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 this report. 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 and bicycle market;
• our expectation regarding increasing demand for protective equipment used in
the motor sports and bicycle market;
• our belief that we will be able to effectively compete with our competitors
and increase our market share;
• our expectations with respect to increased revenue growth and our ability to
achieve profitability resulting from increases in our production volumes; and
• our future business development, results of operations and financial
condition.
Also, forward-looking statements represent our estimates and assumptions only as
of the date of this quarterly report. You should read this quarterly report and
the documents that we reference and filed as exhibits to the quarterly report
completely and with the understanding that our actual future results may be
materially different from what we expect. Except as required by law, we assume
no obligation to update any forward-looking statements publicly, or to update
the reasons actual results could differ materially from those anticipated in any
forward-looking statements, even if new information becomes available in the
future.
Use of Certain Defined Terms
Except as otherwise indicated by the context, references in this annual 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 subsidiary, Two Eleven.
• "Leatt SA" are to the Company's branch office known as 'Leatt Corporation
(Incorporated in the State of Nevada)' incorporated under the laws of South
Africa with registration number: 2007/032780/10;
• "Leatt USA" are to Leatt USA, LLC, a Nevada Limited Liability Company;
• "PRC", and "China" are to the People's Republic of China;
• "Two Eleven" refers to Two Eleven Distribution, LLC, a Nevada Limited
Liability Company;
• "Securities Act" are to the Securities Act of 1933, as amended, and to
"Exchange Act" are to Securities Exchange Act of 1934, as amended;
• "South Africa" are to the Republic of South Africa;
• "U.S. dollar," "$" and "US$" are to the legal currency of the United States;
• "Xceed Holdings" refers to Xceed Holdings CC., a close corporation
incorporated under the laws of South Africa, and wholly- owned by The Leatt
Family Trust, of which Dr. Christopher J. Leatt, the Company's chairman, is a
Trustee and Beneficiary; and
• "ZAR" refers to the South African Rand, the legal currency of South Africa.
For all ZAR amounts reported, the dollar amount has been calculated on the basis
that $1 = ZAR14.4848 for its March 31, 2022 balance sheet.
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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 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 GPX 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. We are currently in the process of applying to certify our Moto 3.5
helmet and latest helmet model Moto 7.5 to the CCC standard in China.
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 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 products 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 March 31, 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® 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®, 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 78% of our sales are
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, we did not see any significant material negative
impact of COVID-19 on the Company's results of operations for the quarter ended
March 31, 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.
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• 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. We have not seen any
significant impact due to the outbreak of war in Ukraine and the subsequent
institution of sanctions against Russia by the U.S. and several European nations
on the Company's results of operations for the quarter ended March 31, 2022.
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-month periods
ended March 31, 2022 and 2021 included herein.
Comparison of Three Months Ended March 31, 2022 and Three Months Ended March 31,
2021
The following table summarizes the results of our operations during the
three-month periods ended March 31, 2022 and 2021 and provides information
regarding the dollar and percentage increase or (decrease) in such periods:
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Three Months Ended March 31, Percentage
2022 2021 Increase Increase
Item (Decrease) (Decrease)
REVENUES $ 24,228,108 $ 12,896,475 $ 11,331,633 88%
COST OF REVENUES 14,601,018 6,844,521 $ 7,756,497 113%
GROSS PROFIT 9,627,090 6,051,954 $ 3,575,136 59%
PRODUCT ROYALTY INCOME 78,839 24,810 $ 54,029 218%
OPERATING EXPENSES
Salaries and Wages 1,297,962 924,537 $ 373,425 40%
Commissions and
Consulting 162,586 220,662 $ (58,076 ) -26%
Professional Fees 259,115 337,755 $ (78,640 ) -23%
Advertising and
Marketing 613,890 517,580 $ 96,310 19%
Office Lease and
Expenses 207,021 87,373 $ 119,648 137%
Research and
Development Costs 533,700 405,105 $ 128,595 32%
Bad Debt Expense 18,324 65,825 $ (47,501 ) -72%
General and
Administrative 711,752 528,599 $ 183,153 35%
Depreciation 276,924 236,535 $ 40,389 17%
Total Operating
Expenses 4,081,274 3,323,971 $ 757,303 23%
INCOME FROM OPERATIONS 5,624,655 2,752,793 $ 2,871,862 104%
Other Income (Expenses) 6,157 (4,007 ) $ 10,164 254%
INCOME BEFORE INCOME
TAXES 5,630,812 2,748,786 $ 2,882,026 105%
Income Taxes 1,408,057 687,948 $ 720,109 105%
NET INCOME $ 4,222,755 $ 2,060,838 $ 2,161,917 105%
Revenues - We earn revenues from the sale of our protective gear comprising of
neck braces, body armor, helmets and other products, parts and accessories both
in the United States and abroad. Revenues for the three months ended March 31,
2022 were $24.23 million, an 88% increase, compared to revenues of $12.90
million for the quarter ended March 31, 2021. This increase in worldwide
revenues is primarily attributable to a $5.11 million increase in body armor
sales, a $4.15 million increase in helmet sales, and a $2.48 million increase in
other products, parts and accessories, that were partially offset by a $0.41
million decrease in neck brace sales. Revenues associated with international
customers were $18.94 million and $7.13 million, or 78% and 55% of revenues,
respectively, for the three months ended March 31, 2022 and 2021, respectively.
The following table sets forth our revenues by product line for the three months
ended March 31, 2022 and 2021:
Three months ended March 31,
2022 % of Revenues 2021 % of
Revenues
Neck braces $ 1,531,479 6% $ 1,937,266 15%
Body armor 12,482,393 52% 7,376,736 57%
Helmets 5,688,513 23% 1,540,895 12%
Other products, parts and
accessories 4,525,723 19% 2,041,578 16%
$ 24,228,108 100% $ 12,896,475 100%
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Sales of our flagship neck brace accounted for $1.53 million and $1.94 million,
or 6% and 15% of our revenues for the quarters ended March 31, 2022 and 2021,
respectively. The 21% decrease in neck brace revenues is primarily attributable
to a 32% decrease in the volume of neck braces sold to our customers 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 $12.48 million and $7.38 million, or 52% and 57% of our
revenues for the quarters ended March 31, 2022 and 2021, respectively. The 69%
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 remarkable consumer demand for our innovative upper
body and limb protectors.
Our helmets accounted for $5.69 million or 23% of our revenues for the three
months ended March 31, 2022, as compared to $1.54 million or 12% of our revenues
for the same 2021 period. The 269% increase in helmet sales is primarily the
result of continued strong demand for the Company's expanding and award winning
MTB helmet line up that has appealed to a wide range of riders and continued
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 accessory
sales accounted for $4.53 million and $2.04 million, or 19% and 16% of our
revenues for the quarters ended March 31, 2022 and 2021, respectively. The 122%
increase in revenues from the sale of other products, parts and accessories is
primarily due to strong consumer 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 quarters ended
March 31, 2022 and 2021 were $14.60 million and $6.84 million, respectively.
Gross Profit for the quarters ended March 31, 2022 and 2021 were $9.63 million
and $6.05 million, respectively, or 40% and 47% of revenues, respectively. Our
neck brace products continue to generate a higher gross profit margin than our
other product categories. Neck brace revenues accounted for 6% and 15% of our
revenues for the quarters ended March 31, 2022 and 2021, respectively.
Additionally, revenues associated with international customers were 78% and 55%
of our revenues for the three months ended March 31, 2022 and 2021,
respectively, with revenue associated with international distribution customers
continuing to generate a lower gross profit margin than dealer direct sales in
the United States. The decrease in gross profit as a percentage of revenues for
the three months ended March 31, 2022 was further influenced by a significant
increase in global and domestic shipping and logistic costs as a result of the
COVID-19 pandemic.
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 March 31, 2022 and 2021 were
$78,839 and $24,810, respectively. The 218% 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 quarters ended March 31, 2022
and 2021 were $1,297,962 and $924,537, respectively. The 40% increase in
salaries and wages during the 2022 period was primarily due to the employment of
additional sales professionals and operational warehousing staff in the United
States as we expand our selling activities domestically. Additionally, share
compensation costs relating to a share issuance made to key personnel in
recognition of exceptional performance contributed significantly to the increase
in salaries and wages for the 2022 period.
Commissions and Consulting Expense - During the quarters ended March 31, 2022
and 2021, commissions and consulting expenses were $162,586 and $220,662,
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.
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 March 31, 2022 and 2021 were $259,115 and $337,755,
respectively. The 23% decrease in professional fees is primarily due to a
decrease in product liability litigation expenses incurred during the 2022
period.
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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
March 31, 2022 and 2021 were $613,890 and $517,580, respectively. The 19%
increase in advertising and marketing expenditure is primarily due to the
production and execution of global marketing campaigns that incorporate athlete
sponsorships, event attendance 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
March 31, 2022 and 2021 were $207,021 and $87,373, respectively. The 137%
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 build out its Reno, Nevada warehouse to accommodate storage 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 quarter ended March 31,
2022, increased to $533,700, from $405,105 during the same 2021 quarter. The 32%
increase in research and development costs is primarily as a result of increased
development and certification costs incurred as the Company continues to develop
a pipeline of exceptional, innovative protective gear that appeals to a wider
rider audience.
Bad Debt Expense - Bad debt expense for the quarters ended March 31, 2022 and
2021 were $18,324 and $65,825, respectively. The 72% decrease in bad debt
expense is the result of a decrease in provisions made for unrecoverable debts
during the 2022 period in line with a decrease in the accounts receivable
balance at Two Eleven Distribution in the United States at March 31, 2022 when
compared to December 31, 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 March 31,
2022 and 2021 were $711,752 and $528,599, respectively. The 35% increase in
general and administrative expenses is primarily due to an increase in
expenditures on product liability, general risk and directors and officers'
insurance premiums during the 2022 period. A global industry wide increase in
insurance risk as a result of the COVID-19 pandemic and increased inventory
levels globally as the Company expands its product offerings and selling
activities were the primary factors that contributed to these increased
premiums.
Depreciation Expense - Depreciation expense for the quarters ended March 31,
2022 and 2021 were $276,924 and $236,535, respectively. The 17% increase in
depreciation 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 $757,303, to
$4.08 million in the three months ended March 31, 2022, or 23%, compared to
$3.32 million in the 2021 period. This increase is primarily due to increases in
salaries, general and administrative, research and development and advertising
and marketing costs that were partially offset by a decrease in professional
fees, commissions and bad debt expenditure discussed above.
Net Income - The net income after income taxes for the quarter ended March 31,
2022 was $4.22 million, as opposed to a net income of $2.06 million for the
quarter ended March 31, 2021. This 105% increase in net income is primarily due
to the increase in sales revenues discussed above.
Liquidity and Capital Resources
At March 31, 2022, we had cash and cash equivalents of $4.25 million and $0.06
million of short-term investments. The following table sets forth a summary of
our cash flows for the periods indicated:
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March 31,
2022 2021
Net cash provided by (used in) operating activities $ (686,720 ) $ 1,109,147
Net cash used in investing activities
$ (225,065 ) $ (34,273 )
Net cash used in financing activities $ (72,552 ) $ (237,767 )
Effect of exchange rate changes on cash and cash
equivalents $ 207,577 $ (18,225 )
Net increase (decrease) in cash and cash equivalents $ (776,760 ) $ 818,882
Cash and cash equivalents at the beginning of period $ 5,022,436 $ 2,967,042
Cash and cash equivalents at the end of period
$ 4,245,676 $ 3,785,924
Cash decreased by $776,760, or 15%, for the three months ended March 31, 2022,
when compared to December 31, 2021. The primary uses of cash for the three
months ended March 31, 2022 were increased accounts receivable of $5,097,249 and
decreased accounts payable and accrued expenses of $3,207,604. The primary
sources of cash for the three months ended March 31, 2022 were net income of
$4,222,755, decreased inventory of $1,151,008 and increased income taxes payable
of $1,407,703.
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 March 31, 2022 and 2021, the Company paid an
aggregate of $72,716 and $62,124, 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 March 31, 2022 and 2021, the Company paid an aggregate of $18,179 and
$15,531, 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, 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. 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 March 31, 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 6 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. Accordingly, effective January
1, 2022, the Company's monthly fee to Innovation, increased to $43,289. During
the quarters ended March 31, 2022 and 2021, the Company recognized an aggregate
of $129,867 and $0, respectively, in consulting fees to Innovation.
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Pursuant to a Premium Finance Agreement, dated June 14, 2021, between the
Company and AFCO Acceptance Corporation "AFCO", the Company is obligated to pay
AFCO an aggregate sum of $238,696 in eleven payments of $20,290, at a 4.350%
annual interest rate, commencing on June 1, 2021 and ending on April 1, 2022.
This payment has been adjusted to $19,860 due to returned premium. Any late
payment during the term of the agreement will be assessed a late penalty of 5%
of the payment amount due, and in the event of default AFCO has the right to
accelerate the payment due under the agreement. As of March 31, 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 AFCO Acceptance Corporation "AFCO", the Company is obligated to pay
AFCO 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 September 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 AFCO has
the right to accelerate the payment due under the agreement. As of March 31,
2022, 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. 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
March 31, 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 March 31, 2022, the amount of $258,125 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 March 31, 2022 and December 31, 2021 was $-0- and $-0-, respectively.
Sales commissions are expensed when incurred, which is generally at the time of
sale or cash received from customers, because the amortization period would have
been one year or less. These costs are recorded in commissions and consulting
expenses within operating expense in the accompanying consolidated statements of
operations and comprehensive income.
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.
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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 $306,110 at March 31,2022 and $291,584 at December 31,
2021.
Inventory Valuation - Inventory is stated at the lower of cost or market. Cost
is determined using the first-in first-out (FIFO) method. Inventory consists
primarily of finished goods. Shipping and handling costs are included in the
cost of inventory. In assessing the inventory value, we make estimates and
judgments regarding reserves required for product obsolescence, aging of
inventory and other issues potentially affecting the saleable condition of
products. In performing such evaluations, we utilize historical experience as
well as current market information. The reserve for obsolescence was $129,839
at March 31, 2022 and $116,183 at December 31, 2021.
Impairment of Long-Lived Assets - Our long-lived assets include property and
equipment. We evaluate our long-lived assets for recoverability whenever events
or changes in circumstances indicate that an asset may be impaired. In
evaluating an asset for recoverability, we estimate the future cash flow
expected to result from the use of the asset and eventual disposition. If the
expected future undiscounted cash flow is less than the carrying amount of the
asset, an impairment loss, equal to the excess of the carrying amount over the
fair value of the asset, is recognized. We have determined there was no
impairment charge during the quarters ended March 31, 2022 and 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 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.
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