Edgar Filing: Leatt Corp

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, 2018

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

For the transition period from _____________to _____________

Commission File 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)

12 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 [X] No [_]

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

Large accelerated filer [_]	Accelerated filer [_]	Non-accelerated filer [_]	Smaller reporting company [X]
Emerging growth company [X]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. [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 2, 2018 is as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	5,366,382

LEATT CORPORATION

Quarterly Report on Form 10-Q
Three Months and Six Months Ended June 30, 2018

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	3

ITEM 1.	FINANCIAL STATEMENTS.	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	8
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	19
ITEM 4.	CONTROLS AND PROCEDURES.	19

PART II	OTHER INFORMATION	20

ITEM 1.	LEGAL PROCEEDINGS.	20
ITEM 1A.	RISK FACTORS.	20
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	20
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	20
ITEM 4.	MINE SAFETY DISCLOSURES.	20
ITEM 5.	OTHER INFORMATION.	20
ITEM 6.	EXHIBITS.	20

- i -

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

LEATT CORPORATION
CONSOLIDATED BALANCE SHEETS

ASSETS

		June 30, 2018			December 31, 2017
		Unaudited			Audited
Current Assets
Cash and cash equivalents	$	1,512,283		$	1,518,157
Short-term investments		58,228			58,221
Accounts receivable		1,783,581			2,420,656
Inventory		3,272,914			5,034,310
Payments in advance		701,723			565,124
Income tax refunds receivable		97,766			130,171
Prepaid expenses and other current assets		975,338			847,442
Total current assets		8,401,833			10,574,081

Property and equipment, net		1,937,586			2,113,855

Other Assets
Deposits		25,451			26,081
Intangible assets		68,694			76,364
Total other assets		94,145			102,445

Total Assets	$	10,433,564		$	12,790,381

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable and accrued expenses	$	2,211,559		$	4,433,665
Short term loan, net of finance charges		258,033			518,130
Total current liabilities		2,469,592			4,951,795

Deferred tax liabilities, net		38,100			38,100

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 shares issued and outstanding		130,053			130,053
Additional paid - in capital		7,837,699			7,687,367
Accumulated other comprehensive loss		(601,596	)		(485,286	)
Retained earnings		556,716			465,352
Total stockholders' equity		7,925,872			7,800,486

Total Liabilities and Stockholders' Equity	$	10,433,564		$	12,790,381

LEATT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

		Three Months Ended						Six Months Ended
					June 30						June 30
		2018			2017			2018			2017
		Unaudited			Unaudited			Unaudited			Unaudited

Revenues	$	4,795,863		$	3,510,297		$	10,298,405		$	9,328,066

Cost of Revenues		2,440,660			1,745,138			5,186,757			4,652,808

Gross Profit		2,355,203			1,765,159			5,111,648			4,675,258

Product Royalty Income		7,802			39,961			20,111			50,917

Operating Expenses
Salaries and wages		617,552			555,514			1,395,315			1,314,757
Commissions and consulting expenses		133,575			126,273			258,914			279,321
Professional fees		128,987			119,981			297,458			430,772
Advertising and marketing		458,450			407,781			962,612			809,335
Office rent and expenses		71,321			66,627			141,759			132,678
Research and development costs		378,912			322,155			702,192			645,398
Bad debt expense		10,705			5,291			20,472			650
General and administrative expenses		454,156			434,077			889,716			835,490
Depreciation		165,011			102,490			327,775			191,455
Total operating expenses		2,418,669			2,140,189			4,996,213			4,639,856

Income (Loss) from Operations		(55,664	)		(335,069	)		135,546			86,319

Other Expenses
Interest and other expenses, net		(2,475	)		(2,567	)		(5,927	)		(5,555	)
Total other expenses		(2,475	)		(2,567	)		(5,927	)		(5,555	)

Income (Loss) Before Income Taxes		(58,139	)		(337,636	)		129,619			80,764

Income Taxes		(8,684	)		(116,573	)		38,255			29,867

Net Income (Loss) Available to Common Shareholders	$	(49,455	)	$	(221,063	)	$	91,364		$	50,897

Net Income (Loss) per Common Share
Basic	$	(0.01	)	$	(0.04	)	$	0.02		$	0.01
Diluted	$	(0.01	)	$	(0.04	)	$	0.02		$	0.01

Weighted Average Number of Common Shares Outstanding
Basic		5,366,382			5,364,743			5,366,382			5,363,872
Diluted		5,514,452			5,496,278			5,514,452			5,496,278

Comprehensive Income (Loss)
Net Income (Loss)	$	(49,455	)	$	(221,063	)	$	91,364		$	50,897
Other comprehensive income (loss), net of $0 and $0 deferred income taxes in 2018 and 2017
Foreign currency translation		(174,542	)		3,667			(116,310	)		56,388

Total Comprehensive Income (Loss)	$	(223,997	)	$	(217,396	)	$	(24,946	)	$	107,285

LEATT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2018

										Accumulated
										Other
	Preferred Stock A			Common Stock				Additional		Comprensive			Retained
	Shares		Amount	Shares		Amount		Paid - In Capital		(Loss)			Earnings		Total
Balance, January 1, 2018	120,000	$	3,000	5,366,382	$	130,053	$	7,687,367	$	(485,286	)	$	465,352	$	7,800,486

Compensation cost recognized in connection with stock options	-		-	-		-		150,332		-			-		150,332

Net income	-		-	-		-		-		-			91,364		91,364

Foreign currency translation adjustment	-		-	-		-		-		(116,310	)		-		(116,310	)

Balance, June 30, 2018	120,000	$	3,000	5,366,382	$	130,053	$	7,837,699	$	(601,596	)	$	556,716	$	7,925,872

LEATT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

		2018			2017

Cash flows from operating activities
Net income	$	91,364		$	50,897
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		327,775			191,455
Deferred income taxes		-			(62,000	)
Stock-based compensation		150,332			177,113
Bad debts		13,991			(2,024	)
Inventory reserve		14,660			126,660
Loss on sale of property and equipment		-			49
(Increase) decrease in:
Accounts receivable		623,084			582,146
Inventory		1,746,736			1,231,456
Payments in advance		(136,599	)		(73,957	)
Prepaid expenses and other current assets		(127,896	)		(172,633	)
Income tax refunds receivable		32,405			4,660
Deposits		630			(556	)
Decrease in:
Accounts payable and accrued expenses		(2,222,106	)		(945,555	)
Net cash provided by operating activities		514,376			1,107,711

Cash flows from investing activities
Capital expenditures		(210,680	)		(603,180	)
Increase in short-term investment, net		(7	)		(11	)
Net cash used in investing activities		(210,687	)		(603,191	)

Cash flows from financing activities
Repayments of short-term loan, net		(260,097	)		(275,890	)
Net cash used in financing activities		(260,097	)		(275,890	)

Effect of exchange rates on cash and cash equivalents		(49,466	)		30,404

Net increase (decrease) in cash and cash equivalents		(5,874	)		259,034

Cash and cash equivalents - beginning of period		1,518,157			1,103,003

Cash and cash equivalents - end of period	$	1,512,283		$	1,362,037

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	8,070		$	6,898
Cash paid for income taxes	$	5,850		$	87,207

Other non-cash investing and financing activities
Common stock issued for services	$	150,332		$	177,113

LEATT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Basis of presentation

The consolidated balance sheet as of December 31, 2017 was audited and appears in the Form 10-K filed by the Company with the Securities and Exchange Commission on March 19, 2018. The consolidated balance sheet as of June 30, 2018 and the consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2018 and 2017, changes in stockholders’ equity for the six months ended June 30, 2018, cash flows for the six months ended June 30, 2018 and 2017, 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, 2018 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, 2017 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 net realizable value. Cost is determined using the first-in first-out (FIFO) method. Inventory consists primarily of finished goods. Shipping and handling costs are included in the cost of inventory. In assessing the inventory value, the Company must make estimates and judgments regarding reserves required for product obsolescence, aging of inventory and other issues potentially affecting the saleable condition of products. In performing such evaluations, the Company utilizes historical experience as well as current market information. The reserve for obsolescence as of June 30, 2018 and December 31, 2017 was $72,468 and $57,808, respectively.

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, 2018 was zero. There was no impairment of intangible assets at June 30, 2018.

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 both of its product liability insurance premiums over the period of coverage which is generally twelve months. The U.S. short-term loan is payable in monthly instalments of $55,071 over eleven months including interest at 4.150% and the South African short-term loan is payable in monthly instalments of $1,725 over a ten-month period at a flat interest rate of 4.00% .

The Company carries various short-term insurance policies in the U.S. 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 $9,181 at 4.990% annual interest rate.

Note 5 - Revenue and Cost Recognition

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method, and due to the immaterial difference, there was no adjustment to the opening balance of retained earnings at January 1, 2018. Based upon the Company’s review, and the interpretive guidance that has been issued and examined, the adoption of this standard has not had a material impact on our consolidated financial statements. In particular, the Company has performed a detailed review of its revenue arrangements, which includes product sales and royalty payments in compliance with FASB ASC topic 606. The Company has and will continue to review its performance obligations in terms of material customer contractual arrangements in order to verify that revenue is recognized when performance obligations are satisfied on a periodic basis.

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 or where consumers choose to purchase directly via the Company’s e-commerce website (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 where no exchange of product is possible. Revenues are recognized at the point in time when our performance obligations are satisfied as evidenced by transfer of control of promised goods to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Product royalty income, representing less than 1% of total revenues, is recorded as the underlying product sales occur, in accordance with the related licensing arrangements.

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 or the consumer chooses to purchase directly from the Company’s e-commerce website 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.

The Company's standard terms and conditions of sale for non-consumer direct or web-based sales do not allow for product returns other than under warranty.

International sales (other than in the United States and 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 and exchanged 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.

In the following table, revenue is disaggregated by the source of revenue:

			Six months ended June 30,
		2018	% of Revenues		2017	% of Revenues
Consumer and athlete direct revenues	$	579,202	6%	$	503,671	5%
Dealer direct revenues		4,207,110	41%		3,561,242	38%
International distributor revenues		5,512,093	53%		5,263,153	57%
	$	10,298,405	100%	$	9,328,066	100%

The Company reviews the reserves for customer returns at each reporting period and adjusts them to reflect data available at that time. To estimate reserves for returns, the Company estimates the expected returns and claims based on historical rates as well as events and circumstances that indicate changes to historical rates of product returns and claims. Historically, returns due to product quality issues have not been material and there have been no distributor terminations that resulted in product returns. The provision for estimated returns as of June 30, 2018 and December 31, 2017 was $-0-, and $-0-, respectively.

Accounts receivable consist of amounts due to the Company from normal business activities. Credit is granted to substantially all distributors on an unsecured basis. The Company continuously monitors collections and payments from customers and maintains an allowance for doubtful accounts receivable based upon historical experience and any specific customer collection issues that have been identified. The allowance for doubtful accounts was $98,974 at June 30, 2018, and $84,983 at December 31, 2017.

Sales commissions are expensed when incurred, which is generally at the time of sale, because the amortization period would have been one year or less. These costs are recorded in commissions and consulting expenses within operating expense in the accompanying consolidated statements of operations and comprehensive income.

Shipping and handling activities associated with outbound freight, after control over a product has transferred to a customer, are accounted for as a fulfillment cost and are included in revenues and cost of revenues in the accompanying consolidated statements of operations and comprehensive income.

Revenue recognized from contracts with customers is recorded net of sales taxes, value added taxes, or similar taxes that are collected on behalf of local taxing authorities.

For the six months ended June 30, 2018, revenue recognized from performance obligations related to prior periods was not material. Revenue expected to be recognized in any future period related to remaining performance obligations is not material. As of June 30, 2018, contract liabilities, if any, were not material.

Note 6 - 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, 2018, the Company has no unrecognized tax benefits.

Note 7 - 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 six months ended June 30, 2018, the Company had 636,000 potential common shares, consisting of 120,000 preferred shares, 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 8 – Common Stock

Stock-based compensation expense related to vested stock options during the six months ended June 30, 2018 was $150,332. As of June 30, 2018, there was $166,400 of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a 3-year vesting period.

Note 9 – Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. The updated guidance, and subsequent clarifications, collectively referred to as ASC 606, require an entity to recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the guidance requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this standard, utilizing the modified retrospective approach, with the cumulative effect of initially applying the new standard recognized in retained earnings. Accordingly, comparative prior period information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the timing of revenue recognition for its significant revenue streams to remain substantially unchanged, with no material effect on net sales. The adoption of this ASU did not have a material impact on its financial statements.

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 adopted the new standard on January 1, 2018. The adoption of this ASU did not have a material impact on its financial statements.

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 adopted the new standard on January 1, 2018. The adoption of this ASU did not have a material impact on its financial statements.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows” ("ASU 2016-15"). ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for the Company in the first quarter of 2018, with early adoption permitted, and is to be applied using a retrospective approach. The Company adopted the new standard on January 1, 2018. The adoption of this ASU did not have a material impact on its 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 adopted the new standard on January 1, 2018. The adoption of this ASU did not have a material impact on its 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 Company adopted the new standard on January 1, 2018. The adoption of this ASU did not have a material impact on its financial statements.

Accounting Pronouncements Not Yet Adopted

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation”, which aligns the measurement and classification guidance for share-based payments to non-employees with the guidance for share-based payments to employees. Under the new guidance, the measurement period for equity-classified non-employee awards will be fixed at the grant date. This update is effective for annual periods beginning after December 15, 2018, and interim periods within those periods and early adoption is permitted. The Company is evaluating the new standard to determine the impact of adoption on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which provides for an election to reclassify stranded tax effects within accumulated other comprehensive income/(loss) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company does not expect this new guidance will have a material impact on the consolidated financial statements.

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 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.

Note 10 - 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 11 – Subsequent Events

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

ITEM 2. MANAGEMENT’S 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 “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:

	•	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 Company’s 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 People’s 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 Company’s 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 = ZAR13.7345 for its June 30, 2018 balance sheet.

Overview of our Business

We were incorporated in the State of Nevada on March 11, 2005 under the name Treadzone, Inc. We were a shell company with little or no operations until March 1, 2006, when we acquired the exclusive global manufacturing, distribution, sale and use rights to the Leatt-Brace®, pursuant to a license agreement between the Company and Xceed Holdings, a company owned and controlled by the Company’s Chairman and founder, Dr. Christopher Leatt. On May 25, 2005, we changed our name to Leatt Corporation in connection with our anticipated acquisition of the Leatt-Brace® rights. Leatt designs, develops, markets and distributes personal protective equipment for participants in all forms of motor sports and leisure activities, including riders of motorcycles, bicycles, snowmobiles and ATVs. The Company sells its products to customers worldwide through a global network of distributors and retailers. Leatt also acts as the original equipment manufacturer for neck braces sold by other international brands.

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 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 100 distributors worldwide, who in turn sell its products to retailers. Leatt distributors are required to follow certain standard business terms and guidelines for the sale and distribution of Leatt products. Two Eleven and Leatt SA directly distribute Leatt products to retailers in the United States and South Africa, respectively.

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect our financial performance:

	•	*Global Economic Fragility* – The ongoing turmoil in the global economy, especially in the U.S., South America 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. If demand for our products fluctuates as a result of these economic conditions or otherwise, our revenue and gross margin could be harmed.

	•	*Fuel Prices* – Significant fluctuations in fuel prices could have both a positive and negative effect on our business and operations. A significant portion of our revenue is derived from international sales and significant fluctuations in world fuel prices could significantly increase the price of shipping or transporting our products which we may not be able to pass on to our customers. On the other hand, fluctuations in fuel prices lead to higher commuter costs which may encourage the increased use of motorcycles and bicycles as alternative modes of transportation and lead to an increase in the market for our protection products.

	•	*Product Liability Litigation –* We face an inherent business risk of exposure to product liability claims arising from the claimed failure of our products to help prevent the types of personal injury or death against which they are designed to help protect. Therefore, we have acquired very costly product liability insurance worldwide. We have not experienced any material uninsured losses due to product liability claims, but it is possible that we could experience material losses in the future. After a two-week trial in the United States District Court for the Northern District of Ohio (Eastern) ending on April 17, 2014, a federal jury returned a defense verdict for the Company in the first Leatt- Brace® product liability lawsuit to be tried in the United States. The plaintiffs in that case had alleged that defective product design and failure to warn had caused a then fifteen-year-old motocross rider, to suffer multiple mid- thoracic spine fractures, causing immediate and permanent paraplegia, when he crashed at a relatively low speed on February 13, 2011. When the accident occurred, he was wearing a helmet and other safety gear from several different companies, including the Company's acclaimed Leatt-Brace®. The Company produced evidence at trial showing that his thoracic paraplegia was an unavoidable consequence of his fall, not the result of wearing a Leatt- Brace®, and that the neck brace likely saved his life (or saved him from quadriplegia) by preventing cervical spine injury. The Company had maintained from the onset that this and a small handful of other lawsuits are without merit and that it will vigorously defend itself in each case. In this case, the plaintiffs subsequently appealed the court’s 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.

	•	*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 58% 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 six-month periods ended June 30, 2018 and 2017 included herein.

Three Months Ended June 30, 2018 compared to the Three Months Ended June 30, 2017

The following table summarizes the results of our operations during the three-month periods ended June 30, 2018 and 2017 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

		Three Months Ended June 30,								Percentage
		2018			2017			$ Increase		Increase
Item								(Decrease)		(Decrease)

REVENUES	$	4,795,863		$	3,510,297		$	1,285,566		37%
COST OF REVENUES		2,440,660			1,745,138		$	695,522		40%
GROSS PROFIT		2,355,203			1,765,159		$	590,044		33%
PRODUCT ROYALTY INCOME		7,802			39,961		$	(32,159	)	-80%
OPERATING EXPENSES
Salaries and Wages		617,552			555,514		$	62,038		11%
Commissions and Consulting		133,575			126,273		$	7,302		6%
Professional Fees		128,987			119,981		$	9,006		8%
Advertising and Marketing		458,450			407,781		$	50,669		12%
Office Rent and Expenses		71,321			66,627		$	4,694		7%
Research and Development Costs		378,912			322,155		$	56,757		18%
Bad Debt Expense		10,705			5,291		$	5,414		102%
General and Administrative		454,156			434,077		$	20,079		5%
Depreciation		165,011			102,490		$	62,521		61%
Total Operating Expenses		2,418,669			2,140,189		$	278,480		13%
LOSS FROM OPERATIONS		(55,664	)		(335,069	)	$	279,405		83%
Other Expenses		(2,475	)		(2,567	)	$	92		4%
LOSS BEFORE INCOME TAXES		(58,139	)		(337,636	)	$	279,497		83%
Income Taxes		(8,684	)		(116,573	)	$	107,889		93%
NET LOSS	$	(49,455	)	$	(221,063	)	$	171,608		78%

Revenues – We earn revenues from the sale of our protective gear comprising of neck braces, body armor, helmets and other products, parts and accessories both in the United States and abroad. Revenues for the three months ended June 30, 2018 were $4.80 million, a 37% increase, compared to revenues of $3.51 million for the quarter ended June 30, 2017. Revenues generated from sales to our customers in the United States increased from $1.87 million to $2.23 million, for the three months ended June 30, 2018 and 2017, respectively. Revenues associated with international customers were $2.57 million and $1.64 million, or 53% and 47% of revenues, respectively, for the three months ended June 30, 2018 and 2017. This increase in worldwide revenues is primarily attributable to a $0.17 million increase in neck brace sales, a $0.42 million increase in body armor sales, a $0.60 million increase in helmet sales and a $0.09 million increase in sales of other products, parts and accessories.

The following table sets forth our revenues by product line for the three months ended June 30, 2018 and 2017:

		Three months ended June 30,
		2018	% of Revenues		2017	% of Revenues
Neck braces	$	1,263,402	26%	$	1,095,390	31%
Body armor		2,275,999	47%		1,853,412	53%
Helmets		886,703	19%		281,238	8%
Other Products, Parts and Accessories		369,759	8%		280,257	8%
	$	4,795,863	100%	$	3,510,297	100%

Sales of our flagship neck brace accounted for $1.26 million and $1.10 million, or 26% and 31% of our revenues for the quarters ended June 30, 2018 and 2017, respectively. The 15% increase in neck brace revenues during the 2018 second quarter is primarily attributable to a 38% increase in the volume of neck braces sold to our customers worldwide as the Company continued to ship its highly anticipated and award winning 3.5 neck brace during the period.

Our body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee braces and knee and elbow guards. Body armor sales accounted for $2.28 million and $1.85 million, or 47% and 53% of our revenues for the quarters ended June 30, 2018 and 2017, respectively. The 23% increase in body armor revenues during the 2018 second quarter is primarily the result of an increase in the volume of upper body protectors and knee guards sold during the period.

Our helmets accounted for $0.89 million and $0.28 million or 19% and 8% of our revenues for the three months ended June 30, 2018, and 2017, respectively. The $0.61 million increase in helmet sales during the 2018 second quarter is primarily due to increased demand for our refined GPX 5.5 Composite helmet for motorcycle use and continued demand for our highly anticipated and award winning DBX 3.0 Enduro helmet and DBX 2.0 helmet for bicycle use during the period.

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 $0.37 million and $0.28 million, or 8% and 8% of our revenues for the quarters ended June 30, 2018 and 2017, respectively. The 32% increase in revenues from the sale of other products, parts and accessories during the 2018 second quarter is primarily due to an increase in the sales volume of 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 June 30, 2018 and 2017 were $2.44 and $1.75 million, respectively. Gross Profit for the quarters ended June 30, 2018 and 2017 were $2.36 million and $1.77 million, respectively, or 49% and 50% of revenues respectively. Our neck brace products continue to generate a higher gross margin than our other product categories. Neck brace revenues accounted for 26% and 31% of our revenues for the quarters ended June 30, 2018 and 2017 respectively.

Product Royalty Income – Product royalty income is earned on sales to distributors that have royalty agreements in place, as well as on sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the quarters ended June 30, 2018 and 2017 were $7,802 and $39,961, respectively. The 80% decrease in product royalty income is due to a decrease in the sale of licensed products by licensees in the 2018 period.

Salaries and Wages – Salaries and wages for the quarters ended June 30, 2018 and 2017 were $617,552 and $555,514, respectively. This 11% increase in salaries and wages during the 2018 period was primarily due to the employment of additional sales personnel based in the United States and annual increases granted to the Company’s staff globally.

Commissions and Consulting Expense – During the quarters ended June 30, 2018 and 2017, commissions and consulting expenses were $133,575 and $126,273, respectively. This 6% increase in commissions and consulting expenses is primarily due to sales commissions paid to the Company’s European sales staff in connection with increased revenues.

Professional Fees – Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection and product liability litigation expenses incurred as the Company continues to expand. Professional fees for the quarters ended June 30, 2018 and 2017 were $128,987 and $119,981, respectively. This 8% increase in professional fees is primarily due to increased spending on general corporate legal advice as the Company continues to refine its global distribution network.

Advertising and Marketing – The Company places paid advertising in various motorsport magazines and online media, and sponsors a number of events, teams and individuals to increase product and brand visibility. Advertising and marketing expenses for the quarters ended June 30, 2018 and 2017 were $458,450 and $407,781, respectively. The 12% increase in advertising and marketing expenditures during the 2018 period is primarily due to the production and implementation of global marketing campaigns designed to support and promote the Company’s widening product range, brand activation and awareness and target market reach.

Office Rent and Expenses – Office rent and expenses for the quarters ended June 30, 2018 and 2017 were $71,321 and $66,627, respectively. This 7% increase in office rent and expenses during the 2018 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 quarter ended June 30, 2018 increased to $378,912, from $322,155 during the same 2017 quarter. The 18% increase in research and development costs during the 2018 second quarter is as a result of the Company’s continued development of products and product categories that reach wider consumer groups.

Bad Debt Expense – Bad Debt Expense for the quarters ended June 30, 2018 and 2017 were $10,705 and $5,291, respectively. This increase in Bad Debt Expense is primarily the result of the write off of higher value unrecoverable debts during the 2018 period.

General and Administrative Expenses – General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the quarters ended June 30, 2018 and 2017 were $454,156 and $434,077, respectively. The 5% increase in general and administrative expenses is primarily due to increased travel expenditure incurred on dealer visits and in the production of marketing material that were partially offset by a decrease in product liability insurance premiums.

Depreciation Expense – Depreciation Expense for the quarters ended June 30, 2018 and 2017 were $165,011 and $102,490, respectively. This 61% increase in depreciation during the 2018 second quarter is primarily due to the addition of molds and tooling utilized in the production of the Company’s widening product range.

Total Operating Expenses – Total operating expenses increased by $278,480 to $2.42 million in the three months ended June 30, 2018, or 13%, compared to $2.14 million in the 2017 period. This increase is primarily due to increased research and development, salaries and wages and depreciation discussed above.

Net loss – The net loss after income taxes for the quarter ended June 30, 2018 was $49,455 as opposed to a net loss after income taxes of $221,063 for the quarter ended June 30, 2017. This decrease in net loss is primarily due to the increase in revenues and gross profit discussed above.

Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017

The following table summarizes the results of our operations during the six-month periods ended June 30, 2018 and 2017 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

		Six Months Ended June 30,								Percentage
		2018			2017			$ Increase		Increase
Item								(Decrease)		(Decrease)

REVENUES	$	10,298,405		$	9,328,066		$	970,339		10%
COST OF REVENUES		5,186,757			4,652,808		$	533,949		11%
GROSS PROFIT		5,111,648			4,675,258		$	436,390		9%
PRODUCT ROYALTY INCOME		20,111			50,917		$	(30,806	)	-61%
OPERATING EXPENSES
Salaries and Wages		1,395,315			1,314,757		$	80,558		6%
Commissions and Consulting		258,914			279,321		$	(20,407	)	-7%
Professional Fees		297,458			430,772		$	(133,314	)	-31%
Advertising and Marketing		962,612			809,335		$	153,277		19%
Office Rent and Expenses		141,759			132,678		$	9,081		7%
Research and Development Costs		702,192			645,398		$	56,794		9%
Bad Debt Expense		20,472			650		$	19,822		3050%
General and Administrative		889,716			835,490		$	54,226		6%
Depreciation		327,775			191,455		$	136,320		71%
Total Operating Expenses		4,996,213			4,639,856		$	356,357		8%
INCOME FROM OPERATIONS		135,546			86,319		$	49,227		57%
Other Expenses		(5,927	)		(5,555	)	$	(372	)	-7%
INCOME BEFORE INCOME TAXES		129,619			80,764		$	48,855		60%
Income Taxes		38,255			29,867		$	8,388		28%
NET INCOME	$	91,364		$	50,897		$	40,467		80%

Revenues – We earn revenues from the sale of our protective gear comprising of neck braces, body armor, helmets and other products, parts and accessories both in the United States and internationally. Revenues for the six months ended June 30, 2018 were $10.30 million, a 10% increase, compared to $9.33 million for the six months ended June 30, 2017. Revenues generated from sales to our customers in the United States increased from $3.72 million to $4.32 million, for the six months ended June 30, 2018 and 2017, respectively. Revenues associated with international customers were $5.98 million and $5.61 million, or 58% and 60% of revenues, respectively, for the six months ended June 30, 2018 and 2017. This increase in global revenues during the 2018 period is attributable to a $0.89 million increase in helmet sales and a $0.31 million increase in sales of other products, parts and accessories that were partially offset by a $0.18 million decrease in neck brace sales and a $0.05 million decrease in body armor sales.

The following table sets forth our revenues by product line for the six months ended June 30, 2018 and 2017:

		Six months ended June 30,
		2018	% of Revenues		2017	% of Revenues
Neck braces	$	2,921,115	29%	$	3,105,964	33%
Body armor		4,554,958	44%		4,606,934	49%
Helmets		1,785,440	17%		892,490	10%
Other Products, Parts and Accessories		1,036,892	10%		722,678	8%
	$	10,298,405	100%	$	9,328,066	100%

Sales of our flagship neck brace accounted for $2.92 million and $3.11 million, or 29% and 33% of our revenues for the six-month periods ended June 30, 2018 and 2017, respectively. Although the Company shipped the highly anticipated and award winning 3.5 neck brace during the first and second quarters of 2018 and sales of our DBX range of neck braces for bicycle use increased for the six month period ending June 30, 2018, the 6% decrease in neck brace sales during the 2018 period is primarily due to customer restocking of our GPX 5.5 neck brace during the first quarter of 2017 in response to high customer demand during that period.

Our body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee braces and knee and elbow guards. Body armor sales accounted for $4.55 million and $4.61 million, or 44% and 49% of our revenues for the six-month periods ended June 30, 2018 and 2017, respectively. Although sales of the Company’s knee brace line and other protective armor products continued to increase during the six months ended June 30, 2018, the 1% decrease in body armor sales is primarily due to a decrease in the volume of upper body protectors sold during the 2018 period.

Our Helmets accounted for $1.79 million and $0.89 million, or 17% and 10% of our revenues for the six-month periods ended June 30, 2018 and 2017, respectively. The $0.90 million increase in helmet sales during the 2018 period is primarily due to shipment of our GPX 4.5 helmet for motorcycle use, increased demand for our refined GPX 5.5 Composite helmet for motorcycle use and continued demand for our highly anticipated and award winning DBX 3.0 Enduro and All mountain helmets as well as the DBX 2.0 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 $1.04 million and $0.72 million or 10% and 8% of our revenues for the six-month periods ended June 30, 2018 and 2017, respectively. The 43% increase in revenues from the sale of other products, parts and accessories is primarily due to an increase in the sales volume of GPX and DBX apparel designed for off-road motorcycle and bicycle use respectively.

Cost of Revenues and Gross Profit – Cost of revenues for the six-months ended June 30, 2018 and 2017 were $5.19 million and $4.65 million, respectively. Gross Profit for the six-month periods ended June 30, 2018 and 2017 were $5.11 million and $4.68 million, respectively, or 50% and 50% of revenues respectively.

Product Royalty Income – Product royalty income is earned on sales to distributors that have royalty agreements in place, as well as on sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the six-month periods ended June 30, 2018 and 2017 were $20,111 and $50,917, respectively. The 9% decrease in product royalty income is due to a decrease in the sale of licensed products by licensees in the 2018 period.

Salaries and Wages – Salaries and wages for the six-month periods ended June 30, 2018 and 2017 were $1,395,315 and $1,314,757, respectively. This 6% increase in salaries and wages during the 2018 period was primarily due to the employment of additional sales personnel in the United States during the six months ended June 30, 2018 that were partially offset by a decrease in share-based compensation costs incurred.

Commissions and Consulting Expense – During the six-month periods ended June 30, 2018 and 2017, commissions and consulting expenses were $258,914 and $279,321, respectively. This 7% decrease in commissions and consulting expenses during the 2018 period is primarily the result of decreased sales commissions paid in the United States as the Company continues to employ professional sales personnel on a permanent basis.

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, 2018 and 2017 were $297,458 and $430,772, respectively. This 31% decrease in professional fees is primarily due to decreased spending on product liability litigation during the 2018 period.

Advertising and Marketing – The Company places paid advertising in various motorsport magazines and online media, and sponsors a number of events, teams and individuals to increase product and brand visibility. Advertising and marketing expenses for the six-months ended June 30, 2018 and 2017 were $962,612 and $809,335, respectively. The 19% increase in advertising and marketing expenditures during the 2018 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 six-month periods ended June 30, 2018 and 2017 were $141,759 and $132,678, respectively. The 7% increase in office rent and expenses during the 2018 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 six-month periods ended June 30, 2018 and 2017, increased to $702,192, from $645,398, during the same 2017 period. The 9% increase in research and development costs during the 2018 period is due to the Company’s continued expansion of its product offering and product categories in order to reach wider consumer groups.

Bad Debt Expense – Bad Debt Expense for the six-month periods ended June 30, 2018 and 2017 were $20,472 and $650, respectively. This increase in Bad Debt Expense during the 2018 period is primarily the result of the recovery of previously unrecoverable debts during the 2017 period.

General and Administrative Expenses – General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the six-month periods ended June 30, 2018 and 2017 were $889,716 and $835,490, respectively. The 6% increase in general and administrative expenses during the 2018 period is primarily as a result of increased travel expenditure incurred on dealer visits, sales conferences and marketing production events globally that were partially offset by a decrease in product liability insurance premiums.

Depreciation Expense – Depreciation Expense for the six-month periods ended June 30, 2018 and 2017 were $327,775 and $191,455, respectively. This 71% increase in depreciation during the 2018 period is primarily due to the addition of molds and tooling utilized in the production of the Company’s widening product range.

Total Operating Expenses – Total operating expenses increased by $356,357, to $5.00 million in the six-month periods ended June 30, 2018, or 8%, compared to $4.64 million in the 2017 period. This increase in total operating expenses during the 2018 period is primarily due to increased advertising, marketing and depreciation costs that were partially offset by decreased professional fees discussed above.

Net income – Net income after income taxes for the six-month period ended June 30, 2018 was $91,364 as opposed to a net income after income taxes of $50,897 for the six-month period ended June 30, 2017. This increase in net income during the 2018 period is primarily due to the increase in revenue and gross profit that were partially offset by the increase in operating expenses discussed above.

Liquidity and Capital Resources

At June 30, 2018, we had cash and cash equivalents of $1.51 million and $0.58 million of short-term investments. The following table sets forth a summary of our cash flows for the periods indicated:

		June 30,
		2018			2017
Net cash provided by operating activities	$	514,376		$	1,107,711
Net cash used in investing activities	$	(210,687	)	$	(603,191	)
Net cash used in financing activities	$	(260,097	)	$	(275,890	)
Effect of exchange rate changes on cash and cash equivalents	$	(49,466	)	$	30,404
Net increase (decrease) in cash and cash equivalents	$	(5,874	)	$	259,034
Cash and cash equivalents at the beginning of period	$	1,518,157		$	1,103,003
Cash and cash equivalents at the end of period	$	1,512,283		$	1,362,037

Cash decreased by $5,874, or 0.4%, for the six months ended June 30, 2018 when compared to cash on hand at December 31, 2017. The primary sources of cash for the six months ended June 30, 2018 were decreased inventory of $1.75 million and decreased accounts receivable of $623,084. The primary uses of cash for the six months ended June 30, 2018 were decreased accounts payable and accrued expenses of $2.22 million, capital expenditures of $210,680 and the repayment of short-term loan amounting to $260,097. As of June 30, 2018, 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, chairman and head of research and development, we pay Xceed Holdings 4% of all neck brace sales revenue billed and received by the Company on a quarterly basis based on sales of the previous quarter. In addition, pursuant to a separate license agreement between the Company and Mr. J. P. De Villiers, our former director, the Company is obligated to pay a royalty fee of 1% of all our billed and received neck brace sales revenue, in quarterly installments, based on sales of the previous quarter, to a trust that is beneficially owned and controlled by Mr. De Villiers. During the quarter ended June 30, 2018 and 2017, the Company paid an aggregate of $16,604 and $16,231 in licensing fees to 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, as amended, Innovate has agreed to serve as the Company’s exclusive research, development and marketing consultant, in exchange for a monthly fee of $38,062; 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 is qualified in its entirety by reference to the Consulting Agreement filed as Exhibit 10.14 to the Company’s report on Form 10-K for the year ended December 31, 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 $4.150%, 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. As of June 30, 2018, the Company had not defaulted on its payment obligations under this agreement.

Pursuant to a Premium Finance Agreement, dated May 30, 2018, between the Company and AFCO, the Company is obligated to pay AFCO an aggregate sum of $107,700 in eleven payments of $9,181 at a 4.990% annual interest rate, commencing on June 1, 2018 and ending on April 1, 2019. Any late payment during the term of the agreement will be assessed a late penalty of 5% of the payment amount due, and in the event of default AFCO has the right to accelerate the payment due under the agreement. As of June 30, 2018, 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 - On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method, and due to the immaterial difference, there was no adjustment to the opening balance of retained earnings at January 1, 2018. Based upon the Company’s review, and the interpretive guidance that has been issued and examined, the adoption of this standard has not had a material impact on our consolidated financial statements. In particular, the Company has performed a detailed review of its revenue arrangements, which includes product sales and royalty payments in compliance with FASB ASC topic 606. The Company has and will continue to review its performance obligations in terms of material customer contractual arrangements in order to verify that revenue is recognized when performance obligations are satisfied on a periodic basis.

Revenues from product sales are recognized when earned, net of applicable provisions for discounts and returns and allowances in the event of product defect where no exchange of product is possible. Revenues are recognized when our performance obligations are satisfied as evidenced by transfer of control of promised goods to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Product royalty income, representing less than 1% of total revenues, is recorded as the underlying product sales occur, in accordance with the related licensing arrangements.

The Company's standard terms and conditions of sale for non-consumer direct or web-based sales do not allow for product returns other than under warranty.

In the following table, revenue is disaggregated by the source of revenue:

		Six months ended June 30,
		2018	% of Revenues		2017	% of Revenues
Consumer and athlete direct revenues	$	579,202	6%	$	503,671	5%
Dealer direct revenues		4,207,110	41%		3,561,242	38%
International distributor revenues		5,512,093	53%		5,263,153	57%
	$	10,298,405	100%	$	9,328,066	100%

The Company reviews the reserves for customer returns at each reporting period and adjusts them to reflect data available at that time. To estimate reserves for returns, the Company estimates the expected returns and claims based on historical rates as well as events and circumstances that indicate changes to historical rates of product returns and claims. Historically, returns due to product quality issues have not been material and there have been no distributor terminations that resulted in product returns. The provision for estimated returns for the six months ended June 30, 2018 and December 31, 2017 was $-0-, and $-0-, respectively.

Sales commissions are expensed when incurred, which is generally at the time of sale or cash received from customers, because the amortization period would have been one year or less. These costs are recorded in commissions and consulting expenses within operating expense in the accompanying consolidated statements of operations and comprehensive income.

Revenue recognized from contracts with customers is recorded net of sales taxes, value added taxes, or similar taxes that are collected on behalf of local taxing authorities.

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 June 30, 2018 and December 31, 2017 was $72,468 and $57,808, respectively.

Impairment of Long-Lived Assets – Our long-lived assets include property and equipment. We evaluate our long-lived assets for recoverability whenever events or changes in circumstances indicate that an asset may be impaired. In evaluating an asset for recoverability, we estimate the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. We have determined there was no impairment charge during the six month periods ended June 30, 2018 and 2017.

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 9, “Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption, or expected adoption and effects of our consolidated financial position, results of operations and cash flows.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to its stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As of June 30, 2018, 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, 2018, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 effect on our business, financial condition or operating results.

On August 7, 2017, a lawsuit was filed against the Company and one other defendant on behalf of a motorcycle rider in the Southern District Court of Iowa for strict liability, breach of warranty, negligence, gross negligence and consumer fraud. On May 3, 2018 the Federal Court dismissed the Plaintiff’s entire complaint against Leatt Corporation in this matter.

On April 3, 2018, a wrongful death lawsuit was filed against the Company and three other defendants in Superior Court of California, County of Imperial. The claims being asserted against the defendants is strict liability, negligence, failure to warn, and breach of implied and express warranties. The litigation is in the initial stage and no hearing date has yet been set. The Company believes that the lawsuit is without merit and intends to vigorously defend 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 for the period ended December 31, 2017.

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	Description
No.

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.

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 10, 2018	LEATT CORPORATION


	By: /s/ Sean Macdonald
	Sean Macdonald
	Chief Executive Officer and Chief Financial Officer
	(Principal Executive, Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit	Description
No.

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