ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 personal protective equipment 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 body protection products, and helmets which it markets under the Leatt® brand.
The Company's research and development efforts are conducted at its research facilities, located at its executive headquarters in Cape Town, South Africa. The Company employs 4 full-time employees who are dedicated exclusively to research, development, and testing. The Company also utilizes consultants, academic institutions and engineering companies as independent contractors or consultants, from time to time, to assist it with its research and development efforts. Leatt products have been tested and reviewed internally and by external bodies. All Leatt products are compliant with applicable European Union directives, or CE certified, where appropriate. Depending on the market we have other certifications outside of CE. Specifically, all our motorcycle helmets comply with Economic Commission for Europe (ECE) UN Regulation No. 22 r06, and our bicycle helmet complies with the European Committee for Standardization (CEN) EN-1078 standard. For the US market, our motorcycle helmets comply with the US Department of Transportation (DOT) FMVSS 218 helmet safety standard and our bicycle helmet complies with the US Consumer Product Safety Commission (CPSC) 1203 standard for helmet safety. Our downhill specific bicycle helmets also comply with the American Society for Testing and Materials ( ASTM) F1952 standard for downhill racing safety. For the Australian market, our bicycle helmet complies with Australian/New Zealand Standard (AS/NZS) 2063, for the UK market, substantially all of our motorcycle helmets comply with the Auto Cycle Union (ACU) gold standard, for the Japanese market, our Moto 3.5 helmet with the Japanese Standard Association (JSA) JIS T 8133 standard for protective helmets, and for the Brazilian market our Moto 7.5, Moto 3.5, and Moto 2.5 helmets comply with The Brazilian Association of Technical Standards (ABNT) NBR 7471 safety standard. Moto 9.5, Moto 8.5, Moto 7.5, Moto 3.5 and Moto 2.5 and ADV 9.5, ADV 8.5 and ADV 7.5 have CCC approval for the market in China. Our Enduro 4.0 helmet, All-Mountain 4.0 helmet and Gravity 5.0 helmet have acquired NTA8776 certification, a new e-bike helmet certification required in the Dutch Technical Agreement (NTA) 8776. The Moto 9.5 have been homologated to FRHPhe-02-2023 for us in FIM sanctioned off-road racing events.
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 continue to build manufacturing capacity outside China, namely, in Thailand, Cambodia, 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 61 distributors worldwide and 6 e-commerce partners, 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 and direct to end consumers through digital channels 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 31, 2025, 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.
• 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 product design and to had caused a motocross rider to multiple mid-thoracic spine fractures, causing immediate and permanent paraplegia, when he crashed at a relatively low speed on February 13, 2011. When the occurred, he was wearing a helmet and other safety gear from several different companies, including the Company's Leatt-Brace®. The Company produced evidence at trial showing that his thoracic paraplegia was an 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 cervical spine . The Company had maintained from the onset that this and a small handful of other lawsuits are without merit and that it would vigorously itself in each case. In this case, the subsequently appealed the court's decision, and the parties reached an amicable settlement. Although we carry product liability insurance, a claim brought us could significantly our business and financial condition and have an 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 , such as impacts on our consumers and on consumer purchasing behavior, which could cause in new orders, in completing sales or even order . The continued mutation and spread of deadly viruses, economic headwinds caused by global quarantines, or the occurrence of any other events, could have a impact on our sales revenue for the coming periods and beyond.
• Impact of Global Conflict - We are exposed to global conflict, such as the ones in Ukraine and the Middle East, that may disrupt our business and reduce consumer demand for our products. A disruption of global shipping routes, the imposition of government sanctions, or other activities resulting from such conflicts 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, prolonged conflict may have unintended global consequences such as increased inflation and volatility in 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 in the receipt of receivables in our bank account from the distributors of our products in Russia caused by screening of Russian funds in compliance with global sanctions Russia for the war in Ukraine. The , intensification or expansion of these into surrounding regions could have an impact on our consumers and on consumer purchasing behavior, and result in of new orders and completing sales, order , or payment and shipping . We will continue to monitor these fluid situations and any impact that they may have on the global economy in general and on our business operations and especially that of our customers, and we will develop contingencies as necessary to address any to our business operations as they arise.
Results of Operations
Year ended December 31, 2025, compared to the year ended December 31, 2024
The following table summarizes the results of our operations during the years ended December 31, 2025 and 2024 and provides information regarding the dollar and percentage of year-over-year increase or (decrease):
Fiscal Year Ended December 31,
Percentage
Increase
Increase
Item
(Decrease)
(Decrease)
REVENUES
COST OF REVENUES
GROSS PROFIT
PRODUCT ROYALTY INCOME
OPERATING EXPENSES
Salaries and Wages
Commissions and Consulting
Professional Fees
Advertising and Marketing
Office Lease and Expenses
Research and Development Costs
Bad Debt Recovery
General and Administrative
Depreciation
Impairment
Total Operating Expenses
INCOME (LOSS) FROM OPERATIONS
Other Income
INCOME (LOSS) BEOFRE INCOME TAXES
Provision for (benefit from) Income taxes
NET INCOME (LOSS)
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, 2025 were $61.91 million, a 41% increase, compared to revenues of $44.03 million, for the year ended December 31, 2024. This increase in worldwide revenues is attributable to a $6.52 million increase in body armor sales, a $4.92 million increase in helmet sales, a $5.99 million increase in other products, parts and accessories sales and a $0.45 million increase in neck brace sales. Revenues associated with international customers for the years ended December 31, 2025 and 2024, respectively, were $44.64 million and $30.41 million, or 72% and 69% of global revenues. Consumer direct sales increased by 44% and dealer direct sales increased by 22% for the year ended December 31, 2025, with sales to our global distributors increasing by 48%, when compared to the prior year period, as consumer demand for our products continued to build and sales momentum at the dealer level domestically improved.
The following table sets forth our revenues by product line for the years ended December 31, 2025 and 2024:
Year Ended December 31,
% of Revenues
% of Revenues
Neck braces
Body armor
Helmets
Other products, parts and accessories
Sales of our flagship neck brace accounted for $2.89 million and $2.44 million, or 5% and 6% of our revenues for the years ended December 31, 2025 and 2024, respectively. The 18% increase in neck brace revenues is primarily attributable to a 35% increase in the volume of neck braces sold during the 2025 period.
Our body armor products are comprised of chest protectors, full upper body protectors, upper body protection vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes. Body armor revenues accounted for $28.98 million and $22.46 million, or 47% and 51% of our revenues for the years ended December 31, 2025 and 2024, respectively. The 29% increase in body armor revenues was primarily the result of a 22% increase in revenue generated from the sale of upper body and limb protection and a 40% increase in the volume of footwear, comprising of motorcycle boots and mountain biking shoes, sold during the 2025 period.
Our helmets accounted for $13.31 million and $8.39 million, or 21% and 19% of our revenues for the years ended December 31, 2025 and 2024, respectively. The 59% increase in helmet revenues is primarily due to a 33% increase in the volume of MOTO, MTB, and ADV helmets sold to our global customers during the 2025 period.
Our other products, parts and accessories are comprised of goggles, hydrations bags and apparel items including jerseys, pants, shorts and jackets, sunglasses, bicycle components and aftermarket product support items. Other products, parts and accessories sales accounted for $16.73 million and $10.74 million, or 27% and 24% of our revenues for the years ended December 31, 2025 and 2024, respectively. The 56% increase in revenues of other products, parts and accessories is primarily due to a 54% increase in the sales volume of our MOTO, MTB and ADV technical apparel lines, designed for offroad motorcycle, mountain biking and adventure motorcycle riding, respectively during the 2025 period.
Costs of Revenues and Gross Profit - Cost of revenues for the years ended December 31, 2025 and 2024 were $34.69 million and $26.31 million, respectively. Gross Profit for the years ended December 31, 2025 and 2024 were $27.22 million or 44% of revenues, and $17.71 million or 40% of revenues, respectively. Our neck brace products continue to generate a higher gross margin than our other product categories. Although neck brace revenues accounted for 5% and 6% of our revenues for the year ended December 31, 2025 and 2024, respectively, the 4% increase in gross profit as a percentage of revenues, was primarily due to dealer direct promotional selling activity during the year ended December 31, 2024, designed to turn slower moving inventory. As industry-wide inventory dynamics continue to improve and our dealer direct sales momentum continues, margins earned on dealer direct sales continued to improve. Additionally, shipping costs as a percentage of domestic and international distributor revenues improved as shipping and logistics efficiencies continue to improve.
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, 2025 and 2024 were $381,757 and $326,614, respectively. The 17% increase in product royalty income is primarily due to an increase in the sale of licensed products to licensees during the 2025 period.
Salaries and Wages - Salaries and wages for the years ended December 31, 2025 and 2024 were $7.92 million and $7.14 million, respectively. This 11% increase in salaries and wages during the 2025 period was primarily due to the employment of sales, marketing and brand management professionals globally as the Company continues to build a diversified multi-channel selling organization and global consumer facing brand. Additionally, share compensation costs relating to the recognition of share grants that were issued during the fourth quarter of 2023 were recognized on a straight-line basis for the year ended December 31, 2025.
Commissions and Consulting Expense - Commissions and consulting expense for the years ended December 31, 2025 and 2024 were $764,602 and $535,584, respectively. This 43% increase in commissions and consulting expenses during the 2025 period is primarily the result of an increase in commissions paid to sales representatives and management in the United States in line with the increase in domestic sales when compared to the 2024 period.
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 incurred as the Company continues to expand its portfolio of exceptional protective gear. Professional fees for the years ended December 31, 2025 and 2024 were $853,065 and $627,659, respectively. The 36% increase in professional fees is primarily due to an increase in expenditures on corporate legal, listing and audit fees incurred during the 2025 period.
Advertising and Marketing - The Company primarily places paid advertising on various motorsport and bicycle online platforms 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, 2025 and 2024 were $4.56 million and $4.45 million, respectively. The 2% increase in advertising and marketing costs during the 2025 period is primarily due to increased trade show, athlete sponsorship and international sales conference expenditures, that were partially offset by a decrease in point of sale merchandising costs.
Office Lease and Expenses - Office lease and expenses for the years ended December 31, 2025 and 2024 were $923,839 and $702,785, respectively. Although lease expenses relating to our offices and warehouse in the United States decreased when compared to the 2024 period, the 31%, increase in office lease and expenses is primarily due to the inclusion of consolidation warehousing costs incurred during the 2025 period in order to facilitate consolidated global shipping.
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 year ended December 31, 2025, increased to $2,704,071, from $2,523,881, during the same 2024 period. The 7% increase in research and development costs during the 2025 period is primarily as a result of an increase in expenditure on product certification and research costs, as the Company continues to develop a pipeline on cutting edge products and refine its product categories.
Bad Debt Recovery - Bad debt recovery for the years ended December 31, 2025 and 2024 were $65,923 and $76,278, respectively. This 14% decrease in bad debt recovery is primarily the result of a decrease in bad debts that were recovered during the 2025 period, when compared to the prior year comparative period.
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, 2025 and 2024, were $4.37 million and $3.88 million, respectively. The 13% increase in general and administrative expenses is primarily due to an increase in fees paid to enhance the Company's global e-commerce selling capabilities, that were partially offset by a decrease in merchant fees paid when compared to the comparative 2024 period.
Depreciation Expense - Depreciation expense for the years ended December 31, 2025 and 2024 was $1.33 million and $1.23 million, respectively. The 8% increase in depreciation expense is primarily due to software enhancements that were implemented to improve customer and consumer buying activity across the Company's digital and web-based selling platforms.
Impairment Expense - Impairment expense for the years ended December 31, 2025 and 2024 was $234,224 and $0, respectively. The 100% increase in impairment expense is primarily due to the impairment of long-lived intangible web assets as a result of web platform enhancements designed to increase development, engagement and ultimately e-commerce selling abilities.
Total Operating Expenses - Total operating expenses increased by $2.58 million to $23.59 million for the year ended December 31, 2025, when compared to $21.02 million in the 2024 period. This increase in total operating expenses during the 2025 period is primarily due to increases in salaries and wages, commission and consulting and general administrative expenditures discussed above.
Other Income - Other income for the years ended December 31, 2025 and 2024 was $397,000 and $275,413, respectively. The 44% increase in other income is primarily due to an increase in interest received during the 2025 period.
Provision for (benefit from) Income taxes - Provision for (benefit from) Income taxes for the years ended December 31, 2025 and 2024 was $1.14 million and $(498,799), respectively. The 329% increase in income taxes is primarily due to an increase in net income before taxation as a result of the increase in revenues and margins discussed above.
Net Income (Loss) - The net income after income taxes for the year ended December 31, 2025 was $3.26 million, an increase of $5.47 million when compared to a net loss after income taxes of ($2.20) million. This 248% increase in net income is primarily due to the increase in revenues and margins that were partially offset by the increase in total operating expenses discussed above.
Liquidity and Capital Resources
At December 31, 2025, we had cash, cash equivalents and restricted cash of $13.23 million, as compared to cash and cash equivalents of $12.37 million at December 31, 2024. The following table sets forth a summary of our cash flows for the periods indicated:
December 31,
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of period
Cash, cash equivalents and restricted cash at the end of period
Cash increased by $864,947 or 7%, for the year ended December 31, 2025. The primary sources of cash during 2025 were net income of $3,263,922 and an increase in accounts payable and accrued expenses amounting to $1,654,576. The primary uses of cash for the 2025 period were an increase in inventory of $2,869,908, increased accounts receivable of $1,197,572 an increase in prepaid expenses and other current assets amounting to $631,082 and capital expenditures of $1,081,946.
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 31, 2025 and 2024, the Company paid an aggregate of $113,740 and $106,679, 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, 2025 and 2024, the Company paid an aggregate of $28,435 and $26,670, in licensing fees to Mr. De Villiers.
Dr. Christopher Leatt is compensated in his capacity as our Research and Development consultant, pursuant to our Consulting Agreement, dated November 8, 2021, with Innovation Services Limited, or Innovation, a Jersey limited company in which, Dr. Leatt 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; 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. During the year ended December 31, 2025, the monthly fee payable by the Company to Innovation was $$48,437. Innovation may increase its monthly fees, on an annual basis on written notice to the Company, by no greater than the lesser of: (a) five percent (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 term of the Consulting Agreement will continue unless by either party in accordance with its terms. Either party may the Consulting Agreement upon 6 months' prior written notice, except that the Company may immediately it without notice if the services to be performed by to be performed by Dr. Leatt, if ownership in by Dr. Leatt and his immediate family members decreases, or for any other material of the agreement. The parties have agreed to settle any 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.
In addition to the Consulting Agreement, the Company 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 in his fulfillment of such duties and obligations. The foregoing agreements replaced prior agreements in from June 2018 to November 2021, among the Company, Dr. Leatt and Services Limited, a Seychelles company, owned by Dr. Leatt, that wound up operations. 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, 2025, and 2024, the Company recognized an aggregate of $573,058 and $555,317, respectively, in consulting fees to .
The Company is the holder of a $1,500,000 revolving line of credit through March 1, 2026, pursuant to a line of credit agreement with a U.S. bank, dated November 19, 2018, as amended. Advances under the line of credit bear interest at the greater of the Secured Overnight Financing Rate Daily Floating rate plus spread adjustment or an Index Floor of 1.25 percentage points, plus 2.5 percentage points. Effective February 12. 2026, the Company signed Amended and Restated Loan Agreement to extend the revolving line of credit to March 1, 2027, the agreement adjusted the interest rate to the greater of the Secured Overnight Financing Rate Daily Floating rate plus spread SOFR adjustment or the index floor, plus 2.7 percentage points. Obligations under the line of credit are secured by the United States accounts receivable, inventory, and equipment and fixtures of the Company and its subsidiary, Two Eleven Distribution, LLC. As of December 31, 2025 and 2024, respectively, there were no advances of the line of credit, leaving $1,500,000 and $1,500,000 available for advances.
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 a 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 and upon shipment of products direct to end consumers, which have been sold through digital channels. The Company's standard terms and conditions of sale for non-consumer direct sales do not allow for product returns other than under warranty. Web-based direct sales permit products to be returned or exchanged within 30 days of the purchase date.
International sales (other than in the United States and South Africa) are generally drop-shipped directly from our consolidation warehouse or our third-party manufacturing partner to Company's 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.
Sales commissions are expensed when incurred, which is generally at the time of sale.
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 cost of revenues in the accompanying consolidated statements of operations and comprehensive income (loss). 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.
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 Credit Losses - Accounts receivable consist of amounts due to the Company from normal business activities. Credit is granted to distributors on an unsecured basis based on credit risk analysis procedures. We continuously monitor credit reports, collections, communication and payments from customers and maintain an allowance for credit losses based upon the expected credit losses determined utilizing historical experience and any specific customer collection issues that have been identified. In determining the amount of the allowance, we are required to make certain estimates and assumptions. Accounts receivable balances that are still outstanding after we have used reasonable collection efforts are written off as uncollectible. While such credit losses have historically been minimal, within our expectations and the provisions established, macro-economic conditions and customer financial positions are fluid, and we cannot guarantee that we will continue to experience the same credit loss rates that we have had in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results. The allowance for short-term credit at December 31, 2025 and December 31, 2024, was $205,827 and $500,164, respectively. Additionally, an allowance for long-term credit will be included for accounts receivables that are anticipated to be collected over a period that is than 12 months. The allowance for long-term credit at December 31, 2025 and December 31, 2024 was $0 and $3,366, respectively.
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, 2025 and December 31, 2024 was $510,576 and $533,953, respectively.
Impairment of Long-Lived Assets - The Company reviews its intangible and tangible long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the expected future net cash flows to be generated by the assets. Based on these reviews, the Company recognized an impairment charge of $234,224 relating to intangible capitalized website costs and $0 to the carrying value of long-lived assets during the years ended December 31, 2025 and 2024, respectively.
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 are material to its stockholders.
