UNITED STATES
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: SeptemberJune 30, 20212022
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to_____________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 organization) | (I.R.S. Employer Identification No.) |
|
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 November 3, 2021August 5, 2022 is as follows:
Class of Securities | Shares Outstanding |
Common Stock, $0.001 par value |
|
LEATTCORPORATION
Quarterly Report on Form 10-QNine months ended SeptemberSix Months Ended June 30, 20212022
TABLE OF CONTENTS
- i -
LEATT CORPORATION
CONSOLIDATED BALANCE SHEETS
| ASSETS | ||||||
| September 30, 2021 | December 31, 2020 | |||||
| Unaudited | Audited | |||||
| Current Assets | ||||||
| Cash and cash equivalents | $ | 2,586,671 | $ | 2,967,042 | ||
| Short-term investments | 58,261 | 58,257 | ||||
| Accounts receivable, net | 17,164,890 | 7,173,829 | ||||
| Inventory, net | 14,678,324 | 9,670,036 | ||||
| Payments in advance | 1,757,165 | 805,098 | ||||
| Income tax refunds receivable | 0 | 2,964 | ||||
| Prepaid expenses and other current assets | 4,321,801 | 2,109,190 | ||||
| Total current assets | 40,567,112 | 22,786,416 | ||||
| Property and equipment, net | 3,178,888 | 3,052,276 | ||||
| Operating lease right-of-use assets, net | 1,539,698 | 285,932 | ||||
| Deferred tax asset, net | 78,700 | 78,700 | ||||
| Other Assets | ||||||
| Deposits | 33,553 | 33,699 | ||||
| Total Assets | $ | 45,397,951 | $ | 26,237,023 | ||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
| Current Liabilities | ||||||
| Accounts payable and accrued expenses | $ | 16,421,446 | $ | 8,008,925 | ||
| Operating lease liabilities, current | 399,314 | 207,824 | ||||
| Income taxes payable | 2,925,216 | 1,654,200 | ||||
| Short term loan, net of finance charges | 142,653 | 677,601 | ||||
| Total current liabilities | 19,888,629 | 10,548,550 | ||||
| Deferred compensation | 300,000 | 240,000 | ||||
| Operating lease liabilities, net of current portion | 1,140,384 | 78,108 | ||||
| Commitments and contingencies | 0 | 0 | ||||
| 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, 5,471,669 and 5,430,374 shares issued | ||||||
| and outstanding | 130,111 | 130,111 | ||||
| Additional paid - in capital | 8,393,178 | 8,338,158 | ||||
| Accumulated other comprehensive loss | (676,444 | ) | (562,700 | ) | ||
| Retained earnings | 16,219,093 | 7,461,796 | ||||
| Total stockholders' equity | 24,068,938 | 15,370,365 | ||||
| Total Liabilities and Stockholders' Equity | $ | 45,397,951 | $ | 26,237,023 | ||
The accompanying notes are an integral part of these consolidated financial statements
LEATT CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30 | September 30 | |||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||
| Unaudited | Unaudited | Unaudited | Unaudited | |||||||||
| Revenues | $ | 22,100,827 | $ | 11,370,946 | $ | 49,297,861 | $ | 25,855,950 | ||||
| Cost of Revenues | 12,571,692 | 6,422,472 | 27,523,233 | 14,129,516 | ||||||||
| Gross Profit | 9,529,135 | 4,948,474 | 21,774,628 | 11,726,434 | ||||||||
| Product Royalty Income | 58,246 | 36,016 | 141,535 | 40,675 | ||||||||
| Operating Expenses | ||||||||||||
| Salaries and wages | 975,676 | 784,131 | 2,813,024 | 2,251,583 | ||||||||
| Commissions and consulting expenses | 144,837 | 157,672 | 581,485 | 345,014 | ||||||||
| Professional fees | 510,713 | 181,233 | 971,969 | 716,138 | ||||||||
| Advertising and marketing | 633,915 | 543,020 | 1,669,648 | 1,524,251 | ||||||||
| Office lease and expenses | 99,314 | 78,932 | 273,887 | 225,132 | ||||||||
| Research and development costs | 468,922 | 404,723 | 1,319,183 | 1,129,535 | ||||||||
| Bad debt expense | 42,197 | 32,172 | 56,290 | 59,092 | ||||||||
| General and administrative expenses | 691,696 | 459,993 | 1,830,055 | 1,390,236 | ||||||||
| Depreciation | 265,777 | 212,564 | 744,713 | 595,365 | ||||||||
| Total operating expenses | 3,833,047 | 2,854,440 | 10,260,254 | 8,236,346 | ||||||||
| Income from Operations | 5,754,334 | 2,130,050 | 11,655,909 | 3,530,763 | ||||||||
| Other Income | ||||||||||||
| Interest and other income | 1,413 | 19,727 | 1,354 | 1,621 | ||||||||
| Total other income | 1,413 | 19,727 | 1,354 | 1,621 | ||||||||
| Income Before Income Taxes | 5,755,747 | 2,149,777 | 11,657,263 | 3,532,384 | ||||||||
| Income Taxes | 1,467,936 | 538,320 | 2,899,966 | 883,972 | ||||||||
| Net Income Available to Common Shareholders | $ | 4,287,811 | $ | 1,611,457 | $ | 8,757,297 | $ | 2,648,412 | ||||
| Net Income per Common Share | ||||||||||||
| Basic | $ | 0.79 | $ | 0.30 | $ | 1.61 | $ | 0.49 | ||||
| Diluted | $ | 0.69 | $ | 0.27 | $ | 1.42 | $ | 0.45 | ||||
| Weighted Average Number of Common Shares Outstanding | ||||||||||||
| Basic | 5,461,933 | 5,386,723 | 5,443,780 | 5,386,723 | ||||||||
| Diluted | 6,190,748 | 5,860,428 | 6,172,596 | 5,860,428 | ||||||||
| Comprehensive Income | ||||||||||||
| Net Income | $ | 4,287,811 | $ | 1,611,457 | $ | 8,757,297 | $ | 2,648,412 | ||||
| Other comprehensive income, net of $0 income taxes in 2021 and 2020 | ||||||||||||
Foreign currency translation | (146,285 | ) | 17,584 | (113,744 | ) | (239,806 | ) | |||||
| Total Comprehensive Income | $ | 4,141,526 | $ | 1,629,041 | $ | 8,643,553 | $ | 2,408,606 | ||||
The accompanying notes are an integral part of these consolidated financial statements
PART I
FINANCIAL INFORMATION
LEATT CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYAS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Preferred Stock A | Common Stock | Additional | Comprehensive | Retained | ||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid - In Capital | Loss | Earnings | Total | |||||||||||||||||
| Balance, January 1, 2021 | 120,000 | $ | 3,000 | 5,430,374 | $ | 130,111 | $ | 8,338,158 | $ | (562,700 | ) | $ | 7,461,796 | $ | 15,370,365 | |||||||||
| Compensation cost recognized in connection with stock options | - | - | - | - | 55,020 | - | - | 55,020 | ||||||||||||||||
| Options exercised on a cashless basis | - | - | 41,295 | - | - | - | - | - | ||||||||||||||||
| Net income | - | - | - | - | - | - | 8,757,297 | 8,757,297 | ||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (113,744 | ) | - | (113,744 | ) | ||||||||||||||
| Balance, September 30, 2021 | 120,000 | $ | 3,000 | 5,471,669 | $ | 130,111 | $ | 8,393,178 | $ | (676,444 | ) | $ | 16,219,093 | $ | 24,068,938 | |||||||||
| ASSETS | ||||||
| June 30, 2022 | December 31, 2021 | |||||
| Unaudited | Audited | |||||
| Current Assets | ||||||
| Cash and cash equivalents | $ | 4,949,771 | $ | 5,022,436 | ||
| Short-term investments | 58,263 | 58,262 | ||||
| Accounts receivable, net | 13,823,969 | 12,660,936 | ||||
| Inventory, net | 21,853,273 | 21,081,481 | ||||
| Payments in advance | 1,351,666 | 1,610,640 | ||||
| Prepaid expenses and other current assets | 3,449,089 | 4,178,427 | ||||
| Total current assets | 45,486,031 | 44,612,182 | ||||
| Property and equipment, net | 2,959,009 | 3,128,086 | ||||
| Operating lease right-of-use assets, net | 1,239,776 | 1,393,213 | ||||
| Other Assets | ||||||
| Deposits | 41,333 | 33,339 | ||||
| Total Assets | $ | 49,726,149 | $ | 49,166,820 | ||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
| Current Liabilities | ||||||
| Accounts payable and accrued expenses | $ | 7,967,771 | $ | 14,617,671 | ||
| Note payable, current | 88,950 | 83,270 | ||||
| Operating lease liabilities, current | 301,640 | 318,621 | ||||
| Income taxes payable | 3,442,038 | 2,738,818 | ||||
| Short term loan, net of finance charges | 227,180 | 975,025 | ||||
| Total current liabilities | 12,027,579 | 18,733,405 | ||||
| Deferred compensation | 360,000 | 320,000 | ||||
| Note payable, net of current portion | 147,423 | 189,249 | ||||
| Operating lease liabilities, net of current portion | 938,136 | 1,074,592 | ||||
| Deferred tax liability, net | 228,600 | 228,600 | ||||
| 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, 5,826,892 and 5,673,683 shares issued and outstanding | 130,280 | 130,162 | ||||
| Additional paid - in capital | 9,809,539 | 9,230,847 | ||||
| Accumulated other comprehensive loss | (904,316 | ) | (779,268 | ) | ||
| Retained earnings | 26,985,908 | 20,036,233 | ||||
| Total stockholders' equity | 36,024,411 | 28,620,974 | ||||
| Total Liabilities and Stockholders' Equity | $ | 49,726,149 | $ | 49,166,820 | ||
The accompanying notes are an integral part of these consolidated financial statementsstatements.
LEATT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWSOPERATIONS AND COMPREHENSIVE INCOME
| 2021 | 2020 | |||||
| Cash flows from operating activities | ||||||
| Net income | $ | 8,757,297 | $ | 2,648,412 | ||
| Adjustments to reconcile net income to net cash provided by | ||||||
| operating activities: | ||||||
| Depreciation | 744,713 | 595,365 | ||||
| Stock-based compensation | 55,020 | 65,942 | ||||
| Bad debts reserve | 32,423 | 47,639 | ||||
| Inventory reserve | 51,840 | (9,002 | ) | |||
| (Gain) Loss on sale of property and equipment | 5,767 | (25,046 | ) | |||
| (Increase) decrease in: | ||||||
| Accounts receivable | (10,023,484 | ) | (2,712,168 | ) | ||
| Inventory | (5,060,128 | ) | 1,792,014 | |||
| Payments in advance | (952,067 | ) | (457,097 | ) | ||
| Prepaid expenses and other current assets | (2,212,611 | ) | (719,419 | ) | ||
| Income tax refunds receivable | 2,964 | 0 | ||||
| Deposits | 146 | (5,949 | ) | |||
| Increase (decrease) in: | ||||||
| Accounts payable and accrued expenses | 8,412,521 | 582,176 | ||||
| Income taxes payable | 1,271,016 | 266,948 | ||||
| Deferred compensation | 60,000 | 60,000 | ||||
| Net cash provided by operating activities | 1,145,417 | 2,129,815 | ||||
| Cash flows from investing activities | ||||||
| Capital expenditures | (892,658 | ) | (697,625 | ) | ||
| Proceeds from sale of property and equipment | 0 | 25,745 | ||||
| Increase in short-term investments, net | (4 | ) | (16 | ) | ||
| Net cash used in investing activities | (892,662 | ) | (671,896 | ) | ||
| Cash flows from financing activities | ||||||
| Repayment of note payable to bank, net | 0 | (200,000 | ) | |||
| Proceeds from Paycheck Protection Program loan | 0 | 210,732 | ||||
| Repayments of short-term loan, net | (534,948 | ) | (504,577 | ) | ||
| Net cash used in financing activities | (534,948 | ) | (493,845 | ) | ||
| Effect of exchange rates on cash and cash equivalents | (98,178 | ) | (168,277 | ) | ||
| Net increase (decrease) in cash and cash equivalents | (380,371 | ) | 795,797 | |||
| Cash and cash equivalents - beginning of period | 2,967,042 | 2,072,864 | ||||
| Cash and cash equivalents - end of period | $ | 2,586,671 | $ | 2,868,661 | ||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||
| Cash paid for interest | $ | 21,741 | $ | 26,446 | ||
| Cash paid for income taxes | $ | 1,659,698 | $ | 616,148 | ||
| Other noncash investing and financing activities | ||||||
| Common stock issued for services | $ | 55,020 | $ | 65,942 |
| Three Months Ended | Six Months Ended | |||||||||||
| June 30 | June 30 | |||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||
| Unaudited | Unaudited | Unaudited | Unaudited | |||||||||
| Revenues | $ | 17,938,310 | $ | 14,300,559 | $ | 42,166,418 | $ | 27,197,034 | ||||
| Cost of Revenues | 10,294,238 | 8,107,020 | 24,895,256 | 14,951,541 | ||||||||
| Gross Profit | 7,644,072 | 6,193,539 | 17,271,162 | 12,245,493 | ||||||||
| Product Royalty Income | 46,971 | 58,479 | 125,810 | 83,289 | ||||||||
| Operating Expenses | ||||||||||||
| Salaries and wages | 1,325,177 | 912,811 | 2,623,139 | 1,837,348 | ||||||||
| Commissions and consulting expenses | 150,634 | 215,986 | 313,220 | 436,648 | ||||||||
| Professional fees | 79,653 | 123,501 | 338,768 | 461,256 | ||||||||
| Advertising and marketing | 746,114 | 518,153 | 1,360,004 | 1,035,733 | ||||||||
| Office lease and expenses | 193,878 | 87,200 | 400,899 | 174,573 | ||||||||
| Research and development costs | 480,843 | 445,156 | 1,014,543 | 850,261 | ||||||||
| Bad debt expense (recovery) | (13,969 | ) | (51,732 | ) | 4,355 | 14,093 | ||||||
| General and administrative expenses | 710,351 | 609,760 | 1,422,103 | 1,138,359 | ||||||||
| Depreciation | 287,943 | 242,401 | 564,867 | 478,936 | ||||||||
| Total operating expenses | 3,960,624 | 3,103,236 | 8,041,898 | 6,427,207 | ||||||||
| Income from Operations | 3,730,419 | 3,148,782 | 9,355,074 | 5,901,575 | ||||||||
| Other Income (Expenses) | ||||||||||||
| Interest and other expenses, net | (8,349 | ) | 3,948 | (2,192 | ) | (59 | ) | |||||
| Total other income (expenses) | (8,349 | ) | 3,948 | (2,192 | ) | (59 | ) | |||||
| Income Before Income Taxes | 3,722,070 | 3,152,730 | 9,352,882 | 5,901,516 | ||||||||
| Income Taxes | 995,150 | 744,082 | 2,403,207 | 1,432,030 | ||||||||
| Net Income Available to Common Shareholders | $ | 2,726,920 | $ | 2,408,648 | $ | 6,949,675 | $ | 4,469,486 | ||||
| Net Income per Common Share | ||||||||||||
| Basic | $ | 0.47 | $ | 0.44 | $ | 1.20 | $ | 0.82 | ||||
| Diluted | $ | 0.44 | $ | 0.39 | $ | 1.12 | $ | 0.72 | ||||
| Weighted Average Number of Common Shares Outstanding | ||||||||||||
| Basic | 5,815,285 | 5,438,686 | 5,790,510 | 5,434,553 | ||||||||
| Diluted | 6,255,537 | 6,172,686 | 6,230,763 | 6,168,553 | ||||||||
| Comprehensive Income | ||||||||||||
| Net Income | $ | 2,726,920 | $ | 2,408,648 | $ | 6,949,675 | $ | 4,469,486 | ||||
| Other comprehensive income, net of $0 deferred income taxes in 2022 and 2021 | ||||||||||||
| Foreign currency translation | (382,782 | ) | 60,893 | (125,048 | ) | 32,541 | ||||||
| Total Comprehensive Income | $ | 2,344,138 | $ | 2,469,541 | $ | 6,824,627 | $ | 4,502,027 | ||||
The accompanying notes are an integral part of these consolidated financial statementsstatements.
LEATT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2022
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Preferred Stock A | Common Stock | Additional | Comprehensive | Retained | ||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid - In Capital | Loss | Earnings | Total | |||||||||||||||||
| Balance, January 1, 2022 | 120,000 | $ | 3,000 | 5,673,683 | $ | 130,162 | $ | 9,230,847 | $ | (779,268 | ) | $ | 20,036,233 | $ | 28,620,974 | |||||||||
| Compensation cost recognized in connection with stock options | - | - | - | - | 82,530 | - | - | 82,530 | ||||||||||||||||
| Exercise of stock options | - | - | 118,000 | 118 | 255,682 | - | - | 255,800 | ||||||||||||||||
| Options exercised on a cashless basis | - | - | 35,209 | - | - | - | - | - | ||||||||||||||||
| Restricted stock awards | - | - | - | - | 240,480 | - | - | 240,480 | ||||||||||||||||
| Net income | - | - | - | - | - | - | 6,949,675 | 6,949,675 | ||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (125,048 | ) | - | (125,048 | ) | ||||||||||||||
| Balance, June 30, 2022 | 120,000 | $ | 3,000 | 5,826,892 | $ | 130,280 | $ | 9,809,539 | $ | (904,316 | ) | $ | 26,985,908 | $ | 36,024,411 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
LEATT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
| 2022 | 2021 | |||||
| Cash flows from operating activities | ||||||
| Net income | $ | 6,949,675 | $ | 4,469,486 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
| Depreciation | 564,867 | 478,936 | ||||
| Stock-based compensation | 323,010 | 55,020 | ||||
| Bad debts reserve | (7,871 | ) | 11,763 | |||
| Inventory reserve | 94,269 | 39,995 | ||||
| (Gain) loss on sale of property and equipment | (22,905 | ) | 5,767 | |||
| (Increase) decrease in: | ||||||
| Accounts receivable | (1,155,162 | ) | 2,077,870 | |||
| Inventory | (866,061 | ) | 3,478,553 | |||
| Payments in advance | 258,974 | (397,698 | ) | |||
| Prepaid expenses and other current assets | 729,338 | (3,989,785 | ) | |||
| Income tax refunds receivable | - | 2,964 | ||||
| Deposits | (7,994 | ) | (233 | ) | ||
| Increase (decrease) in: | ||||||
| Accounts payable and accrued expenses | (6,649,900 | ) | (5,377,741 | ) | ||
| Income taxes payable | 703,220 | 375,379 | ||||
| Deferred compensation | 40,000 | 40,000 | ||||
| Net cash provided by operating activities | 953,460 | 1,270,276 | ||||
| Cash flows from investing activities | ||||||
| Capital expenditures | (435,537 | ) | (191,443 | ) | ||
| Proceeds from sale of property and equipment | 42,773 | - | ||||
| Increase in short-term investments, net | (1 | ) | (2 | ) | ||
| Net cash used in investing activities | (392,765 | ) | (191,445 | ) | ||
| Cash flows from financing activities | ||||||
| Issuance of common stock | 255,800 | - | ||||
| Repayment of note payable to bank | (36,146 | ) | - | |||
| Repayment of short-term loan, net | (747,845 | ) | (317,720 | ) | ||
| Net cash used in financing activities | (528,191 | ) | (317,720 | ) | ||
| Effect of exchange rates on cash and cash equivalents | (105,169 | ) | 20,427 | |||
| Net increase (decrease) in cash and cash equivalents | (72,665 | ) | 781,538 | |||
| Cash and cash equivalents - beginning of period | 5,022,436 | 2,967,042 | ||||
| Cash and cash equivalents - end of period | $ | 4,949,771 | $ | 3,748,580 | ||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||
| Cash paid for interest | $ | 30,178 | $ | 16,379 | ||
| Cash paid for income taxes | $ | 1,699,987 | $ | 1,088,360 | ||
| Other noncash investing and financing activities | ||||||
| Common stock issued for services | $ | 323,010 | $ | 55,020 |
The accompanying notes are an integral part of these consolidated financial statements.
Note 1 - Basis of presentation
The consolidated balance sheet as of December 31, 20202021 was audited and appears in the Form 10-K filed by the Company with the Securities and Exchange Commission on March 24, 2021.10, 2022. The consolidated balance sheet as of SeptemberJune 30, 20212022 and the consolidated statements of operations and comprehensive income for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, changes in stockholders' equity for the ninesix months ended SeptemberJune 30, 2021,2022, cash flows for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, 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 SeptemberJune 30, 20212022 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, 20202021 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 was $168,431$210,452 at SeptemberJune 30, 20212022 and $116,591$116,183 at December 31, 2020.2021.
Note 3 - Operating Leases - Right-of-Use Assets and Lease Liability Obligations
The Company has five non-cancellablefour non-cancelable operating leases, four for office and warehousing space, and one for office machinery, that expireexpired in March 2022, April 2022, June 2022, and the other three expiring in June 2023, August 2023 and January 2027.2027, respectively. Rent expense for these operating leases is recognized over the term of the lease on a straight-line basis.
Below is a summary of the Company's Operating Right-of-Use Assets and Operating Lease liabilities as of SeptemberJune 30, 20212022 and December 31, 2020:2021:
| September | December | |||||||||||
| 30, 2021 | 31, 2020 | 2022 | 2021 | |||||||||
| Assets | ||||||||||||
| Operating lease ROU assets | $ | 1,539,698 | $ | 285,932 | $ | 1,239,776 | $ | 1,393,213 | ||||
| Liabilities | ||||||||||||
| Operating lease liabilities, current | $ | 399,314 | $ | 207,824 | $ | 301,640 | $ | 318,621 | ||||
| Operating lease liabilities, net of current portion | 1,140,384 | 78,108 | 938,136 | 1,074,592 | ||||||||
| Total operating lease liabilities | $ | 1,539,698 | $ | 285,932 | $ | 1,239,776 | $ | 1,393,213 | ||||
During the ninesix months ended SeptemberJune 30, 20212022 and 20202021 the Company recognized $164,097$189,954 and $150,110$108,997, respectively, in operating lease expenses, which are included in office lease and expenses in the Company's consolidated statements of operations and comprehensive income.
Generally, the Company's lease agreements do not specify an implicit rate. Therefore, the Company estimates the incremental borrowing rate, which is defined as the interest rate the Company would pay to borrow on a collateralized basis, considering such factors as length of lease term and the risks of the economic environment in which the leased asset operates. As of SeptemberJune 30, 2021,2022, and December 31, 20202021 the following disclosures for the remaining lease termterms and incremental borrowing rates were applicable:
| Supplemental disclosure | September 30, | December 31, |
| 2021 | 2020 | |
| Weighted average remaining lease term | 5 years | 2 years |
| Weighted average discount rate | 4.08% | 4.87% |
| Supplemental disclosure | June 30, 2022 | December 31, 2021 |
| Weighted average remaining lease term | 5 years | 5 years |
| Weighted average discount rate | 3.75% | 4.08% |
SeptemberJune 30, 20212022 were as follows:
| Year ended December 31, | Amounts under Operating Leases | Amounts under Operating Leases | ||||
| Remaining 2021 | 126,161 | |||||
| 2022 | 356,777 | |||||
| Remaining 2022 | $ | 149,366 | ||||
| 2023 | 273,449 | 293,329 | ||||
| 2024 | 281,664 | 281,663 | ||||
| 2025 | 290,098 | 290,098 | ||||
| 2026 | 298,792 | 298,791 | ||||
| 2027 | 25,455 | 25,455 | ||||
| Total minimum lease payments | $ | 1,652,396 | $ | 1,338,702 | ||
| Less: amount representing interest | $ | (112,698 | ) | $ | (98,926 | ) |
| Total operating lease liabilities | $ | 1,539,698 | $ | 1,239,776 | ||
Supplemental cash flow information for the ninesix months ended SeptemberJune 30, 20212022 and 20202021 are as follows:
| Nine Months | Nine Months | |||||||||||
| Ended | Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2021 | 2020 | Six months ended June 30, 2022 | Six months ended June 30, 2021 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 179,129 | $ | 165,228 | $ | 191,732 | $ | 119,300 | ||||
| Right-of-use assets obtained in exchange for lease obligations | $ | 1,418,719 | $ | 0 | $ | 41,163 | $ | 15,170 | ||||
Note 4 - Note Payable to BankRevolving line of Credit facility
On November 19, 2018, the Company entered into a $1,000,000 revolving line of credit agreement with a bank. Advances under the line of credit bear interest at the LIBOR Daily Floating Rate plus 2.5 percentage points commencing January 1, 2019. The line of credit matured on November 19, 2020, at which time the unpaid principal, interest, or other charges outstanding under the agreement were due and payable. On November 5, 2020, the Company executed an amendment to the line of credit agreement to extend the credit facility through November 19, 2021. The amendment took retroactive effect to October 27, 2020 and introduced an index floor so that payments for any future advances will bear interest at the greater of the LIBOR Daily Floating Rate or an Index Floor of 1.25 percentage points plus 2.5 percentage points. Obligations under the line of credit are secured by equipment and fixtures in the United States of America, accounts receivable and inventory of Leatt Corporation and Two-Eleven Distribution, LLC. On March 1, 2021, the Company executed an amendment to the line of credit. The amendment took retroactive effect to February 17, 2021 and extended the line of credit facility through February 28, 2022 and increased the revolving line of credit to $1,500,000. Effective January 21, 2022, the Company executed an amendment agreement for the line of credit to extend the line of credit facility through February 28, 2023, and to replace interest determined by LIBOR daily Floating Rate with the Bloomberg short-term Bank Yield Index Rate. As of SeptemberJune 30, 2022, and December 31, 2021, respectively there were no advances of the line of credit leaving $1,500,000 of the line of creditand $1,500,000 available for advance.advances.
Note 5 - 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 installments of $84,192$102,078 over eleven months including interest at 4.950%4.650% and the South African short-term loan is payable in monthly installments of $4,229,$5,754, over a ten-month period at a flat interest rate of 3.10%. The Company repaid the U.S. short-term loan in full on September 3, 2021.
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 on a sliding scale, in twelvetwo payments of $20,290$37,381, three payments of $1,172 and six payments of $326 at 4.350%6.360% annual interest rate.
Note 6 - Note payable
Two Eleven entered into a Note Payable with a bank effective December 17, 2021 in the principal amount of $272,519, secured by equipment. The Note is payable in 36 consecutive monthly installments of $7,990, including interest at a fixed rate of 3.5370%, commencing February 5, 2022, and continuing to January 5, 2025. As of June 30, 2022 and December 31, 2021, the amount of $236,373 and $272,519 were outstanding, respectively.
| June 30, | December 31, | |||||
| 2022 | 2021 | |||||
| Liabilities | ||||||
| Note payable, current | $ | 88,950 | $ | 83,270 | ||
| Note payable, net off current portion | 147,423 | 189,249 | ||||
| $ | 236,373 | $ | 272,519 |
Principal maturities of note payable as of June 30, 2022 were as follows:
| Year ended December 31, | Amounts under Notes Payable | ||
| Remaining 2022 | $ | 44,082 | |
| 2023 | 90,535 | ||
| 2024 | 93,790 | ||
| 2025 | 7,966 | ||
| $ | 236,373 |
Note 67 - Revenue and Cost Recognition
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 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.
OurThe Company's standard 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, however, in limited instances qualified distributors and dealers may be granted extended payment terms during selected order periods. In performing such evaluations, we utilize historical experience, sales performance, and credit risk requirements. 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 material 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:
| Nine months ended September 30, | Six months ended June 30, | |||||||||||||||||||||||
| 2021 | % of Revenues | 2020 | % of Revenues | 2022 | % of Revenues | 2021 | % of Revenues | |||||||||||||||||
| Consumer and athlete direct revenues | $ | 1,519,454 | 3% | $ | 1,851,441 | 7% | $ | 1,385,732 | 3% | $ | 1,137,597 | 4% | ||||||||||||
| Dealer direct revenues | 14,401,624 | 29% | 8,558,106 | 33% | 8,551,462 | 20% | 10,140,312 | 37% | ||||||||||||||||
| International distributor revenues | 33,376,783 | 68% | 15,446,403 | 60% | 32,229,224 | 77% | 15,919,125 | 59% | ||||||||||||||||
| $ | 49,297,861 | 100% | $ | 25,855,950 | 100% | $ | 42,166,418 | 100% | $ | 27,197,034 | 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 at SeptemberJune 30, 20212022 and December 31, 20202021 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 the expected credit losses determined utilizing historical experience and any specific customer collection issues that have been identified. In determining the amount of the allowance, the Company is required to make certain estimates and assumptions. Accounts receivable balances that are still outstanding after the Company used reasonable collection efforts are written off as uncollectible. While such credit losses have historically been minimal, within the Company's expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates as in the past. A significant change in the liquidity or financial position of any of the Company's significant customers could have a material adverse effect on the collectability of the Company's accounts receivable and future operating results. The allowance of doubtful accounts was $134,308$283,713 at SeptemberJune 30, 20212022 and $101,885$291,584 at December 31, 2020.2021.
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 expenseexpenses 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.
Note 78 - 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 SeptemberJune 30, 2021,2022, the Company has no unrecognized tax benefits.
Note 89 - 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 ninesix months ended SeptemberJune 30, 2021,2022, the Company had 800,035471,000 potential common shares, consisting of 120,000 preferred shares, and options to purchase 680,035351,000 shares, outstanding that were dilutive.
Note 910 - Common Stock
In August 2021,January 2022, the companyCompany issued 28,89578,000 shares of commonscommon stock to an employee who exercised stock options. In March 2022, the Company issued 40,000 shares of common stock to two employees who exercised stock options in a cashless exercise.options. In May 2021,2022, the Company issued 12,40035,209 shares of common stock to an employee who exercised stock options in a cashless exercise.
Stock-based compensation expense related to vested stock options during the ninesix months ended SeptemberJune 30, 20212022 was $55,020.$82,530. As of SeptemberJune 30, 2021,2022, there was $82,530$0 of unrecognized compensation cost related to unvested stock options, which is expectedoptions.
Stock-based compensation expense related to be recognized over a 1-year vesting period.vested restricted stock awards during the six months ended June 30, 2022 was $240,480. As of June 30, 2022, there was $240,480 of unrecognized compensation cost related to unvested restricted stock.
Note 1011 - Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements - In December 2019,November 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, Income TaxesAccounting Standard Update ("ASU") No. 2021-10 Government Assistance (Topic 740)832): "Simplifying the Accounting"Disclosures by Business Entities About Government Assistance," which requires entities to provide annual disclosures about transactions with a government that are accounted for Income Taxes", which is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 andapplying a grant or contribution model by clarifying and amending existing guidance to improve consistent application. Thisanalogy. The standard is effective in fiscal yearsfor annual periods beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted.2021. The Company adopted the new standard effective January 1, 2021,2022. The adoption of the standard had no impact on the Company's consolidated financial statements.
Accounting Pronouncements Not Yet Adopted - The Company evaluated all ASU's issued by the FASB for consideration of their applicability. ASU's not included in our disclosures were assessed and it diddetermined to be either not applicable or are not expected to have a material impact on the Company's consolidated financial statements.
Accounting Pronouncements Not Yet Adopted - In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued, subject to meeting certain criteria. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which adds implementation guidance to ASU 2020-04 to clarify certain optional expedients in Topic 848. The guidance in ASU 2020-04 and ASU 2021-01 was effective upon issuance and may generally be applied prospectively through December 31, 2022. The Company is evaluating the impact that adoption of this standard would have on the Company's consolidated financial statements.
Note 1112 - 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 1213 - Risks and Uncertainties
As the COVID-19 pandemic continues to evolve, the Company believes the extent of the impact to its operations will be primarily driven by the severity and duration of the pandemic, the pandemic's impact on the U.S. and global economies and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Due to strong consumer demand for outdoor product categories since the Companyinitial stages of the pandemic, we did not see any significant material negative impact of COVID-19 on the Company's results of operations for the ninesix months ended SeptemberJune 30, 2021.2022. The Company remains cautiously optimistic that ongoing efforts to increase the availability of new COVID-19 vaccines worldwide will mitigate the spread of the virus throughout Europe and the U.S. (our largest markets) and bring about an end to global quarantines. The continued mutation and spread of the virus, economic headwinds caused by global quarantines or the occurrence of any other catastrophic events, could have a negative impact on sales revenue for the coming periods and beyond.
Note 1314 - Subsequent Events
The Company has evaluated all subsequent events through the date the financial statements were released.
The Company entered into a Premium Finance Agreement with AFCO Acceptance Corporation "AFCO" dated October 29, 2021, to finance its U.S short-term insurance over the period of coverage. The Company is obligated to pay AFCO an aggregate sum of $1,122,858 in eleven payments of $102,078, at an annual interest rate of 4.650% commencing on November 1, 2021 and ending on September 1, 2022. Any late payment during the term of the agreement will be assessed by 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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, performance or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors" in our latest annual report on Form 10-K filed with the SEC. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements include, among other things, statements relating to:
• our expectations regarding growth in the motor sports market;
• our expectation regarding increasing demand for protective equipment used in the motor sports market;
• our belief that we will be able to effectively compete with our competitors and increase our market share;
• our expectations with respect to increased revenue growth and our ability to achieve profitability resulting from increases in our production volumes; and
• our future business development, results of operations and financial condition.
Use of Certain Defined Terms
Except as otherwise indicated by the context, references in this 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 Prop;
•"Leatt Prop" refers to Leatt Prop (Pty) Ltd, a South African Company incorporated under the laws of South Africa with registration number: 2022/523867/07;
•
"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 Nevada Limited Liability Company;
•
"Three Eleven" are to Three Eleven Distribution (Pty) Limited, a dormant South African Company that was deregistered on October 11, 2021;
"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-ownedwholly- owned by The Leatt Family Trust, of which Dr. Christopher J. Leatt, the Company's chairman, is a Trustee and Beneficiary; and
•
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Overview of ourOur 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 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 3 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. Depending on the market we have other certifications outside of CE. For the US market our motorcycle helmets comply with the DOT (FMVSS 218) helmet safety standard and our bicycle helmet complies with EN1078, as well as CPSC 1203. Our downhill specific bicycle helmets also comply with ASTM F1952. For our Australian Market our bicycle helmet complies with AS/NZS 2063. For the UK market our motorcycle helmets comply with ACU Gold and our GPXMoto 3.5 helmet with JIS T 8133 for the Japanese Market. We are currently inFor the process of applying to certifyBrazilian market our Moto 7.5 and Moto 3.5 helmet and latest helmet model, Moto 7.5, to the CCC standard in China and thehelmets comply with NBR 7471 standard in Brazil.7471.
Our products are predominately manufactured in China under outsourcein accordance with our manufacturing specifications, pursuant to outsourced manufacturing arrangements with third-party manufacturers located there, subject tobased on agreed standard terms. We are also building manufacturing capacity outside China, namely, in Thailand and Bangladesh. The Company utilizes outside consultants and its own employees to ensure the quality of its products through regular on-site product inspections. Products sold to our international customers are usually shipped directly from our consolidation warehouse or manufacturers' warehouses to customers or their import agents.
Leatt earns revenues through the sale of its products through approximately 55 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 dealers 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., Asia 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 may impact levels of consumer spending in the foreseeable future. If demand for our products fluctuates as a result of these economic conditions or otherwise, our revenue and gross margin could be harmed.
•
Trade Restrictions - We engage in international manufacturing and sales which exposes us to trade restrictions and disruptions that could harm our business and competitive position. Most of our products are manufactured in China, and the U.S. administration has announced tariffs on certain productproducts imported into the United States with China as the country of origin. While these tariffs have not had a significant impact on the shipment of our products to international markets as at SeptemberJune 30, 2021,2022, we believe that the future imposition of, or significant increases in, the level of tariffs, custom duties, export quotas and other barriers and restrictions by the U.S. on China or other countries could disrupt our supply chain, increase the cost of our raw materials and therefore our pricing, and impose the burdens of compliance with foreign trade laws, any of which could potentially affect our bottom line and sales. While we are in continuous discussions with our manufacturers to ensure there are contingencies in place, we cannot assure you that we will not be adversely affected by changes in the trade laws of foreign jurisdictions where we sell and seek to sell our products.
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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®Leatt-Brace® product liability lawsuit to be tried in the United States. The plaintiffs in that case had alleged that defective product design and failure to warn had caused a motocross rider to suffer multiple mid-thoracic spine fractures, causing immediate and permanent paraplegia, when he crashed at a relatively low speed on February 13, 2011. When the accident occurred, he was wearing a helmet and other safety gear from several different companies, including the Company's acclaimed Leatt-Brace®. The Company produced evidence at trial showing that his thoracic paraplegia was an unavoidable consequence of his fall, not the result of wearing a Leatt- Brace®Leatt-Brace®, and that the neck brace likely saved his life (or saved him from quadriplegia) by preventing cervical spine injury. The Company had maintained from the onset that this and a small handful of other lawsuits are without merit and that it would vigorously defend itself in each case. In this case, the plaintiffs subsequently appealed the 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 70%78% of our sales isare 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.
•
Natural or Man-made Catastrophic Events - We are exposed to natural or man-made catastrophic events that may disrupt our business and may reduce consumer demand for our products. A disruption or failure of our systems or operations in the event of a natural disaster, health pandemic, such as the outbreak and global spread of COVID-19 or the coronavirus, or a man-made catastrophic event could cause delays in completing sales, continuing production or performing other critical functions of our business, particularly if a catastrophic event occurred at our primary manufacturing locations or our distributor locations worldwide. Any of these events could severely affect our ability to conduct normal business operations and, as a result, our operating results could be adversely affected. There may also be secondary impacts that are unforeseeable, such as impacts on our consumers and on consumer purchasing behavior, which could cause delays in new orders, delays in completing sales or even order cancellations. As the COVID-19 pandemic continues to evolve, we believe the extent of the impact to our operations will be primarily driven by the severity and duration of the pandemic, the pandemic's impact on the U.S. and global economies and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Due to strong consumer demand for outdoor product categories since the initial stages of the pandemic, we did not see any significant material negative impact of COVID-19 on the Company's results of operations for the quartersix months ended SeptemberJune 30, 2021.2022. We remain cautiously optimistic that ongoing efforts to increase the availability of new COVID-19 vaccines worldwide will mitigate the spread of the virus throughout Europe and the U.S. (our largest markets) and bring about an end to global quarantines. The continued mutation and spread of the virus, economic headwinds caused by global quarantines, or the occurrence of any other catastrophic events, could have a negative impact on our sales revenue for the coming periods and beyond.
•Conflict in Ukraine - We are exposed to conflicts that may disrupt our business and may reduce consumer demand for our products. A disruption or failure of our systems, government sanctions or operations in the event of a conflict could directly affect consumer demand for our products, cause delays in completing sales, shipping of our products, continuing production or performing other critical functions of our business, particularly if a conflict occurs at our primary manufacturing locations or our distributor locations worldwide. Furthermore, a prolonged conflict may have unintended global consequences such as increased inflation, fuel and transportation costs. While we have conducted due diligence on our customers in Russia to ensure that they do not fall into any sanctioned categories, we have seen a delay in the receipt of receivables in our bank account from the distributors of our products in Russia caused by enhanced screening of Russian funds in compliance with global sanctions against Russia for the war in Ukraine. The prolonging or expansion of the conflict could have an adverse impact on our consumers and on consumer purchasing behavior, and result in delays of new orders and completing sales, order cancellations, or payment and shipping delays. We will continue to monitor this fluid situation and any adverse impact that it may have on the global economy in general and on our business operations and especially that of our customers in particular, and we will develop contingencies as necessary to address any disruptions to our business operations as they arise.
•Rising Freight Shipping and Logistics Costs - The economic disruption resulting from the COVID-19 pandemic has had an adverse impact on the global freight shipping industry and on the cost of shipping our products to our global network of distributors, dealers and customers, or their import agents, from warehouses in China. Over the past year, the strong rise in demand for Chinese exports has outpaced the availability of containers in Asia, creating a container shortage and huge backlogs in many freight markets around the world, including the U.S., the Middle East, and East Asia. These container shortages at Asian ports have exacerbated supply bottlenecks and further increased shipping costs, by up to 400% in some regions, as companies in Asia are reported to be paying premium rates to get containers back. Further compounding matters is the shortage of dockworkers and truck drivers available to load and unload containers at ports in Europe and the U.S. and to move them to other locations, resulting in congested ports. We are working closely with our supply chain management in Asia, our logistics service providers, and our freight forwarders, to streamline our global shipping and logistics processes, to mitigate any disruption to our operations. Continued disruption and pricing volatility in the global shipping and logistics industry could have a negative impact on our results of operations for the coming periods and beyond.
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-three and nine-monthsix-month periods ended SeptemberJune 30, 20212022 and 20202021 included herein.
Comparison of Three Months Ended SeptemberJune 30, 20212022 and 2020Three Months Ended June 30, 2021
The following table summarizes the results of our operations during the three-month periodsthree months ended SeptemberJune 30, 20212022 and 20202021 and provides information regarding the dollar and percentage increase or (decrease) in such periods:
| Three Months Ended September 30, | Percentage | |||||||||||
| 2021 | 2020 | $ Increase | Increase | |||||||||
| Item | (Decrease) | (Decrease) | ||||||||||
| REVENUES | $ | 22,100,827 | $ | 11,370,946 | $ | 10,729,881 | 94% | |||||
| COST OF REVENUES | 12,571,692 | 6,422,472 | $ | 6,149,220 | 96% | |||||||
| GROSS PROFIT | 9,529,135 | 4,948,474 | $ | 4,580,661 | 93% | |||||||
| PRODUCT ROYALTY INCOME | 58,246 | 36,016 | $ | 22,230 | 62% | |||||||
| OPERATING EXPENSES | ||||||||||||
| Salaries and Wages | 975,676 | 784,131 | $ | 191,545 | 24% | |||||||
| Commissions and Consulting | 144,837 | 157,672 | $ | (12,835 | ) | -8% | ||||||
| Professional Fees | 510,713 | 181,233 | $ | 329,480 | 182% | |||||||
| Advertising and Marketing | 633,915 | 543,020 | $ | 90,895 | 17% | |||||||
| Office Lease and Expenses | 99,314 | 78,932 | $ | 20,382 | 26% | |||||||
| Research and Development Costs | 468,922 | 404,723 | $ | 64,199 | 16% | |||||||
| Bad Debt Expense | 42,197 | 32,172 | $ | 10,025 | 31% | |||||||
| General and Administrative | 691,696 | 459,993 | $ | 231,703 | 50% | |||||||
| Depreciation | 265,777 | 212,564 | $ | 53,213 | 25% | |||||||
| Total Operating Expenses | 3,833,047 | 2,854,440 | $ | 978,607 | 34% | |||||||
| INCOME FROM OPERATIONS | 5,754,334 | 2,130,050 | $ | 3,624,284 | 170% | |||||||
| Other Income | 1,413 | 19,727 | $ | (18,314 | ) | -93% | ||||||
| INCOME BEFORE INCOME TAXES | 5,755,747 | 2,149,777 | $ | 3,605,970 | 168% | |||||||
| Income Taxes | 1,467,936 | 538,320 | $ | 929,616 | 173% | |||||||
| NET INCOME | $ | 4,287,811 | $ | 1,611,457 | $ | 2,676,354 | 166% | |||||
| Three Months Ended June 30, | Percentage | |||||||||||
| 2022 | 2021 | Increase | Increase | |||||||||
| Item | (Decrease) | (Decrease) | ||||||||||
| REVENUES | $ | 17,938,310 | $ | 14,300,559 | $ | 3,637,751 | 25% | |||||
| COST OF REVENUES | 10,294,238 | 8,107,020 | $ | 2,187,218 | 27% | |||||||
| GROSS PROFIT | 7,644,072 | 6,193,539 | $ | 1,450,533 | 23% | |||||||
| PRODUCT ROYALTY INCOME | 46,971 | 58,479 | $ | (11,508 | ) | -20% | ||||||
| OPERATING EXPENSES | ||||||||||||
| Salaries and Wages | 1,325,177 | 912,811 | $ | 412,366 | 45% | |||||||
| Commissions and Consulting | 150,634 | 215,986 | $ | (65,352 | ) | -30% | ||||||
| Professional Fees | 79,653 | 123,501 | $ | (43,848 | ) | -36% | ||||||
| Advertising and Marketing | 746,114 | 518,153 | $ | 227,961 | 44% | |||||||
| Office Lease and Expenses | 193,878 | 87,200 | $ | 106,678 | 122% | |||||||
| Research and Development Costs | 480,843 | 445,156 | $ | 35,687 | 8% | |||||||
| Bad Debt Recovery | (13,969 | ) | (51,732 | ) | $ | 37,763 | 73% | |||||
| General and Administrative | 710,351 | 609,760 | $ | 100,591 | 16% | |||||||
| Depreciation | 287,943 | 242,401 | $ | 45,542 | 19% | |||||||
| Total Operating Expenses | 3,960,624 | 3,103,236 | $ | 857,388 | 28% | |||||||
| INCOME FROM OPERATIONS | 3,730,419 | 3,148,782 | $ | 581,637 | 18% | |||||||
| Other Income (Expenses) | (8,349 | ) | 3,948 | $ | (12,297 | ) | -311% | |||||
| INCOME BEOFRE INCOME TAXES | 3,722,070 | 3,152,730 | $ | 569,340 | 18% | |||||||
| Income Taxes | 995,150 | 744,082 | $ | 251,068 | 34% | |||||||
| NET INCOME | $ | 2,726,920 | $ | 2,408,648 | $ | 318,272 | 13% | |||||
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 monthsquarter ended SeptemberJune 30, 20212022 were $22.10$17.94 million, a 94%25% increase, compared to revenues of $11.37$14.30 million for the quarter ended SeptemberJune 30, 2020. Revenues associated with international customers were $17.79 million and $7.11 million, or 81% and 63% of revenues, respectively, for the three months ended September 30, 2021 and 2020.2021. This increase in globalworldwide revenues is primarily attributable to a $6.58$0.94 million increase in body armor sales, a $1.52$1.35 million increase in neck bracehelmet sales and a $1.51$1.61 million increase in the sales of other products, parts and accessories, that were partially offset by a $0.26 million decrease in neck brace sales. Revenues associated with international customers were $13.91 million and a $1.12$9.58 million, increase in helmet sales.or 78% and 67% of revenues, respectively, for the quarters ended June 30, 2022 and 2021, respectively.
The following table sets forth our revenues by product line for the three monthsquarter ended SeptemberJune 30, 20212022 and 2020:2021:
| Three months ended September 30 | Three months ended June 30, | |||||||||||||||||||||||
| 2021 | % of Revenues | 2020 | % of Revenues | 2022 | % of Revenues | 2021 | % of Revenues | |||||||||||||||||
| Neck braces | $ | 2,708,364 | 12% | $ | 1,185,879 | 10% | $ | 1,314,710 | 7% | $ | 1,578,424 | 11% | ||||||||||||
| Body armor | 12,365,185 | 56% | 5,788,786 | 51% | 9,511,878 | 53% | 8,568,017 | 60% | ||||||||||||||||
| Helmets | 2,320,111 | 11% | 1,203,038 | 11% | 2,377,878 | 13% | 1,025,318 | 7% | ||||||||||||||||
| Other products, parts and accessories | 4,707,167 | 21% | 3,193,243 | 28% | 4,733,844 | 27% | 3,128,800 | 22% | ||||||||||||||||
| $ | 22,100,827 | 100% | $ | 11,370,946 | 100% | $ | 17,938,310 | 100% | $ | 14,300,559 | 100% | |||||||||||||
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Sales of our flagship neck brace accounted for $2.71$1.31 million and $1.19$1.58 million, or 12%7% and 10%11% of our revenues for the quarters ended SeptemberJune 30, 2022 and 2021, and 2020, respectively. This 128% increaseThe 17% decrease in neck brace salesrevenues is primarily attributable to a 181% increase17% decrease in the volume of neck braces sold to our customers worldwide as demand for our neck braces continues to increase.in the United States and abroad during the 2022 period.
Our body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes. Body armor sales accounted for $12.37$9.51 million and $5.79$8.57 million, or 56%53% and 51%60% of our revenues for the quarters ended SeptemberJune 30, 20212022 and 2020,2021, respectively. The 114%11% increase in body armor revenues during the 2021 third2022 second quarter is primarily the result of a 101% increase in the volume of upper body protectors sold during the period due to continued globalstrong demand for our range of body protectors. This demand has resulted in significant restocking orders from our customers around the world, with encouraging sales of our growing footwear category consisting of off-road motorcycle boots and mountain biking shoes continuing to exceed our expectations.upper body protective gear globally.
Our helmets accounted for $2.32 million or 11% of our revenues for the three months ended September 30, 2021, as compared to $1.20 million or 11% of our revenues for the same 2020 period. The 93% increase in helmet sales during the 2021 third quarter is primarily due to a 149% increase in the volume of helmets sold globally during the 2021 period.
Our other products, parts and accessories are comprised of goggles, hydration bags and apparel items including jerseys, pants, shorts, and jackets as well as aftermarket support items required primarily to replace worn or damaged parts through our global distribution network. Other products, parts and accessories sales accounted for $4.71$2.38 million and $3.19$1.03 million or 21%13% and 28%7% of our revenues for the quarters ended SeptemberJune 30, 20212022 and 2020,2021, respectively. The 47%132% increase in revenues from the sale of other products, parts, and accessorieshelmet sales during the 2021 third2022 second quarter is primarily due to a 189%strong increase in the sales volume of mountain biking apparel sold during the period as consumer demandour expanded and redesigned MOTO helmet line up for our cutting-edge mountain biking gear continues to surge around the world.
Product Royalty Income - Product royalty income is earned on sales to distributors that have royalty agreements in place, as well as on sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the quarters ended September 30, 2021 and 2020 were $58,246 and $36,016, respectively. The 62% increase in product royalty income is due to an increase in the sale of licensed products by licensees in the 2021 period.
Salaries and Wages - Salaries and wages for the quarters ended September 30, 2021 and 2020 were $975,676 and $784,131, respectively. This 24% increase in salaries and wages during the 2021 period was primarily due to the employment of marketing and sales personnel in North and South America, as the Company continues to build a team of high performing sales and brand management professionals.
Commissions and Consulting Expense - During the quarters ended September 30, 2021 and 2020, commissions and consulting expenses were $144,837 and $157,672, respectively. This 8% decrease in commissions and consulting expenses is primarily due to a decrease in commissions paid to employees and outside sales personnel in the United States. Container shortages and congestion at major shipping ports globally and particularly in the United States resulted in a temporary delay in the shipment and ultimate receipt of stock available for sale which affected the achievement of sales targets for the third quarter of 2021.
Professional Fees - Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection and product liability litigation and settlement expenses incurred as the Company continues to expand. Professional fees for the quarters ended September 30, 2021 and 2020 were $510,713 and $181,233, respectively. This 182% increase in professional fees is primarily due to an increase in product liability litigation settlement costs during the third quarter of 2021.
Advertising and Marketing - The Company places paid advertising in various motorsport magazines and online media, and sponsors a number of events, teams and individuals to increase product and brand visibility. Advertising and marketing expenses for the quarters ended September 30, 2021 and 2020 were $633,915 and $543,020, respectively. The 17% increase in advertising and marketing expenditures during the 2021 period is primarily due to an increase in global coordinated marketing activities undertaken by our distribution partners. The Company successfully partnered with its global distribution partners in a cost sharing initiative in order to create global, synchronized brand building and product launch campaigns during the 2021 period.
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Office Lease and Expenses - Office lease and expenses for the quarters ended September 30, 2021 and 2020 were $99,314 and $78,932, respectively. This 26% increase in office lease and expenses during the 2021 period was primarily due to an increase in warehouse lease expenditure in the United States in line with additional storage required as the company continues to expand its assortment of exceptional protective gear.
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 September 30, 2021 increased to $468,922, from $404,723, during the same 2020 quarter. The 16% increase during the 2021 third quarter is primarily as a result of the employment of product design, development and engineering professionals with specific industry competence in order to continue the development of a refined and expanded pipeline of exceptional cutting-edge products.
Bad Debt Expense - Bad debt expense for the quarters ended September 30, 2021 and 2020 were $42,197 and $32,172, respectively. The 31% increase in bad debt expense is primarily the result of an increase in the provision for doubtful accounts during the 2021 period, in line with an increase in accounts receivable balances at Two Eleven Distribution in the United States at September 30, 2021 when compared to June 30, 2021.
General and Administrative Expenses - General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the quarters ended September 30, 2021 and 2020 were $691,696 and $459,993, respectively. The 50% increase in general and administrative expenses is primarily due to an increase in product liability insurance premiums incurred during the third quarter of 2021 as a result of exceptional sales growth achieved in the United States for the 12 months ended September 30, 2021.
Depreciation Expense - Depreciation expense for the quarters ended September 30, 2021 and 2020 were $265,777 and $212,564, respectively. This 25% increase in depreciation during the 2021 third quarter is primarily due to the addition of molds and tooling utilized in the production of the Company's rapidly expanding product offering
Total Operating Expenses - Total operating expenses increased by $978,607 to $3.83 million in the three months ended September 30, 2021, or 34%, compared to $2.85 million in the 2020 period. This increase is primarily due to the increase in professional fees, general and administrative costs and salaries and wages discussed above.
Net income - The net income after income taxes for the quarter ended September 30, 2021 was $4.29 million, as opposed to a net income of $1.61 million for the quarter ended September 30, 2020. This increase in net income is primarily due to the increase in revenues and gross profit discussed above.
Comparison of Nine Months ended September 30, 2021 and 2020
The following table summarizes the results of our operations during the nine-month periods ended September 30, 2021 and 2020 and provides information regarding the dollar and percentage increase or (decrease) in such periods:
18
| Nine Months Ended September 30, | Percentage | |||||||||||
| 2021 | 2020 | $ Increase | Increase | |||||||||
| Item | (Decrease) | (Decrease) | ||||||||||
| REVENUES | $ | 49,297,861 | $ | 25,855,950 | $ | 23,441,911 | 91% | |||||
| COST OF REVENUES | 27,523,233 | 14,129,516 | $ | 13,393,717 | 95% | |||||||
| GROSS PROFIT | 21,774,628 | 11,726,434 | $ | 10,048,194 | 86% | |||||||
| PRODUCT ROYALTY INCOME | 141,535 | 40,675 | $ | 100,860 | 248% | |||||||
| OPERATING EXPENSES | ||||||||||||
| Salaries and Wages | 2,813,024 | 2,251,583 | $ | 561,441 | 25% | |||||||
| Commissions and Consulting | 581,485 | 345,014 | $ | 236,471 | 69% | |||||||
| Professional Fees | 971,969 | 716,138 | $ | 255,831 | 36% | |||||||
| Advertising and Marketing | 1,669,648 | 1,524,251 | $ | 145,397 | 10% | |||||||
| Office Lease and Expenses | 273,887 | 225,132 | $ | 48,755 | 22% | |||||||
| Research and Development Costs | 1,319,183 | 1,129,535 | $ | 189,648 | 17% | |||||||
| Bad Debt Expense | 56,290 | 59,092 | $ | (2,802 | ) | -5% | ||||||
| General and Administrative | 1,830,055 | 1,390,236 | $ | 439,819 | 32% | |||||||
| Depreciation | 744,713 | 595,365 | $ | 149,348 | 25% | |||||||
| Total Operating Expenses | 10,260,254 | 8,236,346 | $ | 2,023,908 | 25% | |||||||
| INCOME FROM OPERATIONS | 11,655,909 | 3,530,763 | $ | 8,125,146 | 230% | |||||||
| Other Expenses | 1,354 | 1,621 | $ | (267 | ) | 16% | ||||||
| INCOME BEFORE INCOME TAXES | 11,657,263 | 3,532,384 | $ | 8,124,879 | 230% | |||||||
| Income Taxes | 2,899,966 | 883,972 | $ | 2,015,994 | 228% | |||||||
| NET INCOME | $ | 8,757,297 | $ | 2,648,412 | $ | 6,108,885 | 231% | |||||
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 nine-month period ended September 30, 2021 were $49.30 million, a 91% increase, compared to revenues of $25.86 million for the period ended September 30, 2020. Revenues generated from salesoff-road motorcycle use to our customers in the United States increased from $9.73 million to $14.79 million, for the nine months ended September 30, 2021 and 2020, respectively. Revenues associated with international customers were $34.51 million and $16.13 million, or 70% and 62% of revenues, respectively, for the nine months ended September 30, 2021 and 2020. This increase in global revenues during the 2021 period is attributable to a $14.30 million increase in body armor sales, a $4.12 million increase in sales of other products, parts and accessories, a $2.64 million increase in neck brace sales and a $2.41 million increase in helmet sales.abroad.
The following table sets forth our revenues by product line for the nine months ended September 30, 2021 and 2020:
| Nine months ended September 30, | ||||||||||||
| 2021 | % of Revenues | 2020 | % of Revenues | |||||||||
| Neck braces | $ | 6,224,054 | 13% | $ | 3,579,838 | 14% | ||||||
| Body armor | 28,309,938 | 57% | 14,040,660 | 54% | ||||||||
| Helmets | 4,886,324 | 10% | 2,475,167 | 10% | ||||||||
| Other products, parts and accessories | 9,877,545 | 20% | 5,760,285 | 22% | ||||||||
| $ | 49,297,861 | 100% | $ | 25,855,950 | 100% | |||||||
19
Sales of our flagship neck brace accounted for $6.22 million and $3.58 million, or 13% and 14% of our revenues for the nine-month periods ended September 30, 2021 and 2020, respectively. The 74% increase in neck brace revenues is primarily attributable to a 67% increase in the volume of neck braces sold to our customers globally as demand for neck braces continues to grow.
Our body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes. Body armor sales accounted for $28.31 million and $14.04 million, or 57% and 54% of our revenues for the nine-month period ended September 30, 2021 and 2020, respectively. The 102% increase in body armor revenues was primarily the result of a 75% increase in the volume body armor sold during the period. There is a continued worldwide demand for our line of premium, athlete-tested upper body and limb protectors designed for off-road motorcycle and mountain biking use and continued encouraging shipments of our growing footwear category consisting of off-road motorcycle boots and mountain biking shoes.
Our Helmets accounted for $4.89 million and $2.48, or 10% and 10% of our revenues for the nine months ended September 30, 2021 and 2020, respectively. The 97% increase in helmet sales during the 2021 period is primarily due to a 126% increase in the volume of helmets sold globally during the period.
Our other products, parts and accessories are comprised of goggles, hydrations bags and apparel items including jerseys, pants, shorts and jackets as well as aftermarket support items required primarily to replace worn or damaged parts through our global distribution network. Other products, parts and accessories sales accounted for $9.88$4.73 million and $5.76$3.13 million, or 20%27% and 22% of our revenues for the nine monthsquarters ended SeptemberJune 30, 20212022 and 2020,2021, respectively. The 71%51% increase in revenues from the sale of other products, parts and accessories during the 2022 second quarter is primarily due to a 135% increase in the volumecontinued strong sales of ridingour MOTO and MTB technical apparel designed for off-road motorcycle and mountain biking use, during the 2021 period, as consumers around the world continue to recognize our apparel as a premium, cutting edge offering designed for professional and recreational use. respectively.
Cost of Revenues and Gross Profit - Cost of revenues for the nine-month periodsquarters ended SeptemberJune 30, 2022 and 2021 and 2020 were $27.52$10.29 million and $14.13$8.11 million, respectively. Gross Profit for the nine-month periodsquarters ended SeptemberJune 30, 2022 and 2021 and 2020 were $21.77$7.64 million and $11.73$6.19 million, respectively, or 44%43% and 45%43% of revenues, respectively. Ourneck braceproducts continue to generate a higher gross profit margin than our other product categories. NeckAlthough neck brace revenues accounted for 13%7% and 14%11% of our revenues for the nine-monthquarters ended June 30, 2022 and 2021, respectively our gross profit remained consistent with the 2021 period ended September 30, 2021due to a stabilization in global and 2020, respectively, and globaldomestic shipping and logistic cost increases contributed to an increase in our cost of sales during the 2021 period.logistics costs.
Product Royalty Income - Product royalty income is earned on sales to distributors that have royalty agreements in place, as well as on sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the nine-month periodquarters ended SeptemberJune 30, 2022 and 2021 were $46,971 and 2020 were $141,535 and $40,675,$58,479, respectively. The 248% increase20% decrease in product royalty income is due to an increasea decrease in the sale of licensed products by licensees induring the 20212022 period.
Salaries and Wages - Salaries and wages for the nine-month periodquarters ended SeptemberJune 30, 2022 and 2021 were $1,325,177 and 2020 were $2,813,024 and $2,251,583,$912,811, respectively. This 25%The 45% increase in salaries and wages during the 20212022 period was primarily due to the employment of additional sales professionals and marketingoperational warehousing staff in the United States as we continue to expand and build our selling activities domestically in order to facilitate growth. Additionally, share compensation costs relating to a share issuance made to key personnel contributed to the increase in Northsalaries and South America duringwages for the 2021 period, and the temporary staff cost reduction measures implemented by the Company during the second quarter of 2020, in an effort to partially mitigate the potential effects of the COVID-19 pandemic.2022 period.
Commissions and Consulting Expense - During the nine-month periodsquarters ended SeptemberJune 30, 20212022 and 2020,2021, commissions and consulting expenses were $581,485$150,634 and $345,014,$215,986, respectively. This 69% increaseThe 30% decrease in commissions and consulting expenses during the 2021 period is primarily due to an increasethe result of a decrease in commissions and performance incentives paid to both employeein-house and external sales personnelrepresentatives in the United States asin line with a result of the achievement of significantdecrease in sales growth in the region during the 2021 period.region.
Professional Fees - Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection and product liability litigation and settlement expenses incurred as the Company continues to expand. Professional fees for the nine-month periodsquarters ended SeptemberJune 30, 2022 and 2021 were $79,653 and 2020$123,501, respectively. The 36% decrease in professional fees is primarily due to a decrease in patent development and product liability litigation expenses incurred during the 2022 period.
Advertising and Marketing - The Company places paid advertising in various motorsport and bicycle magazines and online media and sponsors a number of events, professional teams and individuals to increase product and brand visibility globally. Advertising and marketing expenses for the quarters ended June 30, 2022 and 2021 were $971,969$746,114 and $716,138,$518,153, respectively. This 36%The 44% increase in advertising and marketing expenditure during the 2022 period is primarily due to the production, execution and distribution of global marketing campaigns that incorporate athlete sponsorships, event attendance, campaign activation and coordinated digital marketing activities designed to market the Company's growing product offering and increase global consumer engagement.
Office Lease and Expenses - Office lease and expenses for the quarters ended June 30, 2022 and 2021 were $193,878 and $87,200, respectively. The 122% increase in office lease and expenses during the 2022 period is primarily due to additional warehouse storage rented in the United States as the Company continues to expand its Reno, Nevada warehouse to accommodate storage of its expanding line up of exceptional protective gear.
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, 2022, increased to $480,843, from $445,156 during the same 2021 quarter. The 8% increase in research and development costs during the 2022 second quarter is primarily due to the employment of professional product development, engineering and design personnel in order to continue the refinement of the Company's widening product categories and the expansion of our pipeline of exceptional cutting-edge products.
Bad Debt Recovery - Bad debt recovery for the quarters ended June 30, 2022 and 2021 were $13,969 and $51,732, respectively. The 73% decrease in bad debt recovery is primarily the result of a decrease in provisions made for unrecoverable debts during the 2022 period, in line with a decrease in the Two Eleven's accounts receivable balance at June 30, 2022, when compared to March 31, 2022, that was partially offset by an increase in the provision for unrecoverable debts relating to the Company's international customers.
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, 2022 and 2021 were $710,351 and $609,760, respectively. The 16% increase in general and administrative expenses is primarily due to an increase in product and general liability insurance premiums paid during the 2022 period as a result of increased inventory levels to facilitate an increase in the Company's selling activities.
Depreciation Expense - Depreciation expense for the quarters ended June 30, 2022 and 2021 were $287,943 and $242,401, respectively. The 19% increase in depreciation during the 2022 second quarter is primarily due to the addition of molds and tooling utilized in the production of the Company's expanding product categories.
Total Operating Expenses - Total operating expenses increased by $857,388, to $3,960,624 million, in the quarter ended June 30, 2022, or 28%, compared to $3.10 million in the 2021 period. This increase is primarily due to increases in salaries, general and administrative, office and warehouse leasing and advertising and marketing costs that were partially offset by a decrease in professional fees and commissions paid discussed above.
Net Income - The net income after income taxes for the quarter ended June 30, 2022 was $2.73 million, as opposed to net income of $2.41 million for the quarter ended June 30, 2021. This 13% increase in net income is primarily due to the increase in sales revenues discussed above.
Comparison of Six Months Ended June 30, 2022 and Six Months Ended June 30, 2021
The following table summarizes the results of our operations during the six-month periods ended June 30, 2022 and 2021 and provides information regarding the dollar and percentage increase or (decrease) in such periods:
| Six Months Ended June 30, | Percentage | |||||||||||
| 2022 | 2021 | Increase | Increase | |||||||||
| Item | (Decrease) | (Decrease) | ||||||||||
| REVENUES | $ | 42,166,418 | $ | 27,197,034 | $ | 14,969,384 | 55% | |||||
| COST OF REVENUES | 24,895,256 | 14,951,541 | $ | 9,943,715 | 67% | |||||||
| GROSS PROFIT | 17,271,162 | 12,245,493 | $ | 5,025,669 | 41% | |||||||
| PRODUCT ROYALTY INCOME | 125,810 | 83,289 | $ | 42,521 | 51% | |||||||
| OPERATING EXPENSES | ||||||||||||
| Salaries and Wages | 2,623,139 | 1,837,348 | $ | 785,791 | 43% | |||||||
| Commissions and Consulting | 313,220 | 436,648 | $ | (123,428 | ) | -28% | ||||||
| Professional Fees | 338,768 | 461,256 | $ | (122,488 | ) | -27% | ||||||
| Advertising and Marketing | 1,360,004 | 1,035,733 | $ | 324,271 | 31% | |||||||
| Office Lease and Expenses | 400,899 | 174,573 | $ | 226,326 | 130% | |||||||
| Research and Development Costs | 1,014,543 | 850,261 | $ | 164,282 | 19% | |||||||
| Bad Debt Expense | 4,355 | 14,093 | $ | (9,738 | ) | -69% | ||||||
| General and Administrative | 1,422,103 | 1,138,359 | $ | 283,744 | 25% | |||||||
| Depreciation | 564,867 | 478,936 | $ | 85,931 | 18% | |||||||
| Total Operating Expenses | 8,041,898 | 6,427,207 | $ | 1,614,691 | 25% | |||||||
| INCOME FROM OPERATIONS | 9,355,074 | 5,901,575 | $ | 3,453,499 | 59% | |||||||
| Other Income (Expenses) | (2,192 | ) | (59 | ) | $ | (2,133 | ) | -3615% | ||||
| INCOME BEOFRE INCOME TAXES | 9,352,882 | 5,901,516 | $ | 3,451,366 | 58% | |||||||
| Income Taxes | 2,403,207 | 1,432,030 | $ | 971,177 | 68% | |||||||
| NET INCOME | $ | 6,949,675 | $ | 4,469,486 | $ | 2,480,189 | 55% | |||||
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, 2022 were $42.17 million, a 55% increase, compared to $27.20 million for the six months ended June 30, 2021. Revenues generated from sales to our customers in the United States decreased from $10.48 million to $9.32 million, for the six months ended June 30, 2022 and 2021, respectively. Revenues associated with international customers were $32.85 million and $16.71 million, or 78% and 61% of revenues, respectively, for the six months ended June 30, 2022 and 2021. This increase in global revenues during the 2022 period is attributable to a $6.05 million increase in body armor sales, a $4.09 million increase in sales of other products, parts and accessories and a $5.50 million increase in helmet sales that were partially offset by a $0.67 million decrease in neck brace sales.
The following table sets forth our revenues by product line for the six months ended June 30, 2022 and 2021:
| Six months ended June 30, | ||||||||||||
| 2022 | % of Revenues | 2021 | % of Revenues | |||||||||
| Neck braces | $ | 2,846,189 | 7% | $ | 3,515,690 | 13% | ||||||
| Body armor | 21,994,271 | 52% | 15,944,753 | 59% | ||||||||
| Helmets | 8,066,391 | 19% | 2,566,213 | 9% | ||||||||
| Other products, parts and accessories | 9,259,567 | 22% | 5,170,378 | 19% | ||||||||
| $ | 42,166,418 | 100% | $ | 27,197,034 | 100% | |||||||
Sales of our flagship neck brace accounted for $2.85 million and $3.52 million, or 7% and 13% of our revenues for the six-month periods ended June 30, 2022 and 2021, respectively. The 19% decrease in neck brace revenues is primarily attributable to a 26% decrease in the volume of neck braces sold to our customers in the United States and abroad.
Our body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes. Body armor sales accounted for $21.99 million and $15.94 million, or 52% and 59% of our revenues for the six-month period ended June 30, 2022 and 2021, respectively. The 38% increase in body armor revenues was primarily the result of continued shipments of our footwear category consisting of off-road motorcycle boots and mountain biking shoes and continued strong consumer demand for our innovative upper body and limb protectors.
Our Helmets accounted for $8.07 million and $2.57 million, or 19% and 9% of our revenues for the six-month periods ended June 30, 2022 and 2021, respectively. The 214% increase in helmet sales during the 2022 period is primarily due to continued strong demand for the Company's expanding and award-winning MTB helmet line up designed to appeal to a wide range of riders, and continued strong shipments of our redesigned MOTO helmet line up for off-road motorcycle use to our customers in the United States and abroad.
Our other products, parts and accessories are comprised of goggles, hydrations bags and apparel items including jerseys, pants, shorts and jackets as well as aftermarket support items required primarily to replace worn or damaged parts through our global distribution network. Other products, parts and accessories sales accounted for $9.26 million and $5.17 million, or 22% and 19% of our revenues for the six-month periods ended June 30, 2022 and 2021, respectively. The 79% increase in revenues from the sale of other products, parts and accessories is primarily due to strong demand for our MOTO and MTB technical apparel designed for off-road motorcycle and mountain biking use respectively.
Cost of Revenues and Gross Profit - Cost of revenues for the six-month periods ended June 30, 2022 and 2021 were $24.90 million and $14.95 million, respectively. Gross Profit for the six-month periods ended June 30, 2022 and 2021 were $17.27 million and $12.24 million, respectively, or 41% and 45% of revenues respectively. Our neck brace products continue to generate a higher gross margin than our other product categories. Neck brace revenues accounted for 7% and 13% of our revenues for the six-month periods ended June 30, 2022 and 2021, respectively. Additionally, revenues associated with international customers were 78% and 61% of our revenues for the six months ended June 30, 2022 and 2021, respectively, with revenues associated with international distribution customers continuing to generate a lower gross profit margin than direct dealer sales in the United States.
Product Royalty Income - Product royalty income is earned on sales to distributors that have royalty agreements in place, as well as on sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the six-month periods ended June 30, 2022 and 2021 were $125,810 and $83,289, respectively. The 51% increase in product royalty income is due to an increase in the sale of licensed products by licensees during the 2022 period.
Salaries and Wages - Salaries and wages for the six-month periods ended June 30, 2022 and 2021 were $2,623,139 and $1,837,348, respectively. The 43% increase in salaries and wages during the 2022 period was primarily due to the employment of additional sales professionals and warehousing staff in the United States as we continue to expand and build our selling activities domestically in order to facilitate growth. Additionally, share compensation costs relating to a share issuance made to key personnel in recognition of performance contributed significantly to the increase in salaries and wages for the 2022 period.
Commissions and Consulting Expense - During the six-month periods ended June 30, 2022 and 2021, commissions and consulting expenses were $313,220 and $436,648. This 28% decrease in commissions and consulting expenses during the 2022 period is primarily due to a decrease in commissions and incentives paid to both in-house and external sales representatives in the United States in line with a decrease in sales growth in the region.
Professional Fees - Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection and product liability litigation settlement costsexpenses incurred as the Company continues to expand. Professional fees for the six-month periods ended June 30, 2022 and 2021 were $338,768 and $461,256, respectively. This 27% decrease in professional fees is primarily due to a decrease in expenditure on product liability litigation during the 2022 period.
Advertising and Marketing - The Company places paid advertising in various motorsport magazines and online media, and sponsors a number of events, teams and individuals to increase product and brand visibility. Advertising and marketing expenses for the nine-month periodssix-months ended SeptemberJune 30, 2022 and 2021 were $1,360,004 and 2020 were $1,669,648 and $1,524,251,$1,035,733, respectively. The 10%31% increase in advertising and marketing expendituresexpenditure during the 20212022 period is primarily due to an increase inthe production, execution and distribution of global marketing campaigns that incorporate high caliber athlete sponsorships, event attendance and activation activities, and coordinated digital marketing productionplans designed to market the Company's product offering to a wider group of riders and implementation activities undertaken globally. Additionally, the Company successfully partnered with itsenthusiasts and continue building a global distribution partners in a cost sharing initiative to implement synchronized brand building and product launch campaigns for both the off-road motorcycle and mountain biking riding community during the 2021 period.consumer brand.
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Office Lease and Expenses - Office lease and expenses for the nine-monthsix-month periods ended SeptemberJune 30, 2022 and 2021 were $400,899 and 2020 were $273,887 and $225,132,$174,573, respectively. The 22%130% increase in office lease and expenses during the 20212022 period was primarily due to an increase inadditional warehouse lease expenditure incurredstorage rented in the United States in line with additional storage space requiredas the Company continues to build out and expand its Reno, Nevada warehouse to accommodate the Company's rapidly growing assortmentstorage and sales of its expanding line up of exceptional protective gear.
Research and Development Costs - These costs consist of the salaries of personnel who are directly involved in the research and development of innovative products, as well as the direct costs associated with developing these products. Research and development costs for the nine-monthsix-month periods ended SeptemberJune 30, 20212022 and 2020,2021, increased to $1,319,183,$1,014,543, from $1,129,535,$850,261, during the same 20202021 period. The 17%19% increase in research and development costs during the 20212022 period is primarily due to the employment of industry specific product development, engineering and design development,professionals as the Company continues to refine its widening product categories and engineering professionals in order to continue the Company's refinement and development ofexpand a pipeline of exceptional cutting-edge products.
Bad Debt Expense - Bad debt expense for the nine-monthsix-month periods ended SeptemberJune 30, 2022 and 2021 were $4,355 and 2020 were $56,290 and $59,092,$14,093, respectively. The 5%This 69% decrease in bad debt expense during the 20212022 period is primarily the result of a decrease in badprovisions made for unrecoverable debts that were considered to be unrecoverable and written off during the 2022 period in line with a decrease in the Two Eleven accounts receivable balance at June 30, 2022, when compared to December 31, 2021, period.that was partially offset by an increase in the provision for unrecoverable debts relating to the Company's international customers.
General and Administrative Expenses - General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the nine-monthsix-month periods ended SeptemberJune 30, 2022 and 2021 were $1,422,103 and 2020 were $1,830,055 and $1,390,236,$1,138,359, respectively. The 32%25% increase in general and administrative expenses during the 20212022 period is primarily theas a result of an increase in expenditures on product liability, general risk and directors' and officers' insurance premiums incurred during the 20212022 period, as the Company expands its product offerings and selling activities. Additionally, travel expenditure increased in line with a relaxation of travel restrictions imposed as a result of the significantCOVID-19 pandemic and an increase in revenues in the United States for the 12 months ended September 30, 2021.marketing and sales management travel activity.
Depreciation Expense - Depreciation expenseExpense for the nine-monthsix-month periods ended SeptemberJune 30, 2022 and 2021 were $564,867 and 2020 were $744,713 and $595,365,$478,936, respectively. This 25%18% increase in depreciation during the 20212022 period is primarily due to the addition of molds and tooling utilized in the production of the Company's growingwidening product offeringrange.
Total Operating Expenses - Total operating expenses increased by $2,023,908$1.61 million to $10,260,254$8.04 million in the nine monthssix-month period ended SeptemberJune 30, 2021,2022, or 25%, compared to $8,236,346 in$6.43 million for the 2020 period. The 25%six-month period ended June 30, 2021. This increase in total operating expenses during the 20212022 period is primarily due to the increaseincreases in salaries, and wages, commissions and consulting costs, general and administrative, expensesoffice and warehouse leasing, advertising and marketing and research and development costs, that were partially offset by a decrease in professional fees and commissions paid discussed above.
Net incomeIncome - Net income after income taxes for the nine-monthsix-month period ended SeptemberJune 30, 20212022 was $8.76$6.95 million, as opposedcompared to net income after income taxes of $2.65$4.47 million for the nine-monthsix-month period ended SeptemberJune 30, 2020.2021. This increase in net income during the 20212022 period is primarily due to the increase in revenuesrevenue and gross profit discussed above.
Liquidity and Capital Resources
At SeptemberJune 30, 2021,2022, we had cash and cash equivalents of $2.59$4.95 million and $0.58$0.06 million of short-term investments. The following table sets forth a summary of our cash flows for the periods indicated:
| September 30 | June 30, | |||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||
| Net cash provided by operating activities | $ | 1,145,417 | $ | 2,129,815 | $ | 953,460 | $ | 1,270,276 | ||||
| Net cash used in investing activities | $ | (892,662 | ) | $ | (671,896 | ) | $ | (392,765 | ) | $ | (191,445 | ) |
| Net cash used in financing activities | $ | (534,948 | ) | $ | (493,845 | ) | $ | (528,191 | ) | $ | (317,720 | ) |
| Effect of exchange rate changes on cash and cash equivalents | $ | (98,178 | ) | $ | (168,277 | ) | $ | (105,169 | ) | $ | 20,427 | |
| Net (decrease) increase in cash and cash equivalents | $ | (380,371 | ) | $ | 795,797 | |||||||
| Net increase (decrease) in cash and cash equivalents | $ | (72,665 | ) | $ | 781,538 | |||||||
| Cash and cash equivalents at the beginning of period | $ | 2,967,042 | $ | 2,072,864 | $ | 5,022,436 | $ | 2,967,042 | ||||
| Cash and cash equivalents at the end of period | $ | 2,586,671 | $ | 2,868,661 | $ | 4,949,771 | $ | 3,748,580 | ||||
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Cash decreased by $380,371,$72,665 or 13%1%, for the ninesix months ended SeptemberJune 30, 2021,2022, when compared to cash on hand at December 31, 2020.2021. The primary sources of cash for the ninesix months ended SeptemberJune 30, 20212022 were net income of $8,757,297, an increase in accounts payable$6,949,675, decreased prepaid expenses of $8,412,521 and an increase in$729,338, increased income taxes payable of $1,271,016.$703,220 and proceeds from the issuance of common stock amounting to $255,800. The primary uses of cash for the ninesix months ended SeptemberJune 30, 20212022 were an increase inincreased accounts receivable of $10,023,484, an increase in$1,155,162, decreased accounts payable and accrued expenses of $6,649,900, increased inventory of $5,060,128, an increase in prepaid expenses$866,061 and other current assetsthe repayment of $2,212,611 and an increase in payments in advance of $952,067.a short term loan amounting to $747,845.
The Company is currently meeting its working capital needs through cash on hand, a revolving line of credit with a bank, 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 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. During the quarters ended SeptemberJune 30, 20212022 and 2020,2021, the Company paid an aggregate of $58,085$66,844 and $42,451,$79,590, in licensing fees to Xceed Holdings. 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 quarters ended SeptemberJune 30, 20212022 and 2020,2021, the Company paid an aggregate of $14,515$16,711 and $10,613,$19,898, in licensing fees to Mr. De Villiers.
From May 15, 2015 through October 31, 2021, the Company was party to a consulting agreement, dated July 8, 2015, between the Company and Innovate Services Limited, or Innovate, a Seychelles limited company in which Dr. Leatt is an indirect beneficiary, pursuant to which, as amended, Innovate served as the Company's exclusive research, development and marketing consultant.consultant, in exchange for a monthly fee of $42,233; provided that Dr. Leatt personally performs the services to be performed by Innovate under the agreement. Either party had the right to terminate the agreement for convenience, upon six months' prior written notice, or by the Company immediately without notice in the event of Innovate's breach of an obligation under the contract or if Dr. Leatt could no longer perform the services. During the quarters ended September 30, 2021 and 2020, the Company recognized an aggregate of $126,699 and $124,338, respectively, in consulting fees to Innovate. On November 8, 2021, the Company terminated the agreement with Innovate, effective October 31, 2021, in connection with the wind-up of Innovate's business operations. The termination of the agreement with Innovate will not have an adverse effect on the Company's research and development operations as the Company simultaneously entered into a new consulting agreement with Innovation Services Limited, Jersey limited company beneficially owned by Dr. Leatt, for the same research, development and marketing services, and on substantially the same terms and conditions as the terminated agreement. During the quarters ended June 30, 2022 and 2021, the Company recognized an aggregate of $0 and $126,699, respectively, in consulting fees to Innovate.
On November 8, 2021, the Company entered into a consulting agreement with Innovation Services Limited, a Jersey limited company in which, Dr. Christopher Leatt, the Company's founder and chairman, is an indirect beneficiary. Pursuant to the terms of the agreement, Innovation has agreed to serve as the Company's exclusive research, development and marketing consultant, in exchange for a monthly fee of $42,233; provided, however, that Dr. Leatt must remain an Innovation director and beneficiary of a majority of its ownership interests during the term of the agreement, and Dr. Leatt must remain the Company's primary point of contact responsible for the oversight, review and delivery of the services to be performed by Innovation under the agreement. Innovation may increase its monthly fees, on an annual basis, by no greater than the lesser of: (a) two and one-half percent (2.5%) of the prior year's annualized fee; or (b) a percentage equal to then-applicable annual percentage increase in the Consumer Price Index (CPI) published by the United States Department of Labor's bureau of labor statistics, plus one-half percent (0.5%). 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 November 1, 2021, and will continue unless terminated by either party in accordance with its terms. Either party has the right to terminate the consulting agreement upon 6six months' prior written notice, except that the consulting agreement may be terminated by the Company immediately without notice if the services to be performed by Innovation cease to be performed by Dr. Leatt, if beneficial ownership in Innovation by Dr. Leatt's and his immediate family members decreases, or for any other material breach of the agreement. The parties have agreed to settle any dispute under the consulting agreement by submission to JAMS for final and binding arbitration pursuant to its Comprehensive Arbitration Rules and Procedures and in accordance with the Expedited Procedures in those Rules. The Company also simultaneously entered into a side letter agreement, dated November 8, 2021, with Dr. Leatt, pursuant to which Dr. Leatt agreed, among other things: (1) not to perform services similar to the services provided under the agreement for any current or future, direct or indirect competitor of the Company or any similar company; (2) not to solicit any current or future employees of the Company for employment with Innovation or any other entity with which he may become affiliated, or to contact or solicit any current or future stockholder or investor of the Company in connection with any matter that is not directly related to the ongoing or future business operations of the Company; and (3) that he will apprise the Company of any business opportunity that he becomes aware of that could benefit the Company so that the Company, can in its sole discretion, make a determination regarding whether to pursue such opportunity in the best interest of the Company and its stockholders. Dr. Leatt further agreed to continue dedicating a majority of his time on matters related to performance of his duties as a director of the Company and to the fulfillment of his obligations to the Company's research and development efforts under the consulting agreement, and the Company will have the right to adjust the amount of the fees payable under the consulting agreement to the extent of any substantial diminution in his fulfillment of such duties and obligations. The foregoing descriptionAccordingly, effective January 1, 2022, the Company's monthly fee to Innovation, increased to $43,289. During the quarters ended June 30, 2022 and 2021, the Company recognized an aggregate of the Consulting Agreement$129,867 and Side Letter Agreement is qualified$0, respectively, in its entirety by referenceconsulting fees to the Consulting Agreement and the Side Letter Agreement, copies of which are filed as Exhibits 10.1 and 10.2, respectively, hereto and are incorporated by reference in this report.Innovation.
Pursuant to a Premium Finance Agreement, dated June 14, 2021,May 27, 2022, between the Company and AFCO Acceptance Corporation "AFCO",Aon Premium Finance, LLC, or APF, the Company is obligated to pay AFCOAPF an aggregate sum of $238,696$80,233 in twelveeleven monthly payments on a sliding scale, as follows, $37,381, $37,381, $1,172, $ 1,172, $ 1,172 and thereafter six payments of $20,290,$326, at a 4.350%6.360% annual interest rate, commencing on June 1, 2022 and ending on April 1, 2023. Any late payment during the term of the agreement would be assessed a late penalty of 5% of the payment amount due, and in the event of default APF has the right to accelerate the payment due under the agreement. As of June 30, 2022, the Company had not defaulted on its payment obligations under this agreement.
Pursuant to a Premium Finance Agreement, dated October 29, 2021, between the Company and APF, the Company is obligated to pay APF an aggregate sum of $1,122,858 in eleven payments of $102,078, at a 4.650% annual interest rate, commencing on November 1, 2021 and ending on AprilSeptember 1, 2022. 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 AFCOAPF has the right to accelerate the payment due under the agreement. As of SeptemberJune 30, 2021,2022, the Company had not defaulted on its payment obligations under this agreement.
The Company entered into a Premium Finance Agreement with AFCO, dated October 27, 2020, to finance its U.S short-term insurance over the period of coverage. The Company is obligated to pay AFCO an aggregate sum of $926,110 in eleven payments of $84,192, at an annual interest rate of 4.950% commencing on November 1, 2020 and ending on September 1, 2021. 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. This agreement was paid in full on September 3, 2021.
The Company entered into a Premium Finance Agreement with AFCO, dated October 29, 2021, to finance its U.S short-term insurance over the period of coverage. The Company is obligated to pay AFCO an aggregate sum of $1,122,858 in eleven payments of $102,078, at an annual interest rate of 4.650% commencing on November 1, 2021 and ending on September 1, 2021. 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.
On November 19, 2018, the Company entered into a $1,000,000 revolving line of credit agreement with a bank. Payments for the advances under the line bear interest at the LIBOR Daily Floating Rate plus 2.5 percentage points commencing January 1, 2019. The line of credit matured on November 19, 2020, at which time the unpaid principal, interest, or other charges outstanding under the agreement are due and payable. On November 5, 2020, the Company executed an amendment to the line of credit to extend the line of credit facility through November 19, 2021. The amendment took retroactive effect to October 27, 2020 and introduced an index floor so that payments for any future advances will bear interest at the greater of the LIBOR Daily Floating Rate or an Index Floor of 1.25 percentage points plus 2.5 percentage points. Obligations under the line of credit are secured by equipment and fixtures in the United States of America, accounts receivable and inventory of Leatt Corporation and Two-Eleven Distribution, LLC. On March 1, 2021, we executed a second amendment to the line of credit. The amendment took retroactive effect to February 17, 2021, extended the line of credit facility through February 28, 2022 and increased the revolving line of credit to $1,500,000. Effective January 21, 2022, the Company executed an amendment to the line of credit to extend the line of credit facility through February 28, 2023 and to replace interest determined by LIBOR Daily Floating Rate with the Bloomberg Short-Term Bank Yield Index rate. As of SeptemberJune 30, 2021,2022, there were no advances of the line of credit leaving $1,500,000 of the line of credit available for advance.
On December 29, 2021, Two Eleven entered into a Loan and Security agreement with a bank, effective December 17, 2021, to finance equipment. The Equipment Note financed under the Loan and Security Agreement has a total value of $272,519, payable in 36 consecutive monthly installments commencing February 5, 2022, and continuing to January 5, 2025. Interest shall accrue on the entire principal amount of this Equipment Note outstanding from time to time at a fixed rate of 3.5370% per annum.The principal and interest amount of each payment shall be $7,990. As of June 30, 2022, the amount of $236,373 was outstanding.
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, leases and accounting for income taxes.
Revenue and Cost Recognition - The Company recognizes revenue in accordance with ASC 606 "Revenues from Contracts with Customers". As such 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.
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All manufacturing of Leatt products is performed by third party subcontractors that are predominately based 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 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 standard 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.us, however, in limited instances qualified distributors and dealers may be granted extended payment terms during selected order periods. In performing such evaluations, we utilize historical experience, sales performance, and credit risk requirements. 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.
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 at SeptemberJune 30, 2022 and December 31, 2021 was $-0- and 2020 were $0 and $0,$-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 expenseexpenses 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 fulfilment 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.
Allowance for Doubtful Accounts Receivable - Accounts receivable consist of amounts due to the Company from normal business activities. Credit is granted to substantially all distributors on an unsecured basis. We continuously monitor collections and payments from customers and maintain an allowance for doubtful accounts receivable based upon the expected credit losses determined utilizing historical experience and any specific customer collection issues that have been identified. In determining the amount of the allowance, we are required to make certain estimates and assumptions. Accounts receivable balances that are still outstanding after we have used reasonable collection efforts are written off as uncollectible. While such credit losses have historically been minimal, within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results. The allowance for doubtful accounts was $283,713 at SeptemberJune 30, 2021 was $134,3082022 and $291,584 at December 31, 2020 was $101,885.2021.
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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 werewas no impairment chargescharge during the quarters ended SeptemberJune 30, 20212022 and 2020.2021.
Operating Leases - The Company determines if an arrangement is a lease at contract inception. Operating leases are included in the right-of-use assets ("ROU''), and lease liability obligations are included in the Company's consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset of the lease term and lease liability obligations represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date, based on the present value of lease payments over the lease term. As the Company's leases typically do not provide an implicit rate, the Company estimates its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. Please refer to Note 3 "Leases", in the Notes to Consolidated Financial Statements for additional information.
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 10,11, "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 on 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
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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 SeptemberJune 30, 2021,2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
PART IIOTHER 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 April 3, 2018, a wrongful death lawsuit was filed against the Company in Superior Court of California, Imperial County, and subsequently removed to USDC San Diego. The claims asserted included strict liability, negligence, failure to warn, and breach of implied and express warranties. After facing a vigorous defense, the plaintiffs agreed to a confidential settlement dismissing all claims against the Company. A formal dismissal order has not yet been entered.
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, 2020.2021.
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:
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| 101* | |
| Interactive data files pursuant to Rule 405 of Regulation S-T | |
| 101.INS | Inline XBRL Instance |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | 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 11 | LEATT CORPORATION |
| By: /s/ Sean Macdonald | |
| Sean Macdonald | |
| Chief Executive Officer and Chief Financial Officer | |
| (Principal Executive, Financial and Accounting Officer) |
EXHIBIT INDEX
* |
|