The following management's discussion and analysis should be read in conjunction
with our financial statements and the notes thereto and the other financial
information appearing elsewhere in this report. In addition to historical
information, the following discussion contains certain forward-looking
information. See "Special Note Regarding Forward Looking Statements" above Part
I, for certain information concerning those forward-looking statements. Our
financial statements are prepared in U.S. dollars and in accordance with U.S.
GAAP.
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.
35
--------------------------------------------------------------------------------
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 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 56
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 if economic conditions do not improve. We sell our
products through a global network of distributors and dealers who may have
difficulty clearing elevated multi-brand stock, previously ordered in response
to industry wide supply chain challenges, which in turn could slow new orders
and affect our financial performance. If our customers were to experience
prolonged slow growth or recession as a result of these conditions or otherwise,
we could see a drop-in demand for our products and potentially difficulty in
collecting accounts receivables.
• 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 December 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.
36
--------------------------------------------------------------------------------
• 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 77% 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 since the initial stages of the pandemic, we did not
see any significant material negative impact of COVID-19 on the Company's
results of operations for the year ended December 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
COVID-19 pandemic had an adverse impact on global shipping and supply chains
which caused a disruption in our customers ordering patterns and ultimately
inflated certain industry wide stock levels. This was further compounded by the
global economic slowdown experienced worldwide due to a high inflationary
environment and geo-political instability. The occurrence of any other
catastrophic events could have a negative impact on our sales revenue for the
coming periods and beyond.
37
--------------------------------------------------------------------------------
• Conflict in Ukraine - We are exposed to conflicts that may disrupt our
business and may reduce consumer demand for our products. A disruption or
failure of our systems, government sanctions or operations in the event of a
conflict could directly affect consumer demand for our products, cause delays in
completing sales, shipping of our products, continuing production or performing
other critical functions of our business, particularly if a conflict occurs at
our primary manufacturing locations or our distributor locations worldwide.
Furthermore, a prolonged conflict may have unintended global consequences such
as increased inflation, fuel and transportation costs. While we have conducted
due diligence on our customers in Russia to ensure that they do not fall into
any sanctioned categories, we have seen a delay in the receipt of receivables in
our bank account from the distributors of our products in Russia caused by
enhanced screening of Russian funds in compliance with global sanctions against
Russia for the war in Ukraine. The prolonging or expansion of the conflict could
have an adverse impact on our consumers and on consumer purchasing behavior, and
result in delays of new orders and completing sales, order cancellations, or
payment and shipping delays. We will continue to monitor this fluid situation
and any adverse impact that it may have on the global economy in general and on
our business operations and especially that of our customers in particular, and
we will develop contingencies as necessary to address any disruptions to our
business operations as they arise.
• Rising Freight Shipping and Logistics Costs - The economic disruption
resulting from the COVID-19 pandemic has had an adverse impact on the global
freight shipping industry and on the cost of shipping our products to our global
network of distributors, dealers and customers, or their import agents, from
warehouses in China. Over the past year, the strong rise in demand for Chinese
exports has outpaced the availability of containers in Asia, creating a
container shortage and huge backlogs in many freight markets around the world,
including the U.S., the Middle East, and East Asia. These container shortages at
Asian ports have exacerbated supply bottlenecks and further increased shipping
costs, by up to 400% in some regions, as companies in Asia are reported to be
paying premium rates to get containers back. Further compounding matters is the
shortage of dockworkers and truck drivers available to load and unload
containers at ports in Europe and the U.S. and to move them to other locations,
resulting in congested ports. We are working closely with our supply chain
management in Asia, our logistics service providers, and our freight forwarders,
to streamline our global shipping and logistics processes, to mitigate any
disruption to our operations. Continued disruption and pricing volatility in the
global shipping and logistics industry could have a negative impact on our
results of operations for the coming periods and beyond.
Results of Operations
Year ended December 31, 2022, compared to the year ended December 31, 2021
The following table summarizes the results of our operations during the years
ended December 31, 2022 and 2021 and provides information regarding the dollar
and percentage of year-over-year increase or (decrease).
38
--------------------------------------------------------------------------------
Fiscal Year Ended December 31, Percentage
2022 2021 Increase Increase
Item (Decrease) (Decrease)
REVENUES $ 76,335,539 $ 72,475,813 $ 3,859,726 5%
COST OF REVENUES 45,202,712 41,029,710 $ 4,173,002 10%
GROSS PROFIT 31,132,827 31,446,103 $ (313,276 ) -1%
PRODUCT ROYALTY INCOME 240,044 182,698 $ 57,346 31%
OPERATING EXPENSES
Salaries and Wages 6,148,179 5,003,640 $ 1,144,539 23%
Commissions and
Consulting 563,689 812,097 $ (248,408 ) -31%
Professional Fees 586,474 1,072,912 $ (486,438 ) -45%
Advertising and
Marketing 3,342,791 2,170,788 $ 1,172,003 54%
Office Lease and
Expenses 689,068 428,608 $ 260,460 61%
Research and
Development Costs 2,179,996 1,826,846 $ 353,150 19%
Bad Debt Expense 474,019 222,250 $ 251,769 113%
General and
Administrative 3,273,346 2,450,376 $ 822,970 34%
Depreciation 1,098,433 1,025,536 $ 72,897 7%
Total Operating
Expenses 18,355,995 15,013,053 $ 3,342,942 22%
INCOME FROM OPERATIONS 13,016,876 16,615,748 $ (3,598,872 ) -22%
Other Expenses (13,550 ) (163 ) $ (13,387 ) -8213%
INCOME BEOFRE INCOME
TAXES 13,003,326 16,615,585 $ (3,612,259 ) -22%
Income Taxes 3,042,873 4,041,148 $ (998,275 ) -25%
NET INCOME $ 9,960,453 $ 12,574,437 $ (2,613,984 ) -21%
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 year ended December 31, 2022
were $76.34 million, a 5% increase, compared to revenues of $72.48 million for
the year ended December 31, 2021. This increase in global revenues is
attributable to a $5.44 million increase in helmet sales and a $3.84 million
increase in sales of other products, parts and accessories, that were partially
offset by a $3.05 million decrease in neck braces sales and a $2.37 million
decrease in body armor sales, during the year ended December 31, 2022. Revenues
associated with international customers for the years ended December 31, 2022
and 2021, respectively were $59.02 million and $52.34 million, or 77% and 72% of
global revenues.
The following table sets forth our revenues by product line for the years ended
December 31, 2022 and 2021:
Year Ended December 31,
2022 % of Revenues 2021 % of Revenues
Neck braces $ 5,389,672 7% $ 8,443,610 12%
Body armor 38,864,312 51% 41,229,569 57%
Helmets 14,477,472 19% 9,040,265 12%
Other products, parts and
accessories 17,604,083 23% 13,762,369 19%
$ 76,335,539 100% $ 72,475,813 100%
Sales of our flagship neck brace accounted for $5.39 million and $8.44 million,
or 7% and 12% of our revenues for the years ended December 31, 2022 and 2021,
respectively. The 36% decrease in neck brace revenues was primarily due to a 37%
decrease in the volume of neck braces sold to our customers worldwide during the
2022 period, when compared to the 2021 period, which was a particularly strong
quarter for neck brace sales. Neck brace volumes sold for the year ended
December 31, 2021 had increased by 71% over the prior year period.
39
--------------------------------------------------------------------------------
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
revenues accounted for $38.86 million and $41.23 million, or 51% and 57% of our
revenues for the years ended December 31, 2022 and 2021, respectively. Although
our footwear category consisting of off-road motorcycle boots and mountain
biking shoes continued to show encouraging growth with sales volumes increasing
by 19%, there was a 6% decrease in body armor revenues from the prior year
period, primarily due to a 18% decrease in upper body armor revenues during the
2022 period, when compared to the 2021 period, which was an exceptionally strong
period for upper body armor sales. Upper body armor revenues for the year ended
December, 31 2021 had increased by 76% when compared to the prior year period.
Our helmets accounted for $14.48 million and $9.04 million, or 19% and 12% of
our revenues for the years ended December 31, 2022 and 2021, respectively. The
60% increase in helmet revenues is primarily due to continued strong demand for
the Company's expanding and award-winning MTB helmet line up and continued
shipping of our redesigned MOTO helmet offering for off-road motorcycle use
worldwide.
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 $17.60 million and $13.76 million, or 23% and 19% of our
revenues for the years ended December 31, 2022 and 2021, respectively. The 28%
increase in revenues of other products, parts and accessories is primarily due
to continued strong demand for our line of technical apparel designed for
off-road motorcycle and mountain biking use. Apparel sales volumes increased by
35% for the period ending December 31, 2022, when compared to the prior year
period.
Costs of Revenues and Gross Profit - Cost of revenues for the years ended
December 31, 2022 and 2021 were $45.20 million and $41.03 million, respectively.
Gross Profit for the years ended December 31, 2022 and 2021 were $31.13 million
or 41% of revenues, and $31.45 million or 43% of revenues, respectively. Our
neck brace products continue to generate a higher gross margin than our other
product categories. Neck brace revenues accounted for 7% and 12% of our revenues
for the years ended December 31, 2022 and 2021, respectively. Additionally,
revenues associated with international customers were 77% and 72% of our
revenues for the twelve months ended December 31, 2022 and 2021, respectively,
with revenues associated with international distributors continuing to generate
a lower gross profit as a percentage of revenues than direct dealer sales in the
United States.
Product Royalty Income - Product royalty income is earned on sales to
distributors that have royalty agreements in place as well as sales of licensed
products by third parties that have licensing agreements in place. Product
royalty income for the years ended December 31, 2022 and 2021 were $240,044 and
$182,698, respectively. The 31% increase in product royalty income is primarily
due to an increase in the sale of licensed products by licensees during the 2022
period.
Salaries and Wages - Salaries and wages for the years ended December 31, 2022
and 2021 were $6,148,179 and $5,003,640, respectively. This 23% increase in
salaries and wages during the 2022 period was primarily due to the employment of
new marketing, sales and business development personnel in North America, Europe
and Oceania as the Company continues to build a global regional team of sales
and brand management professionals.
Commissions and Consulting Expense - Commissions and consulting expense for the
years ended December 31, 2022 and 2021 were $563,689 and $812,097, respectively.
This 31% decrease in commissions and consulting expenses during the 2022 period
is primarily due to a decrease in commissions and performance incentives paid to
both employee and external sales personnel and management in the United States
in line with the decrease in sales revenues and continued employment of in-house
employee sales personnel in the region during the 2022 period.
40
--------------------------------------------------------------------------------
Professional Fees - Professional fees consist of costs incurred for audit, tax,
regulatory filings and quarterly reporting requirements, as well as patent
maintenance, protection and litigation expenses and settlement costs incurred as
the Company continues to expand its portfolio of exceptional protective gear.
Professional fees for the years ended December 31, 2022 and 2021 were $586,474
and $1,072,912, respectively. The 45% decrease in professional fees is primarily
due to a decrease in spending on product liability litigation and associated
costs during the 2022 period.
Advertising and Marketing - The Company places paid advertising in various
motorsport and bicycle magazines and online media, and sponsors a number of
events, teams and individuals to increase brand and product visibility globally.
Advertising and marketing expenses for the years ended December 31, 2022 and
2021 were $3,342,791 and $2,170,788, respectively. This 54%, increase in
advertising and marketing expenditure is in line with the continued production
and implementation of global marketing campaigns that incorporate high caliber
athlete sponsorships, industry trade show and event attendance and co-ordinated
global advertising activities undertaken with the support of our distributiuon
partners and designed to market the Company's growing product offering and
increase global consumer brand engagement.
Office Lease and Expenses - Office lease and expenses for the years ended
December 31, 2022 and 2021 were $689,068 and $428,608, respectively. The 61%
increase in office lease and expenses is primarily due to the Company's
continued expansion of space in its Reno, Nevada warehousing facility in
response to the Company's need for additional distribution capacity and
warehousing space as it expands its product offering and dealer presence
throughout the United States.
Research and Development Costs - These costs include the salaries of staff
members that are directly involved in the research and development of protective
gear, as well as the direct costs associated with developing these products.
Research and development costs for the years ended December 31, 2022 and 2021
were $2,179,996 and $1,826,846, respectively. This 19% increase in research and
development costs during the 2022 period is primarily the result of the
employment of product development, engineering, design and manufacturing
professionals with industry competence in order to continue the refinement of
our product categories and expansion of our pipeline of cutting-edge products.
Bad Debt Expense - Bad debt expense for the years ended December 31, 2022 and
2021 were $474,019 and $222,250, respectively. This 113% increase in bad debt
expense is primarily due to an increase in the provision for doubtful accounts
during the 2022 period, in line with an increase in accounts receivable balances
owing by our international distribution customers at December 31, 2022, when
compared to December 31, 2021.
General and Administrative Expenses - General and administrative costs consist
of insurance, travel, merchant fees, communication costs, office and computer
equipment with insurance and travel comprising a substantial part of these
expenses. General and administrative expenses for the years ended December 31,
2022 and 2021, were $3,273,346 and $2,450,376, respectively. The 34% increase in
general and administrative expenses is primarily due to an increase in product
liability, and general risk insurance premiums paid during the 2022 period.
Additionally, travel expenditure globally increased in line with a relaxation of
COVID-19 related travel restrictions and an increase in marketing, tradeshow and
sales activation travel.
Depreciation Expense - Depreciation expense for the years ended December 31,
2022 and 2021 was $1,098,433 and $1,025,536, respectively. The 7% increase in
depreciation expense is primarily due to the addition of warehouse racking and
inventory management equipment at the Company's expanded Reno, Nevada warehouse
to support our expanding product line, and to upgrades of the Company's
direct-to-consumer and business-to-business web platforms in order to facilitate
sales growth and efficiency.
Total Operating Expenses - Total operating expenses increased by $3,342,942 to
$18,355,995 for the year ended December 31, 2022 or 22%, from $15,013,053 in the
2021 period. This increase during the 2022 period is primarily due to increased
expenditures on salaries, general and administrative expenses, research and
development, and on advertsing and marketing costs that were partially offset by
decreases in professional fees incurred and commissions paid during the period.
41
--------------------------------------------------------------------------------
Other Expenses - Other expenses for the years ended December 31, 2022 and 2021
was $13,550 and $163, respectively. The increase in other expenses is primarily
due to interest paid on debt during the 2022 period.
Net Income - The net income after income taxes for the year ended December 31,
2022 was $9,960,453, a decrease of $2,613,984, when compared to a net income
after income taxes of $12,574,437. This 21% decrease in net income is primarily
due to the 22% increase in operating costs discussed above.
Liquidity and Capital Resources
At December 31, 2022, we had cash and cash equivalents of $7.10 million,
compared to cash and cash equivalents of $5.02 million and short-term
investments of $0.06 million at December 31, 2021. The following table sets
forth a summary of our cash flows for the periods indicated:
December 31,
2022 2021
Net cash provided by operating activities $ 3,086,982 $ 2,782,410
Net cash used in investing activities $ (1,042,442 ) $ (1,137,337 )
Net cash provided by financing activities $ 288,817 $ 595,943
Effect of exchange rate changes on cash and cash
equivalents $ (252,848 ) $ (185,622 )
Net increase in cash and cash equivalents $ 2,080,509 $ 2,055,394Cash and cash equivalents at the beginning of period $ 5,022,436 $ 2,967,042
Cash and cash equivalents at the end of period
$ 7,102,945 $ 5,022,436
Cash increased by $2,080,509 or 41%, for the year ended December 31, 2022. The
primary sources of cash during 2022 were a net income of $9,960,453, a decrease
in prepaid expenses and other current assets of $1,300,315, a decrease in
payments in advance of $563,503, and an increase in income taxes payable of
$643,882. The primary uses of cash during calendar year 2022 were a decrease in
accounts payable of $8,606,281, an increase in accounts receivable of $630,698,
an increase in deferred asset of $1,121,886, an increase in inventory of
$1,712,870, and increased capital expenditures of $1,144,173, relating primarily
to the commissioning of moulds and tooling that will be used in the production
of the Company's expanding product range.
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
domestically as well as internationally.
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 years ended December 30, 2022 and 2021, the Company paid an
aggregate of $243,822 and $327,729, 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 years ended
December 31, 2022 and 2021, the Company paid an aggregate of $60,957 and
$81,920, in licensing fees to Mr. De Villiers.
42
--------------------------------------------------------------------------------
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 years ended December 31, 2022 and 2021, the
Company recognized an aggregate of $0 and $422,330, 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. 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 years ended December 31,
2022 and 2021, the Company recognized an aggregate of $519,468 and $84,466,
respectively, in consulting fees to Innovation.
43
--------------------------------------------------------------------------------
Pursuant to a Premium Finance Agreement, dated May 27, 2022, between the Company
and Aon Premium Finance, LLC, or APF, the Company is obligated to pay APF an
aggregate sum of $80,233 in eleven monthly payments on a sliding scale, as
follows, $37,381, $37,381, $1,172, $1,172, $1,172 and thereafter six payments of
$326, at a 6.360% annual interest rate, commencing on June 1, 2022 and ending on
April 1, 2023. Any late payment during the term of the agreement would be
assessed a late penalty of 5% of the payment amount due, and in the event of
default APF has the right to accelerate the payment due under the agreement. As
of December 31, 2022, the Company had not defaulted on its payment obligations
under this agreement.
Pursuant to a Premium Finance Agreement, dated September 20, 2022, between the
Company and Aon Premium Finance, the Company is obligated to pay APF an
aggregate sum of $138,470 in seven payments of $19,781, at a 6.360% annual
interest rate, commencing on October 1, 2022 and ending on April 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 December 31, 2022, the
Company had not defaulted on its payment obligations under this agreement.
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 a 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 December 31,
2022, 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 a 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 December 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 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
December 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 December 31, 2022, and 2021, respectively, $192,291 and $272,519
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
December 31, 2022, all $58,075 of the Equipment Note was outstanding.
44
--------------------------------------------------------------------------------
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting period. We have identified the following as the items that require the
most significant judgment and often involve complex estimation: revenue
recognition, estimating allowances for doubtful accounts receivable, inventory
valuation, impairment of long-lived assets, leases and accounting for income
taxes.
Revenue and Cost Recognition - The Company recognizes revenue in accordance with
ASC 606 "Revenues from Contracts with Customers". As such the Company has and
will continue to review its performance obligations in terms of material
customer contractual arrangements in order to verify that revenue is recognized
when performance obligations are satisfied on a periodic basis.
All manufacturing of Leatt products is performed by third party subcontractors
that are predominately based in China.
The Company's products are sold worldwide to a global network of distributors
and dealers, and directly to consumers when there are no dealers or distributors
in their geographic area or where consumers choose to purchase directly via the
Company's e-commerce website (collectively the "customers").
Revenues from product sales are recognized when earned, net of applicable
provisions for discounts and returns and allowances in the event of product
defect where no exchange of product is possible. Revenues are recognized when
our performance obligations are satisfied as evidenced by transfer of control of
promised goods to our customers, in an amount that reflects the consideration we
expect to be entitled to in exchange for those goods or services. Product
royalty income, representing less than 1% of total revenues, is recorded as the
underlying product sales occur, in accordance with the related licensing
arrangements.
Our standard distributor payment terms range from pre-payment in full to sixty
(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, the
Company utilizes historical experience, sales performance, and credit risk
requirements. Furthermore, products purchased by distributors may not be
returned to the Company 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.
45
--------------------------------------------------------------------------------
Sales totaling $2,509,534 were deferred as all the requirements to have a
contract with the customer in accordance with ASC 606 had not been met as of
December 31, 2022. The shipped goods associated with these deferred sales are
included in the caption deferred asset, net of an allowance for potential loss
of $105,071.
International sales (other than in the United States and South Africa) are
generally drop-shipped directly from our consolidation warehouse or 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 December 31, 2022 and 2021 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.
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 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 at December 31, 2022 was $743,621 and at December 31, 2021 was
$291,584.
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 at December 31,
2022 was $105,072 and at December 31, 2021 was $116,183.
46
--------------------------------------------------------------------------------
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 years ended December 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.
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 2, "Summary of Significant Accounting Policies" 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.
© Edgar Online, source Glimpses
LEATT CORPORATION 