Leatt Corp - Quarter Report: 2021 September (Form 10-Q)

LEATT CORPORATION

Quarterly Report on Form 10-Q
Nine months ended September 30, 2021

TABLE OF CONTENTS

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Special Note Regarding Forward Looking Statements

This report contains forward-looking statements that are contained principally in the sections entitled "Our Business," "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned "Risk Factors" in our latest annual report on Form 10-K filed with the SEC. In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements include, among other things, statements relating to:

• our expectations regarding growth in the motor sports market;

• our expectation regarding increasing demand for protective equipment used in the motor sports market;

• our belief that we will be able to effectively compete with our competitors and increase our market share;

• our expectations with respect to increased revenue growth and our ability to achieve profitability resulting from increases in our production volumes; and

• our future business development, results of operations and financial condition.

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.

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. 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 and the NBR 7471 standard in Brazil.

Our products are predominately manufactured in China under outsource manufacturing arrangements with third-party manufacturers located there subject to agreed standard terms. 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.

Results of Operations

The following summary of our results of operations should be read in conjunction with our financial statements and the notes thereto for the three- and nine-month periods ended September 30, 2021 and 2020 included herein.

Comparison of Three Months Ended September 30, 2021 and 2020

The following table summarizes the results of our operations during the three-month periods ended September 30, 2021 and 2020 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

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 September 30, 2021 were $22.10 million, a 94% increase, compared to revenues of $11.37 million, for the quarter ended September 30, 2020. Revenues associated with international customers were $17.79 million and $7.11 million, or 81% and 63% of revenues, respectively, for the three months ended September 30, 2021 and 2020.  This increase in global revenues is primarily attributable to a $6.58 million increase in body armor sales, a $1.52 million increase in neck brace sales, a $1.51 million increase in the sales of other products, parts and accessories and a $1.12 million increase in helmet sales.

The following table sets forth our revenues by product line for the three months ended September 30, 2021 and 2020:

Sales of our flagship neck brace accounted for $2.71 million and $1.19 million, or 12% and 10% of our revenues for the quarters ended September 30, 2021 and 2020, respectively.  This 128% increase in neck brace sales is primarily attributable to a 181% increase in the volume of neck braces sold to our customers worldwide as demand for our neck braces continues to increase.

Our body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes. Body armor sales accounted for $12.37 million and $5.79 million, or 56% and 51% of our revenues for the quarters ended September 30, 2021 and 2020, respectively. The 114% increase in body armor revenues during the 2021 third quarter is primarily the result of a 101% increase in the volume of upper body protectors sold during the period due to continued global demand for our range of body protectors. This demand has resulted in significant restocking orders from our customers around the world, with encouraging sales of our growing footwear category consisting of off-road motorcycle boots and mountain biking shoes continuing to exceed our expectations.

Our helmets accounted for $2.32 million or 11% of our revenues for the three months ended September 30, 2021, as compared to $1.20 million or 11% of our revenues for the same 2020 period.  The 93% increase in helmet sales during the 2021 third quarter is primarily due to a 149% increase in the volume of helmets sold globally during the 2021 period.

Our other products, parts and accessories are comprised of goggles, hydration bags and apparel items including jerseys, pants, shorts, and jackets as well as aftermarket support items required primarily to replace worn or damaged parts through our global distribution network. Other products, parts and accessories sales accounted for $4.71 million and $3.19 million, or 21% and 28% of our revenues for the quarters ended September 30, 2021 and 2020, respectively.  The 47% increase in revenues from the sale of other products, parts, and accessories during the 2021 third quarter is primarily due to a 189% increase in the volume of mountain biking apparel sold during the period as consumer demand for our cutting-edge mountain biking gear continues to surge around the world.

Product Royalty Income - Product royalty income is earned on sales to distributors that have royalty agreements in place, as well as on sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the quarters ended September 30, 2021 and 2020 were $58,246 and $36,016, respectively. The 62% increase in product royalty income is due to an increase in the sale of licensed products by licensees in the 2021 period.

Salaries and Wages - Salaries and wages for the quarters ended September 30, 2021 and 2020 were $975,676 and $784,131, respectively. This 24% increase in salaries and wages during the 2021 period was primarily due to the employment of marketing and sales personnel in North and South America, as the Company continues to build a team of high performing sales and brand management professionals.

Commissions and Consulting Expense - During the quarters ended September 30, 2021 and 2020, commissions and consulting expenses were $144,837 and $157,672, respectively. This 8% decrease in commissions and consulting expenses is primarily due to a decrease in commissions paid to employees and outside sales personnel in the United States. Container shortages and congestion at major shipping ports globally and particularly in the United States resulted in a temporary delay in the shipment and ultimate receipt of stock available for sale which affected the achievement of sales targets for the third quarter of 2021.

Professional Fees - Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection and product liability litigation and settlement expenses incurred as the Company continues to expand. Professional fees for the quarters ended September 30, 2021 and 2020 were $510,713 and $181,233, respectively. This 182% increase in professional fees is primarily due to an increase in product liability litigation settlement costs during the third quarter of 2021.

Advertising and Marketing - The Company places paid advertising in various motorsport magazines and online media, and sponsors a number of events, teams and individuals to increase product and brand visibility. Advertising and marketing expenses for the quarters ended September 30, 2021 and 2020 were $633,915 and $543,020, respectively. The 17% increase in advertising and marketing expenditures during the 2021 period is primarily due to an increase in global coordinated marketing activities undertaken by our distribution partners. The Company successfully partnered with its global distribution partners in a cost sharing initiative in order to create global, synchronized brand building and product launch campaigns during the 2021 period.

Office Lease and Expenses - Office lease and expenses for the quarters ended September 30, 2021 and 2020 were $99,314 and $78,932, respectively. This 26% increase in office lease and expenses during the 2021 period was primarily due to an increase in warehouse lease expenditure in the United States in line with additional storage required as the company continues to expand its assortment of exceptional protective gear.

Research and Development Costs - These costs consist of the salaries of personnel who are directly involved in the research and development of innovative products, as well as the direct costs associated with developing these products. Research and development costs for the quarter ended September 30, 2021 increased to $468,922, from $404,723, during the same 2020 quarter.  The 16% increase during the 2021 third quarter is primarily as a result of the employment of product design, development and engineering professionals with specific industry competence in order to continue the development of a refined and expanded pipeline of exceptional cutting-edge products.

Bad Debt Expense - Bad debt expense for the quarters ended September 30, 2021 and 2020 were $42,197 and $32,172, respectively. The 31% increase in bad debt expense is primarily the result of an increase in the provision for doubtful accounts during the 2021 period, in line with an increase in accounts receivable balances at Two Eleven Distribution in the United States at September 30, 2021 when compared to June 30, 2021.

General and Administrative Expenses - General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the quarters ended September 30, 2021 and 2020 were $691,696 and $459,993, respectively. The 50% increase in general and administrative expenses is primarily due to an increase in product liability insurance premiums incurred during the third quarter of 2021 as a result of exceptional sales growth achieved in the United States for the 12 months ended September 30, 2021.

Depreciation Expense - Depreciation expense for the quarters ended September 30, 2021 and 2020 were $265,777 and $212,564, respectively. This 25% increase in depreciation during the 2021 third quarter is primarily due to the addition of molds and tooling utilized in the production of the Company's rapidly expanding product offering

Total Operating Expenses - Total operating expenses increased by $978,607 to $3.83 million in the three months ended September 30, 2021, or 34%, compared to $2.85 million in the 2020 period. This increase is primarily due to the increase in professional fees, general and administrative costs and salaries and wages discussed above.

Net income - The net income after income taxes for the quarter ended September 30, 2021 was $4.29 million, as opposed to a net income of $1.61 million for the quarter ended September 30, 2020. This increase in net income is primarily due to the increase in revenues and gross profit discussed above.

Comparison of Nine Months ended September 30, 2021 and 2020

The following table summarizes the results of our operations during the nine-month periods ended September 30, 2021 and 2020 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

Revenues - We earn revenues from the sale of our protective gear comprising of neck braces, body armor, helmets and other products, parts and accessories both in the United States and internationally. Revenues for the nine-month period ended September 30, 2021 were $49.30 million, a 91% increase, compared to revenues of $25.86 million for the period ended September 30, 2020.  Revenues generated from sales to our customers in the United States increased from $9.73 million to $14.79 million, for the nine months ended September 30, 2021 and 2020, respectively. Revenues associated with international customers were $34.51 million and $16.13 million, or 70% and 62% of revenues, respectively, for the nine months ended September 30, 2021 and 2020. This increase in global revenues during the 2021 period is attributable to a $14.30 million increase in body armor sales, a $4.12 million increase in sales of other products, parts and accessories, a $2.64 million increase in neck brace sales and a $2.41 million increase in helmet sales.

The following table sets forth our revenues by product line for the nine months ended September 30, 2021 and 2020:

Sales of our flagship neck brace accounted for $6.22 million and $3.58 million, or 13% and 14% of our revenues for the nine-month periods ended September 30, 2021 and 2020, respectively.  The 74% increase in neck brace revenues is primarily attributable to a 67% increase in the volume of neck braces sold to our customers globally as demand for neck braces continues to grow.

Our body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes.  Body armor sales accounted for $28.31 million and $14.04 million, or 57% and 54% of our revenues for the nine-month period ended September 30, 2021 and 2020, respectively. The 102% increase in body armor revenues was primarily the result of a 75% increase in the volume body armor sold during the period. There is a continued worldwide demand for our line of premium, athlete-tested upper body and limb protectors designed for off-road motorcycle and mountain biking use and continued encouraging shipments of our growing footwear category consisting of off-road motorcycle boots and mountain biking shoes.

Our Helmets accounted for $4.89 million and $2.48, or 10% and 10% of our revenues for the nine months ended September 30, 2021 and 2020, respectively. The 97% increase in helmet sales during the 2021 period is primarily due to a 126% increase in the volume of helmets sold globally during the period.

Our other products, parts and accessories are comprised of goggles, hydrations bags and apparel items including jerseys, pants, shorts and jackets as well as aftermarket support items required primarily to replace worn or damaged parts through our global distribution network.  Other products, parts and accessories sales accounted for $9.88 million and $5.76 million, or 20% and 22% of our revenues for the nine months ended September 30, 2021 and 2020, respectively. The 71% increase in revenues from the sale of other products, parts and accessories is primarily due to a 135% increase in the volume of riding apparel designed for off-road motorcycle and mountain biking use during the 2021 period, as consumers around the world continue to recognize our apparel as a premium, cutting edge offering designed for professional and recreational use. 

Cost of Revenues and Gross Profit - Cost of revenues for the nine-month periods ended September 30, 2021 and 2020 were $27.52 million and $14.13 million, respectively. Gross Profit for the nine-month periods ended September 30, 2021 and 2020 were $21.77 million and $11.73 million, respectively, or 44% and 45% of revenues respectively. Our neck brace products continue to generate a higher gross profit margin than other product categories. Neck brace revenues accounted for 13% and 14% of our revenues for the nine-month period ended September 30, 2021 and 2020, respectively, and global shipping and logistic cost increases contributed to an increase in our cost of sales during the 2021 period.

Product Royalty Income - Product royalty income is earned on sales to distributors that have royalty agreements in place, as well as on sales of licensed products by third parties that have licensing agreements in place. Product royalty income for the nine-month period ended September 30, 2021 and 2020 were $141,535 and $40,675, respectively. The 248% increase in product royalty income is due to an increase in the sale of licensed products by licensees in the 2021 period.

Salaries and Wages - Salaries and wages for the nine-month period ended September 30, 2021 and 2020 were $2,813,024 and $2,251,583, respectively. This 25% increase in salaries and wages during the 2021 period was primarily due to the employment of additional sales and marketing personnel in North and South America during the 2021 period, and the temporary staff cost reduction measures implemented by the Company during the second quarter of 2020, in an effort to partially mitigate the potential effects of the COVID-19 pandemic.

Commissions and Consulting Expense - During the nine-month periods ended September 30, 2021 and 2020, commissions and consulting expenses were $581,485 and $345,014, respectively. This 69% increase in commissions and consulting expenses during the 2021 period is primarily due to an increase in commissions and performance incentives paid to both employee and external sales personnel in the United States as a result of the achievement of significant sales growth in the region during the 2021 period.

Professional Fees - Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection and product liability litigation and settlement expenses incurred as the Company continues to expand. Professional fees for the nine-month periods ended September 30, 2021 and 2020 were $971,969 and $716,138, respectively. This 36% increase in professional fees is primarily due to an increase in product liability litigation settlement costs during the period.

Advertising and Marketing - The Company places paid advertising in various motorsport magazines and online media, and sponsors a number of events, teams and individuals to increase product and brand visibility. Advertising and marketing expenses for the nine-month periods ended September 30, 2021 and 2020 were $1,669,648 and $1,524,251, respectively. The 10% increase in advertising and marketing expenditures during the 2021 period is primarily due to an increase in coordinated marketing production and implementation activities undertaken globally. Additionally, the Company successfully partnered with its global distribution partners in a cost sharing initiative to implement synchronized brand building and product launch campaigns for both the off-road motorcycle and mountain biking riding community during the 2021 period.

Office Lease and Expenses - Office lease and expenses for the nine-month periods ended September 30, 2021 and 2020 were $273,887 and $225,132, respectively. The 22% increase in office lease and expenses during the 2021 period was primarily due to an increase in warehouse lease expenditure incurred in the United States in line with additional storage space required to accommodate the Company's rapidly growing assortment of protective gear.

Research and Development Costs - These costs consist of the salaries of personnel who are directly involved in the research and development of innovative products, as well as the direct costs associated with developing these products. Research and development costs for the nine-month periods ended September 30, 2021 and 2020, increased to $1,319,183, from $1,129,535, during the same 2020 period. The 17% increase in research and development costs during the 2021 period is due to the employment of product design, development, and engineering professionals in order to continue the Company's refinement and development of a pipeline of exceptional cutting-edge products.

Bad Debt Expense - Bad debt expense for the nine-month periods ended September 30, 2021 and 2020 were $56,290 and $59,092, respectively.  The 5% decrease in bad debt expense during the 2021 period is primarily the result of a decrease in bad debts that were considered to be unrecoverable and written off during the 2021 period.

General and Administrative Expenses - General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the nine-month periods ended September 30, 2021 and 2020 were $1,830,055 and $1,390,236, respectively. The 32% increase in general and administrative expenses during the 2021 period is primarily the result of an increase in product liability premiums incurred during the 2021 period in line with the significant increase in revenues in the United States for the 12 months ended September 30, 2021.

Depreciation Expense - Depreciation expense for the nine-month periods ended September 30, 2021 and 2020 were $744,713 and $595,365, respectively. This 25% increase in depreciation during the 2021 period is primarily due to the addition of molds and tooling utilized in the production of the Company's growing product offering

Total Operating Expenses - Total operating expenses increased by, $2,023,908 to $10,260,254 in the nine months ended September 30, 2021, or 25%, compared to $8,236,346 in the 2020 period. The 25% increase in total operating expenses during the 2021 period is primarily due to the increase in salaries and wages, commissions and consulting costs, general and administrative expenses and professional fees discussed above.

Net income - Net income after income taxes for the nine-month period ended September 30, 2021 was $8.76 million, as opposed to net income after income taxes of $2.65 million for the nine-month period ended September 30, 2020.  This increase in net income during the 2021 period is primarily due to the increase in revenues and gross profit discussed above.

Liquidity and Capital Resources

At September 30, 2021, we had cash and cash equivalents of $2.59 million and $0.58 million of short-term investments. The following table sets forth a summary of our cash flows for the periods indicated:

Cash decreased by $380,371, or 13%, for the nine months ended September 30, 2021, when compared to cash on hand at December 31, 2020. The primary sources of cash for the nine months ended September 30, 2021 were net income of $8,757,297, an increase in accounts payable of $8,412,521 and an increase in income taxes payable of $1,271,016. The primary uses of cash for the nine months ended September 30, 2021 were an increase in accounts receivable of $10,023,484, an increase in inventory of $5,060,128, an increase in prepaid expenses and other current assets of $2,212,611 and an increase in payments in advance of $952,067.

The Company is currently meeting its working capital needs through cash on hand 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 September 30, 2021 and 2020, the Company paid an aggregate of $58,085 and $42,451, 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 September 30, 2021 and 2020, the Company paid an aggregate of $14,515 and $10,613, 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. During the quarters ended September 30, 2021 and 2020, the Company recognized an aggregate of $126,699 and $124,338, respectively, in consulting fees to Innovate.  On November 8, 2021, the Company terminated the agreement with Innovate, effective October 31, 2021, in connection with the wind-up of Innovate's business operations.  The termination of the agreement with Innovate will not have an adverse effect on the Company's research and development operations as the Company simultaneously entered into a new consulting agreement with Innovation Services Limited, Jersey limited company beneficially owned by Dr. Leatt, for the same research, development and marketing  services, and on substantially the same terms and conditions as the terminated agreement.   

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.

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 twelve payments of $20,290, at a 4.350% annual interest rate, commencing on June 1, 2021 and ending on April 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 September 30, 2021, the Company had not defaulted on its payment obligations under this agreement.

The Company entered into a Premium Finance Agreement with AFCO, dated October 27, 2020, to finance its U.S short-term insurance over the period of coverage.  The Company is obligated to pay AFCO an aggregate sum of $926,110 in eleven payments of $84,192, at an annual interest rate of 4.950% commencing on November 1, 2020 and ending on September 1, 2021.  Any late payment during the term of the agreement will be assessed a late penalty of 5% of the payment amount due, and in the event of default AFCO has the right to accelerate the payment due under the agreement. This agreement was paid in full on September 3, 2021.

The Company entered into a Premium Finance Agreement with AFCO, dated October 29, 2021, to finance its U.S short-term insurance over the period of coverage.  The Company is obligated to pay AFCO an aggregate sum of $1,122,858 in eleven payments of $102,078, at an annual interest rate of 4.650% commencing on November 1, 2021 and ending on September 1, 2021.  Any late payment during the term of the agreement will be assessed a late penalty of 5% of the payment amount due, and in the event of default AFCO has the right to accelerate the payment due under the agreement.

On November 19, 2018, the Company entered into a $1,000,000 revolving line of credit agreement with a bank. Payments for the advances under the line bear interest at the LIBOR Daily Floating Rate plus 2.5 percentage points commencing January 1, 2019. The line of credit matured on November 19, 2020, at which time the unpaid principal, interest, or other charges outstanding under the agreement are due and payable. On November 5, 2020, the Company executed an amendment to the line of credit to extend the line of credit facility through November 19, 2021. The amendment took retroactive effect to October 27, 2020 and introduced an index floor so that payments for any future advances will bear interest at the greater of the LIBOR Daily Floating Rate or an Index Floor of 1.25 percentage points plus 2.5 percentage points. Obligations under the line of credit are secured by equipment and fixtures in the United States of America, accounts receivable and inventory of Leatt Corporation and Two-Eleven Distribution, LLC. On March 1, 2021, we executed a second amendment to the line of credit. The amendment took retroactive effect to February 17, 2021, extended the line of credit facility through February 28, 2022, and increased the revolving line of credit to $1,500,000.  As of September 30, 2021, there were no advances of the line of credit leaving $1,500,000 of the line of credit available for advance.

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 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. 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 September 30, 2021 and 2020 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 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.

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 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 September 30, 2021 was $134,308 and at December 31, 2020 was $101,885.

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 quarters ended September 30, 2021 and 2020.