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, 2010
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission file number 000-15303
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LEO MOTORS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3909667
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
291-1, Hasangok-dong, Hanam City, Gyeonggi-do, Republic of Korea 465-250
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code +82 31 796 8805
---------------
n/a
(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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [x]
(Do not check if a smaller reporting company)
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 of the registrant's common stock outstanding as of June 30,
2010 was 50,783,115 shares.
LEO MOTORS, INC.
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INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO.
- --------------------------------------------------------------------------------
Item 1. Consolidated Interim Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2010 (unaudited) F-3
Consolidated Statements of Operations for the six months ended
June 30, 2010 (Unaudited) F-4
Consolidated Statements of Changes in Stockholders' Equity for
the six months ended June 30, 2010 (unaudited) F-5
Consolidated Statement of Cash Flows for the six months ended
June 30, 2010 (Unaudited) F-6
Notes to Condensed Consolidated Interim Financial
Statements (unaudited) F-7
Item 2. Management's Discussion and Analysis 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
Signatures 21
PART I. FINANCIAL INFORMATION.
ITEM 1. CONDENSED CONSONSOLIDATED INTERIM FINANCIAL STATEMENTS
LEO MOTORS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2010
AS OF JUNE 30, AS OF DECEMBER 31,
2010 2009
ASSETS (UNAUDITED) (AUDITED-RESTATED)
- ------------------------------------------------- ---------------- --------------------
CURRENT ASSETS
Cash in banks $ 851,289 $ 499,025
Accounts Receivable-net of allowance of $8,394
and $11,735, respectively 12,377 244,670
Inventory 2,339,254 395,001
Prepaid costs and other current assets 1,552,814 151,067
---------------- --------------------
TOTAL CURRENT ASSETS 4,755,734 1,289,763
Fixed assets- net of accumulated depreciation 264,485 157,981
Deposit 165,059 107,640
Investment in net equity interest 10,850,000 -
---------------- --------------------
TOTAL OTHER ASSETS 11,279,544 265,621
---------------- --------------------
TOTAL ASSETS $ 16,035,278 $ 1,555,384
================ ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------
Commitments and Contingencies
CURRENT LIABILITIES
Short term borrowings $ 413,121 $ 428,229
Accounts payable and accrued expenses 649,477 433,004
Other payables 311,531 5,847
Taxes Payable - -
Payments received in advance from customers 2,958,108 296,167
Related party payable - -
---------------- --------------------
TOTAL CURRENT LIABILITIES 4,332,237 1,163,247
Accrued severance benefits 26,624 30,031
---------------- --------------------
TOTAL LIABILIITIES 4,358,861 1,193,278
Minority interest 1,055,861 1,020,428
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, Authorized 100,000,000
Shares, $0.001 par value, 50,783,115 and
40,708,115 shares issued and outstanding 50,783 40,708
Additional paid-in capital 19,262,850 3,964,160
Comprehensive income (Loss) 1,394,890 406,476
Deficit (10,087,968) (5,069,666)
---------------- --------------------
TOTAL STOCKHOLDERS' DEFICIT 10,620,555 (658,322)
---------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 16,035,278 $ 1,555,384
================ ====================
The notes are an integral part of these financial statements
F-3
LEO MOTORS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three and Six Months Ended June 30, 2010 and 2009
(Unaudited
) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2010 2009 2010 2009
------------ ------------ ------------ ------------
Sales $ 554,159 $ 29,128 $ 566,622 $ 389,009
Cost of Goods Sold 472,818 25,063 480,158 233,266
------------ ------------ ------------ ------------
GROSS PROFIT 81,341 4,065 86,464 155,743
OPERATING COSTS AND EXPENSES
Salaries and Benefits 122,113 236,131 4,564,718 262,345
Service Fees 77,122 31,201 222,663 65,753
Selling, General and Administrative 331,041 680,212 761,765 2,465,207
------------ ------------ ------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 530,276 947,544 5,549,146 2,793,305
------------ ------------ ------------ ------------
NET LOSS FROM OPERATIONS (448,935) (943,479) (5,462,682) (2,637,562)
OTHER INCOME (EXPENSE)
Non-Operating Income 846 - 9,871 -
Non-Operating Expenses (7,005) (18,752) (17,723) (3,049)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAX BENEFIT (455,094) (962,231) (5,470,534) (2,640,611)
INCOME TAX
Current Income Taxes - - - -
Deferred Income Taxes - - - -
Income Tax Benefit - - - -
Attributable to minority interest (203,030) - (452,232) -
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (252,064) $ (962,231) $(5,018,302) $(2,640,611)
============ ============ ============ ============
NET INCOME PER SHARE $ (0.00) $ (0.03) $ (0.11) $ (0.08)
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMOMN
SHARES OUTSTANDING 50,783,115 36,792,282 46,737,286 34,625,615
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS)
NET LOSS $ (252,064) $ (962,231) $(5,018,302) $(2,640,611)
Currency transaction gain (loss) 988,414 (1,231) 988,414 (1,029)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ 736,350 $ (963,462) $(4,029,888) $(2,641,640)
============ ============ ============ ============
The notes are an integral part of these financial statements
F-4
LEO MOTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
For the Six Months Ended June 30, 2010 and 2009
(Unaudited)
ADDITIONAL RETAINED
COMMON STOCK PAID IN COMPREHENSIVE EARNINGS
SHARES AMOUNT CAPITAL INCOME(LOSS) (DEFICIT) TOTAL
---------- ----------- ----------- --------------- ------------- ------------
Balance, January 1, 2010 40,708,115 $ 40,708 $ 3,964,160 $ 406,476 $ (5,069,666) $ (658,322)
Common stock issued for
compensation, Feb 8, 2010 3,075,000 3,075 4,455,690 4,458,765
Common stock issued for
acquisition of BnT Co. ltd. 7,000,000 7,000 10,843,000 10,850,000
Foreign currency translation
adjustment 988,414 988,414
Net loss for the year ended
December 31, 2009 (5,018,302) (5,018,302)
---------- ----------- ----------- --------------- ------------- ------------
Balance, June 30, 2010 50,783,115 $ 50,783 $19,262,850 $ 1,394,890 $(10,087,968) $10,620,555
========== =========== =========== =============== ============= ============
The notes are an integral part of these financial statements
F-5
LEO MOTORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2010 and 2009
(Unaudited)
SIX MONTHS ENDED
JUNE 30, 2010 JUNE 30, 2009
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (5,018,302) $ (2,640,611)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Stock for services 4,458,766 2,037,584
Depreciation 53,950 5,940
Loss on disposition of property and equipment 130 -
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease (Increase) in accounts receivable 232,293 (32,560)
Decrease (Increase) in inventories (1,944,253) 30,400
Decrease (Increase) in deposit and prepaid (1,401,747) 2,215
Increase (Decrease) in accounts payable and accrued liabilities 216,473 83,325
Increase (Decrease) in other payable 305,684 -
Increase (Decrease) in advance from customers 2,661,941 -
Increase (Decrease) in accrued severance benefits (3,407) -
--------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (438,472) (513,707)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in net equity interest (10,850,000) -
Purchase of property and equipment - -
Loss in investment in a closely held-company - -
Outlay for deposit (57,419) -
--------------- ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (10,907,419) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued to invest in net equity interest 10,850,000 -
Proceeds from short-term borrowing (15,108) -
Increase (Decrease) in interest payable - -
Increase in minority interest 35,433 -
Proceeds ( Repaid) from advance from customers - 1,626,901
Proceeds from related party/bank - 392,083
Debt reduction - related party and payment in advance - (600,594)
Minority Interest Investment - -
--------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 10,870,325 1,418,390
CHANGE IN CASH DUE TO FOREIGN CURRENCY TRANSLATION ADJUSTMENT 988,414 (372,064)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH 512,848 532,619
CASH, BEGINNING OF PERIOD 499,025 32,181
--------------- ---------------
CASH, END OF PERIOD $ 1,011,873.0 $ 564,800.0
=============== ===============
SUPPLEMENTAL DISCLOSURES ON INTEREST AND INCOME TAXES PAID
Interest paid for the period $ - $ -
=============== ===============
Income taxes paid for the period $ - $ -
=============== ===============
The notes are an integral part of these financial statements
F-6
LEO MOTORS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
NOTE 1 - BACKGROUND
Company Business
- -----------------
Leo Motors, Inc. (the "Company") is engaged in the development, assembly and
sales of electric vehicles ("EVs").
Background
- ----------
The Company was originally incorporated as Classic Auto Accessories, a
California Corporation on July 2, 1986. The Company then underwent several name
changes from FCR Automotive Group, Inc. to Shinil Precision Machinery, Inc. to
Simco America Inc. and then to Leo Motors. The Company had been dormant since
1989, and effectuated a reverse merger on November 12, 2007 with Leozone Inc., a
South Korean Company, which is the maker of electrical transportation devices.
The merger essentially exchanges shares in Leo Motors, Inc. for shares in
Leozone. As this is a reverse merger the accounting treatment of such is that
of a combination of the two entities with the activity of Leozone, Inc. the
surviving entity, going forward.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant account policies of the Company is presented to
assist in understanding the Company's financial statements. The financial
statements and the notes are the representation of the Company's management, who
are responsible for their integrity and objectivity. These accounting policies
conform to U.S. generally accepted accounting principles ("USGAAP") and have
been consistently applied in the preparation of the financial statements.
Basis of Presentation and Consolidation
- -------------------------------------------
These financial statements and related notes are expressed in US dollars. The
Company's fiscal year-end is December 31. The consolidated financial statements
include the financial statements of the Company, its wholly owned subsidiaries.
All inter-company transactions and balances have been eliminated upon
consolidation.
Use of Estimates
- ------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
- ---------------------------------------
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable inventory and prepaid expenses, accounts
payable and deferred revenues, the carrying amounts approximate fair value due
to their short maturities.
F-7
Revenue Recognition
- --------------------
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial
Statements". In general, the Company records revenue when persuasive evidence of
an arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectability is reasonably assured. The following policies reflect specific
criteria for the various revenues streams of the Company:
The Company generates revenue from the delivery of goods and records revenues
when the sales are completed, already collected or collectability is reasonably
assured, there is no future obligation and there is remote chance of future
claim or refund to the customers.
Revenue from periodic maintenance agreements is generally recognized ratably
over the respective maintenance periods provided no significant obligations
remain and collectability of the related receivable is probable.
Revenue from the performance of services is recognized upon completion of the
service.
Accounts receivables of the Company are reviewed to determine if their carrying
value has become impaired. The Company considers the assets to be impaired if
the balances are greater than six months old. Management regularly reviews
accounts receivable and will establish an allowance for potentially
uncollectible amounts when appropriate. When accounts are written off, they
will be charged against the allowance. Receivables are not collateralized and
do not bear interest.
The Company anticipates adopting a warranty and return policy granting a one
year limited warranty. The policy will warrant that the products will be free
from defects in material and workmanship and meet Seller's published
specifications at the time of shipment under normal use and regular service and
maintenance. The Company is evaluating the accounting treatment for product
returns and warranties and will provide an allowance at the time of sale.
Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of credit risk
include cash and cash equivalents.
The Company maintains its cash in well-known banks selected based upon
management's assessment of the bank's financial stability. Balances may
periodically exceed the $250,000 federal depository insurance limit; however,
the Company has not experienced any losses on deposits. The Company extends
credit based on an evaluation of the customer's financial condition, generally
without collateral. Exposure to losses on receivables is principally dependent
on each customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses, as required.
Accounts Receivables
- ---------------------
Accounts receivables of the Company are reviewed to determine if their carrying
value has become impaired.
F-8
The Company considers the assets to be impaired if the balances are greater than
one-year old. Management regularly reviews accounts receivable and will
establish an allowance for potentially uncollectible amounts when appropriate.
When accounts are written off, they will be charged against the allowance.
Receivables are not collateralized and do not bear interest.
Concentration of Credit Risk
- -------------------------------
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents and trade accounts
receivable. The Company places its cash with high credit quality financial
institutions in Korea. The Company has not experienced any losses in such bank
accounts through June 30, 2010. At June 30, 2010, our bank deposits were
$851,289.
The Company extends credit based on an evaluation of the customer's financial
condition, generally without collateral. Exposure to losses on receivables is
principally dependent on each customer's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses, as required.
Cash Equivalents
- -----------------
For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less to be cash
equivalent.
Fixed Assets
- -------------
Fixed assets are stated at cost, less accumulated depreciation. Depreciation is
provided principally on the straight-line method over the estimated useful lives
of the assets, which is generally 3 to 10 years. The cost of repairs and
maintenance is charged to expense as incurred. Expenditures for property
betterments and renewals are capitalized. Upon sale or other disposition of a
depreciable asset, cost and accumulated depreciation are removed from the
accounts and any gain or loss is reflected in other income (expense).
The Company will periodically evaluate whether events and circumstances have
occurred that may warrant revision of the estimated useful lives of fixed assets
or whether the remaining balance of fixed assets should be evaluated for
possible impairment. We use an estimate of the related undiscounted cash flows
over the remaining life of the fixed assets in measuring their recoverability.
Comprehensive Income
- ---------------------
The Company follows ASC Topic 220 Comprehensive Income, formerly Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in the financial statements.
The functional currency of the Company is the Korean Won. Assets and
liabilities are translated to U.S. Dollars at the period-end exchange rates
($.000826241) and ($.0007584166) respectively and revenues and expenses are
translated at weighted average exchange rates for the period, which was
($.000866664) and ($.000742274) respectively. Resulting translation adjustments
are recorded as a component of stockholders' equity in other comprehensive
income (loss).
F-9
- ------
Advertising Costs
- ------------------
Advertising costs are expensed as incurred.
Income Taxes
- -------------
The Company accounts for income taxes under ASC Topic 740, formerly SFAS 109,
"Accounting for Income Taxes." Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment. ASC
Topic 740 also requires that uncertain tax positions are evaluated in a two-step
process whereby (1) it is determined whether it is more likely than not that the
tax positions will be sustained based on the technical merits of the position
and (2) for those tax positions that meet the more-likely-than-not recognition
threshold, the largest amount of tax benefit that is greater than fifty percent
likely of being realized upon ultimate settlement with the related tax authority
would be recognized
Loss per Share
- ----------------
In accordance with ASC Topic 260 formerly SFAS No. 128, "Earnings Per Share,"
the basic income / (loss) per common share is computed by dividing net income /
(loss) available to common stockholders by the weighted average number of common
shares outstanding. Diluted income per common share is computed similar to
basic income per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive.
Consulting and Service Fees
- ------------------------------
Consulting and Service Fees consist of accounting, legal, and professional fees
and for the period, most of it was paid in common stock.
Research and Development
- --------------------------
According to Statement of Financial Accounting Standards No 2, research and
product development costs are expensed as incurred.
Stock-Based Compensation
- -------------------------
The Company has adopted ASC Topic 718, formerly SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes and encourages the use of the fair
value based method of accounting for stock-based compensation arrangements under
which compensation cost is determined using the fair value of stock-based
compensation determined as of the date of grant and is recognized over the
periods in which the related services are rendered. For stock based
compensation the Company recognizes an expense in accordance with SFAS No. 123
and values the equity securities based on the fair value of the security on the
date of grant. Stock option awards are valued using the Black-Scholes
option-pricing model.
F-10
- ------
Foreign Currency Translation
- ------------------------------
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with ASC Topic 830-20, formerly SFAS
No. 52, "Foreign Currency Translation", and are included in determining net
income or loss.
The Company's reporting currency is the U.S. dollar. The functional currency of
the Company's Korean subsidiaries is the Korean Won (KRW). For foreign
operations with the local currency as the functional currency, assets and
liabilities are translated from the local currencies into U.S. dollars at the
exchange rate prevailing at the balance sheet date and weighted average rates of
exchange for the period for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the consolidated
statements of operations. The cumulative translation adjustment and effect of
exchange rate changes on cash at June 30, 2010 was $576,588. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining accumulated
comprehensive loss. As of June 30, 2010 and for the period then ended, the
exchange rate for the local currency, KRW was $ 1 USD for 1,129 and 1,144 KRW,
respectively.
Recent Accounting Pronouncements and Impact of New Accounting Standards
- --------------------------------
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position, or cash flow.
NOTE 3 - EARNINGS PER SHARE
Basic loss per share are calculated by dividing net loss by the weighted average
number of common shares outstanding during the period.
NOTE 4 - ACCOUNTS RECEIVABLE
The Company recognizes a receivable on sales of parts and electrical motor
equipment. The June 30, 2010 balance of accounts receivable was $12,377, net of
reserve for doubtful accounts.
NOTE 5 - INVENTORY
The Company accounts for its inventory under the FIFO method and lower of cost
or market method of costing. The company's inventory consists of parts for the
electric transportation industry. As of June 30, 2010, the inventory consisted
of:
Raw materials $ -
Work in Process 2,339,254
Finished goods -
----------
TOTAL $ 810,198
==========
F-11
NOTE 6 - FIXED ASSETS
The Company's fixed assets consist of the following:
Structures $ 2,545
Vehicles 78,127
Tools 36,282
Equipment, furniture , fixtures and equipment 246,245
----------
363,208
Less Accumulated Depreciation (98,723)
----------
Net $ 264,485
==========
The Company depreciates it assets over useful lives of between 3 and 7 years.
Depreciation expense was $53,950 for the six month period ended June 30, 2010.
NOTE 7 - INVESTMENT IN NET EQUITY OF LEO BNT CO., LTD
On February 11, 2010, Leo Motors, Inc. (the "Company") entered into an agreement
to purchase 50% of Leo BnT Co. Ltd, a Korean Corporation ("BNT"), from two
shareholders of BNT in exchange for 7,000,000 shares of the Company's common
stock. The purchase price was valued at $ 1.55 per share or $10,850,000.
NOTE 8 - DUE TO RELATED PARTY
The company is indebted to its officer for advances. Repayment is on demand
without interest. The Company reduced this obligation by the issuance of
1,000,800 valued at $110,088 during 2008 and cash repayment in 2009.
NOTE 9 - PAYMENTS RECEIVED IN ADVANCE
The Company during the periods received payments from potential customers, or
deposits, on future orders. The Company's policy is to record these payments as
a liability until the product is completed and shipped to the customer at which
the Company recognizes revenue. As of June 30, 2010, the balance of payments
received in advance was $2,958,108.
NOTE 10 - BANK LOAN
The Company is indebted to Shin Han Bank at June 30, 2010 for $413,121, payable
in May 2010, interest at 6.57 % per annum. The loan is secured by guarantee
issued by "KIBO", a Korean government agency created to guarantee loans to
small-to-medium technology companies.
NOTE 11 - CAPITAL STOCK
Company is authorized to issue up to 100,000,000 common shares at $0.001 par
value. Total number of common shares issued and outstanding as of June 30, 2010
were 50,783,115 shares and 40,708,115 shares, December 31, 2009.
F-12
For the six months ended June 30, 2010, 10,075,000 new shares were issued,
7,000,000 shares for the purchase of 50 % interest in Leo B & T Inc., valued at
$ 1.55 per share or $ 10,850,000, 3,000,000 shares for compensation and 75,000
shares for consulting service, latter two valued at $ 1.45 per share or $
4,458,750.
NOTE 12 - OPERATING RISK
(a) Concentration of credit risk
Financial instruments that potentially expose the Company to concentration of
credit risk consist primarily of cash. The Company places its cash with
financial institutions with high credit ratings.
(b) Country risk
Revenues of the Company are mainly derived from the sale in Korea. The Company
hopes to expand its operations to other Countries, however, such expansion has
not been commenced and there are no assurances that the Company will be able to
achieve such an expansion successfully. Therefore, a downturn or stagnation in
the economic environment of Korea could have a material adverse effect on the
Company's financial condition.
(c) Product risk
The Company might have to compete with larger companies who have greater funds
available for expansion, marketing, research and development and the ability to
attract more qualified personnel. There can be no assurance that Company will
remain competitive should this occur.
(d) Exchange risk
The Company cannot guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of Korean Won
were converted to U.S. dollars on that date. The exchange rate could fluctuate
depending on changes in the political and economic environments without notice.
(e) Key personnel risk
The Company's future success depends on the continued services of few
individuals and loss of one or several of their service would be detrimental to
the Company and could have an adverse effect on business development. The
Company does not currently maintain key man insurance on their life but plan to
implement in near future. Future success is also dependent on the ability to
identify, hire, train and retain other qualified managerial and other employees.
NOTE 13 - SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In period
ended June 30, 2010, the Company operated in a single reportable business
segment, sales of specialized electric vehicle.
The Company's reportable segments are strategic business units that offer
different products. The Company's reportable segments, although integral to the
success of the others, offer distinctly different
F-13
products and services and require different types of management focus. As such,
these segments are managed separately.
Condensed information with respect to these reportable business segments for the
period is as follows:
Sales from specialized electric vehicles $566,622
(single segment for the period)
NOTE 14 - COMMITMENT AND CONTINGENCIES
13.1 Lease Commitments
Company leases its office space and assembly facilities in HaNam City in Korea
which expires on March 31, 2011 and its monthly minimum rental is $ 6,875.
The minimum obligations under such commitments for the years ending December 31
until its expiration are:
Year 2010 $ 82,500
Year 2011 $ 86,600
Year 2012 $ 91,000
Rental expense for the period ended June 30, 2010 was $19,522.
13.2 Litigation
The Company has no threatened, pending or unsettled litigation as of August 19,
2010, the date the financial statement is available for issuance.
NOTE 15 - CONTRACTS
In May, 2010, the Company appointed M&M Corp as its exclusive Korean provider of
electric scooters. Upon entering the agreement, M&M paid the Company
400,000,000 Korean Won for the order of 170 units of e-scooters. On April 2,
2010, M&M placed a definitive order for 1,170 units for 4.2 billion Korean Won
(approximately $3.73 Million US), and has advanced a down payment of 30 billion
Korean Won (approximately $2.66 million US).
NOTE 16-GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net
loss of $5,018,302 during the quarter ended June 30, 2010, and as of that date,
the Company has a deficit of $9,573,491. Those factors create an uncertainty
about the Company's ability to continue as a going concern. Management of the
Company has developed a plan to continue as a going concern by focusing on
increasing short term revenues from sales of its e-Bikes and EV conversion
services. In April, 2010 the Company received its first large scale order for
its EVs, which upon fulfillment will generate the Company's first significant
revenues from its main plan of operation. See Note 15 above.
The ability of the Company to continue as a going concern is dependent on
attaining profitable operations and the success of its business plan. The
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
..
F-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS: STATEMENTS ABOUT OUR FUTURE EXPECTATIONS ARE
"FORWARD-LOOKING STATEMENTS" AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. WHEN
USED HEREIN, THE WORDS "MAY," "WILL," "SHOULD," "ANTICIPATE," "BELIEVE,"
"APPEAR," "INTEND," "PLAN," "EXPECT," "ESTIMATE," "APPROXIMATE," AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INHERENT IN OUR BUSINESS, INCLUDING
THOSE SET FORTH UNDER THE CAPTION "RISK FACTORS," IN THIS DISCLOSURE STATEMENT,
AND ARE SUBJECT TO CHANGE AT ANY TIME. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. THIS FORM 10-Q DOES NOT HAVE
ANY STATUTORY SAFE HARBOR FOR THIS FORWARD LOOKING STATEMENT. WE UNDERTAKE NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENT.
This Management's Discussion and Analysis should be read in conjunction with the
financial statements included in this Quarterly Report on Form 10-Q (the
"Financial Statements"). The financial statements have been prepared in
accordance with generally accepted accounting policies in the United States
("GAAP"). Except as otherwise disclosed, all dollar figures included therein
and in the following management discussion and analysis are quoted in United
States dollars.
OVERVIEW
Leo Motors, Inc. (the "Company") is currently in the process of producing and
selling its electric scooter models in Korea, which began in the first quarter
of this year, with a view to expanding our sales to Japan and other countries in
the near future. We are also currently marketing our power train for the
conversion of Internal Combustion Engine ("ICE") vehicles into Electric
Vehicles. We also have several other projects in various stages of development.
Our immediate term strategy is to develop the sales of our electric scooters and
EV conversion services in order to develop revenue streams and profitability.
Until we succeed in these regards, our other production-ready projects have been
placed on hold. Our recent success has enabled us to continue initial
development of some of our projects on a case-by-case basis.
RECENT BUSINESS DEVELOPMENTS
Hilless Electric Scooter Sales
We have begun to mass produce, market, and sell our three models of electric
scooters: Hilless 1,3, and 5. Initially, we produced 100 units which were sold
out to the dealers who will sell our scooters in Korea, in Japan, and in the
U.S. In Korea, the company appointed M&M Corp., a publicly traded company
listed on KOSDAQ, a division of the Korea Exchange (KRX), as our exclusive
distributor in Korea. We have already received two definitive orders from M&M
and in each case have received up-front down payments for the orders. We
received 400,000,000 Korean won (approximately $300,000) from M&M as a down
payment for the definitive order of 170, and we received 3 billion Korean Won
(about $2.66 million) as down payment for the definitive order of 1,170 electric
scooters. The second order will be delivered by June 2010, for which we
anticipate total revenues of 4.2 billion Korean Won (approximately $3.73
million).
Page 15
These scooters were also presented to government organizations such as post
office and police, social organizations, bigger companies, and delivery
businesses. The company is collecting orders from these national providers.
In December, 2009 we participated in the 2009 International Motorcycle Show in
Long Beach, California to gauge US marketability of our scooters. We found that
the power system is highly competitive with other electric scooters, but we
should enhance the design and quality of non electric parts before our scooter
will be ready for a US launch.
EV Conversion Kit
We tested our EV conversion kit during September, 2009 and exhibited the kits in
Tokyo and Seoul, and have since sold kits and conversion services in Japan and
Korea. We must successfully enter into the mass market of the electric power
train in order to generate significant revenues from this project.
Leo B&T
On February 11, 2010, Leo Motors, Inc. (the "Company") acquired 50% of Leo B&T
Co. Ltd, a Korean Corporation ("Leo B&T"), from two shareholders of Leo B&T in
exchange for 7,000,000 shares of the Company's common stock. Leo B&T is an
electric bus and truck Company that will convert existing Internal Combustion
Engine buses and trucks into electric ones, and will make its own designs of
electric buses and trucks in the future.
Through Leo B&T, we have developed a full speed micro electric bus sized with 24
seats, using one 120 kW power train. An initial prototype has been developed
and successfully tested. The bus ran more than 65 mph, and demonstrated that it
can run more than 60 miles per single charge. Leo B&T's electric bus also did
not experience a loss of power despite high speeds and navigation of 30-degree
mountain roads. We intend to market this and other bus conversions and original
EV designs to governments and will not begin production without a definitive
order.
Other Projects
We have several other projects that have been placed on hold while we develop
sales from our electric scooters. As we have begun to generate significant
revenue from the scooters, we anticipate being able to continue some of these
projects on a case by case basis.
We have developed a power storage system for solar and wind powered houses and
buildings. We are waiting for additional orders from our Japanese dealer, LMJ,
before continuing with this project.
We are in the initial development stages of a canopied four wheel scooter. We
have studied the design and power system, and we plan to develop the prototype
beginning August, 2010.
We have also developed production ready models of various models of EV,
including the S 65 SUV and SKG electric car, which we currently are making
available on a pre-order basis only. We do not intend to produce inventory
without pre-orders. If we do not receive orders of these vehicles, we may
discontinue these projects and use our existing prototypes for demonstration of
our power trains.
We have started the development of a 240 kW controller and motor. The
controller is developed by our own researchers, and the motor is under
development by our supplier based on our design and
Page 16
requirements. With development of 240 kW motor and controller, we are going to
have 240kW power train which can be used in heavy duty buses and trucks.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements arise principally from our plans to develop EV
production capability, additional product development, and marketing costs.
Although in the future we intend to fund our liquidity requirements through a
combination of cash on hand and revenues from operations, during the period, the
Company had incurred $4,728,804 in expenses and had realized only $12,463 in
revenues. Accordingly, our ability to initiate our plan of operations and
continue as a going concern is currently dependent on our ability to either
generate significant new revenues or raise external capital.
Our monthly operating cost including salaries and general expense is currently
approximately $65,000, as we focus on our e-Bikes and power trains. In April
2010 we received approximately $3 million in a down payment from our
distribution agreement in Korea; accordingly, we have already secured our annual
operating budget for 2010. However, in order to continue the projects we have
put on hold, we will require additional revenues or financing.
Despite being able to reach this stage in our development with limited funding,
the EV and general automotive industries are extremely capital intensive, and we
will need substantial additional financing in order to produce and sell our EVs.
Our anticipated minimum costs of implementing our current business plan are
summarized as follows:
e-Bikes
STEP ANTICIPATED COST ANTICIPATED START DATE
- ----------------------- ----------------- ----------------------
Initial Design $ N/A Completed
Initial Prototypes $ N/A Completed
Testing $ N/A Completed
Component Development $ N/A Completed
Production Capability $ N/A Completed
Production of Inventory $ 100,000 In process
Marketing & Sales $ 100,000 In process
- ----------------------- ----------------- ----------------------
TOTAL 200,000
Power Trains
STEP ANTICIPATED COST ANTICIPATED START DATE
- ----------------------- ----------------- ----------------------
Initial Design N/A Completed
Initial Prototypes $ 500,000 In process
Testing $ 500,000 In process
Production Capability $ 500,000 September 2010
Production of Inventory $ 100,000 December 2010
Marketing & Sales $ 100,000 In process
- ----------------------- ----------------- ----------------------
TOTAL 1,700,000
To date we have raised approximately $936,200 in equity financing, $200,000 in
November 2008, $417,000 in January 2009, and $119,200 in May 2009.
Page 17
To date we have raised approximately $2,340,000 in debt financing. This
includes the $1,500,000 advance from Mr. Lee in 2008 and an additional $440,000
loan from Mr. Lee in 2009. In addition, in May, 2009, the Company secured a
loan from Shin Han Bank for 500,000,000 Korean Won (approximately $400,000),
with a term of one year which can be extended under certain conditions. The
loan is guaranteed by KIBO Technology Fund, a non-profit Korean Government
institution whose purpose is to provide credit guarantees for new
technology-based enterprises, and to promote the growth of technologically
strong small and medium enterprises. We have no relationship to KIBO other than
the guarantee, and did not compensate KIBO for the guarantee. The loan is due
within one year. If we fail to repay the loan, it will be repaid by KIBO and
KIBO will seek the amounts from us; however, KIBO generally extends the payment
term by up to three years provided that the Company owns the original technology
and its management is stable. We will continue to explore additional debt
financing opportunities.
Accordingly we have obtained sufficient financing to implement our initial
business plan, but are currently seeking up to $10,000,000 in additional
financing in order to fully implement plans that have been placed on hole. In
addition to the above financing, we continue to negotiate with financial
institutions, venture capital firms, and individual investors among our business
contacts.
Despite receipt of approximately $3,000,000 in an advanced payment, there
continues to be doubt as to our ability to continue in the short term and long
term as a going concern. Our plan in the short term is to develop revenue
streams from e-Scooters and power train conversions. Our long term survival
will depend on the success of these initial plans operations and the generation
of significant recurring revenue. If our efforts should fail or fall short of
our goal, we will have to restructure our business plan in order to sustain our
operations. However, in that event we may be unable to implement our business
plan or continue operations.
In addition, the functional currency in our operations is the Korean Won, and we
conduct business or plan to conduct business in several other currencies,
including that of the US, the Philippines, and Thailand. Foreign currency
exchange rates are subject to significant fluctuation which could have a
material effect on our liquidity. For example, a material advance payment made
in Korean Won decreased in value from December 31, 2007 to December 31, 2008 by
over 25%. This represents a significant risk that assets we hold in foreign
currencies will lose value due to the change in exchange rates.
RESULTS OF OPERATIONS
Revenues
Sales for the three months ended June 30, 2010 were $12,436 compared to $349,881
for the three months ended March 31, 2009. Costs of sales were $7,340 in the
current period and compared to $208,203 in the same period last year. In the
three months ended June 30, 2010, we experienced a gross profit of $5,123,
compared to $151,678 in gross profit in the same period in 2009. Neither
period's sales represent sales from regular business, but rather sales of
samples and development services. We anticipate sales in the second quarter to
be significantly higher than in the first due to the recent sales to M&M Corp.
Expenses
During the three months ended June 30, 2010, we incurred $4,728,804 in expenses,
compared to $2,262,428 for the same period in 2009. The primary increase was
due to payment of consulting service fees and development costs. We also hired
R&D and sales staff as part of the implementation of our business. The company
rented another building near its existing office to operate its sales and
administration division.
Page 18
Expenses for the quarter consisted of the following:
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
EXPENSES: 2008 2007
---------------- ----------------
Salaries and Benefits $ 4,476,891 $ 26,214
Service Fees 142,975 34,552
General and Administrative 108,938 2,201,662
---------------- ----------------
Salaries and Benefits - consist of total cash compensation paid to our employees
during the year and the cost of all benefits provided to our employees. This
expense increased $4,450,677 or 16978% from the prior period. This increase is
due primarily payments made in stock to consultants and employees.
Consulting and Service Fees - consist of consist of accounting, legal, and
professional fees. This expense increased $108,423 or 314% from the prior
period. This increase is due primarily to the increased needs for our
consulting and service providers due to the increase in our operations. We
anticipate that this expense will continue to fluctuate significantly as we
continue to grow our sales, and begin to implement various other parts of our
business plan.
Selling, General and Administrative - consists of travel expenses, entertainment
expenses, communication expenses, utilities, taxes & dues, depreciation
expenses, rent, repairs, vehicle maintenance, ordinary development expenses,
shipping, education & training, printing, storage, advertising, insurance,
office supplies and expense, payroll expenses, investor referral fees and other
miscellaneous expenses. This expense decreased $2,092,724 or 95% from the prior
period. This decrease is due primarily to extraordinary expenditures in the
same period in the prior year. We anticipate that this expense will continue to
fluctuate, but will not increase significantly in 2010.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Interim Chief Financial Officer (the "Certifying
Officer") maintains a system of disclosure controls and procedures that is
designed to provide reasonable assurance that information, which is required to
be disclosed, is accumulated and communicated to management timely. Under the
supervision and with the participation of management, the Certifying Officer
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule [13a-14(c)/15d-14(c)] under the
Exchange Act) within 45 days prior to the filing date of this report. Based
upon that evaluation, the Certifying Officer concluded that our disclosure
controls and procedures are not effective in timely alerting them to material
information relative to our company required to be disclosed in our periodic
filings with the SEC.
Page 19
CHANGES IN INTERNAL CONTROLS
There were no changes in our internal control over financial reporting during
the quarter ended June 30, 2010, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
The following exhibits are filed as part of this quarterly report on Form 10-Q:
31.1 Certification of Chief Executive Officer and Interim Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Interim Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Page 20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 19, 2010 LEO MOTORS, INC.
(the registrant)
By: \s\Robert Kang
--------------
Robert Kang
Chief Executive Officer
and Interim Chief Financial Officer
Page 21