UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
X
For the fiscal year ended December 31, 2021
OR
☐ 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
TANDY LEATHER FACTORY, INC.
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
OTC Pink Market
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 X No ☐
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 X No ☐
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 $18,217,065 at June 30, 2021 (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 March 25, 2022, there were 8,594,757 shares
of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
PART I
PART II
PART III
PART IV
TABLE OF CONTENTS
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
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. CONSOLIDATED 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
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
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
SIGNATURES
LIST OF THE SUBSIDIARIES OF THE COMPANY
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PART I
ITEM 1.
BUSINESS
The following discussion, as well as other portions of this 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 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 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. ("TLFA,” "we,” "our,” "us,” the” Company,” "Tandy,” or "Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries) 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, and 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 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 also offer
production services to our business customers such as cutting ("clicking”), splitting, and some assembly. We maintain our principal offices at 1900 Southeast Loop 820, Fort
Worth, Texas 76140.
The Company’s common shares currently trade on the OTC Pink Market operated by OTC Markets Group under the symbol "TLFA.”
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Retail Fleet
The Company currently operates a total of 106 retail stores. There are 95 stores in the U.S., ten stores in Canada and one store in Spain.
All Tandy locations, other than our corporate headquarters (which includes our flagship store, corporate offices, distribution center, and manufacturing facility) are leased.
Business Strategy
Tandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been and continue to be our competitive advantage: where our consumers learn
the craft in classes, open table, and from the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others
passionate about leather. Our website provides inspiration, detailed product descriptions and specifications, educational information and videos, and a convenient place to also
purchase product – especially for those who are far from our retail stores, including a growing international customer base. For many of our retail and web customers,
leatherworking evolves from a passion to a trade. Our Commercial Division is tailored to the needs of those customers who build businesses around leather. With dedicated direct
account representatives, a direct-from-our-warehouse shipping model, bulk and volume-based competitive pricing, customized product development, and production and pre-
production services, we are building long-term, strategic relationships with our largest customers.
Our focus over the last three years has been on three broad strategic initiative areas:
1.
Improving our brand proposition, with both Retail and Commercial customers
2. Rebuilding our foundation – the talent, processes, tools and systems needed to serve these customers
3. Position us for long-term growth – creating the vision and roadmap for the future
Despite the unforeseen obstacles of the financial restatement and the COVID-19 pandemic, we have made significant progress against these initiatives. Some key accomplishments
include:
■ Significantly improving the product quality, breadth of assortment and value
■ Reinventing the pricing architecture/strategy to simplify it, provide great everyday value and also the excitement of sale
■ Improving the quality, clarity and efficiency of the marketing collateral and mix
■ Relaunching and dramatically improving the website; centralizing web fulfillment
■ Significantly improving the Retail organization and skills: new team, training, career paths, incentives
■ Launching the Commercial Division: a completely new business model tailored to the needs of the largest customers
■ Recruiting, developing and retaining the right team for the work ahead; creating a collaborative, performance-based culture
■ Building people management infrastructure: performance evaluations, benefits, communications, recognition, incentives, training
■ Replacing and significantly upgrading general ledger, warehouse management and point-of-sale systems
■ Developing a robust counter-sourcing program for product and supplies
■ Reorganizing and improving factory and warehouse capabilities
■ Creating a roadmap for future growth
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COVID-19 and Outlook
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 the second and third quarters 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.
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. However, under the CARES
Act we were eligible to participate in the payroll tax deferral program, and we deferred $0.6 million in payroll tax with $0.3 million to be paid by December 31, 2021, and the remaining
$0.3 million to be paid by December 31, 2022. 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. In Canada, we participated in the Canada Emergency Commercial Rent Assistance ("CECRA”)
program for rent relief, receiving total rent abatements under the program of $0.05 million.
Nine stores were permanently closed during 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.
Since then, various spikes in local infection rates have forced us to sporadically move stores to short-term "curbside only” operations or closures due to local conditions or
staffing issues. We expect that at least some further infections and temporary store shutdowns will continue for the foreseeable future.
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 seen
strong sales performance, but the future remains uncertain, and more store closures and/or other ongoing effects of the pandemic on the economy or employment market could
cause a material negative impact on future sales.
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Customers
Our customers fall into 2 broad categories: those who shop in retail stores and on our website ("Retail Customers”) and those whom we serve through our Commercial Division
("Commercial Customers”). Retail Customers range from hobbyists to institutions like schools, camps, and other groups to small businesses. Affinity groups like Military and
First Responders and smaller and larger businesses who purchase in our retail stores receive special pricing or general discounts. To be served through our Commercial Division,
customers generally need to spend more than $20,000 per year and receive pricing based on their purchasing levels.
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
Information regarding net sales, gross profit, operating income, and total assets is included within Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations, and within Item 8, Financial Statements and Supplementary Data.
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 or, increasingly, bi-monthly shipments, using third
party logistics providers. Occasionally, merchandise is shipped to stores directly from the vendor. We now fulfill all of our U.S. and many of our International web orders from our
Fort Worth distribution center. Canada web orders are fulfilled out of our 10 Canada stores, and European web orders are fulfilled out of our Spain store. We have a global
customer service team that handles web order inquiries and phone orders. Our goal is to optimize the tradeoff between the sales and market share we realize from having a broad
product line against the safety stock required to support those items . We generally maintain higher inventories of imported or long-lead-time items, to ensure a continuous
supply. Our inventory levels have grown as we have increased our product assortment to improve conversion and retention of customers and to mitigate out-of-stocks, especially
during the supply chain disruptions over the last 2 years. We have also been executing a number of strategic initiatives to test smaller quantities of new items online, buying into
them only when we are certain of their success, tailor product assortments to the needs of local customers in each store, and to ship directly from vendors to customers. 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 170 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, as the course of the
disease has impacted countries differently over time. We continue to see product price increases and longer lead-times across most product categories due to container and/or raw
material scarcity and labor shortages. We are also beginning to see the impact of higher energy prices on both product and freight costs as well. We invested heavily in
inventory of key items, especially in leather and hardware, over the last 12 months at 2020 prices. We believe we will be well-positioned to wait out any short-term price hikes for
some months.
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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Employees
As of December 31, 2021, we employed 593 people, 492 of whom were 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 2, Significant Accounting Policies: Revenue Recognition and Note 3,
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 Form 10-K.
Information about our Executive Officers
The following table sets forth information concerning our executive officers as of December 31, 2021:
Name and Age
Janet Carr, 60
Michael Galvan, 53
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 C&J Energy Services, Inc., 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.
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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. During the third quarter of 2020, all of our 106
stores reopened. Since that time, we have continued to manage through the pandemic as we 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 current
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.
The continuing 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
(including new variants) and availability and acceptance rates 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 since fiscal year 2020. This situation continues to change 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 COVID-19, 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.
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Risks Related to Owning our Common Stock
Our continued delisting from the Nasdaq Market or a continued suspension of broker trading of our common stock could reduce liquidity or impair the value of your
investment.
Our common stock was previously listed on the Nasdaq Global Market. Because of the Company’s inability during its financial restatement to timely file its quarterly and annual
financial reports, Nasdaq suspended trading in the Company’s stock as of August 13, 2020 and formally delisted it on February 9, 2021. To date, the delisting has not materially
affected the trading price of the Company’s common stock. The Company has applied for re-listing on Nasdaq; such listing is subject to Nasdaq approval, and we cannot
guarantee when or if our application will be approved. Our stock currently trades on the Pink Market operated by OTC Markets Group, where trading volume is typically lower
than on exchanges such as Nasdaq. Failure to relist our stock on Nasdaq could adversely affect the market liquidity of our common stock or otherwise impair the value of your
investment.
In addition, on September 16, 2020, the SEC adopted final rules amending Securities Exchange Act Rule 15c-211. The amended rule requires that a company have current and
publicly available information as a precondition for a broker-dealer to either initiate or continue to quote its securities. Because the Company was not yet current in its periodic
reporting with the SEC, in October 2021 our stock was removed from the OTC Pink Market and began trading on a new OTC "Expert Market” for stocks whose trading is restricted
by Rule 15c-2-11. When the Company became current again in its financial reporting in December 2021, our stock was elevated to the OTC Pink Market (Current Information).
However, trading in our stock has continued to be restricted under Rule 15c-2-11 until such time as a market maker for our stock is approved by the Financial Industry Regulatory
Authority (FINRA). A potential market maker has filed an application for approval by FINRA, but we cannot guarantee if or when such an application will be approved. Any
continued restrictions on the trading of our common stock would adversely affect the market liquidity of our common stock and might impair the value of your investment.
Material weaknesses in our system of internal controls were identified during our investigation and financial restatement. Some of these material weaknesses are still 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 Form 10-K, our management, including our Chief Executive Officer and our Chief Financial Officer, has determined that we continue to
have material weaknesses in the Company’s internal control over financial reporting as of December 31, 2021. 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, 2021.
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 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 undetected errors. 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, 2021 and the remediation activities undertaken by us, see Part II, Item 9A, Controls and
Procedures of this Form 10-K.
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Risks Related to Cash Flow and Capitalization
If our cash from operations falls short and we are unable to raise additional working capital, we might be unable to fully fund our operations or to otherwise execute our
business plan.
Historically, the Company has funded its business primarily with cash from operations and has utilized only small lines of working capital for seasonal expenditures. As a result of
the restatement and the Company not having current audited financial information, our working capital lines were discontinued by the lenders. We believe that access to this
capital can be restored now that we are current in our financial reporting and that our currently available working capital will be sufficient to continue the needs of our business for
at least the next twelve (12) months. However, should (1) our costs and expenses prove to be greater than we currently anticipate, or (2) seasonal fluctuations in sales or inventory
purchases result in needing additional capital, and (3) we remain unable to borrow short- or long-term capital, the depletion of our working capital would be accelerated and could
leave us unable to make required payments. We may also seek capital through the private issuance of debt or equity securities. We currently do not have any binding
commitments for, or readily available sources of, additional financing. We cannot guarantee that we will be able to secure the additional cash or working capital we might require to
continue our operations.
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. Specifically, at the time of filing this Form 10-K, the American and world
economies have been acutely affected by a combination of factors resulting from both the COVID-19 pandemic and the war resulting from the invasion of Ukraine by Russian
military forces. The current impacts of these events include (but are not limited to) levels of inflation that are the highest in the U.S. in more than 40 years, fuel prices at or near
record highs, an extremely tight labor market with rising wages and competition to attract qualified workers, rising real estate prices and increases in interest rates. Purchases of
non-essential, discretionary products tend to decline in periods (such as the current one) of recession or uncertainty regarding future economic prospects, as disposable income
declines. During these 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
continued 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 current 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. 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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
embargoes against products originating in countries from which we source;
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, which also could result in a former manufacturer beginning to produce similar products that compete with
ours;
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 and fuel costs, government regulation, economic climates, war or other
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, would 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 under 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 typically ranging from three years to five 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 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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Declines in foot traffic in our retail store locations could negatively impact our sales and profits.
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 or political 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. 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 three to 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
1
1
3
1
10
4
1
5
2
1
1
1
1
1
1
2
1
1
2
2
3
1
1
1
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
Ontario
Saskatchewan
International locations:
Spain
3
1
1
2
2
1
1
2
3
2
2
3
1
1
3
16
4
3
1
1
3
1
1
As a result of the COVID-19 pandemic and resulting legal requirements in most of our markets, we temporarily closed all of our stores to the public during March 2020. We have
continued to manage through the pandemic during intermittent spikes in COVID-19 infections, continue to see varying levels of infection rates, and have at times been forced to
temporarily close or move certain stores to "curbside only” operations. As of the date of filing this Form 10-K, most of our stores have reopened fully, and preventive measures
are in place in most stores but are not believed to be materially impacting store sales. However, some stores have had to temporarily close due to COVID-19, especially with the
rise of the Delta variant in the third quarter of 2021, which has negatively impacted sales for those stores.
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ITEM 3.
LEGAL PROCEEDINGS
In 2019, the Company self-reported to the SEC information concerning the internal investigation of certain accounting matters resulting in the restatement for the full year 2017 and
full year 2018, including interim quarters in 2018, and the first quarter of 2019. In response, the Division of Enforcement of the SEC initiated an investigation into the Company’s
historical accounting practices. In July 2021, the Company entered into a settlement agreement with the SEC to conclude this investigation. Under the terms of the settlement, in
addition to other non-monetary settlement terms, (1) the Company paid a civil monetary penalty of $200,000, and (2) the Company’s former Chief Financial Officer and Chief
Executive Officer agreed to pay a civil monetary penalty of $25,000. In accepting the Company’s settlement offer, the SEC took into account remedial actions the Company took
promptly after learning of the issues detailed in the SEC’s order.
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. See discussion of Legal Proceedings in Note 8, Commitments and Contingencies of the Notes to the Consolidated
Financial Statements included in Item 8 of this 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 Pink Market operated by OTC Markets Group under the symbol "TLFA.”
There were approximately 286 stockholders of record on February 25, 2022.
We did not sell any shares of our equity securities during our fiscal year ended December 31, 2021 that were not registered under the Securities Act.
Our Board of Directors did not authorize any dividends during the fiscal years ended December 31, 2021 or 2020. 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 2021:
Period (2)
October 1 – October 31, 2021
November 1 – November 30, 2021
December 1 – December 31, 2021
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) Dollar value of
shares that may yet be
purchased under the
plans or programs (1)
- $
- $
214,581 $
214,581 $
-
-
5.00
5.00
- $
- $
- $
-
5,000,000
5,000,000
5,000,000
(1) 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.
(3) On Decmber 8, 2021, we entered into an agreement with an institutional shareholder of the Company to repurchase 212,690 shares of our common stock in a private transaction
separate from our share repurchase program. The purchase price was $5.00 per share for a total of $1.1 million. The closing of the repurchase took place on December 17, 2021, and
these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding common stock.
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.
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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 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
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, and organized in 2005 as
a Delaware corporation, 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, and 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 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 also offer
production services to our business customers such as cutting ("clicking”), splitting, and some assembly. We maintain our principal offices at 1900 Southeast Loop 820, Fort
Worth, Texas 76140.
Currently, the Company operates a total of 106 retail stores. There are 95 stores in the United States ("U.S,”), ten stores in Canada and one store in Spain.
Tandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been and continue to be our competitive advantage: where our consumers learn
the craft in classes, open table, and from the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others
passionate about leather. Our website provides inspiration, detailed product descriptions and specifications, educational information and videos, and a convenient place to also
purchase product – especially for those who are far from our retail stores, including a growing international customer base. For many of our retail and web customers,
leatherworking evolves from a passion to a trade. Our Commercial Division is tailored to the needs of those customers who build businesses around leather. With dedicated direct
account representatives, a direct-from-our-warehouse shipping model, bulk and volume-based competitive pricing, customized product development, and production and pre-
production services, we are building long-term, strategic relationships with our largest customers.
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Our focus over the last three years has been on three broad strategic initiative areas:
1.
Improving our brand proposition, with both Retail and Commercial customers
2. Rebuilding our foundation – the talent, processes, tools and systems needed to serve these customers
3. Position us for long-term growth – creating the vision and roadmap for the future
COVID-19
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 the second and third quarters 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.
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. However, under the CARES
Act we were eligible to participate in the payroll tax deferral program, and we deferred $0.6 million in payroll tax with $0.3 million to be paid by December 31, 2021, and the remaining
$0.3 million to be paid by December 31, 2022. 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. In Canada, we participated in the Canada Emergency Commercial Rent Assistance ("CECRA”)
program for rent relief, receiving total rent abatements under the program of $0.05 million.
During the third quarter of 2020, all of Tandy’s stores reopened to the public, and the store re-openings were well received by our employees and customers. We have continued
to manage through the pandemic during intermittent spikes in COVID-19 infections, continued to see varying levels of infection rates, and have at time been forced to temporarily
close or move certain stores to "curbside only” operations. We expect that at least some further infections and temporary store shutdowns will continue for the foreseeable future.
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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 other ongoing effects of the pandemic on the economy or employment
market 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 which continued
throughout the remainder of 2020.
Impairment charges recognized during 2020 totaled $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
The following table presents selected financial data:
(in thousands)
Sales
Gross profit
Gross margin percentage
Operating expenses
Impairment expense
Income (loss) from operations
Net Sales
2021
2020
$ Change
% Change
$
$
$
82,661
46,999
56.9%
44,699
-
2,300
$
$
64,084
36,058
56.3%
41,328
1,078
(6,348) $
18,577
10,941
3,371
(1,078)
8,648
29.0%
30.3%
0.6%
8.2%
(100.0)%
136.2%
Consolidated net sales increased by $18.6 million, or 29.0%, from 2021 to 2020. This sales growth is a reflection of continued strong demand from customers in all channels of
distribution: retail stores, our website and our Commercial Division. While staffing challenges and sporadic store closures due to COVID-19 limited sales upside in some areas,
consumers continued to invest COVID-era stimulus payments in their leatherworking interests, especially in our retail stores. At the same time, we believe our improved product
quality, broader assortment, improved in-store expertise and service, and focused and efficient marketing communications were continuing to work together to drive sales.
Our store footprint consisted of 106 stores at both December 31, 2021 and December 31, 2020.
Gross Profit
Gross profit increased by $10.9 million, or 30.3%, from 2021 to 2020 as a result of higher net sales as well as improved gross margin. Our gross margin percentage for the year ended
December 31, 2021 increased to 56.9%, versus 56.3% in the same period in 2020. This increase was a result of a combination of factors, including product and customer mix shifts
as well as refining the process we use to capitalize cost into our inventory value for freight, warehousing and handling expenditures, updating from a manual, higher-level process
to a more automated mechanism using our new ERP system, partially offset by higher costs for warehouse handling and freight costs.
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Operating Expenses
(in thousands)
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
$
$
2021
2020
44,699
$
(1,252)
-
43,447
$
54.1%
52.6%
41,328
(3,587)
(388)
37,353
64.5%
58.3%
Operating expenses increased by $3.4 million in 2021 as compared to the corresponding prior year. This was mostly as a result of recalling store employees who had been
furloughed while stores were closed in 2020 due to the COVID pandemic as well as sales-driven expenses like credit card fees and sales-based incentives, partially offset by $2.3
million in higher costs associated with the restatement of our financial statements and $0.4 million higher CFO transition costs in the prior year period. Adjusted operating
expenses, which excludes the non-routine items related to the restatement and CFO turnover, increased $6.1 million or 16.3% for the reasons noted above. Adjusted operating
expenses excluding non-routine items as shown above is a non-GAAP measure, included here to provide additional information regarding the Company’s financial performance on
a recurring basis. Non-routine items are primarily 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 turnover of our CFO in 2020.
Impairment Expense
During the first quarter of 2020, we determined the economic impact from the COVID-19 pandemic created a triggering event for our fleet of stores, and we performed recoverability
testing at the store level with 26 stores failing recoverability testing and resulting in impairment expense of $1.1 million during the 2020 year. For the year ended December 31, 2021,
no impairment expense was recognized. See Note 2, Significant Accounting Policies – Impairment of long-lived assets of the Notes to the Consolidated Financial Statements
included in Item 8, Financial Statements and Supplementary Data of this Form 10-K for further detail.
Other (Income) Expense
Other (income) expense consists primarily of interest expense, interest income and foreign currency (gain) loss. For the year ended December 31, 2021, we recognized other
expense of $0.1 million. During the year ended December 31, 2020, we recognized other income of $0.1 million. We incurred higher levels of interest expense in 2021 as compared to
the prior year as a result of a $0.4 million loan provided for by the Spanish government as part of a COVID-19 relief program.
Provision for Income Taxes
Our effective tax rate was 38.3% and (21.9%) for the years ended December 31, 2021 and 2020, respectively. For 2021 and 2020, 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 U.S. deferred tax assets and certain foreign net operating losses.
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Table of Contents
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 primarily
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 in accordance
with its approved investment policy. Our cash balance as of December 31, 2021 totaled $10.2 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.
Share Repurchase Program
On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5.0 million of our common stock between August 9, 2020 and July 31, 2022. The
Company’ s previous share repurchase program expired in August 2020. As of December 31, 2021 and 2020, the full $5.0 million of our common stock remained available for
repurchase under this program.
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, and these
shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock.
On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company to repurchase 212,690 shares of our common stock, par value $0.0024 in a
private transaction. The purchase price was $5.00 per share for a total of $1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were
subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding common stock. These share repurchases were separately
authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plan described in the previous paragraph.
Cash Flows
(amounts in thousands)
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
25
2021
2020
3,716 $
(1,001)
(2,777)
(112)
(174) $
(12,527)
6,256
416
279
(5,576)
$
$
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For 2021, we generated $3.7 million of cash from operations driven by net income of $1.4 million, non-cash expenses of $5.2 million, including depreciation, amortization, and stock-
based compensation, a reduction to income tax receivable of $1.8 million due to a federal income tax refund of $1.0 million related to the 2019 tax year and $0.8 million in income tax
expense from expected taxable income generation in 2021, and $1.6 million of other changes in operating assets and liabilities mostly attributable to an increase in accounts payable
and accrued liabilities of $1.9 million, and partially offset by the net buildup of inventory of $2.8 million and a reduction in lease liabilities of $3.4 million. We invested $1.0 million in
capital expenditures for the purchase of store fixtures and systems implementations. We used cash in financing activities to repurchase 712,690 shares of Tandy common stock in
two private purchases totaling $2.7 million at an average price of $3.84 per share. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease
in cash of $0.2 million.
For the year ended 2020, we used $12.6 million of cash from operations driven by our net loss of $4.9 million which was offset by non-cash expenses of $6.7 million, including
depreciation and amortization, impairments, and stock-based compensation. Working capital used $14.3 million of cash, primarily from the build-up of inventory. We received $7.5
million from the sale of short-term U.S. Treasuries. We invested $1.3 million in capital expenditures for the purchase of store fixtures and systems implementations. We borrowed
$0.4 million as part of a COVID-19 relief program sponsored by the Spanish government. The activities above, in addition to the effect of exchange rate changes, resulted in a net
decrease in cash of $5.6 million.
We believe that cash flow from operations and our existing cash reserves will be adequate to fund our operations through 2022, 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 2022. 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 2021 or 2020, and we do not currently have any such arrangements.
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.
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Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) shipment of product generally via web
sales, and (3) sales of product directly to commercial customers. 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 control passes to the customer. Shipping terms are normally free on board ("FOB”)
shipping point and control 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 are based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns. 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. 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.
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 is 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 and warehouse equipment for our Texas distribution center, both 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 a
lease asset and lease liability at commencement date based on the present value of the lease payments over the lease term. For our operating leases, 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. 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. For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the
right-of-use asset or the end of the lease term with rent expense recorded to operating expenses. We adjust the lease liability to reflect lease payments made during the period and
interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the consolidated statements of
comprehensive income (loss). As of December 31, 2021, we have 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.
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Table of Contents
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.
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.
28
Table of Contents
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 it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, 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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Table of Contents
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Tandy Leather Factory, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Tandy Leather Factory, Inc. and Subsidiaries (the Company) as of December 31, 2021 and 2020, and the related
consolidated statements of operations and comprehensive income (loss) and cash flows for each of the two years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in
conformity with accounting principles generally accepted in the United States of America.
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as
a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it
relates.
Valuation of Inventory
The Company’s accounting policy for the recognition of inventory and cost of sales is described in Note 2 to the consolidated financial statements. The Company has recorded an
inventory balance of approximately $38.1 million and cost of sales of approximately $35.7 million as of and for the year ended December 31, 2021. Additionally, Note 3 to the
consolidated financial statements provides further detail of the components of the year-end inventory balance.
The Company’s merchandise inventories are stated at the lower of cost or net realizable value using a first-in first-out costing principle. Finished goods inventory costs include the
cost of merchandise purchases, the costs to bring the merchandise to the Company’s distribution center, warehousing and handling expenditures, and distributing and delivering
merchandise to the Company’s stores. Manufacturing inventory, raw materials and work-in-process are also valued on a first-in, first-out basis using full absorption accounting
which includes material, labor, and other applicable manufacturing overhead. The determination of amounts that are required to be capitalized to inventory resulting from
manufacturing labor and overhead costs, warehouse and handling expenditures and transportation costs (together "overhead costs”) are subjective and are generally based on an
allocation ratio calculated by the Company using the previous year’s actual overhead costs and the value of inventory handled during that year, subject to adjustment for current
economic or market conditions. Additionally, to determine if the value of their inventory should be written down, the Company considers many factors, including condition of the
product (excessive scars, discoloring or damage from UV light), current and anticipated demand that may cause the product to become slow moving and age of the merchandise to
ensure that the product line is considered fresh. If a write-down is warranted, the carrying value of the merchandise is reduced from its original cost to the lower of its cost or net
realizable value.
Management estimates the value of inventory by estimating the capitalizable overhead costs and adjusts the inventory to lower of cost or net realizable value. Our audit
procedures to evaluate these items involved a higher degree of auditor judgment and the involvement of more senior members of the engagement team in executing, supervising,
and reviewing the results of the procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation of inventories included the following, among others:
• We obtained an understanding of the controls over the valuation of inventory.
• We tested the inventory costs incurred by the Company by reviewing supplier invoices and ensuring that appropriate application of the first-in first-out principle was
followed.
• We evaluated the appropriateness and consistency of management’s methodology and assumptions used in calculating the capitalizable overhead costs allocation ratio.
• We evaluated the appropriateness of the capitalized overhead costs by analyzing them against actual overhead costs incurred during the year.
• We tested the mathematical accuracy of the Company’s inventory obsolescence reserve calculation.
• We evaluated the appropriateness and consistency of management’s methodology and assumptions used in developing its estimate of the inventory obsolescence
reserve.
• We performed analytical procedures on the current year reserve rates (by product category) by comparing them to prior year rates and then obtaining corroborating
evidence for any significant fluctuations.
• We tested on a sample basis, sales subsequent to yearend of the written-down items to ensure that the net realizable value was not lower than the previously written
down value.
/s/ WEAVER AND TIDWELL, L.L.P.
We have served as the Company’s auditor since 2003.
Oklahoma City, Oklahoma
March 31, 2022
31
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data and per share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable-trade, net of allowance for doubtful accounts of $24 and $14 at December 31, 2021 and 2020, respectively
Inventory
Income tax receivable
Prepaid expenses
Other current assets
Total current assets
Property and equipment, at cost
Less accumulated depreciation
Property and equipment, net
Operating lease assets
Financing lease assets
Deferred income taxes
Other intangibles, net of accumulated amortization of $548 at December 31, 2021 and 2020
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable-trade
Accrued expenses and other liabilities
Current portion of operating lease liabilities
Current portion of finance lease liabilities
Current maturities of long-term debt
Total current liabilities
Uncertain tax positions
Other non-current liabilities
Operating lease liabilities, non-current
Finance lease liabilities, non-current
Long-term debt, net of current maturities
COMMITMENTS AND CONTINGENCIES (Note 8)
$
$
$
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; 9,971,711 and 10,575,182 shares issued at December 31, 2021 and 2020,
respectively; 8,547,335 and 9,150,806 shares outstanding at December 31, 2021 and 2020, respectively
Paid-in capital
Retained earnings
Treasury stock at cost (1,424,376 shares at December 31, 2021 and 2020)
Accumulated other comprehensive loss, net of tax
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
The accompanying notes are an integral part of these Consolidated Financial Statements.
32
December 31,
2021
December 31,
2020
$
$
$
10,155
614
38,084
972
483
141
50,449
27,750
(15,989)
11,761
10,438
37
-
6
394
73,085
4,786
4,302
3,025
15
79
12,207
415
417
8,194
15
336
-
24
3,959
58,664
(9,773)
(1,373)
51,501
73,085
$
10,329
350
36,779
2,753
536
265
51,012
27,468
(15,078)
12,390
11,772
44
82
6
387
75,693
5,737
3,642
3,530
14
-
12,923
393
463
9,245
29
446
-
25
5,924
57,310
(9,773)
(1,292)
52,194
75,693
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Tandy Leather Factory, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(amounts in thousands, except share and per share data)
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
Income tax provision (benefit)
Net income (loss)
Foreign currency translation adjustments, net of tax
Comprehensive income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
The accompanying notes are an integral part of these Consolidated Financial Statements.
33
For the Years Ended December 31,
2021
2020
$
$
$
$
$
$
82,661
35,662
46,999
44,699
-
2,300
16
91
107
2,193
839
1,354
$
(81)
1,273
$
0.16
0.16
$
$
64,084
28,026
36,058
41,328
1,078
(6,348)
7
(76)
(69)
(6,279)
(1,378)
(4,901)
(211)
(5,112)
(0.54)
(0.54)
8,709,866
8,720,469
9,062,598
9,062,598
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Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Operating lease asset amortization
Impairment of goodwill and long-lived assets
Loss (gain) 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 liabilities
Total adjustments
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchase of property and equipment
Proceeds from sales of short-term investments
Proceeds from sales of assets
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Payments of capital lease obligations
Repurchase of common stock
Purchase of vested stock for employee payroll tax
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
The accompanying notes are an integral part of these Consolidated Financial Statements.
34
For the Years Ended December 31,
2021
2020
$
1,354
$
(4,901)
1,105
3,202
-
(8)
797
83
23
(325)
(2,777)
83
(8)
1,143
743
1,775
(52)
(3,422)
2,362
3,716
(1,001)
-
-
(1,001)
-
(14)
(2,738)
(25)
(2,777)
(112)
(174)
$
10,329
10,155
$
1,021
3,193
1,078
59
887
442
(5)
86
(12,686)
675
1,574
(440)
1,022
(1,120)
(41)
(3,371)
(7,626)
(12,527)
(1,313)
7,523
46
6,256
416
-
-
-
416
279
(5,576)
15,905
10,329
Table of Contents
Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows - continued
(amounts in thousands)
Supplemental disclosures of cash flow information:
Interest paid during the period
Income tax paid (refunded) during the period, net
Supplemental disclosures of non-cash activity:
Change in accruals related to property and equipment
Operating lease assets obtained in exchange for lease liabilities, net
For the Years Ended December 31,
2021
2020
$
$
$
$
16
(994)
-
1,853
$
$
$
$
17
56
(105)
1,702
The accompanying notes are an integral part of these Consolidated Financial Statements.
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Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders’ Equity
(amounts in thousands, except share data)
Number of
Shares
Common
Stock
Outstanding
Par Value
Paid-in
Capital
Treasury
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Total
Balance, December 31, 2019
Stock-based compensation
expense
Issuance of restricted stock
Net loss
Foreign currency translation
adjustments, net of tax
Balance, December 31, 2020
Stock-based compensation
expense
Issuance of restricted stock
Purchase of vested stock for
employee payroll tax
Repurchase of common stock
Net income
Foreign currency translation
adjustments, net of tax
Balance, December 31, 2021
9,022,187
$
25
$
5,037
$
(9,773)
$
62,211
$
(1,081)
56,419
-
128,619
-
-
-
-
887
-
-
-
-
-
-
-
(4,901)
-
-
-
-
9,150,806
$
-
25
$
-
5,924
$
-
(9,773)
$
-
57,310
$
(211)
(1,292)
$
-
114,075
(4,856)
(712,690)
-
-
-
-
(1)
-
797
-
(25)
(2,737)
-
-
-
-
-
-
-
-
-
-
1,354
-
-
-
-
-
-
8,547,335
$
-
24
$
-
3,959
$
-
(9,773)
$
-
58,664
$
(81)
(1,373)
$
887
-
(4,901)
(211)
52,194
797
-
(25)
(2,738)
1,354
(81)
51,501
The accompanying notes are an integral part of these Consolidated Financial Statements.
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TANDY LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021and 2020
1. DESCRIPTION OF BUSINESS
Tandy Leather Factory, Inc. ("TLFA,” "we,” "our,” "us,” the” Company,” "Tandy,” or "Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries) 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, and 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 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 also offer
production services to our business customers such as cutting ("clicking”), splitting, and some assembly. We maintain our principal offices at 1900 Southeast Loop 820, Fort
Worth, Texas 76140.
The Company currently operates a total of 106 retail stores. There are 95 stores in the United States ("U.S.”), ten stores in Canada and one store in Spain.
The Company’s common shares currently trade on the OTC Pink Market operated by OTC Markets Group under the symbol "TLFA.”
We operate as a single segment and report on a consolidated basis.
COVID-19
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 the second and third quarters 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. However, under the CARES
Act we were eligible to participate in the payroll tax deferral program, and we deferred $0.6 million in payroll tax with $0.3 million paid on December 31, 2021, and the remaining $0.3
million to be paid by December 31, 2022. 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, receiving total rent abatements under the program of $0.05
million.
Nine stores were permanently closed during 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.
During the third quarter of 2020, all of Tandy’s stores reopened to the public. While customer response to our store reopening has been good, since then, various spikes in local
infection rates and the "wave” created by the Delta variant of COVID-19 in the summer of 2021 have forced us to sporadically move stores to short-term "curbside only” operations
or closures due to local conditions or staffing issues. We expect that at least some further infections and temporary store shutdowns will continue for the foreseeable future.
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 seen
strong sales performance, but the future remains uncertain, and more store closures and/or other ongoing effects of the pandemic on the economy or employment market 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 recorded impairment expense of $1.1 million, primarily related to property and equipment and operating lease assets for certain stores that
underperformed to a level where the cash flows they generate will not be sufficient to cover their respective asset carry values.
2. 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.
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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.
Accounts Receivable and Expected Credit Losses
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 estimate expected credit losses 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.
Management believes that the historical loss information it has compiled is a reasonable base on which to determine expected credit losses for trade receivables held at December
31, 2021, because the composition of the trade receivables at that date is consistent with that used in developing the historical credit-loss percentages (i.e., the similar risk
characteristics of its customers and its credit practices have not changed significantly over time).
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 are recorded in stockholders’ equity, net of
tax. For the years ended December 31, 2021 and 2020, we recorded foreign currency translation loss adjustments of $0.1 million and $0.2 million, respectively.
Gains and losses resulting from foreign currency transactions are recorded in other, net within the statements of operations and comprehensive income (loss). We did not
recognize a foreign currency transaction gain or loss in the years ended December 31, 2021 and 2020.
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Revenue recognition
Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) shipment of product generally via web sales, and (3) sales of
product directly to commercial customers. 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 control passes to the customer. Shipping terms are normally free on board ("FOB”) shipping point and control
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.
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 $0.2 million as of December 31, 2021 and 2020. The estimated value of merchandise expected to be returned
included in other current assets was $0.1 million as of December 31, 2021 and 2020.
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, 2021 and 2020, our gift card liability, included in accrued expenses and other liabilities, was $0.4 million and $0.3 million,
respectively. We recognized gift card revenue of $0.2 million during 2021 from the December 31, 2020 deferred revenue balance and $0.2 million during 2020 from the December 31,
2019 deferred revenue balance.
For the years ended December 31, 2021 and 2020, we recognized $0.7 million and $0.6 million, respectively, in net sales associated with gift cards.
Disaggregated revenue
In the following table, revenue for the years ended December 31, 2021 and 2020 is disaggregated by geographic areas as follows:
(in thousands)
United States
Canada
Spain
Net sales
2021
2020
73,546
7,470
1,645
82,661
$
$
56,877
5,798
1,409
64,084
$
$
Geographic sales information is based on the location of the store. Excluding Canada, no single foreign country had net sales greater than 2.2% of our consolidated net sales in
2021 or 2020.
Discounts
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.
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.
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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 is 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 and warehouse equipment for our Texas distribution center, both under long-term lease agreements. We determine if an
arrangement is a lease at inception and recognize right-of-use ("ROU”) assets and lease liabilities at commencement date based on the present value of the lease payments over the
lease term. We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes.
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For operating leases, 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 or options to purchase leased equipment, when it is reasonably certain we will exercise such an option. The exercise of lease renewal or purchase option 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.
We recognize rent expense related to our operating leases on a straight-line basis over the lease term.
For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term with rent
expense recorded to operating expenses. We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the
effective interest method. The incurred interest expense is recorded in interest expense on the consolidated statements of comprehensive income (loss).
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 lease assets for
impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable.
None of our lease agreements contain contingent rental payments, material residual value guarantees or material restrictive covenants. We have no sublease agreements and no
lease agreements in which we are named as a lessor. Refer to Note 4, Leases for further discussion of the Company’s leases.
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.
During the first quarter of 2020, we determined the economic impact from the COVID-19 pandemic created a triggering event for our fleet of stores, and we performed recoverability
testing at the store level with 26 stores failing recoverability testing and resulting in impairment expense of $1.1 million during the 2020 year. For the year ended December 31, 2021,
no impairment expense was recognized
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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.
(in thousands, except share data)
Numerator:
Net income (loss)
Denominator:
Basic weighted-average common shares ouststanding
Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan
Diluted weighted-average common shares outstanding
2021
2020 (1)
$
1,354
$
(4,901)
8,709,866
10,603
8,720,469
9,062,598
-
9,062,598
(1) For the year ended December 31, 2020, there were 6,401 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 10, Stockholders’ Equity – Equity Compensation Plans.
Other intangibles
All our intangible assets 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 was less than $0.01 million in each of 2021 and 2020 and was recorded in operating expenses. 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:
•
•
•
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.
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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 accounts receivable, accounts payable, and long-term debt. As of December 31, 2021 and 2020, 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, 2021 and 2020.
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.
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 it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, 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 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.
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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. 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.
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 Operations and Comprehensive Income (Loss).
These costs totaled $3.1 million and $3.2 million for the years ended December 31, 2021 and 2020, respectively.
Advertising
Advertising costs include the cost of print, digital, direct mail, community events, trade shows, and our e-commerce platform. Advertising costs are expensed as incurred. Total
advertising expense was $1.0 million and $1.1 million in 2021 and 2020, respectively.
Recently Adopted Accounting Pronouncements
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. We adopted this ASU on January 1, 2021; the adoption of this ASU did not have a material effect on the Company’s financial condition,
results of operations or cash flows.
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3. BALANCE SHEET COMPONENTS
Inventory
(in thousands)
On hand:
Finished goods held for sale
Raw materials and work in process
Inventory in transit
TOTAL
Property and Equipment
(in thousands)
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:
(in thousands)
United States
Canada
United Kingdom
Spain
Depreciation expense was $1.1 million and $1.0 million for the years ended December 31, 2021 and 2020, respectively.
December 31, 2021 December 31, 2020
$
$
34,928
828
2,328
38,084
$
$
32,654
828
3,297
36,779
$
December 31, 2021 December 31, 2020
9,240
$
1,451
1,853
7,361
7,339
224
27,468
(15,078)
12,390
9,257
1,451
1,833
7,704
7,350
155
27,750
(15,989)
11,761
$
$
$
December 31, 2021 December 31, 2020
12,077
$
309
2
2
12,390
11,508
252
-
1
11,761
$
$
Short-term Liabilities
Accrued Expenses and Other Liabilities
(in thousands)
Accrued employee related costs
Unearned gift card revenue
Estimated returns
Sales and payroll taxes payable
Accrued vendor payables
TOTAL
December 31, 2021 December 31, 2020
2,508
351
242
987
214
4,302
$
1,121
301
241
935
1,044
3,642
$
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4. LEASES
The Company leases certain real estate and warehouse equipment under long-term lease agreements.
On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) ("Topic 842”), and all subsequent amendments, using the optional transition method applied to leases
existing on January 1, 2019, with no restatement of comparative periods.
The Company performs interim reviews of its operating and finance lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease
asset, may not be recoverable. The Company recognized no impairment expense related to its lease assets during the year ended December 31, 2021. During the years ended
December 31, 2020, the Company recognized impairment expense of approximately $0.6 million associated with certain operating lease assets.
Additional information regarding the Company’s operating and finance leases is as follows (in thousands, except for lease term and discount rate information):
Leases
(in thousands)
Assets:
Operating
Finance
Total assets
Liabilities:
Current
Operating
Finance
Non-current
Operating
Finance
Total lease liabilities
Lease Cost
(in thousands)
Operating lease cost
Operating lease cost
Short-term lease cost
Variable lease cost (1)
Finance: (2)
Amortization of lease assets
Interest on lease liabilities
Total lease cost
Balance Sheet Classification
December 31, 2021 December 31, 2020
Operating lease assets
Financing lease assets
Current portion of operating lease liabilities
Current portion of finance lease liabilities
Operating lease liabilities, non-current
Finance lease liabilities, non-current
$
$
$
$
10,438
37
10,475
3,025
15
8,194
15
11,249
$
$
$
$
11,772
44
11,816
3,530
14
9,245
29
12,818
Income Statement Classification
December 31, 2021 December 31, 2020
Operating expenses
Impairment expense
Operating expenses
Operating expenses
Operating expenses
Interest expense
$
$
3,664
-
45
946
7
2
4,664
$
$
3,809
601
-
937
-
-
5,347
(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.
(2) Finance lease costs were less than $1,000 during the 2020 year.
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Maturity of Lease Liabilities
(in thousands)
2022
2023
2024
2025
2026
Thereafter
Total lease payments
Less: Interest
Present value of lease liabilities
Other Information
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases
Operating cash flows used in finance leases
Financing cash flows used in finance leases
Operating lease assets obtained in exchange for lease obligations
Operating leases, initial recognition
Operating leases, modifications and remeasurements
Finance leases, initial recognition
Lease Term and Discount Rate
Weighted-average remaining lease term (years):
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
5. NOTES PAYABLE AND LONG-TERM DEBT
December 31, 2021
Operating Leases
Finance Leases
$
$
$
3,488
2,665
2,021
1,386
1,114
2,218
12,892
(1,673)
11,219
$
$
$
$
$
$
$
$
17
15
-
-
-
-
32
(2)
30
December 31, 2021 December 31, 2020
$
$
3,876
2
14
1,653
200
-
3,866
-
-
317
1,340
45
December 31, 2021
December 31, 2020
5.3
1.9
4.5%
6.5%
5.9
2.9
4.4%
6.5%
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 coronavirus ("COVID-19”) virus. This loan was provided for by the
Spanish government as part of a COVID-19 relief program and was denominated in Euros. 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.
On April 2, 2020, the Company’s primary bank, BOKF, NA d/b/a Bank of Texas, terminated a $6.0 million working capital line of credit facility secured by inventory and a $15.0
million credit facility secured by the Company’s owned real estate as a result of the failure to provide timely quarterly financial statements and compliance certificates required
under the facilities. The delay was the result of the need to restate previously filed financial statements and file subsequent delinquent filings with the SEC. As of the date of the
termination, Tandy had no borrowings outstanding under these line of credit facilities or with any other lending institution.
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The amount outstanding under the above agreement consisted of the following with changes in the year over year balance solely due to foreign currency translation:
(in thousands)
Institute of Official Credit ("ICO”) Guarantee for Small and Medium-sized Enterprises with Banco Santander S.A. (Spain) as described
more fully above - interest due monthly at 1.50%; matures June 4, 2025
Less current maturities
TOTAL
6. EMPLOYEE BENEFIT AND SAVINGS PLANS
2021
2020
$
$
$
336
336
79
415
$
$
$
446
446
-
446
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 2021 and 2020, 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 the years ended December 31, 2021 and
2020, we recorded employer match expense of $0.3 million and $0.2 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 2021 or 2020.
We offer no postretirement or postemployment benefits to our employees.
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7. INCOME TAXES
The provision for income taxes consists of the following:
(in thousands)
Income Tax Benefit
Current provision (benefit):
Federal
State
Foreign
Related to UTP
Deferred provision (benefit):
Federal
State
Foreign
Total tax provision (benefit)
Year Ended December 31,
2020
2021
640
98
-
19
757
-
-
82
82
839
$
$
(1,385)
65
6
20
(1,294)
(62)
(3)
(19)
(84)
(1,378)
$
$
We have $2.2 million of net operating loss ("NOL”) carryovers which will begin to expire in 2025.
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 has
evaluated the impact of the CARES Act and estimates the NOL carryback provision of the CARES Act will result in a cash tax benefit in excess of $1.0 million.
Income (loss) before income taxes was earned in the following tax jurisdictions:
(in thousands)
Income (Loss) Before Income Taxes
United States
Spain
Canada
Australia
United Kingdom
TOTAL
Year Ended December 31,
2020
2021
2,552
(135)
(229)
(1)
6
2,193
$
$
(6,222)
161
(204)
(7)
(7)
(6,279)
$
$
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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:
(in thousands)
Inventory
Stock-based compensation
Accounts receivable
Sales returns
Foreign currency translation gain/loss in OCI
Goodwill and other intangible assets amortization
Net operating loss
Accrued expenses
Leases
Other
Total deferred income tax assets
Less: valuation allowance
Total deferred income tax assets, net of valuation allowance
Property and equipment depreciation
Total deferred income tax liabilities
Net deferred tax asset (liability)
2021
2020
$
$
$
464
59
4
125
342
-
646
359
195
2
2,196
(1,489)
707
707
707
-
$
498
63
4
105
323
5
665
170
250
1
2,084
(1,320)
764
682
682
82
$
$
$
$
We are required to reduce deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred
tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences are deductible. We determined a $0.2 million increase to the valuation allowance for deferred income tax assets was necessary as of December 31, 2021, as compared to
2020. Our evaluation considered, among other things, the nature, frequency, and severity of losses, forecasts of future profitability and the duration of statutory carryforward
periods.
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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 for the 2020 tax year,
foreign income/loss positions, expenses that are nondeductible for tax purposes, the change in our valuation allowance associated with our deferred tax assets, 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
Permanent book/tax differences
Difference in tax rates in loss carryback periods
Change in valuation allowance
Rate differential on UTP reversals
Other, net
Effective rate
Year Ended December 31,
2021
2020
21%
9%
3%
0%
6%
1%
(2)%
38%
21%
3%
(2)%
8%
(10)%
0%
2%
22%
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 2017. 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. We file tax returns in a limited number of foreign jurisdictions. With few
exceptions, we are no longer subject to non-U.S. income tax examinations for years before 2015.
A reconciliation of the beginning and ending amount of uncertain tax positions ("UTP”) is as follows:
UTP at beginning of the year
Gross increase to tax positions in current period
Interest expense
UTP at end of year
2021
2020
393
3
19
415
$
$
296
77
20
393
$
$
Included in the balance of UTPs as of December 31, 2021 and 2020 are $0.1 million of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance
of UTPs as of December 31, 2021 and 2020 are $0.3 million of tax benefits that, if recognized, would result in adjustments primarily to deferred taxes.
8. 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.
SEC Investigation
In 2019, the Company self-reported to the SEC information concerning the internal investigation of previously disclosed accounting matters resulting in the restatement for the full
year 2017 and full year 2018, including interim quarters in 2018, and the first quarter of 2019. In response, the Division of Enforcement of the SEC initiated an investigation into the
Company’s historical accounting practices. In July 2021, the Company entered into a settlement agreement with the SEC to conclude this investigation. Under the terms of the
settlement, in addition to other non-monetary settlement terms, (1) the Company paid a civil monetary penalty of $200,000, and (2) the Company’s former Chief Financial Officer and
Chief Executive Officer agreed to pay a civil monetary penalty of $25,000. In accepting the Company’s settlement offer, the SEC took into account remedial actions the Company
took promptly after learning of the issues detailed in the SEC’s order.
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Delisting of the Company’s Common Stock
As previously disclosed, the Company was unable to timely file the delinquent Exchange Act filings due to the process of restating its financial statements as described above.
Because the restatement process was not complete, Nasdaq suspended trading in our stock on Nasdaq as of August 13, 2020, and subsequently delisted it in February 2021. Since
August 13, 2020, our stock has traded on the Pink Market operated by OTC Markets Group under the symbol "TLFA.” We have reapplied for Nasdaq listing but cannot be certain
when or if that application will be approved.
9. 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 0.7% of our consolidated revenues in 2021 or 2020, and sales to our five largest customers represented 2.0% and 1.1%, 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 Suppliers
We purchase merchandise and raw materials from over 170 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.
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,
2021 and 2020, two customers’ balances represented 23.7% and 29.9% 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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10. 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 (of which, there were 591,138 shares available for future awards as of December 31, 2021) 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. 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. 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 February and May 2021, as part of their annual director compensation, certain of
our non-employee directors were granted a total of 21,673 and 3,415 service-based RSUs, respectively, under the 2013 Plan, which will vest ratably over the next four years
provided that the participant is still on the board on the vesting date.
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:
Balance, January 1, 2021
Granted
Forfeited
Vested
Balance, December 31, 2021
522
25
(10)
(114)
423
$
$
7.11
3.88
3.53
7.00
7.03
The Company’s stock-based compensation relates to restricted stock and RSU awards. For these service-based awards, our stock-based compensation expense, included in
operating expenses, was $0.8 million and $0.9 million in 2021 and 2020, respectively.
As of December 31, 2021, 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.
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As of December 31, 2021, there was unrecognized compensation cost related to non-vested, service-based awards of $1.4 million which will be recognized over 1.6 weighted
average years in each of the following years:
Unrecognized Expense
2022
2023
2024
2025
$
$
784
537
24
5
1,350
We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs. In 2021 and 2020, we issued 114,075 and 128,619 shares,
respectively, resulting from the vesting of restricted stock and RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards.
Share Repurchase Program
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. The
Company’s previous share repurchase program expired in August 2020. As of December 31, 2021 and 2020, the full $ 5.0 million of our common stock remained available for
repurchase under this program.
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, and these
shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock.
On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 212,690 shares of our common stock, par value $0.0024 in a
private transaction. The purchase price was $5.00 per share for a total of $1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were
subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding common stock. These share repurchases were separately
authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plan described in the previous paragraph.
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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
As part of the filing of this Form 10-K for the period ended December 31, 2021, 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.
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, 2021 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 activities to mitigate risks,
including the development of alternative control activities that address segregation of duties issues; (ii) selecting and implementing information technology and related systems
supportive to our internal control over financial reporting; and (iii) deploying control activities through policies and establishing procedures that put these policies into action,
including timely review of account reconciliations and methodologies used to calculate and report financial information and results, as well as timely periodic management reviews
of financial information and results that would help identify misstatements.
Information and communication. We identified deficiencies associated with information and communication within our internal control framework. Specifically, we did
not effectively assign responsibility to personnel for gathering required information nor did we periodically communicate objectives and internal control responsibilities
throughout the organization which contributed to inadequate documentation of processes, untimely review of account reconciliations and calculations involving judgement and
delays in the accounting close cycle, hindering timely communication with 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.
Remediation Efforts to Address Material Weaknesses
Our management, including our CEO and CFO, continue to work 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:
During 2020, 2021 and through the filing date of this Form 10-K, we have taken the following measures, among others:
i. Replaced critical roles within our accounting team with contract accounting resources and continue to search for full-time employees with expertise in GAAP accounting,
SEC reporting and disclosure, internal audit and internal controls;
ii. Replaced our legacy accounting systems with an integrated enterprise resource planning ("ERP”) solution which includes general ledger, warehouse management and
iii.
factory production modules designed to calculate inventory on a FIFO basis;
Implemented a new point-of-sale system for 94 U.S. stores that is fully integrated with our new ERP system (the remaining 12 stores will be converted during the
remainder of 2022);
iv. 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);
v. Established a greater sense of accountability by requiring sub-certifications below the CEO and CFO level for certain key accounting, finance and operations personnel.
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Our continuing plan and additional steps for remediation include:
i. Ongoing recruitment and hiring of permanent, qualified public-company accounting personnel;
ii. Converting the remaining 12 stores onto our new point-of-sale 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. Continuing to improve the accounting close process, including periodic review and update of our accounting close checklists for completeness of duties, accuracy of
owners and deadlines to maintain accountability, timely review of account reconciliations and calculations involving judgement, and timely reporting of financial results;
v. Updating process narrative documentation 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. Periodically reviewing of our risk controls matrix and process narrative documentation to ensure changes such as personnel, information sources, processes, systems,
and frequency in performing the control are properly reflected in a timely manner;
vii. 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
viii. 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.
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 address segregation of duties issues, 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.
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Control Activities
We continue to redesign and implement our internal control activities. Specifically, we are conducting detailed working sessions to document our current and prior finance and
accounting policies, procedures and step-by-step activities. These sessions are expected to identify specific areas that require improvement and redesign of processes, structure,
authorities and controls, and those actions include:
Completing the implementation of our new point-of-sale system, which is fully integrated with our ERP system, for our remaining 12 stores during the remainder of 2022.
Continuing to implement functionality in our ERP system to improve on our internal controls over financial reporting, such as implementing the ERP’s bank reconciliation
module.
■ Creating and implementing newly-designed processes, structures, delegation of authority and controls, in accordance with the COSO Framework, including:
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;
Timely reviews each quarter of the most significant accounting estimates and judgements;
o
o Validation of results through detailed variance analyses and reconciliation of account balances performed on a timely basis;
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 eliminated the need for 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
eliminated 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 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.
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Cybersecurity
We utilize information technology for internal and external communications with vendors, customers and banks as well as systems technology for reporting and managing our
operations. Loss, disruption or compromise of these systems could significantly impact operations and results. Other than temporary disruption to operations that may be caused
by a cybersecurity breach, we believe cash transactions to be the primary risk for potential loss. We work with our financial institutions to take steps to minimize the risk by
requiring multiple levels of authorization, encryption and other controls. The Company utilizes third party intrusion prevention and detection systems and performs periodic
penetration testing to monitor its cybersecurity environment. However, the Company has not performed a formalized risk assessment to address cybersecurity risks or
documented internal controls that assist in alleviating such risks.
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, and we implemented our new point-of-sale system, which is fully integrated with our ERP system, in 94
of our U.S. stores with the remaining 12 stores to be converted during the remainder of 2022. Although we had not fully remediated all material weaknesses in our internal control
over financial reporting as of December 31, 2021, 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*
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 or will be set forth in the definitive proxy statement relating to the 2022 Annual Meeting of Stockholders of Tandy
Leather Factory, Inc., which is to be 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 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 (PCAOB ID Number 410)
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020
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 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 December 8, 2021 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.
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.
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 Current Report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2014 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.
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10.7
10.8
*10.9
14.1
*21.1
*23.1
*31.1
*31.2
*32.1
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 Stock Purchase Agreement dated January 28, 2021 between the Company and Central Square Management, filed as Exhibit 10.14 to the Tandy Leather
Factory, Inc.’s 2019 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 December 8, 2021 between the Company and Right Lane I, LP.
Code of Business Conduct and Ethics of Tandy Leather Factory, Inc., adopted by the Board of Directors on December 4, 2018, 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.
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
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ITEM 16.
FORM 10-K SUMMARY
None.
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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 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: March 31, 2022
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
/s/ Elaine D. Crowley
Elaine D. Crowley
Title
Date
Chairman of the Board
March 31, 2022
Chief Executive Officer, Director
(principal executive officer)
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Director
Director
Director
Director
Director
Director
March 31, 2022
March 31, 2022
March 31, 2022
March 31, 2022
March 31, 2022
March 31, 2022
March 31, 2022
March 31, 2022
THIS AGREEMENT is dated as of the 8th day of December, 2021, by and between Tandy Leather Factory, Inc., a Delaware corporation having its principal address at 1900
SE Loop 820, Fort Worth, TX 76104 (hereinafter referred to as "Purchaser”), and Right Lane I, LP, a Delaware Limited Liability Company (hereinafter referred to as "Seller”).
STOCK PURCHASE AGREEMENT
Exhibit 10.9
A. Seller is the beneficial owner of 212,690 shares of common stock of Purchaser (the "Shares”).
Statement of Facts:
B. Purchaser desires to the Shares from Seller, and Seller desires to sell the Shares to Purchaser under the terms and conditions set forth herein below.
NOW, THEREFORE, in consideration of the mutual promises set forth herein, the parties agree and stipulate as follows:
1. Purchase and Sale. Purchaser shall purchase the Shares from Seller (the "Purchase”), and Seller shall sell the Shares to Purchaser for the price and upon the other
terms set forth herein.
2. Purchase Price. Purchaser shall pay Seller $5.00 per Share for a total purchase price for the Shares of $1,063,450.00 (the "Purchase Price”).
3. Closing. The closing shall occur on or before the 17th day of December, 2021 (the "Closing Date”), at the offices of Purchaser or at such time and place and
Purchaser and Seller may otherwise agree (which may include an online "virtual” closing).
4. Delivery and Payment for Shares. On the Closing Date, Purchaser shall wire the Purchase Price to Seller in accordance with written wire transfer instructions
provided to Purchaser by Seller on or before the Closing Date. Upon receipt of the Purchase Price, Seller shall deliver the Shares to Purchaser electronically through DTC in
accordance with written instructions provided by Purchaser to Seller on or before the Closing Date.
5. Representations and Warranties of Seller. Seller hereby represents and warrants to Purchaser as follows: (i) upon receipt of the Purchase Price as provided in
this Agreement, Seller will deliver good and valid title to the Shares, free and clear from all liens, claims and encumbrances of any nature whatsoever, other than any liens, claims
and encumbrances created by Purchaser, (ii) the execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of Seller and
this Agreement has been duly executed and delivered on behalf of Seller, and (iii) Seller has the power and authority to execute, deliver and perform this Agreement.
6. Representations and Warranties of Purchaser. Purchaser hereby represents and warrants to Seller as follows:
(a) Power; Due Authorization; Binding Agreement . Purchaser is a limited corporation duly organized, validly existing and in good standing under the laws
of Delaware. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of Purchaser, and Purchaser has the full
power and authority to execute and deliver this Agreement, to perform its obligations under this Agreement and to consummate the transactions contemplated hereby. This
Agreement has been duly executed and delivered on behalf of Purchaser and constitutes a valid and binding agreement of Purchaser.
(b) No Conflicts. The execution and delivery of this Agreement by Purchaser does not, and the performance of the terms of this Agreement by Purchaser
will not, (i) contravene or conflict with any organizational documents of Purchaser, (ii) require Purchaser to obtain the consent or approval of, or make any filing with or notification
to, any governmental body, agency or official of any country or political subdivision of any country, including any federal, national, supranational, state, provincial, local or other
government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body ("Governmental Authority”), other than
any required filing under U.S. federal securities laws, (iii) require the consent or approval of any other person pursuant to any agreement, obligation or instrument binding on
Purchaser or its properties and assets, (iv) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Purchaser or pursuant to which any of its assets
are bound or (v) violate any other agreement to which Purchaser is a party.
(c) Material Non-Public Information. To its knowledge, Purchaser has not provided any material non-public information regarding Purchaser to Seller that
has not been disclosed to the public prior to the date hereof.
(d) Accredited Investor. Purchaser is an "accredited investor” as that term is defined under Securities and Exchange Commission Regulation D.
(e) Acquisition of the Shares for Own Account. Purchaser is acquiring the Shares for its own account and not with a view to, or for resale in connection
with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended.
contemplated by this Agreement are being made in a private, negotiated transaction between the parties.
(f)
Private, Negotiated Transaction. Purchaser is aware and hereby acknowledges that the purchase and sale of the Shares and the transactions
(g) No Reliance. Purchaser hereby acknowledges and agrees that Seller has not made any representation or warranty, express or implied, regarding any
aspect of the transactions contemplated by this Agreement except as explicitly set forth in this Agreement, and Seller is not relying on any representation or warranty not
contained in this Agreement.
7. Securities Law Representations, Warranties, Covenants, and Releases. In connection with the Purchase, Seller hereby represents, warrants and agrees as
follows:
(a) Purchaser has informed Seller that Purchaser possesses non-public information (the "Non-Public Information”) concerning Purchaser. Seller is aware
that (1) Purchaser has not filed its regular quarterly reports for the third fiscal quarter of 2021 with the Securities and Exchange Commission, and (3) Purchaser is in possession of
material non-public information regarding its past and present and future operations, results of operations and financial condition, including, without limitation, with respect to
Purchaser’s current fiscal quarter ending December 31, 2021, and Purchaser is precluded from disclosing such information to Seller (the "Non-Disclosure”);
(b)
the Non-Public information may be (1) indicative of a value of the Shares that is higher than the purchase price reflected in the Purchase and/or (2)
otherwise material to a reasonable investor such as Seller when making investment disposition decisions, including the decision to enter into this Agreement;
(c) Seller is an experienced and sophisticated investor that would qualify as an "accredited investor” as defined in Rule 501 of Regulation D, Seller is
engaged in the business of assessing and assuming investment risks with respect to securities such as the Shares, and Seller is knowledgeable in trading equity securities and
understands the disadvantage to which Seller is subject on account of the disparity of information as between Purchaser and Seller;
(d) Seller is not relying on any representations, warranties or disclosure from Purchaser or any person acting on Purchaser’s behalf in connection with the
Purchase;
acknowledgement that Purchaser is privy to the Non-Public Information) in purchasing the Shares and would not purchase the Shares in the absence of this Agreement; and
(e)
Seller acknowledges that Purchaser is relying on this Agreement and Seller’s representations herein (including, but not limited to Seller’s
(f)
Seller hereby waives, releases and forever discharges Purchaser from and against any and all claims, demands, causes of action and liabilities
whatsoever, whether known or unknown, both at law and at equity, that it may have against Purchaser on account of the Non-Disclosure or Purchaser’s possession of the Non-
Public Information, including, without limitation, under Federal and state securities laws, including Section 10(b) or Rule 10b-5 of the Securities Exchange Act of 1934, as amended.
8. Further Assurances. Purchaser and Seller shall execute and deliver any further documents of whatsoever nature which may be reasonably necessary to effectuate
and consummate the transaction set forth in this Agreement.
9. Survival. The representations and warranties contained in this Agreement shall survive indefinitely.
10. Applicable Law. This Agreement shall be subject to and governed by the laws of the State of Texas without regard to conflicts of law principles. The Parties
acknowledge and consent to the personal jurisdiction of federal and state courts sitting in Tarrant County in the State of Texas for the adjudication of any disputes arising
hereunder.
11. Binding Effect. This Agreement shall bind the parties hereto, their legal representatives, their successors and assigns.
12. Counterparts and Facsimiles. This Agreement may be executed by facsimile and/or electronic signature and/or in multiple counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same document.
13. Entire Agreement. This Agreement constitutes the entire Agreement among the parties with respect to the subject matter hereof and supersedes all other prior
and contemporaneous agreements or representations and understandings.
14.
Severability. If any provision of this Agreement or the application of any such provision to any person or circumstance shall be held invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision hereof and all other conditions
and provisions of this Agreement shall nevertheless remain in full force and effect so long as the essential economic or legal substance of the transactions contemplated hereby is
not affected. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to affect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be
consummated as originally contemplated to the greatest extent possible.
15. Modification. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties.
16. Waiver. No waiver of any of the provisions of this Agreement shall be deemed, or will constitute, a waiver of any other provision, whether or not similar, nor will
any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year first above written.
PURCHASER:
TANDY LEATHER FACTORY, INC.
By:/s/ Janet Carr
Name:Janet Carr
Title: CEO
SELLER:
RIGHT LANE I, LP
By:/s/ Eric Mara
Name:Eric Mara
Title: Managing Member
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 Espana, S.L., a Spanish limited liability company
Tandy Leather Factory UK Limited, a United Kingdom limited liability company
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 March 31, 2022, relating
to our audits of the consolidated financial statements of Tandy Leather Factory, Inc. as of and for the years ended December 31, 2021 and 2020 appearing in this Form 10-K.
/s/ WEAVER AND TIDWELL, L.L.P.
Oklahoma City, Oklahoma
March 31, 2022
EXHIBIT 31.1
I, Janet Carr, certify that:
RULE 13a-14(a) CERTIFICATION
I have reviewed this annual report on Form 10-K of Tandy Leather Factory, Inc.;
1.
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: March 31, 2022
/s/ Janet Carr
Janet Carr
Chief Executive Officer
(principal executive officer)
EXHIBIT 31.2
I, Michael Galvan, certify that:
RULE 13a-14(a) CERTIFICATION
I have reviewed this annual report on Form 10-K of Tandy Leather Factory, Inc.;
1.
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: March 31, 2022
/s/ Michael Galvan
Michael Galvan
Chief Financial Officer
(principal financial officer and principal accounting officer)
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 annual report on Form 10-K of Tandy Leather Factory, Inc. (the "Company”) for the fiscal year ended December 31, 2021 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.
Date: March 31, 2022
Date: March 31, 2022
By:
/s/ Janet Carr
Janet Carr
Chief Executive Officer
/s/ Michael Galvan
By:
Michael Galvan
Chief Financial Officer