LEATT CORPORATION 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 theSEC . 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.
Use of Certain Defined Terms
Except as otherwise indicated by the context, references in this report to:
• "Leatt," "we," "us," "our," the "Registrant" or the "Company" are to the combined business ofLeatt Corporation , aNevada corporation, its South African branch,Leatt SA , and its direct, wholly-owned subsidiaries, Two Eleven and Leatt Prop;
• "Leatt Prop" refers to
• "
• "
• "PRC", and "China" are to
• "Two Eleven" refers to
• "Securities Act" are to the Securities Act of 1933, as amended, and to "Exchange Act" are to Securities Exchange Act of 1934, as amended;
• "South Africa" are to the
• "
• "
• "ZAR" refers to the South African Rand, the legal currency ofSouth Africa . For all ZAR amounts reported, the dollar amount has been calculated on the basis that$1 =ZAR17.9694 for itsSeptember 30, 2022 balance sheet. 13
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Overview of Our Business
We were incorporated in theState of Nevada onMarch 11, 2005 , under the nameTreadzone, Inc. We were a shell company with little or no operations untilMarch 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 andXceed Holdings , a company controlled by the Company's Chairman and founder, Dr.Christopher Leatt . OnMay 25, 2005 , we changed our name toLeatt 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 byXceed 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 andXceed 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 inCape 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 applicableEuropean 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 theUK market our motorcycle helmets comply with ACU Gold and our Moto 3.5 helmet with JIS T 8133 for the Japanese Market. For the Brazilian market our Moto 7.5 and Moto 3.5 helmets comply with NBR 7471. Our products are predominately manufactured inChina in accordance with our manufacturing specifications, pursuant to outsourced manufacturing arrangements with third-party manufacturers located there, based on agreed terms. We are also building manufacturing capacity outsideChina , namely, inThailand andBangladesh . 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. TwoEleven and Leatt SA directly distribute Leatt products to dealers inthe United States andSouth 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 theU.S. ,Asia andEurope , may have an impact on our business and our financial condition, and we may face challenges if economic conditions do not improve. These economic conditions may impact levels of consumer spending in the foreseeable future. If demand for our products fluctuates as a result of these economic conditions or otherwise, our revenue and gross margin could be harmed. • Trade Restrictions - We engage in international manufacturing and sales which exposes us to trade restrictions and disruptions that could harm our business and competitive position. Most of our products are manufactured inChina , and theU.S. administration has announced tariffs on certain products imported intothe United States withChina as the country of origin. While these tariffs have not had a significant impact on the shipment of our products to international markets as atSeptember 30, 2022 , we believe that the future imposition of, or significant increases in, the level of tariffs, custom duties, export quotas and other barriers and restrictions by theU.S. onChina 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. 14
-------------------------------------------------------------------------------- • 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 theUnited States District Court for the Northern District of Ohio (Eastern) ending onApril 17, 2014 , a federal jury returned a defense verdict for the Company in the first Leatt-Brace® product liability lawsuit to be tried inthe United States . The plaintiffs in that case had alleged that defective product design and failure to warn had caused a motocross rider to suffer multiple mid-thoracic spine fractures, causing immediate and permanent paraplegia, when he crashed at a relatively low speed onFebruary 13, 2011 . When the accident occurred, he was wearing a helmet and other safety gear from several different companies, including the Company's acclaimed Leatt-Brace®. The Company produced evidence at trial showing that his thoracic paraplegia was an unavoidable consequence of his fall, not the result of wearing a Leatt-Brace®, and that the neck brace likely saved his life (or saved him from quadriplegia) by preventing cervical spine injury. The Company had maintained from the onset that this and a small handful of other lawsuits are without merit and that it would vigorously defend itself in each case. In this case, the plaintiffs subsequently appealed the court's decision, and the parties reached an amicable settlement. Although we carry product liability insurance, a successful claim brought against us could significantly harm our business and financial condition and have an adverse impact on our ability to renew our product liability insurance or secure new coverage. • Protection of Intellectual Property - We believe that the continued success of our business is dependent on our intellectual property portfolio consisting of globally registered trademarks, design patents and utility patents related to the Leatt-Brace®. We believe that a loss of these rights would harm or cause a material disruption to our business and, our corporate strategy is to aggressively take legal action against any violators of our intellectual property rights, regardless of where they may be. From time to time, we have had to enforce our intellectual property rights through litigation, and we may be required to do so in the future. Such litigation may result in substantial costs and could divert resources and management attention from the operations of our business. • Fluctuations in Foreign Currencies - We are exposed to foreign exchange risk as our revenues and consolidated results of operations may be affected by fluctuations in foreign currency as we translate these currencies intoU.S. dollars when we consolidate our financial results. While our reporting currency is theU.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 inSouth Africa utilize South African labor sources. A decrease in the value of theU.S. dollar in relation to the ZAR could increase our cost of doing business inSouth Africa . If the ZAR depreciates against theU.S. Dollar, the value of our ZAR revenues, earnings and assets as expressed in ourU.S. Dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. Furthermore, since 78% of our sales are derived outside theU.S. , where theU.S. dollar is not the primary currency, significant fluctuations in exchange rates such as the strengthening of the dollar versus our customers' local currency can adversely affect our ability to remain competitive in those areas. • Natural or Man-made Catastrophic Events - We are exposed to natural or man-made catastrophic events that may disrupt our business and may reduce consumer demand for our products. A disruption or failure of our systems or operations in the event of a natural disaster, health pandemic, such as the outbreak and global spread of COVID-19 or the coronavirus, or a man-made catastrophic event could cause delays in completing sales, continuing production or performing other critical functions of our business, particularly if a catastrophic event occurred at our primary manufacturing locations or our distributor locations worldwide. Any of these events could severely affect our ability to conduct normal business operations and, as a result, our operating results could be adversely affected. There may also be secondary impacts that are unforeseeable, such as impacts on our consumers and on consumer purchasing behavior, which could cause delays in new orders, delays in completing sales or even order cancellations. As the COVID-19 pandemic continues to evolve, we believe the extent of the impact to our operations will be primarily driven by the severity and duration of the pandemic, the pandemic's impact on theU.S. and global economies and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Due to strong consumer demand for outdoor product categories since the initial stages of the pandemic, we did not see any significant material negative impact of COVID-19 on the Company's results of operations for the nine months endedSeptember 30, 2022 . We remain cautiously optimistic that ongoing efforts to increase the availability of new COVID-19 vaccines worldwide will mitigate the spread of the virus throughoutEurope and theU.S. (our largest markets) and bring about an end to global quarantines. The continued mutation and spread of the virus, economic headwinds caused by global quarantines, or the occurrence of any other catastrophic events, could have a negative impact on our sales revenue for the coming periods and beyond. 15
-------------------------------------------------------------------------------- • Conflict inUkraine - We are exposed to conflicts that may disrupt our business and may reduce consumer demand for our products. A disruption or failure of our systems, government sanctions or operations in the event of a conflict could directly affect consumer demand for our products, cause delays in completing sales, shipping of our products, continuing production or performing other critical functions of our business, particularly if a conflict occurs at our primary manufacturing locations or our distributor locations worldwide. Furthermore, a prolonged conflict may have unintended global consequences such as increased inflation, fuel and transportation costs. While we have conducted due diligence on our customers inRussia to ensure that they do not fall into any sanctioned categories, we have seen a delay in the receipt of receivables in our bank account from the distributors of our products inRussia caused by enhanced screening of Russian funds in compliance with global sanctions againstRussia for the war inUkraine . The prolonging or expansion of the conflict could have an adverse impact on our consumers and on consumer purchasing behavior, and result in delays of new orders and completing sales, order cancellations, or payment and shipping delays. We will continue to monitor this fluid situation and any adverse impact that it may have on the global economy in general and on our business operations and especially that of our customers in particular, and we will develop contingencies as necessary to address any disruptions to our business operations as they arise. •Rising Freight Shipping and Logistics Costs - The economic disruption resulting from the COVID-19 pandemic has had an adverse impact on the global freight shipping industry and on the cost of shipping our products to our global network of distributors, dealers and customers, or their import agents, from warehouses inChina . Over the past year, the strong rise in demand for Chinese exports has outpaced the availability of containers inAsia , creating a container shortage and huge backlogs in many freight markets around the world, including theU.S. , theMiddle East , andEast Asia . These container shortages at Asian ports have exacerbated supply bottlenecks and further increased shipping costs, by up to 400% in some regions, as companies inAsia are reported to be paying premium rates to get containers back. Further compounding matters is the shortage of dockworkers and truck drivers available to load and unload containers at ports inEurope and theU.S. and to move them to other locations, resulting in congested ports. We are working closely with our supply chain management inAsia , our logistics service providers, and our freight forwarders, to streamline our global shipping and logistics processes, to mitigate any disruption to our operations. Continued disruption and pricing volatility in the global shipping and logistics industry could have a negative impact on our results of operations for the coming periods and beyond.
Results of Operations
The following summary of our results of operations should be read in conjunction with our financial statements and the notes thereto for the three and nine-month periods endedSeptember 30, 2022 and 2021 included herein.
Comparison of Three Months Ended
The following table summarizes the results of our operations during the
three-month periods ended
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Three Months Ended September 30, Percentage
2022 2021 Increase Increase
Item (Decrease) (Decrease)
REVENUES $ 23,258,752 $ 22,100,827 $ 1,157,925 5%
COST OF REVENUES 13,122,213 12,571,692 $ 550,521 4%
GROSS PROFIT 10,136,539 9,529,135 $ 607,404 6%
PRODUCT ROYALTY INCOME 74,411 58,246 $ 16,165 28%
OPERATING EXPENSES
Salaries and Wages 1,274,554 975,676 $ 298,878 31%
Commissions and Consulting 143,691 144,837 $ (1,146 ) -1%
Professional Fees 166,537 510,713 $ (344,176 ) -67%
Advertising and Marketing 1,166,804 633,915 $ 532,889 84%
Office Lease and Expenses 145,499 99,314 $ 46,185 47%
Research and Development Costs 501,604 468,922 $ 32,682 7%
Bad Debt Expense 97,325 42,197 $ 55,128 131%
General and Administrative 977,796 691,696 $ 286,100 41%
Depreciation 264,923 265,777 $ (854 ) 0%
Total Operating Expenses 4,738,733 3,833,047 $ 905,686 24%
INCOME FROM OPERATIONS 5,472,217 5,754,334 $ (282,117 ) -5%
Other Income 7,784 1,413 $ 6,371 451%
INCOME BEOFRE INCOME TAXES 5,480,001 5,755,747 $ (275,746 ) -5%
Income Taxes 1,391,878 1,467,936 $ (76,058 ) -5%
NET INCOME $ 4,088,123 $ 4,287,811 $ (199,688 ) -5%
Revenues - We earn revenues from the sale of our protective gear comprising of
neck braces, body armor, helmets and other products, parts and accessories both
in the United States and abroad. Revenues for the quarter ended September 30,
2022 were $23.26 million , a 5% increase, compared to $22.10 million for the
quarter ended September 30, 2021 . This increase in worldwide revenues is
primarily attributable to a $2.04 million increase in helmet sales, a $1.8
million increase in other products, parts and accessories, that were partially
offset by a $1.85 million decrease in body armor and a $0.81 million decrease in
neck brace sales. Revenues generated from sales to our customers in the United
States increased from $4.31 million , to $5.42 million , for the three months
ended September 30, 2022 and 2021, respectively. Revenues associated with
international customers were $17.84 million and $17.79 million , or 77% and 81%
of revenues, respectively, for the three months ended September 30, 2022 and
2021, respectively.
The following table sets forth our revenues by product line for the quarter
ended
Three months ended September 30,
2022 % of Revenues 2021 % of Revenues
Neck braces $ 1,894,839 8% $ 2,708,364 12%
Body armor 10,519,065 45% 12,365,185 56%
Helmets 4,359,829 19% 2,320,111 11%
Other products, parts and
accessories 6,485,019 28% 4,707,167 21%
$ 23,258,752 100% $ 22,100,827 100%
Sales of our flagship neck brace accounted for
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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 $10.52 million and $12.37 million , or 45% and 56% of our
revenues for the quarters ended September 30, 2022 and 2021, respectively. The
15% decrease in body armor revenues during the 2022 third quarter is primarily
the result of a 30% decrease in upper body armor revenues, when compared to the
third quarter of 2021, which was an exceptionally strong quarter for upper body
armor revenues. Upper body armor revenues in the third quarter of 2021 had
increased by 114% when compared to the prior year period.
Our helmet sales accounted for $4.36 million or 19% of our revenues for the
quarter ended September 30, 2022 , as compared to $2.32 million or 11% of our
revenues for the three months ended September 30, 2021 . The 88% increase in
helmet sales during the third quarter is primarily due to exceptional global
demand for our redesigned MOTO helmet line-up for off-road motorcycle use.
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 $6.49 million and $4.71 million , or 28% and 21% of our
revenues for the quarters ended September 30, 2022 and 2021, respectively. The
38% increase in revenues from the sale of other products, parts and accessories
during the 2022 third quarter is primarily due to a 51% increase in the sales
volume of our MOTO and MTB technical apparel designed for off-road motorcycle
and mountain biking use, respectively.
Cost of Revenues and Gross Profit - Cost of revenues for the quarters ended
September 30, 2022 and 2021 were $13.12 million and $12.57 million ,
respectively. Gross Profit for the quarters ended September 30, 2022 and 2021
were $10.14 million and $9.53 million , respectively, or 44% and 43% of revenues,
respectively. Our neck brace products continue to generate a higher gross profit
margin than our other product categories. Although neck brace revenues accounted
for 8% and 12% of our revenues for the quarters ended September 30, 2022 and
2021, respectively, our gross profit improved during the third quarter of 2022
due to a stabilization in global and domestic shipping and logistics costs, when
compared to the three month period ended September 30, 2022 .
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, 2022 and 2021 were
$74,411 and $58,246 , respectively. The 28% increase in product royalty income is
due to an increase in the sale of licensed products by licensees during the 2022
period.
Salaries and Wages - Salaries and wages for the quarters ended September 30,
2022 and 2021 were $1,274,554 and $975,676 , respectively. The 31% increase in
salaries and wages during the 2022 period was primarily due to the employment of
additional sales, marketing and brand management personnel in the United States
and abroad as we continue to expand and build our selling activities globally in
order to facilitate growth. Additionally, share compensation costs relating to
a share issuance made to key personnel contributed to the increase in salaries
and wages for the 2022 period.
Commissions and Consulting Expense - During the quarters ended September 30,
2022 and 2021, commissions and consulting expenses were $143,691 and $144,837 ,
respectively. The 1% decrease in commissions and consulting expenses is
primarily the result of a decrease in commissions and incentives paid to
external sales representatives in the United States , that were partially offset
by an increase in commissions and incentives paid to internal, Company employed
sales representatives, in line with an increase in sales growth in the region
and our continued drive to build out a strong domestic employee sales force.
Professional Fees - Professional fees consist of costs incurred for audit, tax
and regulatory filings, as well as patent protection and product liability
litigation expenses incurred as the Company continues to expand. Professional
fees for the quarters ended September 30, 2022 and 2021 were $166,537 and
$510,713 , respectively. The 67% decrease in professional fees is primarily due
to a decrease in product liability litigation expenses incurred during the 2022
period.
Advertising and Marketing - The Company places paid advertising in various
motorsport and bicycle magazines and online media and sponsors a number of
events, professional teams and individuals to increase product and brand
visibility globally. Advertising and marketing expenses for the quarters ended
September 30, 2022 and 2021 were $1,166,804 and $633,915 , respectively. The 84%
increase in advertising and marketing expenditure during the 2022 period is
primarily due to an increase in global coordinated marketing campaigns
undertaken in conjunction with our distribution partners and a return to
industry tradeshows. During the 2022 period, the Company successfully partnered
with its distribution partners in a cost sharing initiative designed to create
synchronized launch campaigns, and returned to trade shows that were previously
not well attended due to COVID-19 related travel restrictions.
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Office Lease and Expenses - Office lease and expenses for the quarters ended
September 30, 2022 and 2021 were $145,499 and $99,314 , respectively. The 47%
increase in office lease and expenses during the 2022 period is primarily due to
additional warehouse storage rented in the United States as the Company
continues to expand its Reno, Nevada warehousing capability to accommodate
storage and distribution of its expanding line up 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 quarter ended September
30, 2022 , increased to $501,604 , from $468,922 during the same 2021 quarter. The
7% increase in research and development costs during the 2022 third quarter is
primarily due to the employment of professional product development, design, and
quality control personnel, in order to continue the refinement of the Company's
product categories and the expansion of our pipeline of innovative cutting-edge
products.
Bad Debt Expense - Bad debt expense for the quarters ended September 30, 2022
and 2021 were $97,325 and $42,197 , respectively. The 131% increase in bad debt
expense is primarily the result of an increase in the provision for
unrecoverable debts relating to the Company's international sales.
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, 2022 and 2021 were $977,796 and $691,696 , respectively. The 41% increase in
general and administrative expenses is primarily due to an increase in product
and general liability insurance premiums paid during the 2022 period and a
significant increase in staff travel activity related to product development,
industry trade shows and domestic customer sales visits, in line with a
relaxation of COVID-19 related travel restrictions.
Depreciation Expense - Depreciation expense for the quarters ended September 30,
2022 and 2021 were $264,923 and $265,777 , respectively. The marginal decrease in
depreciation during the 2022 third quarter is primarily due to a decrease in
depreciation expenses relating to mold and tooling items that had been fully
depreciated, and were partially offset by the addition of warehouse racking and
inventory management equipment utilized at the expanded Company's Reno, Nevada
warehouse and the addition of upgrades to the Company's direct to consumer
website to facilitate an increase in selling activity.
Total Operating Expenses - Total operating expenses increased by $905,686 , to
$4.74 million , in the quarter ended September 30, 2022 , or 24%, compared to
$3.83 million in the 2021 period. This increase is primarily due to increases in
advertising and marketing, salaries and general and administrative costs, that
were partially offset by the decrease in professional fees mentioned in this
report.
Net Income - The net income after income taxes for the quarter ended September
30, 2022 was $4.09 million , as opposed to a net income of $4.29 million for the
quarter ended September 30, 2021 . This 5% decrease in net income is primarily
due to the increase in total operating costs, that were partially offset by the
increase in revenues and gross profit discussed above.
Comparison of Nine Months Ended
The following table summarizes the results of our operations during the
nine-month periods ended
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Nine Months Ended September 30, Percentage
2022 2021 Increase Increase
Item (Decrease) (Decrease)
REVENUES $ 65,425,170 $ 49,297,861 $ 16,127,309 33%
COST OF REVENUES 38,017,469 27,523,233 $ 10,494,236 38%
GROSS PROFIT 27,407,701 21,774,628 $ 5,633,073 26%
PRODUCT ROYALTY
INCOME 200,221 141,535 $ 58,686 41%
OPERATING EXPENSES
Salaries and Wages 3,897,693 2,813,024 $ 1,084,669 39%
Commissions and
Consulting 456,911 581,485 $ (124,574 ) -21%
Professional Fees 505,305 971,969 $ (466,664 ) -48%
Advertising and
Marketing 2,526,808 1,669,648 $ 857,160 51%
Office Lease and
Expenses 546,398 273,887 $ 272,511 99%
Research and
Development Costs 1,516,147 1,319,183 $ 196,964 15%
Bad Debt Expense 101,680 56,290 $ 45,390 81%
General and
Administrative 2,399,899 1,830,055 $ 569,844 31%
Depreciation 829,790 744,713 $ 85,077 11%
Total Operating
Expenses 12,780,631 10,260,254 $ 2,520,377 25%
INCOME FROM
OPERATIONS 14,827,291 11,655,909 $ 3,171,382 27%
Other Income 5,592 1,354 $ 4,238 313%
INCOME BEOFRE INCOME
TAXES 14,832,883 11,657,263 $ 3,175,620 27%
Income Taxes 3,795,085 2,899,966 $ 895,119 31%
NET INCOME $ 11,037,798 $ 8,757,297 $ 2,280,501 26%
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, 2022 were $65.43 million , a 33% increase, compared to
revenues of $49.30 million for the period ended September 30, 2021 . This
increase in worldwide revenues is primarily attributable to a $7.54 million
increase in helmet sales, a $5.87 million increase in other products, parts and
accessory sales and a $4.2 million increase in body armor sales, that were
partially offset by a $1.48 million decrease in neck brace sales. Revenues
generated from sales to our customers in the United States decreased from $14.79
million to $14.57 million , for the nine months ended September 30, 2022 and
2021, respectively. Revenues associated with international customers were $50.86
million and $34.51 million , or 78% and 70% of revenues, respectively, for the
nine months ended September 30, 2022 and 2021.
The following table sets forth our revenues by product line for the nine months
ended
Nine months ended September 30,
2022 % of Revenues 2021 % of Revenues
Neck braces $ 4,741,028 7% $ 6,224,054 13%
Body armor 32,513,336 50% 28,309,938 57%
Helmets 12,426,220 19% 4,886,324 10%
Other products, parts and
accessories 15,744,586 24% 9,877,545 20%
$ 65,425,170 100% $ 49,297,861 100%
Sales of our flagship neck brace accounted for $4.74 million and $6.22 million ,
or 7% and 13% of our revenues for the nine-month periods ended September 30,
2022 and 2021, respectively. The 24% decrease in neck brace revenues is
primarily attributable to a 25% decrease in the volume of neck braces sold
globally, when compared to the nine months ended September 30, 2021 , which was a
particularly strong period for neck brace sales. Neck brace volumes for the
first nine months of 2021 had increased by 67% over the prior year period.
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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 $32.51 million and $28.31 million , or 50% and 57% of our
revenues for the nine-month period ended September 30, 2022 and 2021,
respectively. The 15% increase in body armor revenues was primarily the result
of continued global shipments of the off-road motorcycle boots and mountain
biking shoes comprising our footwear category.
Our Helmets accounted for
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$15.74 million and$9.88 million , or 24% and 20% of our revenues for the nine-month periods endedSeptember 30, 2022 and 2021, respectively. The 59% increase in revenues from the sale of other products, parts and accessories is primarily due to strong demand for our MOTO and MTB technical apparel designed for off-road motorcycle and mountain biking use, respectively. Cost of Revenues and Gross Profit - Cost of revenues for the nine-month periods endedSeptember 30, 2022 and 2021 were$38.02 million and$27.52 million , respectively. Gross Profit for the nine-month periods endedSeptember 30, 2022 and 2021 were$27.41 million and$21.77 million , respectively, or 42% and 44% of revenues respectively. Our neck brace products continue to generate a higher gross margin than our other product categories. Neck brace revenues accounted for 7% and 13% of our revenues for the nine-month periods endedSeptember 30, 2022 and 2021, respectively. Additionally, revenues associated with international customers were 78% and 70% of our revenues for the nine months endedSeptember 30, 2022 and 2021, respectively, with revenues associated with international distribution customers continuing to generate a lower gross profit margin than direct dealer sales inthe United States .
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 periods ended
Salaries and Wages - Salaries and wages for the nine-month periods endedSeptember 30, 2022 and 2021 were$3,897,693 and$2,813,024 , respectively. The 39% increase in salaries and wages during the 2022 period was primarily due to the employment of additional sales and warehousing personnel inthe United States as we continue to expand and build our selling activities to facilitate growth. Additionally, share compensation costs relating to a share issuance made to key personnel contributed to the increase in salaries and wages for the 2022 period. Commissions and Consulting Expense - During the nine-month periods endedSeptember 30, 2022 and 2021, commissions and consulting expenses were$456,911 and$581,485 , respectively. This 21% decrease in commissions and consulting expenses during the 2022 period is primarily due to a decrease in commissions and incentives paid to both in-house and external sales representatives inthe United States , in line with a decrease in sales growth in the region. Professional Fees - Professional fees consist of costs incurred for audit, tax and regulatory filings, as well as patent protection and product liability litigation expenses incurred as the Company continues to expand. Professional fees for the nine-month periods endedSeptember 30, 2022 and 2021 were$505,305 and$971,969 , respectively. This 48% decrease in professional fees is primarily due to a decrease in expenditure on product liability litigation during the 2022 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 endedSeptember 30, 2022 and 2021 were$2,526,808 and$1,669,648 , respectively. The 51% increase in advertising and marketing expenditure during the 2022 period is primarily due to the production, execution and synchronization of global marketing campaigns that incorporate high caliber athlete sponsorships, industry trade shows and event attendance activities, and other coordinated global marketing plans designed to market the Company's product offering to a wider group of riders and enthusiasts and continue building a globally recognizable and respected consumer brand. 21 -------------------------------------------------------------------------------- Office Lease and Expenses - Office lease and expenses for the nine-month periods endedSeptember 30, 2022 and 2021 were$546,398 and$273,887 , respectively. The 99% increase in office lease and expenses during the 2022 period was primarily due to additional warehouse storage rented inthe United States as the Company continues to expand itsReno, Nevada warehousing facility to accommodate storage and sales of its expanding line up of protective gear categories. 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 endedSeptember 30, 2022 and 2021, increased to$1,516,147 , from$1,319,183 , during the same 2021 period. The 15% increase in research and development costs during the 2022 period is primarily due to the employment of industry specific product development, engineering, design and quality management professionals as the Company continues to refine its widening product categories and expand a pipeline of innovative products. Bad Debt Expense - Bad debt expense for the nine-month periods endedSeptember 30, 2022 and 2021 were$101,680 and$56,290 , respectively. This 81% increase in bad debt expense during the 2022 period is primarily the result of an increase in the provision for unrecoverable debts relating to the Company's international customers. General and Administrative Expenses - General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the nine-month periods endedSeptember 30, 2022 and 2021 were$2,399,899 and$1,830,055 , respectively. The 31% increase in general and administrative expenses during the 2022 period is primarily as a result of an increase in expenditures on product liability, general risk and directors' and officers' insurance premiums during the 2022 period, as the Company expands its product offering and due to the increase in sales over the period. Additionally, travel expenditures increased in line with a relaxation of COVID-19 related travel restrictions and an increase in marketing, industry tradeshow and sales travel activity. Depreciation Expense - Depreciation Expense for the nine-month periods endedSeptember 30, 2022 and 2021 were$829,790 and$744,713 , respectively. This 11% increase in depreciation during the 2022 period is primarily due to the addition of warehouse racking and inventory management equipment utilized at the expanded Company'sReno, Nevada warehouse and upgrades to the Company's direct to consumer website in order to facilitate an increase in selling activity. Total Operating Expenses - Total operating expenses increased by$2.52 million to$12.78 million , in the nine-month period endedSeptember 30, 2022 , compared to$10.26 million in the nine-month period endedSeptember 30, 2021 . This increase in total operating expenses during the 2022 period is primarily due to increases in salaries, advertising and marketing, general and administrative, warehouse leasing, and research and development costs, that were partially offset by the decrease in professional fees and commissions paid mentioned in this report. Net Income - Net income after income taxes for the nine-month period endedSeptember 30, 2022 was$11.04 million , as opposed to net income after income taxes of$8.76 million for the nine-month period endedSeptember 30, 2021 . This increase in net income during the 2022 period is primarily due to the increase in revenue and gross profit discussed above.
Liquidity and Capital Resources
At
September 30,
2022 2021
Net cash provided by operating activities$ 1,748,661 $
1,145,417
Net cash used in investing activities$ (821,740 ) $ (892,662 ) Net cash used in financing activities$ (634,379 ) $ (534,948 ) Effect of exchange rate changes on cash and cash equivalents$ (479,710 ) $ (98,178 ) Net decrease in cash and cash equivalents$ (187,168 ) $ (380,371 ) Cash and cash equivalents at the beginning of period$ 5,022,436 $ 2,967,042 Cash and cash equivalents at the end of period$ 4,835,268 $ 2,586,671 22
-------------------------------------------------------------------------------- Cash decreased by$187,168 or 4%, for the nine months endedSeptember 30, 2022 , when compared to cash on hand atDecember 31, 2021 . The primary sources of cash for the nine months endedSeptember 30, 2022 were net income of$11,037,798 , decreased prepaid expenses of$2,845,924 and increased income taxes payable of$2,073,221 . The primary uses of cash for the nine months endedSeptember 30, 2022 were increased accounts receivable of$9,925,342 , increased inventory of$4,088,914 , decreased accounts payable and accrued expenses of$2,136,609 , capital expenditures of$865,204 and the repayment of a short term loan amounting to$ 832,089 . The Company is currently meeting its working capital needs through cash on hand, a revolving line of credit with a bank, as well as internally generated cash from operations. Management believes that its current cash and cash equivalent balances, along with the net cash generated by operations are sufficient to meet its anticipated operating cash requirements for at least the next twelve months. There are currently no plans for any major capital expenditures in the next twelve months. Our long-term financing requirements depend on our growth strategy, which relates primarily to our desire to increase revenue both in theU.S. and abroad.
Obligations under Material Contracts
Pursuant to our Licensing Agreement withXceed Holdings , a company controlled by Dr.Christopher Leatt , our founder, chairman and head of research and development, we payXceed 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 endedSeptember 30, 2022 and 2021, the Company paid an aggregate of$40,062 and$58,085 in licensing fees toXceed 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 byMr. De Villiers . During the quarters endedSeptember 30, 2022 and 2021, the Company paid an aggregate of$10,016 and$14,515 , in licensing fees toMr. De Villiers . FromMay 15, 2015 throughOctober 31, 2021 , the Company was party to a consulting agreement, datedJuly 8, 2015 , between the Company andInnovate Services Limited , or Innovate, aSeychelles limited company in whichDr. 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 thatDr. 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 nine 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 ifDr. Leatt could no longer perform the services. OnNovember 8, 2021 , the Company terminated the agreement with Innovate, effectiveOctober 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 withInnovation Services Limited , Jersey limited company beneficially owned byDr. Leatt , for the same research, development and marketing services, and on substantially the same terms and conditions as the terminated agreement. During the quarters endedSeptember 30, 2022 and 2021, the Company recognized an aggregate of$0 and$126,699 , respectively, in consulting fees to Innovate. OnNovember 8, 2021 , the Company entered into a consulting agreement withInnovation 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, thatDr. Leatt must remain an Innovation director and beneficiary of a majority of its ownership interests during the term of the agreement, andDr. 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 theUnited 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 ofNovember 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 nine 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 byDr. Leatt , if beneficial ownership in Innovation byDr. 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, datedNovember 8, 2021 , withDr. Leatt , pursuant to whichDr. Leatt agreed, among other things: (1) not to perform services similar to the services provided under the agreement for any current or future, direct or indirect competitor of the Company or any similar company; (2) not to solicit any current or future employees of the Company for employment with Innovation or any other entity with which he may become affiliated, or to contact or solicit any current or future stockholder or investor of the Company in connection with any matter that is not directly related to the ongoing or future business operations of the Company; and (3) that he will apprise the Company of any business opportunity that he becomes aware of that could benefit the Company so that the Company, can in its sole discretion, make a determination regarding whether to pursue such opportunity in the best interest of the Company and its stockholders.Dr. Leatt further agreed to continue dedicating a majority of his time on matters related to performance of his duties as a director of the Company and to the fulfillment of his obligations to the Company's research and development efforts under the consulting agreement, and the Company will have the right to adjust the amount of the fees payable under the consulting agreement to the extent of any substantial diminution in his fulfillment of such duties and obligations. Accordingly, effectiveJanuary 1, 2022 , the Company's monthly fee to Innovation, increased to$43,289 . During the quarters endedSeptember 30, 2022 and 2021, the Company recognized an aggregate of$129,867 and$0 , respectively, in consulting fees to Innovation. 23 -------------------------------------------------------------------------------- Pursuant to a Premium Finance Agreement, datedMay 27, 2022 , between the Company andAon Premium Finance, LLC , or APF, the Company is obligated to pay APF an aggregate sum of$80,233 in eleven monthly payments on a sliding scale, as follows,$37,381 ,$37,381 ,$1,172 ,$ 1,172 ,$ 1,172 and thereafter six payments of$326 , at a 6.360% annual interest rate, commencing onJune 1, 2022 and ending onApril 1, 2023 . Any late payment during the term of the agreement would be assessed a late penalty of 5% of the payment amount due, and in the event of default APF has the right to accelerate the payment due under the agreement. As ofSeptember 30, 2022 , the Company had not defaulted on its payment obligations under this agreement. Pursuant to a Premium Finance Agreement, datedSeptember 20, 2022 , between the Company and APF, the Company is obligated to pay APF an aggregate sum of$138,470 in seven payments of$19,781 , at a 6.360% annual interest rate, commencing onOctober 1, 2022 and ending onApril 1, 2023 . Any late payment during the term of the agreement will be assessed a late penalty of 5% of the payment amount due, and in the event of default APF has the right to accelerate the payment due under the agreement. As ofSeptember 30, 2022 , the Company had not defaulted on its payment obligations under this agreement. Pursuant to a Premium Finance Agreement, datedOctober 25, 2022 , between the Company and APF, the Company is obligated to pay APF an aggregate sum of$1,235,372 in ten payments of$123,537 , at a 8.250% annual interest rate, commencing onDecember 1, 2022 and ending onSeptember 1, 2023 . Any late payment during the term of the agreement will be assessed a late penalty of 5% of the payment amount due, and in the event of default APF has the right to accelerate the payment due under the agreement. OnNovember 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, commencingJanuary 1, 2019 , and any unpaid principal, interest, or other charges outstanding under the agreement were due and payable on theNovember 19, 2020 , maturity date. OnNovember 5, 2020 , the Company and the bank agreed to extend the line of credit facility throughNovember 19, 2021 , with retroactive effect onOctober 27, 2020 . The renewed line of credit also featured 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, and secured the Company's obligations with Company-owned equipment and fixtures, accounts receivable and inventory in theU.S. . OnMarch 1, 2021 , the Company and the bank agreed to an extension of the line of credit facility throughFebruary 28, 2022 , with retroactive effect onFebruary 17, 2021 , and to increase the facility amount to 1,500,000. OnJanuary 21, 2022 , the Company and the bank agreed to extend the line of credit facility throughFebruary 28, 2023 and to replace interest determined by LIBOR Daily Floating Rate with the Bloomberg Short-Term Bank Yield Index rate. As ofSeptember 30, 2022 , no amounts were advanced to the Company from the$1,500,000 line of credit facility. OnDecember 29, 2021 , Two Eleven entered into a Loan and Security agreement with a bank, effectiveDecember 17, 2021 , to finance equipment. The Equipment Note financed under the Loan and Security Agreement has a total value of$272,519 , payable in 36 consecutive monthly installments commencingFebruary 5, 2022 , and continuing toJanuary 5, 2025 . Interest shall accrue on the entire principal amount of this Equipment Note outstanding from time to time at a fixed rate of 3.5370% per annum. The principal and interest amount of each payment shall be$7,990 . As ofSeptember 30, 2022 ,$214,429 of the Equipment Note was outstanding.
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 inthe United States of America . The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting period. We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, estimating allowances for doubtful accounts receivable, inventory valuation, impairment of long-lived assets, leases and accounting for income taxes. Revenue and Cost Recognition - The Company's products are sold worldwide to a global network of distributors and dealers, and directly to consumers when there are no dealers or distributors in their geographic area or where consumers choose to purchase directly via the Company's e-commerce website (collectively the "customers"). 24
-------------------------------------------------------------------------------- Revenues from product sales are recognized when earned, net of applicable provisions for discounts and returns and allowances in the event of product defect where no exchange of product is possible. Revenues are recognized when our performance obligations are satisfied as evidenced by transfer of control of promised goods to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Product royalty income, representing less than 1% of total revenues, is recorded as the underlying product sales occur, in accordance with the related licensing arrangements. Our standard distributor payment terms range frompre-payment in full to 60 days after shipment and subsequent sales of our products by distributors have no effect on the amount and timing of payments due to us, however, in limited instances qualified distributors and dealers may be granted extended payment terms during selected order periods. In performing such evaluations, we utilize historical experience, sales performance, and credit risk requirements. Furthermore, products purchased by distributors may not be returned to us in the event that any such distributor relationship is terminated. Since the Company (through its wholly-owned subsidiary) serves as the distributor of Leatt products inthe United States , the Company records its revenue and related cost of revenue for its product sales inthe 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 inSouth Africa , the Company records its revenue and related cost of revenue for its product sales inSouth 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 inthe United States andSouth 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 atSeptember 30, 2022 andDecember 31, 2021 was$-0 - and$-0 -, respectively. Sales commissions are expensed when incurred, which is generally at the time of sale or cash received from customers, because the amortization period would have been one year or less. These costs are recorded in commissions and consulting expenses within operating expenses in the accompanying consolidated statements of operations and comprehensive income. Shipping and handling activities associated with outbound freight, after control over a product has transferred to a customer, are accounted for as a fulfilment cost and are included in revenues and cost of revenues in the accompanying consolidated statements of operations and comprehensive income. Revenue recognized from contracts with customers is recorded net of sales taxes, value added taxes, or similar taxes that are collected on behalf of local taxing authorities. Allowance for Doubtful Accounts Receivable - Accounts receivable consist of amounts due to the Company from normal business activities. Credit is granted to substantially all distributors on an unsecured basis. We continuously monitor collections and payments from customers and maintain an allowance for doubtful accounts receivable based upon the expected credit losses determined utilizing historical experience and any specific customer collection issues that have been identified. In determining the amount of the allowance, we are required to make certain estimates and assumptions. Accounts receivable balances that are still outstanding after we have used reasonable collection efforts are written off as uncollectible. While such credit losses have historically been minimal, within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results. The allowance for doubtful accounts was$372,889 atSeptember 30, 2022 and$291,584 atDecember 31, 2021 . 25
-------------------------------------------------------------------------------- Inventory Valuation - Inventory is stated at the lower of cost or market. Cost is determined using the first-in first-out (FIFO) method. Inventory consists primarily of finished goods. Shipping and handling costs are included in the cost of inventory. In assessing the inventory value, we make estimates and judgments regarding reserves required for product obsolescence, aging of inventory and other issues potentially affecting the saleable condition of products. In performing such evaluations, we utilize historical experience as well as current market information. The reserve for obsolescence was$265,084 atSeptember 30, 2022 and$116,183 atDecember 31, 2021 . Impairment of Long-Lived Assets - Our long-lived assets include property and equipment. We evaluate our long-lived assets for recoverability whenever events or changes in circumstances indicate that an asset may be impaired. In evaluating an asset for recoverability, we estimate the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. We have determined there was no impairment charge during the quarters endedSeptember 30, 2022 and 2021. Operating Leases - The Company determines if an arrangement is a lease at contract inception. Operating leases are included in the right-of-use assets ("ROU''), and lease liability obligations are included in the Company's consolidated balance sheets. ROU assets represent the Company's right to use an underlying asset of the lease term and lease liability obligations represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date, based on the present value of lease payments over the lease term. As the Company's leases typically do not provide an implicit rate, the Company estimates its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The ROU asset also includes any lease payments made and excludes lease incentives and lease direct costs. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. Please refer to Note 3 "Leases", in the Notes to Consolidated Financial Statements for additional information. Income Taxes - As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which the temporary differences reverse.
Recent Accounting Pronouncements
See Note 11, "Recent Accounting Pronouncements" in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption, or expected adoption and effects on our consolidated financial position, results of operations and cash flows.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to its stockholders.
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