LEAT Leatt Corporation (QB)

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

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2023

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

For the transition period from _____________to _____________

Commission File No. 000-54693

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

Nevada	20-2819367
(State or other jurisdiction of incorporation or 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 August 4, 2023 is as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	5,971,340

 

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Quarterly Report on Form 10-Q
Six Months Ended June 30, 2023

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Note 3 - Operating Leases - Right-of-Use Assets and Lease Liability Obligations

The Company has three non-cancelable operating leases, for office and warehousing space, that expires in February 2025, February 2025 and January 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 June 30, 2023 and December 31, 2022:

		2023			2022
Assets
Operating lease ROU assets	$	945,901		$	1,092,170
Liabilities
Operating lease liabilities, current	$	266,057		$	280,743
Operating lease liabilities, net of current portion		679,844			811,427
Total operating lease liabilities	$	945,901		$	1,092,170

During the six months ended June 30, 2023 and 2022 the Company recognized $145,194 and $189,954, 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 June 30, 2023, and December 31, 2022 the following disclosures for the remaining lease terms and incremental borrowing rates were applicable:

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Supplemental disclosure		June 30, 2023			December 31, 2022
Weighted average remaining lease term		3.55 years			5 years
Weighted average discount rate		3.75%			3.75%

Maturities of lease liabilities as of June 30, 2023 were as follows:

Year ended December 31,		Amounts under Operating Leases
Remaining 2023	$	140,931
2024		281,664
2025		290,098
2026		298,792
2027		25,455
Total minimum lease payments	$	1,036,940
Less: amount representing interest	$	(91,039	)
Total operating lease liabilities	$	945,901

Supplemental cash flow information for the six months ended June 30, 2023 and 2022 are as follows:

		Six months ended			Six months ended
		June 30, 2023			June 30, 2022
Cash paid for amounts included in the measurement of lease liabilities	$	150,041		$	191,732
Right-of-use assets obtained in exchange for lease obligations	$	-		$	41,163

Note 4 - Revolving line of Credit facility

On November 19, 2018, the Company entered into a $1,000,000 revolving line of credit agreement with a bank. 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. The Company and Two Eleven signed amended documents to secure the loan by equipment and fixtures, accounts receivable and inventory of Two-Eleven. Effective January 20, 2023, the Company executed an amendment to the line of credit to extend the line of credit facility through February 29, 2024, to amend Banking days and update Successor Rate. The Company and Two Eleven signed updated documents to secure the loan by equipment and fixtures, accounts receivable and inventory of Two-Eleven. As of June 30, 2023, and December 31, 2022, respectively there were no advances of the line of credit leaving $1,500,000 and $1,500,000 available for 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 short-term loan is payable in monthly installments of $123,537 over ten months including interest at 8.250%. The South African short-term loan is payable in monthly installments of $5,494 over a ten-month period at a flat interest rate of 3.80%.

The Company also 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. One short-term loan is payable in monthly installments of $3,369 over a ten-month period at a flat interest rate of 8.25%. A second short-term loan is payable in monthly installments of $14,320 over a five-month period at a flat interest rate of 9.990%.

Note 6 - Notes 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, 2023 and December 31, 2022, $147,422 and $192,290, was outstanding, respectively.

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Two Eleven entered into a Note Payable with a bank effective December 1, 2022 in the principal amount of $58,075, secured by equipment. The Note is payable in 36 consecutive monthly installments of $1,816, including interest at a fixed rate of 7.8581%, commencing February 5, 2023, and continuing to January 5, 2026. As of June 30, 2023 and December 31, 2022, $50,802 and $58,075, was outstanding, respectively.

		June 30, 2023			December 31, 2022
Liabilities
Notes payable, current	$	110,484		$	108,398
Notes payable, net of current portion		87,740			141,967
	$	198,224		$	250,365

Principal maturities of notes payable as of June 30, 2023 were as follows:

Year ended December 31,		Amounts under Notes Payable
Remaining 2023	$	54,715
2024		112,983
2025		28,723
2026		1,803
	$	198,224

 

Note 8 - 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.

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The Company applies the provisions of FASB ASC Topic 740-10, Accounting for Uncertainty in Income Taxes ("Standard"), which provides that the tax effects from an uncertain tax position can be recognized in the consolidated financial statements only if the position is more likely than not of being sustained upon an examination by tax authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, the standard provides guidance on derecognition, classification, interest and penalties; accounting in interim periods, disclosure and transition, and any amounts when incurred would be recorded under these provisions.

The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2023, the Company has no unrecognized tax benefits.

Note 9 - Net Income Per Share of Common Stock

Basic net income per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common stock shares and dilutive potential common shares outstanding during the period. For the six months ended June 30, 2023, the Company had 341,000 potential common shares, consisting of 120,000 preferred shares, and options to purchase 221,000 shares, outstanding that were dilutive.

Note 10 - Common Stock

In January 2022, the Company issued 78,000 shares of common 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 May 2022, the Company issued 35,209 shares of common stock to an employee who exercised stock options.

Stock-based compensation expense related to vested stock options during the six months ended June 30, 2022 was $82,530. As of June 30, 2023, there was $0 of unrecognized compensation cost related to unvested stock options.

Stock-based compensation expense related to vested restricted stock awards during the six months ended June 30, 2022 was $120,240. As of June 30, 2023, there was $0 of unrecognized compensation cost related to unvested restricted stock.

Note 11 - Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements - In September 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-04, Liabilities-Supplier Finance Programs (Topic 405-50): Disclosure of Supplier Finance Program Obligations. This standard requires a buyer that uses supplier finance programs to make annual disclosures about the programs' key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period and associated rollforward information.  The Company adopted this standard effective January 1, 2023.  The adoption did not have an impact on the Company's disclosures as the impact of supplier finance programs is not material to the Company's consolidated financial statements.

Accounting Pronouncements Not Yet Adopted - There were no new material accounting standards issued in the first quarter of 2023.

The Company evaluated all ASU's issued by the FASB for consideration of their applicability. ASU's not included in the Company's disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on the Company's consolidated financial statements.

Note 12 - 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.

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

Special Note Regarding Forward Looking Statements

This report contains forward-looking statements that are contained principally in the sections entitled "Our Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, 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:

Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this quarterly report and the documents that we reference and filed as exhibits to the quarterly report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Use of Certain Defined Terms

Except as otherwise indicated by the context, references in this report to:

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Overview of Our Business

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

The Company's flagship products are based on the Leatt-Brace® system, a patented injection molded neck protection system owned by Xceed Holdings, designed to prevent potentially devastating injuries to the cervical spine and neck. The Company has the exclusive global manufacturing, distribution, sale and use rights to the Leatt-Brace®, pursuant to a license agreement between the Company and Xceed Holdings, a company owned and controlled by the Company's Chairman and founder, Dr. Christopher Leatt. The Company also has the right to use apparatus embodying, employing and containing the Leatt-Brace® technology and has designed, developed, marketed and distributed other personal protective equipment using this technology, as well as its own developed technology, including the Company's new body protection products which it markets under the Leatt Protection Range brand.

The Company's research and development efforts are conducted at its research facilities, located at its executive headquarters in Cape Town, South Africa. The Company employs 4 full-time employees who are dedicated exclusively to research, development, and testing. The Company also utilizes consultants, academic institutions and engineering companies as independent contractors or consultants, from time to time, to assist it with its research and development efforts. Leatt products have been tested and reviewed internally and by external bodies. All Leatt products are compliant with applicable European Union directives, or CE certified, where appropriate. 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 Moto 3.5 helmet with JIS T 8133 for the Japanese Market. For the Brazilian market our Moto 7.5 and Moto 3.5 helmets comply with NBR 7471.

Our products are predominately manufactured in China in accordance with our manufacturing specifications, pursuant to outsourced manufacturing arrangements with third-party manufacturers located there, based on agreed 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 59 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:

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Results of Operations

The following summary of our results of operations should be read in conjunction with our financial statements and the notes thereto for the three and six-month periods ended June 30, 2023 and 2022 included herein.

Comparison of Three Months Ended June 30, 2023 and Three Months Ended June 30, 2022

The following table summarizes the results of our operations during the three months ended June 30, 2023 and 2022 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

		Three Months Ended June 30,									Percentage
		2023		2022			Increase				Increase
Item							(Decrease)				(Decrease)
REVENUES	$	12,350,224		$	17,938,310		$	(5,588,086	)		-31%
COST OF REVENUES		7,007,442			10,294,238		$	(3,286,796	)		-32%
GROSS PROFIT		5,342,782			7,644,072		$	(2,301,290	)		-30%
PRODUCT ROYALTY INCOME		10,248			46,971		$	(36,723	)		-78%
OPERATING EXPENSES
Salaries and Wages		1,228,491			1,325,177		$	(96,686	)		-7%
Commissions and Consulting		110,925			150,634		$	(39,709	)		-26%
Professional Fees		111,785			79,653		$	32,132			40%
Advertising and Marketing		863,378			746,114		$	117,264			16%
Office Lease and Expenses		161,572			193,878		$	(32,306	)		-17%
Research and Development Costs		632,968			480,843		$	152,125			32%
Bad Debt Recovery		(230,616	)		(13,969	)	$	(216,647	)		-1551%
General and Administrative		868,595			710,351		$	158,244			22%
Depreciation		292,374			287,943		$	4,431			2%
Total Operating Expenses		4,039,472			3,960,624		$	78,848			2%
INCOME FROM OPERATIONS		1,313,558			3,730,419		$	(2,416,861	)		-65%
Other Expenses		(16,874	)		(8,349	)	$	(8,525	)		-102%
INCOME BEOFRE INCOME TAXES		1,296,684			3,722,070		$	(2,425,386	)		-65%
Income Taxes		520,545			995,150		$	(474,605	)		-48%
NET INCOME	$	776,139		$	2,726,920		$	(1,950,781	)		-72%

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 quarter ended June 30, 2023 were $12.35 million, a 31% decrease, compared to $17.94 million for the quarter ended June 30, 2022. This decrease in worldwide revenues is attributable to a $4.14 million decrease in body armor sales, a $1.82 million decrease in other products, parts and accessory sales, and a $0.77 million decrease in neck brace sales, that was partially offset by a $1.15 million increase in helmet sales. Revenues associated with international customers were $8.93 million and $13.91 million, or 72% and 78% of revenues, respectively, for the quarters ended June 30, 2023 and 2022, respectively.

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The following table sets forth our revenues by product line for the quarter ended June 30, 2023 and 2022:

					Three months ended June 30,
		2023			% of Revenues			2022			%of Revenues
Neck braces	$	541,056			4%		$	1,314,710			7%
Body armor		5,375,160			43%			9,511,878			53%
Helmets		3,523,450			29%			2,377,878			13%
Other products, parts and accessories		2,910,558			24%			4,733,844			27%
	$	12,350,224			100%		$	17,938,310			100%

Sales of our flagship neck brace accounted for $0.54 and $1.31 million, or 4% and 7% of our revenues for the quarters ended June 30, 2023 and 2022, respectively. The 59% decrease in neck brace revenues is primarily attributable to a 59% decrease in the volume of neck braces sold to our customers in the United States and abroad during the 2023 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 $5.38 and $9.51 million, or 43% and 53% of our revenues for the quarters ended June 30, 2023 and 2022, respectively. The 43% decrease in body armor revenues during the 2023 second quarter is primarily the result of a 60% decrease in the volume of upper body armor protection units sold globally during the 2023 period.

Our helmet sales accounted for $3.52 and $2.38 million or 29% and 13% of our revenues for the quarters ended June 30, 2023 and 2022, respectively. The 48% increase in helmet sales during the 2023 second quarter is primarily due to a strong increase in MTB helmet sales. Sales of our award winning, innovative and expanding MTB helmet line up increased by 116% when compared to the second quarter of 2022. Additionally, MOTO helmet sales volume increased by 141% during the period due to strong demand for our redesigned MOTO helmet line up.

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 $2.91 and $4.73 million, or 24% and 27% of our revenues for the quarters ended June 30, 2023, and 2022, respectively. The 39% decrease in revenues from the sale of other products, parts and accessories during the 2023 second quarter is primarily due to a 33% decrease in the sales volume of MOTO and MTB technical apparel designed for off-road motorcycle and mountain biking use.

Cost of Revenues and Gross Profit - Cost of revenues for the quarters ended June 30, 2023 and 2022 were $7.01 and $10.29 million, respectively. Gross Profit for the quarters ended June 30, 2023 and 2022 were $5.34 and $7.64 million, respectively, or 43% and 43% of revenues, respectively. Our neck brace products continue to generate a higher gross profit margin than our other product categories. Although neck brace revenues accounted for 4% and 7% of our revenues for the quarters ended June 30, 2023 and 2022, respectively our gross profit remained consistent with the 2022 period due to further stabilization in global shipping and logistics costs as the significant global shipping constraints resulting from the COVID-19 pandemic continued to improve.

Product Royalty Income - Product royalty income is earned on sales to distributors that have royalty agreements in place, as well as on sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the quarters ended June 30, 2023 and 2022 were $10,248 and $46,971, respectively. The 78% decrease in product royalty income is due to a decrease in the sale of licensed products by licensees during the 2023 period.

Salaries and Wages - Salaries and wages for the quarters ended June 30, 2023 and 2022 were $1,228,491 and $1,325,177, respectively. The 7% decrease in salaries and wages during the 2023 period was primarily due to a decrease in share compensation costs relating to a share issuance made to key personnel during the 2022 period which was partially offset by the employment of additional international marketing and sales personel as the Company continues to build a diversified multi-channel sales organization.

Commissions and Consulting Expense - During the quarters ended June 30, 2023 and 2022, commissions and consulting expenses were $110,925 and $150,634, respectively. The 26% decrease in commissions and consulting expenses is primarily the result of 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.

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Professional Fees - Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection and product liability litigation expenses incurred as the Company continues to expand. Professional fees for the quarters ended June 30, 2023 and 2022 were $111,785 and $79,653, respectively. The 40% increase in professional fees is primarily due to an increase in patent development and maintenance costs as the Company continues to develop and patent a pipeline of innovative products and technologies.

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, 2023 and 2022 were $863,378 and $746,114, respectively. The 16% increase in advertising and marketing expenditure during the 2023 period is primarily due to the production, execution and distribution of global marketing campaigns that incorporate athlete sponsorships and influencer endorsement activations, event and trade show attendance, campaign activation and coordinated digital and web-based 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, 2023 and 2022 were $161,572 and $193,878, respectively. The 17% decrease in office lease and expenses during the 2023 period is primarily due to a decrease in additional warehouse storage rented in the United States as the Company continues to streamline inventory levels and warehouse operations at its Reno, Nevada warehouse.

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, 2023, increased to $632,968, from $480,843 during the same 2022 quarter. The 32% increase in research and development costs during the 2023 second quarter is primarily due to certification, homologation and development and design consulting costs incurred in order to continue the refinement of the Company's growing 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, 2023 and 2022 were $230,616 and $13,969, respectively. The increase in bad debt recovery is primarily the result of a decrease in provisions made for unrecoverable debts during the 2023 period, in line with a decrease in the Two Eleven's accounts receivable balance at June 30, 2023, when compared to March 31, 2023 and a decrease 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, 2023 and 2022 were $868,595 and $710,351, respectively. The 22% increase in general and administrative expenses is primarily due to an increase in product liability insurance premiums paid during the 2023 period. Additionally, travel expenditure increased in line with a relaxation of global COVID-19 related travel restrictions and an increase in product development, marketing and sales activation travel.

Depreciation Expense - Depreciation expense for the quarters ended June 30, 2023 and 2022 were $292,374 and $287,943, respectively. The 2% increase in depreciation during the 2023 second quarter is primarily due to the addition of moulds and tooling utilized in the production of the Company's expanding product categories.

Total Operating Expenses - Total operating expenses increased by $78,848, to $4.04 million, for the quarter ended June 30, 2023, or 2%, compared to $3.96 million in the 2022 period. This increase is primarily due to increases in general and administrative, advertising and marketing and research and development costs that were partially offset by bad debt recoveries, a decrease in salaries and wages and commissions paid as discussed above.

Net Income - The net income after income taxes for the quarter ended June 30, 2023 was $776,139, as opposed to net income of $2.73 million for the quarter ended June 30, 2022. This 72% decrease in net income is primarily due to the decrease in sales revenues discussed above.

Comparison of Six Months Ended June 30, 2023 and Six Months Ended June 30, 2022

The following table summarizes the results of our operations during the six-month periods ended June 30, 2023 and 2022 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

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	Six Months Ended June 30,										Percentage
	2023			2022			Increase				Increase
Item							(Decrease)				(Decrease)
REVENUES	$	25,429,567		$	42,166,418		$	(16,736,851	)		-40%
COST OF REVENUES		14,314,015			24,895,256		$	(10,581,241	)		-43%
GROSS PROFIT		11,115,552			17,271,162		$	(6,155,610	)		-36%
PRODUCT ROYALTY INCOME		23,384			125,810		$	(102,426	)		-81%
OPERATING EXPENSES
Salaries and Wages		2,469,927			2,623,139		$	(153,212	)		-6%
Commissions and Consulting		207,249			313,220		$	(105,971	)		-34%
Professional Fees		449,028			338,768		$	110,260			33%
Advertising and Marketing		1,704,472			1,360,004		$	344,468			25%
Office Lease and Expenses		311,812			400,899		$	(89,087	)		-22%
Research and Development Costs		1,217,959			1,014,543		$	203,416			20%
Bad Debt Expense (Recovery)		(181,221	)		4,355		$	(185,576	)		-4261%
General and Administrative		1,686,774			1,422,103		$	264,671			19%
Depreciation		572,184			564,867		$	7,317			1%
Total Operating Expenses		8,438,184			8,041,898		$	396,286			5%
INCOME FROM OPERATIONS		2,700,752			9,355,074		$	(6,654,322	)		-71%
Other Expenses		(37,798	)		(2,192	)	$	(35,606	)		-1624%
INCOME BEOFRE INCOME TAXES		2,662,954			9,352,882		$	(6,689,928	)		-72%
Income Taxes		863,594			2,403,207		$	(1,539,613	)		-64%
NET INCOME	$	1,799,360		$	6,949,675		$	(5,150,315	)		-74%

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, 2023 were $25.43 million, a 40% decrease, compared to $42.17 million for the six months ended June 30, 2022. Revenues generated from sales to our customers in the United States decreased from $9.32 million to $7.32 million, for the six months ended June 30, 2023 and 2022, respectively. Revenues associated with international customers were $18.11 million and $32.85 million, or 71% and 78% of revenues, respectively, for the six months ended June 30, 2023 and 2022. This decrease in global revenues during the 2023 period is attributable to a $10.25 million decrease in body armor sales, a $3.55 million decrease in sales of other products, parts and accessories, a $1.53 million decrease in neck brace sales and a $1.41 million decrease in helmet sales.

The following table sets forth our revenues by product line for the six months ended June 30, 2023 and 2022:

		Six months ended June 30,
		2023			% of Revenues			2022			% of Revenues
Neck braces	$	1,321,371			5%		$	2,846,189			7%
Body armor		11,741,341			47%			21,994,271			52%
Helmets		6,652,204			26%			8,066,391			19%
Other products, parts and accessories		5,714,651			22%			9,259,567			22%
	$	25,429,567			100%		$	42,166,418			100%

 

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Sales of our flagship neck brace accounted for $1.32 million and $2.85 million, or 5% and 7% of our revenues for the six-month periods ended June 30, 2023 and 2022, respectively. The 54% decrease in neck brace revenues is primarily attributable to a 54% 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 $11.74 million and $21.99 million, or 47% and 52% of our revenues for the six-month period ended June 30, 2023 and 2022, respectively. The 47% decrease in body armor revenues was primarily the result of a 47% decrease in upper body armor revenues and a 49% decrease in the volume of motorcycle boots sold when compared to the 2022 period, which was an exceptionally strong period for motorcycle boot sales. Motorcycle boot revenues for the six months ended June 30, 2022 had increased by 189%, when compared to the prior year period.

Our Helmets accounted for $6.65 million and $8.07 million, or 26% and 19% of our revenues for the six-month periods ended June 30, 2023 and 2022, respectively. The 18% decrease in helmet sales during the 2023 period is primarily due to a 20% decrease in the volume of MOTO and MTB helmets sold to our customers in the United States and abroad during the 2023 period, when compared to the 2022 period, which was an exceptionally strong period globally for helmet sales. Helmet revenues for the quarter ending June 30, 2022 had increased by 214%, when compared to the prior year 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 $5.71 million and $9.26 million, or 22% and 22% of our revenues for the six-month periods ended June 30, 2023 and 2022, respectively. The 38% decrease in revenues from the sale of other products, parts and accessories is primarily due to a 37% decrease in revenues derived from the sale of our MOTO and MTB technical apparel designed for off-road motorcycle and mountain biking use respectively when compared to the 2022 period, which was a particularly strong period for apparel sales. Apparel revenues for the six months ended June 30, 2022 had increased by 50%, when compared to the prior year period.

Cost of Revenues and Gross Profit - Cost of revenues for the six-month periods ended June 30, 2023 and 2022 were $14.31 million and $24.90 million, respectively. Gross Profit for the six-month periods ended June 30, 2023 and 2022 were $11.12 million and $17.27 million, respectively, or 44% and 41% of revenues respectively. Our neck brace products continue to generate a higher gross margin than our other product categories. Although neck brace revenues accounted for 5% and 7% of our revenues for the six-month periods ended June 30, 2023 and 2022, respectively, revenues associated with international customers were 71% and 78% of our revenues for the six months ended June 30, 2023 and 2022 respectively with revenues associated with international distribution customers continuing to generate a lower gross profit margin than direct dealer sales in the United States. The increase in gross profit as a percentage of revenues for the six month period ended June 30, 2023 was further influenced by a decrease in global shipping and logistic costs as supply chain constraints as a result of the COVID-19 pandemic continued to improve.

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, 2023 and 2022 were $23,384 and $125,810, respectively. The 81% decrease in product royalty income is due to a decrease in the sale of licensed products by licensees during the 2023 period.

Salaries and Wages - Salaries and wages for the six-month periods ended June 30, 2023 and 2022 were $2,469,927 and $2,623,139, respectively. The 6% decrease in salaries and wages during the 2023 period was primarily due to a decrease in share compensation costs relating to a share issuance made to key personnel in the recognition of performance during the 2022 period that was partially offset by the employment of additional sales and marketing professionals in the United States and abroad as we continue to expand our diversified multi-channel sales operations globally.

Commissions and Consulting Expense - During the six-month periods ended June 30, 2023 and 2022, commissions and consulting expenses were $207,249 and $313,220. This 34% decrease in commissions and consulting expenses during the 2023 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 domestic sales growth.

Professional Fees - Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection and product liability litigation expenses incurred as the Company continues to expand. Professional fees for the six-month periods ended June 30, 2023 and 2022 were $449,028 and $338,768, respectively. This 33% increase in professional fees is primarily due to an increase in patent development and maintenance costs incurred as the Company continues to build a pipeline of innovative products and technologies. Additionally, audit fees increased during the 2023 period.

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Advertising and Marketing - The Company places paid advertising in various motorsport magazines and online media, and sponsors a number of events, teams and individuals to increase product and brand visibility. Advertising and marketing expenses for the six-months ended June 30, 2023 and 2022 were $1,704,472 and $1,360,004, respectively. The 25% increase in advertising and marketing expenditure during the 2023 period is primarily due to the production and execution of global marketing campaigns that incorporate high-caliber athlete and influencer sponsorships, event and trade show attendance attendance, media outreach 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 six-month periods ended June 30, 2023 and 2022 were $311,812 and $400,899, respectively. The 22% decrease in office lease and expenses during the 2023 period was primarily due to a decrease in additional warehouse storage rented in the United States as the Company continues to streamline and consolidate inventory levels and warehousing operations at its Reno, Nevada warehouse.

Research and Development Costs - These costs consist of the salaries of personnel who are directly involved in the research and development of innovative products, as well as the direct costs associated with developing these products. Research and development costs for the six-month periods ended June 30, 2023 and 2022, increased to $1,217,959, from $1,014,543, during the same 2022 period. The 20% increase in research and development costs during the 2023 period is primarily due to certification, homologation, testing and specialized design and development fees incurred as the Company continues to refine its widening product categories and expand a pipeline of exceptional cutting-edge products and technologies.

Bad Debt Expense (Recovery) - Bad debt expense (recovery) for the six-month periods ended June 30, 2023 and 2022 were ($181,221) and $4,355, respectively. This increase in bad debt recovery during the 2023 period is primarily the result of a decrease in provisions made for unrecoverable debts during the 2023 period in line with a decrease in accounts receivable balances at June 30, 2023, when compared to December 31, 2022.

General and Administrative Expenses - General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the six-month periods ended June 30, 2023 and 2022 were $1,686,744 and $1,422,103, respectively. The 19% increase in general and administrative expenses during the 2023 period is primarily as a result of an increase in expenditures on product liability insurance premiums. Additionally, travel expenditure increased in line with a relaxation of global COVID-19 related travel restrictions and an increase in product development, marketing, trade show and sales activation travel.

Depreciation Expense - Depreciation Expense for the six-month periods ended June 30, 2023 and 2022 were $572,184 and $564,867, respectively. This 1% increase in depreciation during the 2023 period is primarily due to the addition of online software and web enhancements designed to improve consumer engagement and sales across the Company's web-based selling platforms.

Total Operating Expenses - Total operating expenses increased by $0.40 million to $8.44 million for the six-month period ended June 30, 2023, or 5%, compared to $8.04 million for the six-month period ended June 30, 2022. This increase in total operating expenses during the 2023 period is primarily due to increases in advertising and marketing, general and administrative and research and development costs that were partially offset by an increase in bad debts recovered, salaries and wages and commissions paid as discussed above.

Net Income - Net income after income taxes for the six-month period ended June 30, 2023 was $1.80 million, compared to net income of $6.95 million for the six-month period ended June 30, 2022. This decrease in net income during the 2023 period is primarily due to the decrease in revenues discussed above.

Liquidity and Capital Resources

At June 30, 2023, we had cash and cash equivalents of $12.00 million. The following table sets forth a summary of our cash flows for the periods indicated:

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		June 30
		2023			2022
Net cash provided by operating activities	$	6,818,148		$	953,460
Net cash used in investing activities	$	(265,819	)	$	(392,765	)
Net cash used in financing activities	$	(790,369	)	$	(528,191	)
Effect of exchange rate changes on cash and cash equivalents	$	(867,308	)	$	(105,169	)
Net increase (decrease) in cash and cash equivalents	$	4,894,652		$	(72,665	)
Cash and cash equivalents at the beginning of period	$	7,102,945		$	5,022,436
Cash and cash equivalents at the end of period	$	11,997,597		$	4,949,771

Cash increased by $4,894,652 or 69%, for the six months ended June 30, 2023, when compared to cash on hand at December 31, 2022. The primary sources of cash for the six months ended June 30, 2023 were net income of $1,799,360, decreased accounts receivable of $2,692,726, decreased inventory of $3,466,369, decreased prepaid expenses and other current assets of $865,006 and a decrease in deferred assets of $762,012. The primary uses of cash for the six months ended June 30, 2023 were decreased accounts payable and accrued expenses of $858,760, a decrease in income taxes payable of $2,026,505, decreased deferred compensation of $400,000, capital expenditure of $265,819 and the repayment of a short term loan amounting to $738,228.

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 June 30, 2023 and 2022, the Company paid an aggregate of $34,857 and $66,844, 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 June 30, 2023 and 2022, the Company paid an aggregate of $8,714 and $16,711, in licensing fees to Mr. De Villiers.

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 six 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 monthly fee increased to $43,289 effective January 1, 2022, and thereafter, increased to $44,371 effective January 1, 2023. The foregoing description of the Consulting Agreement and Side Letter Agreement is qualified in its entirety by reference 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. During the quarters ended June 30, 2023 and 2022, the Company recognized an aggregate of $113,114 and $129,867, respectively, in consulting fees to Innovation.

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Pursuant to a Premium Finance Agreement, dated October 25, 2022, between the Company and Aon Premium Finance, the Company is obligated to pay APF an aggregate sum of $1,235,372 in ten payments of $123,537, at an 8.250% annual interest rate, commencing on December 1, 2022 and ending on September 1, 2023. 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 APF has the right to accelerate the payment due under the agreement. As of June 30, 2023, the Company had not defaulted on its payment obligations under this agreement.

Pursuant to a Premium Finance Agreement, dated November 22, 2022, between the Company and Aon Premium Finance, the Company is obligated to pay APF an aggregate sum of $32,451 in ten payments of $3,369, at an 8.250% annual interest rate, commencing on December 1, 2022 and ending on September 1, 2023. 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 APF has the right to accelerate the payment due under the agreement. As of June 30, 2023, the Company had not defaulted on its payment obligations under this agreement.

Pursuant to a Premium Finance Agreement, dated May 23, 2023, between the Company and Aon Premium Finance, the Company is obligated to pay APF an aggregate sum of $57,278 in four payments of $14,320, at an 9.990% annual interest rate, commencing on June 1, 2023 and ending on September 1, 2023. 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 APF has the right to accelerate the payment due under the agreement. As of June 30, 2023, the Company had not defaulted on its payment obligations under this agreement.

On November 19, 2018, the Company entered into a $1,000,000 revolving line of credit agreement with a bank. 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 29, 2023 and to replace interest determined by LIBOR Daily Floating Rate with the Bloomberg Short-Term Bank Yield Index rate. Effective January 20, 2023, the Company executed an amendment to the line of credit to extend the line of credit facility through February 29, 2024. As of June 30, 2023, 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, 2023 and December 31, 2022, respectively, $147,422 and $192,290 of the Equipment Note was outstanding.

On December 20, 2022, Two Eleven entered into a Loan and Security Agreement with a bank, effective December 1, 2022, to finance certain equipment owned by Two Eleven. The note issued under the agreement, the Equipment Note, has a total value of $58,075, payable by Two Eleven in 36 consecutive monthly installments, commencing on February 5, 2023, and continuing through to January 5, 2026. Interest will accrue on the entire principal amount of the Equipment Note outstanding from time to time at a fixed rate of 7.8581% per annum, and the principal and interest amount of each installment payment will be $1,816. As of June 30, 2023, and December 31, 2022, respectively, $50,802 and $58,075 of the Equipment Note was outstanding.

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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'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, 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 June 30, 2023 and December 31, 2022 were $0 and $0, respectively.

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

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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 maintains an allowance for doubtful accounts receivable based upon the expected credit lossess 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 had 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 $540,716 at June 30, 2023 and $743,621 at December 31, 2022.

Inventory Valuation - 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, we make estimates and judgments regarding reserves required for product obsolescence, aging of inventory and other issues potentially affecting the saleable condition of products. In performing such evaluations, we utilize historical experience as well as current market information. The reserve for obsolescence was $285,236 at June 30, 2023 and $105,072 at December 31, 2022.

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 were no impairment charges during the six months ended June 30, 2023 and 2022.

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 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.

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ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As of June 30, 2023, the Company's management, under the direction of its Chief Executive Officer and the Chief Financial Officer, Mr. Sean Macdonald, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer determined that the Company's disclosure controls and procedures were deemed to be effective.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal controls over financial reporting during the period ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings in the ordinary course of our business. 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.

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, 2022.

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.

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ITEM 6. EXHIBITS.

Exhibit No.	Description
31.1	Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	Interactive data files pursuant to Rule 405 of Regulation S-T
101.INS	Inline XBRL Instance Document-the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document
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
*	Filed with this Form 10-Q for Leatt Corporation. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

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

Date: August 10, 2023	LEATT CORPORATION
	By: /s/ Sean Macdonald
	Sean Macdonald
	Chief Executive Officer and Chief Financial Officer
	(Principal Executive, Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit No.	Description
31.1	Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	Interactive data files pursuant to Rule 405 of Regulation S-T
101.INS	Inline XBRL Instance Document-the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document
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
*	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.