Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

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

• our expectations regarding growth in the motor sports and bicycle market;

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

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

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

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

Also, forward-looking statements represent our estimates and assumptions only as of the date of this 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:

• "Bike Care" refers to Bike Care Technologies sp. zo.o., a Polish Limited Liability Company established in May 2026 and registered with 8th Commercial Division of the National Court Register with registration number: 0001232558;

• "Leatt," "we," "us," "our," the "Registrant" or the "Company" are to the combined business of Leatt Corporation, a Nevada corporation, its South African branch, Leatt SA, and its direct, wholly owned subsidiaries, Two Eleven and Leatt Prop;

• "Leatt Prop" refers to Leatt Prop (Pty) Ltd, a South African Company incorporated under the laws of South Africa with registration number: 2022/523867/07;

• "Leatt SA" are to the Company's branch office known as 'Leatt Corporation (Incorporated in the State of Nevada)' incorporated under the laws of South Africa with registration number: 2007/032780/10;

• "Leatt USA" are to Leatt USA, LLC, a Nevada Limited Liability Company;

• "PRC", and "China" are to the People's Republic of China;

• "Two Eleven" refers to Two-Eleven Distribution, L.L.C., a Nevada Limited Liability Company;

• "Securities Act" are to the Securities Act of 1933, as amended, and to "Exchange Act" are to Securities Exchange Act of 1934, as amended;

• "South Africa" are to the Republic of South Africa;

• "Poland" are to the Republic of Poland;

• "U.S. dollar," "$" and "US$" are to the legal currency of the United States;

• "Xceed Holdings" refers to Xceed Holdings CC., a close corporation incorporated under the laws of South Africa, and wholly- owned by The Leatt Family Trust, of which Dr. Christopher J. Leatt, the Company's chairman, is a Trustee and Beneficiary; and

• "ZAR" refers to the South African Rand, the legal currency of South Africa. For all ZAR amounts reported, the dollar amount has been calculated on the basis that $1 = ZAR 16.4325 for its June 30, 2026 balance sheet.

• "PLN" refers to the Polish Zloty, the legal currency of Poland. For all PLN amounts reported, the dollar amount has been calculated on the basis that $1 = PLN 3.7582 for its June 30, 2026 balance sheet.

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 the Economic Commission for Europe (ECE) UN Regulation No. 22 r06, and our bicycle helmets comply 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 helmets comply 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 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 9.5, 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 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 has been homologated to FRHPhe-02-2023 for us in FIM sanctioned off-road racing events. We are also working on getting some of our high-end MTB helmets tested at Virginia Polytechnic Institute and State University (V-Tech) in the United States, according to their rating system. In addition to our helmet portfolio, our goggles and sunglasses undergo certification and testing in accordance with applicable international eyewear standards. Within our goggle range, the Velocity 6.5, 5.5 and 4.5 goggles are certified to EN1938 and are impact-tested on the lenses according to MIL-DTL-43511D. The Velocity 6.5 SNX, 5.5 SNX and 4.5 SNX goggles are certified to EN13178 and are also impact-tested to MIL-DTL-43511D. Our MTB 5.0, 4.0 and 4.0 X-Flow goggles are tested to EN1938 and undergo MIL-DTL-43511D lens impact testing. The Vizion 3.5, 2.5 and 2.5s goggles are certified to EN1938, while our MTB 2.0 goggles are tested to EN1938. Within our sunglass range, the SpeedViz Pro and SpeedViz Lite models are tested to EN ISO 12312, ANSI Z87.1 and AS/NZS 1067.1. Our RideViz Pro, RideViz Lite, RideViz Pro S, RideViz Lite S, TheViz Andes, TheViz Sierra, TheViz Pyrenees and MadViz One sunglasses are tested to EN ISO 12312, ANSI Z80.3 and AS/NZS 1067.1.

Our products are predominantly 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 June 30, 2026, 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 defective product design and failure to warn had caused a motocross rider to suffer multiple mid-thoracic spine fractures, causing immediate and permanent paraplegia, when he crashed at a relatively low speed on February 13, 2011. When the accident occurred, he was wearing a helmet and other safety gear from several different companies, including the Company's acclaimed Leatt-Brace®. The Company produced evidence at trial showing that his thoracic paraplegia was an unavoidable consequence of his fall, not the result of wearing a Leatt-Brace®, and that the neck brace likely saved his life (or saved him from quadriplegia) by preventing cervical spine injury. The Company had maintained from the onset that this and a small handful of other lawsuits are without merit and that it would vigorously defend itself in each case. In this case, the plaintiffs subsequently appealed the court's decision, and the parties reached an amicable settlement. Although we carry product liability insurance, a successful claim brought against us could significantly harm our business and financial condition and have an adverse impact on our ability to renew our product liability insurance or secure new coverage.

• Protection of Intellectual Property - We believe that the continued success of our business is dependent on our intellectual property portfolio consisting of globally registered trademarks, design patents and utility patents related to the Leatt-Brace®. We believe that a loss of these rights would harm or cause a material disruption to our business and, our corporate strategy is to aggressively take legal action against any violators of our intellectual property rights, regardless of where they may be. From time to time, we have had to enforce our intellectual property rights through litigation, and we may be required to do so in the future. Such litigation may result in substantial costs and could divert resources and management attention from the operations of our business.

• Fluctuations in Foreign Currencies - We are exposed to foreign exchange risk as our revenues and consolidated results of operations may be affected by fluctuations in foreign currency as we translate these currencies into U.S. dollars when we consolidate our financial results. While our reporting currency is the U.S. Dollar, a portion of our consolidated revenues are denominated in South African Rand, or ZAR, certain of our assets are denominated in ZAR, and our research and marketing operations in South Africa utilize South African labor sources. A decrease in the value of the U.S. dollar in relation to the ZAR could increase our cost of doing business in South Africa. If the ZAR depreciates against the U.S. Dollar, the value of our ZAR revenues, earnings and assets as expressed in our U.S. Dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. Furthermore, since 70% of our sales are derived outside the U.S., where the U.S. dollar is not the primary currency, significant fluctuations in exchange rates such as the strengthening of the dollar versus our customers' local currency can adversely affect our ability to remain competitive in those areas.

• Natural or Man-made Catastrophic Events - We are exposed to natural or man-made catastrophic events that may disrupt our business and may reduce consumer demand for our products. A disruption or failure of our systems or operations in the event of a natural disaster, health pandemic, such as the outbreak and global spread of COVID-19 or the coronavirus, or a man-made catastrophic event could cause delays in completing sales, continuing production, or performing other critical functions of our business, particularly if a catastrophic event occurred at our primary manufacturing locations or our distributor locations worldwide. Any of these events could severely affect our ability to conduct normal business operations and, as a result, our operating results could be adversely affected. There may also be secondary impacts that are unforeseeable, such as impacts on our consumers and on consumer purchasing behavior, which could cause delays in new orders, delays in completing sales or even order cancellations. The continued mutation and spread of deadly viruses, 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.

• 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 delay in the receipt of receivables in our bank account from the distributors of our products in Russia caused by enhanced screening of Russian funds in compliance with global sanctions against Russia for the war in Ukraine. The prolonging, intensification or expansion of these conflicts into surrounding regions 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 these fluid situations and any adverse 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 disruptions to our business operations as they arise.

• Acquisition of New Business- In May 2026 we acquired Bike Care to develop, market and sell premium bike care products globally. Bike Care, located in Pozenan, Poland was acquired from its original shareholders for a nominal amount. We did not generate revenues from this business in the three months ended June 30, 2026, and incurred $2,976 of expenses, during that period. We plan to launch and ship GRITT, a new range of bike care products in the second half of 2026.

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 six-month periods ended June 30, 2026 and 2025 included herein.

Comparison of Three-Month Periods Ended June 30, 2026 and 2025

The following table summarizes the results of our operations during the three-month periods ended June 30, 2026 and 2025 and provides information regarding the dollar and percentage increase or (decrease) in such periods:

		Three months Ended June 30,										Percentage
		2026			2025				Increase			Increase
Item									(Decrease)			(Decrease)
REVENUES	$	16,390,944		$	16,176,339			$	214,605			1%
COST OF REVENUES		8,955,702			9,287,146			$	(331,444	)		(4%)
GROSS PROFIT		7,435,242			6,889,193			$	546,049			8%
PRODUCT ROYALTY INCOME		135,115			48,306			$	86,809			180%
OPERATING EXPENSES
Salaries and Wages		2,176,254			1,846,237			$	330,017			18%
Commissions and Consulting		219,661			187,434			$	32,227			17%
Professional Fees		212,003			155,345			$	56,658			36%
Advertising and Marketing		1,428,833			1,152,207			$	276,626			24%
Office Lease and Expenses		199,053			176,120			$	22,933			13%
Research and Development Costs		664,839			616,795			$	48,044			8%
Bad Debt Recovery		(80,543	)		(31,155	)		$	(49,388	)		(159%)
General and Administrative		1,313,482			1,101,992			$	211,490			19%
Depreciation		284,244			332,606			$	(48,362	)		(15%)
Total Operating Expenses		6,417,826			5,537,581			$	880,245			16%
INCOME FROM OPERATIONS		1,152,531			1,399,918			$	(247,387	)		(18%)
Other Income		76,268			117,737			$	(41,469	)		(35%)
INCOME BEFORE INCOME TAXES		1,228,799			1,517,655			$	(288,856	)		(19%)
Provision for Income taxes		319,810			378,921			$	(59,111	)		(16%)
NET INCOME	$	908,989		$	1,138,734			$	(229,745	)		(20%)

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 June 30, 2026 were $16.39 million, a 1% increase, compared to $16.18 million for the quarter ended June 30, 2025. This increase in worldwide revenues is attributable to a $462,309 increase in body armor sales, and a $443,803 increase in helmet sales that were partially offset by a $530,016 decrease in other product, part and accessory sales and a $161,491 decrease in neck brace sales. Revenues generated from sales to our customers in the United States increased from $5.56 million to $6.15 million, for the three months ended June 30, 2026 and 2025, respectively. Revenues associated with international customers were $10.24 million and $10.62 million, or 62% and 66% of revenues for the quarters ended June 30, 2026 and 2025, respectively

Consumer demand for Leatt products continued to show strong momentum and consumer direct sales continued to increase strongly increasing by 68% or $0.96 million during the second quarter of 2026. Although international ordering patterns continued to show promising trends and reflect strong sell-through, shipments consisting primarily of MOTO apparel, boots and helmets that were scheduled for shipping during the second quarter of 2026 were delayed due to global supply chain constraints, resulting in a decrease in sales to our global distributors of 6% or $0.65 million during the second quarter of 2026. Shipping to our global distributors has resumed and we continue to fulfill global orders. Although, dealer direct revenues decreased marginally by 2% or $0.09 million for the second quarter of 2026 due to the timing of domestic inventory replenishment, our investments in selling capabilities and dealer outreach programs continue to grow our dealer base and pre-ordering patterns are encouraging.

The following table sets forth our revenues by product line for the quarter ended June 30, 2026 and 2025:

		Three months ended June 30,
		2026			% of Revenues				2025			% of Revenues
Neck braces	$	541,810			3%			$	703,301			5%
Body armor		8,749,179			53%				8,286,870			51%
Helmets		3,557,586			22%				3,113,783			19%
Other products, parts and accessories		3,542,369			22%				4,072,385			25%
	$	16,390,944			100%			$	16,176,339			100%

Sales of our flagship neck brace accounted for $0.54 million and $0.70 million, or 3% and 5% of our revenues for the quarters ended June 30, 2026 and 2025, respectively. The 23% decrease in neck brace revenues is primarily attributable to a 43% decrease in the volume of neck braces sold when compared to the second quarter of 2025.

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 $8.75 million and $8.29 million, or 53% and 51% of our revenues for the quarters ended June 30, 2026 and 2025, respectively. The 6% increase in body armor revenues was primarily the result of a 21% increase in revenues generated on the sale of our innovative MOTO and ADV boot range designed for offroad and adventure motorcycle riding.

Our helmet sales accounted for $3.56 million and $3.11 million or 22% and 19% of our revenues for the quarters ended June 30, 2026 and 2025, respectively. The 14% increase in helmet sales during the 2026 second quarter is primarily attributable to a 15% increase in revenues generated from the sale of offroad MOTO and ADV helmets sold during the second quarter of 2026 as global demand for these exceptional product categories continues to grow.

Our other products, parts and accessories are comprised of goggles, hydration bags and apparel items including jerseys, pants, shorts, jackets, bicycle components and aftermarket support items required primarily to replace worn or damaged parts through our global distribution network. Other products, parts and accessories sales accounted for $3.54 million and $4.07 million, or 22% and 25% of our revenues for the quarters ended June 30, 2026 and 2025, respectively. The 13% decrease in revenues from the sale of other products, parts and accessories during the 2026 second quarter was primarily due to a 20%decrease in revenues generated on the sale of MTB, ADV and MOTO apparel, that was partially offset by a 16% increase in revenues generated from the sales of bicycle components when compared to the second quarter of 2025.

Cost of Revenues and Gross Profit - Cost of revenues for the quarters ended June 30, 2026 and 2025 were $8.96 million and $9.29 million, respectively. Gross Profit for the quarters ended June 30, 2026 and 2025 were $7.44 million and $6.89 million, respectively, or 45% 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 3% and 5% of our revenues for the quarters ended June 30, 2026 and 2025, respectively, the 2% increase in gross profit as a percentage of revenues for the three months ended June 30, 2026, was primarily due to improved margins achieved on domestic and international sales in line with increased demand for Leatt products. Additionally, shipping costs as a percentage of international distributor revenues improved as management continues to develop shipping and logistics efficiencies.

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 June 30, 2026 and 2025 were $135,115 and $48,306, respectively. The 180% increase in product royalty income is due to an increase in the sale of licensed products by licensees during the 2026 period.

Salaries and Wages - Salaries and wages for the quarters ended June 30, 2026 and 2025 were $2.18 million and $1.85 million, respectively. The 18% increase in salaries and wages was primarily due to the employment of sales, marketing and brand management professionals globally as the Company continues to build a multi-channel selling organization and global consumer facing brand.

Commissions and Consulting Expense - During the quarters ended June 30, 2026 and 2025, commissions and consulting expenses were $219,661 and $187,434, respectively. The 17% increase in commissions and consulting expenses is primarily the result of an increase in commissions paid to employees and MTB external sales representatives in the United States in line with the increase in domestic selling activity when compared to the second quarter of 2025. Additionally, consulting costs relating to the implementation of efficient sales and income tax processes increased when compared to the 2025 second quarter.

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 June 30, 2026 and 2025 were $212,003 and $155,345, respectively. The 36% increase in professional fees is primarily due to an increase in patent maintenance and litigation cost incurred as the Company continues to build a pipeline of innovative protective gear.

Advertising and Marketing - The Company places paid advertising in various motorsport and bicycle magazines and online, digital 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 June 30, 2026 and 2025 were $1.43 million and $1.15 million, respectively. The 24% increase in advertising and marketing expenses relates primarily to costs associated with the production and implementation of global marketing campaigns that are designed to increase demand for the Companies growing, innovative product categories and reach a much wider rider audience globally.

Office Lease and Expenses - Office lease and expenses for the quarters ended June 30, 2026 and 2025 were $199,053 and $176,120, respectively. The 13% increase in office lease and expenses during the 2026 period is primarily due to the inclusion of consolidation warehousing costs incurred to facilitate consolidated global shipping during the 2026 period.

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 June 30, 2026, increased to $664,839, from $616,795, during the same 2025 quarter. The 8% increase in research and development costs during the 2026 second quarter is primarily as a result of an increase in expenditures on product certification, homologation and development incurred as the Company continues to refine and build a pipeline of exceptional products.

Bad Debt Recovery - Bad debt recovery for the quarters ended June 30, 2026 and 2025 were $80,543 and $31,155, respectively. The increase in bad debt recovery is the result of a decrease in amounts owing that were considered to be irrecoverable during the quarter ended June 30, 2026, when compared to the comparative 2025 period.

General and Administrative Expenses - General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the quarters ended June 30, 2026 and 2025 were $1.31 million and $1.10 million, respectively. The 19% increase in general and administrative expenses is primarily due to an increase in global travel expenditures incurred and increased product liability insurance premiums incurred in line with the increase in global sales during the 2026 period.

Depreciation Expense - Depreciation expense for the quarters ended June 30, 2026 and 2025 were $284,244 and $332,606, respectively. The 15% decrease in depreciation during the 2026 second quarter is primarily due to the accelerated depreciation of long-lived intangible web assets in connection with the impairment and resultant useful life adjustment of these assets during the first quarter of 2026.

Total Operating Expenses - Total operating expenses increased by $880,245, to $6.42 million, for the quarter ended June 30, 2026, or 16%, compared to $5.54 million in the 2025 period. This increase is primarily due to increases in salaries, advertising and marketing and general and administrative costs that were partially offset by a decrease in bad debt expense and depreciation during the 2026 period.

Other Income - Other income for the quarters ended June 30, 2026 and 2025 were $76,268 and $117,737, respectively. The 35% decrease in other income is primarily due to a decrease in interest earned during the second quarter of 2026, when compared to the 2025 second quarter.

Income taxes - Income taxes for the quarters ended June 30, 2026 and 2025 were $319,810 and $378,921, respectively. The decrease in income taxes is primarily due to a decrease in the provision for income taxes in line with the decrease in net income when compared to the prior year period.

Net Income - The net income after income taxes for the quarter ended June 30, 2026 was $0.91 million, compared to a net income after income taxes of $1.14 million for the quarter ended June 30, 2025. This 20% decrease in net income is primarily due to the increase in total operating expenses that were partially offset by the increase in gross profit and product royalty income discussed above.

Comparison of Six-Month Periods Ended June 30, 2026 and 2025

The following table summarizes the results of our operations during the six-month periods ended June 30, 2026 and 2025, and provides information regarding the dollar and percentage increase or (decrease) in such periods:

		Six months Ended June 30,										Percentage
		2026			2025				Increase			Increase
Item									(Decrease)			(Decrease)
REVENUES	$	35,898,430		$	31,544,203			$	4,354,227			14%
COST OF REVENUES		19,888,761			17,933,997			$	1,954,764			11%
GROSS PROFIT		16,009,669			13,610,206			$	2,399,463			18%
PRODUCT ROYALTY INCOME		507,934			133,604			$	374,330			280%
OPERATING EXPENSES
Salaries and Wages		4,324,880			3,703,617			$	621,263			17%
Commissions and Consulting		455,454			345,156			$	110,298			32%
Professional Fees		502,495			515,396			$	(12,901	)		(3%)
Advertising and Marketing		2,490,029			2,044,264			$	445,765			22%
Office Lease and Expenses		439,768			345,296			$	94,472			27%
Research and Development Costs		1,462,187			1,281,285			$	180,902			14%
Bad Debt Expense (Recovery)		49,539			(94,659	)		$	144,198			152%
General and Administrative		2,523,715			2,114,641			$	409,074			19%
Depreciation		798,860			659,614			$	139,246			21%
Total Operating Expenses		13,046,927			10,914,610			$	2,132,317			20%
INCOME FROM OPERATIONS		3,470,676			2,829,200			$	641,476			23%
Other Income		150,764			199,884			$	(49,120	)		(25%)
INCOME BEFORE INCOME TAXES		3,621,440			3,029,084			$	592,356			20%
Provision for Income taxes		941,757			769,226			$	172,531			22%
NET INCOME	$	2,679,683		$	2,259,858			$	419,825			19%

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 six months ended June 30, 2026 were $35.90 million, a 14% increase, compared to $31.54 million for the six months ended June 30, 2025. This increase in worldwide revenue is attributable to a $2.18 million increase in body armor sales and a $2.43 million increase in helmet sales that were partially offset by a $0.15 million decrease in other products, parts and accessories sales and a $0.11 million decrease in neck brace sales. Revenues generated from sales to our customers in the United States increased from $9.15 million to $10.85 million, for the six months ended June 30, 2026 and 2025, respectively. Revenues associated with international customers were $25.05 million and $22.39 million, or 70% and 71% of revenues, respectively, for the six months ended June 30, 2026 and 2025. Consumer direct sales increased by 61% and dealer direct sales increased by 11% for the first six months of 2026 as consumer demand for our products continued to build and domestic sales momentum at the dealer level continued to improve. Despite some short term supply chain constraints towards the end of the second quarter, sales to our global distributors increased by 10%, when compared to the first six months of 2025, as international ordering patterns continued to reflect strong sell-through and our distributors continued to invest in our growing product categories.

The following table sets forth our revenues by product line for the six months ended June 30, 2026 and 2025:

		Six months ended June 30,
		2026			% of Revenues				2025			% of Revenues
Neck braces	$	1,270,858			4%			$	1,381,596			4%
Body armor		17,339,848			48%				15,157,346			48%
Helmets		8,948,113			25%				6,514,316			21%
Other products, parts and accessories		8,339,611			23%				8,490,945			27%
	$	35,898,430			100%			$	31,544,203			100%

Sales of our flagship neck brace accounted for $1.27 million and $1.38 million, or 4% and 4% of our revenues for the six-month periods ended June 30, 2026 and 2025, respectively. Although, the volume of neck braces sold globally increased by 10% when compared to the six month period ended June 30, 2025, the 8% decrease in neck brace revenues is due to the sales mix of neck braces sold during the period ended June 30, 2025.

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 $17.34 million and $15.16 million, or 48% and 48% of our revenues for the six-month periods ended June 30, 2026 and 2025, respectively. The 14% increase in body armor revenues was primarily the result of a 19% increase in the volume of footwear, comprising of offroad MOTO and ADV motorcycle boots and mountain biking shoes, sold during the 2026 period.

Our Helmets accounted for $8.95 million and $6.51 million, or 25% and 21% of our revenues for the six-month periods ended June 30, 2026 and 2025, respectively. The 37% increase in helmet sales during the 2026 period is primarily attributable to a 28% increase in the sales volume of helmets designed for mountain biking, offroad motorcycle and adventure motorcycle riding, when compared to the first six months of 2025.

Our other products, parts and accessories are comprised of goggles, hydration bags and apparel items including jerseys, pants, shorts, jackets, bicycle components and aftermarket support items required primarily to replace worn or damaged parts through our global distribution network. Other products, parts and accessories sales accounted for $8.34 million and $8.49 million, or 23% and 27% of our revenues for the six-month periods ended June 30, 2026 and 2025, respectively. The 2% decrease in revenues from the sale of other products, parts and accessories is primarily due to a 7% decrease in the global sales volume of MOTO apparel during the six month period ending June 30, 2026 due to short term international supply chain constraints during second quarter. Global ordering patterns and demand for our apparel remain strong and shipments have resumed.

Cost of Revenues and Gross Profit - Cost of revenues for the six-month periods ended June 30, 2026 and 2025 were $19.89 million and $17.93 million, respectively. Gross Profit for the six-month periods ended June 30, 2026 and 2025 were $16.01 million and $13.61 million, respectively, or 45% and 43% 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 4% and 4% of our revenues for the six-month periods ended June 30, 2026 and 2025, respectively, the 2% increase in gross profit as a percentage of revenues for the six months ended June 30, 2026, was primarily due to an improvement in shipping costs as a percentage of domestic and international distributor revenues as management continues to improve global shipping and logistics efficiencies despite geo-political headwinds.

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 six-month periods ended June 30, 2026 and 2025 were $507,934 and $133,604, respectively. The 280% increase in product royalty income is due to an increase in the sale of licensed products by licensees during the 2026 period.

Salaries and Wages - Salaries and wages for the six-month periods ended June 30, 2026 and 2025 were $4.32 million and $3.70 million, respectively. The 17% increase in salaries and wages during the 2026 period was primarily due to the employment of sales, marketing and brand management professionals globally as we continue to build a diversified multi-channel selling organization and global consumer facing brand.

Commissions and Consulting Expense - During the six-month periods ended June 30, 2026 and 2025, commissions and consulting expenses were $455,454 and $345,156. This 32% increase in commissions and consulting expenses during the 2026 period is primarily due to an increase in commissions paid to sales professionals in the United States in line with the increase in domestic sales when compared to the first six months of 2025. Additionally, consulting expenses relating to sales and income tax processes increased during the six month period ending June, 30 2026.

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 six-month periods ended June 30, 2026 and 2025 were $502,495 and $515,396, respectively. This 3% decrease in professional fees is primarily due to a decrease in corporate legal fees that were partially offset by an increase in patent maintenance and litigation costs incurred during the 2026 period.

Advertising and Marketing - The Company places paid advertising in various motorsport magazines and online, digital media, and sponsors a number of events, teams and individuals to increase product and brand visibility. Advertising and marketing expenses for the six-month periods ended June 30, 2026 and 2025 were $2.49 million and $2.04 million, respectively. The 22% increase in advertising and marketing expenses is the result of costs associated with the production and implementation of targeted and coordinated global marketing campaigns that are designed to increase consumer demand for the Companies growing product categories and brand.

Office Lease and Expenses - Office lease and expenses for the six-month periods ended June 30, 2026 and 2025 were $439,768 and $345,296, respectively. The 27% increase in office lease and expenses during the 2026 period was primarily due to the inclusion of consolidation warehousing costs incurred to facilitate consolidated global shipping during the 2026 period.

Research and Development Costs - These costs for the six-month periods ended June 30, 2026, increased to $1.46 million, from $1.28 million, during the same 2025 period. The 14% increase in research and development costs during the 2026 period is primarily due to increased product homologation, certification and development costs incurred as the Company continues to refine and grow its product categories and build a pipeline of innovative products.

Bad Debt Expense (Recovery) - Bad debt expense (recovery) for the six-month periods ended June 30, 2026 and 2025 were $49,539 and ($94,659), respectively. This decrease in bad debt expense during the 2026 period is primarily the result of a decrease in amounts owing that were considered to be irrecoverable during the six-month period ended June 30, 2026, when compared to the comparative 2025 period.

General and Administrative Expenses - General and administrative expenses consist of insurance, travel, merchant fees, telephone, office and computer supplies. General and administrative expenses for the six-month periods ended June 30, 2026 and 2025 were $2.52 million and $2.11 million, respectively. The 19% increase in general and administrative expenses during the 2026 period is primarily due to an increase in global travel expenditure associated with product development, sales and branding activities when compared to the period ending June 30, 2025. Additionally, product liability insurance premiums increased in line with increased global revenues.

Depreciation Expense - Depreciation Expense for the six-month periods ended June 30, 2026 and 2025 were $798,860 and $659,614, respectively. This 21% increase in depreciation during the 2026 period is primarily due to the accelerated depreciation of long-lived intangible web assets in connection with the impairment and resultant useful life adjustment of these assets.

Total Operating Expenses - Total operating expenses increased by $2.13 million to $13.05 million for the six-month period ended June 30, 2026, or 20%, compared to $10.91 million for the six-month period ended June 30, 2025. This increase in total operating expenses is primarily due to increases in salaries, general and administrative costs that were partially offset by decreases in advertising and marketing costs and a decrease in bad debt expense during the 2026 period.

Other Income - Other income for the six-month periods ended June 30, 2026 and 2025 were $150,764 and $199,884, respectively. The 25% decrease in other income is primarily due to due to a decrease in interest earned during the 2026 period, when compared to the period ended June 30, 2025.

Income taxes - Income taxes for the six-month periods ended June 30, 2026 and 2025 were $941,757 and $769,226, respectively. The increase in income taxes is primarily due to an increase in the provision for income taxes in line with the increase in net income when compared to the prior year period.

Net Income - Net income after taxes for the six-month period ended June 30, 2026 was $2.68 million, compared to net income after taxes of $2.26 million for the six-month period ended June 30, 2025. This increase in net income during the 2026 period is primarily due to the increase in revenues and margins discussed above.

Liquidity and Capital Resources

At June 30, 2026, we had cash, cash equivalents and restricted cash of $19.53 million. The following table sets forth a summary of our cash flows for the periods indicated:

			June 30,
			2026				2025
Net cash provided by operating activities		$	7,438,967			$	4,114,440
Net cash used in investing activities		$	(489,662	)		$	(329,761	)
Net cash used in financing activities		$	(679,288	)		$	(566,604	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		$	24,863			$	140,013
Net increase in cash, cash equivalents and restricted cash		$	6,294,880			$	3,358,088
Cash, cash equivalents and restricted cash at the beginning of period		$	13,233,047			$	12,368,100
Cash, cash equivalents and restricted cash at the end of period		$	19,527,927			$	15,726,188

Cash, cash equivalents and restricted cash increased by $6,294,880 or 48%, for the six months ended June 30, 2026, when compared to $13,233,047 of cash, cash equivalents and restricted cash on hand at December 31, 2025. The primary sources of cash for the six months ended June 30, 2026 were a decrease in inventory of $6,886,587, net income of $2,679,683 and a decrease in accounts receivable of $811,561. The primary uses of cash for the six months ended June 30, 2026 were a decrease in accounts payable and accrued expenses of $2,670,848, an increase in prepaid expenses and other current assets of $1,429,745, the repayment of a short term loan amounting to $575,591 and capital expenditure of $490,405.

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, cash equivalent and restricted cash 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 expenditure in the next twelve months. Our long-term financing requirements depend on our growth strategy, which relates primarily to our desire to increase revenue both in the U.S. and abroad.

Obligations under Material Contracts

Pursuant to our Licensing Agreement with Xceed Holdings, a company controlled by Dr. Christopher Leatt, our founder, chairman and head of research and development, we pay Xceed Holdings 4% of all neck brace sales revenue billed and received by the Company on a quarterly basis based on sales of the previous quarter. During the six months ended June 30, 2026 and 2025, the Company paid an aggregate of $55,729 and $54,879, 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 six months ended June 30, 2026 and 2025, the Company paid an aggregate of $13,932 and $13,720, 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. The monthly fee payable by the Company to Innovation was $48,437, and effective July 1, 2026, increased to $50,714. 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 terminated by either party in accordance with its terms. Either party may terminate the Consulting Agreement upon 6 months' prior written notice, except that the Company may immediately terminate it without notice if the services to be performed by Innovation cease to be performed by Dr. Leatt, if beneficial ownership in Innovation by Dr. Leatt 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. During the six-month periods ended June 30, 2026 and 2025, the Company recognized an aggregate of $290,625 and $282,434, respectively, in consulting fees to Innovation.

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 diminution in his fulfillment of such duties and obligations. The foregoing agreements replaced prior agreements in force from June 2018 to November 2021, among the Company, Dr. Leatt and Innovate Services Limited, a Seychelles company, beneficially 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, to our Annual Report on Form 10-K filed with the SEC on March 10, 2022, and are incorporated by reference in this report.

The Company is the holder of a $1,500,000 revolving line of credit initially available 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 an 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 June 30, 2026 and 2025, 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 of short-term credit losses at June 30, 2026 and December 31, 2025 was $249,782 and $328,292, 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 June 30, 2026 and December 31, 2025 was $597,835 and $548,428, 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 $0 and $234,224 to intangible capitalized website costs as at June 30, 2026 and December 31, 2025, 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 the 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.