GROSS PROFIT

  1,785,878     2,528,554   $  (742,676 )   -29%  

PRODUCT ROYALTY INCOME

  142,224     39,258   $  102,966     262%  

OPERATING EXPENSES

                       

   Salaries and Wages

  552,501     555,524   $  (3,023 )   -1%  

   Commissions and Consulting

  159,996     111,392   $  48,604     44%  

   Professional Fees

  451,516     311,751   $  139,765     45%  

   Advertising and Marketing

  403,688     307,691   $  95,997     31%  

   Office Rent and Expenses

  59,411     62,001   $  (2,590 )   -4%  

   Research and Development Costs

  276,747     255,993   $  20,754     8%  

   General and Administrative

  559,511     527,920   $  31,591     6%  

   Bad debt expense (recovery)

  -     (123,838 ) $  123,838     -100%  

   Depreciation

  97,429     108,551   $  (11,122 )   -10%  

   Total Operating Expenses

  2,560,799     2,116,985   $  443,814     21%  

INCOME (LOSS) FROM OPERATIONS

  (632,697 )   450,827   $ (1,083,524 )   -240%  

Other Income (Expenses)

  (2,647 )   31,605   $  (34,252 )   -108%  

INCOME (LOSS) FROM OPERATIONS

  (635,344 )   482,432   $ (1,117,776 )   -232%  

Income Taxes

  920     105,000   $  (104,080 )   -99%  

NET INCOME (LOSS)

$  (636,264 ) $  377,432   $ (1,013,696 )   -269%  

Revenues – We earn revenues from the sale of our Protective gear comprising of braces, body armor and other products, parts and accessories both in the United States and internationally. For the three months ended June 30, 2013 and 2012, revenues associated with international customers were $2.23 million and $2.88 million, or 62% and 64% of revenues, respectively. Revenues for the three months ended June 30, 2013 were $3.61 million, a 19% decrease, compared to revenues of $4.47 million for the quarter ended June 30, 2012. This decrease in revenues is attributable to a $1.58 million decrease in brace sales, which was partially offset by a $0.77 million increase in body armor sales during the period ended June 30, 2013.

The following table sets forth our revenues by product line for the three months ended June 30, 2013 and 2012:

 

  Three Months Ended June 30,  

 

  2013     % of     2012     % of  

 

        Revenues           Revenues  

Braces

$  1,763,513     49%   $  3,346,795     75%  

Body Armor

  1,655,351     46%     883,462     20%  

Other Products, Parts and Accessories

  197,734     5%     239,476     5%  

 

$  3,616,598     100%   $  4,469,733     100%  

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Sales of our flagship Brace accounted for $1.76 million and $3.35 million, or 49% and 75% of our revenues for the quarters ending June 30, 2013 and 2012, respectively. In the United States the decrease in Brace revenues was primarily due to increased dealer inventory levels as a result of a colder than normal spring season which resulted in decreased sales at the dealer level. Additionally, the Company has changed its bicycle distribution partner in the United States during the 2013 period due to ongoing performance issues, resulting in an interruption in sales there during the period.

Decreased Brace sales through the Company’s OEM partners accounted for 30% of the decrease in Brace sales for the period ended June 30, 2013. The decrease in Brace sales to the Company’s international customers was primarily due to a lower volume of Brace orders from our European distributors that usually account for approximately 30% of worldwide revenues. Abnormally adverse weather conditions experienced in Europe in the first quarter of 2013 contributed to this decline in sales as potential customers engaged in less outdoor sports.

Our Body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee and elbow guards. Body armor sales accounted for $1.66 million and $0.88 million or 46% and 20% of our revenues for the quarters ending June 30, 2013 and 2012, respectively. The 87% increase in Body armor revenues was primarily due to a 103% increase in the volume of Body armor products sold during the 2013 period over such products sold during the 2012 period. We believe that this increase in sales volume is attributable to the continued worldwide market acceptance of the Company's widened Body armor product range.

Our Other Products, Parts and Accessories are comprised of aftermarket support items required primarily to replace worn or damaged parts through our global distribution network as well as clothing, outerwear and accessories that include hats, jackets, bags, hydration kits and cooling garments. Other Products, Parts and Accessories sales accounted for $0.20 million and $0.24 million or 5% and 5% of our revenues for the quarters ending June 30, 2013 and 2012, respectively. The decrease in our Other Products, Parts and Accessories is primarily due to decreased sales of our aftermarket support products during the 2013 period.

Cost of Revenues and Gross Profit – Cost of revenues for the quarters ended June 30, 2013 and 2012 were $1.83 million and $1.94 million, respectively. Gross Profit for the quarters ended June 30, 2013 and 2012 were $1.76 million and $2.53 million, respectively, or 49% and 57% of revenues respectively. The decrease in gross profit margin was primarily due to the inclusion of more Body armor products and less Braces in our sales mix during the 2013 period, as compared to the 2012 period. Our Body armor products continue to generate a lower gross margin than do Brace products, and they represent 46% of the total Company sales in the second quarter of 2013, as compared to 20% in the second quarter of 2012. Our management continues to evaluate all possible measures in order to decrease the cost of the Company’s revenues.

Product Royalty Income – Product royalty income is earned on sales to distributors that have royalty agreements in place, as well as sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the three months ended June 30, 2013 and 2012 were $142,224 and $39,258, respectively. The 262% increase in product royalty income is due to increased revenues from sales of licensed products by licensees.

Salaries and Wages – Salaries and wages for the quarters ended June 30, 2013 and 2012 were $552,501 and $555,524, respectively. Salaries and wages for the quarter ended June 30, 2013 were thus in line with the prior period.

Commissions and Consulting Expense – During the quarters ended June 30, 2013 and 2012, commissions and consulting expenses were $159,996 and $111,392, respectively. This 44% increase in commissions and consulting expenses is primarily due to increased spending on investor relations activities which are included in consulting expenses.

Professional Fees – Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection, product liability litigation expenses incurred as the Company continues to expand. Professional fees for the quarters ended June 30, 2013 and 2012 were $451,516 and $311,751, respectively. This 45% increase in professional fees is primarily due to the effect of increased spending on product liability litigation.

Advertising and Marketing – The Company places paid advertising in various motorsport magazines and online media, and we sponsor a number of events, teams and individuals to increase product and brand visibility. Advertising and marketing expenses for the quarters ended June 30, 2013 and 2012 were $403,688 and $307,691, respectively. The 31% increase in advertising and marketing expenditures during the 2013 period is primarily due to advertising and event sponsorship campaigns developed to promote the Company’s growing range of products and to stimulate brace sales in future quarters.

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Office Rent and Expenses – Office rent and expenses for the quarters ended June 30, 2013 and 2012 were $59,411 and $62,001, respectively. The 4% decrease in office rent and expenses is primarily the result of the consolidation of additional warehouse space occupied by Two Eleven.

Research and Development Costs – These costs consists of the salaries of staff members that are directly involved in the research and development of innovative products, as well as the direct costs associated with developing these products. Research and development costs for the quarters ended June 30, 2013 and 2012, increased to $276,747, from $255,993, respectively. The 8% increase in research and development costs is a result of the employment of additional product development staff that were employed to develop the Company’s growing product range further.

General and Administrative Expenses – General and administrative expenses consists of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the quarters ended June 30, 2013 and 2012 were $559,511 and $527,920, respectively. The 6% increase in general and administrative expenses is primarily as a result of increased product liability insurance premium costs.

Bad Debt Expense (Recovery) Bad Debt Expense (Recovery) for the quarters ended June 30, 2013 and 2012 were $0 and ($123,838) respectively. This 100% decrease in Bad Debt Expense (Recovery) is due to the fact that there were no bad debts recovered for the quarter ended June 30, 2013.

Depreciation Expense Depreciation Expense for the quarters ended June 30, 2013 and 2012 were $97,429 and $108,551, respectively. This 10% 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 $443,814 to $2,560,799 in the three months ended June 30, 2013, or 21%, compared to $2,116,985 in the 2012 period. This increase is primarily due to increased professional fees relating to product liability litigation, as well as increased advertising and marketing expenses incurred to stimulate revenues. Additionally, the Company recovered a bad debt in the prior year.

Net loss – The net loss after income taxes for the quarter ended June 30, 2013 was $636,264 as opposed to net income after income taxes of $377,432 for the quarter ended June 30, 2012. This increase in net loss is primarily due to the decreased revenues and gross profit, as well as increased operating costs discussed above.

Six Months Ended June 30, 2013 compared to the Six Months Ended June 30, 2012

The following table summarizes the results of our operations during the six-month periods ended June 30, 2013 and 2012 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

 

  Six Months Ended June 30,           Percentage  

 

  2013     2012   $ Increase     Increase  

Item

              (Decrease)     (Decrease)  

 

                       

REVENUES

$  6,864,645   $  7,792,428   $  (927,783 )   -12%  

COST OF REVENUES

  3,483,754     3,398,360   $  85,394     3%  

GROSS PROFIT

  3,380,891     4,394,068   $  (1,013,177 )   -23%  

PRODUCT ROYALTY INCOME

  179,686     73,433   $  106,253     145%  

OPERATING EXPENSES

                       

   Salaries and Wages

  1,131,641     1,066,540   $  65,101     6%  

   Commissions and Consulting

  283,169     248,070   $  35,099     14%  

   Professional Fees

  816,111     553,752   $  262,359     47%  

   Advertising and Marketing

  730,325     539,080   $  191,245     35%  

   Office Rent and Expenses

  132,814     140,333   $  (7,519 )   -5%  

   Research and Development Costs

  565,605     521,455   $  44,150     8%  

   General and Administrative

  1,100,684     1,046,243   $  54,441     5%  

   Bad debt expense (recovery)

  -     (123,838 ) $  123,838     -100%  

   Depreciation

  191,455     215,894   $  (24,439 )   -11%  

   Total Operating Expenses

  4,951,804     4,207,529   $  744,275     18%  

INCOME FROM OPERATIONS

  (1,391,227 )   259,972   $  (1,651,199 )   -635%  

Other Income (Expenses)

  1,142     49,368   $  (48,226 )   -98%  

INCOME (LOSS) FROM OPERATIONS

  (1,390,085 )   309,340   $  (1,699,425 )   -549%  

Income Taxes

  920     105,960   $  (105,040 )   -99%  

NET INCOME (LOSS)

  (1,391,005 )   203,380   $  (1,594,385 )   -784%  

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Revenues – We earn revenues from the sale of our Protective gear comprising of braces, body armor and other products, parts and accessories both in the United States and internationally. For the six months ended June 30, 2013 and 2012, revenues associated with international customers were $3.98 million and $4.72 million, or 58% and 61% of revenues, respectively. Revenues for the six months ended June 30, 2013 were $6.86 million, a 12% decrease, compared to revenues of $7.79 million for the six month period ended June 30, 2012. This decrease in revenues is attributable to a $2.34 million decrease in brace sales, which was partially offset by a $1.42 million increase in body armor sales during the period ended June 30, 2013.

The following table sets forth our revenues by product line for the six months ended June 30, 2013 and 2012:

 

  Six Months Ended June 30,  

 

  2013     % of     2012     % of  

 

        Revenues           Revenues  

Braces

$  3,580,887     52%   $  5,919,838     76%  

Body Armor

  2,886,621     42%     1,444,099     19%  

Other Products, Parts and Accessories

  397,137     6%     428,491     5%  

 

$  6,864,645     100%   $  7,792,428     100%  

Sales of our flagship Brace accounted for $3.58 million and $5.92 million, or 52% and 76% of our revenues for the six month periods ending June 30, 2013 and 2012, respectively. In the United States, the decrease in Brace revenues was due to increased dealer inventory levels as a result of our decision to lower the price on certain brace models in previous periods to make space for newer models in future periods. This situation was compounded by a colder than normal spring season during the 2013 period which resulted in decreased sales at the dealer level. Additionally, the Company has changed its bicycle distribution partner in the United States during the 2013 period due to ongoing performance issues, resulting in an interruption in sales there during the period. We are cautiously optimistic that with the construction trade improving in the United States and our restructuring of our bicycle distribution network, market conditions should improve.

Decreased Brace sales through the Company’s OEM partners accounted for 21% of the decrease in Brace sales for the period ended June 30, 2013. The decrease in Brace sale to the Company’s international customers was primarily due to a lower volume of Brace orders from our European distributors that usually account for approximately 30% of worldwide revenues. Abnormally adverse weather conditions experienced in Europe in the first quarter of 2013 contributed to this decline in sales as potential customers engaged in less outdoor sports. While the United States economy appears to be improving slowly, Europe remains cautious and our distributors there are stocking less as a result of lower consumer confidence. However, we have identified new markets where we believe there is further growth potential for sales of our flagship Brace and continue to develop the Brace to increase demand in our core markets and geographical areas.

Our Body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee and elbow guards. Body Armor sales accounted for $2.89 million and $1.44 million or 42% and 19% of our revenues for the six-month periods ending June 30, 2013 and 2012, respectively. The 100% increase in Body Armor revenues was primarily due to a 122% increase in the volume of Body armor products sold during the 2013 period over such products sold during the 2012 period. We believe that this increase in sales volume is attributable to our ongoing advertising and product sponsorship campaigns designed to promote the Company’s new range of products and the continued worldwide market acceptance of the Company's widened Body Armor product range.

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 $397,137 and $428,491 or 6% and 5% of our revenues for the quarters ending June 30, 2013 and 2012, respectively. The decrease in our Other Products, Parts and Accessories is primarily due to a decrease in sales of our aftermarket support items during the 2013 period.

Cost of Revenues and Gross Profit – Cost of revenues for the six month periods ended June 30, 2013 and 2012 were $3.5 million and $3.4 million, respectively. Gross Profit for the six month periods ended June 30, 2013 and 2012 were $3.4 million and $4.4 million, respectively, or 49% and 56% of revenues respectively. The decrease in gross profit margin was primarily due to the inclusion of more body armor products and less braces in our sales mix during the 2013 period, as compared to the 2012 period. Additionally, our decision to lower the price on certain older brace models as discussed above, as well as additional freight and carriage costs incurred as a result of delivering orders directly to our customer’s premises as an incentive to increase customer order volumes contributed to this decrease. Our Body armor products continue to generate a lower gross margin than do Brace products, and they represent 42% of the total Company sales in the six months ended June 30, 2013, as compared to 19% in the six months ended June 30, 2012. Our management continues to evaluate all possible measures in order to decrease the cost of the Company’s revenues.

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Product Royalty Income – Product royalty income is earned on sales to distributors that have royalty agreements in place as well as sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the six months ended June 30, 2013 and 2012 were $179,686 and $73,433, respectively. The 145% increase in product royalty income is due to increased revenues from sales of licensed products by licensees.

Salaries and Wages – Salaries and wages for the six-month periods ended June 30, 2013 and 2012 were $1,131,641 and $1,066,540, respectively. This 6% increase in salaries and wages is primarily due to the employment of additional European sales and US sales and operations staff.

Commissions and Consulting Expense – During the six-month periods ended June 30, 2013 and 2012, commissions and consulting expenses were $283,169 and $248,070, respectively. This 14% increase in commissions and consulting expenses is primarily due to increased spending on investor relations activities which are included in consulting expenses.

Professional Fees – Professional fees consist of costs incurred for audit, tax and regulatory filings as well as patent protection and product liability litigation expenses incurred as the Company continues to expand. Professional fees for the six-month periods ended June 30, 2013 and 2012 were $816,111 and $553,752, respectively. This 47% increase in professional fees is primarily due to the effect of increased spending on product liability litigation.

Advertising and Marketing – The Company places paid advertising in various motorsport magazines, online media and sponsors a number of events, teams and individuals to increase exposure. Advertising and marketing expenses for the six-month periods ended June 30, 2013 and 2012 were $730,325 and $539,080, respectively. The 35% increase in advertising and marketing expenditures during the 2013 period is primarily due to advertising and event sponsorship campaigns, as well as new product sponsorship programs developed to promote the Company’s growing range of products and to stimulate brace sales in future quarters.

Office Rent and Expenses – Office rent and expenses for the six-month periods ended June 30, 2013 and 2012 were $132,814 and $140,333, respectively. The 5% decrease in office rent and expenses is primarily the result of the consolidation of additional warehouse space occupied by Two Eleven, our US subsidiary.

Research and Development Costs – These costs consists of the salaries of staff members that are directly involved in the research and development of innovative products, as well as the direct costs associated with developing these products. Research and development costs for the six-month periods ended June 30, 2013 and 2012, increased to $565,605 from $521,455, respectively. The 8% increase in research and development costs is a result of the employment of additional product development staff employed to further develop the Company’s product range.

Bad Debt Expense (Recovery) Bad Debt Expense (Recovery) for the six-month periods ended June 30, 2013 and 2012 were $0 and ($123,838) respectively. This 100% decrease in Bad Debt Expense (Recovery) is due to the fact that there were no bad debts recovered for the period ended June 30, 2013.

General and Administrative Expenses – General and administrative expenses consists of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the six-month periods ended June 30, 2013 and 2012 were $1,100,684 and $1,046,243, respectively. The 5% increase in general and administrative expenses is primarily as a result of increased product liability insurance premium costs.

Depreciation Expense Depreciation Expense for the six-month periods ended June 30, 2013 and 2012 were $191,455 and $215,894, respectively. This 11% 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 $744,275 to $4,951,804 in the six months ended June 30, 2013, or 18%, compared to $4,207,529 in the 2012 period. This increase is primarily due to increased professional fees relating to product liability litigation, as well as increased advertising and marketing expenses incurred to stimulate revenues. Additionally, the company recovered a bad debt in the prior year.

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Net loss –The net loss after income taxes for the six-month period ended June 30, 2013 was $1,391,005 as opposed to net income after income taxes of $203,380 for the six-month period ended June 30, 2012. This increase in net loss is primarily due to the decreased revenues and gross profit, as well as increased operating costs discussed above.

Liquidity and Capital Resources

At June 30, 2013, we had cash and cash equivalents of $0.63 million and $0.31 million of short term investments. The following table sets forth a summary of our cash flows for the periods indicated:

 

  June 30,  

 

  2013     2012  

Net cash provided by operating activities

$  632,969   $  921,275  

Net cash used in investing activities

$  (48,704 ) $  (88,882 )

Net cash used in financing activities

$ (529,813 ) $  (528,866 )

Effect of exchange rate changes on cash and cash equivalents

$  (90,703 ) $  11,189  

Net (decrease) increase in cash and cash equivalents

$  (36,251 ) $  314,716  

Cash and cash equivalents at the beginning of period

$  667,671   $ 1,084,806  

Cash and cash equivalents at the end of period

$  631,420   $ 1,399,522  

Cash decreased by $36,251, or 5%, for the six months ended June 30, 2013. The primary sources of cash for the six months ended June 30, 2013 were decreased accounts receivables, inventories and prepaid expenses relating to product liability insurance premiums which in total accounted for $1,721,372 of cash generated by operating activities. The primary use of cash for the six months ended June 30, 2013 was a net loss of $1,391,005. As of June 30, 2013, 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, we pay Xceed Holdings 4% of all 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. De Villiers, the Company is obligated to pay a royalty fee of 1% of all our billed and received sales revenue, in quarterly installments, based on sales of the previous quarter, to a trust that is beneficially owned and controlled by Mr. De Villiers.

Pursuant to a Premium Finance Agreement, dated October 10, 2012, between the Company and AFCO Acceptance Corporation “AFCO”, we are obligated to pay to AFCO an aggregate sum of $1,023,881 in eleven payments of $94,316, at a 2.647% annual interest rate, commencing on November 1, 2012 and ending on September 1, 2013. 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 at June 30, 2013, the Company had not defaulted on its payment obligations under this agreement.

Critical Accounting Policies and Estimates

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.

There have been no material changes in our critical accounting policies or critical accounting estimates since December 31, 2012. We have not adopted any accounting policies since December 31, 2012 that have or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see the “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, as of and for the year ended December 31, 2012 included in our annual report on Form 10-K filed for the period, as well as the notes in this Form 10-Q.

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We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, estimating allowances for doubtful accounts receivable, inventory valuation, impairment of long-lived assets and accounting for income taxes.

Revenue and Cost Recognition - All manufacturing of Leatt-Brace products is performed by third party subcontractors in China. The Company's products are sold worldwide to a global network of distributors and dealers, and directly to consumers when there are no dealers or distributors in their geographic area (collectively the "customers"). Revenues from product sales are recognized when earned, net of applicable provisions for discounts and returns and allowances in the event of product defect. Revenue is considered to be realized or realizable and earned when all of the following criteria are met: title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable and collectability is reasonably assured. Our distributor payment terms range from pre-payment in full to 60 days after shipment and subsequent sales of our products by distributors have no effect on the amount and timing of payments due to us. Furthermore, products purchased by distributors may not be returned to us in the event that any such distributor relationship is terminated.

Since the Company (through its wholly owned subsidiary) serves as the distributor of Leatt products in the United States, the Company records its revenue and related cost of revenue for its product sales in the United States upon shipment of the merchandise to the dealer or to the ultimate consumer when there is no dealer in the geographic area and the sales order was received directly from, and paid by, the ultimate consumer. Since the Company (through its South African branch) serves as the distributor of Leatt products in South Africa, the Company records its revenue and related cost of revenue for its product sales in South Africa upon shipment of the merchandise from the branch to the dealer. International sales (other than in South Africa) are generally drop-shipped directly from the third party manufacturer to the international distributors.

Revenue and related cost of revenue is recognized at the time of shipment from the manufacturer's port when the shipping terms are Free On Board ("FOB") shipping point, Cost and Freight ("CFR") or Cost and Insurance to named place ("CIP") as legal title and risk of loss to the product pass to the distributor. Sales to all customers (distributors, dealers and consumers) are generally final; however, in limited instances, product may be returned due to product quality issues. Historically, returns due to product quality issues have not been material and there have been no distributor terminations that resulted in product returns. Cost of revenues also includes royalty fees associated with sales of Leatt-Brace products.

Product royalty income is recorded as the underlying product sales occur, in accordance with the related licensing arrangements.

Allowance for Doubtful Accounts Receivable - Accounts receivable consist of amounts due to the Company from normal business activities. Credit is granted to substantially all distributors on an unsecured basis. We continuously monitor collections and payments from customers and maintain an allowance for doubtful accounts receivable based upon historical experience and any specific customer collection issues that have been identified. In determining the amount of the allowance, we are required to make certain estimates and assumptions. Accounts receivable balances that are still outstanding after we have used reasonable collection efforts are written off as uncollectible. While such credit losses have historically been minimal, within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.

Inventory Valuation – Inventory is stated at the lower of cost or market. Cost is determined using the first-in first-out (FIFO) method. Inventory consists primarily of finished goods. Shipping and handling costs are included in the cost of inventory. In assessing the inventory value, we make estimates and judgments regarding reserves required for product obsolescence, aging of inventory and other issues potentially affecting the saleable condition of products. In performing such evaluations, we utilize historical experience as well as current market information. There was no reserve for obsolescence for the periods ended June 30, 2013 and 2012.

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 periods ended June 30, 2013 and 2012.

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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

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standard which requires entities to present information about significant items reclassified out of accumulated other comprehensive income (loss) by component either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. The standard was effective for the Company in the third quarter of fiscal year 2012. As this standard impacts presentation only, the adoption did not have any impact on the Company’s consolidated financial statements.

Other accounting pronouncements did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

Inflation

Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor the price change in our industry and continually maintain effective cost control in operations.

Off-Balance Sheet Arrangements

As of June 30, 2013, 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As of June 30, 2013, the Company’s management, under the direction of its Chief Executive Officer and the Chief Financial Officer, Mr. Sean Macdonald, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer determined that the Company’s disclosure controls and procedures were deemed to be effective.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting during the period ended June 30, 2013, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings in the ordinary course of our business. Other than as set forth below, we are currently not aware of any legal proceedings the ultimate outcome of which, in our judgment based on information currently available, would have a material adverse affect on our business, financial condition or operating results.

Leatt is the exclusive licensee of certain patents, manufacturing, sale, use and distribution rights held by Xceed Holdings CC, including patents covering the Leatt-Brace®. On October 21, 2011, the Company sent a letter to Atlas’ subsidiary notifying them that certain models of Atlas’ neck braces infringe on the Company’s patents, and demanding that Atlas should cease and desist the manufacture, use, offer for sale and sale of such products. Instead of complying with the Company’s request, on December 1, 2011, Atlas filed a suit for declaratory judgment against the Company in the U.S. District Court for the Central District of California, claiming that Atlas has not directly or indirectly infringed on certain of the Company’s U.S. patents, and that the Company has no right or authority to threaten, complain of, challenge, maintain suit, or interfere in any manner with Atlas’ manufacture, importation, distribution and sale in the U.S. of its neck brace. Atlas also sued to recover attorney’s fees and costs in connection with the suit. On January 18, 2012, the Company filed an answer with the Court responding to Atlas’ declaratory judgment complaint and filed counterclaims (with Xceed) against Atlas for patent infringement. Atlas thereafter filed an amended complaint asserting affirmative claims alleging that Leatt, among other things, tortiously interfered with contractual relationships and prospective contractual relationships based on certain alleged statements made by Leatt employees. A pre-trial hearing has been set for December 16, 2013. The Company believes that Atlas’ case is without merit, and that Leatt (and Xceed’s) claims of patent infringement against Atlas have merit.

On October 1, 2010, a motorcycle rider filed a complaint against the Company in the U.S. District Court for the Western District of Kentucky for alleged strict liability and breach of product warranties, in connection with injury allegedly suffered by him during an accident while wearing one of the Company’s products. The plaintiff is seeking compensatory damages. A trial date has been set for March 24, 2014. The Company believes that the lawsuit is without merit and plans to vigorously defend itself.

On December 30, 2011, a motorcycle rider brought suit against the Company in the United States District Court for the Northern District of Ohio (Eastern Division) for alleged breach of warranty and product liability claims in connection with injury allegedly suffered by him during an October 2011 accident while wearing one of the Company’s products. The plaintiff is seeking damages in excess of $75,000 for compensatory and punitive damages together with interest and costs of bringing the action. Although discovery is completed, the case is not yet set for trial. The Company believes that the lawsuit is without merit and is vigorously defending itself.

In February 2012, a complaint was filed against the Company on behalf of a motorcycle rider in the United States District Court for the Northern District of Ohio (Eastern Division) for alleged product liability claims in connection with injury allegedly suffered by the rider during an accident while wearing one of the Company’s products. The plaintiff is seeking damages in excess of $75,000, for compensatory and punitive damages together with interest and costs of bringing the action. Although discovery is completed, the case is not yet set for trial. The Company believes that the lawsuit is without merit and is vigorously defending itself.

On July 24, 2012, a motorcycle rider brought suit against the Company in Los Angeles (CA) Superior Court for alleged negligence, strict product liability, breach of expressed and implied warranties in connection with injury allegedly suffered by him during a September 2010 accident while wearing one of the Company’s products. The plaintiff is seeking damages, together with interest and costs of bringing the action. Trial is currently scheduled to commence May 5, 2014. The Company believes that the lawsuit is without merit and is vigorously defending itself.

On September 20, 2012, a lawsuit was filed against the Company and other Defendants in Clark County District Court of Nevada for wrongful death of a motorcycle rider for alleged negligence, product defect, strict product liability, breach of expressed and implied warranties, survival and punitive damages. The plaintiff is seeking special, compensatory, survival and punitive damages, together with prejudgment interest, costs and disbursement of suit, reasonable attorneys’ fees and other relief. The litigation is still at an early stage and so a trial date has not yet been set. The Company believes that the lawsuit is without merit and is vigorously defending itself.

On December 28, 2012, a lawsuit was filed against the Company in Los Angeles Superior Court for wrongful death of a motorcycle rider. The plaintiffs are seeking damages for wrongful death and other relief. The case was timely removed to federal court. Trial is currently scheduled to commence May 27, 2014. The Company believes that the lawsuit is without merit and is vigorously defending itself.

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In February 2013, a lawsuit was filed against the Company on behalf of a motorcycle rider in Clark County District Court of Nevada for alleged product defect, failure to warn and negligence. The plaintiff is seeking damages, together with interest and costs of bringing the action. The litigation is at an early stage and so no trial date has been set. The Company believes that the lawsuit is without merit and is vigorously defending itself.

ITEM 1A. RISK FACTORS.

There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our annual report on Form 10-K on March 28, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

None.

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

Exhibit No. Description
31.1

Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*

Interactive data files pursuant to Rule 405 of Regulation S-T


*

Filed with this Form 10-Q for Leatt Corporation. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

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

Date: August 14, 2013 LEATT CORPORATION
   
   
  By: /s/ Sean Macdonald                           
  Sean Macdonald
  Chief Executive Officer and Chief Financial Officer
  (Principal Executive, Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No. Description
31.1

Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*

Interactive data files pursuant to Rule 405 of Regulation S-T


*

Filed with this Form 10-Q for Leatt Corporation. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.