UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X
OR
☐
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ________ to ________
Commission File Number 1-12368
Delaware
(State or other jurisdiction of incorporation or organization)
75-2543540
(I.R.S. Employer Identification No.)
1900 Southeast Loop 820
Fort Worth, Texas 76140
(Address of Principal Executive Offices)
76140
(Zip Code)
817-872-3200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.0024
Trading Symbol
TLFA
Name of each exchange on which registered
N/A*
*Tandy Leather Factory, Inc.’s common stock previously traded on the NASDAQ Global Market under the symbol "TLF”. On August 13, 2020, Tandy
Leather Factory, Inc.’s common stock began trading on the OTC Link (previously "Pink Sheets”) operated by OTC Markets Group under the symbol
"TLFA”. Deregistration under Section 12(b) of the Exchange Act of 1934, as amended, became effective on May 10, 2021.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☐ No X
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, an emerging
growth company. See the definitions of "large accelerated filer,” "accelerated filer,” "smaller reporting company,” and "emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer X Smaller reporting company X Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No X
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued
its audit report. ☐
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $28,164,961 at June 30, 2019 (based on the price
at which the common stock was last traded on the last business day of its most recently completed second fiscal quarter).
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of June 17, 2021, there
were 8,663,921shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
TABLE OF CONTENTS
EXPLANATORY NOTE
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES*
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16. COMPREHENSIVE FORM 10-K SUMMARY
SIGNATURES
LIST OF THE SUBSIDIARIES OF THE COMPANY
1
4
4
10
19
19
20
20
21
21
21
22
34
40
91
91
95
96
96
96
96
96
96
97
97
100
101
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EXPLANATORY NOTE
Tandy Leather Factory, Inc. ("TLFA,” "we,” "our,” "us,” "our Company,” "the Company,” "Tandy,” or "Tandy Leather,” mean Tandy Leather Factory, Inc.,
together with its subsidiaries) is filing this comprehensive annual report on Form 10-K for the fiscal years ended December 31, 2019, 2018 and 2017 (the
"Comprehensive Form 10-K”) as part of its efforts to become current in its filing obligations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act”). This Comprehensive Form 10-K is our first periodic filing with the Securities and Exchange Commission (the "SEC”) since the filing of our
quarterly report on Form 10-Q for the quarter ended March 31, 2019. This Comprehensive Form 10-K contains our audited financial statements as of and
for the year ended December 31, 2019, as well as restatements of the following previously filed periods: (i) our audited Consolidated Financial Statements as
of and for the years ended December 31, 2018 and 2017, and (ii) our unaudited Consolidated Results of Operations for the quarters ended March 31, June
30, September 30, and December 31, 2018, and March 31, 2019. Because of the amount of time that has passed since our last periodic report was filed with
the SEC, discussion relating to our business and related matters is focused on our more recent periods and may also include certain information for periods
after December 31, 2019. The filing of this Comprehensive Form 10-K and the contemporaneous filing of the quarterly reports for the quarters ended June
30, and September 30, 2019, will not result in us being "current” in our reporting requirements under the Exchange Act. It is our intention to become current,
and we are preparing (i) quarterly reports for the quarters ended March 31, 2020, June 30, 2020, September 30, 2020 and March 31, 2021 and (ii) the
annual report for the year ended December 31, 2020. Once we do become "current” in such filings, we will continue to be precluded from the use of certain
abbreviated registration statements and forms, which are predicated on timely filing all required reports over the prior twelve-month period.
Restatement Background
As previously disclosed, on October 14, 2019, as a result of the findings of an independent investigation by the Company’s independent Audit Committee and
the Company’s ongoing financial reporting reviews, the Company, in consultation with the Audit Committee, determined that the Company’s previously issued
financial statements for (i) the years ended December 31, 2018, 2017 and 2016 included in the Company’s most recent Annual Report on Form 10-K, (ii) the
quarterly and year-to-date periods within fiscal 2017 and 2018 included in the Company’s Quarterly Reports on Form 10-Q, and (iii) the three months ended
March 31, 2019 included in the Company’s Quarterly Report on Form 10-Q, should no longer be relied upon due to material misstatements of one or more of
the following categories in all or certain of these periods: the value of inventory and calculation of cost of sales, gross profit, operating expenses, operating
income, net income, and earnings per share ("EPS”) as described below.
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Such errors included: (i) methods used by the Company in the valuation and expensing of costs related to inventory which was not correctly stated and was not
consistent with the first-in, first-out ("FIFO”) methodology, (ii) warehousing and handling expenditures which were not properly capitalized during the first and
third quarters but were subsequently corrected on a semi-annual basis in the second and fourth quarters resulting in the understatement of inventory and net
income in the first and third quarters and the overstatement of net income in the second and fourth quarters, (iii) warehouse and handling expenditures which
were improperly classified in operating expenses in all quarters resulting in an overstatement of operating expenses in all restated periods, (iv) freight-in,
warehousing and handling expenditures, factory labor and overhead, and freight-out costs which were being capitalized to inventory using historical standard
rates that were not based on the actual costs incurred in each period resulting in misstatements of inventory value, (v) inventory reserve levels which did not
reflect the Company’s accounting policy of carrying inventory at the lower of cost or net realizable value resulting in misstatements of inventory value, (vi) sales
returns were not accounted for until November 2018, and through year end 2017 gift cards were initially recorded to net sales causing net sales to be
overstated, (vii) lease accounting errors upon the adoption of Accounting Standards Update ("ASU”) 2016-02, Leases ("Topic 842”) on January 1, 2019,
which resulted in the understatement of operating lease assets and operating lease liabilities, (viii) the income tax effect of pre-tax restatement adjustments as
well as correction of income tax misstatements related to tax effected items recognized in the 2018 income tax provision but related to the previous 2017 tax
year, including adjustments related to the Tax Cuts and Jobs Act ("TCJA”) and recognition of uncertain tax position ("UTP”) liability and related interest
expense, and (ix) other smaller matters as described in Note 2 of the Notes to the Consolidated Financial Statements included in this Comprehensive Form
10-K for the year ended December 31, 2019, Restatement of Previously Issued Consolidated Financial Statements (the "Restatement Footnote”). All
financial statements, schedules and footnotes impacted indicate the restated amounts under the caption "Restated.” In connection with the process of restating
our financial statements, we are also undergoing remediation efforts to fix the internal control failures that contributed to these misstatements. See Item 9A –
Controls and Procedures for further detail on the Company’s remediation efforts.
In addition to the filing of this Comprehensive Form 10-K, we have contemporaneously filed quarterly reports on Form 10-Q for the quarterly periods ended
June 30, and September 30, 2019, that include restated unaudited interim financial statements for the comparative prior year periods in 2018. We believe that
the errors related to inventory valuation could impact periods prior to the years ended December 31, 2017. We do not intend to amend any other annual
reports on Form 10-K or quarterly reports on Form 10-Q for periods affected by these errors. As a result, our prior reports should no longer be relied upon.
This Comprehensive Form 10-K also reflects Management’s Discussion and Analysis of Financial Condition and Results of Operations based on the restated
financial information.
The net effect of the adjustments on the Consolidated Statements of Comprehensive Income (Loss) was to increase net income by $2.4 million and to
decrease net income by $2.0 million for the years ended December 31, 2018 and 2017, respectively.
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Increase (Decrease) in Net income:
Inventory adjustments (1)
Sales returns, gift cards and class fees
Operating expenses (2)
Impairment expense
Other expense
Total adjustments before tax
Income tax expense from adjustments
Increase (decrease) in net income
(1) Inventory adjustments due to:
FIFO adjustment
Freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out
Inventory reserve
Sales returns
Other
Warehouse and handling reclass
(2) Operating expense adjustments due to:
Warehouse and handling reclass
Reclass to impairment expense
Accrued expenses
PTO Accrual
Other
2018
255,372 $
105,382
2,059,463
(285,477)
373,382
2,508,122
73,585
2,434,537 $
843,598 $
503,078
980,000
104,105
19,710
(2,195,119)
255,372 $
2,195,119 $
285,477
(377,912)
(16,930)
(26,291)
2,059,463 $
2017
(3,127,495)
99,327
2,163,065
-
40,255
(824,848)
1,148,459
(1,973,307)
(88,548)
(619,172)
-
(19,999)
(223,895)
(2,175,881)
(3,127,495)
2,175,881
-
51,375
(38,647)
(25,544)
2,163,065
$
$
$
$
$
$
The decrease to retained earnings from the adjustments as of December 31, 2018, is as follows:
FIFO adjustment
Freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out
Inventory reserve
Sales returns
Income tax benefit
Accruals and other
Decrease to retained earnings
$
$
(786,690)
(442,150)
980,000
(172,494)
33,823
(852,872)
(1,240,383)
As previously disclosed, the Company did not timely file with the SEC its Quarterly Reports on Form 10-Q for the periods ended June 30, and September 30,
2019, March 31, June 30, and September 30, 2020, and March 31, 2021 or its Annual Report on Form 10-K for fiscal 2019 and fiscal 2020 (collectively,
the "Delinquent Filings”). The Company was unable to timely file the Delinquent Filings due to its ongoing accounting evaluation and pending restatement of
certain of the Company’s previously filed financial statements (the "Restatement Process”). The Nasdaq Global Market ("Nasdaq”) suspended trading in the
Company’s stock on Nasdaq as of August 13, 2020. Our stock has since traded on the OTC Link (previously "Pink Sheets”) operated by OTC Markets
Group under the symbol "TLFA.” Nasdaq denied the Company’s appeal of its decision to suspend trading in the Company’s stock and the Company’s stock
was formally delisted on February 9, 2021. We intend to reapply for Nasdaq listing after we have made our required Exchange Act filings, including the
Delinquent Filings. Any such listing would be subject to Nasdaq approval.
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PART I
ITEM 1.
BUSINESS
The following discussion, as well as other portions of this Comprehensive Form 10-K contains forward-looking statements that reflect our plans,
estimates and beliefs. Any such forward-looking statements (including, but not limited to, statements to the effect that Tandy Leather Factory, Inc.
("TLFA”) or its management "anticipates,” "plans,” "estimates,” "expects,” "believes,” "intends,” and other similar expressions) that are not
statements of historical fact should be considered forward-looking statements and should be read in conjunction with our Consolidated Financial
Statements and related notes contained elsewhere in this report. These forward-looking statements are made based upon management’s current
plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and should be read carefully because they involve
risks and uncertainties. We assume no obligation to update or otherwise revise these forward-looking statements, except as required by law.
Specific examples of forward-looking statements include, but are not limited to, statements regarding our forecasts of financial performance, share
repurchases, store openings or store closings, capital expenditures and working capital requirements. Our actual results could materially differ
from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to,
those discussed below and elsewhere in this Comprehensive Form 10-K and particularly in "Item 1A. Risk Factors” and "Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” Unless the context otherwise indicates, references in this
Comprehensive Form 10-K to "TLFA,” "we,” "our,” "us,” the "Company,” "Tandy,” or "Tandy Leather” mean Tandy Leather Factory, Inc.,
together with its subsidiaries.
General
Tandy Leather Factory, Inc. is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas,
the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted
source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our
legacy of inspiring the timeless art and trade of leatherworking.
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides
convenience, a high-touch customer service experience, a hub for the local leathercrafting community, and our 100-year heritage. We believe that this
combination of qualities is unique to Tandy and gives the brand competitive advantages that are very difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our four websites: tandyleather.com, tandyleather.ca,
tandyleather.eu and tandyleather.com.au. We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and
on our websites. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
As of August 13, 2020, Nasdaq suspended trading in the Company’s stock on Nasdaq due to the Company not being current with its SEC filings. Our stock
has since traded on the OTC Link (previously "Pink Sheets”) operated by OTC Markets Group under the symbol "TLFA.” Nasdaq denied the Company’s
appeal of its decision to suspend trading in the Company’s stock and the Company’s stock was formally delisted on February 9, 2021. We intend to reapply
for Nasdaq listing after we have made our required Exchange Act filings, including the Delinquent Filings. Any such listing would be subject to Nasdaq
approval.
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Retail Fleet
As of December 31, 2019, the Company operated a total of 115 retail stores. There were 103 stores in the United States ("U.S,”), 11 stores in Canada and
one store in Spain. All e-commerce sales through our websites were fulfilled and recognized through our network of retail stores.
The Company operates a total of 106 retail stores as of May 2021. There are 95 stores in the U.S., ten stores in Canada and one store in Spain. During the
second quarter of 2020, we consolidated U.S. e-commerce web order fulfillment from the stores to our Fort Worth distribution center.
All Tandy locations, other than our corporate headquarters (which includes our flagship store, corporate offices, distribution center, and manufacturing facility)
are leased.
Business Strategy
New management joined the Company in October 2018 and set new strategic directions for both the short and long term. The overarching goal for 2019 and
2020 was to invest in rebuilding a foundation for growth by: 1) improving our brand proposition, 2) reversing the sales decline with business customers, 3)
building our talent, processes, tools and systems and 4) positioning us for long-term growth.
Key initiatives in 2019 and 2020 included:
Simplifying and centralizing the pricing strategy, reducing the number of complex price levels, and creating a balance between everyday-low-prices ("EDLP”) and planned
promotional events;
Enhancing our customer proposition with an upgraded web platform and experience, new branding and assortment architecture, and community-building initiatives;
Improving the quality and assortment of the product offering to better appeal to more advanced leather-crafters and business customers and improving leather quality and
consistency with a new in-house leather quality assurance process;
Assessing our retail stores based on a forecast of long-term four-wall cash flow. Managing the fleet (store moves, closures, renewals) based on that forecast, which
resulted in the closure of five stores in 2019 and one in early 2020, including stores in both Australia and the United Kingdom ("UK”), which were all cash flow negative
and not strategic to ongoing operations;
Investing in retail talent with a focus on training and development, performance evaluations, promotion from within, career paths, achievable and controllable bonus
structures, base pay reflective of geographic differences in cost-of-living, and a flattened organizational structure;
Building the Commercial Program - a team focused on the Company’s largest customers with a business model that meets these customers’ unique needs including
dedicated sales representatives, clear and competitive volume-based pricing, personalized service and sourcing, shipping directly to customers from our distribution
center, and improved product consistency, quality and availability;
Building the organization, processes, infrastructure, tools and systems to efficiently execute these strategies. This included recruiting key talent with deep retail know-
how, replacing decades-old systems (general ledger, point-of-sale, warehouse management and web) with modern tools, and building key best-practices across the
company; and
Evaluating opportunities to grow the company with new store locations and formats, category growth and strategic partnerships.
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Although we made progress against these initiatives throughout 2019, the onset of a new strain of coronavirus ("COVID-19”) pandemic in March 2020
temporarily shifted our strategic focus to company survival and cash preservation. Tandy temporarily closed all stores by the end of March 2020, furloughed a
majority of its employees, and extended payment terms on suppliers. Some landlords granted rent abatements and deferrals for the months of April, May and
June 2020, which assisted with our cash position and preservation.
Web order fulfillment in the U.S. was consolidated from the stores to our Fort Worth distribution center at the end of March 2020, enabling us to continue to
meet our customers’ product needs and generating sales even when our stores were closed. U.S. and some international web orders since are fulfilled
centrally from our distribution center and web sales represent a larger proportion of our sales than they did before the pandemic, even after our stores have
reopened.
During the second quarter of 2020, as leases expired or early terminations were negotiated, we permanently closed eight stores where we believed we can
retain a majority of customers through geographically proximate stores and/or our enhanced website platform. After these permanent closures, 106 stores
remained, including ten in Canada and one in Spain. During the third quarter of 2020, all 106 of Tandy’s stores had reopened to the public and the store re-
openings were well received by our employees and customers. During the fourth quarter of 2020 through the present, we have continued to manage through
the pandemic as we have seen periodic spikes in COVID-19 infections and have been forced to close certain stores or move certain stores to "curbside only”
operations.
Tandy began 2020 with a good cash position. The sharp reduction in sales associated with COVID-related store closures, especially in the second quarter of
2020, mitigated by aggressive cost management, resulted in a decline in our cash reserve. While the stability of our operating environment has improved
significantly relative to the end of March and the second quarter of 2020, the current economic environment remains very risky and highly volatile. We have
retained a high degree of flexibility to react to changes in market conditions, but there is no assurance we can avoid additional detrimental impacts to our
financial position, cash flows, liquidity and results of operations in 2021 and beyond. The extent of the impact of the pandemic on our business and financial
results will depend largely on future developments, including the duration of the spread of the outbreak within the U.S., the effectiveness and acceptance of
newly developed vaccines, the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly
uncertain and cannot be predicted. This situation continues to evolve, and additional impacts may arise that we are not aware of currently.
Customers
Prior to 2019, we defined our customers in a number of different groups, the largest two being Retail, primarily hobbyists, and Business, small and medium-
sized businesses. However, through customer research over the last two years and better understanding of past practices used to categorize customers into
these groups, the Company determined that there was insufficient distinction between such categories. We are continuing to assess and evolve our thinking on
customer segments with a focus on levels of annual and lifetime spend.
To address the opportunity among the largest customers, in 2019 we launched a Commercial Program designed to better meet the needs of these customers.
The program is comprised of dedicated outside sales representatives, clear and competitive volume-based pricing, personalized service and sourcing, shipping
directly to customers from our distribution center, and improved product consistency, quality and availability.
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Merchandise
We carry a wide assortment of products organized into a number of categories including leather, hand tools, hardware, kits, liquids, machinery and other
supplies. We operate a manufacturing facility in Fort Worth, Texas, where we manufacture kits, thread lace, belt strips and straps, and Craftaid®s, and
provide some custom manufacturing processes for commercial and business customers. The factory produces approximately 10% of our products. We
distribute product under the Tandy LeatherTM, Eco-FloTM, CraftoolTM, CraftoolProTM and Dr. Jackson’sTM brands, along with our recently launched
TandyPro® products. We develop and invest in new products through the ideas and referrals of customers and store personnel as well as the analysis of
trends in the market and sales performance at retail. In addition, we have been focused on broadening our assortment through strategic partnerships with key
brands to drive category growth and better meet the needs of our customers.
Operations
As of January 1, 2019, we operate as a single segment and report on a consolidated basis. Prior to January 1, 2019, we operated and reported in two
segments - North America and International. In early 2019, we announced several strategic initiatives to drive future sales growth and long-term profitability,
which resulted in the Company closing two of its three stores outside of North America. This left Spain as our only store outside of North America, and our
chief operating decision maker ("CODM”) was no longer making operating performance assessments and resource allocation decisions for this single store.
As a result, we no longer report International as a reportable segment. All prior year data discussed throughout this Comprehensive Form 10-K has been
retrospectively revised to conform to the new single-reportable segment structure. There is no change to our consolidated financial position or results based on
the change in segment reporting.
Our stores offer a broad selection of products combined with leathercraft expertise in a one-stop shop. Not only can customers purchase leather, related
accessories and supplies necessary to complete their projects from a single source, but many of our store associates are also leathercrafters themselves and
can provide suggestions and advice on our customers’ projects. Customers value the expertise and high level of customer service from our store associates,
the convenience of taking their purchases immediately, as well as the ability to touch, feel and choose their individual pieces of leather, an organic product in
which each piece is unique. We also offer open workbenches where customers can work on projects, take classes, commune with the leathercrafting
community, and test new tools and techniques.
Most of our stores range in size from 1,300 square feet to 9,000 square feet, with the average at approximately 3,500 square feet, and our Fort Worth flagship
store is approximately 22,000 square feet. Stores are located in light industrial warehouse spaces or older strip shopping centers in proximity to major
freeways or well-known crossroads. We believe that many of our customers view our stores as a destination: customers interested in leathercrafting seek us
out, reducing the value of paying high rents for high foot-traffic locations.
Historically, we generate slightly more sales in the fourth quarter of each year due to the holiday shopping season (approximately 28-30% of annual sales),
while the other three quarters average approximately 22-24% of annual sales each quarter.
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Distribution
Our stores receive the majority of their inventory from our central distribution center located in Fort Worth, Texas, in weekly shipments, using third party
logistics providers. Occasionally, merchandise is shipped directly from the vendor. Starting in March 2020, with the store closures due to the COVID-19
pandemic, we began to fulfill web orders from our distribution center in Fort Worth. Prior to 2020, web orders were fulfilled by the store based upon
availability. This required building a new direct-to-consumer pick, pack and ship process supplemented by our new web and shipping platform, which rolled
out in June 2020. We also expanded our customer service team to handle web order inquiries and take phone orders.
Historically, we attempted to maintain the optimum number of items in our product line to minimize out-of-stock situations against carrying costs involved with
such an inventory level. We generally maintain higher inventories of imported items, to ensure a continuous supply. In 2019, we tested our suppliers’ ability to
replenish more rapidly and to commit to on-time deliveries to allow lower overall inventory levels and found that out-of-stocks were at a level we viewed as
unacceptable. Since 2019, we have also been executing against a number of strategic initiatives to improve our product assortment, test new items online, and
tailor product assortments to the needs of local customers in each store. We carry about 6,500 stock-keeping units (SKUs) in our current product line and
continue to refine both the line, the lead times and safety stock levels required to meet customer demand, online vs. in-store assortment, and overall total
inventory levels needed to grow sales and market share.
Competition
Our competitors are typically smaller, independently-owned brick-and-mortar retailers, internet-based retailers including those selling on platforms like
Amazon and eBay, national craft chains like Michaels Stores, Inc. and Hobby Lobby Stores, Inc., and some wholesale-focused distributors. Virtually all of
these competitors carry a more limited line of leathercraft products compared to Tandy. We are competitive on convenience, price, availability of
merchandise, customer service, depth of our product line, and delivery time. Tandy Leather is the only multi-store chain specializing in leathercraft, which we
believe provides a competitive advantage over internet-based retailers and the large general craft retailers. We also believe that our large size relative to most
competitors gives us an advantage in sourcing as well as deep product and leathercrafting expertise among our employees.
Suppliers
We purchase merchandise and raw materials from over 100 vendors from the United States and approximately 20 foreign countries. In general, our 10 largest
vendors account for approximately 60-75% of our inventory purchases.
Because leather is sold internationally, market conditions abroad are likely to affect the price of leather in the United States. Aside from increasing purchases
when we anticipate price increases (or possibly delaying purchases if we foresee price declines), we do not attempt to hedge our inventory costs.
Our supply chain and vendor relationships remain strong. We are focused on continuing to align our product and sourcing strategies to elevate the overall
quality, consistency, and agility to meet the diverse needs of our existing consumers and attract new ones to the brand. COVID-19 has had varying impacts on
our supply chain in 2020 through the present, as the course of the disease has impacted countries differently over time. During the early months of the
pandemic, we experienced longer lead times in Asia, but later, we have faced reduced capacity in Brazil and Europe, and recently a near shut-down in India.
Availability of shipping containers, especially in Asia, continues to be challenging.
Compliance with Environmental Laws
Our compliance with federal, state and local environmental protection laws has not had, and is not expected to have, a material effect on our capital
expenditures, earnings, or competitive position.
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Human Capital
As of December 31, 2019, we employed 578 people, 457 of whom were employed on a full-time basis. As of April 30, 2021, we employed 561 people,
460 of whom are employed on a full-time basis. We are not a party to any collective bargaining agreements. Overall, we believe that relations with employees
are good.
Intellectual Property
The Company owns all of the material trademark rights used in connection with the production, marketing, distribution and sale of all Tandy-branded
products. In addition, we license a limited number of our trademarks and copyrights used in connection with the production, marketing and distribution of
certain categories of goods and limited edition co-branded projects. Major trademarks include federal trade name registrations for "Tandy Leather Factory,”
"Tandy Leather Company,” and "Tandy.” The Company is not dependent on any one particular trademark or design patent, although it believes that the
"Tandy” and "Tandy Leather” names are important for its business. In addition, Tandy owns several patents for specific belt buckles and leather-working
equipment. Tandy polices its trademarks and trade dress, and where appropriate pursues infringers. The Company expects that its material trademarks will
remain in full force and effect for as long as we continue to use and renew them.
Foreign Sales
Information regarding our sales from the United States and abroad and our long-lived assets is found in Note 3 - Significant Accounting Policies: Revenue
Recognition and Note 5 - Balance Sheet Components, of the Notes to the Consolidated Financial Statements. For a description of some of the risks
attendant to our foreign operations, see Item 1A, Risk Factors.
Available Information
We file reports with the SEC. These reports include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and any amendments to these filings. These reports are available on the Securities and Exchange Commission’s website at www.sec.gov.
Our corporate website is located at www.tandyleather.com. We make copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, proxy statements and any amendments thereto filed with or furnished to the SEC available to investors on or through our
website free of charge as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Our SEC filings can be found on the
Investor Relations page of our website through the "SEC Filings” link. In addition, certain other corporate governance documents are available on our website
through the "Corporate Governance” link. No information contained on any of our websites is intended to be included as part of, or incorporated by reference
into, this Comprehensive Form 10-K.
Information about our Executive Officers
The following table sets forth information concerning our executive officers as of June 21, 2021:
Name and Age
Janet Carr, 60
Michael Galvan, 52
Position
Chief Executive Officer
Chief Financial Officer
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Officer Since
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Janet Carr has served as our Chief Executive Officer and as a member of our Board of Directors since October 2018. Prior to her current role, Ms. Carr
served as the Senior Vice-President of Global Business Development for Caleres Inc. (formerly Brown Shoe Company Inc.) from 2016 to 2017. While there,
she was responsible for international wholesale and retail for all of their brands. Prior to Caleres, Ms. Carr was the President of the Handbag Division of Nine
West Group Inc. from 2013 to 2014, where she was responsible for all aspects of design, development and sales in both wholesale and retail. Ms. Carr has
deep experience in strategy and consumer insights in various roles at a number of prominent retailers, including Tapestry, Inc. (formerly Coach, Inc.), Gap Inc.
and Safeway.
Michael Galvan has served as our Chief Financial Officer since January 2021. He first joined the Company in May 2020, initially serving as Interim Chief
Financial Officer. Mr. Galvan brings over 25 years of finance and accounting experience to the Company, including executive leadership roles serving as
Interim Chief Financial Officer, Chief Accounting Officer and Treasurer for a variety of publicly traded companies, including Main Street Capital Corporation
and Mattress Firm. Prior to joining the Company, Mr. Galvan served in various management roles including Senior Vice President, Chief Accounting Officer
and Treasurer of NexTier Oilfield Solutions, Inc. (formerly C&J Energy Services, Inc.), from June 2016 until April 2020, including serving as Interim Chief
Financial Officer from March through September 2018.
ITEM 1A.
RISK FACTORS
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic has had, and likely may continue to have, a material adverse effect on our business and liquidity.
The COVID-19 pandemic had an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which
has created significant uncertainties. These uncertainties include, but are not limited to, the material adverse effect of the pandemic on the economy, our supply
chain partners, our employees and customers, customer sentiment in general, and our stores. In March 2020, we temporarily closed all of our stores and took
other significant actions to mitigate the ongoing impact of the COVID-19 pandemic on our cash flows and to protect our business and associates for the long
term in response to the crisis. Such actions include targeted reductions in discretionary operating expenses such as advertising and payroll expenses, including
furloughing a significant number of our employees and temporarily reducing the payroll of remaining employees, reducing capital expenditures and reducing
merchandise receipts. Further, we have sought and may continue to seek extended payment terms with our vendors, including suppliers of our products and
landlords. During the third quarter of 2020, all of our 106 stores had reopened. However, beginning with the fourth quarter of 2020 and into the present, we
have continued to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection rates, in
various locations and have again been forced periodically to temporarily close certain stores or move certain stores to "curbside only” operations. We are
unable to ensure that our sales will meet or exceed pre-pandemic levels or if additional periods of store closures will be needed or mandated. In addition, our
merchandise vendors may have been negatively impacted by the pandemic and the financial difficulties of other retailers, thereby creating concerns about our
vendors’ ability to provide us with payment terms or merchandise that is suitable to our brand. The effects of the pandemic have materially adversely impacted
our revenues, earnings, liquidity and cash flows, and have required significant actions as mentioned above.
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The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread
of the outbreak and availability of vaccines within the U.S. and Canada and our key sourcing markets, the impact on capital and financial markets and the
related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. The pandemic has had, and may continue to
have, a material adverse impact on our financial position, cash flows, liquidity and results of operations during fiscal year 2020 and beyond. This situation is
changing rapidly, and additional impacts may arise that we are not aware of currently.
Disruptions in the operation of our Fort Worth distribution center or manufacturing facility due to disease, including the COVID-19
pandemic, natural disaster, fire, or other crises, could have an adverse effect on our ability to supply our retail stores, fulfill web orders and/or
manufacture product, resulting in possible decreases in sales and margin.
We are dependent on a limited number of distribution and sourcing centers, primarily the center located at our Fort Worth, Texas headquarters. Our ability to
meet the needs of our customers and our retail stores and e-commerce sites depends on the proper operation of these centers. If any of these centers were to
shut down or otherwise become inoperable or inaccessible for any reason, we could suffer a substantial loss of inventory and/or disruptions of deliveries to our
retail and wholesale customers. While we have business continuity and contingency plans for our sourcing and distribution center sites, significant disruption of
manufacturing or distribution for any of the above reasons could interrupt product supply, result in a substantial loss of inventory, increase our costs, disrupt
deliveries to our customers and our retail stores, and, if not remedied in a timely manner, could have a material adverse impact on our business.
Risks Related to Owning our Common Stock
Our continued delisting from the Nasdaq Market could impair the value of your investment.
Our common stock was listed on the Nasdaq Global Market. In order to maintain that listing, we were required to satisfy minimum financial and other listing
requirements, including filing quarterly and annual financial reports as required by the rules of the SEC. From May 2019 until May 2021, the Company did not
file its quarterly or annual financial reports as required by the rules of the SEC and Nasdaq. The Company applied for, and was granted, extensions by
Nasdaq to comply with Nasdaq’s listing standards.
However, the Company was unable to become current in its filings within that extended time frame. On August 11, 2020, the Company received notice of
Nasdaq’s decision to suspend trading in the Company’s stock on Nasdaq as of August 13, 2020 due to the Company not being current with its SEC filings.
Nasdaq denied the Company’s appeal of this decision, resulting in the Company’s stock being formally delisted on February 9, 2021. To date, the delisting
has not materially affected the trading price of the Company’s common stock. The Company intends to apply for re-listing on Nasdaq once it is current with
its Exchange Act filings. Any such listing would be subject to Nasdaq approval. However, if we are unable to do so, the continued delisting of our common
stock from Nasdaq could adversely affect the market liquidity of our common stock or otherwise impair the value of your investment.
We have concluded that certain of our previously issued financial statements should not be relied upon and have restated certain of our
previously issued financial statements which was time-consuming and expensive and could expose us to additional risks that could have a
negative effect on our Company.
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As discussed in the Explanatory Note and in Note 2, "Restatement of Previously Issued Consolidated Financial Statements” under Item 8 of this
Comprehensive Form 10-K, we have concluded that certain of our previously issued financial statements should not be relied upon. We restated our
previously issued audited financial statements as of and for the years ended December 31, 2018 and 2017 as well as the quarterly and year-to-date periods
within fiscal 2018 included in the Company’s previously filed Quarterly Reports on Form 10-Q, and the three months ended March 31, 2019, included in the
Company’s previously filed Quarterly Report on Form 10-Q. We believe that the errors described in Note 2, "Restatement of Previously Issued Consolidated
Financial Statements” might impact periods prior to years ended December 31, 2017, but we do not intend to amend any other annual reports on Form 10-K
or quarterly reports on Form 10-Q for earlier periods. As a result, our prior reports should no longer be relied upon. In addition, our Quarterly Reports on
Form 10-Q for the quarterly periods ended June 30, and September 30, 2019, March 31, June 30, and September 30, 2020, and March 31, 2021 have not
been filed in a timely manner; however the Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, and September 30, 2019 are being filed
contemporaneously with the filing of this Comprehensive Form 10-K. The restatement process was time consuming and expensive and, along with the failure to
make certain filings with the SEC in a timely manner, could expose us to additional risks that could have a negative effect on our Company. In particular, we
incurred substantial unanticipated expenses and costs, including audit, legal and other professional fees, in connection with the restatement of our previously
issued financial statements and the ongoing remediation of material weaknesses in our internal control over financial reporting. Certain remediation actions
were recommended, and we are in the process of implementing them (see Item 9A, Controls and Procedures of this Comprehensive Form 10-K for a
description of these remediation measures). To the extent these steps are not successful, we could be forced to incur additional time and expense. Our
management’s attention was also diverted from some aspects of the operation of our business in connection with the restatement and these ongoing remediation
efforts.
The restatement of our financial statements led to litigation and in the future may lead to, among other things, future stockholder litigation,
loss of investor confidence, negative impacts on our stock price and certain other risks.
In November 2019, a class action lawsuit was brought against the Company and members of its current and former management relating to our announcement
of the circumstances leading to our restatement. We believe that suit was without merit, and the suit was withdrawn by the plaintiff in April 2020; however,
there can be no assurance that additional litigation against the Company and/or its management or Board of Directors might not be threatened or brought in
connection with matters related to our restatement.
As a result of the circumstances giving rise to the restatement, we have become subject to a number of additional risks and uncertainties, including
unanticipated costs for accounting and legal fees in connection with or related to the restatement, stockholder litigation and government investigations. Any
such proceeding could result in substantial defense costs regardless of the outcome of the litigation or investigation. If we do not prevail in any such litigation,
we could be required to pay substantial damages or settlement costs. In addition, the restatement and related matters could impair our reputation and could
cause our counterparties to lose confidence in us. Each of these occurrences could have an adverse effect on our business, results of operations, financial
condition and stock price.
We are involved in a governmental investigation, which is costly to conduct and may result in substantial financial and other penalties, as well
as adverse effects on our business and financial condition.
Prior to filing the Current Report on Form 8-K on October 21, 2019, disclosing our conclusion that the previously reported financial results of the Company
could not be relied upon, we self-reported the Company’s accounting issues to the SEC. By letter dated October 21, 2019, the SEC informed us that it
would be conducting a private investigation of this matter. The Company believes the SEC investigation is substantially complete, and on February 22, 2021,
the SEC presented the Company with a draft settlement offer and order (which was updated on May 12, 2021). Under the proposed settlement, the
Company expects to pay a civil monetary penalty in the amount of $0.2 million to the SEC. Until such settlement is made official, the Company cannot
guarantee that the SEC would not conduct a further investigation or impose additional penalties that could have a material adverse impact on our business,
reputation, revenues, results of operations and financial condition.
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We have identified material weaknesses in our system of internal controls pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and are
in the process of remediation. If not remediated, these material weaknesses could result in additional material misstatements in our
Consolidated Financial statements. We may be unable to develop, implement and maintain appropriate controls in future periods.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies evaluate and report on their systems of internal control over financial
reporting. As disclosed in Part II, Item 9A, Controls and Procedures of this Comprehensive Form 10-K, our management, including our Chief Executive
Officer and our Chief Financial Officer, has determined that we had material weaknesses in the Company’s internal control over financial reporting as of
December 31, 2019. These material weaknesses resulted in identified misstatements to the financial statements, and previously issued financial statements are
restated in this filing. As a result of the material weaknesses, the Company’s management, under the supervision of the Audit Committee and with participation
of the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s internal control over financial reporting was not effective
as of December 31, 2019.
Although we are working to remedy the ineffectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures, there
can be no assurance as to when the remediation plan will be fully developed and implemented. Until our remediation plan is fully implemented, our
management will continue to devote significant time, attention and financial resources to these efforts. If we do not complete our remediation in a timely
fashion, or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that our future Consolidated Financial Statements could
contain errors that will be undetected. Further and continued determinations that there are one or more material weaknesses in the effectiveness of the
Company’s internal control over financial reporting could adversely affect our business, reputation, revenues, results of operations, financial condition and stock
price and limit our ability to access the capital markets through equity or debt issuances. For more information relating to the Company’s internal control over
financial reporting, the material weaknesses that existed as of December 31, 2019 and the remediation activities undertaken by us, see Part II, Item 9A,
Controls and Procedures of this Comprehensive Form 10-K.
Risks Related to Technology, Data Security and Privacy
Failure to protect the integrity and security of personal information of our customers and employees could result in substantial costs, expose us
to litigation and damage our reputation.
We receive and maintain certain personal, financial, and other information about our customers, employees, and vendors. In addition, our vendors receive and
maintain certain personal, financial, and other information about our employees and customers. The use and transmission of this information is regulated by
evolving and increasingly demanding laws and regulations across various jurisdictions. If our security and information systems are compromised as a result of
data corruption or loss, cyber-attack or a network security incident or if our employees or vendors fail to comply with these laws and regulations and this
information is obtained by unauthorized persons or used inappropriately, it could result in liabilities and penalties and could damage our reputation, cause us to
incur substantial costs and result in a loss of customer confidence, which could materially affect our results of operations and financial condition. Additionally,
we could be subject to litigation and government enforcement actions because of any such failure.
Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries where we
operate. For example, the General Data Protection Regulation ("GDPR”), which was adopted by the European Union effective May 2018, requires
companies to meet new requirements regarding the handling of personal data. In addition, the State of California enacted the California Consumer Privacy Act
(the "CCPA”), which became effective January 2020 and requires companies that process information on California residents to, among other things, provide
new disclosures and options to consumers about data collection, use and sharing practices.
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Moreover, each of the GDPR and the CCPA confer a private right-of-action on certain individuals and associations. Our failure to adhere to or successfully
implement appropriate processes to adhere to the requirements of GDPR, CCPA and other evolving laws and regulations in this area could result in financial
penalties, legal liability and could damage our reputation, which could have a material adverse effect on our business, financial condition and results of
operations.
Unreliable or inefficient information technology or the failure to successfully implement or invest in technology initiatives in the future could
adversely impact operating results.
We rely heavily on information technology systems in the conduct of our business, some of which are managed, and/or hosted by third parties, including, for
example, point-of-sale processing in our stores, management of our supply chain, and various other processes and procedures. These systems are subject to
damage, interruption or failure due to theft, fire, power outages, telecommunications failure, computer viruses, security breaches, malicious cyber-attacks or
other catastrophic events. Certain technology systems may also be unreliable or inefficient, and technology vendors may limit or terminate product support and
maintenance, which could impact the reliability of critical systems operations. If our information technology systems are damaged or fail to function properly,
we may incur substantial costs to repair or replace them and may experience loss of critical data and interruptions or delays in our ability to manage inventories
or process transactions, which could result in lost sales, customer or employee dissatisfaction, or negative publicity that could negatively impact our reputation,
results of operations and financial condition.
Moreover, our failure to adequately invest in new technology or adapt to technological developments and industry trends, particularly with respect to digital
commerce capabilities, could result in a loss of customers and related market share. If our digital commerce platforms do not meet customers’ expectations in
terms of security, speed, attractiveness or ease of use, customers may be less inclined to return to such digital commerce platforms, which could negatively
impact our business.
Risks Related to the Macroeconomic Environment
Our business may be negatively impacted by general economic conditions in the United States and abroad.
Our performance is subject to global economic conditions and their impact on levels of consumer spending that affect not only the ultimate consumer, but also
small businesses and other retailers. Specialty retail, and retail in general, is heavily influenced by general economic cycles, which may be affected by health
emergencies such as the COVID-19 pandemic. Purchases of non-essential, discretionary products tend to decline in periods of recession or uncertainty
regarding future economic prospects, as disposable income declines. During periods of economic uncertainty, we may not be able to maintain or increase our
sales to existing customers, make sales to new customers, open and operate new stores, maintain sales levels at our existing stores, maintain or increase our
international operations on a profitable basis, maintain our earnings from operations as a percentage of net sales, or generate sufficient cash flows to fund our
operational and liquidity needs. As a result, our operating results may be adversely and materially affected by downward trends or uncertainty in the United
States or global economies.
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Foreign currency fluctuations could adversely impact our financial condition and results of operations.
We generally purchase our products in U.S. dollars. However, we source a large portion of our products from countries other than the United States. The
cost of these products may be affected by changes in the value of the applicable currencies. Changes in currency exchange rates may also affect the U.S.
dollar value of the foreign currency denominated sales that occur in other countries (currently Canada and the European Union). This revenue, when translated
into U.S. dollars for consolidated reporting purposes, could be materially affected by fluctuations in the U.S. dollar, negatively impacting our results of
operations and our ability to generate revenue growth.
We face risks related to the effect of economic uncertainty.
During events of economic downturn and slow recovery, our growth prospects, results of operations, cash flows and financial condition could be adversely
impacted. Our stores offer leather and leathercraft-related items, which are viewed as discretionary items. Pressure on discretionary income brought on by
economic downturns and slow recoveries, including housing market declines, rising energy prices and weak labor markets, may cause consumers to reduce the
amount they spend on discretionary items. The inherent uncertainty related to predicting economic conditions makes it difficult for us to accurately forecast
future demand trends, which could cause us to purchase excess inventories, resulting in increases in our inventory carrying cost, or limit our ability to satisfy
customer demand and potentially lose market share.
Risks Related to Legal, Regulatory and Compliance
If the United States maintains recently-imposed tariffs on products manufactured in China, or if additional tariffs or trade restrictions are
implemented by other countries or by the U.S., the cost of our products manufactured in China or other countries and imported into the U.S. or
other countries could increase. This could in turn adversely affect the profitability for these products and have an adverse effect on our
business, financial condition and results of operations.
In addition, the violation of labor, environmental or other laws by an independent manufacturer or supplier, or divergence of an independent manufacturer’s or
supplier’s labor practices from those generally accepted as ethical or appropriate in the U.S., could interrupt or otherwise disrupt the shipment of our products,
harm our trademarks or damage our reputation. The occurrence of any of these events could materially adversely affect our business, financial condition and
results of operations.
Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.
Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce our
trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of
our trademark and other proprietary intellectual property rights on a worldwide basis. Despite any precautions we may take to protect our intellectual
property, policing unauthorized use of our intellectual property is difficult, expensive, and time consuming, and we may be unable to adequately protect our
intellectual property or determine the extent of any unauthorized use. Our efforts to establish and protect our trademark and other proprietary intellectual
property rights may not be adequate to prevent imitation or counterfeiting of our products by others, which may not only erode sales of our products but may
also cause significant damage to our brand name. Further, we could incur substantial costs in legal actions relating to our use of intellectual property or the use
of our intellectual property by others. Even if we are successful in these actions, the costs we incur could have a material adverse effect on us.
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Risks Related to Our Business Strategy
The successful execution of our multi-year transformation and operational efficiency initiatives is key to the long-term growth of our business.
During the fourth quarter of 2018, the Company, under its new management, began to implement a large number of initiatives to transform the Company’s
business, improve sales long term and improve operational efficiency. These include the realignment of the Company’s retail division management structure, the
closing of underperforming stores, the formation of a new division focused on serving commercial customers, pricing and marketing initiatives, systems
improvements and other changes. The Company believes that long-term growth will be realized through these transformational efforts over time, however
there is no assurance that such efforts will be successful in the short or long term. Actual costs incurred and the timeline of these initiatives may differ from our
expectations. If these initiatives are unsuccessful, our business, financial condition and results of operation could be materially adversely affected.
Our business is subject to the risks inherent in global sourcing activities.
As a Company engaged in sourcing on a global scale, we are subject to the risks inherent in such activities, including, but not limited to:
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unavailability of, or significant fluctuations in the cost of, raw materials;
compliance by us and our independent manufacturers and suppliers with labor laws and other foreign governmental regulations;
imposition of additional duties, taxes and other charges on imports or exports;
increases in the cost of labor, fuel (including volatility in the price of oil), travel and transportation;
compliance by our independent manufacturers and suppliers with our Code of Business Conduct and Ethics and our Animal Welfare Policy;
disruptions or delays in shipments;
loss or impairment of key manufacturing or distribution sites;
inability to engage new independent manufacturers that meet the Company’s cost-effective sourcing model;
product quality issues;
political unrest;
unforeseen public health crises, such as pandemic (e.g., the COVID-19 pandemic) and epidemic diseases;
natural disasters or other extreme weather events, whether as a result of climate change or otherwise; and
acts of war or terrorism and other external factors over which we have no control.
Increases in the price of leather and other items we sell or a reduction in availability of those products could increase our cost of goods and
decrease our profitability.
The prices we pay our suppliers for our products are dependent in part on the market price for leather, metals, and other products. The cost of these items
may fluctuate substantially, depending on a variety of factors, including demand, supply conditions, transportation costs, government regulation, economic
climates, political considerations, and other unpredictable factors. Leather prices worldwide have been relatively stable for the past several years although the
outlook for future prices is uncertain. Increases in these costs, together with other factors, will make it difficult for us to sustain the gross margin level we have
achieved in recent years and result in a decrease in our profitability unless we are able to pass higher prices on to our customers or reduce costs in other areas.
Changes in consumers’ product preferences or lack of acceptance of our products whose costs have increased may prohibit us from passing those increases
on to customers, which could cause our gross margin to decline. If our product costs increase and our sale prices do not, our future operating results could be
adversely affected unless we are able to offset such gross margin declines with comparable reductions in operating costs. Accordingly, such increases in costs
could adversely affect our business and our results of operations.
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Further, involvement by the United States in war and other military operations abroad could disrupt international trade and affect our inventory sources.
Finally, livestock diseases, such as mad cow, could reduce the availability of hides and leathers or increase their cost. The occurrence of any of these events
could adversely affect our business and our results of operations.
We are subject to risks associated with leasing retail space subject to long-term and non-cancelable leases. We may be unable to renew leases
on acceptable terms. If we close a leased retail space, we might remain obligated under the applicable lease.
We lease the majority of our retail store locations under long-term, non-cancelable leases, which have initial or renewed terms ranging from three years to ten
years and may include lease renewal options. We believe that most of the lease agreements we will enter into in the future will likely be long-term and non-
cancelable. Generally, our leases are "net” leases, which require us to pay our proportionate share of the cost of insurance, taxes, maintenance and utilities.
We generally cannot cancel these leases at our option. If we determine that it is no longer economical to operate a retail store subject to a lease and decide to
close it, as we have done in the past and will do in the future, we would generally remain obligated under the applicable lease for, among other things, payment
of the base rent, common charges and other net payments for the balance of the lease term. In some instances, we may be unable to close an underperforming
retail store without a significant financial penalty due to continuous operation clauses in our lease agreements. In addition, as each of our leases expire, we may
be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close retail stores in desirable locations. Our
inability to secure desirable retail space or favorable lease terms could impact our ability to grow. Likewise, our obligation to continue making lease payments
in respect of leases for closed retail spaces could have a material adverse effect on our business, financial condition and results of operations.
We may be unable to sustain our financial performance or our past growth, which could have a material adverse effect on our future operating
results.
In 2018, we experienced a decline in operating income due to recent investments in our new store growth strategy. In 2019, we experienced declines in sales
and operating income primarily resulting from changes in our strategic direction. In 2020, we experienced further declines primarily resulting from the COVID-
19 pandemic. Many other specialty retailers have experienced declining sales and losses due to the overall challenging retail environment. Our sales and
profits may continue to be negatively affected in the future. We anticipate that our financial performance will depend on a number of factors, including
consumer preferences, the strength and protection of our brand, the introduction of new products, and the success of our new business strategy.
Competition, including internet-based competition, could negatively impact our business.
The retail industry is competitive, which could result in the reduction of our prices and loss of our market share. We must remain competitive in the areas of
quality, price, breadth of selection, customer service, and convenience. We compete with smaller retailers focused on leather and leather crafting, some of
whom have been able to offer competitive products at lower prices than ours. We also compete with larger specialty retailers (e.g., Michaels Stores, Inc. and
Hobby Lobby Stores, Inc.) that dedicate a small portion of their selling space to products that compete with ours but are larger and have greater financial
resources than we do. The Company also faces competition from internet-based retailers, in addition to traditional store-based retailers. This could result in
increased price competition, since our customers can more readily search and compare products from internet-based retailers who do not need to support a
physical store fleet and may be able to undercut our prices for products. The growth of internet retailers has also significantly reduced traffic to many shopping
centers and physical stores, which, if not countered by an increase in our own online retailing, could have a material adverse effect on our in-store or overall
sales.
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A decline in the volume of traffic to our stores could have a negative impact on our net sales.
The success of our retail stores is affected by (1) the location of the store within its community or shopping center; (2) surrounding tenants or vacancies; (3)
increased competition in areas where shopping centers are located; (4) the amount spent on advertising and promotion to attract consumers to the stores; and
(5) a shift towards online shopping resulting in a decrease in retail store traffic. Many of our stores are located in light industrial areas, where foot traffic tends
to be lower than in traditional retail shopping areas. Furthermore, our initiatives to service our larger customers through a dedicated Commercial Program
rather than primarily through local stores may also lead to a decline in the traffic to our store locations. Declines in consumer traffic could have a negative
impact on our net sales and could materially adversely affect our financial condition and results of operations. Furthermore, declines in traffic could result in
store impairment charges if expected future cash flows of the related asset group do not exceed the carrying value.
Our business could be harmed if we are unable to maintain our brand image.
Tandy Leather is one of the most recognized brand names in our industry. Our success to date has been due in large part to the strength of that brand. If we
are unable to provide quality products and exceptional customer service to our customers, including education, which Tandy Leather has traditionally been
known for, our brand name may be impaired which could adversely affect our operating results.
Changes in customer demand could materially adversely affect our sales, results of operations and cash flow.
Our success depends on our ability to anticipate and respond in a timely manner to changing customer demands and preferences for leather and leathercraft-
related items. If we misjudge the market, we might significantly overstock unpopular products and be forced to take significant inventory markdowns, or
experience shortages of key items, either of which could have a material adverse impact on our operating results and cash flow. In addition, adverse weather
conditions, economic instability and consumer confidence volatility could have material adverse impacts on our sales and operating results.
Our success depends, in part, on attracting, developing and retaining qualified employees, including key personnel.
The ability to successfully execute against our goals is heavily dependent on attracting, developing and retaining qualified employees, including our senior
management team. Competition in our industry to attract and retain these employees is intense and is influenced by our ability to offer competitive
compensation and benefits, employee morale, our reputation, recruitment by other employers, perceived internal opportunities, non-competition and non-
solicitation agreements and macro unemployment rates.
We depend on the guidance of our senior management team and other key employees who have significant experience and expertise in our industry and our
operations. In 2018 and 2019, we experienced significant changes in our senior leadership team and have focused on recruiting for and retaining key roles.
The unexpected loss of one or more of our key personnel or any negative public perception with respect to these individuals could have a material adverse
effect on our business, results of operations and financial condition. We do not maintain key-person or similar life insurance policies on any of senior
management team or other key personnel.
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ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
We lease our store locations, with the exception of our flagship store located in Fort Worth, Texas. The majority of our stores have initial lease terms of at
least five years. The leases are generally renewable, with increases in lease rental rates in some cases. We believe that all of our properties are adequately
covered by insurance. We own the 22,000 square foot building that houses our flagship store. Further, we own our corporate headquarters, which includes
our central distribution center and manufacturing facility, sales, marketing, administrative, and executive offices. The facility consists of 191,000 square feet
located on approximately 30 acres.
The following table summarizes the locations of our leased premises as of the date of this filing:
U.S. Locations
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maryland
Massachusetts
Michigan
Minnesota
Canadian locations:
Alberta
British Columbia
Manitoba
Nova Scotia
Ontario
Saskatchewan
Missouri
Montana
Nebraska
Nevada
New Mexico
New York
New Jersey
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Utah
Washington
Wisconsin
Wyoming
International locations:
Spain
1
1
3
1
10
4
1
5
2
1
1
1
1
1
1
2
1
1
2
2
3
1
1
1
3
1
19
3
1
1
2
2
1
1
2
3
2
2
3
1
1
3
16
4
3
1
1
1
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As a result of the COVID-19 pandemic and resulting legal requirements in most of our markets, we temporarily closed all of our stores during March 2020. In
addition, during the second quarter of 2020, we negotiated lease modifications for some of our properties with our landlords to abate or defer a portion of the
rent or other expenses due during the time period that our properties were closed/limited. During the fourth quarter of 2020 and into the present, we continued
to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection rates, and were forced to
close certain stores or move certain stores to "curbside only” operations. As of the date of filing this Comprehensive Form 10-K, all of our stores have
reopened fully. Reduced store capacity, social distancing and other measures are in place in all stores but are not believed to be materially impacting store
sales in most locations.
ITEM 3.
LEGAL PROCEEDINGS
The Company has self-reported to the SEC information concerning the internal investigation of accounting matters described in the Explanatory Note and in
Note 2, "Restatement of Previously Issued Consolidated Financial Statements” under Part I, Item 1 of this Comprehensive Form 10-K. Subsequently, the
Division of Enforcement of the SEC informed the Company that it had initiated an investigation into the Company’s historical accounting practices. The
Company is fully cooperating with the investigation and is in discussions with the SEC regarding a possible negotiated resolution. In October 2020, an
agreement (which was updated on May 12, 2021) in principle was reached on the material terms of such a resolution, which includes an agreement by the
Company to pay a $0.2 million penalty. However, this provisional resolution is still subject to finalizing the necessary documents and obtaining final approval
from the SEC, which cannot be assured. Accordingly, as of December 31, 2020, a $0.2 million liability has been recorded in accrued expenses and other
liabilities on our Consolidated Balance Sheet which is not presented in this Comprehensive Form 10-K.
In addition, see discussion of Legal Proceedings in Note 10 of the Notes to the Consolidated Financial Statements included in Item 8 of this Comprehensive
Form 10-K.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM.5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the OTC Link (previously "Pink Sheets”) operated by OTC Markets Group under the symbol "TLFA.”
There were approximately 289 stockholders of record on June 17, 2021.
We did not sell any shares of our equity securities during our fiscal year ended December 31, 2019 that were not registered under the Securities Act.
Our Board of Directors did not authorize any dividends during the fiscal years ended December 31, 2019, 2018 or 2017. Our Board of Directors may
consider future cash dividends after giving consideration to our profitability, cash flow, capital requirements, current and forecasted liquidity, as well as financial
and other business conditions existing at the time. This policy is subject to change based on future industry and market conditions, as well as other factors.
The following table summarizes repurchases of our common stock occurring in fourth quarter 2019:
Period (2)
October 1 – October 31, 2019
November 1 – November 30, 2019
December 1 – December 31, 2019
Total
(a) Total
number of
shares
purchased
(b) Average
price paid per
share
(c) Total number of
shares purchased as
part of publicly
announced plans or
programs
(d) Maximum number
of shares that may yet
be purchased under
the plans or programs
(1)
- $
- $
- $
- $
-
-
-
-
-
-
-
-
996,163
996,163
996,163
(1) Represents shares which may be purchased through our stock repurchase program, announced on August 10, 2015, permitting us to repurchase up to 1.2
million shares of our common stock at prevailing market prices. Subsequently, the number of shares which may be purchased was increased by 1 million shares
and the program was extended through, and expired on, August 9, 2020. On August 9, 2020, the Company’s Board of Directors approved a new stock
repurchase program allowing the Company to repurchase up to $5 million value of shares of our common stock on or prior to July 31, 2022.
(2) The Company suspended repurchasing any shares under its program beginning in July 2019, because of the lack of publicly-available financial information
of the Company during this period. Management expects to resume the Company’s repurchase program (as conditions allow) following completion of our
financial restatement and making all outstanding periodic filings with the SEC.
ITEM 6.
SELECTED FINANCIAL DATA
We are a smaller reporting company as defined in Item 10(f)(1) of SEC Regulation S-K and are not required to provide information under this item.
However, see Note 14, Quarterly Financial Data (Unaudited) of the Notes to the Consolidated Financial Statements included in Item 8, Financial
Statements and Supplementary Data of this Comprehensive Form 10-K, which provides unaudited quarterly condensed results of operations for the two years
ended December 31, 2019.
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion is intended to assist in understanding our financial performance and should be read in conjunction with our financial statements and the notes
accompanying those financial statements included elsewhere in this Comprehensive Form 10-K, including the information under the caption "Summary of
Critical Accounting Policies.” In addition to historical financial information, the following management’s discussion and analysis may contain forward-looking
statements. These statements reflect our expectations or estimates based on the information we have today but are not guarantees or predictions of future
performance. They involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual
results to differ materially from the statements contained here. You are cautioned not to put undue reliance on these forward-looking statements. The
Company assumes no obligation to update or otherwise revise these forward-looking statements, except as required by law. More discussion of risks can be
found under Item 1A, Risk Factors.
Summary
NOTE: This discussion has been impacted by the restatement described in the Restatement Footnote. Certain of the financial and other information provided
in this Management’s Discussion and Analysis of Financial Condition and Results of Operations has been updated to reflect the restatement adjustments.
The Business and Strategy
Tandy Leather Factory, Inc. is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas,
the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted
source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our
legacy of inspiring the timeless art and trade of leatherworking.
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides
convenience, a high-touch customer service experience, a hub for the local leathercrafting community, and our 100-year heritage. We believe that this
combination of qualities is unique to Tandy and gives the brand competitive advantages that are very difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our four websites: tandyleather.com, tandyleather.ca,
tandyleather.eu and tandyleather.com.au. We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and
on our websites. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
As of December 31, 2019, the Company operated a total of 115 retail stores. There were 103 stores in the U.S., 11 stores in Canada and one store in
Spain. All e-commerce sales through our websites were fulfilled and recognized through our network of retail stores.
The Company operates a total of 106 retail stores as of May 2021. There are 95 stores in the U.S., ten stores in Canada and one store in Spain. During the
second quarter of 2020, we consolidated U.S. e-commerce web order fulfilment from the stores to our Fort Worth distribution center.
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New management joined the Company in October 2018 and set new strategic directions for both the short and long term. The overarching goal for 2019 and
2020 was to invest in rebuilding a foundation for growth by: 1) improving our brand proposition, 2) reversing the sales decline with business customers, 3)
building our talent, processes, tools and systems and 4) positioning us for long-term growth.
The Restatement
In July 2019, the Company began an investigation of potential misstatements in its prior financial statements related to historical methods of valuation and
expensing of inventory. In October 2019, the Company announced that certain prior financial statements could not be relied upon, specifically the following
filings: financial statements for (i) the years ended December 31, 2018, 2017 and 2016 included in the Company’s 2018 Annual Report on Form 10-K, (ii) the
quarterly and year-to-date periods within fiscal 2017 and 2018 included in the Company’s Quarterly Reports on Form 10-Q, and (iii) the three months ended
March 31, 2019 included in the Company’s Quarterly Report on Form 10-Q. Much effort and resources in 2019, 2020 and 2021 to date have been spent
investigating the nature and magnitude of the misstatements, determining the corrected values, developing and implementing improved controls, including new
processes and systems, and creating and preparing these restated financials. Through these efforts, we identified other areas that were also misstated, the
details of which are described in the Restatement Footnote. The discussion of financial results presented here is reflective of the restatement adjustments.
Nasdaq suspended trading in the Company’s stock on Nasdaq as of August 13, 2020 due to the Company not being current with its SEC filings. Our stock
has since traded on the OTC Link (previously "Pink Sheets”) operated by OTC Markets Group under the symbol "TLFA.” Nasdaq denied the Company’s
appeal of its decision to suspend trading in the Company’s stock and the Company’s stock was formally delisted on February 9, 2021. We intend to reapply
for Nasdaq listing after we have made our required Exchange Act filings, including the Delinquent Filings. Any such listing would be subject to Nasdaq
approval.
COVID-19 and Outlook
In late 2019, COVID-19 was detected in Wuhan, China and has since spread to other parts of the world, including the U.S. On March 11, 2020, the World
Health Organization declared COVID-19 a global pandemic. Federal, state, and local governments implemented various restrictions, including travel
restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and
limitations on business operations. As previously announced and for the health and safety of employees and customers, on March 17, 2020, the Company
made the decision to begin temporary store closures. The onset of the COVID-19 pandemic in March 2020 temporarily shifted our strategic focus to
company survival and cash preservation. We began closing stores on March 18, 2020, and by April 2, 2020, we temporarily closed all stores to the public.
While we pivoted to serve customers only online, the Company experienced significant decreases in demand for its products in Q2 and Q3 of 2020, negatively
impacting net sales.
In response, we took immediate action to mitigate the impact of temporary store closures on our cash flows by: (i) furloughing 406 Tandy employees,
comprising two-thirds of the Tandy work force, (ii) temporarily cutting corporate salaries, with deeper cuts for the Executive Leadership Team, (iii) negotiating
abatements, deferrals and other favorable lease terms with landlords, and (iv) negotiating longer payment terms with our key product vendors.
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Due to our size, we were not eligible for the Paycheck Protection Program administered through the Small Business Administration. Also, due to our not being
current on financial filings with the SEC, we were not able to obtain loans under the Coronavirus Aid, Relief, and Economic Security Act, also known as the
CARES Act. During the second quarter of 2020, the Company borrowed $0.4 million through the Spanish government’s Institute of Official Credit Guarantee
for Small and Medium-sized Enterprises, a COVID-19 relief program. The term of the agreement is for five years and the interest rate is fixed at 1.5%.
Based on the terms of the loan agreement, we make interest-only payments for the first two years and monthly principal and interest payments for the
remainder of the term of the agreement. In Canada, we participated in the Canada Emergency Commercial Rent Assistance ("CECRA”) program for rent
relief. This program provided for a 75% reduction in the store rent for included stores for the months of April, May and June 2020. We received total rent
abatements under the program of $0.05 million.
Eight stores were permanently closed during the second quarter of 2020 as leases expired or early terminations were negotiated, including at locations where
we believe we can retain a majority of customers through geographically proximate stores and/or our enhanced website platform. After these permanent
closures, Tandy operates 106 stores, including ten in Canada and one in Spain.
On May 22, 2020, our Fort Worth flagship store reopened to the public, the beginning of a phased approach to reopening our stores with limited hours, new
protocols for sanitizing, social distancing, wearing masks and taking daily temperatures of employees. During the third quarter of 2020, all 106 of Tandy’s
stores had reopened to the public, and the store re-openings were well received by our employees and customers. During the fourth quarter of 2020 and into
the present, we continue to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection
rates, and have been forced to close certain stores or move certain stores to "curbside only” operations.
While we previously fulfilled our web orders out of our retail stores, during the second quarter of 2020, we built a centralized web fulfillment capability in our
Fort Worth distribution center and have been and expect to continue to fulfill web orders primarily through Fort Worth going forward. Both our e-commerce
business and stores have been performing above last year sales levels, but the future remains uncertain, and more store closures and/or the ongoing
unemployment crisis could cause a material negative impact on future sales.
As part of the Company’s accounting policy for long-lived asset impairments, we believe the COVID-19 impact on the Company’s results of operations, cash
flows and financial position and the ongoing uncertainty the virus has created around future operating results represented a triggering event starting in the first
quarter of 2020 and continuing throughout the remainder of 2020.
Estimated impairment charges recognized during 2020 totaled approximately $1.1 million and primarily related to property and equipment and operating lease
assets for certain stores that are projected to underperform to a level where the cash flows they generate will not be sufficient to cover their respective asset
carry values.
Results of Operations
Consolidated Net Sales
Net sales
% Increase (decrease) from prior year
2019
2018
Restated
2017
Restated
$
74,918,160
$
83,203,569
$
82,420,595
(10.0)%
0.9%
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After relatively little change from 2017 to 2018, 2019 consolidated net sales declined by $8.3 million, or 10.0%, as compared to 2018. Of this decline, $1.7
million was the result of five store closures, the discontinuation of unprofitable sales on Amazon, Walmart.com and eBay, making our Leathercraft Library of
patterns and videos free, and ending our wholesale pricing clubs where customers received lower prices for a yearly membership fee. All these changes were
aligned with our new strategies and supported the key initiatives described above. The decline of $6.6 million was primarily a result of a reduction in
promotional activity associated with the new pricing strategy, out-of-stock inventory and the transition of commercial customers to a new model, resulting in
lower sales to these customers.
The table below reports our global net sales by store category for the year ended December 31, 2019 compared to the year ended December 31, 2018:
Same stores
New stores
Closed stores (1 temporary)
Total at year-end
# Stores
2019
113 $
2
5
115 $
2018
Restated
2019 vs 2018
Sales
72,224,107
881,824
1,812,229
74,918,160
# Stores
Sales
$ Change
% Change
113 $
2
6
120 $
79,276,414 $
400,215
3,526,940
83,203,569 $
(7,052,307)
481,609
(1,714,711)
(8,285,409)
(8.9)%
120.3%
(48.6)%
(10.0)%
We operated 115 stores worldwide as of December 31, 2019 and 120 stores as of December 31, 2018. Five lower-performing stores were closed during
2019: Irving, TX (January 2019), Fort Wayne, IN (January 2019), Minto, NSW, Australia (February 2019), Manchester, UK (June 2019), and Escondido,
CA (October 2019). The two stores categorized as new stores, Austin, TX and Calgary, AB, were opened in July 2018, so were not open for the full year in
2018. We also closed one store in 2018, Northampton, UK (September 2018).
In stores that remained open for the full year, sales declined 8.9% in 2019, and such declines were driven by the factors described above.
The table below reports our global net sales by store category for the year ended December 31, 2018 compared to the year ended December 31, 2017:
Same stores
New stores
Closed stores (1 temporary)
Total at year-end
2018
Restated
2017
Restated
2018 vs 2017
# Stores
Sales
# Stores
Sales
$ Change
% Change
114 $
5
2
120 $
80,340,388
1,795,693
1,067,488
83,203,569
114 $
3
2
119 $
80,776,939 $
612,174
1,031,482
82,420,595 $
(436,551)
1,183,519
36,006
782,974
(0.5)%
193.3%
3.5%
0.9%
We operated 120 stores worldwide as of December 31, 2018 and 119 stores as of December 31, 2017. During 2018, we opened two stores, Austin, TX
(July 2018) and Calgary, AB (July 2018), and closed one store in Northampton, UK (September 2018). During 2017, we opened three new stores: Allen,
TX (April 2017), Miami, FL (May 2017), and McAllen, TX (May 2017). Our store in Harrisburg, PA was temporarily closed April 2016 – January 2017,
so we categorized it as a closed store, since it was not open for the full year in 2017.
Prior to 2019, we defined our customers in a number of different groups, the largest two being Retail, primarily hobbyists, and Business, small and medium-
sized businesses. However, through customer research over the last two years and better understanding of past practices used to categorize customers into
these groups, the Company determined that there was insufficient distinction between such categories. We are continuing to assess and evolve our thinking on
customer segments with focus on levels of annual and lifetime spend.
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To address the opportunity among the largest customers, in 2019 we launched a Commercial Program designed to better meet the needs of these customers.
The program is comprised of dedicated outside sales representatives, clear and competitive volume-based pricing, personalized service and sourcing, shipping
directly to customers from our distribution center, and improved product consistency, quality and availability.
Gross Profit
Sales
Cost of sales
Gross profit
Gross profit margin percentage
$
$
2019
2018
Restated
$
74,918,160
32,958,708
41,959,452
$
56.0%
$
83,203,569
32,262,624
50,940,945
$
61.2%
2017
Restated
82,420,595
33,334,934
49,085,661
59.6%
Decline in gross profit margin rate in 2019 to 56.0% from 61.2% in 2018 was a result of a combination of factors including our move to a new pricing strategy
which lowered the highest pricing tiers to be on par with competition on key items, product and customer mix shifts and $0.6 million in added reserve for
inventory write-downs in 2019. Average unit retails (sales/units sold) declined by 5.5% in 2019 versus in 2018.
2018 gross profit rose from 2017 by $1.9 million, driven by an increase in sales and gross profit rate. The gross profit rate increased by 160 basis points to
61.2%, primarily driven by an improvement in the product mix toward categories with higher margins.
Operating Expenses
Operating expenses
Non-routine items related to restatement
Non-routine items related to CFO transition
Adjusted operating expenses
Operating expenses % of sales
Adjusted operating expenses % of sales
2019
2018
Restated
2017
Restated
$
$
43,555,826
$
(1,346,478)
(205,650)
$
42,003,698
44,692,265
-
-
44,692,265
$
$
42,708,942
-
-
42,708,942
58.1%
56.1%
53.7%
53.7%
51.8%
51.8%
Operating expenses decreased by $1.1 million in 2019 as compared to the corresponding prior year mostly as a result of payroll and occupancy savings
associated with store closures, lower bonuses, group insurance expense savings, and marketing expense reductions, partially offset by higher costs for
restricted stock units, the annual store manager conference and non-routine expenses related to the restatement and Chief Financial Officer ("CFO”) transition.
Adjusted operating expenses, which excludes the non-routine items related to the restatement and CFO transition, declined in 2019 by $2.7 million, compared
to prior year, mostly as a result of the items noted above. Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP measure
and is included here because we believe it provides additional information regarding the Company’s financial performance on a recurring basis. Non-routine
items in 2019 primarily included legal and accounting fees associated with the restatement and recruiting fees, exit costs, interim CFO-related expenses, and
expenses for a number of other contract accounting professionals associated with the transition to our CFO.
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2018 Restated operating expenses rose by $2.0 million from 2017 restated operating expenses, primarily driven by higher store payroll and payroll-related
expenses, escalations in occupancy costs such as facility rent and maintenance expenses, and increases in sales-variable expenses such as credit card merchant
fees.
Impairment Expense
We completed our annual goodwill impairment assessment as of December 31, 2019, and based on the concluded fair value of the reporting unit, we recorded
impairment expense of $1.0 million during the fourth quarter of 2019, representing the entire balance of goodwill. See Note 3, Significant Accounting
Policies – Goodwill and other intangible assets of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and
Supplementary Data of this Comprehensive Form 10-K for further detail.
For the years ended December 31, 2019 and 2018, three stores and four stores, respectively, were reviewed for impairment due to overall
underperformance. Based on the results of the review, impairment expense of less than $0.01 million and $0.3 million was recorded for 2019 and 2018,
respectively. There were no impairment charges in 2017.
Other Income/Expense (net)
Other income/expense consists primarily of interest expense and interest income. In 2019, 2018 and 2017, we incurred other expenses/(income) (net) of
$(0.1) million, $(0.2) million (restated) and $0.04 million (restated), respectively. In 2019, we earned $0.2 million in interest income and paid $0.04 million in
interest expense on our debt. We earned $0.2 million and $0.1 million in interest income and paid $0.3 million and $0.2 million in interest expense on our bank
debt in 2018 and 2017, respectively.
Provision for Income Taxes
Our effective tax rate was 26.6%, 29.2% (restated), and 60.9% (restated) for the years ended December 31, 2019, 2018 and 2017, respectively. For 2019,
the difference between our statutory rates and our effective rate are primarily due to state income taxes, the difference in tax rates for loss carryback periods,
items that are nondeductible for income tax purposes, and the change in valuation allowance against certain foreign net operating losses. For 2018, the
difference between our statutory rates and our effective rate are primarily due to state income taxes, the difference it tax rates in foreign jurisdictions, items that
are nondeductible for income tax purposes, and the change in valuation allowance against certain foreign net operating losses. Going forward, we expect that
our effective tax rate for 2020 will be 25-27%.
In 2017, in connection with the Tax Cuts and Jobs Act, we recorded an additional $1.3 million of net income tax expense as follows:
Transition tax on deemed repatriation of certain foreign earnings (1)
Foreign withholding taxes (1)
Remeasuring deferred tax position (2)
(1) classified as part of the Federal current provision in 2017
(2) classified as part of the Federal deferred provision in 2017
27
$
$
603,976
290,128
402,135
1,296,239
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Capital Resources, Liquidity and Financial Condition
We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments. We expect to fund our operating and liquidity
needs from a combination of current cash balances and cash generated from operating activities. Any excess cash will be invested as determined by our Board
of Directors. Our cash balance as of December 31, 2019 totaled $15.9 million, and as of March 31, 2021, our cash balance totaled $10.9 million.
Spain Loan
During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small
and Medium-sized Enterprises in order to facilitate the continuation of employment and to attenuate the economic effects of the COVID-19 virus. This loan
was provided for by the Spanish government as part of a COVID-19 relief program. The term of the agreement is five years, and the interest rate is fixed at
1.5%. Based on the terms of the loan agreement, we are required to make monthly interest-only payments for the first two years and monthly principal and
interest payments for the remainder of the term of the agreement.
Lines of Credit
As previously disclosed, on October 14, 2019, our management, in consultation with the Audit Committee, determined that Tandy’s previously issued
Consolidated Financial Statements as of and for (i) the years ended December 31, 2018 and 2017, (ii) the three and six-month periods ended June 30, 2018,
(iii) the three and nine-month periods ended September 30, 2018, and (iv) the three-month period ended March 31, 2019, should no longer be relied upon
due to misstatements related to our accounting processes for inventory transactions, and we would restate such financial statements as part of the Restatement
Process. See the Restatement Footnote for further information around the Restatement Process. As a result, the Company did not timely file with the SEC its
Quarterly Reports on Form 10-Q for the periods ended June 30, and September 30, 2019, March 31, June 30, and September 30, 2020 and March 31,
2021, or its Annual Report on Form 10-K for fiscal 2019 and fiscal 2020 (collectively, the "Delinquent Filings”). Under the terms of the Promissory Note
agreements the Company had in place with its primary bank, BOKF, NA d/b/a Bank of Texas ("BOKF”), we were required to provide BOKF quarterly
financial statements and compliance certificates. We were unable to provide these financial statements and compliance certificates for the Delinquent Filings
noted above. In response, on April 2, 2020, BOKF provided notice under the terms of the Promissory Note agreements that such Promissory Notes were
cancelled. As of the date of cancellation, Tandy had no borrowings outstanding under these credit facilities or with any other lending institution. As of the date
of this filing, Tandy has no lines of credit outstanding.
In August 2015, our Board of Directors authorized a share repurchase program, pursuant to which we were authorized to repurchase up to 1.2 million shares
of our common stock at prevailing market rates through August 2016 (collectively, "Repurchasing Shares”). Subsequently, the program was amended to
increase the number of shares available for repurchase to 2.2 million and to extend the program through August 2019. In June 2019, the program was again
amended to increase the number of shares available to one million as of such date and to extend the program through August 9, 2020. In 2019, 2018, and
2017, we repurchased 131,782 shares at an average price of $5.58 per share, 243,387 shares at an average price of $6.79 per share and 0 shares,
respectively. As of December 31, 2019, there were 996,163 shares available for repurchase under the plan. The Company suspended repurchasing any
shares under its program beginning in June 2019, because of the lack of publicly-available financial information of the Company during this period.
Management expects to resume the Company’s repurchase program (as conditions allow) following completion of our financial restatement and the filing of all
Delinquent Filings with the SEC.
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On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5 million of its common stock between August 9, 2020 and July
31, 2022, subject to the completion of our financial restatement and the filing of all Delinquent Filings with the SEC. The Company’s previous share
repurchase program expired in August 2020.
On September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF which provided us with a working capital line of credit
facility of up to $6 million which was secured by our inventory. On August 20, 2018, this line of credit was amended to extend the maturity to September 18,
2020 and to reduce the interest rate by 0.35%, and on September 18, 2019, the maturity date was further extended through September 18, 2021. The
Business Loan Agreement contained covenants that required us to maintain a funded debt to EBITDA ratio of no greater than 1.5 to 1 and a Fixed Charge
Coverage Ratio greater than or equal to 1.2 to 1. Both ratios were calculated quarterly on a trailing four quarter basis. For the years ended December 31,
2019, 2018 and 2017, there were no amounts drawn on this line of credit.
Also, on September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF which provided us with a line of credit facility of
up to $10 million for the purpose of repurchasing shares of our common stock pursuant to our stock repurchase program, announced in August 2015 and
subsequently amended, which permitted us to repurchase up to 2.2 million shares of our common stock at prevailing market prices through August 2020.
Subsequently, this line of credit was amended to increase the availability from $10 million to $15 million for the repurchase of shares of our common stock
pursuant to our stock repurchase program through the end of the draw down period which was the earlier of August 9, 2020 or the date on which the entire
amount was drawn. In addition, this Promissory Note was amended on August 20, 2018 to reduce the interest rate by 0.35%, and on September 18, 2019,
the maturity date was further extended through September 18, 2024. We were required to make monthly interest-only payments through September 18,
2020. After this date, the principal balance would have rolled into a 4-year term note with principal and interest paid on a monthly basis with a maturity date of
September 18, 2024. This Promissory Note was secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas. There
were no amounts drawn on this line of credit during 2017. During the year ended December 31, 2018, we drew $1.6 million on this line of credit which we
used to purchase 243,387 shares of our common stock pursuant to our stock repurchase program. As of December 31, 2018, the outstanding balance on this
line of credit was $9.0 million. During the quarter ended March 31, 2019, we paid off this line of credit with no pre-payment penalties incurred.
Prior to August 20, 2018, amounts drawn under either Promissory Note accrued interest at the London Interbank Offered Rate for U.S. dollars (commonly
known as "LIBOR”) plus 1.85% (3.351% as of December 31, 2017). Beginning August 20, 2018, the notes accrued interest at LIBOR plus 1.5% (4.0% as
of December 31, 2018). Neither line of credit carried commitment fees.
Share Repurchase Program
In August 2015, our Board of Directors authorized a share repurchase program, pursuant to which we were authorized to repurchase up to 1.2 million shares
of our common stock at prevailing market rates through August 2016. Subsequently, the program was amended to increase the number of shares available for
repurchase to 2.2 million and to extend the program through August 2019. In June 2019, the program was again amended to increase the number of shares
available to one million as of such date and to extend the program through August 9, 2020.
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For the years ended December 31, 2019 and 2018, we repurchased the following shares:
Year ended
December 31,
2019
2018
Total shares
repurchased
Average price
per share
131,782 $
243,387 $
5.58
6.79
As of December 31, 2019, there were 996,163 shares that remained available for repurchase under the plan.
On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5 million of its common stock between August 9, 2020 and July
31, 2022, subject to the completion of our financial restatement and the filing of all Delinquent Filings with the SEC. The Company’s previous share
repurchase program expired in August 2020.
On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 500,000 shares of our common stock,
par value $0.0024 in a private transaction. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase of these shares
took place on February 1, 2021. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock.
Cash Flows
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
2019
For the Years Ended December 31,
2018
Restated (1)
2017
Restated (1)
$
$
10,471,293 $
(9,156,147)
(9,703,217)
222,878
(8,165,193) $
7,771,740 $
(1,060,389)
(56,978)
(666,879)
5,987,494 $
2,465,775
(1,656,036)
150,718
260,096
1,220,553
(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.
For the year ended 2019, we generated $10.5 million of cash from operations driven by our efforts to streamline working capital levels, of which $9.3 million
was from the liquidation of inventory. The 2019 net loss of $1.9 million was offset by non-cash expenses of $6.7 million, including depreciation and
amortization, impairments, and stock-based compensation. With the cash generated from operations, we invested $18.1 million in short-term U.S. Treasuries
and sold short-term U.S. Treasuries at maturity for $9.1 million, and we invested $0.3 million in capital expenditures for the purchase of store fixtures and
systems implementations. We used cash in financing activities to extinguish $9.0 million of debt and to repurchase 131,782 shares of treasury stock for $0.7
million at an average price of $5.58 per share. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of
$8.2 million.
For the year ended 2018, we generated $7.8 million of cash from operations primarily due to net income of $4.4 million, plus $2.3 million from non-cash
expenses, including depreciation and amortization, impairments, and stock-based compensation and $1.1 million of working capital including $1.0 million due
to the liquidation of inventory. We invested in capital expenditures of $1.1 million for new store fixtures, store relocations and remodels, and computer
equipment. And we borrowed $1.6 million to finance the repurchase of 243,387 shares of treasury stock for $1.7 million at an average price of $6.79 per
share. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $6.0 million.
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For the year ended 2017, we generated $2.5 million of cash from operations primarily due to net income of $2.5 million, plus $2.8 million from non-cash
expenses, including depreciation and amortization, and stock-based compensation and partially offset by a $2.8 million decrease in working capital of which
$3.0 million was a build-up of inventory and $2.3 million related to payments of accrued expenses and other liabilities. We invested in capital expenditures of
$1.7 million, including vehicles and computer equipment for our new district managers. The activities above, in addition to the effect of exchange rate changes,
resulted in a net increase in cash of $1.2 million.
We believe that cash flow from operations and our existing cash reserves will be adequate to fund our operations through 2021, taking into account the current
effects of the COVID-19 pandemic on our business and cash flow and our current business performance. In addition, we anticipate that this cash flow and our
current cash reserves will enable us to meet our contractual obligations and commercial commitments throughout 2021. There can be no assurance, however,
that the COVID-19 pandemic would not result in further restrictions on our business operations in a manner that would more materially impact our cash flow.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during 2019, 2018, or 2017, and we do not have any such arrangements as of the date of this filing.
Summary of Critical Accounting Policies
The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States
requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and
various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s conclusions. The
Company continually evaluates the information used to make these estimates as the business and the economic environment changes. Actual results may differ
from these estimates, and estimates are subject to change due to modifications in the underlying conditions or assumptions. The policies discussed below
require estimates that contain a significant degree of judgement. The use of estimates is pervasive throughout the Consolidated Financial Statements, but the
accounting policies and estimates considered most critical are as follows.
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via two methods: (1) at the store counter and (2) shipment of
product generally via web sales. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a
customer. At the store counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer. When
merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when title passes to the customer. Shipping terms are
normally free on board ("FOB”) shipping point and title passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is
excluded from net sales, while shipping charged to our customers is included in net sales. Net sales is based on the amount of consideration that we expect to
receive, reduced by estimates for future merchandise returns. Our sales return allowance for future merchandise returns is estimated based on historical sales
return rates. Under our sales returns policy, merchandise may be returned, under most circumstances, up to 60 days after date of purchase. As merchandise
is returned, the company records the sales return against the sales return allowance. We record a gift card liability for the unfulfilled performance obligation on
the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. In addition, for gift
card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one
year.
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Inventory. Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods held for sale includes the cost of merchandise
purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering
merchandise to our stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing
inventory including raw materials and work-in-process are valued on a first-in, first out basis using full absorption accounting which includes material, labor, and
other applicable manufacturing overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable
value, provisions are made to reduce the carrying amount of the inventory. We regularly review all inventory items to determine if there are (i) damaged goods
(e.g., for leather, excessive scars or damage from ultra-violet ("UV”) light), (ii) items that need to be removed from our product line (e.g., slow-moving items,
inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be
taken to adequately value our inventory at the lower of cost or net realizable value. Since the determination of net realizable value of inventory involves both
estimation and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ
from the recorded asset. The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign
currency fluctuations. Goods shipped to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier. Inventory is physically
counted twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our
accounting system to reflect actual count results.
Leases. We lease certain real estate for our retail store locations under long-term lease agreements. Starting in 2019, with the adoption of Accounting
Standards Update ("ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognize an operating lease
asset and lease liability at commencement date based on the present value of the lease payments over the lease term. The present value of our lease payments
may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably certain we will
exercise such an option. The exercise of lease renewal options is generally at our discretion. Payments based on a change in an index or market rate are not
considered in the determination of lease payments for purposes of measuring the related lease liability. We discount lease payments using our incremental
borrowing rate based on information available as of the measurement date. Prior to 2019, rent expense on operating leases, including rent holidays and
scheduled rent increases, was recorded on a straight-line basis over the term of the lease, commencing on the date we took possession of the leased property.
Rent expense is recorded in operating expenses. The net excess of rent expense over the actual cash paid has been recorded as accrued expenses and other
liabilities in the accompanying consolidated balance sheets. As of December 31, 2019, we have no finance leases, no sublease agreements, and no lease
agreements in which we are named as a lessor. Subsequent to the recognition of our operating lease assets and lease liabilities, we recognize lease expense
related to our operating leases on a straight-line basis over the lease term. The depreciable life of related leasehold improvements is based on the shorter of the
useful life or the lease term. We also perform interim reviews of our operating lease assets for impairment when evidence exists that the carrying value of an
asset group, including a lease asset, may not be recoverable.
Impairment of Long-Lived Assets. We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances ("triggering events”)
that indicate the carrying value of certain assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use ("ROU”) lease assets,
property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is
determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future
net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such
cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of
identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash
flows for a given store are less than the carrying amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with
the carrying value of the related assets. The impairment loss is then allocated across the asset group’s major classifications which in this case are operating
lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or
planned changes in the use of assets, such as store relocation or store closure. This evaluation requires management to make judgements relating to future cash
flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method.
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Stock-based Compensation. The Company’s stock-based compensation relates primarily to restricted stock unit ("RSU”) awards. Accounting guidance
requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for
service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date
of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. The
total compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards. Performance-based RSUs vest, if at
all, upon the Company satisfying certain performance targets. The Company records compensation expense for awards with a performance condition when it
is probable that the condition will be achieved. If the Company determines it is not probable a performance condition will be achieved, no compensation
expense is recognized. If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved,
the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the
performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the
accumulated expense that has been previously recognized will be reversed. The compensation expense ultimately recognized, if any, related to performance-
based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied. We issue shares from
authorized shares upon the lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued under stock-based compensation
awards. We had one stock option plan that expired in March 2017. This plan permitted annual stock option grants to non-employee directors with an
exercise price equal to the fair market value of the shares at the date of grant. These options vested and became exercisable six months from the option grant
date. Under this plan, no stock options were awarded in 2015 or after, therefore, we did not recognize any stock-based compensation expense for these
options during those periods.
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary
differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for
recoverability based on estimated future taxable income. To the extent recovery is deemed not likely, a valuation allowance is recorded. Our evaluation
regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent
losses, forecasts of future profitability and the duration of statutory carryforward periods. Deferred tax assets and liabilities are measured using the enacted tax
rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized
through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax
assets and liabilities in the future. A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be
sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet
a more-likely-than-not recognition threshold to be recognized. We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our
judgement changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate
resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or
decreases to income tax expense and the effective tax rate in the period in which new information becomes available. We may be subject to periodic audits by
the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions
and allocation of taxable income to the various jurisdictions.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Tandy Leather Factory, Inc.
Opinions on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Tandy Leather Factory, Inc. and Subsidiaries (the Company) as of December 31, 2019,
2018, and 2017, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2019, and the related notes (collectively referred to as the "consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, 2018, and 2017, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
Restatement to Correct Previously Issued Consolidated Financial Statements
As discussed in Note 2 to the consolidated financial consolidated statements, the Company has restated its previously issued consolidated balance sheets as of
December 31, 2018 and 2017 and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the
two years in these periods.
Change in Accounting Principle
As discussed in Note 3 to the Consolidated Financial Statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to
the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), and related amendments.
Basis for Opinion
These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ WEAVER AND TIDWELL, L.L.P.
We have served as the Company’s auditor since 2003.
Fort Worth, Texas
June 21, 2021.
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Tandy Leather Factory, Inc.
Consolidated Balance Sheets
ASSETS
CURRENT ASSETS:
Cash
Short-term investments
Accounts receivable-trade, net of allowance for doubtful accounts of $15,940; $15,703; and $22,642 at December
31, 2019, 2018 and 2017, respectively
Inventory
Prepaid income taxes
Prepaid expenses
Other current assets
Total current assets
Property and equipment, at cost
Less accumulated depreciation
Property and equipment, net
Operating lease assets
Deferred income taxes
Goodwill
Other intangibles, net of accumulated amortization of $547,369; $690,869; and $688,147 at December 31, 2019, 2018
and 2017, respectively
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable-trade
Accrued expenses and other liabilities
Income taxes payable
Operating lease liabilities
Current maturities of long-term debt
Total current liabilities
Uncertain tax position
Other non-current liabilities
Operating lease liabilities, non-current
Long-term debt, net of current maturities
COMMITMENTS AND CONTINGENCIES (Note 10)
December 31,
2019
December 31,
December 31,
2018
Restated (1)
2017
Restated (1)
$
15,905,158 $
9,152,166
24,070,351 $
-
408,711
24,041,827
1,628,985
1,081,859
296,994
52,515,700
27,470,545
(14,551,645)
12,918,900
13,897,422
427,333
-
408,170
33,302,549
419,908
1,283,795
331,805
59,816,578
28,140,345
(13,625,261)
14,515,084
-
1,092,293
954,765
18,082,857
-
461,212
34,546,084
-
1,392,278
328,522
54,810,953
27,332,299
(11,765,416)
15,566,883
-
1,130,905
962,949
$
$
7,000
344,816
80,111,171 $
16,500
386,107
76,781,327 $
19,222
379,695
72,870,607
5,752,613 $
2,656,718
-
3,822,748
-
12,232,079
296,127
508,907
10,654,631
-
2,154,394 $
5,401,508
-
-
519,516
8,075,418
1,415,715
555,296
-
8,448,502
2,409,845
5,045,015
354,629
-
614,311
8,423,800
1,197,078
596,770
-
6,757,419
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.10 par value; 20,000,000 shares authorized; none issued or outstanding; attributes to be
determined on issuance
Common stock, $0.0024 par value; 25,000,000 shares authorized; 10,446,563; 10,353,155; and 10,320,069 shares
issued at December 31, 2019, 2018, and 2017, respectively
Paid-in capital
Retained earnings
Treasury stock at cost (1,424,376; 1,292,594; and 1,049,207 shares at December 31, 2019, 2018 and 2017,
respectively)
Accumulated other comprehensive loss (net of tax of $358,646; $480,112; and $240,045 at December 31, 2019, 2018
and 2017, respectively)
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
-
-
-
25,072
5,037,102
62,210,781
24,848
4,267,138
64,476,378
24,768
3,939,589
60,078,013
(9,772,982)
(9,037,783)
(7,384,517)
(1,080,546)
56,419,427
80,111,171 $
(1,444,185)
58,286,396
76,781,327 $
(762,313)
55,895,540
72,870,607
$
(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.
The accompanying notes are an integral part of these financial statements.
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Tandy Leather Factory, Inc.
Consolidated Statements of Comprehensive Income (Loss)
Net sales
Cost of sales
Gross profit
Operating expenses
Impairment expense
Income (loss) from operations
Other (income) expense:
Interest expense
Other, net
Total other (income) expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
2019
For the Years Ended December 31,
2018
Restated (1)
2017
Restated (1)
$
74,918,160 $
32,958,708
41,959,452
83,203,569 $
32,262,624
50,940,945
43,555,826
1,001,835
44,692,265
285,477
82,420,595
33,334,934
49,085,661
42,708,942
-
(2,598,209)
5,963,203
6,376,719
36,260
(40,225)
(3,965)
304,957
(553,573)
(248,616)
205,555
(167,112)
38,443
(2,594,244)
6,211,819
6,338,276
(690,463)
1,813,454
3,859,832
$
(1,903,781) $
4,398,365 $
2,478,444
Foreign currency translation adjustments, net of tax
363,639
(681,872)
411,427
Comprehensive income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
$
(1,540,142) $
3,716,493 $
2,889,871
$
$
(0.21) $
(0.21) $
0.48 $
0.48 $
0.27
0.27
8,973,246
8,973,246
9,185,203
9,205,008
9,242,092
9,245,537
(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.
The accompanying notes are an integral part of these financial statements.
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Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Operating lease asset amortization
Impairment of goodwill and long-lived assets
Loss on disposal of assets
Stock-based compensation
Deferred income taxes
Exchange (gain) loss
Changes in operating assets and liabilities:
Accounts receivable-trade
Inventory
Prepaid expenses
Other current assets
Accounts payable-trade
Accrued expenses and other liabilities
Income taxes, net
Other assets
Operating lease liability
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Purchase of short-term investments
Proceeds from sales of short-term investments
Proceeds from sales of assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Payments on long-term debt
Payments on capital lease obligations
Repurchase of treasury stock
Proceeds from exercise of stock options
Net cash (used in) provided by financing activities
2019
For the Years Ended December 31,
2018
Restated (1)
2017
Restated (1)
$
(1,903,781) $
4,398,365 $
2,478,444
1,655,223
3,481,931
1,001,835
8,795
770,188
(334,343)
137,241
(22,703)
9,329,998
596,071
(96,492)
3,499,627
(2,718,611)
(1,219,596)
(325,691)
(3,388,399)
12,375,074
10,471,293
(268,961)
(18,094,775)
9,095,000
112,589
(9,156,147)
-
(8,968,018)
-
(735,199)
-
(9,703,217)
1,798,762
-
285,477
1,321
327,629
257,249
(406,832)
49,155
1,034,430
71,915
-
(148,340)
314,937
(795,609)
583,281
-
3,373,375
7,771,740
(1,088,328)
-
-
27,939
(1,060,389)
1,596,288
-
-
(1,653,266)
-
(56,978)
1,884,043
-
-
3,139
239,599
638,056
32,999
88,445
(2,978,285)
66,812
-
764,889
(2,266,301)
1,148,313
365,622
-
(12,669)
2,465,775
(1,691,999)
-
-
35,963
(1,656,036)
-
-
(72,686)
-
223,404
150,718
Effect of exchange rate changes on cash and cash equivalents
222,878
(666,879)
260,096
Net (decrease) increase in cash and cash equivalents
(8,165,193)
5,987,494
1,220,553
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
24,070,351
15,905,158 $
18,082,857
24,070,351 $
16,862,304
18,082,857
$
(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.
The accompanying notes are an integral part of these financial statements.
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Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows - continued
Supplemental disclosures of cash flow information:
Interest paid during the period
Income tax paid during the period, net of refunds
Supplemental disclosures of non-cash activity:
Cumulative effect of accounting changes - ASC 842 (1)
Operating lease assets obtained in exchange for lease liabilities, net
(1) ASC 842 - Leases - "Topic 842”
2019
For the Years Ended December 31,
2018
Restated (1)
2017
Restated (1)
36,260 $
714,620 $
304,957 $
1,361,400 $
205,555
2,243,018
(361,816) $
17,328,019 $
- $
- $
-
-
$
$
$
$
The accompanying notes are an integral part of these financial statements
38
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Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders’ Equity
Number of
Shares
Common
Stock
Outstanding
Par Value
Paid-in Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
9,193,162 $
-
27,142 $
(2,560)
6,368,279 $
(2,891,507)
(10,278,584) $
2,894,067
59,469,493 $
(1,869,924)
(1,893,129) $
719,389
53,693,201
(1,150,535)
9,193,162 $
24,582 $
3,476,772 $
(7,384,517) $
57,599,569 $
(1,173,740) $
52,542,666
-
33,300
44,400
-
-
-
79
107
-
-
239,599
(79)
223,297
-
-
-
-
-
-
-
-
-
-
2,478,444
-
-
-
-
239,599
-
223,404
2,478,444
-
411,427
411,427
9,270,862 $
24,768 $
3,939,589 $
(7,384,517) $
60,078,013 $
(762,313) $
55,895,540
-
33,086
(243,387)
-
-
-
80
-
-
-
327,629
(80)
-
-
-
-
(1,653,266)
-
-
-
-
4,398,365
-
-
-
-
327,629
-
(1,653,266)
4,398,365
-
-
-
(681,872)
(681,872)
9,060,561 $
24,848 $
4,267,138 $
(9,037,783) $
64,476,378 $
(1,444,185) $
58,286,396
-
-
93,408
(131,782)
-
-
-
-
224
-
-
-
-
-
(361,816)
770,188
(224)
-
-
-
-
(735,199)
-
-
-
-
(1,903,781)
-
-
-
-
-
(361,816)
770,188
-
(735,199)
(1,903,781)
-
-
-
363,639
363,639
Balance, December 31,
2016 as reported
Restatement adjustment (1)
Balance, December 31,
2016 as restated (1)
Stock-based compensation
expense
Issuance of restricted stock
Shares issued – stock
options exercised
Net income
Foreign currency translation
adjustments, net of tax
Balance, December 31,
2017 as restated (1)
Stock-based compensation
expense
Issuance of restricted stock
Purchase of treasury stock
Net income
Foreign currency translation
adjustments, net of tax
Balance, December 31,
2018 as restated (1)
Cumulative effect of
accounting change, net of
tax (ASC 842)
Stock-based compensation
expense
Issuance of restricted stock
Purchase of treasury stock
Net loss
Foreign currency translation
adjustments, net of tax
Balance, December 31,
2019
(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements
62,210,781 $
(9,772,982) $
5,037,102 $
9,022,187 $
25,072 $
(1,080,546) $
56,419,427
The accompanying notes are an integral part of these financial statements.
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Table of Contents
TANDY LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018, and 2017
1.
DESCRIPTION OF BUSINESS
Tandy Leather Factory, Inc. is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas,
the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted
source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our
legacy of inspiring the timeless art and trade of leatherworking.
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides
convenience, a high-touch customer service experience, a hub for the local leathercrafting community and our 100-year heritage. We believe that this
combination of qualities is unique to Tandy and gives the brand competitive advantages that are very difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our four websites: tandyleather.com, tandyleather.ca,
tandyleather.eu and tandyleather.com.au. We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and
on our websites. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
As of December 31, 2019, the Company operated a total of 115 retail stores. There were 103 stores in the United States ("U.S.”), 11 stores in Canada and
one store in Spain. All e-commerce sales through our websites were fulfilled and recognized through our network of retail stores.
The Nasdaq Global Market ("Nasdaq”) suspended trading in the Company’s stock on Nasdaq as of August 13, 2020. Our stock has since traded on the
OTC Link (previously "Pink Sheets”) operated by OTC Markets Group under the symbol "TLFA.” Nasdaq denied the Company’s appeal of its decision to
suspend trading in the Company’s stock and the Company’s stock was formally delisted on February 9, 2021. We intend to reapply for Nasdaq listing after
we have made our required Exchange Act filings, including the Delinquent Filings. Any such listing would be subject to Nasdaq approval.
Comments and discussion as well as all financials and other data presented here have been updated to reflect the restatement adjustments detailed in Note 2 to
the Consolidated Financial Statements, Restatement of Previously Issued Consolidated Financial Statements (the "Restatement Footnote”).
As of January 1, 2019, we operate as a single segment and report on a consolidated basis. Prior to January 1, 2019, we operated and reported in two
segments, North America and International. In early 2019, we announced several strategic initiatives to drive future sales growth and long-term profitability,
which resulted in the Company closing two of its three stores outside of North America. This left Spain as our only store outside of North America, and our
chief operating decision maker was no longer making operating performance assessments and resource allocation decisions for this one single store. As a
result, we no longer report International as a reportable segment. All prior year data discussed throughout this Comprehensive Form 10-K has been
retrospectively revised to conform to the new single-reportable segment structure. There is no change to our consolidated financial position or results based on
the change in segment reporting.
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Certain reclassifications unrelated to the restatement of prior period financials were made to previously reported prior period amounts in order to conform to
the current period presentation, including a reclass of $0.8 million and $1.1 million from accrued expenses to accounts payable-trade as of December 31,
2018 and 2017, respectively.
See Note 2 of the Notes to the Consolidated Financial Statements, Restatement of Previously Issued Consolidated Financial Statements (the
"Restatement Footnote”) for an explanation of the changes to our consolidated financial position and results of operations due to the restatement for the years
ended December 31, 2018 and 2017.
2.
RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
We are filing this comprehensive annual report on Form 10-K for the fiscal years ended December 31, 2019, 2018 and 2017 (the "Comprehensive Form 10-
K”) as part of our efforts to become current in our filing obligations under the Securities Exchange Act of 1934, as amended (the "Exchange Act”). This
Comprehensive Form 10-K is our first periodic filing with the Securities and Exchange Commission (the "SEC”) since the filing of our quarterly report on Form
10-Q for the quarter ended March 31, 2019. This Comprehensive Form 10-K contains our audited Consolidated Financial Statements as of and for the year
ended December 31, 2019 and our restated audited Consolidated Financial Statements as of and for the years ended December 31, 2018 and 2017, our
unaudited Consolidated Financial Statements as of and for the quarters ended March 31, June 30, September 30, 2018, and March 31, 2019, our unaudited
Statements of Comprehensive Income (Loss) and Statements of Cash Flows for the six months ended June 30, 2018 and the nine months ended September
30, 2018 as well as restatements of our unaudited consolidated quarterly financial data for the quarters ended March 31, 2018, June 30, 2018, September 30,
2018, and December 31, 2018, and March 31, 2019. See Note 14 of the Notes to the Consolidated Financial Statements, Quarterly Financial Data
(Unaudited).
Restatement Background
As previously disclosed, on October 14, 2019, as a result of the findings of the Independent Investigation and the Company’s ongoing reviews, the Company,
in consultation with the Audit Committee, determined that Tandy’s previously issued Consolidated Financial Statements as of and for (i) the years ended
December 31, 2018 and 2017, (ii) the three and six-month periods ended June 30, 2018, (iii) the three and nine-month periods ended September 30, 2018,
and (iv) the three-month period ended March 31, 2019, should no longer be relied upon due to misstatements related to our accounting processes for
inventory transactions, and we would make the necessary accounting corrections and restate such financial statements. In addition to inventory misstatements,
management identified additional areas that required restatement adjustments as described below, with all such restatement items constituting the "Restatement
Process.” The restatement adjustments described below pertain to all restatement periods noted above, and restatement adjustments specific to the periods
reported in this Comprehensive Form 10-K are reflected in the tables below.
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Such errors included: (i) methods used by the Company in the valuation and expensing of costs related to inventory which was not correctly stated and was not
consistent with the first-in, first-out ("FIFO”) methodology, (ii) warehousing and handling expenditures which were not properly capitalized during the first and
third quarters but were subsequently corrected on a semi-annual basis in the second and fourth quarters resulting in the understatement of inventory and net
income in the first and third quarters and the overstatement of net income in the second and fourth quarters, (iii) warehouse and handling expenditures which
were improperly classified in operating expenses in all quarters resulting in an overstatement of operating expenses in all restated periods, (iv) freight-in,
warehousing and handling expenditures, factory labor and overhead, and freight-out costs which were being capitalized to inventory using historical standard
rates that were not based on the actual costs incurred in each period resulting in misstatements of inventory value, (v) inventory reserve levels which did not
reflect the Company’s accounting policy of carrying inventory at the lower of cost or net realizable value resulting in misstatements of inventory value, (vi) sales
returns were not accounted for until November 2018, and through year end 2017 gift cards were initially recorded to net sales causing net sales to be
overstated, (vii) lease accounting errors upon the adoption of Accounting Standards Update ("ASU”) 2016-02, Leases ("Topic 842”) on January 1, 2019,
which resulted in the understatement of operating lease assets and operating lease liabilities, (viii) the income tax effect of pre-tax restatement adjustments as
well as correction of income tax misstatements related to tax effected items recognized in the 2018 income tax provision but related to the previous 2017 tax
year, including adjustments related to the Tax Cuts and Jobs Act ("TCJA”) and recognition of uncertain tax position ("UTP”) liability and related interest
expense, and (ix) other smaller matters described further below.
Description of Restatement Adjustments
Inventory
Under the Company’s inventory accounting policy, inventory is stated using the FIFO methodology for cost, and such cost includes merchandise purchases,
the costs to bring the merchandise to its Texas distribution center (freight-in), warehousing and handling expenditures, factory labor and overhead for items that
are internally manufactured, and distributing and delivering merchandise to stores (freight-out). The Company carries inventory at the lower of this cost or net
realizable value.
The inventory restatement adjustments below were first identified by management as a result of a deeper analysis of legacy systems and practices that were in
place for many years and which the Company is working to replace. Management identified the following areas in which the accounting for inventory did not
adhere to the Company’s inventory accounting policy:
(1) FIFO adjustment: inventory was not correctly stated and was not consistent with the FIFO methodology;
(2) Freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out adjustment:
i. warehousing and handling expenditures were not properly capitalized during the first and third quarters but were subsequently corrected on a semi-annual basis in
the second and fourth quarters resulting in the understatement of inventory and net income in the first and third quarters and the overstatement of net income in the
second and fourth quarters; and
freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out costs were being capitalized to inventory using historical standard
rates that were not based on the actual costs incurred in each period resulting in misstatements;
ii.
(3)
Inventory reserve adjustment: Tandy’s accounting policy is to carry inventory at the lower of cost or net realizable value. Management noted inventory reserve levels did not
reflect the Company’s accounting policy of carrying inventory at the lower of cost or net realizable value. This resulted in cumulative understatements of inventory.
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Sales Returns, Gift Card Liabilities and Class Fees
(4) Sales returns: management noted estimates for sales returns had not been accounted for until November 2018. Using historical sales return trends for 2017 and 2018,
management has estimated a sales return liability along with a corresponding inventory asset for all restatement periods. In addition, estimated sales returns previously
recorded in the fourth quarter of 2018 were incorrectly presented on a net basis in cost of sales and have since been restated to reflect accounting on a gross basis in both net
sales and cost of sales.
Gift cards: for the restatement year 2017, management noted sales of gift cards were initially recorded to net sales causing net sales to be overstated.
Management has estimated a gift card liability for the year ended December 31, 2017 based on historical gift card issuances and the redemption activity.
Starting January 1, 2018, management noted the Company had begun to account for the sale of gift cards properly by recording a gift card liability on the
date a gift card is issued to a customer and recognizing revenue with a corresponding reduction to the gift card liability as the customer redeems the gift
card.
Class fees: for the restatement year 2018, management noted fees paid to instructors for in-store classes were initially netted against net sales causing
operating expense and net sales to be understated. These fees incurred have been properly recorded to operating expense. There was no impact to net
income (loss) related to this reclassification.
Warehouse and Handling Reclassifications
(5) Warehousing and handling expenditures were classified as operating expenses, resulting in overstatement of operating expenses in all periods. These costs have been
reclassified to cost of sales since the inventory restatement in adjustment (2) above is properly adjusting the inventory balance for such costs with the offset recorded to cost
of sales. There was no impact to net income (loss) related to this reclassification.
Income Tax
(6) Management noted the 2018 income tax provision included tax effected items related to the previous 2017 tax year, including adjustments related to the TCJA which was
enacted on December 22, 2017, among other smaller tax correcting adjustments. Management noted the 2017 income tax provision had misstatements related not only to TCJA
but also related to the recognition of UTP liability and related interest expense among other smaller tax correcting adjustments. Also, income tax restatement adjustments were
made to reflect the tax effect of the pre-tax restatement adjustments for 2018 and 2017.
The 2018 tax provision restatement adjustments consisted of a $0.6 million increase to income tax expense for the tax effect of pre-tax restatement
adjustments and offset by a $0.5 million decrease to income tax expense primarily for the correction of the 2017 tax related items noted above ($0.4
million) along with smaller adjustments to correct return to provision amounts and correction of tax on income earned from wholly-owned foreign
subsidiaries ($0.1 million).
The 2017 provision restatement adjustments consisted of a $0.2 million decrease to income tax expense for the tax effect of pre-tax restatement
adjustments and a $1.3 million increase to income tax expense for the correction of the TCJA misstatement noted above ($0.9 million) and other
corrections such as uncertain tax position (UTP) liability and related interest expense ($0.2 million), correction of taxable income on the return of our
Canada and Spain foreign subsidiaries ($0.2 million), and other smaller correcting adjustments.
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Accruals and Other
(7) There were misstatements related to the recognition of accrued paid-time-off ("PTO”) resulting in understatement of accrued expenses and other liabilities as well as other
misstatements primarily related to recognition of other accrued operating expenses, payroll related costs, long-term debt classification, cash cutoff for outstanding checks,
break out of impairment expense previously included in operating expenses, and reclass of leasehold improvements from prepaid expenses to property and equipment, all of
which are being corrected in connection with the restatement of previously issued financial statements.
Leases
(8) During the first quarter of 2019, we adopted the new lease accounting standard under Topic 842. Management noted as part of the adoption that the Company did not ensure
the appropriateness of inputs being used to calculate the present value of lease payments over the lease terms. This resulted in the misstatement of operating lease assets,
and the current and long-term portion of operating lease liabilities upon initial recognition on January 1, 2019.
Foreign Currency Gains & Losses and Cumulative Translation Adjustments
(9) Foreign currency gains and losses associated with the activity of the Company’s Canadian subsidiary were incorrectly classified as a component of accumulated other
comprehensive income (loss). These gains and losses have been restated and are included in net income (loss).
Cumulative translation adjustments ("CTA”) included in accumulated other comprehensive income (loss) were not tax effected. Management has
corrected this error by tax effecting CTA and by presenting CTA net of tax within accumulated other comprehensive income (loss).
Common Stock
(10) A number of shares of the Company’s common stock were repurchased by the Company and cancelled prior to 2010. Management noted these repurchases were incorrectly
accounted for as treasury stock. The number of shares issued, and the number of shares held in treasury, were both overstated by 993,623 shares. The number of shares
outstanding has been properly presented in all periods. This correction will not result in any change to net stockholders’ equity, nor will it affect any weighted average shares
outstanding calculations used in the determination of earnings per share.
The net effect of the adjustments on the Consolidated Statements of Comprehensive Income (Loss) was to increase net income by $2.4 million for the year
ended December 31, 2018, and to decrease net income by $2.0 million for the year ended December 31, 2017.
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Increase (Decrease) in Net income:
Inventory adjustments (1)
Sales returns, gift cards and class fees
Operating expenses (2)
Impairment expense
Other expense
Total adjustments before tax
Income tax expense from adjustments
Increase (decrease) in net income
(1) Inventory adjustments due to:
FIFO adjustment
Freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out
Inventory reserve
Sales returns
Other
Warehouse and handling reclass
(2) Operating expense adjustments due to:
Warehouse and handling reclass
Reclass to impairment expense
Accrued expenses
PTO Accrual
Other
2018
255,372 $
105,382
2,059,463
(285,477)
373,382
2,508,122
73,585
2,434,537 $
843,598 $
503,078
980,000
104,105
19,710
(2,195,119)
255,372 $
2,195,119 $
285,477
(377,912)
(16,930)
(26,291)
2,059,463 $
2017
(3,127,495)
99,327
2,163,065
-
40,255
(824,848)
1,148,459
(1,973,307)
(88,548)
(619,172)
-
(19,999)
(223,895)
(2,175,881)
(3,127,495)
2,175,881
-
51,375
(38,647)
(25,544)
2,163,065
$
$
$
$
$
$
The decrease to retained earnings from the adjustments as of December 31, 2018, is as follows:
FIFO adjustment
Freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out
Inventory reserve
Sales returns
Income tax benefit
Accruals and other
Decrease to retained earnings
$
$
(786,690)
(442,150)
980,000
(172,494)
33,823
(852,872)
(1,240,383)
Restatement Reconciliation Tables
The following tables present a reconciliation of our Consolidated Balance Sheets as previously reported as of December 31, 2018 and 2017 to the restated
amounts shown in this filing. We have also presented a reconciliation of our Consolidated Statements of Comprehensive Income (Loss) and Consolidated
Statements of Cash Flows for the years ended December 31, 2018 and 2017, as previously reported to the restated amounts shown in this filing. The
following restatement adjustment footnote numbers correspond to the restatement adjustment descriptions above.
45
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Tandy Leather Factory, Inc.
Consolidated Balance Sheet
ASSETS
CURRENT ASSETS:
Cash
Accounts receivable-trade, net of allowance for doubtful accounts of $15,703
Inventory
Prepaid income taxes
Prepaid expenses
Other current assets
Total current assets
Property and equipment, at cost
Less accumulated depreciation
Property and equipment, net
Deferred income taxes
Goodwill
Other intangibles, net of accumulated amortization of $690,869
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable-trade
Accrued expenses and other liabilities
Current maturities of long-term debt
Total current liabilities
Uncertain tax positions
Deferred income taxes
Other non-current liabilities
Long-term debt, net of current maturities
As Reported
December 31, 2018
Adjustments
As Restated
$
$
$
24,070,351 $
408,170
33,867,276
383,478
1,244,754
161,208
60,135,237
28,005,563
(13,606,266)
14,399,297
248,228
954,765
16,500
386,107
76,140,134 $
1,978,840 $
4,176,479
747,335
6,902,654
-
1,556,493
-
8,220,683
-
-
(564,727)
36,430
39,041
170,597
(318,659)
134,782
(18,995)
115,787
844,065
-
-
-
641,193
175,554
1,225,029
(227,819)
1,172,764
1,415,715
(1,556,493)
555,296
227,819
$
(1) (2)(3)(4)(7)
(6)
(7)
(7)
(7)
(7)
(6)
(7)
(4)(7)
(7)
(6)
(6)(9)
(6)
(7)
$
$
24,070,351
408,170
33,302,549
419,908
1,283,795
331,805
59,816,578
28,140,345
(13,625,261)
14,515,084
1,092,293
954,765
16,500
386,107
76,781,327
2,154,394
5,401,508
519,516
8,075,418
1,415,715
-
555,296
8,448,502
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.10 par value; 20,000,000 shares authorized; none issued or outstanding;
attributes to be determined on issuance
Common stock, $0.0024 par value; 25,000,000 shares authorized; 10,353,155 shares issued
Paid-in capital
Retained earnings
Treasury stock at cost (1,292,594 shares)
Accumulated other comprehensive loss (net of tax)
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
46
-
27,232
7,158,821
65,716,761
(11,931,850)
(1,510,660)
59,460,304
76,140,134 $
-
(2,384)
(2,891,683)
(1,240,383)
2,894,067
66,475
(1,173,908)
641,193
(10)
(10)
(1)(2)(3)(4)(6)(7)
(9)
(10)
(9)
$
-
24,848
4,267,138
64,476,378
(9,037,783)
(1,444,185)
58,286,396
76,781,327
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Comprehensive Income
Net sales
Cost of sales
Gross profit
Operating expenses
Impairment expense
Income from operations
Other (income) expense:
Interest expense
Other, net
Total other (income) expense
Income before income taxes
Provision for income taxes
Net income
As Reported
For the Year Ended December 31, 2018
Adjustments
As Restated
$
83,098,187 $
32,517,996
50,580,191
(4)(7)
105,382
$
(255,372) (1)(2)(3)(4)(5)(7)
360,754
46,751,728
-
(2,059,463)
285,477
(5)(7)
(7)
3,828,463
2,134,740
304,957
(180,191)
124,766
-
(373,382)
(373,382)
(9)
3,703,697
2,508,122
1,739,869
73,585
(6)
83,203,569
32,262,624
50,940,945
44,692,265
285,477
5,963,203
304,957
(553,573)
(248,616)
6,211,819
1,813,454
$
1,963,828 $
2,434,537
$
4,398,365
Foreign currency translation adjustments, net of tax
(548,557)
(133,315)
(9)
(681,872)
Comprehensive income
Net income per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
1,415,271 $
2,301,222
$
3,716,493
0.21 $
0.21 $
0.27
0.26
$
$
0.48
0.48
9,185,203
9,185,662
9,185,203
9,205,008
9,185,203
9,205,008
$
$
$
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Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Impairment of goodwill and long-lived assets
Loss on disposal of assets
Stock-based compensation
Deferred income taxes
Exchange (gain) loss
Changes in operating assets and liabilities:
Accounts receivable - trade
Inventory
Prepaid expenses
Other current assets
Accounts payable - trade
Accrued expenses and other liabilities
Income taxes
Other assets
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sale of assets
Net cash used in (provided by) investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Repurchase of treasury stock
Net cash used in financing activities
As Reported
For the Year Ended December 31, 2018
Adjustments
As Restated
$
1,963,828 $
2,434,537
$
4,398,365
(7)
(6)(9)
(9)
(7)
(1)(2)(3)(4)
(6)(7)
(7)
(7)
(4)(7)
(6)
(7)
(7)
(7)
1,797,281
285,477
1,321
327,629
(90,997)
27,984
53,042
3,443,921
239,082
27,821
(197,960)
(181,959)
(308,129)
(3,690)
5,420,823
7,384,651
(1,091,433)
27,396
(1,064,037)
1,596,288
(1,653,266)
(56,978)
1,481
-
-
-
348,246
(434,816)
(3,887)
(2,409,491)
(167,167)
(27,821)
49,620
496,896
(487,480)
586,971
(2,047,448)
387,089
3,105
543
3,648
-
-
-
1,798,762
285,477
1,321
327,629
257,249
(406,832)
49,155
1,034,430
71,915
-
(148,340)
314,937
(795,609)
583,281
3,373,375
7,771,740
(1,088,328)
27,939
(1,060,389)
1,596,288
(1,653,266)
(56,978)
(666,879)
5,987,494
18,082,857
24,070,351
304,957
1,361,400
Effect of exchange rate changes on cash and cash equivalents
(530,543)
(136,336)
(9)
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Interest paid during the period
Income tax paid during the period, net of refunds
5,733,093
254,401
18,337,258
24,070,351 $
(254,401)
-
304,957 $
2,138,995 $
-
(777,595)
$
$
$
$
$
$
48
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Balance Sheet
ASSETS
CURRENT ASSETS:
Cash
Accounts receivable-trade, net of allowance for doubtful accounts of $22,642
Inventory
Prepaid income taxes
Prepaid expenses
Other current assets
Total current assets
Property and equipment, at cost
Less accumulated depreciation
Property and equipment, net
Deferred income taxes
Goodwill
Other intangibles, net of accumulated amortization of $688,147
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable-trade
Accrued expenses and other liabilities
Income taxes payable
Current maturities of long-term debt
Total current liabilities
Uncertain tax position
Deferred income taxes
Other non-current liabilities
Long-term debt, net of current maturities
As Reported
December 31, 2017
Adjustments
As Restated
$
$
$
18,337,258 $
461,212
37,311,197
41,307
1,473,147
189,029
57,813,150
27,218,481
(11,750,639)
15,467,842
271,738
962,949
19,222
379,695
74,914,596 $
2,480,593 $
3,886,334
-
614,311
6,981,238
-
1,636,958
-
6,757,419
(254,401)
-
(2,765,113)
(41,307)
(80,869)
139,493
(3,002,197)
113,818
(14,777)
99,041
859,167
-
-
-
(2,043,989)
(70,748)
1,158,681
354,629
-
1,442,562
1,197,078
(1,636,958)
596,770
-
(7)
$
(1)(2)(4)(5)(7)
(6)
(7)
(7)
(7)
(7)
(6)
(7)
(4)(7)
(6)
(6)
(6)(9)
(6)
$
$
18,082,857
461,212
34,546,084
-
1,392,278
328,522
54,810,953
27,332,299
(11,765,416)
15,566,883
1,130,905
962,949
19,222
379,695
72,870,607
2,409,845
5,045,015
354,629
614,311
8,423,800
1,197,078
-
596,770
6,757,419
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.10 par value; 20,000,000 shares authorized; none issued or outstanding;
attributes to be determined on issuance
Common stock, $0.0024 par value; 25,000,000 shares authorized; 10,320,069 shares issued
Paid-in capital
Retained earnings
Treasury stock at cost (1,049,207 shares)
Accumulated other comprehensive loss (net of tax)
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
49
-
27,153
6,831,271
63,921,244
-
(2,385)
(2,891,682)
(3,843,231)
(10,278,584)
(962,103)
59,538,981
74,914,596 $
2,894,067
199,790
(3,643,441)
(2,043,989)
(10)
(10)
(1) (2)(4)(6)(7)
(9)
(10)
(9)
$
-
24,768
3,939,589
60,078,013
(7,384,517)
(762,313)
55,895,540
72,870,607
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Comprehensive Income (Loss)
Net sales
Cost of sales
Gross profit (loss)
Operating expenses
Income (loss) from operations
Other (income) expense:
Interest expense
Other, net
Total other (income) expense
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
As Reported
For the Year Ended December 31, 2017
Adjustments
As Restated
$
82,321,268 $
30,207,439
52,113,829
44,872,007
7,241,822
99,327
3,127,495
(3,028,168)
(2,163,065)
(865,103)
205,555
(126,857)
78,698
-
(40,255)
(40,255)
7,163,124
(824,848)
(4)(7)
(1)(2)(4)(5)
$
(5)(7)
(9)
2,711,373
1,148,459
(6)
82,420,595
33,334,934
49,085,661
42,708,942
6,376,719
205,555
(167,112)
38,443
6,338,276
3,859,832
$
4,451,751 $
(1,973,307)
$
2,478,444
Foreign currency translation adjustments, net of tax
931,026
(519,599)
(9)
411,427
Comprehensive income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
5,382,777 $
(2,492,906)
$
2,889,871
0.48 $
0.48 $
(0.21)
(0.21)
$
$
0.27
0.27
9,242,092
9,256,810
9,242,092
9,245,537
9,242,092
9,245,537
$
$
$
50
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Cash Flows
2017
For the Year Ended December 31, 2017
2017
Adjustments
2017
As Restated
As Reported
$
4,451,751 $
(1,973,307)
$
2,478,444
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Loss on disposal of assets
Stock-based compensation
Deferred income taxes
Exchange loss
Changes in operating assets and liabilities:
Accounts receivable - trade
Inventory
Prepaid expenses
Other current assets
Accounts payable - trade
Accrued expenses and other liabilities
Income taxes
Other assets
Total adjustments
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sale of assets
Net cash used in investing activities
Cash flows from financing activities:
Payments on capital lease obligations
Proceeds from exercise of stock options
Net cash provided by financing activities
1,875,102
3,139
239,599
(215,576)
29,848
99,772
(4,133,658)
135,713
(48,797)
(208,434)
(983,710)
923,016
(43,669)
(2,327,655)
2,124,096
(1,689,645)
35,963
(1,653,682)
(72,686)
223,404
150,718
(7)
(6)(9)
(9)
(7)
(1)(2)(4)
(6)(7)
(7)
(7)
(4)(7)
(6)
(7)
8,941
-
-
853,632
3,151
(11,327)
1,155,373
(68,901)
48,797
973,323
(1,282,591)
225,297
409,291
2,314,986
341,679
(7)
(2,354)
-
(2,354)
-
-
-
Effect of exchange rate changes on cash and cash equivalents
853,822
(593,726)
(9)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Interest paid during the period
Income tax paid during the period, net of refunds
1,474,954
(254,401)
16,862,304
18,337,258 $
-
(254,401)
205,555 $
1,788,357 $
-
454,661
$
$
$
$
$
$
51
1,884,043
3,139
239,599
638,056
32,999
88,445
(2,978,285)
66,812
-
764,889
(2,266,301)
1,148,313
365,622
(12,669)
2,465,775
(1,691,999)
35,963
(1,656,036)
(72,686)
223,404
150,718
260,096
1,220,553
16,862,304
18,082,857
205,555
2,243,018
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Balance Sheet
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash
Short-term investments
Accounts receivable-trade, net of allowance for doubtful accounts of $12,940
Inventory
Prepaid income taxes
Prepaid expenses
Other current assets
Total current assets
Property and equipment, at cost
Less accumulated depreciation
Property and equipment, net
Operating lease assets
Deferred income taxes
Goodwill
Other intangibles, net of accumulated amortization of $714,000
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable-trade
Accrued expenses and other liabilities
Operating lease liabilities
Total current liabilities
Uncertain tax position
Deferred income taxes
Other non-current liabilities
Operating lease liabilities, non-current
As Reported
March 31, 2019
Adjustments
As Restated
$
$
$
12,679,373 $
4,999,750
456,537
30,564,322
272,028
1,537,367
174,043
50,683,420
27,863,939
(13,921,523)
13,942,416
6,389,561
-
956,945
15,833
379,661
72,367,836 $
897,196 $
3,752,711
3,340,843
7,990,750
-
1,258,721
-
3,427,705
-
6,828
-
(389,839)
36,430
54,676
106,363
(185,542)
38,268
(20,007)
18,261
10,379,823
908,500
-
-
-
11,121,042
-
354,568
707,318
1,061,886
1,415,715
(1,258,721)
555,778
9,806,954
$
(7)
(1)(2)(3)(4)
(6)
(7)
(4)
(7)
(7)
(8)
(6)
(4)(7)
(8)
(6)
(6)(8)(9)
(6)
(8)
$
$
12,679,373
5,006,578
456,537
30,174,483
308,458
1,592,043
280,406
50,497,878
27,902,207
(13,941,530)
13,960,677
16,769,384
908,500
956,945
15,833
379,661
83,488,878
897,196
4,107,279
4,048,161
9,052,636
1,415,715
-
555,778
13,234,659
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.10 par value; 20,000,000 shares authorized; none issued or outstanding;
attributes to be determined on issuance
Common stock, $0.0024 par value; 25,000,000 shares authorized; 10,354,563 shares issued
Paid-in capital
Retained earnings
Treasury stock at cost (1,420,539 shares)
Accumulated other comprehensive loss (net of tax)
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
52
-
27,234
7,344,644
66,188,614
-
(2,383)
(2,891,684)
(554,243)
(12,646,467)
(1,223,365)
59,690,660
72,367,836 $
2,894,067
93,673
(460,570)
11,121,042
(10)
(10)
(1) (2)(3)(4)(6)
(7)(8)(9)
(10)
(9)
$
-
24,851
4,452,960
65,634,371
(9,752,400)
(1,129,692)
59,230,090
83,488,878
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Comprehensive Income
Unaudited
Net sales
Cost of sales
Gross profit
Operating expenses
Income (loss) from operations
Other (income) expense:
Interest expense
Other, net
Total other (income) expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
As Reported
For the Three Months Ended March 31, 2019
Adjustments
As Restated
$
20,784,652 $
8,333,847
156,670
362,805
$
(4)
(1) (2)(3)(4)(5)
(7)
12,450,805
(206,135)
11,281,377
(1,249,724)
(5)(7)(8)
1,169,428
1,043,589
32,383
(33,041)
(658)
-
142,659
142,659
(7)(9)
1,170,086
900,930
301,123
250,082
(6)
20,941,322
8,696,652
12,244,670
10,031,653
2,213,017
32,383
109,618
142,001
2,071,016
551,205
$
868,963 $
650,848
$
1,519,811
Foreign currency translation adjustments, net of tax
287,295
27,198
(9)
Comprehensive income (loss)
Net income (loss) per common share:
Basic
Diluted
Basic
Diluted
$
$
$
1,156,258 $
678,046
0.10 $
0.10 $
0.07
0.07
9,009,752
9,010,037
9,009,752
9,011,107
53
$
$
$
314,493
1,834,304
0.17
0.17
9,009,752
9,011,107
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Cash Flows
Unaudited
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Right-of-use asset amortization
(Gain) loss on disposal of assets
Stock-based compensation
Deferred income taxes
Exchange (gain) loss
Changes in operating assets and liabilities:
Accounts receivable-trade
Inventory
Prepaid expenses
Other current assets
Accounts payable-trade
Accrued expenses and other liabilities
Income taxes
Other assets
Operating lease liability
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Purchase of short-term investments
Proceeds from sales of assets
Net cash used in investing activities
Cash flows from financing activities:
Payments on long-term debt
Repurchase of treasury stock
Net cash used in financing activities
As Reported
For the Three Months Ended March 31, 2019
Adjustments
As Restated
$
868,963 $
650,848
$
1,519,811
495,449
-
(3,794)
185,825
(33,861)
2,154
(48,367)
3,302,954
(292,613)
(12,835)
(318,294)
(1,205,241)
95,767
6,446
-
2,173,590
3,042,553
(30,893)
(4,999,750)
12,552
(5,018,091)
(8,968,018)
(714,617)
(9,682,635)
(7)
(8)
(6)(9)
(7)(9)
(7)
(1)(2)(3)(4)
(7)
(7)
(7)
(4)(7)
(6)
(7)
(8)
(7)
(1,154)
865,050
-
-
217,654
134,113
(7,696)
(130,791)
325,165
(180,812)
(962,853)
49,346
12,943
(48,416)
(833,690)
(561,141)
89,707
(7)
-
-
(7)
-
-
-
494,295
865,050
(3,794)
185,825
183,793
136,267
(56,063)
3,172,163
32,552
(193,647)
(1,281,147)
(1,155,895)
108,710
(41,970)
(833,690)
1,612,449
3,132,260
(30,900)
(4,999,750)
12,552
(5,018,098)
(8,968,018)
(714,617)
(9,682,635)
177,495
(11,390,978)
24,070,351
$
12,679,373
Effect of exchange rate changes on cash and cash equivalents
267,195
(89,700)
(9)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
(11,390,978)
24,070,351
$
12,679,373 $
-
-
-
54
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Balance Sheet
Unaudited
ASSETS
CURRENT ASSETS:
Cash
Short-term investments
Accounts receivable-trade, net of allowance for doubtful accounts of $9,839
Inventory
Prepaid income taxes
Prepaid expenses
Other current assets
Total current assets
Property and equipment, at cost
Less accumulated depreciation
Property and equipment, net
Deferred income taxes
Goodwill
Other intangibles, net of accumulated amortization of $712,000
Other assets
Other assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable-trade
Accrued expenses and other liabilities
Current maturities of long-term debt
Total current liabilities
Uncertain tax positions
Deferred income taxes
Other non-current liabilities
Long-term debt, net of current maturities
COMMITMENTS AND CONTINGENCIES (Note 10)
As Reported
September 30, 2018
Adjustments
As Restated
$
16,814,972 $
-
$
16,814,972
418,612
40,720,630
452,389
1,348,113
290,028
60,044,744
27,950,353
(12,976,025)
14,974,328
281,721
960,304
17,166
387,487
76,665,750 $
3,718,393
2,235,793
174,056
6,128,242
-
1,467,481
-
8,180,613
-
(2,308,873)
(386,595)
64,393
93,308
(2,537,767)
33,314
(17,940)
15,374
1,139,475
-
-
-
(1,382,918)
-
1,174,004
-
1,174,004
1,197,078
(1,467,481)
598,188
-
(1)(2)(3)(4)
(6)
(7)
(7)
(7)
(7)
(6)
(4)(7)
(6)
(6)(9)
(6)
$
$
418,612
38,411,757
65,794
1,412,506
383,336
57,506,977
27,983,667
(12,993,965)
14,989,702
1,421,196
960,304
17,166
387,487
75,282,832
3,718,393
3,409,797
174,056
7,302,246
1,197,078
-
598,188
8,180,613
$
$
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.10 par value; 20,000,000 shares authorized; none issued or outstanding;
attributes to be determined on issuance
Common stock, $0.0024 par value; 25,000,000 shares authorized; 10,336,717 shares issued
Paid-in capital
Retained earnings
Treasury stock at cost (1,182,509 shares)
Accumulated other comprehensive loss (net of tax)
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
-
27,193
6,907,678
66,345,110
(11,273,822)
(1,116,745)
60,889,414
76,665,750 $
-
(2,385)
(2,891,682)
(2,983,997)
2,894,067
99,290
(2,884,707)
(1,382,918)
-
(10)
(10)
(1)(2)(3)(4)(6)(7)
(9)
(10)
(9)
$
-
24,808
4,015,996
63,361,113
(8,379,755)
(1,017,455)
58,004,707
75,282,832
55
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Comprehensive Income (Loss)
Unaudited
Net sales
Cost of sales
Gross profit
Operating expenses
Income from operations
Other expense:
Interest expense
Other, net
Total other expense
Income before income taxes
Provision (benefit) for income taxes
Net income (loss)
As Reported
Three Months Ended September 30, 2018
Adjustments
As Restated
$
18,887,099 $
7,040,266
11,846,833
(8,836)
(57,886)
49,050
(4)
(1)(2)(3)(4)(5)
11,531,389
(535,400)
(5)(7)
315,444
584,450
80,710
(40,846)
39,864
-
-
-
275,580
584,450
397,114
(145,785)
(6)
18,878,263
6,982,380
11,895,883
10,995,989
899,894
80,710
(40,846)
39,864
860,030
251,329
$
(121,534) $
730,235
$
608,701
Foreign currency translation adjustments, net of tax
118,165
(29,541)
(9)
Comprehensive income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
$
$
$
(3,369) $
700,694
(0.01) $
(0.01) $
0.08
0.08
$
$
$
9,154,209
9,155,031
9,154,215
9,160,022
56
88,624
697,325
0.07
0.07
9,154,215
9,160,022
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Comprehensive Income
Unaudited
Net sales
Cost of sales
Gross profit
Operating expenses
Income from operations
Other (income) expense:
Interest expense
Other, net
Total other (income) expense
Income before income taxes
Provision (benefit) for income taxes
Net income
As Reported
Nine Months Ended September 30, 2018
Adjustments
As Restated
$
58,353,784 $
20,545,547
37,808,237
212,279
$
1,202,081 (1)(2)(3)(4)(5)(7)
(989,802)
(4)
33,742,351
(1,460,053)
(5)(7)
4,065,886
470,251
223,534
(126,459)
97,075
-
(199,607)
(199,607)
(9)
3,968,811
669,858
1,376,634
(21,065)
(6)
58,566,063
21,747,628
36,818,435
32,282,298
4,536,137
223,534
(326,066)
(102,532)
4,638,669
1,355,569
$
2,592,177 $
690,923
$
3,283,100
Foreign currency translation adjustments, net of tax
(154,642)
(100,500)
(9)
Comprehensive income
Net income per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
$
$
$
2,437,535 $
590,423
0.28 $
0.28 $
0.08
0.08
9,199,173
9,199,959
9,199,173
9,201,577
57
$
$
$
(255,142)
3,027,958
0.36
0.36
9,199,173
9,201,577
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Cash Flows
Unaudited
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
(Gain) loss on disposal of assets
Stock-based compensation
Deferred income taxes
Exchange (gain) loss
Changes in operating assets and liabilities:
Accounts receivable-trade
Inventory
Prepaid expenses
Other current assets
Accounts payable-trade
Accrued expenses and other liabilities
Income taxes
Other assets
Total adjustments
Net cash provided (used) by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sales of assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Repurchase of treasury stock
Net cash used in financing activities
As Reported
For the Nine Months Ended September 30, 2018
Adjustments
As Restated
$
2,592,177 $
690,923
$
3,283,100
1,310,774
4,556
76,447
(115,460)
(93,163)
42,600
(3,409,433)
125,034
(111,688)
28,525
(609,577)
(475,082)
(5,736)
(3,232,203)
(640,026)
(887,679)
17,718
(869,961)
982,939
(995,238)
(12,299)
(7)
(6)(9)
(9)
(7)
(1)(2)(4)
(6)(7)
(7)
(7)
(4)(7)
(6)
(7)
2,056
-
-
(174,831)
(43,735)
(53,500)
(552,298)
(90,533)
111,688
1,374,694
(1,043,249)
56,112
358,049
(55,547)
635,376
-
-
-
-
-
-
1,312,830
4,556
76,447
(290,291)
(136,898)
(10,900)
(3,961,731)
34,501
-
1,403,219
(1,652,826)
(418,970)
352,313
(3,287,750)
(4,650)
(887,679)
17,718
(869,961)
982,939
(995,238)
(12,299)
(380,975)
(1,267,885)
18,082,857
Effect of exchange rate changes on cash and cash equivalents
-
(380,975)
(9)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
(1,522,286)
18,337,258
254,401
(254,401)
Cash and cash equivalents, end of period
$
16,814,972 $
-
$
16,814,972
58
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Balance Sheet
Unaudited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable-trade, net of allowance for doubtful accounts of $9,911
Inventory
Prepaid income taxes
Prepaid expenses
Other current assets
Total current assets
Property and equipment, at cost
Less accumulated depreciation
Property and equipment, net
Deferred income taxes
Goodwill
Other intangibles, net of accumulated amortization of $712,000
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable-trade
Accrued expenses and other liabilities
Income taxes payable
Current maturities of long-term debt
Total current liabilities
Uncertain tax positions
Deferred income taxes
Other non-current liabilities
Long-term debt, net of current maturities
$
$
$
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.10 par value; 20,000,000 shares authorized; none issued or outstanding;
attributes to be determined on issuance
Common stock, $0.0024 par value; 25,000,000 shares authorized; 10,336,717 shares issued
Paid-in capital
Retained earnings
Treasury stock at cost (1,182,502 shares)
Accumulated other comprehensive loss
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
59
As Reported
June 30, 2018
Adjustments
As Restated
18,955,328 $
496,255
38,020,269
233,002
1,374,944
75,459
59,155,257
27,551,811
(12,552,648)
14,999,163
269,512
958,464
18,083
384,744
75,785,223
3,115,778
1,971,026
-
1,740,556
6,827,360
-
1,474,675
-
6,614,112
-
27,193
6,883,919
66,466,644
(11,273,770)
(1,234,910)
60,869,076
75,785,223
-
-
(2,897,936)
(233,002)
64,393
87,557
(2,978,988)
33,314
(16,886)
16,428
1,016,036
-
-
-
(1,946,524)
-
1,165,165
153,593
-
1,318,758
1,197,078
(1,474,675)
597,716
-
$
$
$
(1)(2)(3)(4)
(6)
(7)
(7)
(7)
(7)
(6)
(4)(7)
(6)
(6)
(6)(9)
(6)
(10)
(10)
-
(2,385)
(2,891,682)
(3,714,232) (2)(3)(4)(6)(7)(9)
2,894,067
128,831
(3,585,401)
(1,946,524)
(10)
(9)
$
18,955,328
496,255
35,122,333
-
1,439,337
163,016
56,176,269
27,585,125
(12,569,534)
15,015,591
1,285,548
958,464
18,083
384,744
73,838,699
3,115,778
3,136,191
153,593
1,740,556
8,146,118
1,197,078
-
597,716
6,614,112
-
24,808
3,992,237
62,752,412
(8,379,703)
(1,106,079)
57,283,675
73,838,699
Table of Contents
Consolidated Statement of Comprehensive Income (Loss)
Unaudited
Net sales
Cost of sales
Gross profit (loss)
Operating expenses
Income (loss) from operations
Other (income) expense:
Interest expense
Other, net
Total other (income) expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
As Reported
Three Months Ended June 30, 2018
Adjustments
As Restated
$
19,177,767 $
6,059,325
13,118,442
9,455
894,405
(884,950)
(4)
$
(1)(2)(3)(4)(5)
11,136,961
(485,575)
(5)(7)
1,981,481
(399,375)
78,182
(46,741)
31,441
-
(85,101)
(85,101)
(9)
1,950,040
(314,274)
509,948
(31,925)
(6)
19,187,222
6,953,730
12,233,492
10,651,386
1,582,106
78,182
(131,842)
(53,660)
1,635,766
478,023
$
1,440,092 $
(282,349)
$
1,157,743
Foreign currency translation adjustments, net of tax
(294,598)
9,824
(9)
Comprehensive income (loss)
Net income (loss) per common share:
Basic
Diluted
Basic
Diluted
$
$
$
1,145,494 $
(272,525)
0.15 $
0.15 $
(0.02)
(0.02)
9,180,076
9,180,727
9,180,076
9,182,527
60
$
$
$
(284,774)
872,969
0.13
0.13
9,180,076
9,182,527
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Comprehensive Income (Loss)
Unaudited
As Reported
Six Months Ended June 30, 2018
Adjustments
As Restated
Net sales
Cost of sales
Gross profit (loss)
Operating expenses
Income (loss) from operations
Other (income) expense:
Interest expense
Other, net
Total other (income) expense
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
$
39,466,685 $
13,505,281
25,961,404
221,115
$
1,259,967 (1)(2)(3)(4)(5)(7)
(1,038,852)
(4)
22,210,962
(924,653)
(5)(7)
3,750,442
(114,199)
142,824
(85,613)
57,211
-
(199,607)
(199,607)
(9)
3,693,231
85,408
979,520
124,720
(6)
39,687,800
14,765,248
24,922,552
21,286,309
3,636,243
142,824
(285,220)
(142,396)
3,778,639
1,104,240
$
2,713,711 $
(39,312)
$
2,674,399
Foreign currency translation adjustments, net of tax
(272,807)
(70,959)
(9)
(343,766)
Comprehensive income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
2,440,904 $
(110,271)
$
2,330,633
0.29 $
0.29 $
0.01
0.01
$
$
0.29
0.29
9,222,028
9,222,533
9,222,028
9,223,086
9,222,028
9,223,086
$
$
$
61
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Cash Flows
Unaudited
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
(Gain) loss on disposal of assets
Stock-based compensation
Deferred income taxes
Exchange (gain) loss
Changes in operating assets and liablities:
Accounts receivable-trade
Inventory
Prepaid expenses
Other current assets
Accounts payable-trade
Accrued expenses and other liabilities
Income taxes
Other assets
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sales of assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Repurchase of treasury stock
Net cash used in financing activities
As Reported
Six Months Ended June 30, 2018
Adjustments
As Restated
$
2,713,711 $
(39,312)
$
2,674,399
878,955
4,556
52,688
(96,057)
(268,321)
(35,043)
(709,072)
98,203
113,570
(189,928)
(1,258,506)
(255,695)
(3,910)
(1,668,560)
1,045,151
(421,861)
7,028
(414,833)
982,938
(995,186)
(12,248)
(7)
(6)(9)
(9)
(7)
(1)(2)(4)
(6)(7)
(7)
(7)
(4)(7)
(6)
(7)
1,139
-
-
(58,586)
52,455
12,509
20,638
67,654
(113,570)
911,645
(662,391)
53,044
426,212
710,749
671,437
-
-
-
-
-
-
880,094
4,556
52,688
(154,643)
(215,866)
(22,534)
(688,434)
165,857
-
721,717
(1,920,897)
(202,651)
422,302
(957,811)
1,716,588
(421,861)
7,028
(414,833)
982,938
(995,186)
(12,248)
(417,036)
872,471
18,082,857
Effect of exchange rate changes on cash and cash equivalents
-
(417,036)
(9)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
618,070
18,337,258
254,401
(254,401)
Cash and cash equivalents, end of period
$
18,955,328 $
-
$
18,955,328
62
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Balance Sheet
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash
Accounts receivable-trade, net of allowance for doubtful accounts of $16,075
Inventory
Prepaid expenses
Other current assets
Total current assets
Property and equipment, at cost
Less accumulated depreciation
Property and equipment, net
Deferred income taxes
Goodwill
Other intangibles, net of accumulated amortization of $711,000
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable-trade
Accrued expenses and other liabilities
Income taxes payable
Current maturities of long-term debt
Total current liabilities
Uncertain tax position
Deferred income taxes
Other non-current liabilities
Long-term debt, net of current maturities
As Reported
March 31, 2018
Adjustments
As Restated
$
$
$
19,252,878 $
503,322
36,771,860
1,576,205
78,412
58,182,677
27,403,608
(12,162,066)
15,241,542
265,456
960,353
18,667
379,292
75,047,987 $
2,922,764 $
2,372,090
105,176
1,153,931
6,553,961
-
1,581,178
-
6,758,739
-
-
(2,494,226)
64,393
91,150
(2,338,683)
33,314
(15,831)
17,483
782,684
-
-
-
(1,538,516)
-
1,174,621
386,595
-
1,561,216
1,197,078
(1,581,178)
597,243
-
$
$
$
(1)(2)(3)(4)
(7)
(7)
(7)
(7)
(6)
(4)(7)
(6)
(6)
(6)(9)
(6)
19,252,878
503,322
34,277,634
1,640,598
169,562
55,843,994
27,436,922
(12,177,897)
15,259,025
1,048,140
960,353
18,667
379,292
73,509,471
2,922,764
3,546,711
491,771
1,153,931
8,115,177
1,197,078
-
597,243
6,758,739
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.10 par value; 20,000,000 shares authorized; none issued or outstanding;
attributes to be determined on issuance
Common stock, $0.0024 par value; 25,000,000 shares authorized; 10,336,717 shares issued
Paid-in capital
Retained earnings
Treasury stock at cost (1,121,607 shares)
Accumulated other comprehensive loss (net of tax of $240,045)
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
63
-
27,193
6,860,200
65,026,552
(10,819,524)
(940,312)
60,154,109
75,047,987 $
-
(2,385)
(2,891,682)
(3,431,882)
2,894,067
119,007
(3,312,875)
(1,538,516)
(10)
(10)
(1)(2)(3)(4)(6)(7)
(9)
(10)
(9)
$
-
24,808
3,968,518
61,594,670
(7,925,457)
(821,305)
56,841,234
73,509,471
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Comprehensive Income
(Unaudited)
Net sales
Cost of sales
Gross profit
Operating expenses
Income from operations
Other (income) expense:
Interest expense
Other, net
Total other (income) expense
Income before income taxes
Provision for income taxes
Net income
As Reported
For the Three Months Ended March 31, 2018
Adjustments
As Restated
$
20,288,918 $
7,445,956
12,842,962
211,660
$
365,562 (1)(2)(3)(4)(5)(7)
(153,902)
(4)
11,074,001
(439,078)
(5)(7)
1,768,961
285,176
64,642
(38,872)
25,770
-
(114,506)
(114,506)
(9)
1,743,191
399,682
469,572
156,645
(6)
20,500,578
7,811,518
12,689,060
10,634,923
2,054,137
64,642
(153,378)
(88,736)
2,142,873
626,217
$
1,273,619 $
243,037
$
1,516,656
Foreign currency translation adjustments, net of tax
21,791
(80,783)
(9)
(58,992)
Comprehensive income
Net income per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
1,295,410 $
162,254
$
1,457,664
0.14 $
0.14 $
0.03
0.03
$
$
0.16
0.16
9,264,446
9,264,811
9,264,446
9,264,604
9,264,446
9,264,604
$
$
$
64
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statement of Cash Flows
(Unaudited)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Loss on disposal of assets
Stock-based compensation
Deferred income taxes
Exchange (gain) loss
Changes in operating assets and liabilities:
Accounts receivable - trade
Inventory
Prepaid expenses
Other current assets
Accounts payable - trade
Accrued expenses and other liabilities
Income taxes
Other assets
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Net cash used in (provided by) investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Repurchase of treasury stock
Net cash used in financing activities
As Reported
For the Three Months Ended March 31, 2018
Adjustments
As Restated
$
1,273,619 $
243,037
$
1,516,656
465,522
798
28,969
(49,498)
2,994
(42,110)
539,337
(103,058)
110,617
6,055
(1,246,439)
146,483
957
(139,373)
1,134,246
(7)
(7)
(6)
(9)
(4)(7)
(1)(2)(3)(4)(6)
(7)
(7)
(7)
(4)(7)
(6)
(7)
1,111
1,131
-
132,263
(124,717)
(256,048)
(17,812)
1,723,149
(1,307,715)
(1,018,467)
714,239
(9,979)
76,218
(86,627)
156,410
(240,020)
(240,020)
222,399
222,399
(7)
540,940
(540,940)
-
-
-
-
466,633
1,929
28,969
82,765
(121,723)
(298,158)
521,525
1,620,091
(1,197,098)
(1,012,412)
(532,200)
136,504
77,175
(226,000)
1,290,656
(17,621)
(17,621)
540,940
(540,940)
-
(103,014)
1,170,021
18,082,857
19,252,878
Effect of exchange rate changes on cash and cash equivalents
21,394
(124,408)
(9)
Net increase in cash and cash equivalents
915,620
254,401
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
18,337,258
19,252,878 $
$
(254,401)
-
$
65
Table of Contents
3.
SIGNIFICANT ACCOUNTING POLICIES
Management estimates and reporting
The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States
("GAAP”) requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical
experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s
conclusions. The Company continually evaluates the information used to make these estimates as the business and the economic environment changes. Actual
results may differ from these estimates, and estimates are subject to change due to modifications in the underlying conditions or assumptions. The policies
discussed below require estimates that contain a significant degree of judgement. The use of estimates is pervasive throughout the Consolidated Financial
Statements, but the accounting policies and estimates considered most significant are as follows.
Principles of consolidation
Our Consolidated Financial Statements include the accounts of Tandy Leather Factory, Inc. and its active wholly-owned subsidiaries, The Leather Factory,
L.P. (a Texas limited partnership), Tandy Leather Company, L.P. (a Texas limited partnership), The Leather Factory of Canada, Ltd. (a Canadian
corporation), Tandy Leather Factory UK Limited (a UK corporation), Tandy Leather Factory Australia Pty. Limited (an Australian corporation), and Tandy
Leather Factory España, S.L. (a Spanish corporation). All intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
The Company considers investments with a maturity when purchased of three months or less to be cash equivalents. All credit card, debit card and electronic
transfer transactions that process in less than seven days are classified as cash and cash equivalents.
Foreign currency translation and transactions
Foreign currency translation adjustments arise from activities of our foreign subsidiaries. Results of operations are translated into U.S. dollars using the average
exchange rates during the period, while assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments of assets
and liabilities are recorded in stockholders’ equity, net of tax charge of $0.1 million in 2019, tax benefit of $0.2 million in 2018 and tax charge of $0.5 million in
2017.
Gains and losses resulting from foreign currency transactions are reported in the statements of income (loss) under the caption "Other, net,” for all periods
presented. We recognized a foreign currency transaction loss of less than $0.01 million in 2019 and foreign currency transaction gains of $0.4 million and $0.1
million in both 2018, and 2017, respectively.
Revenue recognition
Our revenue is earned from sales of merchandise and generally occurs via two methods: (1) at the store counter and (2) shipment of product generally via web
sales. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store
counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a
customer, our performance obligation is met and revenue is recognized when title passes to the customer. Shipping terms are normally free on board ("FOB”)
shipping point and title passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while
shipping charged to our customers is included in net sales. Net sales is based on the amount of consideration that we expect to receive, reduced by estimates
for future merchandise returns.
66
Table of Contents
The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales,
accordingly. The sales return allowance included in accrued expense and other liabilities was $0.3 million, $0.4 million and $0.3 million as of December 31,
2019, 2018 and 2017, respectively. The estimated value of merchandise expected to be returned included in other current assets was $0.1 million, $0.2
million and $0.1 million as of December 31, 2019, 2018 and 2017.
We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift
card liability as the customer redeems the gift card. In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift
cards over the expected customer redemption period, which is one year. As of December 31, 2019, 2018, and 2017 our gift card liability, included in
accrued expenses and other liabilities, was $0.3 million and $0.2 million and $0.3 million, respectively.
During 2019, we ended our wholesale pricing club program where customers received lower prices in exchange for a yearly membership fee. Under this
program, the yearly membership fee when paid is recorded as deferred revenue and is recognized in net sales throughout the one-year period. As of
December 31, 2018 and 2017, our deferred revenue associated with this program and included in accrued expenses and other liabilities was $0.6 million and
$0.8 million, respectively. We recognized gift card revenue of $0.1 million in 2019 from the December 31, 2018 deferred revenue balance, $0.2 million in
2018 from the December 31, 2017 deferred revenue balance and $0.2 million in 2017 from the December 31, 2016 deferred revenue balance.
For the years ended December 31, 2019, 2018 and 2017, we recognized $1.1 million, $1.9 million and $2.1 million, respectively, in net sales associated with
gift cards and the wholesale pricing club membership fees.
Disaggregated revenue
In the following table, revenue for the years ended December 31, 2019, 2018 and 2017 is disaggregated by geographic areas as follows:
United States
Canada
All other countries
Net sales
2019
65,745,750 $
6,513,631
2,658,779
74,918,160 $
$
$
2018
Restated
72,563,038 $
7,095,697
3,544,834
83,203,569 $
2017
Restated
71,473,430
7,194,116
3,753,049
82,420,595
Geographic sales information is based on the location of the customer. Excluding Canada, no single foreign country had net sales greater than 1.7% of our
consolidated net sales in 2019, 2018, or 2017.
Discounts
Prior to 2019, we maintained five price levels: retail, wholesale gold, wholesale elite, business, and manufacturer. Since May of 2019 (April of 2019 in
Canada), we offer a single retail price level, plus three volume-based levels for commercial customers. Discounts from those price levels are offered to
Business, Military/First Responder and Employee customers. Such discounts do not convey a material right to these customers since the discounted pricing
they receive at the point of sale is not dependent upon any previous or subsequent purchases. As a result, sales are reported after deduction of discounts at
the point of sale. We do not pay slotting fees or make other payments to resellers.
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Operating expense
Operating expenses include all selling, general and administrative costs, including wages and benefits, rent and occupancy costs, depreciation, advertising, store
operating expenses, outbound freight charges (to ship merchandise to customers), and corporate office costs.
Property and equipment, net of accumulated depreciation
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are
three to ten years for equipment and machinery, seven to fifteen years for furniture and fixtures, five years for vehicles, and forty years for buildings and related
improvements. Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the asset. Repairs and maintenance costs are
expensed as incurred.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods held for sale includes the cost of merchandise purchases, the
costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our
stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing inventory including
raw materials and work-in-process are valued on a first-in, first out basis using full absorption accounting which includes material, labor, and other applicable
manufacturing overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are
made to reduce the carrying amount of the inventory. We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather,
excessive scars or damage from ultra-violet ("UV”) light), (ii) items that need to be removed from our product line (e.g., slow-moving items, inability of a
supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to
adequately value our inventory at the lower of cost or net realizable value. Since the determination of net realizable value of inventory involves both estimation
and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the
recorded asset. The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency
fluctuations. Goods shipped to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier. Inventory is physically counted
twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our accounting
system to reflect actual count results.
Leases
We lease certain real estate for our retail store locations under long-term lease agreements. Starting in 2019, with the adoption of Accounting Standards
Update ("ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognize an operating lease asset and
lease liability at commencement date based on the present value of the lease payments over the lease term. The present value of our lease payments may
include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably certain we will
exercise such an option. The exercise of lease renewal options is generally at our discretion. Payments based on a change in an index or market rate are not
considered in the determination of lease payments for purposes of measuring the related lease liability. We discount lease payments using our incremental
borrowing rate based on information available as of the measurement date.
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Prior to 2019, rent expense on operating leases, including rent holidays and scheduled rent increases, was recorded on a straight-line basis over the term of the
lease, commencing on the date we took possession of the leased property. Rent expense is recorded in operating expenses. The net excess of rent expense
over the actual cash paid was recorded as accrued expenses and other liabilities in the accompanying consolidated balance sheets.
As of December 31, 2019, we have no finance leases, no sublease agreements, and no lease agreements in which we are named as a lessor. Subsequent to
the recognition of our operating lease assets and lease liabilities, we recognize lease expense related to our operating leases on a straight-line basis over the
lease term. The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. We also perform interim reviews
of our operating lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable.
Impairment of long-lived assets
We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances ("triggering events”) that indicate the carrying value of certain
assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use ("ROU”) lease assets, property and equipment and definite-lived
intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is determined that the carrying amount of the assets is
not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level
for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated
remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of
other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying
amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The
impairment loss is then allocated across the asset group’s major classifications which in this case are operating lease assets and property and equipment.
Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as
store relocation or store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and
market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method.
For the years ended December 31, 2019 and 2018, three stores and four stores, respectively, were reviewed for impairment due to overall
underperformance. Based on the results of the review, impairment expense of less than $0.1 million and $0.3 million was recorded for 2019 and 2018,
respectively. Using a discounted cash flow valuation method, we assumed a discount rate of 12.5% based on a remaining useful life of the asset groups ranging
from one to two years. For 2018, prior to the adoption of Topic 842, the only asset within the store asset group was property and equipment, and the fair
value was estimated using a market based approach. There were no impairment charges in 2017.
Earnings per share
Basic earnings per share ("EPS”) are computed based on the weighted average number of common shares outstanding during the period. Diluted EPS
includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the
Company’s restricted stock plan, had been issued. Anti-dilutive securities represent potentially dilutive securities which are excluded from the computation of
diluted EPS as their impact would be anti-dilutive. Diluted EPS is computed using the treasury stock method.
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Numerator:
Net income (loss)
2019
(1)
Years Ended December 31,
2018
Restated
2017
Restated
$
(1,903,781) $
4,398,365 $
2,478,444
Denominator:
Basic weighted-average common shares ouststanding
Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan
Dilutive effect of service-based restricted stock awards granted to employees under the Plan
Diluted weighted-average common shares outstanding
8,973,246
-
-
8,973,246
9,185,203
-
19,805
9,205,008
9,242,092
177
3,268
9,245,537
(1) For the year ended December 31, 2019, there were 9,203 shares excluded from the diluted EPS calculation because the impact of their assumed vesting
would be anti-dilutive due to a net loss in that period.
For additional disclosures regarding restricted stock awards and employee stock options, see Note 12, Stockholder’s Equity – Equity Compensation
Plans, to the Consolidated Financial Statements.
Goodwill and other intangible assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is allocated across one
reporting unit: Tandy Leather Factory. Goodwill is not amortized but is evaluated at least annually for impairment. At the reporting unit level, the Company
tests goodwill for impairment on an annual basis as of December 31 of each year, or more frequently if events or changes in circumstances, referred to as
triggering events, indicate the carrying value of goodwill may not be recoverable and that a potential impairment exists. Application of the goodwill impairment
test requires exercise of judgement, including the estimation of future cash flows, determination of appropriate discount rates and other Level 3 assumptions
(significant unobservable inputs which are supported by little or no market activity). Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for the reporting unit.
On October 1, 2019, we elected to early adopt ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill
Impairment and applied the simplified accounting method as part of the Company’s annual goodwill impairment assessment as of December 31, 2019.
We completed our annual goodwill impairment assessment as of December 31, 2019 using a quantitative Step 1 approach with the income approach
methodologies discussed below.
The discounted cash flow ("DCF”) model utilizes present values of cash flows to estimate fair value. Future cash flows were projected based on estimates of
projected sales growth, store count, pricing, gross margin rates, operating expense rates, working capital fluctuations, income tax expense and capital
expenditures. Forecasted cash flows took into account known market conditions as of December 31, 2019, and management’s anticipated business outlook.
The future cash flows were discounted using a market-participant risk-adjusted weighted average cost of capital for the reporting unit. A terminal year value
was calculated under two approaches: (i) using an EBITDA exit multiple supported by guideline public company data using selected public companies
operating within the retail industry and (ii) applying a perpetual growth rate methodology to the terminal year. These assumptions were derived from both
observable and unobservable inputs and were combined to reflect management’s judgements and assumptions.
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The estimated fair values determined under both approaches above were consistent. The concluded fair value for the reporting unit was based on a 50/50
weighting of the two valuation approaches above. The results of the Step 1 impairment testing for goodwill resulted in the Company recognizing an impairment
expense of $1.0 million during the fourth quarter of 2019, representing the entire balance of goodwill for the reporting unit. No adjustment to the carrying value
of goodwill was required for the years ended December 31, 2018 and 2017.
The change in our goodwill for each of 2018 and 2017 resulted from foreign currency translation gains (losses) of less than $0.01 million which was recorded
in accumulated other comprehensive loss.
Other intangibles
Our intangible assets, excluding goodwill, and related accumulated amortization consisted of the following:
Trademarks/copyrights
TOTAL
Trademarks/copyrights
Non-compete agreements
TOTAL
Trademarks/copyrights
Non-compete agreements
TOTAL
Gross
As of December 31, 2019
Accumulated
Amortization
554,369 $
554,369 $
547,369 $
547,369 $
Gross
As of December 31, 2018
Accumulated
Amortization
7,000
7,000
Net
Net
554,369 $
153,000
707,369 $
546,702 $
144,167
690,869 $
7,667
8,833
16,500
Gross
As of December 31, 2017
Accumulated
Amortization
Net
554,369 $
153,000
707,369 $
545,980 $
142,167
688,147 $
8,389
10,833
19,222
$
$
$
$
$
$
All our intangible assets, other than goodwill, are definite-lived intangibles and are subject to amortization. The weighted average amortization period is 15
years for trademarks and copyrights. Amortization expense related to other intangible assets of less than $0.01 million in each of 2019, 2018, and 2017 was
recorded in operating expenses, and non-compete intangible assets were fully amortized during 2019 upon the expiration of such agreements. Based on the
current amount of intangible assets subject to amortization, we estimate amortization expense to be less than $0.01 million annually over the next five years.
Fair value of financial instruments
We measure fair value as an exit price, which is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As a basis for considering such assumptions, accounting standards establish a three-tier fair value hierarchy, which prioritizes the
inputs used in the valuation methodologies in measuring fair value:
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•
•
•
Level 1 – observable inputs that reflect quoted prices in active markets for identical assets or liabilities.
Level 2 – significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or
liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.
Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Our principal financial instruments held consist of short-term investments, accounts receivable, accounts payable, and long-term debt. As of December 31,
2019, 2018 and 2017, the carrying values of our financial instruments, included in our Consolidated Balance Sheets, approximated their fair values. There
were no transfers into or out of Levels 1, 2 and 3 during the years ended December 31, 2019, 2018 and 2017.
Short-term investments
We determine the appropriate classification of investments at the time of purchase, and we re-evaluate that determination at each balance sheet date.
Investments are recorded as either short-term or long-term on the Consolidated Balance Sheet, based on contractual maturity date.
As of December 31, 2019, we held investments in U.S. Treasuries with maturity values of $9.2 million and maturities less than one year. We have classified
these investments in debt securities as held-to-maturity. Such investments are recorded at amortized cost with book value approximating fair value which is
based on Level 1 inputs for these investments.
The Company believes there is no current expected credit allowance necessary for our short-term investments as: 1) Treasury securities typically are the most
highly rated securities among rating agencies; 2) Treasury securities have a long history of no credit losses; and 3) Treasury securities are guaranteed by a
sovereign entity (the U.S. Government) that can print its own money and whose currency (the U.S. dollar) is the reserve currency.
Income taxes
Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences
resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability
based on estimated future taxable income. To the extent recovery is deemed not likely, a valuation allowance is recorded. Our evaluation regarding whether a
valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of
future profitability and the duration of statutory carryforward periods.
Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse.
The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change.
Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.
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A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition
threshold to be recognized.
We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information
not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from
the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the
period in which new information becomes available. We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that
accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax
provision in the period that such determination is made.
We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions,
such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.
Stock-based compensation
The Company’s stock-based compensation relates primarily to restricted stock unit ("RSU”) awards. Accounting guidance requires measurement and
recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on
a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant. The service-based
awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. Compensation expense is reduced
by actual forfeitures as they occur over the requisite service period of the awards.
Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets. The Company records compensation expense for awards
with a performance condition when it is probable that the condition will be achieved. If the Company determines it is not probable a performance condition
will be achieved, no compensation expense is recognized. If the Company changes its assessment in a subsequent period and concludes it is probable a
performance condition will be achieved), the Company will recognize compensation expense ratably between the period of the change in assessment through
the expected date of satisfying the performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance
condition will be achieved, the accumulated expense that has been previously recognized will be reversed. The compensation expense ultimately recognized, if
any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been
satisfied. We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued
under stock-based compensation awards.
We had one stock option plan that expired in March 2017. This plan permitted annual stock option grants to non-employee directors with an exercise price
equal to the fair market value of the shares at the date of grant. These options vested and became exercisable six months from the option grant date. Under
this plan, no stock options were awarded in 2015 or after, therefore, we did not recognize any stock-based compensation expense for these options during
those periods.
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Comprehensive income (loss)
Comprehensive income (loss) includes net income (loss) and certain other items that are recorded directly to stockholders’ equity. The Company’s only
source of other comprehensive income (loss) is foreign currency translation adjustments, and those adjustments are presented net of tax.
Shipping and handling costs
Costs to ship products from our stores to our customers are included in operating expenses on the Consolidated Statements of Comprehensive Income
(Loss). These costs totaled $2.1 million, $1.8 million, and $2.0 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Advertising
Advertising costs include the cost of print, digital, direct mail, community events, trade shows, and our ecommerce platform. With the exception of catalog
costs, advertising costs are expensed as incurred. Catalog costs are capitalized and expensed over an estimated period in which such catalogs will be issued,
which is typically twelve months. We issue catalogs every other year and did not issue a catalog for the 2019 year. Such capitalized costs are included in
other current assets and totaled $0.2 million at both December 31, 2018 and 2017. Total advertising expense was $3.4 million in 2019; $3.9 million in 2018;
and $5.0 million in 2017.
Cash flows presentation
For purposes of the Consolidated Statements of Cash Flows, we consider all highly liquid investments with initial maturities of three months or less from the
date of purchase to be cash equivalents. All credit card, debit card and electronic transfer transactions that process in less than seven days are classified as
cash and cash equivalents.
Recently Adopted Accounting Pronouncements
Goodwill Impairment
In January 2017, the Financial Accounting Standards Board ("FASB”) issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying
the Test for Goodwill Impairment ("ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to
compare the implied fair value of goodwill with its carrying amount as part of Step 2 of the goodwill impairment test referenced in ASC Topic 350, Intangibles
- Goodwill and Other. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with
its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
However, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual
reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We elected early adoption of ASU 2017-04 as of October 1,
2019. As a result, we removed Step 2 of the goodwill impairment test as part of our annual impairment assessment of goodwill as of December 31, 2019.
See section above: Goodwill and other intangibles.
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Leases
In February 2016, the FASB issued ASU 2016-02, Leases ("Topic 842”), which amends the accounting guidance on leases and establishes a ROU model
that requires a lessee to record an ROU asset and a lease liability on the Consolidated Balance Sheet for all leases with terms longer than 12 months. The
Company adopted Topic 842 and all subsequent amendments on January 1, 2019, using the optional transition method applied to leases existing at January 1,
2019, with no restatement of comparative periods. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior
period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting policies under Accounting
Standard Codification Topic 840, Leases ("ASC 840”).
The Company elected the package of practical expedients available under the transition guidance within Topic 842, which among other things, permits the
Company to carry forward its historical lease classification. The Company also elected other practical expedients under Topic 842 to: (1) apply hindsight
when determining its reasonably certain lease terms or assessing impairment of its ROU assets at transition, (2) not record leases with an initial term of 12
months or less on the Consolidated Balance Sheet, and (3) combine and account for both lease and non-lease components within a contract as a single
component for its sole asset class, real estate leases.
Upon adoption of Topic 842, the Company recognized operating ROU assets (referred herein as "lease assets”) and lease liabilities based on the present value
of its remaining minimum rental payments for existing operating leases as of the adoption date, utilizing the Company’s applicable incremental borrowing rate as
of the adoption date. The adoption of Topic 842 resulted in the Company recognizing $17.6 million and $18.1 million of operating lease assets and lease
liabilities, respectively, as of January 1, 2019. The difference between the lease assets and lease liabilities is primarily due to the recognition of a $0.5 million
pre-tax cumulative effect adjustment to retained earnings on January 1, 2019, resulting from the impairment of certain operating lease assets upon transition
which was based on fair value using Level 3 inputs. The Company has no finance leases, previously termed capital leases under ASC 840. The adoption of
Topic 842 had no material impact on the Company’s Consolidated Statements of Comprehensive Income (Loss) or Consolidated Statements of Cash Flows
and did not impact the Company’s compliance with its debt covenants under its debt agreements. For further information, see Note 6 of the Notes to the
Consolidated Financial Statements, Leases.
During the year ended December 31, 2019, the Company recognized an impairment charge of less than $0.01 million related to one of its operating lease
assets in the U.S.
Recent Accounting Standards Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the
accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and
simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance will be effective for entities for the fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We do not believe that the
adoption of this standard will have a material impact on our financial condition, results of operations or cash flows.
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Internal-Use Software
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update
provides additional guidance to ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which was issued in
April 2015. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include
an internal use software license). This ASU is effective for annual reporting periods beginning on or after December 15, 2019, and interim periods within those
annual periods with early adoption permitted in any interim period for which financial statements have not yet been issued. We do not believe that the adoption
of this standard will have a material effect on our financial condition, results of operations or cash flows.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments,”
which requires entities to measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses.
This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the
adoption of this standard will have a material impact on the Company’s financial condition, results of operations or cash flows.
4. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Our receivables primarily arise from the sale of merchandise to customers that have applied for and been granted credit. Accounts receivable are stated at
amounts due, net of an allowance for doubtful accounts. Accounts receivable are generally due within 30 days of invoicing. We maintain allowances for bad
debts based on factors such as the composition of accounts receivable, the age of the accounts, historical bad debt experience, and our evaluation of the
financial condition and past collection history of each customer. Write-offs have historically not been material, but receivables are evaluated for write off as
they are deemed uncollectible based on a periodic review of accounts.
5. BALANCE SHEET COMPONENTS
Inventory
On hand:
Finished goods held for sale
Raw materials and work in process
Inventory in transit
TOTAL
December 31, 2019 December 31, 2018 December 31, 2017
Restated
Restated
$
$
20,575,216 $
717,053
2,749,558
24,041,827 $
31,263,806 $
919,202
1,119,541
33,302,549 $
32,042,251
1,155,680
1,348,153
34,546,084
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Property and Equipment
Building
Land
Leasehold improvements
Equipment and machinery
Furniture and fixtures
Vehicles
Lesss: accumulated depreciation
TOTAL
Our property and equipment, net was located in the following countries:
United States
Canada
United Kingdom
Spain
Australia
December 31, 2019 December 31, 2018 December 31, 2017
Restated
Restated
$
$
9,257,066 $
1,451,133
1,828,448
6,516,068
8,080,427
337,403
27,470,545
(14,551,645)
12,918,900 $
9,257,066 $
1,451,133
1,980,547
6,594,487
8,335,926
521,186
28,140,345
(13,625,261)
14,515,084 $
9,257,066
1,451,133
1,729,281
6,447,776
7,907,704
539,339
27,332,299
(11,765,416)
15,566,883
December 31, 2019 December 31, 2018 December 31, 2017
Restated
Restated
$
$
12,540,891 $
373,083
2,654
2,272
-
12,918,900 $
13,849,019 $
434,201
211,368
4,308
16,188
14,515,084 $
15,038,459
240,560
217,254
14,639
55,971
15,566,883
Depreciation expense was $1.7 million, $1.8 million, and $1.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Short-term Liabilities
Accrued Expenses and Other Liabilities
Accrued bonuses, PTO and payroll
Deferred revenue
Unearned gift card revenue
Estimated returns
Sales and payroll taxes payable
Exit obligations
Accrued severance
Accrued vendor payables
TOTAL
6. LEASES
December 31, 2019 December 31, 2018 December 31, 2017
Restated
Restated
$
$
1,104,757 $
-
319,124
284,734
458,882
-
37,782
451,439
2,656,718 $
2,762,170 $
647,277
195,901
416,091
572,497
150,529
367,387
289,656
5,401,508 $
2,904,294
905,657
271,109
348,732
584,726
-
-
30,497
5,045,015
The Company leases certain real estate for its retail store locations under long-term lease agreements. For leases effective on or after January 1, 2019, the
Company determines if an arrangement is a lease at inception and recognizes operating lease assets and lease liabilities at commencement date based on the
present value of lease payments over the lease term. The present value of the Company’s lease payments may include: (1) rental payments adjusted for
inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably certain the Company will exercise such an option. The
exercise of lease renewal options is generally at the Company’s discretion. Payments based on a change in an index or market rates are not considered in the
determination of lease payments for purposes of measuring the related lease liability. The Company discounts lease payments using its incremental borrowing
rate based on information available as of the measurement date. Subsequent to the recognition of its operating lease assets and lease liabilities, the Company
recognizes lease expense related to its operating leases on a straight-line basis over the lease term.
None of the Company’s lease agreements contain contingent rental payments, material residual value guarantees or material restrictive covenants. The
depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. The Company has no finance leases, no sublease
agreements, and no lease agreements in which it is named as a lessor.
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The Company performs interim reviews of its long-lived assets for impairment when evidence exists that the carrying value of an asset group, including a lease
asset, may not be recoverable. Excluding the January 1, 2019 impairment charge to retained earnings upon the adoption of Topic 842, the Company
recognized an impairment expense of less than $0.01 million associated with operating lease assets during 2019.
Additional information regarding the Company’s operating leases is as follows:
Leases
Assets:
Non-current
Liabilities:
Current
Non-current
Total lease liabilities
Lease Cost
Operating lease cost
Variable lease cost (1)
Total lease cost
Balance Sheet Classification
Operating lease assets
Operating lease liabilities
Operating lease liabilities, noncurrent
Income Statement Classification
Operating expenses
Operating expenses
December 31, 2019
$
$
$
13,897,422
3,822,748
10,654,631
14,477,379
December 31, 2019
4,151,220
$
895,373
5,046,593
$
(1) Variable lease cost includes payment for certain real estate taxes, insurance, common area maintenance, and other charges related to lease agreements,
which are not included in the measurement of the operating lease liabilities.
Maturity of Lease Liabilities
2020
2021
2022
2023
2024
Thereafter
Total lease payments (2)
Less: Interest
Present value of lease liabilities
(2) Operating lease payments exclude $0.3 million of legally binding minimum lease payments for leases signed, but not yet commenced as of
December 31, 2019.
December 31, 2019
3,891,153
$
3,282,122
2,411,124
1,722,991
1,309,459
3,697,717
16,314,566
(1,837,187)
14,477,379
$
$
At December 31, 2019, the weighted average remaining lease term for our operating leases was 6.0 years, and the weighted average discount rate used to
measure our operating leases was 4.1%.
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Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases
Operating lease assets obtained in exchange for lease obligations
Prior Disclosures under ASC 840
December 31, 2019
$
4,078,695
18,076,962
The Company incurred rent expenses of $5.0 million and $4.6 million related to its operating leases during the years ended December 31, 2018 and 2017,
respectively. Future minimum lease payments under noncancelable operating leases as of December 31, 2018 were as follows:
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
7. NOTES PAYABLE AND LONG-TERM DEBT
December 31, 2018
4,417,806
3,750,324
3,042,779
2,102,463
1,289,874
2,139,218
16,742,464
$
$
As previously disclosed, on October 14, 2019, our management, in consultation with the Audit Committee, determined that Tandy’s previously issued
Consolidated Financial Statements as of and for (i) the years ended December 31, 2018 and 2017, (ii) the three and six-month periods ended June 30, 2018,
(iii) the three and nine-month periods ended September 30, 2018, and (iv) the three-month period ended March 31, 2019, should no longer be relied upon
due to misstatements related to our accounting processes for inventory transactions, and we would restate such financial statements as part of the Restatement
Process. See the Restatement Footnote for further information around the Restatement Process. As a result, the Company did not timely file with the SEC its
Quarterly Reports on Form 10-Q for the periods ended June 30, and September 30, 2019, March 31, June 30, and September 30, 2020, and March 31,
2021, or its Annual Report on Form 10-K for fiscal 2019 and fiscal 2020 (collectively, the "Delinquent Filings”). Under the terms of the Promissory Note
agreements the Company had in place with its primary bank, BOKF, NA d/b/a Bank of Texas ("BOKF”), we were required to provide BOKF quarterly
financial statements and compliance certificates. We were unable to provide these financial statements and compliance certificates for the Delinquent Filings
noted above. In response, on April 2, 2020, BOKF provided notice under the terms of the Promissory Note agreements that such Promissory Notes were
cancelled. As of the date of cancellation, Tandy had no borrowings outstanding under these credit facilities or with any other lending institution. As of the date
of this filing, Tandy has no lines of credit outstanding.
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On September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF which provided us with a working capital line of credit
facility of up to $6 million which was secured by our inventory. On August 20, 2018, this line of credit was amended to extend the maturity to September 18,
2020 and to reduce the interest rate by 0.35%, and on September 18, 2019, the maturity date was further extended through September 18, 2021. The
Business Loan Agreement contained covenants that required us to maintain a funded debt to EBITDA ratio of no greater than 1.5 to 1 and a Fixed Charge
Coverage Ratio greater than or equal to 1.2 to 1. Both ratios were calculated quarterly on a trailing four quarter basis. For the years ended December 31,
2019, 2018 and 2017, there were no amounts drawn on this line of credit.
Also, on September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF which provided us with a line of credit facility of
up to $10 million for the purpose of repurchasing shares of our common stock pursuant to our stock repurchase program, announced in August 2015 and
subsequently amended, which permitted us to repurchase up to 2.2 million shares of our common stock at prevailing market prices through August 2020.
Subsequently, this line of credit was amended to increase the availability from $10 million to $15 million for the repurchase of shares of our common stock
pursuant to our stock repurchase program through the end of the draw down period which was the earlier of August 9, 2020 or the date on which the entire
amount was drawn. In addition, this Promissory Note was amended on August 20, 2018 to reduce the interest rate by 0.35%, and on September 18, 2019,
the maturity date was further extended through September 18, 2024. We were required to make monthly interest-only payments through September 18,
2020. After this date, the principal balance would have rolled into a 4-year term note with principal and interest paid on a monthly basis with a maturity date of
September 18, 2024. This Promissory Note was secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas. There
were no amounts drawn on this line of credit during 2017. During the year ended December 31, 2018, we drew $1.6 million on this line of credit which was
used to purchase 243,387 shares of our common stock pursuant to our stock repurchase program. As of December 31, 2018, the outstanding balance on this
line of credit was $9.0 million. During the quarter ended March 31, 2019, we paid off this line of credit with no pre-payment penalties incurred.
Prior to August 20, 2018, amounts drawn under either Promissory Note accrued interest at the London Interbank Offered Rate for U.S. dollars (commonly
known as "LIBOR”) plus 1.85% (3.351% as of December 31, 2017). Beginning August 20, 2018, the notes accrued interest at LIBOR plus 1.5% (4.0% as
of December 31, 2018). Neither line of credit carried commitment fees.
The amounts outstanding under the above agreements consisted of the following:
Business loan agreement with BOKF – collateralized by real estate; payable as follows:
Line of credit note, as amended, in the maximum principal amount of $15,000,000 with features as more fully
described above – interest due monthly at LIBOR plus 1.5%; matures September 18, 2024
Line of credit note, as amended, in the maximum principal amount of $6,000,000 with revolving features as more
fully described above – interest due monthly at LIBOR plus 1.5%; matures September 18, 2021
Less current maturities
TOTAL
2019
December 31,
2018
2017
$
$
$
- $
8,968,018 $
7,371,730
-
- $
-
- $
-
8,968,018 $
519,516
8,448,502 $
-
7,371,730
614,311
6,757,419
During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small
and Medium-sized Enterprises in order to facilitate the continuation of employment and to attenuate the economic effects of the COVID-19 virus. This loan
was provided for by the Spanish government as part of a COVID-19 relief program. The term of the agreement is five years and the interest rate is fixed at
1.5%. Based on the terms of the loan agreement, we are required to make monthly interest-only payments for the first two years and monthly principal and
interest payments for the remainder of the term of the agreement.
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8. EMPLOYEE BENEFIT AND SAVINGS PLANS
We have a 401(k) plan to provide retirement benefits for our employees. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides
tax-deferred salary contributions for eligible employees and allows employees to contribute a percentage of their annual compensation to the plan on a pretax
basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. In 2019, 2018, and 2017, we
matched 100% of the pretax employee contributions on the first 3% of eligible earnings and 50% of the pretax employee contributions on the next 2% of
eligible earnings that are contributed by employees. For 2019, 2018 and 2017, we recorded employer match expense of $0.3 million, $0.4 million, and $0.3
million, respectively.
The plan allows employees who meet the age requirements and reach the plan contribution limits to make a catch-up contribution. The catch-up contributions
are not eligible for matching contributions. In addition, the plan provides for discretionary matching contributions as determined by the Board of Directors.
There were no discretionary matching contributions made in 2019, 2018, or 2017.
We offer no postretirement or postemployment benefits to our employees.
9. INCOME TAXES
The provision for income taxes consists of the following:
Income Tax Provision
Current provision:
Federal
State
Foreign
Interest expense related to UTB
Deferred provision (benefit):
Federal
State
Foreign
Total tax provision (benefit)
2019
Years Ended December 31,
2018
Restated
2017
Restated
$
$
(582,502)
7,341
(10,477)
25,640
(559,998)
(94,001)
(23,559)
(12,905)
(130,465)
(690,463)
$
$
$
879,822
223,156
356,199
80,868
1,540,045
194,735
36,629
42,045
273,409
1,813,454
$
2,999,960
343,954
544,495
45,942
3,934,351
(59,918)
(52,637)
38,036
(74,519)
3,859,832
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act”) was enacted in response to the COVID-19 pandemic. The
CARES Act, among other things, permits net operating loss ("NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning
before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to
generate a refund of previously paid income taxes. The Company is evaluating the impact of the CARES Act and expects that the NOL carryback provision
of the CARES Act will result in a cash tax benefit to the Company.
On December 22, 2017, the Tax Act was enacted which included a number of changes to U.S. tax laws that impact the Company, including beginning in
calendar 2018, a reduction of the U.S. corporate tax rate from 35% to 21%, the repeal of the domestic production activities deduction, new taxes on certain
foreign sourced income, and new limitations on certain business deductions. The Tax Act also provided for a one-time transition tax on certain foreign
earnings. Because the Tax Act was enacted in 2017, we recorded an estimated $1.3 million (Restated) of income tax expense in the fourth quarter of 2017 as
follows:
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Transition tax on deemed repatriation of certain foreign earnings (1)
Foreign withholding taxes (1)
Remeasuring deferred tax position (2)
(1) classified as part of the Federal current provision in 2017
(2) classified as part of the Federal deferred provision in 2017
$
$
603,976
290,128
402,135
1,296,239
The amounts in 2017 were recorded based on estimates and our current interpretation of the Tax Act and Staff Accounting Bulletin ("SAB”) No. 118, which
provides guidance related to ASC Topic 740, Income Tax. After completing our accounting for the income tax effects of the Tax Act and taking the filings of
our 2017 tax returns across all of our jurisdictions into consideration, we estimated additional income tax expense of approximately $0.1 million primarily
related to an increase in the transition tax. Also negatively impacting our effective tax rate in 2018, certain of our international locations incurred operating
losses for which no tax benefit was recorded, additional U.S. federal income was recognized related to cross-border intercompany transactions with our
Canadian subsidiary, and the Tax Act created new taxes on foreign sourced income while eliminating the domestic manufacturing deduction.
Income (loss) before income taxes was earned in the following tax jurisdictions:
Income (Loss) Before Income Taxes
United States
Spain
Canada
Australia
United Kingdom
TOTAL
2019
Years Ended December 31,
2018
2017
$
$
(1,960,121) $
20,595
(130,878)
(169,718)
(354,122)
(2,594,244) $
5,352,088 $
66,799
1,166,176
7,124
(380,368)
6,211,819 $
5,811,797
(40,505)
937,655
(115,809)
(254,862)
6,338,276
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The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:
Deferred income tax assets:
Inventory
Stock-based compensation
Accounts receivable
Sales returns
Deferred revenue
Accrued expenses
FX gain/loss in OCI
Goodwill and other intangible assets amortization
Net operating loss
Change in tax method
Accrued bonuses
Leases
Other
Total deferred income tax assets
Less: valuation allowance
Total deferred income tax assets, net of valuation allowance
Property and equipment depreciation
Goodwill and other intangible assets amortization
Accrued expenses
Total deferred income tax liabilities
Net deferred tax asset (liability)
2019
2018
2017
468,438 $
51,430
3,977
119,404
-
-
359,078
32,670
459,196
-
-
144,699
25
1,638,917 $
(381,872)
1,257,045 $
739,633 $
-
90,079
829,712 $
578,029 $
46,165
-
61,251
48,878
222,538
480,112
-
344,578
375,595
250,355
-
-
2,407,501 $
(260,313)
2,147,188 $
897,494 $
157,401
-
1,054,895 $
542,820
29,332
3,239
52,205
67,642
227,489
240,045
-
337,904
631,015
363,710
-
-
2,495,401
(208,350)
2,287,051
1,004,163
151,983
-
1,156,146
427,333 $
1,092,293 $
1,130,905
$
$
$
$
$
$
The valuation allowance for deferred income tax assets increased by $0.1 million in each of the years ended December 31, 2019, 2018, and 2017.
Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, the difference in tax rates for loss carryback
periods, foreign income/loss positions, expenses that are nondeductible for tax purposes, and differences in tax rates. Below is a reconciliation of our effective
tax rate from the statutory rate:
Statutory rate – Federal U.S. income tax
State and local taxes
Impact of Tax Act
Non-U.S. income tax at different rates
Permanent book/tax differences
Difference in tax rates in loss carryback periods
Change in valuation allowance
Rate differential on UTB reversals
Other, net
Effective rate
2019
21%
0%
0%
0%
(6)%
3%
(5)%
13%
1%
27%
Years Ended December 31,
2018
21%
4%
0%
3%
0%
0%
1%
0%
0%
29%
2017
34%
5%
20%
(3)%
1%
0%
1%
0%
3%
61%
We file a consolidated U.S. income tax return as well as state tax returns on a consolidated, combined, or stand-alone basis, depending on the jurisdiction.
We are no longer subject to U.S. federal income tax examinations by tax authorities for years prior to the tax year ended December 2016. Depending on the
jurisdiction, we are no longer subject to state examinations by tax authorities for years prior to the December 2015 and December 2016 tax years.
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A reconciliation of the beginning and ending amount of unrecognized tax benefits (UTB) is as follows:
Fiscal Year
UTB at beginning of the year
Gross decrease to tax positions in prior periods
Gross increase to tax positions in current period
Interest expense
Lapses in statute
UTB at end of year
2019
2018
2017
1,415,714 $
(1,145,227)
-
25,640
-
296,127 $
1,197,077 $
(102,236)
351,304
80,869
(111,300)
1,415,714 $
937,705
-
213,430
45,942
-
1,197,077
$
$
We file tax returns in the U.S. and a limited number of foreign jurisdictions. With few exceptions, we are no longer subject to federal, state and local, or non-
U.S. income tax examinations for years before 2015. Included in the balance of UTBs as of December 31, 2019, 2018 and 2017 are $0.1 million, $0.1
million, and $0.2 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of UTBs as of
December 31, 2019, 2018 and 2017 are $0.2 million, $1.3 million and $1.0 million, respectively, of tax benefits that, if recognized, would result in adjustments
primarily to deferred taxes.
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are periodically involved in various litigation that arises in the ordinary course of business and operations. There are no such matters pending that we
expect to have a material impact on our financial position or operating results. Legal costs associated with the resolution of claims, lawsuits, and other
contingencies are expensed as incurred.
In November 2019, a class action lawsuit seeking unspecified damages was brought by a stockholder in the Federal District Court in Los Angeles, California,
and subsequently transferred to the Federal District Court for the Northern District of Texas, against the Company and members of its current and former
management relating to our announcement of the circumstances leading to our restatement. We believe that suit was without merit, and the suit was withdrawn
by the plaintiff in April 2020; however, there can be no assurance that additional litigation against the Company and/or its management or Board of Directors
might not be threatened or brought in connection with matters related to our restatement.
Delisting of the Company’s Common Stock
As previously disclosed, the Company was unable to timely file the Delinquent Filings due to the Restatement Process. As a result, on February 18, 2020, the
Company received a notice from Nasdaq indicating that, unless the Company timely requested a hearing before a Nasdaq Hearings Panel (the "Panel”), the
Company’s common stock would be subject to suspension and delisting from Nasdaq due to non-compliance with Nasdaq Listing Rule 5250(c)(1). On May
1, 2020, the Panel granted the Company’s request to remain listed on Nasdaq, subject to the Company filing all current and overdue quarterly and annual
reports with the Securities and Exchange Commission on or before August 10, 2020. Because the Restatement Process was not complete by such date,
Nasdaq suspended trading in our stock on Nasdaq as of August 13, 2020. Our stock has since traded on the OTC Link (previously "Pink Sheets”) operated
by OTC Markets Group under the symbol "TLFA.” Nasdaq denied our appeal of this decision, and our stock was formally delisted on February 9, 2021.
We intend to reapply for Nasdaq listing once the Company has made the required Exchange Act filings.
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SEC Investigation
The Company has self-reported to the SEC information concerning the internal investigation of accounting matters described in the Explanatory Note included
in Part I, Item 1 of this Comprehensive Form 10-K and in Note 2, "Restatement of Previously Issued Consolidated Financial Statements”. Subsequently, the
Division of Enforcement of the SEC informed the Company that it had initiated an investigation into the Company’s historical accounting practices. The
Company is fully cooperating with the investigation and is in discussions with the SEC regarding a possible negotiated resolution. In October 2020, an
agreement (which was updated on May 12, 2021) in principle was reached on the material terms of such a resolution, which includes an agreement by the
Company to pay a $0.2 million penalty. However, this provisional resolution is still subject to finalizing the necessary documents and obtaining final approval
from the SEC, which cannot be assured. Accordingly, as of December 31, 2020, a $0.2 million liability has been recorded in accrued expenses and other
liabilities on our Consolidated Balance Sheet.
11. SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK
Major Customers
Our revenues are derived from a diverse group of customers, from hobbyist crafters to small and large businesses across a wide variety of industries. No
single customer accounted for more than 0.5% of our consolidated revenues in 2019, 2018, or 2017, and sales to our five largest customers represented
1.7%, 1.0%, and 1.2%, respectively, of consolidated revenues in those years. While we do not believe the loss of one of these customers would have a
significant negative impact on our operations, we do believe the loss of several of these customers simultaneously or a substantial reduction in sales generated
by them could temporarily affect our operating results.
Major Vendors
We purchase a significant portion of our inventory through one supplier. Due to the number of alternative sources of supply, we do not believe that the loss of
this supplier would have an adverse impact on our operations.
Credit Risk
Due to the large number of customers comprising our customer base, concentrations of credit risk with respect to customer receivables are limited, although as
of December 31, 2019, 2018 and 2017, two customers’ balances represented 35.3%, 33.3% and 21.4% of net accounts receivable balance, respectively.
We do not generally require collateral for accounts receivable, but we do perform periodic credit evaluations of our customers and believe the allowance for
doubtful accounts is adequate. It is our opinion that if any one or a group of customer receivable balances should be deemed uncollectable, it would not have a
material adverse effect on our results of operations or financial condition.
We maintain a majority of our cash in bank deposit accounts that, at times, may exceed federally insured limits. We have not experienced any losses in such
accounts. We believe we are not exposed to any significant credit risk on our cash and cash equivalents.
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12. STOCKHOLDERS’ EQUITY
Equity Compensation Plans
Restricted Stock Plan
The Tandy Leather Factory, Inc. 2013 Restricted Stock Plan (the "2013 Plan”) was adopted by our Board of Directors in January 2013 and approved by our
stockholders in June 2013. The 2013 Plan initially reserved up to 300,000 shares of our common stock for restricted stock and restricted stock unit ("RSU”)
awards, on or prior to June 2018, to our executive officers, non-employee directors and other key employees (of which, there were 149,605 shares available
for future awards as of December 31, 2019). Awards granted under the 2013 Plan may be service-based awards or performance-based awards, and may be
subject to a graded vesting schedule with a minimum vesting period of four years, unless otherwise determined by the Compensation Committee of the Board
of Directors that administers the plan. In March 2019, as part of their annual director compensation, certain of our non-employee directors were granted a
total of 28,191 service-based RSUs under the 2013 Plan which will vest ratably over the next three years provided that the participant is still on the board on
the vesting date. In December 2019 certain of our key employees were granted a total of 17,988 service-based RSUs under the 2013 Plan which will vest
ratably over the next three years provided that the participants are employed on the vesting date.
In June 2020, our stockholders approved an increase to the plan reserve to 800,000 shares of our common stock and extended the 2013 Plan through June
2023.
In addition to grants under the Company’s 2013 Restricted Stock Plan, in October 2018 we granted a total of 644,000 RSUs to the Company’s Chief
Executive Officer ("CEO”), of which (i) 460,000 are service-based RSUs that vest ratably over a period of five years from the grant date based on our CEO’s
continued employment in her role, (ii) 92,000 are performance-based RSUs that will vest if the Company’s operating income exceeds $12 million dollars two
fiscal years in a row, and (iii) 92,000 are performance-based RSUs that will vest if the Company’s operating income exceeds $14 million dollars in one fiscal
year.
A summary of the activity for non-vested restricted stock and RSU awards is as follows:
Shares
Balance, January 1, 2017
Granted
Vested
Balance, December 31, 2017
Balance, January 1, 2018
Granted
Vested
Balance, December 31, 2018
Balance, January 1, 2019
Granted
Forfeited
Vested
Balance, December 31, 2019
Grant Fair Value
8.03
8.05
8.14
7.93
61,098 $
9,005
(33,300)
36,803 $
36,803 $
654,000
(33,086)
657,717 $
657,717 $
46,179
(5,319)
(93,408)
605,169 $
7.93
5.31
7.94
7.39
7.39
5.67
5.64
7.39
7.27
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The Company’s stock-based compensation relates primarily to RSU awards. For these service-based awards, our stock-based compensation expense,
included in operating expenses, was $0.8 million, $0.3 million, and $0.2 million in 2019, 2018 and 2017, respectively.
As of December 31, 2019, the Company has concluded it is not probable that the performance conditions related to performance-based RSUs will be
achieved, and as a result no compensation expense related to performance-based RSUs has been recorded.
As of December 31, 2019, there was unrecognized compensation cost related to non-vested, service-based awards of $2.8 million which will be recognized
over 3.6 weighted average years in each of the following years:
Unrecognized Expense
2020
2021
2022
2023
$
$
777,537
758,325
721,284
509,910
2,767,056
We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs. In 2019, 2018 and 2017, we issued 93,408,
33,086 and 33,300 shares, respectively, resulting from the vesting of restricted stock. We do not use cash to settle equity instruments issued under stock-
based compensation awards.
Stock Options
We had a stock option plan that terminated in March 2017, which permitted stock option grants to non-employee directors with an exercise price equal to the
fair market value of the shares at the date of grant. Options outstanding and exercisable were granted at a stock option price which was not less than the fair
market value of our common stock on the date the option was granted, and no option has a term in excess of ten years.
A summary of stock option transactions for the year ended December 31, 2017 is as follows (no amounts shown for 2018, as the plan was terminated in
March 2017):
Outstanding at January 1
Granted
Forfeited or cancelled
Exercised
Outstanding at December 31
Exercisable at end of year
Weighted-average fair value of
options granted during year
Option
Shares
Weighted Average
Exercise Price
56,400 $
-
(12,000)
(44,400)
- $
- $
n/a
5.14
-
5.14
5.14
-
-
Because there were no grants of stock options or vested options outstanding in 2019, 2018 or 2017, there were no amounts of compensation cost recorded.
The intrinsic value of stock options exercised in 2017 was $0.2 million. Cash received from the exercise of stock options for 2017 was $0.2 million.
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Share Repurchase Program
In August 2015, our Board of Directors authorized a share repurchase program, pursuant to which we were authorized to repurchase up to 1.2 million shares
of our common stock at prevailing market rates through August 2016. Subsequently, the program was amended to increase the number of shares available for
repurchase to 2.2 million and to extend the program through August 2019. In June 2019, the program was again amended to increase the number of shares
available to one million as of such date and to extend the program through August 9, 2020.
For the years ended December 31, we repurchased the following shares:
Year ended
December 31,
2019
2018
Total shares
repurchased
Average price
per share
131,782 $
243,387 $
5.58
6.79
As of December 31, 2019, there were 996,163 shares that remained available for repurchase under the plan.
On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5.0 million of its common stock between August 9, 2020 and July
31, 2022, subject to the completion of our financial restatement and the filing of all Delinquent Filings with the SEC. The Company’s previous share
repurchase program expired in August 2020.
On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 500,000 shares of our common stock,
par value $0.0024 in a private transaction. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase of these shares
took place on February 1, 2021. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock.
13. SEGMENT INFORMATION
As of January 1, 2019, we operate as a single segment and report on a consolidated basis. Prior to January 1, 2019, we operated and reported in two
segments - North America and International. In early 2019, we announced several strategic initiatives to drive future sales growth and long-term profitability,
which resulted in the Company closing two of its three stores outside of North America, leaving Spain as our only store outside of North America. Due to
these strategic decisions, our CODM changed the way operating performance assessments and resource allocation decisions are made by incorporating a
consolidated view. As a result, we no longer report International as a reportable segment. All prior year data discussed throughout this Comprehensive Form
10-K has been retrospectively revised to conform to the new single-reportable segment structure. There is no change to our consolidated financial position or
results based on the change in segment reporting.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company is providing restated quarterly and year-to-date unaudited consolidated financial information for interim periods occurring within the years ended
December 31, 2019 and 2018 in order to comply with SEC requirements. See the Restatement Footnote for further background concerning the events
preceding the restatement of financial information in this Comprehensive Form 10-K.
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2019
Net sales
Gross profit
Net income (loss)
Net income (loss) per common share:
Basic
Diluted (1)
Weighted average number of common shares outstanding:
Basic
Diluted
$
$
$
First
Quarter
Restated
Second
Quarter
Third
Quarter
Fourth
Quarter
20,941,322 $
12,244,670
1,519,811
17,196,815 $
9,370,446
(875,667)
16,310,887 $
8,848,648
(1,718,452)
20,469,136
11,495,688
(829,473)
0.17 $
0.17 $
(0.10) $
(0.10) $
(0.19) $
(0.19) $
(0.09)
(0.09)
9,009,752
9,011,107
8,933,648
8,933,648
8,932,246
8,932,246
9,020,187
9,020,187
(1) For the three months ended June 30, 2019, September 31, 2019 and December 31, 2019, there were 2,290, 2,704 and 8,387 shares, respectively, excluded from the diluted EPS
calculation because the impact of their assumed exercise would be anti-dilutive due to a net loss in those periods.
2018
Net sales
Gross profit
Net income
Net income per common share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
15. SUBSEQUENT EVENTS
COVID-19
$
$
$
First
Quarter
Restated
Second
Quarter
Restated
Third
Quarter
Restated
Fourth
Quarter
Restated
20,500,578 $
12,689,060
1,516,656
19,187,222 $
12,233,492
1,157,743
18,878,263 $
11,895,883
608,701
24,637,506
14,122,510
1,115,265
0.16 $
0.16 $
0.13 $
0.13 $
0.07 $
0.07 $
0.12
0.12
9,264,446
9,264,604
9,180,076
9,182,527
9,154,215
9,160,022
9,143,746
9,144,020
In late 2019, COVID-19 was detected in Wuhan, China and has since spread to other parts of the world, including the U.S. On March 11, 2020, the World
Health Organization declared COVID-19 a global pandemic. Federal, state, and local governments have since implemented various restrictions, including
travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place
restrictions and limitations on business operations. As previously announced and for the health and safety of employees and customers, on March 17, 2020,
the Company made the decision to begin temporary store closures. The onset of the COVID-19 pandemic in March 2020 shifted our strategic focus to
company survival and cash preservation. We began closing stores on March 18, 2020 and by April 2, 2020, we temporarily closed all stores to the public.
While we pivoted to serve customers online, the Company experienced significant decreases in demand for its products in Q2 and Q3 of 2020, negatively
impacting net sales.
In response, we took immediate action to mitigate the impact of temporary store closures on our cash flows by: (i) furloughing 406 Tandy employees,
comprising two-thirds of the Tandy work force, (ii) temporarily cutting corporate salaries, with deeper cuts for the Executive Leadership Team, (iii) negotiating
abatements, deferrals and other favorable lease terms with landlords, and (iv) negotiating longer payment terms with our key product vendors. By June 2020,
we also permanently closed eight stores with expiring leases and/or negative cash flows, creating additional savings in operating expenses.
Due to our size, we were not eligible for the Paycheck Protection Program administered through the Small Business Administration. Also, due to our not being
current on financial filings with the SEC, we were not able to obtain loans under the Coronavirus Aid, Relief, and Economic Security Act, also known as the
CARES Act. In Canada, we participated in the Canada Emergency Commercial Rent Assistance ("CECRA”) program for rent relief. This program provided
for a 75% reduction in the store rent for included stores for the months of April, May and June 2020. We received total rent abatements under the program of
$0.05 million.
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Eight stores were permanently closed during the second quarter of 2020 as leases expired or early terminations were negotiated, including at locations where
we believe we can retain a majority of customers through geographically proximate stores and/or our enhanced website platform. After these permanent
closures, Tandy operates 106 stores, including ten in Canada and one in Spain.
On May 22, 2020, our Fort Worth flagship store reopened to the public, the beginning of a phased approach to reopening our stores with limited hours, new
protocols for sanitizing, social distancing, wearing masks and taking daily temperatures of employees. During the third quarter of 2020, all 106 of Tandy’s
stores had reopened to the public and the store re-openings were well received by our employees and customers. During the fourth quarter of 2020 and into
the present, we continue to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection
rates, and are forced to close certain stores or move certain stores to "curbside only” operations.
While we previously fulfilled our web orders out of our retail stores, we have built a centralized web fulfillment capability in our Fort Worth distribution center
and will be fulfilling web orders primarily through Fort Worth going forward. Both our e-commerce business and stores, during the limited period since
reopening, have been performing above last year sales levels, but the future remains uncertain, and more store closures and/or the ongoing unemployment crisis
could cause a material negative impact on future sales.
As part of the Company’s accounting policy for long-lived asset impairments, we believe the COVID-19 impact on the Company’s results of operations, cash
flows and financial position and the ongoing uncertainty the virus has created around future operating results represented a triggering event during the first
quarter of 2020 and continued throughout 2020. For fiscal year 2020, the Company expects to record impairment expense of approximately $1.1 million,
primarily related to property and equipment and operating lease assets for certain stores that are projected to underperform to a level where the cash flows
they generate will not be sufficient to cover their respective asset carry values.
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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the filing of this Comprehensive Form 10-K for the period ended December 31, 2019, our management, with the participation of our Chief
Executive Officer ("CEO”) and Chief Financial Officer ("CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act”). As a result of this
evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective due to the material weaknesses described below,
which resulted in reporting errors requiring a restatement of our financial statements for the years ended December 31, 2017 and 2018 and for the first quarter
ended March 31, 2019.
Management’s Annual Report on Internal Control over Financial Reporting
Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over our financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management’s establishing and maintaining adequate internal control over financial reporting is
based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the "COSO Framework”). A system of internal control over financial reporting should be designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error, the circumvention or
overriding of controls, or fraud, and therefore can provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent
limitations, our internal control over financial reporting may not prevent or detect all misstatements.
A material weakness is defined as a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on this definition,
our management, with the participation of our CEO and CFO, evaluated the effectiveness and design of our internal control over financial reporting against the
COSO Framework and concluded that our internal control over financial reporting was not effective as of December 31, 2019 due to material weaknesses
arising from flaws in our control environment, risk oversight measures, control activities, information processing and communication and our monitoring
systems, each of which is described in more detail below.
Control environment. We concluded that we did not maintain effective controls in the following areas: (i) managerial functions, procedures and oversight;
(ii) organizational structure, delegation of authority and responsibilities; (iii) segregation of duties; (iv) adequacy of trained accounting and financial reporting
personnel to ensure that internal control responsibilities were performed effectively and material accounting errors were detected; and (v) maintenance and
enforcement of internal control responsibilities, including holding individuals accountable for their internal control responsibilities.
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Risk oversight environment. We did not maintain adequate risk oversight measures related to the (i) identification and assessment of risks that could
impact achieving our objectives and (ii) identification and analysis of the potential changes that could affect our internal controls environment.
Control activities. We concluded that we did not have effective control activities in the following areas: (i) selecting and developing control policies,
procedures and activities to mitigate risks, including with respect to the methodologies used to calculate and report financial information and results; and (ii)
selecting and implementing information technology and related systems supportive to our internal control over financial reporting.
Information processing and communication. We identified deficiencies associated with information processing and communication within our internal
control framework. Specifically, we did not effectively communicate objectives and internal control responsibilities throughout the organization which
contributed to inadequate documentation of processes and methodologies used to calculate and reconcile regular consolidation adjustments hindering clear
communication with management, the Board of Directors and our independent auditors.
In addition, the documentation of inventory purchasing relied on paper-based vendor invoices and multi-step manual data-entry processes, some of which
were subject to management override, which resulted in errors at multiple steps of the process, and deficiencies in communicating accurate information to
management, the Board of Directors and our independent auditors.
Monitoring activities. We concluded that we did not design and implement effective monitoring activities related to (i) selecting, developing, and
performing separate evaluations of our internal control over financial reporting; and (ii) evaluating and communicating internal control deficiencies in a timely
manner to parties responsible for taking corrective actions.
The issues described above resulted in the following errors in our financial statements previously filed with the SEC:
Inventory was not stated on a FIFO basis nor was it stated at the lower of FIFO cost or net realizable value;
Freight-in, warehousing and handling expenditures, factory labor and overhead and freight-out costs were not correctly capitalized;
•
•
• Warehousing and handling expenditures were incorrectly classified as operating expenses;
• Allowance for sales returns was incorrectly calculated and accounted for;
• Net gift card liability was not correctly accounted for in 2017;
•
•
•
Lease asset and liability under ASC Topic 842 was incorrectly calculated;
PTO related accrued liabilities were incorrectly calculated;
Provision for income taxes, including adjustments related to the Tax Cuts and Jobs Act (the "Tax Act”), uncertain tax position (UTP) liability and related interest expense,
and correction of taxable income on the return of our Canada and Spain foreign subsidiaries;
Foreign currency gains and losses associated with the Company’s Canadian subsidiary were incorrectly classified as a component of accumulated other comprehensive
loss and the cumulative translation adjustments included in accumulated other comprehensive loss were not tax effected; and
Shares repurchased and subsequently cancelled were incorrectly accounted for as treasury stock.
•
•
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Remediation Efforts to Address Material Weaknesses
Our management, including our CEO and CFO, has worked with expert accounting consultants and our Audit Committee to design and implement both a
short-term and a long-term remediation plan to correct the material weaknesses in our disclosure controls and procedures and our internal control over
financial reporting. The following activities highlight our commitment to remediating our identified material weaknesses:
Since October 2019 and through the filing date of this Comprehensive Form 10-K, we have taken the following measures, among others:
i. Hired a new, highly-qualified CFO in January 2021 with extensive public-company experience;
ii. Replaced critical roles within our accounting team with contract accounting resources and ultimately (ongoing) full-time employees with expertise in GAAP accounting,
SEC reporting and disclosure, internal audit and internal controls;
iii. Replaced our legacy accounting systems with an integrated enterprise resource planning ("ERP”) solution which includes general ledger, warehouse management and
factory production modules designed to calculate inventory on a FIFO basis;
iv. Made improvements to our accounting close process, including a formalized accounting close checklist establishing accountability for oversight and review;
v. Documented process narratives in the following areas: (i) financial reporting, (ii) inventory, (iii) purchasing and accounts payable, (iv) revenue, (v) fixed assets and lease
accounting, (vi) general accounting, treasury and financial planning & analysis, (vii) tax, (viii) information technology (IT) governance, and (ix) HR and payroll;
vi. Created a risk controls matrix which includes, among other things, a comprehensive list of key and mitigating controls, a description of the risk the control is designed to
mitigate, the individual responsible for each control, the frequency in which the control is performed, and a mapping of each control to the five COSO Framework
components (control environment, risk assessment, control activities, information and communication, or monitoring activities).
Our continuing plan and additional steps for remediation include:
i. Ongoing recruitment and hiring of permanent, qualified public-company accounting personnel;
ii. Point-of-sale systems implementation that will be fully integrated with our new ERP system;
iii. Redesigning our accounting procedures and activities to align with our new ERP system that will include built-in controls to improve upon the reliability of financial
reporting and the preparation of financial statements in accordance with GAAP;
iv. Reporting the progress and results of our remediation plan to the Audit Committee on a recurring basis, including the identification, status, and resolution of internal
control deficiencies; and
v. Creating a comprehensive approach to regularly evaluate the operating effectiveness of our disclosure controls and procedures and our internal control over financial
reporting using the COSO Framework as a guide.
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Control Environment
Our management, including our CEO and CFO, our Audit Committee and our Board of Directors have taken certain steps to set the proper tone-at-the-top in
support of the Company’s values and climate to develop and maintain an effective internal control environment. These actions include:
Recurring meetings with leadership, finance and accounting and other key functional areas to train staff on processes for oversight and emphasize each individual’s
accountability for internal control compliance, and to create a pattern of regular discussion of such controls.
Periodic communications from the CEO, CFO and other key senior leaders on the Company’s mission, core values, Code of Business Conduct and Ethics, whistleblower
policies, and each employee’s individual responsibility for internal control compliance.
Reorganization of the finance and accounting team to ensure appropriate segregation of duties, oversight and review of work, and recruiting and hiring qualified,
competent employees with relevant experience for the roles.
Regular performance evaluations to include position-specific criteria for functional competence, including performance of internal control responsibilities.
Risk Oversight Measures
We continue to identify risks and enhance risk oversight measures. In late 2019, we developed an annual strategic planning process designed to identify
specific operating objectives for the organization and to conduct an assessment across the organization of the risks to meeting those objectives, including the
risk of fraud. Furthermore, on a quarterly basis, management will review our periodic filings to ensure that identified risks have been appropriately disclosed.
In the areas of reporting and compliance objectives, we are also developing a process to conduct monthly business reviews by functional area that would
include risk assessments of reporting accuracy based on complexity and transaction levels as well as compliance with GAAP and other regulatory
requirements, in order to evaluate whether our existing control activities appropriately mitigate such risks or if additional controls need to be employed.
Control Activities
We continue to redesign and implement our internal control activities. Specifically, we conducted detailed working sessions to document our current and prior
finance and accounting policies, procedures and step-by-step activities as a prerequisite to selecting a new systems vendor. These sessions identified specific
areas that required short-term improvement and long-term redesign of processes, structure, authorities and controls, and those actions include:
New systems designed to calculate inventory at FIFO and create efficiency and accuracy through integration: we implemented the warehouse management, factory
production system and general ledger systems modules as part of our new ERP system implementation which went live on September 1, 2020. We are still in the process
of implementing our new point-of-sale system, which will be fully integrated with our ERP system and with a phased implementation across our fleet of stores throughout
2021.
Creation and implementation of newly-designed processes, structures, delegation of authority and controls, in accordance with the COSO Framework, including:
The creation of a risk controls matrix;
o
o Driving a greater sense of accountability by requiring sub-certifications below the CEO and CFO level for certain key accounting, finance and operations
personnel;
o Quarterly updates for the CFO regarding upcoming accounting pronouncement and proposed changes to GAAP accounting standards, tax regulations, and
other requirements that may impact the Company’s financial reporting;
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o Quarterly reviews of the most significant accounting estimates and judgements;
o Validation of results through detailed variance analyses and reconciliation of account balances;
o Monthly business review of actual financial performance compared to forecasts with participation from leadership across the organization; and
o
Establishing a disclosure committee comprised of key management throughout the different areas of the organization to evaluate the appropriateness of
disclosures in the Company’s periodic filings on Forms 10-K and 10-Q and to support the CEO and CFO with the certification process.
Information Processing and Communication
The implementation of our new ERP system is expected to eliminate the need for many of the topside adjustment calculations that had to be performed
because our legacy systems were not integrated and many of our accounting processes were manual. This new ERP system allows us to automate certain
accounting processes, reducing the risk of management override, and over time will eliminate the need for topside adjustments outside of the system. In
addition, management is developing detailed policies, procedures and internal controls related to our financial reporting and working with our ERP vendor to
develop regular reporting from our new systems that can validate the quality of our data and provide accurate information to support internal and external
reporting and audit requirements.
Monitoring Activities
In addition to the items noted above, as we continue to evaluate, remediate, and improve our internal control over financial reporting, our management expects
to continue to implement additional measures to address control deficiencies and further refine and improve the remediation efforts described above.
Specifically, we are developing a checklist of activities based on the criteria established in the COSO Framework against which we will assess the design of
entity-level and activity-level controls, and the operational effectiveness of such controls. Deficiencies identified in this process will be addressed by
management, including our CEO and CFO. This assessment, any deficiencies and any remedial actions will be shared and discussed with our Audit
Committee and our independent auditors on a quarterly basis.
Changes in Internal Control Over Financial Reporting
As discussed in the remediation section above, we implemented the warehouse management, factory production system and general ledger systems modules as
part of our new ERP system implementation which had a go-live date of September 1, 2020. We are still in the process of implementing our new point-of-sale
system, with a phased implementation throughout 2021. Also, during January 2021, we hired a new CFO and a Corporate Controller, both highly-qualified
individuals with public company experience. Although we had not fully remediated the material weaknesses in our internal control over financial reporting as of
December 31, 2019, as the phased implementation of this system continues, we are experiencing certain changes to our processes and procedures which, in
turn, result in changes to our internal control over financial reporting. While we expect our new ERP system to strengthen our internal financial controls by
automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and
monitor our internal controls as each of the affected areas evolves.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE*
GENERAL INFORMATION ABOUT EXECUTIVE OFFICERS
Name and Age
Janet Carr, 60
Michael Galvan, 52
Position
Chief Executive Officer
Chief Financial Officer
Served as Executive
Officer Since
2018
2021
Janet Carr, 60, has served as our Chief Executive Officer and as a member of our Board of Directors since October 2018. Prior to her current role, Ms.
Carr served as the Senior Vice-President of Global Business Development for Caleres Inc. (formerly Brown Shoe Company Inc.) from 2016 to 2017. While
there, she was responsible for international wholesale and retail for all of their brands. Prior to Caleres, Ms. Carr was the President of the Handbag Division of
Nine West Group Inc. from 2013 to 2014, where she was responsible for all aspects of design, development and sales in both wholesale and retail. Ms. Carr
has deep experience in strategy and consumer insights in various roles at a number of prominent retailers, including Tapestry, Inc. (formerly Coach, Inc.), Gap
Inc. and Safeway.
Michael Galvan, 52, has served as our Chief Financial Officer since January 2021. He first joined the Company in May 2020, initially serving as Interim
Chief Financial Officer. Mr. Galvan brings over 25 years of finance and accounting experience to the Company, including executive leadership roles serving as
Interim Chief Financial Officer, Chief Accounting Officer and Treasurer for a variety of publicly traded companies, including Main Street Capital Corporation
and Mattress Firm. Prior to joining the Company, Mr. Galvan served in various management roles including Senior Vice President, Chief Accounting Officer
and Treasurer of NexTier Oilfield Solutions, Inc. (formerly C&J Energy Services, Inc.), from June 2016 until April 2020, including serving as Interim Chief
Financial Officer from March through September 2018.
ITEM 11.
EXECUTIVE COMPENSATION*
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS*
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE*
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES*
* The information required by Items 10, 11, 12, 13, and 14 is set forth in the definitive proxy statement relating to the 2019 Annual Meeting of Stockholders of
Tandy Leather Factory, Inc., which was filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended. This definitive proxy statement relates to a meeting of stockholders involving the election of directors, and the portions therefrom required
to be set forth in this Form 10-K by Items 10, 11, 12, 13, and 14 are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
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PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following are filed as part of this Comprehensive Form 10-K:
1. Financial Statements
The following Consolidated Financial Statements are included in Item 8, Financial Statements and Supplementary Data:
•
•
•
•
•
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018, and 2017
2. Financial Statement Schedules
All financial statement schedules are omitted because the required information is not present or not present in sufficient amounts to require submission of the
schedule or because the information is reflected in the Consolidated Financial Statements or notes thereto.
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3. Exhibits
Exhibit
Number
3.1
3.2
3.3
4.1
10.1
10.2
10.3
10.4
10.5
10.6
TANDY LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Description
Certificate of Incorporation of The Leather Factory, Inc., and Certificate of Amendment to Certificate of Incorporation of The Leather Factory, Inc. filed as Exhibit
3.1 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2005 and incorporated by
reference herein.
Bylaws of The Leather Factory, Inc. (n/k/a Tandy Leather Factory, Inc.), filed as Exhibit 3.5 to the Current Report on Form 8-K (Commission File No. 001-12368)
filed by Tandy Leather Factory, Inc (f/k/a The Leather Factory, Inc.) with the Securities and Exchange Commission on July 14, 2004 and incorporated by reference
herein.
Certificate of Designations of Series A Junior Participating Preferred Stock of Tandy Leather Factory, Inc. filed as Exhibit 3.1 to Tandy Leather Factory, Inc.’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013 and incorporated by reference herein.
Description of Securities, filed as Exhibit 4.1 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission
on June 22, 2021 and incorporated by reference herein.
$6,000,000 Promissory Note, dated August 20, 2018, by and between Tandy Leather Factory, Inc. and BOKF, NA dba Bank of Texas, filed as Exhibit 10.1 to Tandy
Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 21, 2018 and incorporated by reference herein.
$15,000,000 Promissory Note, dated August 20, 2018, by and between Tandy Leather Factory, Inc. and BOKF, NA dba Bank of Texas, filed as Exhibit 10.2 to
Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 21, 2018 and incorporated by reference
herein.
Deed of Trust, dated as of September 18, 2015, by and among Tandy Leather Factory, Inc., Jeffrey L Seasor and BOKF, NA dba Bank of Texas, filed as Exhibit
10.1 to Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2015 and incorporated by
reference herein.
Form of Change of Control Agreement between the Company and each of Jon Thompson, Shannon Greene and Mark Angus, each effective as of December 3,
2012, filed as Exhibit 10.1 to Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 2012 and
incorporated by reference herein.
Tandy Leather Factory, Inc. 2013 Restricted Stock Plan, filed as Exhibit 10.1 to Tandy Leather Factory’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on November 14, 2013 and incorporated by reference herein.
Amendment #1 to Tandy Leather Factory, Inc. 2013 Restricted Stock Plan, filed as Exhibit 10.5 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission on June 22, 2021 and incorporated by reference herein.
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10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
14.1
*21.1
*23.1
*31.1
Form of Non-Employee Director Restricted Stock Agreement under Tandy Leather Factory, Inc.’s 2013 Restricted Stock Plan, filed as Exhibit 10.1 to Tandy
Leather Factory, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2014 and incorporated by reference
herein.
Form of Employee Restricted Stock Award Agreement under Tandy Leather Factory, Inc.’s 2013 Restricted Stock Plan, filed as Exhibit 10.7 to Tandy Leather
Factory, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 22, 2021 and incorporated by reference herein.
Form of Employment Agreement dated October 2, 2018 between the Company and Janet Carr, filed as Exhibit 10.1 to Tandy Leather Factory Inc.’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on October 5, 2018 and incorporated by reference herein.
Form of Stand-Alone Restricted Stock Unit Agreement dated October 2, 2018 between the Company and Janet Carr, filed as Exhibit 10.2 to Tandy Leather Factory
Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2018 and incorporated by reference herein.
Form of Stand-Alone Restricted Stock Unit Agreement dated October 2, 2018 between the Company and Janet Carr, filed as Exhibit 10.3 to Tandy Leather Factory
Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2018 and incorporated by reference herein.
Form of Separation Agreement and Release dated October 2, 2018 between the Company and Shannon Greene, filed as Exhibit 10.11 to Tandy Leather Factory,
Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2019 and incorporated by reference herein.
Form of Separation Agreement and Release dated October 2, 2018 between the Company and Mark Angus, filed as Exhibit 10.12 to Tandy Leather Factory, Inc.’s
Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2019 and incorporated by reference herein.
Form of Separation and Release Agreement dated October 15, 2019 between the Company and Tina Castillo, filed as Exhibit 10.13 to Tandy Leather Factory, Inc.’s
Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 22, 2021 and incorporated by reference herein.
Form of Stock Purchase Agreement dated January 28, 2021 between the Company and Central Square Management, filed as Exhibit 10.14 to Tandy Leather
Factory, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 22, 2021 and incorporated by reference herein.
Code of Business Conduct and Ethics of Tandy Leather Factory, Inc., adopted by the Board of Directors in May, filed as Exhibit 14.1 to Tandy Leather Factory,
Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 22, 2021 and incorporated by reference herein.
Subsidiaries of Tandy Leather Factory, Inc.
Consent of Independent Registered Public Accounting Firm.
Certification by the Chief Executive Officer and President pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
99
Table of Contents
*31.2
*32.1
Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*101.INS
XBRL Instance Document.
*101.SCH
XBRL Taxonomy Extension Schema Document.
*101.CAL
XBRL Taxonomy Extension Calculation Document.
*101.DEF
XBRL Taxonomy Extension Definition Document.
*101.LAB
XBRL Taxonomy Extension Labels Document.
*101.PRE
XBRL Taxonomy Extension Presentation Document.
*Filed Herewith
ITEM 16.
COMPREHENSIVE FORM 10-K SUMMARY
None.
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Comprehensive
Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
TANDY LEATHER FACTORY, INC.
By:
/s/ Janet Carr
Janet Carr
Chief Executive Officer
Dated: June 21, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
/s/ Jefferson Gramm
Jefferson Gramm
/s/ Janet Carr
Janet Carr
/s/ Michael Galvan
Michael Galvan
/s/ William M. Warren
William M. Warren
/s/ James Pappas
James Pappas
/s/ Vicki Cantrell
Vicki Cantrell
/s/ Sharon M. Leite
Sharon M. Leite
/s/ Sejal Patel
Sejal Patel
Title
Chairman of the Board
Chief Executive Officer, Director
(principal executive officer)
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Director
Director
Director
Director
Director
101
Date
June 21, 2021
June 21, 2021
June 21, 2021
June 21, 2021
June 21, 2021
June 21, 2021
June 21, 2021
June 21, 2021
EXHIBIT 21.1
LIST OF THE SUBSIDIARIES OF THE COMPANY
•
•
•
•
•
•
•
•
•
•
•
•
•
The Leather Factory, Inc., a Nevada corporation
The Leather Factory of Nevada Investments, Inc., a Nevada corporation
The Leather Factory, LP, a Texas limited partnership
The Leather Factory, Inc., an Arizona corporation
Hi-Line Leather & Manufacturing Company, a California corporation
Roberts, Cushman & Company, Inc., a New York corporation
The Leather Factory of Canada Ltd., an Ontario domiciled Canadian corporation
Tandy Leather Company, Inc., a Nevada corporation
Tandy Leather Company Investments, Inc. a Nevada corporation
Tandy Leather Company, LP, a Texas limited partnership
Tandy Leather Factory Australia Pty Ltd, an Australian proprietary company
Tandy Leather Factory España, S.L., a Spanish limited liability company
Tandy Leather Factory UK Limited, a United Kingdom limited liability company
126
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement on Form S-8 No. 333-190389 of Tandy Leather Factory, Inc. of our
report dated June 21, 2021, relating to our audit of the consolidated financial statements of Tandy Leather Factory, Inc., as of and for the years
ended December 31, 2019, 2018 and 2017 appearing in this Form 10-K.
/s/ WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
June 22, 2021
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EXHIBIT 31.1
I, Janet Carr, certify that:
RULE 13a-14(a) CERTIFICATION
1.
I have reviewed this comprehensive annual report on Form 10-K of Tandy Leather Factory, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: June 21, 2021
/s/ Janet Carr
Janet Carr
Chief Executive Officer
(principal executive officer)
128
EXHIBIT 31.2
I, Michael Galvan, certify that:
RULE 13a-14(a) CERTIFICATION
1.
I have reviewed this comprehensive annual report on Form 10-K of Tandy Leather Factory, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and
the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: June 21, 2021
/s/ Michael Galvan
Michael Galvan
Chief Financial Officer
(principal financial officer and principal accounting officer)
129
EXHIBIT 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the comprehensive annual report on Form 10-K of Tandy Leather Factory, Inc. (the "Company”) for the fiscal years ended December 31, 2019, 2018, and 2017 as
filed with the United States Securities and Exchange Commission on the date hereof (the "Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
i.
ii.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
June 21, 2021
June 21, 2021
By: /s/ Janet Carr
Janet Carr
Chief Executive Officer
By: /s/ Michael Galvan
Michael Galvan
Chief Financial Officer
130