Olivier Colombo - Consultant & Corporate Advisor
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New Investment Idea: Leatt Corp (LEAT)


Leatt Corp (LEAT)

 
Market cap: 12Mil$

Shares outstanding: 5.2mil

Insiders own 41.5% of outstanding shares

Debt: 0

Cash: $700’000

Recent price (30/03/2015): $2.30

52 week price range: $0.48 - $3.51

Average daily volume: 3’000

Is a fully reporting SEC company

 

Leatt Corp (LEAT)www.leatt.comand www.leatt-corp.com  is an emerging growth company thatdesigns, 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.  Leatt sells its products directly to distributors in South Africa (through Leatt SA), in the USA (through Two Eleven, Leatt’s wholly owned California subsidiary), and through a network of 60 third-party distributors worldwide. The company has approximately 996 distributors and dealers who stock Leatt products in the U. S. and approximately 152 distributors and dealers in South Africa. As of December 31, 2014, it employed 40 full-time employees and no part-time employees. The company has sold over 500,000 units of neck braces Worldwide do date. Leatt also acts as the original equipment manufacturer for neck braces sold by other international brands.

Leatt’s products are manufactured in China in accordance with their manufacturing specifications, pursuant to outsource manufacturing arrangements with third-party manufacturers located there. Their third-party manufacturers usually have the capacity to produce more than 120,000 braces per year and have the space to expand such capacity as required. Leatt generally offers a 2-year warranty on their products in accordance with EU regulations. Products purchased through international sales are usually shipped directly from their manufacturers’ warehouses or points of dispatch to customers or their import agents.

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. Under the terms of the Licensing Agreement dated March 1,  2006, they are obligated to pay Xceed Holdings 4% of all LEATT’s revenues from the Leatt-Brace®. In addition, pursuant to a separate license agreement between us and Mr. De Villiers, they are obligated to pay a royalty fee of 1% of all 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

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 Fédération Internationale de l'Automobile (FIA), the Fédération Internationale de Motocyclisme (FIM) and the National Association for Stock Car Auto Racing (NASCAR), to have the Leatt-Brace® accredited by these bodies. Leatt is in discussions with governing racing bodies, such as the Commission Internationale de Karting, or CIK, the American Motorcyclist Association, or AMA, the FIM, the FIA, and NASCAR, to have their Leatt-Brace® accredited. They believe that these accreditations and endorsements will increase sales of their products and solidify their position as a leader in safety products.

Market share: According to a Racer X Illustrated magazine October 2014 reader survey, available at http://mediakit.filterpubs.com/survey approximately 54% of riders still do not own a neck brace for protection. The same RacerX survey shows that Leatt had an approximately 64% market share for neck braces and 10.8% of the market share for chest protectors in the U.S. motorcross market, which represents approximately 50% of the world motorcross market. The company believes it has gained market share, largely due to the innovation and quality of their products, the growth of the market, the increased marketing efforts and their steps to secure its international patents and protect its patents from infringement.

Competition: Leatt competes with a small number of dominant competitors in the neck brace and body protection market, some of whom have substantially greater financial and other resources than Leatt currently has. Their major competitors in the neck brace market is Alpinestars S.p.A (11.4% market share) and EVS Sports (13.3%), and their major competitors in the body protection market is Thor Motocross (with 18.7% market share) and Fox Racing (30.4%)

Sales: In 2014, net sales increased 24% to $18,458,928 and had a profit of 8cts/share vs a loss of 7cts/share in 2013. Neck braces represented $9,799,767 or 53% of total sales versus, $8,379,338 or 56% of sales in 2013. Body Armor had sales of 7,811,511 or 42% of total sales in 2014, versus 5,596,738 or 38% in 2013. The major increase here is due to the launch of their knee brace in 4Q14. Other products, parts & accessories had sales of 847,650 or 5% of sales in 2014 and 915,591 or 6% in 2013. Leatt generates revenue both in the United States and internationally. For the years ended December 31, 2014 and 2013, annual revenues associated with international customers were $11,025,185 and $9,061,355, or 60% and 61% of total revenue, respectively. For the year ended December 31, 2014, the U.S. revenue was concentrated in one customer that accounted for approximately 13% of annual U.S. revenue. 

Corporate structure: Leattwas incorporated in the State of Nevada on March 11, 2005 under the name Treadzone, Inc. Until March 2006, was a shell company with little or no operations. Effective as of March 1, 2006, they 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, they changed their name to Leatt Corporation in connection with the anticipated acquisition of the Leatt-Brace® rights. The Company conducts business in South Africa as a foreign registered branch known as ‘Leatt Corporation (Incorporated in the State of Nevada)’ registered under the laws of South Africa with registration number: 2007/032780/10. Based in Cape Town, South Africa, Leatt SA was formed on November 14, 2007, for conducting the Company’s business and operations in South Africa. Corporate headquarters and our research and development efforts are based at Leatt SA. Is a fully reporting SEC company.

Capital structure:  Ordinairy shares: 5’200’623 after a 1-25 reverse stock split Sept 2012. Prefered shares: 120’000, Controlled by Chris Leatt 96’000 and Jean-Pierre de Villiers (Xceed Holdings) 24’000. The preferred stock votes with the common stock at a vote of 100-for-one, subject to adjustments resulting from any future stock splits. The preference stock has no dividend rights. Each preference share is convertible to one common stock share.

Management team collectively owns 41.53% of LEAT common stock (including the preferred stock which converts on a one-for-one basis to common stock). Management, therefore, has the power to make all major decisions regarding Leatt’s affairs, including decisions regarding whether or not to issue stock and for what consideration, whether or not to sell all or substantially all of Leatt’s. As of March 20, 2015 there were approximatively 225 stockholders. Jean-Pierre De Villiers owns 9.39% of the shares outstanding and Alfred Bjorn Christensen 8.86%. So 60% of LEAT outstanding shares are in strong hands.

Cash: At December 31, 2014, Leatt had cash and cash equivalents of $0.7 million and short-term investments of $0.06 million, as compared to cash and cash equivalents of $0.80 million and short-term investments of $0.06 million at December 31, 2013. 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. 

Compensation: Dr Leatt had a fix salary of $487,668 for the past 3 years. The CEO Mr. MacDonald (age 37 who has been with the company since and has had the role of CEO since Nov. 2010) had a salary of $172,774 and a bonus of $13,055 in 2014, vs $189,502 in 2013 and 196,922 in 2012.

R&D: Leatt’s research and development efforts are headed by the company’s Chairman and Founder, Dr. Christopher Leatt (46 years old) and are conducted at their research facility, or Leatt Lab, located at their executive headquarters in Cape Town, South Africa. The facility houses a team of 5 biomedical engineers and designers who ensure products are scientifically and mechanically sound. This facility features state of the art testing and prototyping equipment and sophisticated simulation models. Leatt also utilizes consultants, academic institutions and engineering companies from time to time to assist them with our research and development efforts. R&D expenses for the fiscal years ended December 31, 2014 and 2013, amounted to $1,222,209 and $1,170,039, respectively. These expenses included salaries for research and development staff as well as other direct product development and research costs.

 
Outlook:

I see the company growing revenues by 30% for the next 3 years, thanks to the recent introduction of their knee brace and the soon to be launched proprietary helmets. 2014 saw revenues grow 24% and profit hit 8cts/share vs a loss of 7cts in 2013.

In the 2015 first quarter their Knee Brace was accepted for registration by both the United States Food and Drug Administration (FDA) and the UK’s Medicine and Healthcare Regulatory Products Agency (MHRA), and their Shoulder Brace was accepted by the FDA, as Class 1 Medical Devices. FDA and MHRA registration will allow Leatt take these products directly to market as medical devices for patients (not just athletes) recuperating from injuries, surgery, muscle tears or strains, dislocations, breaks or fractures. This opens up a new huge market in the MedTech space.

The introduction of their first ever helmet, at the Intermot (largest motorbike show in Europe that took place this past October) was very well received and will start selling in the end of 1 half of 2015. They are setting new industry standards thanks to their advanced technology features, like their 360 degrees turbine that will decrease rotation, acceleration and G-force and prevent major injuries to the head and brain. The helmet is positioned to gain significant market share and reach gold standard. TechNavio's analysts forecast the Global Premium Motorcycle Helmets market to grow at a CAGR of 6.19 percent over the period 2014-2019.

Will launch a new knee brace for the ski 2015-2016 season. The knee brace has significantly higher profit margins, so we will see continues increases in margins in the coming years.

Management has told investors on their last conference call that they plan to do a marketing trip to the US and see MicroCap investors in the spring 2015. They will also push actively to get research coverage on the company. They now have a very compelling story to tell investors.

On the body armor side, they are looking at new sports like US football, Australian football and also ice- hockey.

Company will continue to innovate and bring new body protection products on a regular basis.


My thoughts:

Over the past year I have spoken at least 5 times with Sean MacDonald Leatt’s CEO and met him in person in Cologne last October. I was very impressed by his deep knowledge of the industry, the motivation to bring Leatt to the next level of growth and profitability. He is a very nice and down to earth person.  

Leatt is entering a new phase of growth and has a market cap of only 12Mil$. I think the company could see revenues hit 24Mil$ in 2015 up 30% from last year and potentially have profits of 30 - 40cts. I would not be surprised to see the stock trade in the 4 - 5$ level in the next 12months 

Leatt has only 5.2mil shares outstanding with 60% held by insiders. No debt, and cash and cash equivalents of roughly $700,000 at the end of 2014

I believe that it could be taken over in the next 2-3 years by a company like BRG Sports (the owner of Giro, Bell Helmets, Riddell American Football Helmets. BRG Sports is privately owned) http://www.brgsports.com If you take the same multiple Black Diamond (BDE)http://blackdiamondequipment.com paid in June 2012 to take over POC (helmets and body protection) http://www.pocsports.com you arrive at a price of 2x sales. POC was doing 22Mil$ in sales and Black Diamond paid 43Mil$. So 2x 2014 sales of LEAT of roughly 18Mil$ would put the stock around 6.50$.....vs 2.30$ today…..


Risks:

The departure of Dr. Christopher Leatt, Chairman, Sean Macdonald, Chief Executive Officer and President, and Erik Olsson, their International General Manager could harm their business.

Limited trading in the stock could create some volatility in the stock price.

Leatt maintains product liability insurance policies in excess of $1 million with a self-insured retention to attempt to manage this risk worldwide. The company is currently defending against 5 such claims which they have a fair expectation will be resolved in their favor, like the others in the past