UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| ☒ |
For the fiscal year ended December 31, 20172020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period ________ to ________to________
| Commission File Number 1-12368 |
| Delaware | 75-2543540 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1900 Southeast Loop 820 Fort Worth, | 76140 | |
| (Address of Principal Executive | ( | |
| 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 | Trading Symbol | Name of each exchange on which registered |
| Common Stock, par value $0.0024 | TLFA |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. (Check one):
Large accelerated filer [ ]☐ Accelerated filer [ ]☐ Non-accelerated filer [ ]☒ 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 $47,389,981$17,580,516 at June 30, 20172020 (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). At March 7, 2018,
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of August 30, 2021, there were 9,270,8628,663,921 shares of the registrant'sregistrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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| 8 | 13 | |
| 9 | 28 | |
| 9A | 28 | |
| 9B | 28 | |
| Part III | ||
| 10 | 28 | |
| 11 | 28 | |
| 12 | 28 | |
| 13 | 28 | |
| 14 | 28 | |
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PART I
With $82.3 million of sales in 2017 (of which 14% were export sales), Tandy Leather Factory, Inc. is to our knowledge,one of the world’s largest specialty retailerretailers of leather and leathercraft related items based on sales, offeringleathercraft-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 wide rangetrack record as the trusted source of quality leather, quality tools, hardware, accessories, liquids, lace,supplies, kits and teaching materials. materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.
Our company was founded in 1980 as Midas Leathercraft Tool Company, a Texas corporation (“Midas”), which focused on the distribution
Our Development in Recent Years
We have built our business by offering our customers quality products in one location at competitive prices. We have expanded our store footprint by opening newThe Company currently operates a total of 106 retail stores and by making numerous acquisitionsas of small businesses in strategic geographic locations. In 1996, we expanded into Canada by acquiring our Canadian distributor, The Leather Factory of Canada, Ltd. In 2000, we acquired the operating assets of two subsidiaries of Tandycrafts, Inc. We began expanding outside of North America by opening a store in the United Kingdom in 2008, then Australia in 2011 and Spain in 2012. We opened another store in the United Kingdom in 2015. At December 31, 2017, we operated 115 stores located in North America and 4August 2021. There are 95 stores in the United Kingdom, AustraliaU.S., ten stores in Canada and one store in Spain. During the second quarter of 2020, we centralized U.S. e-commerce web order fulfillment from the stores to our Fort Worth distribution center.
*1 store temporarily closed inmonths of April, 2016May and reopened in January 2017June 2020, which assisted with our cash position and preservation.
Our mission is to teach and inspire the art of leathercrafting, one person, one class, one neighborhood, one community at a time. Our rich heritage began with Tandy Leather Company, which was originally established in 1919 as Hinkley-Tandy Leather Company, onebeyond. The extent of the oldest and oneimpact of the best-known supplierspandemic on our business and financial results will depend largely on future developments, including the duration of leatherthe spread of the outbreak within the U.S., the effectiveness and acceptance of newly developed vaccines, in particular against new variants of the virus, the impact on capital and financial markets and the related products used in the leathercraft industry. Tandy has long been known for its commitmentimpact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. This situation continues to promotingevolve, and developing the craft through education and customer development. We continue to seek to broaden our customer base by opening new stores, working with various youth organizations and institutions where peopleadditional impacts may arise that we are introduced to leathercraft, as well as hosting classes in our stores. In 2017, we began offering military and first responder appreciation programs which gives eligible customers discounted pricing.
We are also focusing on improving our customer experience, increasing our brand awareness, and strengthening our store performance. To help achieve those goals, in early 2017, we announced a district restructuring with our store footprint divided into fifteen districts (previously, our store footprint was divided into five regions). Each district contains six to ten stores, reporting to a district manager who is tasked with growing traffic and sales, as well as training store managers and associates to better serve our customers and succeed in today’s retail environment. Asnot aware of March 7, 2018, we have filled twelve of our fifteen district manager positions.currently.
OurPrior to 2019, we defined our customers in a number of different groups, the largest two being Retail, primarily hobbyists, and Business, small and medium-sized businesses. However, through customer base is diverse,research over the last two years and better understanding of past practices used to categorize customers into these groups, the Company determined that there was insufficient distinction between such categories. We are continuing to assess and evolve our thinking on customer segments with individual retail customers as our largest customer group, representing approximately 60%a focus on levels of our 2017 sales. The remaining portion of our 2017 sales were to our wholesale, manufacturerannual and institutional groups (including horse and tack shops, Western wear, crafters, upholsterers, cobblers, auto repair, education, hospitals, prisons and other large businesses that use our products as raw materials to produce goods for resale). Generally, our retail customers provide a higher gross profit as compared to our wholesale and manufacturer groups. lifetime spend.
We serve ourTo address the opportunity among the largest customers, through various means including walk-in traffic, phone, mail order,in 2019 we launched a Commercial Program designed to better meet the needs of these customers. The program is comprised of dedicated outside sales representatives, clear and orders generatedcompetitive volume-based pricing, personalized service and sourcing, shipping directly to customers from our website. We seek to minimize delivery time by locating our stores based on the location of customers. A two-day maximum delivery time for phone, webdistribution center, and mail orders is our goal. We also employ a distinctive marketing tactic in that we maintain an internally-developed target customer mailing list for use in our direct mail advertising campaigns. We staff our stores with experienced managers whose compensation is tied to the operating profit of the store they manage. Sales are generated by the selling efforts of the store personnel, combined with our marketing programs, including print, digital, direct mail, community eventsimproved product consistency, quality and trade shows.
No single customer’s purchases represented more than 0.5% of our total sales in 2017. Sales to our five largest customers represented 1.2%, 1.4% and 1.3% of consolidated sales in 2017, 2016, and 2015, respectively. We do not believe the loss of any one of these customers would have a significant negative impact on our consolidated results.
We offer an unconditional satisfaction guarantee to our customers. Simply stated, we will accept product returns for any reason. We believe this liberal policy promotes customer loyalty. We offer credit terms to our non-retail customers upon receipt of a credit application and approval by our credit manager. Generally, our open accounts are net 30 days.availability.
Our products are generally organized into 12 categories. We carry a wide assortment of products organized into a number of categories including leather, lace, hand tools, hardware, kits, liquids, machinery and craftother supplies. We operate a light manufacturing facility in Fort Worth, Texas, whosewhere we manufacture kits, thread lace, belt strips and straps, and Craftaid®s, and provide some custom manufacturing processes generally involve cutting leather into various shapesfor commercial and patterns using metal dies.business customers. The factory produces approximately 20%10% of our products and also assembles and repackages products as needed. Products manufactured in our factory are distributed through our stores under the TejasTM brand name.products. We also distribute product under the Tandy LeatherTM, Eco-FloTM, CraftoolTM, CraftoolProTMand Dr. Jackson'sJackson’sTM brands.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. 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.
Sales by product category were as follows:
^A concho is a metal adornment attached to clothing, belts, saddles, etc., usually made into a pattern
Our Operating Segments
We operate in two segments, based on management responsibility and store location: North America and International. Prior to January 1, 2017, we operated in three segments: Wholesale, Retail and International. To better reflect how management analyzes the business and allocates resources, we combined Wholesale and Retail into North America effective January 1, 2017, while International remains the same. All prior year data discussed throughout this Annual Report on Form 10K has been restated to conform to the new reporting segment structure. The new reporting segment structure did not result in any change to our consolidated financial position or results.Operations
North America Segment
As of March 7, 2018, the North America segment consists of 115 stores, of which 105 are in the United States across 42 US states and 10 are in Canada across 7 provinces. This segment had net sales of $78.6 million, $79.0 million and $80.5 million for 2017, 2016, and 2015, respectively.Data.
From a physical standpoint,Most of our stores range in size from 1,2001,300 square feet to 22,0009,000 square feet, with the average size of aat approximately 3,500 square feet, and our Fort Worth flagship store beingis approximately 4,00022,000 square feet. The types of premises utilized for our storesStores are generallylocated in light industrial offices or warehouse spaces or older strip shopping centers in proximity to major freeways or well-known crossroads; these typescrossroads. We believe that many of locations typically offer lowerour customers view our stores as a destination: customers interested in leathercrafting seek us out, reducing the value of paying high rents compared to other more retail-orientedfor high foot-traffic locations. In 2016, we began opening new stores with an average footprint of 2,500 square feet in upgraded retail centers to seek to attract more retail customers.
We plan to open two to four new stores in 2018, and we will evaluate the number of store relocations to seek to ensure that the benefits gained exceed the costs of relocation.
International Segment
The International segment consists of all stores located outside of North America. As of March 7, 2018, we had four such stores, two located in the United Kingdom, one located in Australia, and one located in Spain. This segment’s net sales were approximately $3.8 million, $3.9 million and $3.7 million in 2017, 2016, and 2015, respectively. We intend to open more stores internationally, as the opportunities present themselves, but we have not determined a specific time schedule for future store openings and we do not expect to open any international stores in 2018.
The business concept for our International segment is similar to our North America strategy, although the stores average 7,000 square feet and are generally located in light industrial areas. The customer base generally consists of individuals, wholesale distributors, equine-related shops, cobblers, dealers, and retailers dispersed geographically throughout Europe, Australia, and Asia. No single customer’s purchases represented more than 4% of International Leathercraft’s sales in 2017.
For more information about our business and our reportable segments, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Operations
Starting March 1, 2018, in the majority of our stores, our hours of operation were extended to allow for later closing times to seek to better accommodate our customer’s schedules. Our stores now open at 10:00 am Monday through Saturday, and close at 6:00 pm on Monday, Wednesday, Friday and Saturday and close at 8 pm on Tuesday and Thursday. Previously, the hours of operation of our stores were 9:00 am to 6:00 pm Monday through Friday, and from 9:00 am to 4:00 pm on Saturdays. Our stores are closed on Sunday, but this is currently under evaluation. The stores maintain uniform prices, except where lower prices are necessary to meet local competition.
We attemptHistorically, we attempted to maintain the optimum number of items in our product line in order to seek to minimize out-of-stock situations against carrying costs involved with such an inventory level. We generally maintain higher inventories of imported items, to seek to ensure a continuous supply. TheIn 2019, we tested our suppliers’ ability to replenish more rapidly and to commit to on-time deliveries to allow lower overall inventory levels and found that out-of-stocks were at a level we viewed as unacceptable. Since 2019, we have also been executing against a number of products offered changes every year duestrategic initiatives to improve our product assortment, test new items online, and tailor product assortments to the introductionneeds of new items and the discontinuance of others.local customers in each store. We carry approximately 2,600 itemsabout 6,500 stock-keeping units (SKUs) in our current product line and continue to refine both the current lines of leatherline, the lead times and leather-related merchandise. All items are offered in all stores, unless prohibited by local regulations.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.
MostOur 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 our competition comes in the form of small, independently-owned businesses some of which are also our customers. These small businesses generallythese competitors carry only a more limited line of leathercraft products.products compared to Tandy. We also compete with several national chains that also carry leathercraft productsare competitive on a very small scale relative to their overall product line. We also compete with internet-based retailers that provide customers the ability to search and compare products and prices without having to visit a physical store. We compete onconvenience, price, availability of merchandise, customer service, depth of our product line, and delivery time. While there is competition with a number of our products, to our knowledge, there is no direct competition affecting our entire product line. Further, to our knowledge, our store chainTandy Leather is the only one in existence solelymulti-store chain specializing in leathercraft. As such,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 thean advantage of being able to purchase large volumes and stock a full range of products in our stores,sourcing as well as hire experienced store personnel that offerdeep product and leathercrafting expertise and project advice.among our employees.
Overall, we believe thatOur supply chain and vendor relationships remain strong. We are focused on continuing to align our relationships with suppliers are strongproduct and do not anticipate any material changes in these supplier relationships. Duesourcing strategies to elevate the overall quality, consistency, and agility to meet the diverse needs of our existing consumers and attract new ones to the number of alternative sources of supply, we do not believe that the loss of any of these principal suppliers would have a material impactbrand. COVID-19 has had varying impacts on our operations.supply chain in 2020 through the present, as the course of the disease has impacted countries differently over time. During the early months of the pandemic, we experienced longer lead times in Asia, and later, we faced reduced capacity in Brazil and Europe, and a near shut-down in India in early 2021. Availability of shipping containers and vessels, especially in Asia, continues to be challenging. Vendors are now increasing product costs across nearly our entire product line, driven by raw material, shipping cost increases and labor shortages due to COVID-19. 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.
We own approximately 120 registeredThe 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 including 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“Tandy Leather Factory,” “The“Tandy Leather Factory," "Tandy Leather Company,"” and “Tandy.” We also own approximately 60 registered foreign trademarks worldwide. We own approximately 600 registered copyrights in The Company is not dependent on any one particular trademark or design patent, although it believes that the United States covering more than 800 individual works relating to various products. We also own“Tandy” and “Tandy Leather” names are important for its business. In addition, Tandy owns several United States patents for specific belt buckles and leather-working equipment. These rights are valuable assets,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 defend them as necessary.continue to use and renew them.
Shannon L. GreeneJanet Carr has served as our Chief Executive Officer and as a member of our Board of Directors since February 2016 and a director since January 2001;October 2018. Prior to her current role, Ms. GreeneCarr 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.
Mark J. AngusThe COVID-19 pandemic had an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the material adverse effect of the pandemic on the economy, our supply chain partners, our employees and customers, customer sentiment in general, and our stores. In March 2020, we temporarily closed all of our stores and took other significant actions to mitigate the ongoing impact of the COVID-19 pandemic on our cash flows and to protect our business and associates for the long term in response to the crisis. Such actions include targeted reductions in discretionary operating expenses such as advertising and payroll expenses, including furloughing a significant number of our employees and temporarily reducing the payroll of remaining employees, reducing capital expenditures and reducing merchandise receipts. Further, we have sought and may continue to seek extended payment terms with our vendors, including suppliers of our products and landlords. During the third quarter of 2020, all of our 106 stores had reopened. However, beginning with the fourth quarter of 2020 and into the present, we have continued to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection rates, in various locations and have again been forced periodically to temporarily close certain stores or move certain stores to “curbside only” operations. We has servedare unable to ensure that our sales will meet or exceed pre-pandemic levels or if additional periods of store closures will be needed or mandated. In addition, our merchandise vendors may have been negatively impacted by the pandemic and the financial difficulties of other retailers, thereby creating concerns about our vendors’ ability to provide us with payment terms or merchandise that is suitable to our brand. The effects of the pandemic have materially adversely impacted our revenues, earnings, liquidity and cash flows, and have required significant actions as President since February 2016 and a director since June 2009; previously, Mr. Angus served as our Senior Vice President from June 2008 – February 2016 and as Vice President of Merchandising from January 1993 – June 2008.mentioned above.
Tina CastilloThe extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak (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 servedhad, and may continue to have, a material adverse impact on our financial position, cash flows, liquidity and results of operations during fiscal year 2020 and beyond. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
William M. Warren has servedAlthough 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 Secretaryto when the remediation plan will be fully developed and General Counsel since 1993. Since 1979, Mr. Warren has been Presidentimplemented. Until our remediation plan is fully implemented, our management will continue to devote significant time, attention and Directorfinancial resources to these efforts. If we do not complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that our future Consolidated Financial Statements could contain errors that will be undetected. Further and continued determinations that there are one or more material weaknesses in the effectiveness of Loe, Warren, Rosenfield, Kaitcer, Hibbs, Windsor & Lawrence, P.C., a law firm located in Fort Worth, Texas.
All officers are elected annuallythe 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, 2020 and the remediation activities undertaken by the Boardus, see Part II, Item 9A, Controls and Procedures of Directors to serve for the ensuing year.this Form 10-K.
RisksIf our cash from operations falls short and we are unable to Our Industryraise additional working capital, we might be unable to fully fund our operations or to otherwise execute our business plan.
Increases in the priceForeign currency fluctuations could adversely impact our financial condition and results 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.operations.
The prices we pay our suppliers forWe generally purchase our products are dependent in part onU.S. dollars. However, we source a large portion of our products from countries other than the market price for leather, metals, and other products.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.
Further, involvementIn 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 United States in war and other military operations abroadU.S., could interrupt or otherwise disrupt international trade and affectthe shipment of our inventory sources. Finally, livestock diseases, such as mad cow, could reduce the availability of hides and leathersproducts, harm our trademarks or increase their cost.damage our reputation. The occurrence of any of these events could materially adversely affect our business, financial condition and our results of operations.Risks Related to Our Business
We may be unable to sustain our financial performance or our past growth, which may have a material adverse effect on our future operating results.
In 2017, we experienced a decline in sales, primarily due to lower sales from our non-retail customers and a decline in operating income due to recent investments in our district manager program and new store growth strategy. 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 district manager program. Our future success will depend substantially on the ability of our management team to successfully execute on its business strategies. If we fail to successfully execute on these business strategies, our future operating results could be adversely affected.
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Our profitability may decline from increasing pressure on margins.
Our industry is subject to significant pricing pressure caused by many factors, including fluctuations in the cost of the leathers and metal products that we purchase and changes in consumer spending patterns and acceptance of our products. 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.
Our growth depends on our ability to open new stores and increase comparable store sales.
One of our key business strategies is to expand our base of retail stores. If we are unable to continue this strategy, our ability to increase our sales, profitability and cash flow could be impaired. To the extent we are unable to open new stores as we anticipate, our sales growth would come only from increases in comparable store sales. Growth in profitability in that case would depend significantly on our ability to improve gross margin. We may be unable to continue our store growth strategy if we cannot identify suitable sites for additional stores, negotiate acceptable leases, or hire and train a sufficient number of qualified team members.
Foreign currencyRisks Related to Our Business Strategy
ITEM 3. LEGAL PROCEEDINGSIn 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.
SeeIn addition, see discussion of Legal Proceedings in Note 98, Commitments and Contingencies of the Notes to the consolidated financial statementsConsolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
We did not purchase any shares of our common stock in 2017, although we are authorized to do so through a stock purchase program permitting us to repurchase up to 2.2 million shares of our common stock at prevailing market prices. We announced the program on August 10, 2015, and it was amended on June 6, 2017 to extend the termination date to August 9, 2018. See Note 11 to our Financial Statements included in Item 8 of this report.
ITEM 6. SELECTED FINANCIAL DATAThe following table summarizes repurchases of our common stock occurring in fourth quarter 2020:
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSoperations for the two years ended December 31, 2020.
This discussion should be read in conjunction with our financial statements and the notes accompanying those financial statements included elsewhere in this Annual Report on Form 10-K. You are also urged to consider10-K, including the information under the caption "Summary“Summary of Critical Accounting Policies."” In addition to historical financial information, the following management'smanagement’s discussion and analysis containsmay contain forward-looking statements. These statements thatreflect 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 assumptions. Ourother factors, many of which are beyond our control, and which may cause actual results and the timing of selected events mayto differ materially from those anticipated inthe 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 a resultrequired by law. More discussion of many factors, including those discussedrisks can be found under “Item 1A. Item 1A, Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Factors.
To our knowledge, we areThe Business and Strategy
We believe thatThe Company currently operates a total of 106 retail stores as of August 2021. There are 95 stores in the key to our success is our ability to profitably grow our base business. We expect to grow that business by opening newU.S., ten stores and by increasing sales in our existing stores. In 2017, we reopenedCanada and one store in Harrisburg, PA and opened newSpain. During the second quarter of 2020, we consolidated U.S. e-commerce web order fulfilment from the stores in Allen, TX; Miami, FL; and McAllen, TX.to our Fort Worth distribution center.
Our International segment operates four company-owned stores with one located in eachResults of Northampton, United Kingdom; Manchester, United Kingdom; Sydney, Australia; and Jerez, Spain. We expect to continue opening international stores in the future, but do not intend to open any new international stores in 2018.Operations
Prior to 2015, we had experienced stable to steady increases in revenue and net income. In 2016, ourConsolidated Net Sales
In addition to the district manager program,The table below reports our store manager base compensation was increased by 40% in December 2016 to comply with the then expected FLSA minimum salaries. While that requirement was delayed and is still being evaluated by the Department of Labor, we maintained the increased base salaries as our store managers are essential to our mission and vision. With a higher base salary, we believe we are better equipped to attract and recruit these key employees, particularly in a tightening labor market.
Also, in 2017, to expand our customer base and increase our brand awareness, we committed to be the national sponsor of the Pinner’s Conference & Expo (“Pinners”), which hosted 2-day events across four U.S. cities focused on crafting classes and shopping, with thousands of women and DIY’s in attendance. We hosted four leathercrafting classes at each of the four conferences with over 1,500 participants. Given our success with the Pinner’s collaboration, in 2018, we committed again to be the national sponsor of Pinners, which will grow to six U.S. cities.
In 2017, our overallglobal net sales continued to be weak with a 0.7% decrease compared to 2016, despite contributions from new stores and the investments in ourby store manager base compensation, the new district manager program and Pinners sponsorship. Our long-term strategy to drive sustainable growth in traffic and sales and achieve our 2020 financial targets of $87 - $90 million in net sales and greater than 10% operating income margins include the following priorities:
Our strategy has required, and is expected to continue to require, investments in our new stores, expanded inventory and merchandising, as well as operating costs for additional headcount, travel, training and marketing expenses. We believe we are investing in areas that will drive sustainable long-term growth.
Results of Operations
Net Sales
Our net salescategory for the three yearsyear ended December 31, 2017, 2016 and 2015 were as follows:2020 compared to the year ended December 31, 2019:
ConsolidatedWe operated 106 stores worldwide as of December 31, 2020 and 115 stores as of December 31, 2019. Since January 1, 2020, we have closed nine stores, including Beaverton, OR in February 2020. During the second quarter of 2020, we converted eight stores from temporary closures to permanent closures based on expiring leases, proximity to other stores, and local web sales for 2017 decreased 0.7% compared to 2016. North America reported a sales decline of 0.6% while International reported a 3.3% decline. In North America, same store sales declined by 2.3%penetration: Phoenix, AZ; Austin TX; Dallas, TX; Peoria, IL; Henrico (Richmond), whileVA; Nyack, NY; Johnston, RI and St Leonard (Montreal), QC. We did not open any new stores added $1.3 million of sales. The decline in same store sales can be attributed to a 9% decrease in purchases from our non-retail customers, offset by a 6% increase in sales to our retail customers. For our International stores, the sales decline was mostly attributable to weakness in our Australia operation as overall foreign currency impacts mostly offset one another.during 2019 or 2020.
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In 2016, our International segment reported a sales increase compared to 2015 while our North America segment reported a sales decline due to a decline in same store sales and loss of sales from closed stores. The increase in sales for our International segment was primarily due to the full year impact of the UK store that opened in October 2015, offset by the change in UK foreign currency rates between 2016 and 2015.
On a consolidated basis, gross profit margins were 63.3%
Our consolidated
The $3.4 million increase in operating expenses in 2017 compared to 2016 was primarilyreviewed for impairment due to $1.3 million in costs related tooverall underperformance. Based on the seven new stores that have opened / reopened since October 2016,results of the review, impairment expense of $1.1 million related to the district manager program, $0.2and $1.0 million was recorded for the increased base salary for our store managers, $0.2 million in increased advertising2020 and marketing related to our national sponsorship of the Pinners program, with the remaining increase related to increases in credit card processing fees, occupancy costs across our store footprint, and home office wages.2019, respectively.
The $184,000 decrease in operating expenses in 2016 compared to 2015 primarily related to $0.5 million savings in store moves (fewer store relocations in 2016 as compared to 2015), $0.3 million decrease in employee compensation and benefits (decrease in store manager bonus, partially offset by increases in headcount), $0.1 million lower advertising and marketing expenses, offset by $0.7 million higher occupancy costs.
In 2016, we incurred other expenses (net) of approximately $98,000 compared to other expenses (net) of approximately $256,000 in 2015. In 2016, we earned approximately $4,000 in interest income on our cash and paid approximately $155,000 in interest expense on our bank debt. We had a currency exchange gain of approximately $19,000 in 2016 compared to a currency exchange gain of approximately $24,000 in 2015.
On December 22, 2017, Tax Cutschange in valuation allowance against U.S. deferred tax assets and Jobs Act (the “Tax Act”) was enacted. Except for certain provisions, the Tax Act isforeign net operating losses. Going forward, we expect that our effective for tax years beginning on or after January 1, 2018. As a fiscal year U.S. taxpayer, the majority of the provisions will apply in 2018, such as the lowering of the U.S. federal corporate income tax rate to 21%, eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income and introducing new limitations on certain business deductions. Additionally, because the Tax Act was enacted in 2017, we were required to record an additional $340,782 of net income tax expense in the fourth quarter of 2017 as follows:
The above amounts were recorded based on reasonable estimates and our current interpretation of the Tax Act. We are still accumulating and processing data to finalize the underlying calculations and expect regulators to issue further guidance. As such, our estimates may subsequently change.
Segment Information
Results of operations by segment follows:
North America
The table below reports our net sales by store category for our North America segment for the year ended December 31, 2017 compared to the prior year:
North America consisted of 115 stores at December 31, 2017 and 111 stores at December 31, 2016. In 2017, we opened stores in Allen, TX (April 2017); Miami, FL (May 2017); and McAllen, TX (May 2017). Our Harrisburg, PA store was temporarily closed from April 2016 through December 2016. In 2016, we opened stores in Nyack, NY (March 2016); Philadelphia, PA (October 2016); Lyndhurst, NJ (November 2016); and Johnston, RI (December 2016). We closed stores in Tucson, AZ (March 2016) and Allentown, PA (April 2016). A store is categorized as “new” until it is operating for the full comparable period in the prior year.
The decline in same store sales was primarily due to a 9% decrease in sales to our non-retail customers, offset by a 6% increase to our retail customers. Specifically, ticket counts to our non-retail customers were relatively flat, decreasing by 0.1%, while the average ticket decreased 10%, from $130.25 in 2016 to $117.01. Our non-retail customers are still buying, just not as much.
For our retail customers, we believe the initiatives to improve our customer experience and increase our brand awareness have been successful. Further, our military and first responder appreciation programs (eligible customers receive discounted pricing) have also been well accepted, as enrollments continue to increase from 9,085 members at December 31, 2016 to 43,895 members at December 31, 2017. Sales to this customer group increased 6% in 2017 compared to 2016. Specifically, ticket counts increased 15%, while the average ticket was $63.12 in 2017 compared to $68.34 in 2016.
The table below reports our net sales by store category for the year ended December 31, 2016 compared to the prior year:
In 2015, there were no changes in our store footprint (no store openings or closures). The overall sales decline in 2016 compared to 2015 was due to lower sales to our non-retail customer group, while sales to retail customers experienced an increase.
Our sales mix by customer group for the three years ended December 31, 2017, 2016 and 2015 was as follows:
In 2017, North America’s operating expenses increased $3.3 million to $42.4 million compared to $39.1 million in 2016 due to $1.3 million in costs related to the seven new stores that have opened / reopened since October 2016, $1.1 million related to the district manager program, $0.2 million for the increased base salary for our store managers, $0.2 million in increased advertising and marketing related to our national sponsorship of the Pinners program, while the remaining increases related to increases in credit card processing fees, occupancy costs across our store footprint and home office wages,2021 will be 25-27%.
In 2016, North America’s operating expenses decreased $0.4 million primarily due to $0.5 million savings in store moves (fewer store relocations in 2016 than 2015), $0.3 million decrease in employee compensation and benefits (decrease in store manager bonus, partially offset by increases in headcount), $0.1 million lower advertising and marketing expenses, offset by $0.5 million higher occupancy costs.International
Our International segment consists of all stores located outside of North America. As of December 31, 2017 and 2016, that represents four retail/wholesale combination stores with two located in the United Kingdom, one located in Australia, and one located in Spain. International accounted for 4.6%, 4.7%, and 4.4% of our total sales in 2017, 2016, and 2015, respectively. We opened the second store in the United Kingdom in October 2015.
The increases (or decreases) in net sales, operating income and operating income as a percentage of sales from our International stores for the years ended December 31, 2017, 2016 and 2015 were as follows:
International’s sales totaled approximately $3.8 million in 2017, compared to approximately $3.9 million in 2016, a decrease of $129,000, primarily due to lower sales in our Australia unit and unfavorable foreign currency exchange rates in the UK, offset by favorable exchange rates in Spain. Gross profit for International decreased to 59.3% in 2017 compared to 61.8% in 2016, due to customer and product mix. International’s operating expenses increased by $159,000 due to higher personnel, rent and advertising costs. Specifically, International’s operating expenses totaled approximately $2.5 million in 2017, compared to $2.3 million in 2016. Overall, advertising and marketing expenses are this segment’s largest expense, followed by employee compensation, rent, travel, and shipping costs to customers.
International’s sales increased by 5.1% in 2016 compared to 2015, primarily due to the full year impact of the Manchester, UK store that opened in October 2015. Gross margin increased from 60.5% in 2015 to 61.8% in 2016. Operating expenses as a percentage of sales in 2016 increased from 57.2% in 2015 to 59.8% in 2016 as operating expenses grew at a faster pace in 2016 than sales, due to the addition of the Manchester, UK store. As a result, International’s operating income as a percentage of sales decreased to 2.0% for 2016 compared to 3.3% for 2015. The change in foreign currency exchange rates from 2015 to 2016, primarily in the UK, and the performance our stores in Europe were the primary causes of the decline in this segment.
Also, on September 18, 2015,For the year ended 2019, we executed a Promissory Note and Business Loan Agreement with BOKF which provides us with a linegenerated $10.5 million of credit facility of up to $6,000,000 and is securedcash from operations driven by our inventory. On August 10, 2017, this line of credit was amendedefforts to extend the maturity to September 18, 2019. The Business Loan Agreement contains covenants that require us to maintain a funded debt to EBITDA ratio of no greater than 1.5 to 1 and a Fixed Charge Coverage Ratio greater than or equal to 1.2 to 1. Both ratios are calculated quarterly on a trailing four quarter basis. For the years ended December 31, 2017 and 2016, there were no amounts drawn on this line and we were fully in compliance with the required covenants.
Amounts drawn under either facility accrue interest at the London interbank Eurodollar market rate for U.S. dollars (commonly known as “LIBOR”) plus 1.85% (3.351% and 2.557% at December 31, 2017 and 2016, respectively).
On our consolidated balance sheet, total assets increased to $74.9 million at December 31, 2017 from $70.7 million at year-end 2016. Total stockholders’ equity increased to $59.5 million at December 31, 2017 from $53.7 at year-end 2016, primarily due to net income earned during 2017, the exercise of stock options and the impact of foreign currency translation. Our current ratio increased to 8.3 at December 31, 2017 from 6.5 at year-end 2016 due primarily to an increase in cash and inventory and a decrease in accrued liabilities.
As of December 31, 2017, our investment in inventory increased by $4.1 million from year-end 2016, as we invested in the four new stores that opened/reopened since December 31, 2016 and expanded our product line to support new marketing and merchandising initiatives. Inventory turnover reached an annualized rate of 2.3 times in 2017, decreasing from 2.5 times in 2016. We compute our inventory turns as sales divided by average inventory (calculated as the average of the beginning of the year and end of the year balances). At December 31, 2017, average inventory per store was $176,000, an increase of 9% compared to $161,000 at year-end 2016. This increase is a result of new merchandise in an effort to appeal to an expanded and diverse customer base, as well as stocking higher end leathers and luxury do-it-yourself kits in an effort to appeal to our legacy customer base. In general, our products are not perishable or seasonal and because we don’t sell finished goods, our products can have a long shelf life.
Accounts payable decreased approximately $0.2 million to $1.4 million at December 31, 2017 compared to year-end 2016 due to timing of payments. Accrued expenses decreased by $1.0 million from year-end 2016 to $5.0 million at December 31, 2017 due to lower accrued bonus and lowerstreamline working capital levels, of inventory in transit.
In 2017, cash flow provided by operating activitieswhich $9.3 million was $3.0 million, composedfrom the liquidation of inventory. The 2019 net incomeloss of $4.5 million, plus $1.9 million was offset by non-cash expenses of $6.7 million, including depreciation and amortization, plus $0.9impairments, and stock-based compensation. With the cash generated from operations, we invested $18.1 million of foreign currency translation, offset by changes in working capital including purchases of inventoryshort-term U.S. Treasuries and payments of accrued expenses.
By comparison, in 2016, cash flow provided by operating activities was approximately $7.5 million, composed of net income of $6.4 million, plus $1.7 million of depreciation and amortization.Cash flow used in investing activities totaled approximately $1.7sold short-term U.S. Treasuries at maturity for $9.1 million, and $1.5we invested $0.3 million in 2017 and 2016, respectively, consisting primarily ofcapital expenditures for the purchase of store fixtures for new stores, store moves and remodels and computer equipment, and in 2017, vehicles and computer equipment for our new district managers.
There was $151,000 ofsystems implementations. We used cash provided by financing activities in 2017, related to proceeds from the exercise of stock options, offset by the final payment on our capital lease, compared to $95,000 used in financing activities in 2016. In 2016, we repurchased $3.7to extinguish $9.0 million of debt and to repurchase 131,782 shares of treasury stock funded primarily through drawdowns on our linefor $0.7 million at an average price of credit with BOKF, as well as made$5.58 per share. The activities above, in addition to the effect of exchange rate changes, resulted in a scheduled payment on our capital lease obligationnet decrease in cash of $80,710.$8.2 million.
We strive to report our financial resultsThe preparation of the Company’s Consolidated Financial Statements in a clear and understandable manner, although in some casesaccordance with accounting and disclosure rules are complex and require us to use technical terminology. We followprinciples generally accepted accounting principles in the U.S. in preparing our consolidated financial statementsUnited 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 require usform 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 assumptionsestimates are subject to change due to modifications in the underlying conditions or assumptions. The policies discussed below require estimates that affect our financial position and resultscontain a significant degree of operations. We continually review ourjudgement. The use of estimates is pervasive throughout the Consolidated Financial Statements, but the accounting policies how theyand estimates considered most critical are applied, and how they are reported and disclosed in our financial statements. Following is a summary of our more significant accounting policies.as follows.
We face exposure to financial market risks, as described below. These exposures may change over time and could have a material impact on our financial results. We do not use or invest in market risk sensitive instruments to hedge any of these risks or for any other purpose.
Foreign Currency Risk. Our primary foreign currency exposure is related to our foreign subsidiaries as those subsidiaries have local currency revenue and local currency operating expenses. Changes in the foreign currency exchange rates impact the U.S. dollar amount of revenue and expenses. See Note 12 to the Consolidated Financial Statements, Segment Information, for financial information concerning our foreign activities.
Interest Rate Risk. We are subject to market risk associated with interest rate movements on our outstanding debt which accrue interest at a rate that changes with fluctuations in the LIBOR rate. Based on the Company's level of debt at December 31, 2017, increase of one percent in the LIBOR rate would result in additional interest expense of approximately $74,000 during a twelve-month period.
Tandy Leather Factory, Inc.Consolidated Balance Sheets
The accompanying notes are an integral part of these financial statements.
Tandy Leather Factory, Inc.Consolidated Statements of Comprehensive IncomeFor the Years Ended December 31
The accompanying notes are an integral part of these financial statements.
Tandy Leather Factory, Inc.Consolidated Statements of Cash FlowsFor the Years Ended December 31
The accompanying notes are an integral part of these financial statements.
Tandy Leather Factory, Inc.Consolidated Statements of Stockholders' EquityFor the Years Ended December 31
The accompanying notes are an integral part of these financial statements.
TANDY LEATHER FACTORY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017, 2016, and 2015
1. DESCRIPTION OF BUSINESS
We are a specialty retailer of leather and leathercraft related items, offering a broad range of leather, quality tools, hardware, accessories, liquids, lace, kits and teaching materials. We sell our products through company-owned stores and through orders generated from our website, www.tandyleather.com. We also manufacture the leather lace and some of our do-it-yourself kits that are sold in our stores and website.
We operate in two segments, based on management responsibility and store location: North America and International. Prior to January 1, 2017, we operated in three segments: Wholesale, Retail and International. To better reflect how management analyzes the business and allocates resources, we combined Wholesale and Retail into North America effective January 1, 2017, while International remains the same.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Assets and liabilities with reported amounts based on significant estimates include trade accounts receivable, inventory (slow-moving), goodwill, and deferred income taxes.
Our consolidated financial statements include the accounts of Tandy Leather Factory, Inc. and its wholly owned subsidiaries, The Leather Factory, L.P. (a Texas limited partnership), Tandy Leather Company, L.P. (a Texas limited partnership), Mid-Continent Leather Sales, Inc. (an Oklahoma corporation), Roberts, Cushman & Company, Inc. (a Texas corporation), 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.
Foreign currency translation adjustments arise from activities of our foreign subsidiaries. Results of operations are translated into U.S. dollars using the average exchange rates during the period, while assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments of assets and liabilities are recorded in stockholders’ equity. Gains and losses resulting from foreign currency transactions are reported in the statements of income under the caption “Other (Income) Expense”, net, for all periods presented. We recognized foreign currency transaction gains of $30,000, $19,000, and $24,000, in 2017, 2016, and 2015, respectively.
Our sales generally occur via two methods: (1) at the store counter, and (2) shipment by common carrier. Sales at the counter are recorded and title passes as transactions occur. Otherwise, sales are recorded and title passes when the merchandise is shipped to the customer. Shipping terms are normally FOB shipping point. Sales tax and comparable foreign tax is excluded from revenue.
We offer an unconditional satisfaction guarantee to all customers and accept all product returns. Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise.
We maintain four price levels on a consistent basis: retail, wholesale, business, and distributor. Gross sales are reported after deduction of discounts. We do not pay slotting fees or make other payments to resellers.
Cost of goods sold includes inbound freight and duty charges from vendors to our central warehouse, freight and handling charges to move merchandise from our central warehouse to our stores, and manufacturing overhead, as appropriate.
Operating expenses include all selling, general and administrative costs including wages and related employee expenses (payroll taxes, health benefits, savings plans, etc.), advertising, outbound freight charges (to ship merchandise to customers), rent, and utilities.
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 is valued at the lower of cost or net realizable value. In addition, the value of inventory is periodically reduced to net realizable value for slow-moving or obsolete inventory based on management's review of items on hand compared to their estimated future demand.
We evaluate long-lived assets for indicators of impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. Additionally, for store assets, we evaluate the performance of individual stores for indicators of impairment and underperforming stores are selected for further evaluation of the recoverability of the carrying amounts. The evaluation of long-lived assets is performed at the lowest level of identifiable cash flows, which is at the individual store level. Impairment is determined when estimated future undiscounted cash flows associated with an asset are less than the asset’s carrying value. To date, we have not recognized any impairment of our long-lived assets.
Basic earnings per share are computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share includes, to the extent inclusion of such shares would be dilutive to earnings per share, the effect of outstanding options and warrants, computed using the treasury stock method.
For additional disclosures regarding the restricted stock awards and the employee stock options, see Note 11. The net effect of converting stock options and restricted stock grants to purchase 19,169, 90,085, and 68,400 shares of common stock at option prices less than the average market prices has been included in the computations of diluted EPS for the years ended December 31, 2017, 2016, and 2015, respectively.
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is required to be evaluated for impairment on an annual basis, absent indicators of impairment during the interim. Application of the goodwill impairment test requires exercise of judgment, including the estimation of future cash flows, determination of appropriate discount rates and other important assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. Goodwill is not amortized, but is evaluated at least annually for impairment. We completed our annual goodwill impairment analysis as of December 31 for each of the years ended December 31, 2017, 2016, and 2015 and determined that no adjustment to the carrying value of goodwill was required.
The only change in our goodwill for 2017 and 2016 resulted from foreign currency translation gains (losses) of $6,748 and $2,845, respectively.
Our intangible assets and related accumulated amortization consisted of the following:
Excluding goodwill, we have no intangible assets not subject to amortization under U.S. GAAP. Amortization of intangible assets of $1,618 in 2017, $6,442 in 2016, and $40,744 in 2015 was recorded in operating expenses. The weighted average amortization period is 15 years for trademarks and copyrights. Based on the current amount of intangible assets subject to amortization, we estimate amortization expense as follows for the next five years:
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 (unadjusted) for identical assets or liabilities in active markets.
Level 2 – include other inputs that are directly or indirectly observable in the marketplace.
Level 3 – significant unobservable inputs which are supported by little or no market activity.
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 certificates of deposit, accounts receivable, accounts payable, and long-term debt. The carrying value of certificates of deposit, accounts receivable and accounts payable approximate their fair value due to the relatively short-term nature of the accounts. The terms of the long-term debt are considered reasonable for this type of financing; therefore, the carrying amount approximates fair value.
We account for income taxes using the asset and liability method. Under this method, the amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our assets and liabilities.
We have one stock option plan that expired in March 2017. This plan permitted annual stock option grants to non-employee directors with an exercise price equal to the fair market value of the shares at the date of grant. These options vest and become exercisable six months from the option grant date. Under this plan, no stock options were awarded in 2017, 2016 or 2015, therefore, we did not recognize any share based compensation expense for these options during those periods.We also have a restricted stock plan that was adopted by our Board of Directors in January 2013 and approved by our stockholders in June 2013. The plan reserves up to 300,000 shares of our common stock for restricted stock awards to our executive officers, non-employee directors, and other key employees. Awards granted under the plan may be stock awards or performance awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years. The fair value of nonvested restricted common stock awards is the market value of our common stock on the date of grant. Compensation costs for these awards will be recognized on a straight-line basis over the four year vesting period.
Comprehensive income includes net income and certain other items that are recorded directly to Stockholders’ Equity. The Company’s only source of other comprehensive income is foreign currency translation adjustments.
All shipping and handling costs incurred by us are included in operating expenses on the statements of income. These costs totaled approximately $1,965,000, $1,982,000, and $2,012,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
With the exception of catalog costs, advertising costs are expensed as incurred. Catalog costs are capitalized and expensed over the estimated useful life of the particular catalog in question, which is typically twelve to eighteen months. Such capitalized costs are included in other current assets and totaled $203,000 and $213,000 at December 31, 2017 and 2016, respectively. Total advertising expense was $4,956,000 in 2017; $4,759,000 in 2016; and $4,826,000 in 2015.
For purposes of the statement of cash flows, we consider all highly liquid investments with initial maturities of three months or less from the date of purchase to be cash equivalents.
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
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3. VALUATION AND QUALIFYING ACCOUNTS
We maintain allowances for bad debts based on factors such as the composition of accounts receivable, the age of the accounts, historical bad debt experience, and our evaluation of the financial condition and past collection history of each customer. Write-offs have historically not been material, but are evaluated for write off as they are deemed uncollectible based on a periodic review of accounts. Our allowance for doubtful accounts was approximately $22,600 and $2,400 at December 31, 2017 and 2016, respectively.
Product returns are generally recorded directly against sales as those returns occur. Historically, the amount of returns is immaterial and as a result, no reserve is recorded in the financial statements.
The majority of inventory items maintained by us have no restrictive shelf life. We review all inventory items annually to determine what items should be eliminated from the product line. Items are selected for several reasons: (1) the item is slow-moving; (2) the supplier is unable to provide an acceptable quality or quantity; or (3) to maintain a freshness in the product line. Reductions in inventory for slow-moving and obsolete inventory are recorded directly against inventory.
4. BALANCE SHEET COMPONENTS
Depreciation expense was $1,873,484, $1,717,548, and $1,520,385 for the years ended December 31, 2017, 2016, and 2015, respectively.
Loss (gain) from abandonment and/or disposal of assets, which is included in operating expenses, is as follows, by segment:
5. NOTES PAYABLE AND LONG-TERM DEBT
On September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF, NA d/b/a Bank of Texas (“BOKF”) which provides us with a line of credit facility of up to $6,000,000 and is secured by our inventory. On August 10, 2017, this line of credit was amended to extend the maturity to September 18, 2019. The Business Loan Agreement contains covenants that require us to maintain a funded debt to EBITDA ratio of no greater than 1.5 to 1 and a Fixed Charge Coverage Ratio greater than or equal to 1.2 to 1. Both ratios are calculated quarterly on a trailing four quarter basis. For the years ended December 31, 2017 and 2016, there were no amounts drawn on this line.
Also, on September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF which provides us with a line of credit facility of up to $10,000,000 for the purpose of repurchasing shares of our common stock pursuant to our stock repurchase program, announced in August 2015 and subsequently amended, which permits us to repurchase up to 2.2 million shares of our common stock at prevailing market prices through August 2018. On August 25, 2016, this line of credit was amended to increase the availability from $10,000,000 to $15,000,000 for the repurchase of shares of our common stock pursuant to our stock repurchase program through the earlier of August 25, 2017 or the date on which the entire amount is drawn. On August 10, 2017, this line of credit was further amended to extend the drawdown period and conversion date from August 25, 2017 to August 18, 2018 to align with our stock repurchase program. During this time period, we are required to make monthly interest-only payments. At the end of this time period, we expect that the principal balance will be rolled into a 4-year term note. This Promissory Note is secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas. There were no amounts drawn on this line during in 2017. During the year ended December 31, 2016, we drew approximately $3.7 million on this line which was used to purchase approximately 520,500 shares of our common stock pursuant to our stock repurchase program. At December 31, 2017, the unused portion of the line of credit was approximately $7.6 million.
Amounts drawn under either facility accrue interest at the London interbank Eurodollar market rate for U.S. dollars (commonly known as “LIBOR”) plus 1.85% (3.351% and 2.557% at December 31, 2017 and December 31, 2016, respectively).
At December 31, the amount outstanding under the above agreements consisted of the following:
The terms of the above lines of credit contain various covenants for which we were in compliance as of December 31, 2017 and 2016.
Scheduled maturities of the Company’s notes payable and long-term debt are as follows:
6. CAPITAL LEASE OBLIGATIONS
We lease certain telecommunication equipment under a capital lease agreement. The asset subject to the agreement totaled $227,783, of which $217,094 and $210,904 was included in Property and Equipment at December 31, 2017 and 2016, respectively, and $10,689 and $16,879 which was included in Prepaid Equipment (not placed in service) as of December 31, 2017 and 2016, respectively. Accumulated depreciation on the assets placed in service December 31, 2017 and 2016 were approximately $63,319 and $21,400, respectively. Amortization of the capitalized cost is charged to depreciation expense.
At December 31, 2017, there were no amounts owed under our capital lease obligation, while at December 31, 2016, we owed $72,686 which was included in current liabilities.
7. EMPLOYEE BENEFIT AND SAVINGS PLANS
We have a 401(k) plan to provide retirement benefits for our employees. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred salary contributions for eligible employees and allows employees to contribute a percentage of their annual compensation to the plan on a pretax basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. In 2017, 2016, and 2015, 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.
* Due to the annual limit on eligible earnings imposed by the Internal Revenue Code
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 2017, 2016, or 2015.
We currently offer no postretirement or postemployment benefits to our employees.
8. INCOME TAXES
The provision for income taxes consists of the following:
On December 22, 2017, Tax Cuts and Jobs Act (the “Tax Act”) was enacted. Except for certain provisions, the Tax Act is effective for tax years beginning on or after January 1, 2018. As a fiscal year U.S. taxpayer, the majority of the provisions will apply in 2018, such as the lowering of the U.S. federal corporate income tax rate to 21%, eliminating the domestic manufacturing deduction, creating new taxes on certain foreign sourced income and introducing new limitations on certain business deductions. Additionally, because the Tax Act was enacted in 2017, we were required to record $340,782 of net income tax expense in the fourth quarter of 2017 as follows:
*classified as part of the Federal current provision^classified as part of the Federal deferred benefit
The above amounts were recorded based on reasonable estimates and our current interpretation of the Tax Act. We are still accumulating and processing data to finalize the underlying calculations and expect regulators to issue further guidance. As such, our estimates may subsequently change.
Income before income taxes is earned in the following tax jurisdictions:
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:
The effective tax rate differs from the statutory rate as follows:
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 2015. Depending on the jurisdiction, we are no longer subject to state examinations by tax authorities for years prior to the December 2014 and December 2015 tax years.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease our store locations under lease agreements that expire on dates ranging from February 2018 to November 2027. Rent expense on all operating leases for the years ended December 31, 2017, 2016, and 2015, was $4,609,724, $4,189,225, and $3,844,641, respectively.
Future minimum lease payments under noncancelable operating leases at December 31, 2017 were as follows:
Legal Proceedings
We are periodically involved in various other 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 and operating results. Legal costs associated with the resolution of claims, lawsuits, and other contingencies are expensed as incurred.
10. SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK
Major Customers
Our revenues are derived from a diverse group of customers primarily involved in the sale of leathercraft. No single customer accounted for more than 1/2% of our consolidated revenues in 2017, 2016, or 2015 and sales to our five largest customers represented 1.2%, 1.4%, and 1.3%, respectively, of consolidated revenues in those years. While we do not believe the loss of one of these customers would have a significant negative impact on our operations, we do believe the loss of several of these customers simultaneously or a substantial reduction in sales generated by them could temporarily affect our operating results.
Major Vendors
We purchase a significant portion of our inventory through one supplier. Due to the number of alternative sources of supply, loss of this supplier would not have an adverse impact on our operations.
Credit Risk
Due to the large number of customers comprising our customer base, concentrations of credit risk with respect to customer receivables are limited, although at December 31, 2017 and 2016, two customer’s balances represented 21.4% and 35.2% 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 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.
11. STOCKHOLDERS' EQUITY
We have one stock option plan that terminated in March 2017. This plan permitted annual stock option grants to non-employee directors with an exercise price equal to the fair market value of the shares at the date of grant. Options outstanding and exercisable were granted at a stock option price which was not less than the fair market value of our common stock on the date the option was granted and no option has a term in excess of ten years.
A summary of stock option transactions for the years ended December 31 is as follows:
Because we had no awards of stock options in 2017, 2016 and 2015, we were not required to record any compensation cost for stock options.
The intrinsic value of stock options exercised in 2017 and 2015 was $155,606 and $2,953, respectively. Cash received from the exercise of stock options for 2017, 2016, and 2015 was $223,404, $ - and $9,920, respectively.
We have a restricted stock plan that was adopted by our Board of Directors in January 2013 and approved by our stockholders in June 2013. The plan reserves up to 300,000 shares of our common stock for restricted stock awards to our executive officers, non-employee directors and other key employees. Awards granted under the plan may be stock awards or performance awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years, unless otherwise determined by the committee that administers the plan.
A summary of the activity for non-vested restricted common stock awards is as follows:
We recognized share based compensation expense of $239,599, $199,870, and $145,321 in 2017, 2016 and 2015, respectively, as a component of operating expenses. As of December 31, 2017, there was unrecognized compensation cost related to non-vested restricted stock awards of $174,314 which will be recognized in each of the following years as follows:
Of the 300,000 shares available for issuance, there are 188,225 shares available for future awards.
Our Board will determine future cash dividends after giving consideration to existing levels of profit and cash flow, capital requirements, current and forecasted liquidity, as well as financial and other business conditions existing at the time.c) Stockholder Rights Plan
On June 6, 2013, our Board of Directors authorized and declared a dividend of one preferred share purchase right (a “Right” and collectively, the “Rights”) for each outstanding share of our common stock, par value $0.0024 per share, to stockholders of record at the close of business on June 16, 2013. Each Right entitled the registered holder to purchase from us one one-thousandth of a newly created series of preferred stock at an exercise price of $30.00 per Right. The Rights were exercisable in the event any person or group acquires 20% or more of our outstanding common stock (an “Acquiring Person”), or commences a tender offer or exchange offer that would result in such person becoming an Acquiring Person. An exception was included in the Rights plan to ensure that certain owners are not, by virtue of their share ownership, automatically deemed to be an Acquiring Person upon adoption of the plan unless any such owner subsequently accrued additional shares of our common stock and after giving effect to such acquisition owns 20% or more of our outstanding common stock. The Rights expired on June 6, 2017.
In August 2015, our Board authorized a share repurchase program pursuant to which we are authorized to repurchase up to 1.2 million shares of our common stock at prevailing market rates through August 2016. Subsequently, the program was amended to increase the number of shares available for repurchase from 1.2 million to 2.2 million and to extend the program through August 2018. In 2017, there were no shares repurchased under this plan. At December 31, 2017, there are 1,150,793 shares available for repurchase under the plan.
12. SEGMENT INFORMATION
Effective January 1, 2017, we updated our reporting segments to better reflect how management analyzes the business and allocates resources, as follows:
Our reportable operating segments have been determined as separately identifiable business units, and we measure segment earnings as operating earnings, defined as income before interest and income taxes. All prior year segment information has been restated to conform to the current segment structure.
Net sales by geographic areas were as follows:
Geographic sales information is based on the location of the customer. Except for Canada, we had no sales to any single foreign country that was material to our consolidated net sales in 2017, 2016, and 2015. We do not have any significant long-lived assets outside of the United States.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification Topic ("ASC") 606. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new accounting guidance may be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We will be adopting this new accounting guidance under a modified retrospective application which allows an adjustment to equity as of January 1, 2018 to all existing contracts and to apply the new standard to all new contracts that begin in 2018. Based on our evaluation, we expect the adoption will change the timing of recognition of our gift card breakage income, which has historically been immaterial to our financial condition, results of operations and cash flows; as such, we had recognized gift card as sales in the period the gift card was sold. The new guidance will require application of the proportional method in recognizing revenue in our consolidated statements of income. Further, while we offer an unconditional right of return to our customers, this has historically been immaterial to our financial condition, results of operations and cash flows (annual gross product returns represent less than 0.1% of our net sales). We estimate that, at adoption on January 1, 2018, there will be an $168,000 increase to other accrued liabilities for gift cards where satisfaction of our performance obligation is not yet complete. Finally, the new guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition.
In February 2016, FASB issued ASU 2016-02, “Leases”, a comprehensive new standard that amends various aspects of existing accounting guidance for leases. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. The guidance retains the current accounting for lessors and does not make significant changes to the recognition, measurement, and presentation of expenses and cash flows by a lessee. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance will require modified retrospective application at the beginning of our first quarter of fiscal 2019, with optional practical expedients, but permits adoption in an earlier period. We are currently evaluating the impact this guidance will have on our consolidated financial statements. We expect this adoption will result in a material increase in the assets and liabilities on our consolidated balance sheets but will likely have an insignificant impact on our consolidated statements of earnings.14. QUARTERLY FINANCIAL DATA (UNAUDITED)
OpinionOpinions on the Consolidated Financial Statements
Fort Worth, TexasOklahoma City, Oklahoma
March 8, 2018September 2, 2021
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.
OurAs previously disclosed in our Comprehensive Form 10-K filing for the period ended December 31, 2019, and in connection with the filing of this Form 10-K for the period ended December 31, 2020, 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 “disclosuredisclosure controls and procedures” (asprocedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) asamended (the “Exchange Act”). As a result of the end of the period covered by this report. Based upon their evaluation, of these disclosure controlsour CEO and procedures, our Chief Executive Officer and Chief Financial Officer haveCFO concluded that theour disclosure controls and procedures were not effective asdue to the material weaknesses described below, which resulted in reporting errors requiring a restatement of our financial statements for the date of such evaluation in ensuring that information required to be disclosed inyears ended December 31, 2017 and 2018 and for the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.first quarter ended March 31, 2019.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We have assessed the effectiveness of our internal controls over financial reporting as of December 31, 2017. In making this assessment, we usedis based upon the criteria set forthestablished in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commissions (COSO)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 Internal Control – Integrated Framework. Based on our assessment, we believe that, asaccordance with GAAP.
This annual report does not include an attestation reportA material weakness is defined as a deficiency, or combination of our registered public accounting firm regardingdeficiencies in internal control over financial reporting. Management’s reportreporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not subject to attestation bybe prevented or detected on a timely basis. Based on this definition, our registered public accounting firm pursuant to rulesmanagement, with the participation of our CEO and CFO, evaluated the Securitieseffectiveness and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes in internal control
There was no change indesign of our internal control over financial reporting against the COSO Framework and concluded that occurred during the fiscal quarter endedour internal control over financial reporting was not effective as of December 31, 20172020 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.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE*Michael Galvan, 52, has served as our Chief Financial Officer since January 2021. He first joined the Company in May 2020, initially serving as Interim Chief Financial Officer. Mr. Galvan brings over 25 years of finance and accounting experience to the Company, including executive leadership roles serving as Interim Chief Financial Officer, Chief Accounting Officer and Treasurer for a variety of publicly traded companies, including Main Street Capital Corporation and Mattress Firm. Prior to joining the Company, Mr. Galvan served in various management roles including Senior Vice President, Chief Accounting Officer and Treasurer of NexTier Oilfield Solutions, Inc. (formerly C&J Energy Services, Inc.), from June 2016 until April 2020, including serving as Interim Chief Financial Officer from March through September 2018.
ITEM 11. EXECUTIVE COMPENSATION*Vicki Cantrell, 63, is a retail veteran with over 20 years of operational experience. Since January 2020 she has served as Chief Executive Officer for Vendors in Partnership LLC. From September 2017 until June 2018, she served as Retail Transformation Officer for Aptos Inc., where Ms. Cantrell brought transformation strategies to the retailer’s businesses and to the vendor/retail partnership. Prior to that role, Ms. Cantrell served from October 2011 to October 2016 as a Senior Vice President at National Retail Federation, which is the world’s largest retail association. From May 2008 until June 2011, she served as Chief Operating Officer of Tory Burch LLC while it experienced 300% growth. From April 2003 until May 2008 she served as Chief Information Officer of Giorgio Armani, as it underwent a multi-phase CRM implementation. Ms. Cantrell has worked in all facets of the retail industry, as retailer, vendor/partner and industry spokesperson. She has deep expertise in building and executing strategies to meet evolving needs including enhancing customer acquisition, service and loyalty; determining optimal organizational structure in ever-changing environments; and in building robust cyber security programs.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE*Sharon M. Leite, 59, has been Chief Executive Officer of Vitamin Shoppe, Inc. since August 2018. She previously served as Managing Director, President of Godiva Chocolatier in North America from October 2017 until August, 2018. Prior to joining Godiva, from February 2016 until May 2017, Ms. Leite was the President of Sally Beauty, US and Canada (NYSE: SBH), an international specialty retailer and distributor of professional beauty products, with over 3,000 stores. Prior to joining SBH, from 2007 until January 2016, Ms. Leite was the Executive Vice President of Sales, Customer Experience, & Real Estate at Pier 1 Imports (NYSE: PIR). In addition, Ms. Leite has held various executive leadership roles at Bath and Body Works (L Brands) as well as various sales and operations positions with other prominent retailers including Gap, Inc. and The Walt Disney Company. She currently serves as a member of the Board of Directors of the National Retail Federation (NRF). Ms. Leite brings significant general management experience as well as retail sales, operations, digital, e-commerce, real estate, merchandising, marketing and human resource strategies.
*James Pappas, 40, is the managing member and owner of JCP Investment Management. Mr. Pappas serves on the board of Innovative Food Holdings, Inc. since 2020. Mr. Pappas also served as a director of US Geothermal, Inc. from September 2016 until April 2018. He served as a director of Jamba, Inc., a health and wellness brand and leading retailer of freshly squeezed juice, from January 2015 to September 2018; he also served on Jamba, Inc.’s Nominating, Corporate Governance and Audit Committees. He served on the board of directors of The information required by Items 10, 11, 12, 13, and 14 is or will be set forthPantry, Inc., the largest independently operated convenience store chains in the definitive proxy statementU.S. from March 2014 until it was acquired in February 2015. Mr. Pappas also served on the board of directors, including Chairman of the Board, of Morgan’s Foods from February 2012 to May 2014 until it was acquired. Mr. Pappas received a BBA in Information Technology and a Masters in Finance from Texas A&M University. Mr. Pappas has substantial skills in marketing and branding, as well as experience with growth-oriented businesses. Mr. Pappas also offers a strong tactical and financial background.
(a)The following are filed as part of this Annual Report on Form 10-K:
___________
*Filed*Filed Herewith
TANDY LEATHER FACTORY, INC.
Dated: March 8, 2018
___________ *Filed Herewith
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The following discussion, as well as other portions of this Annual Report on Form 10-K (or statements otherwise made by the Company or on the Company’s behalf from time to time in other reports, filings with the Securities and Exchange Commission (“SEC”), news releases, conferences, World Wide Web postings or otherwise), 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 TLFTandy Leather Factory, Inc. (“TLFA”) or its management “anticipates”, “plans”, “estimates”, “expects”, “believes”, “intends”,“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. Any forward-looking statement speaks only as of the date on which such statement is made. We do not undertake anyassume no obligation to update or otherwise revise anythese forward-looking statements.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 Annual Report on 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”.Operations.” Unless the context otherwise indicates, references in this Annual Report on Form 10-K to “we”, “our”, “us”,“TLFA,” “we,” “our, Company”, “the Company”, “Tandy”,”Tandy Leather” “us,” the “Company,” “Tandy,” or “TLF”,“Tandy Leather” mean Tandy Leather Factory, Inc,Inc., together with its subsidiaries.
General
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 website, www.tandyleather.com.four websites: tandyleather.com, tandyleather.ca, tandyleather.eu and tandyleather.com.au. We also manufacture the leather lace, cut leather pieces and somemost of ourthe do-it-yourself kits that are sold in our stores and website.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.
As of August 13, 2020, Nasdaq suspended trading in the Company’s stock on Nasdaq due to the Company not being current with its SEC filings. Our common stock tradeshas since traded on the NASDAQ Global MarketOTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol "TLF."“TLFA.” Nasdaq denied the Company’s appeal of its decision to suspend trading in the Company’s stock and the Company’s stock was formally delisted on February 9, 2021. We intend to reapply for Nasdaq listing after we have made our required Exchange Act filings. Any such listing would be subject to Nasdaq approval.
3
Retail Fleet
All Tandy locations, other than our corporate headquarters (which includes our flagship store, corporate offices, distribution center, and manufacturing facility) are leased.
Business Strategy
New management joined the Company in October 2018 and set new strategic directions for both the short and long term. The following tables provide store countoverarching goal is to invest in rebuilding a foundation for growth by: 1) improving our brand proposition, 2) reversing the sales decline with business customers, 3) building our talent, processes, tools and expansion informationsystems and 4) positioning us for long-term growth. A number of key initiatives to achieve these goals were begun in 2019 and continued into 2020. However, the onset of the COVID-19 pandemic in March of 2020 shifted our strategic focus to company survival and cash preservation. With all of the retail stores temporarily closed to the public by segmentthe end of March 2020, web sales, digital marketing and centralized web fulfillment became the highest priority.
Key initiatives in 2020 and 2021 included:
| ■ | Accelerating implementation of our new web platform which supported a significantly improved consumer experience (look-and-feel, searchability, relevant content including video, and product and pricing information) integration of inventory, shipping and other systems, and substantial reduction in the time, manual effort and need for outside resources to make additions and changes; |
| ■ | Accelerating centralization of our web fulfillment activities to our Fort Worth warehouse which provided significant improvement in fulfillment rates and shipping times, and supported early product testing, an increase in product breadth by offering online-only items that required limited inventory investment, and other inventory efficiencies; |
| ■ | Shifting marketing resources from print and in-store activities to digital, with increased investments in SEO, SEM, email, digital advertising, social media, SMS/MMS, and affiliate links; |
| ■ | Accelerating the retail employee training program in the areas of product knowledge, leathercrafting knowledge and selling tools while stores were closed; |
| ■ | Continuing to drive the Commercial Program, through a dedicated team focused on the Company’s largest customers with a business model that meets these customers’ unique needs including dedicated sales representatives, clear and competitive volume-based pricing, personalized service and sourcing, shipping directly to customers from our distribution center, and improved product consistency, quality and availability; |
| ■ | Continuing to improve the quality and assortment of the product offering to better appeal to more advanced leather-crafters and business customers; and |
| ■ | Continuing to build the organization, processes, infrastructure, tools and systems to efficiently execute these strategies. |
As a direct result of the COVID-19 pandemic, Tandy temporarily closed all stores by the end of March 2020, furloughed a majority of its employees, and extended payment terms on suppliers. Some landlords granted rent abatements and deferrals for the last five years:
North America | International | |||||
| Year ended | Opened | Closed | Total | Opened | Closed | Total |
| 2013 | 3 | 2 | 108 | - | - | 3 |
| 2014 | 3 | 1 | 110 | - | - | 3 |
| 2015 | - | - | 110 | 1 | - | 4 |
| 2016 | 4 | 3* | 111 | - | - | 4 |
| 2017 | 4* | - | 115 | - | - | 4 |
During the second quarter of 2020, as leases expired or early terminations were negotiated, we permanently closed nine stores where we believed we can retain a majority of customers through geographically proximate stores and/or our enhanced website platform. After these permanent closures, 106 stores remained, including ten in Canada and one in Spain. During the third quarter of 2020, all 106 of Tandy’s stores had reopened to the public and the store re-openings were well received by our employees and customers. During the fourth quarter of 2020 through the present, we have continued to manage through the pandemic as we have seen periodic spikes in COVID-19 infections and have been forced to close certain stores or move certain stores to “curbside only” operations. The current surge in the virus due to the delta variant is creating more store closures due to illness and “close contact” quarantine requirements.
Tandy began 2020 with a good cash position. The sharp reduction in sales associated with COVID-related store closures, especially in the second quarter of 2020, mitigated by aggressive cost management, resulted in a decline in our cash reserve. While the stability of our operating environment has improved significantly relative to the end of March and the second quarter of 2020, the current economic environment remains very risky and highly volatile. We believe that the keyhave retained a high degree of flexibility to react to changes in market conditions, but there is no assurance we can avoid additional detrimental impacts to our success is our ability to profitably grow our base business. We expect to grow that business by opening new storesfinancial position, cash flows, liquidity and by increasing salesresults of operations in our existing stores. Our initiatives to increase sales include new merchandising with an expanded product line intended to increase our retail customer base, a refocus on business development to our wholesale2021 and manufacturer groups, improvements to our digital and e-commerce channels, as well as increasing our average ticket. We have also increased our training efforts with our store associates to strengthen their product knowledge. We believe that our store associates, armed with a solid knowledge of our extensive product line, can drive higher average tickets and traffic conversion.
Customers
Merchandise
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Product Category | 2017 Sales Mix | 2016 Sales Mix | 2015 Sales Mix | ||
| Belts strips and straps | 4% | 4% | 4% | ||
| Books, patterns, videos | 1% | 1% | 2% | ||
| Buckles | 2% | 3% | 3% | ||
| Conchos^ | 2% | 2% | 2% | ||
| Craft supplies | 2% | 2% | 2% | ||
| Dyes, finishes, glues | 7% | 7% | 7% | ||
| Hand tools | 20% | 18% | 16% | ||
| Hardware | 8% | 8% | 8% | ||
| Kits | 6% | 6% | 6% | ||
| Lace | 3% | 3% | 3% | ||
| Leather | 40% | 41% | 42% | ||
| Stamping tools | 5% | 5% | 5% | ||
| 100% | 100% | 100% |
Information regarding net sales, gross profit, operating income, and total assets attributable to each of our segments, is included within Item 7. Management's7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and within Item 8.8, Financial Statements and Supplementary Data in Note 12, Segment Information, of our Notes to Consolidated Financial Statements.
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 his or her projecttheir 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 customer’s projects. The sizeexpertise and layouthigh level of customer service from our store associates, the stores are plannedconvenience of taking their purchases immediately, as well as the ability to allow large quantitiestouch, feel and choose their individual pieces of leather, an organic product to be displayed in an easily accessible and visually appealing manner. For example, leatherwhich each piece is displayed by the pallet where the customer can see and touch it, assessing first-hand the numerous sizes, styles, and grades offered.unique. We also offer open workbenches where customers can try outwork on projects, take classes, commune with the leathercrafting community, and test new tools and stamps.techniques.
Historically, we typically 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 remain fairly even ataverage approximately 22-24 %22-24% of annual sales each quarter.
Distribution
Our stores receive the majority of their inventory from our central warehousedistribution center located in Fort Worth, Texas, although occasionally,in weekly shipments, using third party logistics providers. Occasionally, merchandise is shipped directly from the vendor. Inventory is typically shippedStarting in March 2020, with the store closures due to the storesCOVID-19 pandemic, we began to fulfill web orders from our central warehouse oncedistribution center in Fort Worth. Prior to 2020, web orders were fulfilled by the store based upon availability. This required building a weeknew direct-to-consumer pick, pack and ship process supplemented by our new web and shipping platform, which rolled out in June 2020. We also expanded our customer service team to handle web order to seek to meet customer demand without sacrificing inventory turns. Customer orders are typically filled as received,inquiries and we do not typically have backlogs.take phone orders.
Competition
Suppliers
We purchase merchandise and raw materials from approximately 150over 100 vendors dispersed throughoutfrom the United States and in approximately 20 foreign countries. In 2017,general, our 10 largest vendors accountedaccount for approximately 72%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.
Compliance Withwith 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.
Employees
As of December 31, 2017,2020, we employed 656496 people, 550419 of whom were employed on a full-time basis. As of August 20, 2021, we employed 513 people, 435 of whom are employed on a full-time basis. We are not a party to any collective bargaining agreements. Overall, we believe that relations with employees are good.
Intellectual Property
Foreign Sales
Information regarding our revenuessales from the United States and abroad and our long-lived assets areis found in Note 122, Significant Accounting Policies: Revenue Recognition and Note 3, Balance Sheet Components, of the Notes to ourthe Consolidated Financial Statements, Segment Information.Statements. For a description of some of the risks attendant to our foreign operations, see Item 1.A “Risk Factors”.1A, Risk Factors.
Available Information
We file reports with the Securities and Exchange Commission ("SEC").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. The public may read any of these filings at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549 on official business days during the hours of 10 a.m. and 3 p.m. In addition, the public may obtain informationThese reports are available on the operation of the Public Reference Room by calling the SECSecurities and Exchange Commission’s website at 1-800-SEC-0330. Further, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information concerning us. You can connect to this site at www.sec.gov.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"“SEC Filings” link. In addition, certain other corporate governance documents are available on our website through the "Corporate Governance"“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 of the Registrant
The following table sets forth information concerning our executive officers as of March 7, 2018:August 31, 2021:
Name and Age | Position | Served as Executive Officer Since | |||
| Janet Carr, 60 | |||||
| Chief Executive Officer | 2018 | ||||
| Michael Galvan, 52 | |||||
| Chief Financial Officer | |||||
Michael Galvan has served as our Chief Financial Officer since January 2021. He first joined the Company in May 2020, initially serving as Interim Chief Financial Officer. Mr. Galvan brings over 25 years of finance and accounting experience to the Company, including executive leadership roles serving as Interim Chief Financial Officer, Chief Accounting Officer and Treasurer for a variety of publicly traded companies, including Main Street Capital Corporation and Mattress Firm. Prior to joining the Company, Mr. Galvan served in various management roles including Senior Vice President, Chief Accounting Officer and Treasurer of NexTier Oilfield Solutions, Inc. (formerly C&J Energy Services, Inc.), from May 2000 – February 2017. Ms. Greene,June 2016 until April 2020, including serving as Interim Chief Financial Officer from March through September 2018.
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic has had, and likely may continue to have, a certified public accountant, also servesmaterial adverse effect on our 401(k) Plan committee.business and liquidity.
Disruptions in the operation of our Fort Worth distribution center or manufacturing facility due to disease, including the COVID-19 pandemic, natural disaster, fire, or other crises, could have an adverse effect on our ability to supply our retail stores, fulfill web orders and/or manufacture product, resulting in possible decreases in sales and margin.
We are dependent on a limited number of distribution and sourcing centers, primarily the center located at our Fort Worth, Texas headquarters. Our ability to meet the needs of our customers and our retail stores and e-commerce sites depends on the proper operation of these centers. If any of these centers were to shut down or otherwise become inoperable or inaccessible for any reason, we could suffer a substantial loss of inventory and/or disruptions of deliveries to our retail and wholesale customers. While we have business continuity and contingency plans for our sourcing and distribution center sites, significant disruption of manufacturing or distribution for any of the above reasons could interrupt product supply, result in a substantial loss of inventory, increase our costs, disrupt deliveries to our customers and our retail stores, and, if not remedied in a timely manner, could have a material adverse impact on our business.
Risks Related to Owning our Common Stock
Our continued delisting from the Nasdaq Market or a suspension of broker trading of our common stock could impair the value of your investment.
Our common stock was listed on the Nasdaq Global Market. In order to maintain that listing, we were required to satisfy minimum financial and other listing requirements, including filing quarterly and annual financial reports as required by the rules of the SEC. From May 2019 until May 2021, the Company did not file its quarterly or annual financial reports as required by the rules of the SEC and Nasdaq, and it has not yet gotten current with filings for the most recent fiscal periods. The Company initially applied for, and was granted, extensions by Nasdaq to comply with Nasdaq’s listing standards.
However, the Company was unable to become current in its filings within that extended time frame. On August 11, 2020, the Company received notice of Nasdaq’s decision to suspend trading in the Company’s stock on Nasdaq as of August 13, 2020 due to the Company not being current with its SEC filings. Nasdaq denied the Company’s appeal of this decision, resulting in the Company’s stock being formally delisted on February 9, 2021. To date, the delisting has not materially affected the trading price of the Company’s common stock. The Company intends to apply for re-listing on Nasdaq once it is current with its Exchange Act filings. Any such listing would be subject to Nasdaq approval. However, if we are unable to do so, the continued delisting of our common stock from Nasdaq could adversely affect the market liquidity of our common stock or otherwise impair the value of your investment.
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. The SEC has set September 28, 2021 as the deadline for companies to achieve this current status. In anticipation of this deadline, some broker dealers have informed their clients that several weeks prior to that deadline, those brokers would place stocks without current financial information in a “liquidation-only” mode, in which clients would be allowed only to sell, but not purchase, securities of affected companies. The Company is working diligently to complete and file all outstanding financial reports prior to the September 28 deadline. If it is unable to do so, however, or if it does so but later becomes delinquent again in filing its reports for a period of six months or more, trading of the Company’s common stock through broker-dealers could be suspended for most owners until the Company regains compliance. Such a suspension could adversely affect the market liquidity of our common stock or otherwise impair the value of your investment.
We have concluded that certain of our previously issued financial statements should not be relied upon and have restated certain of our previously issued financial statements which was time-consuming and expensive and could expose us to additional risks that could have a negative effect on our Company.
As previously disclosed, we have concluded that certain of our previously issued financial statements should not be relied upon. We restated our previously issued audited financial statements as of and for the years ended December 31, 2018 and 2017 as well as the quarterly and year-to-date periods within fiscal 2018 included in the Company’s previously filed Quarterly Reports on Form 10-Q, and the three months ended March 31, 2019, included in the Company’s previously filed Quarterly Report on Form 10-Q. We believe that the errors described in our restated financial statements might impact periods prior to years ended December 31, 2017, but we do not intend to amend any other annual reports on Form 10-K or quarterly reports on Form 10-Q for earlier periods. As a result, our reports for those earlier periods should no longer be relied upon. In addition, our Quarterly Reports on Form 10-Q for quarterly periods during 2020 and 2021 to date have not been filed in a timely manner. The restatement process was time consuming and expensive and, along with the failure to make certain filings with the SEC in a timely manner, could continue to expose us to additional risks that have had a negative effect on our Company. In particular, we incurred substantial unanticipated expenses and costs, including audit, legal and other professional fees, in connection with the restatement of our previously issued financial statements and the ongoing remediation of material weaknesses in our internal control over financial reporting. Certain remediation actions were recommended, and we are in the process of implementing them (see Item 9A, Controls and Procedures of this Form 10-K for a description of these remediation measures). To the extent these steps are not successful, we could be forced to incur additional time and expense. Our management’s attention was also diverted from some aspects of the operation of our business in connection with the restatement and these ongoing remediation efforts.
The restatement of our financial statements led to litigation and in the future may lead to, among other things, future stockholder litigation, loss of investor confidence, negative impacts on our stock price and certain other risks.
In November 2019, a class action lawsuit was brought against the Company and members of its current and former management relating to our announcement of the circumstances leading to our restatement. We believe that suit was without merit, and the suit was withdrawn by the plaintiff in April 2020; however, there can be no assurance that additional litigation against the Company and/or its management or Board of Directors might not be threatened or brought in connection with matters related to our restatement.
As a result of the circumstances giving rise to the restatement, we have become subject to a number of additional risks and uncertainties, including unanticipated costs for accounting and legal fees in connection with or related to the restatement, stockholder litigation and government investigations. Any such proceeding could result in substantial defense costs regardless of the outcome of the litigation or investigation. If we do not prevail in any such litigation, we could be required to pay substantial damages or settlement costs. In addition, the restatement and related matters could impair our reputation and could cause our counterparties to lose confidence in us. Each of these occurrences could have an adverse effect on our business, results of operations, financial condition and stock price.
We have identified material weaknesses in our system of internal controls pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and are in the process of remediation. If not remediated, these material weaknesses could result in additional material misstatements in our Consolidated Financial statements. We may be unable to develop, implement and maintain appropriate controls in future periods.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies evaluate and report on their systems of internal control over financial reporting. As disclosed in Part II, Item 9A, Controls and Procedures of this Form 10-K, our management, including our Chief Executive Officer and our Chief Financial Officer, has determined that we had material weaknesses in the Company’s internal control over financial reporting as of December 31, 2020. These material weaknesses resulted in identified misstatements to the financial statements, and Treasurer since February 2017; previously Ms. Castillo served as Controller from February 2016 to January 2017. Ms. Castillo has served asissued financial statements are restated in this filing. As a result of the material weaknesses, the Company’s management, under the supervision of the Audit Committee and with participation of the Company’s Chief Executive Officer and Chief Financial Officer, for several other public and private companies since 2009 and started her career at Ernst & Young in 1994. Ms. Castillo, a certified public accountant, also serves on our 401(k) Plan committee.concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2020.
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 have been discontinued by the lenders. We believe that access to this capital will be restored once we have become 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.
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.cycles, which may also be affected by health emergencies such as the COVID-19 pandemic. Purchases of non-essential, discretionary products tend to decline in periods of recession or uncertainty regarding future economic prospects, as disposable income declines. During periods of economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, maintain our earnings from operations as a percentage of net sales, or generate sufficient cash flows to fund our operational and liquidity needs. While consumer spending in the United States has stabilized recently, it could deteriorate in the future. As a result, our operating results may be adversely and materially affected by downward trends or uncertainty in the United States or global economies.
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 fluctuate substantially, dependingcause consumers to reduce the amount they spend on a variety of factors, including demand, supplydiscretionary items. The inherent uncertainty related to predicting economic conditions transportation costs, government regulation, economic climates, political considerations, and other unpredictable factors. Leather prices world-wide have been relatively stable for the past several years although the outlook for future prices is uncertain. Increases in these costs, together with other factors, will makemakes it difficult for us to sustain the gross margin level we have achievedaccurately forecast future demand trends, which could cause us to purchase excess inventories, resulting in recent years and result in a decreaseincreases in our profitability unless weinventory carrying cost, or limit our ability to satisfy customer demand and potentially lose market share.
Risks Related to Legal, Regulatory and Compliance
If the United States maintains recently-imposed tariffs on products manufactured in China, or if additional tariffs or trade restrictions are able to pass higher prices on toimplemented by other countries or by the U.S., the cost of our customersproducts manufactured in China or reduce costsother countries and imported into the U.S. or other countries could increase. This could in other areas. Accordingly, such increases in costs couldturn adversely affect the profitability for these products and have an adverse effect on our business, financial condition and our 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.
The successful execution of our multi-year transformation and operational efficiency initiatives is key to the long-term growth of our business.
During the fourth quarter of 2018, the Company, under its new management, began to implement a large number of initiatives to transform the Company’s business, improve sales long term and improve operational efficiency. These include the realignment of the Company’s retail division management structure, the closing of underperforming stores, the formation of a new division focused on serving commercial customers, pricing and marketing initiatives, systems improvements and other changes. The Company believes that long-term growth will be realized through these transformational efforts over time, however there is no assurance that such efforts will be successful in the short or long term. Actual costs incurred and the timeline of these initiatives may differ from our expectations. If these initiatives are unsuccessful, our business, financial condition and results of operation could be materially adversely affected.
Our business is subject to the risks inherent in global sourcing activities.
As a Company engaged in sourcing on a global scale, we are subject to the risks inherent in such activities, including, but not limited to:
unavailability of, or significant fluctuations in the cost of, raw materials;
compliance by us and our independent manufacturers and suppliers with labor laws and other foreign governmental regulations;
imposition of additional duties, taxes and other charges on imports or exports;
increases in the cost of labor, fuel (including volatility in the price of oil), travel and transportation;
compliance by our independent manufacturers and suppliers with our Code of Business Conduct and Ethics and our Animal Welfare Policy;
disruptions or delays in shipments;
loss or impairment of key manufacturing or distribution sites, 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 costs, government regulation, economic climates, political considerations, and other unpredictable factors. Leather prices worldwide have been relatively stable for the past several years although the outlook for future prices is uncertain. Increases in these costs, together with other factors, will make it difficult for us to sustain the gross margin level we have achieved in recent years and result in a decrease in our profitability unless we are able to pass higher prices on to our customers or reduce costs in other areas. Changes in consumers’ product preferences or lack of acceptance of our products whose costs have increased may prohibit us from passing those increases on to customers, which could cause our gross margin to decline. If our product costs increase and our sale prices do not, our future operating results could be adversely affected unless we are able to offset such gross margin declines with comparable reductions in operating costs. Accordingly, such increases in costs could adversely affect our business and our results of operations.
Further, involvement by the United States in war and other military operations abroad could disrupt international trade and affect our inventory sources. Finally, livestock diseases, such as mad cow, could reduce the availability of hides and leathers or increase their cost. The occurrence of any of these events could adversely affect our business and our results of operations.
We are subject to risks associated with leasing retail space subject to long-term and non-cancelable leases. We may be unable to renew leases on acceptable terms. If we close a leased retail space, we might remain obligated under the applicable lease.
We lease the majority of our retail store locations under long-term, non-cancelable leases, which have initial or renewed terms ranging from three years to ten years and may include lease renewal options. We believe that most of the lease agreements we will enter into in the future will likely be long-term and non-cancelable. Generally, our leases are “net” leases, which require us to pay our proportionate share of the cost of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases at our option. If we determine that it is no longer economical to operate a retail store subject to a lease and decide to close it, as we have done in the past and will do in the future, we would generally remain obligated under the applicable lease for, among other things, payment of the base rent, common charges and other net payments for the balance of the lease term. In some instances, we may be unable to close an underperforming retail store without a significant financial penalty due to continuous operation clauses in our lease agreements. In addition, as each of our leases expire, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close retail stores in desirable locations. Our inability to secure desirable retail space or favorable lease terms could impact our ability to grow. Likewise, our obligation to continue making lease payments in respect of leases for closed retail spaces could have a material adverse effect on our business, financial condition and results of operations.
We generally purchasemay 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 U.S. dollars. However, we sourcethe 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 largesmall 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 countries other than the United States. The cost of these productsinternet-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.
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 changes(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 valuetraffic 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 applicable currencies. Changes in currency exchange rates may also affectrelated asset group do not exceed the U.S. dollar value of the foreign currency denominated prices at which our international business will sell products. Furthermore, the majority of our international sales are generally derived from sales in foreign countries. 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.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 subjectforced to information technology system failurestake significant inventory markdowns, or network disruptions, orexperience shortages of key items, either of which could have a material adverse impact on our information systems may prove inadequate, resultingoperating results and cash flow. In addition, adverse weather conditions, economic instability and consumer confidence volatility could have material adverse impacts on our sales and operating results.
Our success depends, in damagepart, 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, business operationsrecruitment by other employers, perceived internal opportunities, non-competition and financial condition.non-solicitation agreements and macro unemployment rates.
We depend on our information systems for many aspectsthe guidance of our business, includingsenior management team and other key employees who have significant experience and expertise in designing, manufacturing, marketingour industry and distributing our products, as well as processing transactions, managing inventoryoperations. In 2018 and accounting2019, we experienced significant changes in our senior leadership team and have focused on recruiting for and reporting our results. Therefore, it is critical that we maintain uninterrupted operationretaining key roles. The unexpected loss of one or more of our information systems. Evenkey personnel or any negative public perception with respect to these individuals could have a material adverse effect on our preventative efforts, we may be subject to information technology system failuresbusiness, results of operations and network disruptions. These may be caused by natural disasters, accidents, power disruptions, telecommunications failures, acts of terrorism or war, denial‑of‑service attacks, computer viruses, physical or electronic break‑ins,financial condition. We do not maintain key-person or similar eventslife insurance policies on any of senior management team or disruptions. System redundancy may be ineffective or inadequate, and our disaster recovery planning may not be sufficient for all eventualities. Such failures or disruptions could prevent access to our online services and preclude store transactions, as well as require a significant investment to repair or replace them. System failures and disruptions could also impede the manufacturing and shipping of products, transactions processing and financial reporting. Additionally, we may be materially adversely affected if we are unable to improve, upgrade, maintain, and expand our systems.other key personnel.
| ITEM 1B. |
Not applicable.
| ITEM 2. |
We lease our store locations, with the exception of our flagship store located in Fort Worth, Texas. The majority of our stores have initial lease terms of at least five years. The leases are generally renewable, with increases in lease rental rates in some cases. We believe that all of our properties are adequately covered by insurance. The properties leased by us are described in Item 1 in the description of each of our two operating segments. We own the 22,000 square foot building that houses our flagship store. Further, we own our corporate headquarters, which includes our central warehousedistribution center and manufacturing facility, sales, advertising,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 December 31, 2017:the date of this filing:
| U.S. Locations | ||||||||
| Alabama | 1 | Montana | 1 | 1 | Missouri | 3 | ||
| Alaska | 1 | Nebraska | 1 | 1 | Montana | 1 | ||
| Arizona | 4 | Nevada | 2 | 3 | Nebraska | 1 | ||
| Arkansas | 1 | New Mexico | 2 | 1 | Nevada | 2 | ||
| California | 11 | New York | 2 | 10 | New Mexico | 2 | ||
| Colorado | 4 | New Jersey | 1 | 4 | New York | 1 | ||
| Connecticut | 1 | North Carolina | 2 | 1 | New Jersey | 1 | ||
| Florida | 5 | Ohio | 3 | 5 | North Carolina | 2 | ||
| Georgia | 1 | Oklahoma | 2 | 2 | Ohio | 3 | ||
| Idaho | 1 | Oregon | 3 | 1 | Oklahoma | 2 | ||
| Illinois | 2 | Pennsylvania | 3 | 1 | Oregon | 2 | ||
| Indiana | 2 | Rhode Island | 1 | 1 | Pennsylvania | 3 | ||
| Iowa | 1 | South Carolina | 1 | 1 | South Carolina | 1 | ||
| Kansas | 1 | South Dakota | 1 | 1 | South Dakota | 1 | ||
| Kentucky | 1 | Tennessee | 3 | 1 | Tennessee | 3 | ||
| Louisiana | 2 | Texas | 18 | 2 | Texas | 16 | ||
| Maryland | 1 | Utah | 4 | 1 | Utah | 4 | ||
| Massachusetts | 1 | Virginia | 1 | 1 | Washington | 3 | ||
| Michigan | 2 | Washington | 3 | 2 | Wisconsin | 1 | ||
| Minnesota | 2 | Wisconsin | 1 | 2 | Wyoming | 1 | ||
| Missouri | 3 | Wyoming | 1 | |||||
Canadian locations: | Canadian locations: | International locations: | ||||||
| Alberta | 3 | Spain | 1 | |||||
| British Columbia | 1 | |||||||
| Manitoba | 1 | |||||||
| Nova Scotia | 1 | |||||||
| Ontario | 3 | |||||||
| Saskatchewan | 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. In addition, during the second quarter of 2020, we negotiated lease modifications for some of our properties with our landlords to abate or defer a portion of the rent or other expenses due during the time period that our properties were closed/limited. During the fourth quarter of 2020 and into the present, we continued to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection rates, and were forced to close certain stores or move certain stores to “curbside only” operations. As of the date of filing this Form 10-K, most of our stores have reopened fully, and reduced store capacity, social distancing and other measures are in place in all stores but are not believed to be materially impacting store sales in most locations. 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.
| ITEM 4. |
Not applicable.
| ITEM 5. |
Our common stock is tradedtrades on the NASDAQ Global Market usingOTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLF.“TLFA.” The high and low trading prices for each calendar quarter during the last two fiscal years are as follows:
2016 | High | Low | 2017 | High | Low | ||||||||||||
4th quarter | $ | 8.25 | $ | 6.85 | 4th quarter | $ | 8.45 | $ | 7.25 | ||||||||
3rd quarter | $ | 7.90 | $ | 6.96 | 3rd quarter | $ | 9.00 | $ | 7.85 | ||||||||
2nd quarter | $ | 7.69 | $ | 6.73 | 2nd quarter | $ | 8.99 | $ | 7.85 | ||||||||
1st quarter | $ | 7.75 | $ | 6.75 | 1st quarter | $ | 8.20 | $ | 7.15 | ||||||||
There were approximately 299289 stockholders of record on March 7, 2018.August 30, 2021.
We did not sell any shares of our equity securities during our fiscal year ended December 31, 20172020 that were not registered under the Securities Act.
Our Board of Directors did not authorize any dividends during the fiscal years ended December 31, 20172020 or 2016.2019. Our Board of Directors determinesmay 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.
| Period (2) | (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) | ||||||||||||
| October 1 – October 31, 2020 | - | $ | - | - | $ | 5,000,000 | ||||||||||
| December 1 – December 31, 2020 | - | $ | - | - | $ | 5,000,000 | ||||||||||
| Total | - | $ | - | - | ||||||||||||
(1) Represents shares which may be purchased through our stock repurchase program, announced on August 9, 2020, permitting us to repurchase up to $5 million value of shares of our common stock on or prior to July 31, 2022.
(2) The selectedCompany suspended repurchasing any shares under its program beginning in July 2019, because of the lack of publicly-available financial data presented belowinformation of the Company during this period. Management expects to resume the Company’s repurchase program (as conditions allow) following completion of our financial restatement and making all outstanding periodic filings with the SEC.
| ITEM 6. |
We are derived froma smaller reporting company as defined in Item 10(f)(1) of SEC Regulation S-K and should be read in conjunction with ourare not required to provide information under this item. However, see Note 12, Quarterly Financial Data (Unaudited) of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and related notes. This information should also be read in conjunction with "Item 7 - Management’s Discussion and AnalysisSupplementary Data of Financial Condition and Resultsthis Form 10-K, which provides unaudited quarterly condensed results of Operations.”
Income Statement Data, Years ended December 31, | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Net sales | $ | 82,321,268 | $ | 82,923,992 | $ | 84,161,200 | $ | 83,430,912 | $ | 78,284,585 | ||||||||||
| Gross profit | 52,113,829 | 51,713,242 | 52,071,060 | 52,124,757 | 49,328,024 | |||||||||||||||
| Income from operations | 7,241,822 | 10,300,731 | 10,474,700 | 11,958,029 | 11,266,790 | |||||||||||||||
| Net income | $ | 4,451,751 | $ | 6,402,259 | $ | 6,402,405 | $ | 7,706,921 | $ | 7,265,717 | ||||||||||
| Net income per share | ||||||||||||||||||||
| Basic | $ | 0.48 | $ | 0.69 | $ | 0.64 | $ | 0.76 | $ | 0.71 | ||||||||||
| Diluted | $ | 0.48 | $ | 0.69 | $ | 0.63 | $ | 0.75 | $ | 0.71 | ||||||||||
| Weighted average common shares outstanding for: | ||||||||||||||||||||
| Basic EPS | 9,242,092 | 9,301,867 | 10,077,506 | 10,203,063 | 10,176,492 | |||||||||||||||
| Diluted EPS | 9,256,810 | 9,321,558 | 10,102,760 | 10,241,121 | 10,216,438 | |||||||||||||||
| Cash dividend declared per common share | - | - | - | $ | 0.25 | - | ||||||||||||||
| Balance Sheet Data, as of December 31, | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Cash and certificates of deposit | $ | 18,337,258 | $ | 16,862,304 | $ | 10,962,615 | $ | 10,636,530 | $ | 11,082,679 | ||||||||||
| Total assets | 74,914,596 | 70,652,720 | 64,611,076 | 62,873,874 | 56,398,566 | |||||||||||||||
| Long-term debt, including current portion | 7,371,730 | 7,444,416 | 3,863,307 | 5,643,125 | 2,598,750 | |||||||||||||||
| Total Stockholders’ Equity | $ | 59,538,981 | $ | 53,693,201 | $ | 50,972,176 | $ | 49,123,012 | $ | 44,621,542 | ||||||||||
| ITEM 7. |
This discussion is intended to provide you with information that will assist you in understanding our financial statements, the changes in key items in those financial statements from year to yearperformance and the primary factors that accounted for those changes, as well as how particular accounting principles affect our financial statements. This discussion also provides information about the financial results of the various segments of our business so you may better understand how those segments and their results affect our financial condition and results of operations as a whole. Finally, we have identified and discussed trends known to management that we believe are likely to have a material effect on our results of operations and financial condition.
Factors.
Summary
Tandy Leather Factory, Inc. is one of the world’s largest specialty retailerretailers of leather and leathercraft related items (based on sales), offeringleathercraft-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 wide rangetrack record as the trusted source of quality leather, quality tools, hardware, accessories, liquids, lace,supplies, kits and teaching materials. 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 website, www.tandyleather.com.four websites: tandyleather.com, tandyleather.ca, tandyleather.eu and tandyleather.com.au. We have builtalso 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 by offeringcustomers such as cutting (“clicking”), splitting, and some assembly. We maintain our customers a broad selection of quality products combined with knowledgeable store associates, in one location,principal offices at competitive prices.1900 Southeast Loop 820, Fort Worth, Texas 76140.
We operatelaunched a new Commercial Program in two segments, basedApril 2019 to better serve larger business customers, a majority of these customers and their sales were also recognized in retail stores through most of 2019. For 2019, the Company operated as a single reportable segment and all reporting herein is presented on a consolidated basis.
New management responsibilityjoined the Company in October 2018 and store location: North Americaset new strategic directions for both the short and International. Priorlong term. The overarching goal is to January 1, 2017, we operatedinvest in three segments: Wholesale, Retailrebuilding a foundation for growth by: 1) improving our brand proposition, 2) reversing the sales decline with business customers, 3) building our talent, processes, tools and International. To better reflect how management analyzessystems and 4) positioning us for long-term growth. Despite the major disruption of the business by COVID-19, progress was made against these goals in 2020.
COVID-19
In late 2019, COVID-19 was detected in Wuhan, China and allocates resources,has since spread to other parts of the world, including the U.S. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Federal, state, and local governments implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and limitations on business operations. As previously announced and for the health and safety of employees and customers, on March 17, 2020, the Company made the decision to begin temporary store closures. The onset of the COVID-19 pandemic in March 2020 temporarily shifted our strategic focus to company survival and cash preservation. We began closing stores on March 18, 2020, and by April 2, 2020, we combined Wholesaletemporarily 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 Retailthird 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. During the second quarter of 2020, the Company borrowed $0.4 million through the Spanish government’s Institute of Official Credit Guarantee for Small and Medium-sized Enterprises, a COVID-19 relief program. The term of the agreement is for five years and the interest rate is fixed at 1.5%. Based on the terms of the loan agreement, we make interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement. In Canada, we participated in the Canada Emergency Commercial Rent Assistance (“CECRA”) program for rent relief. This program provided for a 75% reduction in the store rent for included stores for the months of April, May and June 2020. We received total rent abatements under the program of $0.05 million.
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, and the store re-openings were well received by our employees and customers. During the fourth quarter of 2020 and into North America effective January 1, 2017, while Internationalthe present, we continue to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection rates, and have been forced to close certain stores or move certain stores to “curbside only” operations. 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 been performing above last year sales levels, but the future remains uncertain, and more store closures and/or the same.ongoing unemployment crisis could cause a material negative impact on future sales.
As part of March 7, 2018, our North America segment operates 115 company-owned stores located in 42 U.S. statesthe 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 7 Canadian provinces. We expect to growfinancial position and the number of stores in North America to approximately 150ongoing uncertainty the virus has created around future operating results represented a triggering event starting in the future. Our pacefirst quarter of store openings has recently picked up due2020 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 change in strategy with a focus on growth.level where the cash flows they generate will not be sufficient to cover their respective asset carry values.
| (in thousands) | 2020 | 2019 | ||||||
| Net sales | $ | 64,084 | $ | 74,918 | ||||
| % Decrease from prior year | (14.5 | )% | (10.0 | )% | ||||
Consolidated net sales declined by 1.5%$10.8 million, or 14.5%, although through cost controls, net incomefrom 2019 to 2020. Of this decline, $4.5 million was relatively flat. To addressdue to the weaknesspermanent closure of nine stores in sales, we began focusing on improving our customer experience, increasing our brand awareness, and strengthening our store performance. To help achieve those goals, in early 2017, we announced a district restructuring with our store footprint divided into fifteen districts (previously, our store footprint2020. $14.1 million was divided into five regions). Each district contains sixdue to ten stores, reporting to a district manager who is tasked with growing traffic and sales, as well as training store managers and associates to better serve our customers and succeed in today’s retail environment. Asthe temporary closure of March 7, 2018, we have filled twelveall of our fifteen district manager positions.stores during the second and third quarters of 2020, which was offset by sales in the web and commercial channels. We saw sales increases in the fourth quarter of 2020 over the prior year of 6.5%, or $1.3 million.
Year | North America | International | Total | (Decr) Incr from Prior Year | ||||||||||||
| 2017 | $ | 78,568,219 | $ | 3,753,049 | $ | 82,321,268 | (0.7 | %) | ||||||||
| 2016 | $ | 79,041,920 | $ | 3,882,072 | $ | 82,923,992 | (1.5 | %) | ||||||||
| 2015 | $ | 80,468,597 | $ | 3,692,603 | $ | 84,161,200 | 0.9 | % | ||||||||
| 2020 | 2019 | 2020 vs 2019 | ||||||||||||||||||||||
| (in thousands, except store data) | # Stores | Sales | # Stores | Sales | $ Change | % Change | ||||||||||||||||||
| Comparable retail stores | 106 | $ | 42,556 | 106 | $ | 59,391 | $ | (16,835 | ) | (28.3 | )% | |||||||||||||
| Web/Commercial | 20,784 | 11,748 | 9,036 | 76.9 | % | |||||||||||||||||||
| 2019 Permanently closed stores | - | 5 | 755 | (755 | ) | |||||||||||||||||||
| 2020 Permanently closed stores | 9 | 744 | 9 | 3,024 | (2,280 | ) | ||||||||||||||||||
| Total at year-end | 106 | $ | 64,084 | 115 | $ | 74,918 | $ | (10,834 | ) | |||||||||||||||
Gross Profit
| (in thousands) | 2020 | 2019 | ||||||
| Sales | $ | 64,084 | $ | 74,918 | ||||
| Cost of sales | 28,026 | 32,959 | ||||||
| Gross profit | $ | 36,058 | $ | 41,959 | ||||
| Gross profit margin percentage | 56.3 | % | 56.0 | % | ||||
Gross margin rate in 2017, 62.4%2020 was essentially flat to 2019, with increases in 2016,product costs, shipping and 61.9%handling related to supply chain disruptions of COVID-19 offset by improvements in 2015. In general, our gross profit margin fluctuates based on the mix of customers we serve, the mix of products we sell,average unit retails, investments in inventory at pre-pandemic pricing, and our ability to source products globally. Our negotiations with suppliers for lowerpromotional pricing are an on-going process, for which we have varying degrees of success. Sales to retail customers tend to produce higher gross margins than sales to non-retail customers due to the difference in pricing levels. Therefore, as retail sales increase in the overall sales mix, higher gross margins tend to follow, which is the main reason our gross profit margins have shown steady improvement over the last two years. Finally, there is also significant fluctuation in gross margins between the various merchandise categories we offer. As a result, our gross margins can also vary depending on the mix of products sold during any given time period.optimization.
Operating Expenses
| (in thousands) | 2020 | 2019 | ||||||
| Operating expenses | $ | 41,328 | $ | 43,554 | ||||
| Non-routine items related to restatement | (3,587 | ) | (1,346 | ) | ||||
| Non-routine items related to CFO transition | (388 | ) | (206 | ) | ||||
| Adjusted operating expenses | $ | 37,353 | $ | 42,002 | ||||
| Operating expenses % of sales | 64.5 | % | 58.1 | % | ||||
| Adjusted operating expenses % of sales | 58.3 | % | 56.1 | % | ||||
Operating expenses decreased by $2.2 million in 2020 as compared to the corresponding prior year mostly as a result of payroll and occupancy savings associated with store closures, lower bonuses, marketing expense reductions, and cancellation of the annual store manager conference, partially offset by higher costs for restricted stock units, and non-routine expenses related to the restatement and Chief Financial Officer (“CFO”) turnover. Adjusted operating expenses, which excludes the non-routine items related to the restatement and CFO turnover, decreased in 2020 by $4.6 million, compared to prior year, mostly as a result of the items noted above. Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP measure and is included here because we believe it provides additional information regarding the Company’s financial performance on a recurring basis. Non-routine items in 2020 primarily included legal and accounting fees associated with the restatement and recruiting fees, exit costs, interim CFO-related expenses, and expenses for a number of other contract accounting professionals associated with the threeturnover of our CFO.
Impairment Expense
We completed an interim impairment assessment as of March 31, 2020, and based on the concluded fair value of the reporting unit, we recorded impairment expense of $1.1 million during the first quarter of 2020. No other impairment was recorded throughout the remainder of 2020, including as a result of our annual impairment assessment. 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.
For the years ended December 31, 2017, 20162020 and 20152019, 26 stores and three stores, respectively, were as follows:
2017 | 2016 | 2015 | ||||||||||
| Operating expenses | $ | 44,872,007 | $ | 41,412,511 | $ | 41,596,360 | ||||||
| As a % of sales | 54.5 | % | 49.9 | % | 49.4 | % | ||||||
25
Other Income/Expense (net)
Other Income/Expenseincome/expense consists primarily of currency exchange fluctuations,interest expense and interest income. In the years ended December 31, 2020, we recognized other income (net) of $0.1 million. During the year ended December 31, 2019 other (income) expense, net was immaterial. We earned $0.1 million and $0.2 million, respectively, in interest income and interest expense. In 2017, we incurred other expenses (net) of approximately $79,000 compared to other expenses (net) of approximately $98,000 in 2016. In 2017, we earned approximately $7,000 in interest income on our cashpaid $0.1 million and paid approximately $205,000$0.04 million, respectively, in interest expense on our bank debt. We had a currency exchange gain of approximately $30,000 in 2017 compared to a currency exchange gain of approximately $19,000 in 2016.
Provision for Income Taxes
Our effective tax rate was 38%, 37%,21.9% and 37%26.6% for the years ended December 31, 2017, 20162020, and 2015,2019, respectively. TheFor 2020 and 2019, the difference between our statutory rates and our effective rate are primarily due to state income taxes, the domestic production activities deductiondifference in tax rates for loss carryback periods, items that we receiveare nondeductible for our light manufacturing facility in Fort Worth, Texasincome tax purposes, and the country mix of earnings.
| Transition tax on deemed repatriation of certain foreign earnings | $ | 514,454 | ||
| Foreign Withholding Taxes | 290,128 | |||
| Remeasuring deferred tax position at the lowered income tax rate | (463,800 | ) | ||
| $ | 340,782 |
| # Stores | 2017 | # Stores | 2016 | $ Change | % Change | |||||||||||||||||||
| Same stores | 107 | $ | 75,698,765 | 107 | $ | 77,449,960 | $ | (1,751,195 | ) | (2.3 | %) | |||||||||||||
| New stores | 7 | 2,374,044 | 4 | 1,034,142 | 1,339,902 | 129.6 | % | |||||||||||||||||
| Closed/temp closed stores | 1 | 495,410 | 3 | 557,818 | (62,408 | ) | (11.2 | %) | ||||||||||||||||
| Total net sales | 115 | $ | 78,568,219 | 111 | $ | 79,041,920 | $ | (473,701 | ) | (0.6 | )% | |||||||||||||
| # Stores | 2016 | # Stores | 2015 | $ Change | % Change | |||||||||||||||||||
| Same stores | 107 | $ | 77,449,960 | 107 | $ | 78,265,681 | $ | (815,721 | ) | (1.04 | %) | |||||||||||||
| New stores | 4 | 1,034,142 | - | - | 1,034,142 | NA | ||||||||||||||||||
| Closed/temp closed stores | 3 | 557,818 | 3 | 2,202,916 | (1,645,098 | ) | (74.68 | %) | ||||||||||||||||
| Total net sales | 111 | $ | 79,041,920 | 107 | $ | 80,468,597 | $ | (1,426,677 | ) | (1.77 | )% | |||||||||||||
Customer Group | 2017 | 2016 | 2015 |
| Retail | 60% | 57% | 55% |
| Institution | 2% | 2% | 3% |
| Wholesale | 34% | 36% | 38% |
| Manufacturers | 4% | 5% | 4% |
| 100% | 100% | 100% |
Year | Net Sales Increase (Decrease) from Prior Yr | Operating Income (Loss) | Operating Income Increase (Decrease) from Prior Year | Operating Income as a Percentage of Sales | ||||||||||||
| 2017 | (3.3 | %) | $ | (256,995 | ) | (438.3 | )% | (6.8 | %) | |||||||
| 2016 | 5.1 | % | $ | 75,958 | (37.4 | )% | 2.0 | % | ||||||||
| 2015 | (14.9 | )% | $ | 121,296 | (79.1 | )% | 3.3 | % | ||||||||
Capital Resources, Liquidity and Financial Condition
We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments, and to service our outstanding debt.investments. We expect to fund our operating and liquidity needs as well as our store growthprimarily from a combination of current cash balances, cash generated from operating activities and internally generated funds. Our cash balances at December 31, 2017 totaled $18.3 million. In addition, we have available a $6 millionfuture working capital bank line of credit that we are negotiating. Any excess cash will be invested as more fully described below.determined by our Board of Directors in accordance with its approved investment policy. Our cash balance as of December 31, 2020, totaled $10.3 million, and as of June 30, 2021, our cash balance totaled $5.9 million.
Spain Loan
During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small and Medium-sized Enterprises in order to facilitate the continuation of employment and to attenuate the economic effects of the COVID-19 virus. This loan was provided for by the Spanish government as part of a COVID-19 relief program. The term of the agreement is five years, and the interest rate is fixed at 1.5%. Based on the terms of the loan agreement, we are required to make monthly interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement.
Share Repurchase Program
In August 2015, our Board of Directors authorized a share repurchase program, pursuant to which we arewere authorized to repurchase up to 1.2 million shares of our common stock at prevailing market rates through August 2016. Subsequently, the program was amended to increase the number of shares available for repurchase to 2.2 million and to extend the program through August 2018.2019. In 2017, no shares were repurchased, while 520,500 shares were repurchased during in 2016. At December 31, 2017, there are 1,150,793June 2019, the program was again amended to decrease the number of shares available for repurchase to one million as of such date and to extend the program through August 9, 2020.
For the years ended December 31, 2020, and 2019, we repurchased the following shares:
Year ended December 31, | Total shares repurhased | Average price per share | ||||||
| 2020 | - | $ | - | |||||
| 2019 | 131,782 | $ | 5.58 | |||||
As of December 31, 2020, we were authorized to purchase $5 million of our common stock under the plan.
On September 18, 2015, we executedAugust 9, 2020, the Board of Directors approved a Promissory Note and Business Loan Agreement with BOKF, NA d/b/a Bank of Texas (“BOKF”) which provided us with a line of credit facility ofnew program to repurchase up to $10,000,000 for$5 million of its common stock between August 9, 2020 and July 31, 2022, subject to the purposecompletion of repurchasingour financial restatement and the filing of all delinquent filings with the SEC. The Company’s previous share repurchase program expired in August 2020.
On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 500,000 shares of our common stock, pursuant to our stock repurchase program. On August 25, 2016, this linepar value $0.0024 in a private transaction. The purchase price was $3.35 per share for a total of credit was amended to increase the availability from $10,000,000 to $15,000,000 for$1.7 million. The closing of the repurchase of these shares took place on February 1, 2021. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock pursuant tostock.
| Cash Flows | ||||||||
| (amounts in thousands) | 2020 | 2019 | ||||||
| Net cash provided by (used in) operating activities | $ | (12,527 | ) | $ | 10,471 | |||
| Net cash provided by (used in) investing activities | 6,256 | (9,156 | ) | |||||
Net cash provided by (used in) financing activities | 416 | (9,703 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 279 | 223 | ||||||
| Net decrease in cash and cash equivalents | $ | (5,576 | ) | $ | (8,165 | ) | ||
For the year ended 2020, we used $12.6 million of cash from operations driven by our stock repurchase program through the earliernet loss of August 25, 2017 or the date on which the entire amount is drawn. On August 10, 2017, this line of credit was further amended to extend the drawdown period and conversion date from August 25, 2017 to August 18, 2018 to align with our stock repurchase program. During this time period, we are required to make monthly interest-only payments. At the end of this time period, we expect that the principal balance will be rolled into a 4-year term note. This Promissory Note is secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas. There were no amounts drawn on this line in 2017. In 2016, we drew approximately $3.7$4.9 million on this line 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 repurchase approximately 520,500 sharesthe effect of our common stock pursuant to our stock repurchase program. At December 31, 2017, the unused portionexchange rate changes, resulted in a net decrease in cash of the line of credit was approximately $7.6$5.6 million.
We believe that cash flow from operations and our existing cash reserves will be adequate to fund our operations in 2018, while also fundingthrough 2021, taking into account the current effects of the COVID-19 pandemic on our growth plansbusiness and strategic initiatives. At this time, we know of no trends or demands, commitments, events, or uncertainties that will or are likely to materially affectcash flow and our liquidity, capital resources or results of operations.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. We could defer expansion plans if required by unanticipated dropscommitments throughout 2021. There can be no assurance, however, that the COVID-19 pandemic would not result in further restrictions on our business operations in a manner that would more materially impact our cash flow. In particular, because of the relatively small investment required by each new store, we have flexibility in when we make most expansion expenditures.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during 2017, 2016,2020 or 2015,2019, and we do not currently have any such arrangements.
Summary of Critical Accounting Policies
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via two methods: (1) at the store counter and (2) shipment of product generally via web sales. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when 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. Our sales return allowance for future merchandise returns is estimated based on historical sales return rates. Under our sales returns policy, merchandise may be returned, under most circumstances, up to 60 days after date of purchase. As merchandise is returned, the company records the sales return against the sales return allowance. We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the counter sales as transactions occur and other sales upon shipment of our products, provided that there are no significant post-delivery obligations to theexpected customer and collectionredemption period, which is reasonably assured, which generally occurs upon shipment. Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise.one year.
Inventory. Inventory is stated at the lower of cost (first-in, first-out) or net realizable valuevalue. 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 accounted forvalued on the “first a first‑in, first out” method. This means that salesout basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead. Carrying values of inventory treatare analyzed and, to the oldest itemextent that the cost of identical inventory as beingexceeds the first sold. In addition, we regularlynet 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 our inventory for slow-moving or obsolete inventory. This reduction is based on our reviewinvolves 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 items on hand comparedinventory purchases and commitments are made in U.S. dollars in order to their estimated future demand. If actual future demand is less favorable than what we project, additional write-downs may be necessary.limit the Company’s exposure to foreign currency fluctuations. Goods shipped to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier. Inventory is physically counted twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our accounting system to reflect actual count results.
Leases. We lease certain real estate for our retail store locations under long-term lease agreements. Starting in 2019, with the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognize 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, 2020, 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.
Impairment of Long-Lived Assets.We evaluate long-lived assets for indicators of impairment wheneveron a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate theirthe carrying amountsvalue of certain assets may not be recoverable. Additionally,Upon the occurrence of a triggering event, right-of-use (“ROU”) lease assets, property and equipment and definite-lived intangible assets are reviewed for store assets, we evaluate the performance of individual stores for indicators of impairment and underperforming stores are selected for further evaluationan 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 carrying amounts.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 evaluation of long-lived assets is performed atCompany determined the lowest level of identifiable cash flows which isthat are independent of other asset groups to be primarily at the individual store level. Impairment is determined whenIf the estimated undiscounted future undiscountednet cash flows associated with an assetfor a given store are less than the asset’s 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. ToCompensation 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 we haveof 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, impairmentrelated to performance-based awards will equal the grant date fair value based on the number of our long-lived assets.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.
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent recovery is deemed not likely, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods.
December 31, 2017 | December 31, 2016 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 18,337,258 | $ | 16,862,304 | ||||
| Accounts receivable-trade, net of allowance for doubtful accounts | ||||||||
| of $22,642 and $2,404 as of December 31, 2017 and 2016, respectively | 461,212 | 560,984 | ||||||
| Inventory | 37,311,197 | 33,177,539 | ||||||
| Prepaid income taxes | 41,307 | 964,323 | ||||||
| Prepaid expenses | 1,473,147 | 1,608,860 | ||||||
| Other current assets | 189,029 | 140,232 | ||||||
| Total current assets | 57,813,150 | 53,314,242 | ||||||
| PROPERTY AND EQUIPMENT, at cost | 27,218,481 | 25,536,352 | ||||||
| Less accumulated depreciation and amortization | (11,750,639 | ) | (9,884,559 | ) | ||||
| Property and equipment, net | 15,467,842 | 15,651,793 | ||||||
| DEFERRED INCOME TAXES | 271,738 | 375,236 | ||||||
| GOODWILL | 962,949 | 956,201 | ||||||
| OTHER INTANGIBLES, net of accumulated amortization of | ||||||||
| $710,000 and $708,000 as of December 31, 2017 and 2016, respectively | 19,222 | 20,840 | ||||||
| OTHER assets | 379,695 | 334,408 | ||||||
| Total Assets | $ | 74,914,596 | $ | 70,652,720 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable-trade | $ | 1,413,450 | $ | 1,621,884 | ||||
| Accrued expenses and other liabilities | 4,953,477 | 5,937,187 | ||||||
| Current maturities of capital lease obligations | - | 72,686 | ||||||
| Current maturities of long-term debt | 614,311 | 614,311 | ||||||
| Total current liabilities | 6,981,238 | 8,246,068 | ||||||
| DEFERRED INCOME TAXES | 1,636,958 | 1,956,032 | ||||||
| LONG-TERM DEBT, net of current maturities | 6,757,419 | 6,757,419 | ||||||
| COMMITMENTS AND CONTINGENCIES | - | - | ||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock, $0.10 par value; 20,000,000 shares | ||||||||
| authorized, none issued or outstanding | - | - | ||||||
| Common stock, $0.0024 par value; 25,000,000 shares | ||||||||
| authorized; 11,313,692 and 11,235,992 shares issued at December 31, 2017 and 2016, respectively; 9,270,862 and 9,193,162 shares outstanding | ||||||||
| at December 31, 2017 and 2016, respectively | 27,153 | 26,966 | ||||||
| Paid-in capital | 6,831,271 | 6,368,455 | ||||||
| Retained earnings | 63,921,244 | 59,469,493 | ||||||
Treasury stock at cost (2,042,830 shares each of 2017 and 2016, respectively) | (10,278,584 | ) | (10,278,584 | ) | ||||
| Accumulated other comprehensive income | (962,103 | ) | (1,893,129 | ) | ||||
| Total stockholders' equity | 59,538,981 | 53,693,201 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 74,914,596 | $ | 70,652,720 | ||||
| 2017 | 2016 | 2015 | ||||||||||
| NET SALES | $ | 82,321,268 | $ | 82,923,992 | $ | 84,161,200 | ||||||
| COST OF SALES | 30,207,439 | 31,210,750 | 32,090,140 | |||||||||
| Gross Profit | 52,113,829 | 51,713,242 | 52,071,060 | |||||||||
| OPERATING EXPENSES | 44,872,007 | 41,412,511 | 41,596,360 | |||||||||
| INCOME FROM OPERATIONS | 7,241,822 | 10,300,731 | 10,474,700 | |||||||||
| OTHER (INCOME) EXPENSE: | ||||||||||||
| Interest expense | 205,555 | 155,189 | 330,004 | |||||||||
| Other, net | (126,857 | ) | (57,287 | ) | (74,357 | ) | ||||||
| Total other expense | 78,698 | 97,902 | 255,647 | |||||||||
| INCOME BEFORE INCOME TAXES | 7,163,124 | 10,202,829 | 10,219,053 | |||||||||
| PROVISION FOR INCOME TAXES | 2,711,373 | 3,800,570 | 3,816,648 | |||||||||
| NET INCOME | $ | 4,451,751 | $ | 6,402,259 | $ | 6,402,405 | ||||||
| Foreign currency translation adjustments | 931,026 | (205,450 | ) | (999,621 | ) | |||||||
| COMPREHENSIVE INCOME | $ | 5,382,777 | $ | 6,196,809 | $ | 5,402,784 | ||||||
| NET INCOME PER COMMON SHARE: | ||||||||||||
| BASIC | $ | 0.48 | $ | 0.69 | $ | 0.64 | ||||||
| DILUTED | $ | 0.48 | $ | 0.69 | $ | 0.63 | ||||||
| Weighted Average Number of Shares Outstanding: | ||||||||||||
| Basic | 9,242,092 | 9,301,867 | 10,077,506 | |||||||||
| Diluted | 9,256,810 | 9,321,558 | 10,102,760 | |||||||||
| 2017 | 2016 | 2015 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net income | $ | 4,451,751 | $ | 6,402,259 | $ | 6,402,405 | ||||||
| Adjustments to reconcile net income to net cash | ||||||||||||
| provided by operating activities - | ||||||||||||
| Depreciation and amortization | 1,875,102 | 1,719,154 | 1,567,172 | |||||||||
| Loss on disposal or abandonment of assets | 3,139 | 16,985 | 31,064 | |||||||||
| Non-cash share-based compensation | 239,599 | 199,870 | 145,322 | |||||||||
| Deferred income taxes | (215,576 | ) | 205,111 | 289,171 | ||||||||
| Foreign currency translation | 883,670 | (163,292 | ) | (896,928 | ) | |||||||
| Net changes in assets and liabilities, net of effect of | ||||||||||||
| business acquisitions: | ||||||||||||
| Accounts receivable-trade | 99,772 | (7,778 | ) | 71,848 | ||||||||
| Inventory | (4,133,658 | ) | 407,000 | (709,047 | ) | |||||||
| Prepaid expenses | 135,713 | (284,788 | ) | 43,585 | ||||||||
| Other current assets | (48,797 | ) | (70,035 | ) | 87,561 | |||||||
| Accounts payable-trade | (208,434 | ) | (361,492 | ) | 728,158 | |||||||
| Accrued expenses and other liabilities | (983,710 | ) | (108,365 | ) | 651,038 | |||||||
| Income taxes | 923,016 | (415,046 | ) | (212,449 | ) | |||||||
| Total adjustments | (1,430,164 | ) | 1,137,324 | 1,796,495 | ||||||||
| Net cash provided by operating activities | 3,021,587 | 7,539,583 | 8,198,900 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Purchase of property and equipment | (1,689,645 | ) | (1,697,704 | ) | (2,164,040 | ) | ||||||
| Purchase of intangible property | - | - | (10,000 | ) | ||||||||
| Proceeds from sale of assets / insurance | 35,963 | 153,483 | 11,662 | |||||||||
| Decrease (increase) in other assets | (43,669 | ) | (1,127 | ) | 295 | |||||||
| Net cash used in investing activities | (1,697,351 | ) | (1,545,348 | ) | (2,162,083 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
| Net increase (decrease) in revolving credit loans | - | - | (3,500,000 | ) | ||||||||
| Proceeds from notes payable and long-term debt | - | 3,660,505 | 3,711,225 | |||||||||
| Payments on notes payable and long-term debt | - | - | (2,143,125 | ) | ||||||||
| Payments on capital lease obligations | (72,686 | ) | (79,396 | ) | (79,890 | ) | ||||||
| Repurchase of common stock (treasury stock) | - | (3,675,654 | ) | (3,708,862 | ) | |||||||
| Proceeds from exercise of stock options | 223,404 | - | 9,920 | |||||||||
| Net cash provided by (used in) financing activities | 150,718 | (94,545 | ) | (5,710,732 | ) | |||||||
| NET INCREASE (DECREASE) IN CASH | 1,474,954 | 5,899,689 | 326,085 | |||||||||
| CASH, beginning of period | 16,862,304 | 10,962,615 | 10,636,530 | |||||||||
| CASH, end of period | $ | 18,337,258 | $ | 16,862,304 | $ | 10,962,615 | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||
| Interest paid during the period | $ | 205,555 | $ | 155,189 | $ | 330,004 | ||||||
| Income tax paid during the period, net of refunds | $ | 1,788,357 | $ | 4,215,616 | $ | 3,743,864 | ||||||
| NON-CASH INVESTING ACTIVITIES | ||||||||||||
| Equipment purchased via capital lease arrangements | - | - | $ | 231,972 | ||||||||
Number of Shares | Par Value | Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||
| BALANCE, January 1, 2015 | 10,210,939 | $ | 26,890 | $ | 6,013,419 | $ | (2,894,068 | ) | $ | 46,664,829 | $ | (688,058 | ) | $ | 49,123,012 | |||||||||||||
| Shares issued - stock options exercised | 2,000 | 5 | 9,915 | - | - | - | 9,920 | |||||||||||||||||||||
| Share-based compensation | 8,650 | 21 | 145,301 | - | - | - | 145,322 | |||||||||||||||||||||
| Net income | - | - | - | - | 6,402,405 | - | 6,402,405 | |||||||||||||||||||||
| Purchase of Treasury stock | (528,725 | ) | - | - | (3,708,862 | ) | - | - | (3,708,862 | ) | ||||||||||||||||||
| Translation adjustment | - | - | - | - | - | (999,621 | ) | (999,621 | ) | |||||||||||||||||||
| BALANCE, December 31, 2015 | 9,692,864 | $ | 26,916 | $ | 6,168,635 | $ | (6,602,930 | ) | $ | 53,067,234 | $ | (1,687,679 | ) | $ | 50,972,176 | |||||||||||||
Share-based compensation | 20,780 | 50 | 199,820 | - | - | - | 199,870 | |||||||||||||||||||||
| Net income | - | - | - | - | 6,402,259 | - | 6,402,259 | |||||||||||||||||||||
| Purchase of Treasury stock | (520,482 | ) | - | - | (3,675,654 | ) | - | - | (3,675,654 | ) | ||||||||||||||||||
| Translation adjustment | - | - | - | - | - | (205,450 | ) | (205,450 | ) | |||||||||||||||||||
| BALANCE, December 31, 2016 | 9,193,162 | $ | 26,966 | $ | 6,368,455 | $ | (10,278,584 | ) | $ | 59,469,493 | $ | (1,893,129 | ) | $ | 53,693,201 | |||||||||||||
| Shares issued - stock options exercised | 44,400 | 107 | 223,297 | - | - | - | 223,404 | |||||||||||||||||||||
Share-based compensation | 33,300 | 80 | 239,519 | - | - | - | 239,599 | |||||||||||||||||||||
| Net income | - | - | - | - | 4,451,751 | - | 4,451,751 | |||||||||||||||||||||
| Translation adjustment | - | - | - | - | - | 931,026 | 931,026 | |||||||||||||||||||||
| BALANCE, December 31, 2017 | 9,270,862 | $ | 27,153 | $ | 6,831,271 | $ | (10,278,584 | ) | $ | 63,921,244 | $ | (962,103 | ) | $ | 59,538,981 | |||||||||||||
| BASIC | 2017 | 2016 | 2015 | |||||||||
| Net income | $ | 4,451,751 | $ | 6,402,259 | $ | 6,402,405 | ||||||
| Weighted average common shares outstanding | 9,242,092 | 9,301,867 | 10,077,506 | |||||||||
| Earnings per share – basic | $ | 0.48 | $ | 0.69 | $ | 0.64 | ||||||
| DILUTED | ||||||||||||
| Net income | $ | 4,451,751 | $ | 6,402,259 | $ | 6,402,405 | ||||||
| Weighted average common shares outstanding | 9,242,092 | 9,301,867 | 10,077,506 | |||||||||
| Effect of restricted stock awards and assumed exercise of stock options | 14,718 | 19,691 | 25,254 | |||||||||
| Weighted average common shares outstanding, assuming dilution | 9,256,810 | 9,321,558 | 10,102,760 | |||||||||
| Earnings per share - diluted | $ | 0.48 | $ | 0.69 | $ | 0.63 | ||||||
| Outstanding options and restricted stock awards excluded as anti-dilutive | 17,632 | 31,477 | 60,433 | |||||||||
| As of December 31, 2017 | ||||||||||||
Gross | Accumulated Amortization | Net | ||||||||||
| Trademarks, Copyrights | $ | 554,369 | $ | 545,897 | $ | 8,472 | ||||||
| Non-Compete Agreements | 175,316 | 164,566 | 10,750 | |||||||||
| $ | 729,685 | $ | 710,463 | $ | 19,222 | |||||||
| As of December 31, 2016 | ||||||||||||
Gross | Accumulated Amortization | Net | ||||||||||
| Trademarks, Copyrights | $ | 554,369 | $ | 545,279 | $ | 9,090 | ||||||
| Non-Compete Agreements | 175,316 | 163,566 | 11,750 | |||||||||
| $ | 729,685 | $ | 708,845 | $ | 20,840 | |||||||
| 2018 | $ | 1,417 | ||
| 2019 | 666 | |||
| 2020 | 666 | |||
| 2021 | 666 | |||
| 2022 | 666 | |||
| Thereafter | 5,141 |
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 positionpositions 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 judgmentjudgement 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.
| December 31, 2017 | December 31, 2016 | |||||||
INVENTORY | ||||||||
| On hand: | ||||||||
| Finished goods held for sale | $ | 34,824,728 | $ | 30,684,026 | ||||
| Raw materials and work in process | 1,138,316 | 1,034,041 | ||||||
| Inventory in transit | 1,348,153 | 1,459,472 | ||||||
| TOTAL | $ | 37,311,197 | $ | 33,177,539 | ||||
PROPERTY AND EQUIPMENT | ||||||||
| Building | $ | 9,257,066 | $ | 9,105,286 | ||||
| Land | 1,451,132 | 1,451,132 | ||||||
| Leasehold improvements | 1,615,464 | 1,350,916 | ||||||
| Equipment and machinery | 6,447,776 | 5,991,343 | ||||||
| Furniture and fixtures | 7,907,704 | 7,342,642 | ||||||
| Vehicles | 539,339 | 295,033 | ||||||
| 27,218,481 | 25,536,352 | |||||||
| Less: accumulated depreciation | (11,750,639 | ) | (9,884,559 | ) | ||||
| TOTAL | $ | 15,467,842 | $ | 15,651,793 | ||||
ACCRUED EXPENSES AND OTHER LIABILITIES | ||||||||
| Accrued bonuses | $ | 1,748,236 | $ | 2,123,942 | ||||
| Accrued payroll | 630,259 | 689,150 | ||||||
| Deferred revenue | 905,657 | 909,297 | ||||||
| Sales and payroll taxes payable | 524,184 | 494,720 | ||||||
| Inventory in transit | 1,067,143 | 1,432,590 | ||||||
| Other | 77,998 | 287,488 | ||||||
| TOTAL | $ | 4,953,477 | $ | 5,937,187 | ||||
| Year ended December 31 | North America | International | Total | |||||||||
| 2017 | $ | 2,378 | $ | 761 | $ | 3,139 | ||||||
| 2016 | 17,699 | (714 | ) | 16,985 | ||||||||
| 2015 | 19,583 | 11,481 | 31,064 | |||||||||
2017 | 2016 | |||||||
| Business Loan Agreement with BOKF – collateralized by real estate; payable as follows: | ||||||||
| Line of Credit Note, as amended, in the maximum principal amount of $15,000,000 with features as more fully described above – interest due monthly at LIBOR plus 1.85%; matures September 18, 2022 | $ | 7,371,730 | $ | 7,371,730 | ||||
Line of Credit Note, as amended, in the maximum principal amount of $6,000,000 with revolving features as more fully described above – interest due monthly at LIBOR plus 1.85%; matures September 18, 2019 | - | - | ||||||
| $ | 7,371,730 | $ | 7,371,730 | |||||
| Less current maturities | 614,311 | 614,311 | ||||||
| $ | 6,757,419 | $ | 6,757,419 | |||||
| 2018 | $ | 614,311 | ||
| 2019 | 1,842,932 | |||
| 2020 | 1,842,932 | |||
| 2021 | 1,842,932 | |||
| 2022 | 1,228,623 | |||
| $ | 7,371,730 |
Year Ended December 31, | Maximum Matching Contribution per Participant* | Total Matching Contribution | ||||||
| 2017 | $ | 10,600 | $ | 326,612 | ||||
| 2016 | $ | 10,600 | $ | 277,753 | ||||
| 2015 | $ | 10,400 | $ | 290,388 | ||||
| 2017 | 2016 | 2015 | ||||||||||
| Current provision: | ||||||||||||
| Federal | $ | 3,090,997 | $ | 3,108,894 | $ | 3,045,292 | ||||||
| State | 309,249 | 486,565 | 482,186 | |||||||||
| 3,400,246 | 3,595,459 | 3,527,478 | ||||||||||
| Deferred provision (benefit): | ||||||||||||
| Federal | (665,181 | ) | 183,520 | 212,563 | ||||||||
| State | (23,692 | ) | 21,591 | 76,607 | ||||||||
| (688,873 | ) | 205,111 | 289,170 | |||||||||
| $ | 2,711,373 | $ | 3,800,570 | $ | 3,816,648 | |||||||
| Transition tax on deemed repatriation of certain foreign earnings* | $ | 514,454 | ||
| Foreign Withholding Taxes* | 290,128 | |||
| Remeasuring deferred tax position at the lowered income tax rate^ | (463,800 | ) | ||
| $ | 340,782 |
| 2017 | 2016 | 2015 | ||||||||||
| United States | $ | 6,372,585 | $ | 9,070,894 | $ | 9,272,854 | ||||||
| United Kingdom | (171,608 | ) | (81,987 | ) | (43,567 | ) | ||||||
| Canada | 1,055,783 | 1,034,027 | 813,824 | |||||||||
| Australia | (88,096 | ) | 82,622 | 48,633 | ||||||||
| Spain | (5,540 | ) | 97,273 | 127,309 | ||||||||
| $ | 7,163,124 | $ | 10,202,829 | $ | 10,219,053 | |||||||
| 2017 | 2016 | |||||||
Deferred income tax assets: | ||||||||
| Capitalized inventory costs | $ | 198,616 | $ | 265,454 | ||||
| Warrants and share-based compensation | 29,047 | 44,151 | ||||||
| Accrued expenses, reserves, and other | 44,075 | 65,631 | ||||||
| Total deferred income tax assets | $ | 271,738 | $ | 375,236 | ||||
Deferred income tax liabilities: | ||||||||
| Property and equipment depreciation | $ | 1,008,485 | $ | 1,728,265 | ||||
| Goodwill and other intangible assets amortization | 155,175 | 227,767 | ||||||
| Transition tax on deemed repatriation of foreign earnings | 473,298 | - | ||||||
| Total deferred income tax liabilities | $ | 1,636,958 | $ | 1,956,032 | ||||
| 2017 | 2016 | 2015 | ||
| Statutory rate – Federal US income tax | 34% | 34% | 34% | |
| State and local taxes | 6% | 6% | 6% | |
| Impact of Tax Act | 4% | - | - | |
| Non-U.S. income tax at different rates | (1%) | - | - | |
| Domestic production activities deduction | (2%) | (1%) | (1%) | |
| Other, net | (3%) | (2%) | (2%) | |
| Effective rate | 38% | 37% | 37% |
| Year ending December 31: | ||||
| 2018 | $ | 4,324,431 | ||
| 2019 | 3,579,430 | |||
| 2020 | 2,968,426 | |||
| 2021 | 2,255,792 | |||
| 2022 | 1,461,280 | |||
| 2023 | 832,593 | |||
| 2024 | 546,843 | |||
| 2025 | 432,990 | |||
| 2026 | 221,967 | |||
| 2027 | 96,398 | |||
| Total minimum lease payments | $ | 16,720,150 | ||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Option | Exercise | Option | Exercise | Option | Exercise | |||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
| Outstanding at January 1 | 56,400 | $ | 5.14 | 68,400 | $ | 5.17 | 72,400 | $ | 5.16 | |||||||||||||||
| Granted | - | - | - | - | - | - | ||||||||||||||||||
| Forfeited or canceled | (12,000 | ) | 5.14 | (12,000 | ) | 5.30 | (2,000 | ) | 4.96 | |||||||||||||||
| Exercised | (44,400 | ) | 5.14 | - | - | (2,000 | ) | 4.96 | ||||||||||||||||
| Outstanding at December 31 | - | $ | - | 56,400 | $ | 5.14 | 68,400 | $ | 5.17 | |||||||||||||||
| Exercisable at end of year | - | $ | - | 56,400 | $ | 5.14 | 68,400 | $ | 5.17 | |||||||||||||||
| Weighted-average fair value of | ||||||||||||||||||||||||
| options granted during year | n/a | n/a | n/a | |||||||||||||||||||||
Shares | Grant Fair Value | |||||||
| Balance, January 1, 2016 | 60,432 | $ | 8.97 | |||||
| Granted | 33,685 | 7.14 | ||||||
| Forfeited | (8,187 | ) | 8.97 | |||||
| Vested | (20,780 | ) | 8.97 | |||||
| Balance, December 31, 2016 | 65,150 | $ | 8.03 | |||||
| Balance, January 1, 2017 | 65,150 | $ | 8.03 | |||||
| Granted | 9,005 | 8.05 | ||||||
| Forfeited | (4,054 | ) | 8.97 | |||||
| Vested | (33,300 | ) | 8.97 | |||||
| Balance, December 31, 2017 | 36,801 | $ | 8.03 | |||||
| 2018 | $ | 100,127 | ||
| 2019 | 58,126 | |||
| 2020 | 14,853 | |||
| 2021 | 1,208 |
| North America | International | Total | ||||||||||
| For the year ended December 31, 2017 | ||||||||||||
| Net Sales | $ | 78,568,219 | $ | 3,753,049 | $ | 82,321,268 | ||||||
| Gross Profit | 49,889,888 | 2,223,941 | 52,113,829 | |||||||||
| Operating earnings | 7,498,817 | (256,995 | ) | 7,241,822 | ||||||||
| Interest expense | 205,555 | - | 205,555 | |||||||||
| Other expense, net | (135,011 | ) | 8,154 | (126,857 | ) | |||||||
| Income before income taxes | 7,428,370 | (265,246 | ) | 7,163,124 | ||||||||
| Depreciation and amortization | 1,790,421 | 84,681 | 1,875,102 | |||||||||
| Fixed asset additions | 1,666,171 | 23,474 | 1,689,645 | |||||||||
| Total assets | $ | 70,302,116 | $ | 4,612,480 | $ | 74,914,596 | ||||||
| For the year ended December 31, 2016 | ||||||||||||
| Net Sales | $ | 79,041,920 | $ | 3,882,072 | $ | 82,923,992 | ||||||
| Gross Profit | 49,315,003 | 2,398,239 | 51,713,242 | |||||||||
| Operating earnings | 10,224,773 | 75,958 | 10,300,731 | |||||||||
| Interest expense | 155,189 | - | 155,189 | |||||||||
| Other expense, net | (35,290 | ) | (21,997 | ) | (57,287 | ) | ||||||
| Income before income taxes | 10,104,873 | 97,956 | 10,202,829 | |||||||||
| Depreciation and amortization | 1,631,534 | 87,620 | 1,719,154 | |||||||||
| Fixed asset additions | 1,609,829 | 87,875 | 1,697,704 | |||||||||
| Total assets | $ | 66,502,432 | $ | 4,150,288 | $ | 70,652,720 | ||||||
| For the year ended December 31, 2015 | ||||||||||||
| Net Sales | $ | 80,468,597 | $ | 3,692,603 | $ | 84,161,200 | ||||||
| Gross Profit | 49,838,455 | 2,232,605 | 52,071,060 | |||||||||
| Operating earnings | 10,353,404 | 121,296 | 10,474,700 | |||||||||
| Interest expense | 330,004 | - | 330,004 | |||||||||
| Other expense, net | (63,230 | ) | (11,127 | ) | (74,357 | ) | ||||||
| Income before income taxes | 10,086,630 | 132,423 | 10,219,053 | |||||||||
| Depreciation and amortization | 1,509,592 | 57,580 | 1,567,172 | |||||||||
| Fixed asset additions | 1,878,229 | 285,811 | 2,164,040 | |||||||||
| Total assets | $ | 59,894,498 | $ | 4,716,578 | $ | 64,611,076 | ||||||
2017 | 2016 | 2015 | ||||||||||
| United States | $ | 70,453,773 | $ | 70,886,401 | $ | 72,061,009 | ||||||
| Canada | 7,224,894 | 7,199,155 | 7,543,468 | |||||||||
| All other countries | 4,642,601 | 4,838,436 | 4,556,723 | |||||||||
| $ | 82,321,268 | $ | 82,923,992 | $ | 84,161,200 | |||||||
| First | Second | Third | Fourth | |||||||||||||
| 2017 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| Net sales | $ | 20,149,845 | $ | 19,280,770 | $ | 18,388,381 | $ | 24,502,272 | ||||||||
| Gross profit | 12,286,045 | 12,895,534 | 11,635,331 | 15,296,919 | ||||||||||||
| Net income | 1,231,265 | 1,027,732 | 521,414 | 1,671,340 | ||||||||||||
| Net income per common share: | ||||||||||||||||
| Basic | $ | 0.13 | $ | 0.11 | $ | 0.06 | $ | 0.18 | ||||||||
| Diluted | $ | 0.13 | $ | 0.11 | $ | 0.06 | $ | 0.18 | ||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | 9,308,726 | 9,225,960 | 9,270,862 | 9,270,862 | ||||||||||||
| Diluted | 9,330,919 | 9,229,129 | 9,273,950 | 9,272,330 | ||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| 2016 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| Net sales | $ | 20,672,227 | $ | 19,552,905 | $ | 18,628,362 | $ | 24,100,498 | ||||||||
| Gross profit | 12,652,746 | 12,895,790 | 11,644,871 | 14,519,835 | ||||||||||||
| Net income | 1,520,997 | 1,820,915 | 1,000,350 | 2,059,997 | ||||||||||||
| Net income per common share: | ||||||||||||||||
| Basic | $ | 0.16 | $ | 0.19 | $ | 0.11 | $ | 0.23 | ||||||||
| Diluted | $ | 0.16 | $ | 0.19 | $ | 0.11 | $ | 0.23 | ||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | 9,698,951 | 9,209,446 | 9,188,483 | 9,188,483 | ||||||||||||
| Diluted | 9,718,453 | 9,227,941 | 9,206,382 | 9,301,867 | ||||||||||||
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Tandy Leather Factory, Inc.
We have audited the accompanying consolidated balance sheets of Tandy Leather Factory, Inc. and Subsidiaries (the Company) as of December 31, 20172020 and 2016,2019, and the related consolidated statements of operations and comprehensive income,loss, stockholders’ equity, and cash flows for each of the threetwo years in the period ended December 31, 2017,2020, and the related notes (collectively referred to as the “financial“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, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the two years in the three-year period ended December 31, 2017,2020, 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 Company'sentity’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 a critical audit matter 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 a 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 1 to the consolidated financial statements. The Company has recorded an inventory balance of approximately $36.7 million and cost of sales of approximately $28.0 million as of and for the year ended December 31, 2020. 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 that is based on average inventory turns. 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 mathematical accuracy of the Company’s capitalizable overhead cost schedules.
We evaluated the appropriateness and consistency of management’s methodology and assumptions used in calculating the capitalizable overhead costs.
We independently calculated the amount of capitalizable costs using an independently derived allocation ratio.
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 auditorsauditor since 2003.
Tandy Leather Factory, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data and per share data)
December 31, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 10,329 | $ | 15,905 | ||||
| Short-term investments | - | 9,152 | ||||||
| Accounts receivable-trade, net of allowance for doubtful accounts of $14 and $16 at December 31, 2020 and 2019, respectively | 350 | 409 | ||||||
| Inventory | 36,779 | 24,042 | ||||||
Income tax receivable | 2,753 | 1,629 | ||||||
| Prepaid expenses | 536 | 1,082 | ||||||
| Other current assets | 265 | 297 | ||||||
| Total current assets | 51,012 | 52,516 | ||||||
| Property and equipment, at cost | 27,468 | 27,471 | ||||||
| Less accumulated depreciation | (15,078 | ) | (14,552 | ) | ||||
| Property and equipment, net | 12,390 | 12,919 | ||||||
| Operating lease assets | 11,772 | 13,897 | ||||||
| Financing lease assets | 44 | - | ||||||
| Deferred income taxes | 82 | 427 | ||||||
| Other intangibles, net of accumulated amortization of $548 and $547 at December 31, 2020 and 2019, respectively | 6 | 7 | ||||||
| Other assets | 387 | 345 | ||||||
| TOTAL ASSETS | $ | 75,693 | $ | 80,111 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable-trade | $ | 5,737 | $ | 5,753 | ||||
| Accrued expenses and other liabilities | 3,642 | 2,656 | ||||||
| Operating lease liabilities | 3,530 | 3,823 | ||||||
| Current maturities of financing lease obligations | 14 | - | ||||||
| Total current liabilities | 12,923 | 12,232 | ||||||
| Uncertain tax positions | 393 | 296 | ||||||
| Other non-current liabilities | 463 | 509 | ||||||
| Operating lease liabilities, non-current | 9,245 | 10,655 | ||||||
| Financing lease liabilities, net of current obligation | 29 | - | ||||||
| Long-term debt, net of current maturities | 446 | - | ||||||
| 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; 10,575,182 and 10,446,563 shares issued at December 31, 2020 and 2019, respectively | 25 | 25 | ||||||
| Paid-in capital | 5,924 | 5,037 | ||||||
| Retained earnings | 57,310 | 62,211 | ||||||
| Treasury stock at cost (1,424,376 shares at both December 31, 2020 and 2019, respectively) | (9,773 | ) | (9,773 | ) | ||||
Accumulated other comprehensive loss (net of tax of $395 and $359 at December 31, 2020 and 2019, respectively) | (1,292 | ) | (1,081 | ) | ||||
| Total stockholders’ equity | 52,194 | 56,419 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 75,693 | $ | 80,111 | ||||
The accompanying notes are an integral part of these Consolidated financial statements.
Tandy Leather Factory, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(amounts in thousands, except share and per share data)
| For the Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Net sales | $ | 64,084 | $ | 74,918 | ||||
| Cost of sales | 28,026 | 32,959 | ||||||
| Gross profit | 36,058 | 41,959 | ||||||
| Operating expenses | 41,328 | 43,554 | ||||||
| Impairment expense | 1,078 | 1,002 | ||||||
| Loss from operations | (6,348 | ) | (2,597 | ) | ||||
| Other (income) expense: | ||||||||
| Interest expense | 7 | 36 | ||||||
| Other, net | (76 | ) | (40 | ) | ||||
| Loss before income taxes | (6,279 | ) | (2,593 | ) | ||||
| Benefit for income taxes | (1,378 | ) | (690 | ) | ||||
| Net loss | $ | (4,901 | ) | $ | (1,903 | ) | ||
| Foreign currency translation adjustments, net of tax | (211 | ) | 363 | |||||
| Comprehensive loss | $ | (5,112 | ) | $ | (1,540 | ) | ||
| Net loss per common share: | ||||||||
| Basic | $ | (0.54 | ) | $ | (0.21 | ) | ||
| Diluted | $ | (0.54 | ) | $ | (0.21 | ) | ||
| Weighted average number of shares outstanding: | ||||||||
| Basic | 9,062,598 | 8,973,246 | ||||||
| Diluted | 9,062,598 | 8,973,246 | ||||||
The accompanying notes are an integral part of these Consolidated financial statements.
Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
| For the Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (4,901 | ) | $ | (1,903 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 1,021 | 1,655 | ||||||
| Operating lease asset amortization | 3,193 | 3,482 | ||||||
| Impairment of goodwill and long-lived assets | 1,078 | 1,002 | ||||||
| Loss on disposal of assets | 59 | 9 | ||||||
| Stock-based compensation | 887 | 770 | ||||||
| Deferred income taxes | 442 | (334 | ) | |||||
| Exchange (gain) loss | (5 | ) | 137 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable-trade | 86 | (23 | ) | |||||
| Inventory | (12,686 | ) | 9,330 | |||||
| Prepaid expenses | 675 | 596 | ||||||
| Other current assets | 1,574 | (96 | ) | |||||
| Accounts payable-trade | (440 | ) | 3,500 | |||||
| Accrued expenses and other liabilities | 1,022 | (2,719 | ) | |||||
| Income taxes, net | (1,120 | ) | (1,220 | ) | ||||
| Other assets | (41 | ) | (327 | ) | ||||
| Operating lease liabilities | (3,371 | ) | (3,388 | ) | ||||
| Total adjustments | (7,626 | ) | 12,374 | |||||
| Net cash provided by (used in) operating activities | (12,527 | ) | 10,471 | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (1,313 | ) | (269 | ) | ||||
| Purchase of short-term investments | - | (18,095 | ) | |||||
| Proceeds from sales of short-term investments | 7,523 | 9,095 | ||||||
| Proceeds from sales of assets | 46 | 113 | ||||||
| Net cash provided by (used in) investing activities | 6,256 | (9,156 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from long-term debt | 416 | - | ||||||
| Payments on long-term debt | - | (8,968 | ) | |||||
| Repurchase of treasury stock | - | (735 | ) | |||||
| Net cash provided by (used in) financing activities | 416 | (9,703 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | 279 | 223 | ||||||
| Net decrease in cash and cash equivalents | (5,576 | ) | (8,165 | ) | ||||
| Cash and cash equivalents, beginning of period | 15,905 | 24,070 | ||||||
| Cash and cash equivalents, end of period | $ | 10,329 | $ | 15,905 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows - continued
(amounts in thousands)
| For the Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid during the period | $ | 17 | $ | 36 | ||||
| Income tax paid during the period, net of refunds | $ | 56 | $ | 715 | ||||
Supplemental disclosures of non-cash activity: | ||||||||
| Change in accruals related to property and equipment | $ | (105 | ) | $ | (362 | ) | ||
The accompanying notes are an integral part of these Consolidated financial statements.
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, 2018 | 9,060,561 | $ | 25 | $ | 4,267 | $ | (9,038 | ) | $ | 64,476 | $ | (1,444 | ) | 58,286 | ||||||||||||||
| Cumulative effect of accounting change, net of tax (ASC 842) | - | - | - | - | (362 | ) | - | (362 | ) | |||||||||||||||||||
| Stock-based compensation expense | - | - | 770 | - | - | - | 770 | |||||||||||||||||||||
| Issuance of restricted stock | 93,408 | - | - | - | - | - | - | |||||||||||||||||||||
| Purchase of treasury stock | (131,782 | ) | - | - | (735 | ) | - | - | (735 | ) | ||||||||||||||||||
| Net loss | - | - | - | - | (1,903 | ) | - | (1,903 | ) | |||||||||||||||||||
| Foreign currency translation adjustments, net of tax | - | - | - | - | - | 363 | 363 | |||||||||||||||||||||
| Balance, December 31, 2019 | 9,022,187 | $ | 25 | $ | 5,037 | $ | (9,773 | ) | $ | 62,211 | $ | (1,081 | ) | $ | 56,419 | |||||||||||||
| Stock-based compensation expense | - | - | 887 | - | - | - | 887 | |||||||||||||||||||||
| Issuance of restricted stock | 128,619 | - | - | - | - | - | - | |||||||||||||||||||||
| Net loss | - | - | - | - | (4,901 | ) | - | (4,901 | ) | |||||||||||||||||||
| Foreign currency translation adjustments, net of tax | - | - | - | - | - | (211 | ) | (211 | ) | |||||||||||||||||||
| Balance, December 31, 2020 | 9,150,806 | $ | 25 | $ | 5,924 | $ | (9,773 | ) | $ | 57,310 | $ | (1,292 | ) | $ | 52,194 | |||||||||||||
The accompanying notes are an integral part of these Consolidated financial statements.
TANDY LEATHER FACTORY, INC.
DECEMBER 31, 2020 and 2019
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, a hub for the local leathercrafting community and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are very difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our four websites: tandyleather.com, tandyleather.ca, tandyleather.eu and tandyleather.com.au. We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We 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 Nasdaq Global Market (“Nasdaq”) suspended trading in the Company’s stock on Nasdaq as of August 13, 2020. Our stock has since traded on the OTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLFA.” Nasdaq denied the Company’s appeal of its decision to suspend trading in the Company’s stock and the Company’s stock was formally delisted on February 9, 2021. We intend to reapply for Nasdaq listing after we have made our required Exchange Act filings. Any such listing would be subject to Nasdaq approval.
Certain reclassifications may have been made to prior period financials in order to conform to the current period presentation.
COVID-19
In late 2019, COVID-19 was detected in Wuhan, China and has since spread to other parts of the world, including the U.S. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Federal, state, and local governments have since implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and limitations on business operations. As previously announced and for the health and safety of employees and customers, on March 17, 2020, the Company made the decision to begin temporary store closures. The onset of the COVID-19 pandemic in March 2020 shifted our strategic focus to company survival and cash preservation. We began closing stores on March 18, 2020 and by April 2, 2020, we temporarily closed all stores to the public. While we pivoted to serve customers online, the Company experienced significant decreases in demand for its products in 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. By June 2020, we also permanently closed nine stores with expiring leases and/or negative cash flows, creating additional savings in operating expenses.
Due to our size, we were not eligible for the Paycheck Protection Program administered through the Small Business Administration. Also, due to our not being current on financial filings with the SEC, we were not able to obtain loans under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. During the second quarter of 2020, the Company borrowed $0.4 million through the Spanish government’s Institute of Official Credit Guarantee for Small and Medium-sized Enterprises, a COVID-19 relief program. The term of the agreement is for five years and the interest rate is fixed at 1.5%. Based on the terms of the loan agreement, we make interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement. In Canada, we participated in the Canada Emergency Commercial Rent Assistance (“CECRA”) program for rent relief. This program provided for a 75% reduction in the store rent for included stores for the months of April, May and June 2020. We received total rent abatements under the program of $0.05 million.
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 and the store re-openings were well received by our employees and customers. During the fourth quarter of 2020 and into the present, we continue to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection rates, and are forced to close certain stores or move certain stores to “curbside only” operations. With the rapid spread of the Delta variant of COVID-19 during the third quarter of 2021, we have experienced an increasing number of these shutdowns. We believe that the rollout of COVID-19 vaccines in 2021 has offset these closures somewhat, but it is difficult to predict whether these vaccines will be adopted by further large numbers of Americans or whether current or future vaccines will remain effective against Delta or other future variants of the virus. 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, we have built a centralized web fulfillment capability in our Fort Worth distribution center and will be fulfilling web orders primarily through Fort Worth going forward. Both our e-commerce business and stores, during the limited period since reopening, have been performing above last year sales levels, but the future remains uncertain, and more store closures and/or 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.
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, 2020, 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). Accordingly, the allowance for expected credit losses at December 31, 2020 totaled less than $0.1 million.
Foreign currency translation and transactions
Foreign currency translation adjustments arise from activities of our foreign subsidiaries. Results of operations are translated into U.S. dollars using the average exchange rates during the period, while assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments of assets and liabilities are recorded in stockholders’ equity, net of tax charge of $0.1 million and $0.1 million in the years ended December 31, 2020 and 2019, respectively.
Gains and losses resulting from foreign currency transactions are reported in the statements of income (loss) under the caption “Other, net,” for all periods presented. We did not recognize a foreign currency transaction gain or loss in the years ended December 31, 2020. We recognized a foreign currency transaction loss of less than $0.1 million in the years ended December 31, 2019.
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 and $0.3 million as of December 31, 2020 and 2019, respectively. The estimated value of merchandise expected to be returned included in other current assets was $0.1 million and $0.1 million as of December 31, 2020 and 2019, respectively.
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, 2020 and 2019, our gift card liability, included in accrued expenses and other liabilities, was $0.3 million and $0.3 million, respectively. We recognized gift card revenue of $0.2 million during 2020 from the December 31, 2019 deferred revenue balance and $0.1 million during 2019 from the December 31, 2018 deferred revenue balance.
During 2019, we ended our wholesale pricing club program where customers received lower prices in exchange for a yearly membership fee. Under this program, the yearly membership fee when paid was recorded as deferred revenue and was recognized in net sales throughout the one-year period.
For the years ended December 31, 2020 and 2019, we recognized $0.6 million and $1.1 million, respectively, in net sales associated with gift cards and the wholesale pricing club membership fees.
Disaggregated revenue
In the following table, revenue for the years ended December 31, 2020 and 2019 is disaggregated by geographic areas as follows:
| (in thousands) | 2020 | 2019 | ||||||
| United States | $ | 56,877 | $ | 65,745 | ||||
| Canada | 5,798 | 6,514 | ||||||
| All other countries | 1,409 | 2,659 | ||||||
| Net sales | $ | 64,084 | $ | 74,918 | ||||
Geographic sales information is based on the location of the customer. Excluding Canada, no single foreign country had net sales greater than 2.2% of our consolidated net sales in 2020 or 2019.
Discounts
Prior to 2019, we maintained five price levels: retail, wholesale gold, wholesale elite, business, and manufacturer. Since May of 2019 (April of 2019 in Canada), we offer a single retail price level, plus three volume-based levels for commercial customers. Discounts from those price levels are offered to Business, Military/First Responder and Employee customers. Such discounts do not convey a material right to these customers since the discounted pricing they receive at the point of sale is not dependent upon any previous or subsequent purchases. As a result, sales are reported after deduction of discounts at the point of sale. We do not pay slotting fees or make other payments to resellers.
Operating expense
Operating expenses include all selling, general and administrative costs, including wages and benefits, rent and occupancy costs, depreciation, advertising, store operating expenses, outbound freight charges (to ship merchandise to customers), and corporate office costs.
Property and equipment, net of accumulated depreciation
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are three to ten years for equipment and machinery, seven to fifteen years for furniture and fixtures, five years for vehicles, and forty years for buildings and related improvements. Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods held for sale includes the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process 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.
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 continued to believe the triggering event existed in each of the remaining three quarters of 2020. For each of the four quarters of 2020 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, 2019, three stores failed recoverability due to overall underperformance, and we recognized impairment expense of less than $0.1 million during the year.
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) | 2020(1) | 2019(1) | ||||||
| Numerator: | ||||||||
| Net loss | $ | (4,901 | ) | $ | (1,903 | ) | ||
| Denominator: | ||||||||
| Basic weighted-average common shares ouststanding | 9,062,598 | 8,973,246 | ||||||
| Diluted weighted-average common shares outstanding | 9,062,598 | 8,973,246 | ||||||
| (1) For the years ended December 31, 2020 and 2019, there were 6,401 and 9,203 shares, respectively, 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 and goodwill
Our intangible assets and related accumulated amortization consisted of the following:
| (in thousands) | As of December 31, 2020 | |||||||||||
| Gross | Accumulated Amortization | Net | ||||||||||
| Trademarks/copyrights | $ | 554 | $ | 548 | $ | 6 | ||||||
| TOTAL | $ | 554 | $ | 548 | $ | 6 | ||||||
| As of December 31, 2019 | ||||||||||||
| Gross | Accumulated Amortization | Net | ||||||||||
| Trademarks/copyrights | $ | 554 | $ | 547 | $ | 7 | ||||||
| TOTAL | $ | 554 | $ | 547 | $ | 7 | ||||||
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 of less than $0.01 million in each of 2020, and 2019 was recorded in operating expenses, and non-compete intangible assets were fully amortized during 2019 upon the expiration of such agreements. Based on the current amount of intangible assets subject to amortization, we estimate amortization expense to be less than $0.01 million annually over the next five years.
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is allocated across one reporting unit: Tandy Leather Factory. Goodwill is not amortized but is evaluated at least annually for impairment. At the reporting unit level, the Company tests goodwill for impairment on an annual basis as of December 31 of each year, or more frequently if events or changes in circumstances, referred to as triggering events, indicate the carrying value of goodwill may not be recoverable and that a potential impairment exists. Application of the goodwill impairment test requires exercise of judgement, including the estimation of future cash flows, determination of appropriate
discount rates and other Level 3 assumptions (significant unobservable inputs which are supported by little or no market activity). Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for the reporting unit.
On October 1, 2019, we elected to early adopt ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment and applied the simplified accounting method as part of the Company’s annual goodwill impairment assessment as of December 31, 2019. We completed our annual goodwill impairment assessment as of December 31, 2019 using a quantitative Step 1 approach with the income approach methodologies discussed below.
The discounted cash flow (“DCF”) model utilizes present values of cash flows to estimate fair value. Future cash flows were projected based on estimates of projected sales growth, store count, pricing, gross margin rates, operating expense rates, working capital fluctuations, income tax expense and capital expenditures. Forecasted cash flows took into account known market conditions as of December 31, 2019, and management’s anticipated business outlook. The future cash flows were discounted using a market-participant risk-adjusted weighted average cost of capital for the reporting unit. A terminal year value was calculated under two approaches: (i) using an EBITDA exit multiple supported by guideline public company data using selected public companies operating within the retail industry and (ii) applying a perpetual growth rate methodology to the terminal year. These assumptions were derived from both observable and unobservable inputs and were combined to reflect management’s judgements and assumptions.
The estimated fair values determined under both approaches above were consistent. The concluded fair value for the reporting unit was based on a 50/50 weighting of the two valuation approaches above. The results of the Step 1 impairment testing for goodwill resulted in the Company recognizing an impairment expense of $1.0 million during the fourth quarter of 2019, representing the entire balance of goodwill for the reporting unit.
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.
Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Our principal financial instruments held consist of short-term investments, accounts receivable, accounts payable, and long-term debt. As of December 31, 2020 and 2019, 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, 2020 and 2019.
Short-term investments
We determine the appropriate classification of investments at the time of purchase, and we re-evaluate that determination at each balance sheet date. Investments are recorded as either short-term or long-term on the Consolidated Balance Sheet, based on contractual maturity date.
As of December 31, 2020, we held no short-term investments. As of December 31, 2019, we held investments in U.S. Treasuries with maturity values of $9.2 million and maturities less than one year. We classified these investments in debt securities as held-to-maturity. Such investments were recorded at amortized cost with book value approximating fair value which is based on Level 1 inputs for these investments.
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.
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 Comprehensive Income (Loss). These costs totaled $3.2 million and $2.1 million for the years ended December 31, 2020 and 2019, respectively.
Advertising
Advertising costs include the cost of print, digital, direct mail, community events, trade shows, and our ecommerce platform. Advertising costs are expensed as incurred. Total advertising expense was $1.1 million and $3.4 million in 2020 and 2019, respectively.
Recently Adopted Accounting Pronouncements
Internal-Use Software
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update provides additional guidance to ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which was issued in April 2015. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). We adopted this ASU on January 1, 2020; the adoption of this ASU did not have a material effect on the Company’s financial condition, results of operations or cash flows.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments,” which requires entities to measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. We adopted this ASU on January 1, 2020; the adoption of this ASU did not have a material effect on the Company’s financial condition, results of operations or cash flows.
Recent Accounting Standards Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, on a prospective basis, with early adoption permitted. We do not believe that the adoption of this standard will have a material impact on our financial condition, results of operations or cash flows.
3. BALANCE SHEET COMPONENTS
Inventory
| (in thousands) | December 31, 2020 | December 31, 2019 | ||||||
| On hand: | ||||||||
| Finished goods held for sale | $ | 32,654 | $ | 20,575 | ||||
| Raw materials and work in process | 828 | 717 | ||||||
| Inventory in transit | 3,297 | 2,750 | ||||||
| TOTAL | $ | 36,779 | $ | 24,042 | ||||
Property and Equipment
| (in thousands) | December 31, 2020 | December 31, 2019 | ||||||
| Building | $ | 9,240 | $ | 9,257 | ||||
| Land | 1,451 | 1,451 | ||||||
| Leasehold improvements | 1,853 | 1,828 | ||||||
| Equipment and machinery | 7,361 | 6,516 | ||||||
| Furniture and fixtures | 7,339 | 8,082 | ||||||
| Vehicles | 224 | 337 | ||||||
| 27,468 | 27,471 | |||||||
| Lesss: accumulated depreciation | (15,078 | ) | (14,552 | ) | ||||
| TOTAL | $ | 12,390 | $ | 12,919 | ||||
Our property and equipment, net was located in the following countries:
| (in thousands) | December 31, 2020 | December 31, 2019 | ||||||
| United States | $ | 12,077 | $ | 12,541 | ||||
| Canada | 309 | 373 | ||||||
| United Kingdom | 2 | 3 | ||||||
| Spain | 2 | 2 | ||||||
| $ | 12,390 | $ | 12,919 | |||||
Depreciation expense was $1.0 million and $1.7 million for the years ended December 31, 2020 and 2019, respectively.
Short-term Liabilities
| Accrued Expenses and Other Liabilities | December 31, 2020 | December 31, 2019 | ||||||
| (in thousands) | ||||||||
| Accrued bonuses and payroll | 1,121 | 1,104 | ||||||
| Unearned gift card revenue | 301 | 319 | ||||||
| Estimated returns | 241 | 285 | ||||||
| Sales and payroll taxes payable | 935 | 459 | ||||||
| Accrued severance | - | 38 | ||||||
| Accrued vendor payables | 1,044 | 451 | ||||||
| TOTAL | $ | 3,642 | $ | 2,656 | ||||
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.
Upon adoption of Topic 842, the Company recognized operating ROU assets (referred herein as “lease assets”) and lease liabilities based on the present value of its remaining minimum rental payments for existing operating leases as of the adoption date, utilizing the Company’s applicable incremental borrowing rate as of that date. The adoption of Topic 842 resulted in the Company recognizing $17.6 million and $18.1 million of operating lease assets and lease liabilities, respectively, as of January 1, 2019. The difference between the lease assets and liabilities was primarily due to the recognition of a $0.5 million pre-tax cumulative effect adjustment to retained earnings on January 1, 2019, resulting from the impairment of certain operating lease assets upon adoption. The Company had no existing finance leases, previously termed capital leases under ASC 840, as of its adoption of Topic 842. During the fourth quarter of 2020, the Company executed two financing leases for two forklifts used in the warehouse operations totaling less than $0.1 million.
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. During the year ended December 31, 2020, the Company recognized an impairment expense of approximately $0.6 million associated with certain operating lease assets. Excluding the January 1, 2019 impairment charge to retained earnings upon the adoption of Topic 842, the Company recognized an impairment expense of less than $0.1 million associated with its operating lease assets during 2019.
Additional information regarding the Company’s operating leases is as follows (in thousands, except for lease term and discount rate information):
| Leases | Balance Sheet Classification | December 31, 2020 | December 31, 2019 | |||||||
| (in thousands) | ||||||||||
| Assets: | ||||||||||
| Operating | Operating lease assets | $ | 11,772 | $ | 13,897 | |||||
| Finance | Financing lease assets | 44 | - | |||||||
| Total assets | $ | 11,816 | $ | 13,897 | ||||||
| Liabilities: | ||||||||||
Current | ||||||||||
| Operating | Operating lease liabilities | $ | 3,530 | $ | 3,823 | |||||
| Finance | Current maturities of financing lease obligations | 14 | - | |||||||
Non-current | ||||||||||
| Operating | Operating lease liabilities, non-current | 9,245 | 10,655 | |||||||
| Finance | Financing lease liabilities, net of current obligation | 29 | - | |||||||
| Total lease liabilities | $ | 12,818 | $ | 14,478 | ||||||
| Lease Cost | Income Statement Classification | December 31, 2020 | December 31, 2019 | |||||||
| (in thousands) | ||||||||||
| Operating lease cost | Operating expenses | $ | 3,809 | $ | 4,151 | |||||
| Operating lease cost | Impairment expense | 601 | 4 | |||||||
| Variable lease cost (1) | Operating expenses | 937 | 895 | |||||||
| Finance: | ||||||||||
| Amortization of lease assets (2) | Operating expenses | - | - | |||||||
| Interest on lease liabilities (2) | Interest expense | - | - | |||||||
| Total lease cost | $ | 5,347 | $ | 5,050 | ||||||
(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 are less than $1,000 for December 31, 2020; we had no finance lease costs in 2019.
(2) Finance lease costs are less than $1,000 for December 31, 2020; we had no finance lease costs in 2019.
| December 31, 2020 | ||||||||
| Maturity of Lease Liabilities | Operating Leases | Finance Leases | ||||||
| (in thousands) | ||||||||
| 2021 | $ | 3,591 | $ | 16 | ||||
| 2022 | 2,835 | 16 | ||||||
| 2023 | 2,035 | 15 | ||||||
| 2024 | 1,564 | - | ||||||
| 2025 | 1,220 | - | ||||||
| Thereafter | 3,205 | - | ||||||
| Total lease payments | $ | 14,450 | $ | 47 | ||||
| Less: Interest | (1,675 | ) | (4 | ) | ||||
| Present value of lease liabilities | $ | 12,775 | $ | 43 | ||||
Lease Term and Discount Rate | December 31, 2020 | December 31, 2019 | ||||||
| Weighted-average remaining lease term (years): | ||||||||
| Operating leases | 5.9 | 6.0 | ||||||
| Finance leases | 2.9 | - | ||||||
| Weighted-average discount rate: | ||||||||
| Operating leases | 4.4 | % | 4.1 | % | ||||
Finance leases | 6.5 | % | - | |||||
Other Information | December 31, 2020 | December 31, 2019 | ||||||
| (in thousands) | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows used in operating leases | $ | 3,866 | $ | 4,079 | ||||
| Operating cash flows used in finance leases | - | - | ||||||
| Financing cash flows used in finance leases | 1 | - | ||||||
| Operating lease assets obtained in exchange for lease obligations | ||||||||
| Operating leases, initial recognition | 317 | 18,077 | ||||||
| Operating leases, modifications and remeasurements | 1,340 | - | ||||||
| Finance leases, initial recognition | 45 | - | ||||||
5. NOTES PAYABLE AND LONG-TERM DEBT
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.
We restated our previously issued audited financial statements as of and for the years ended December 31, 2018 and 2017 as well as the quarterly and year-to-date periods within fiscal 2018 included in the Company’s previously filed Quarterly Reports on Form 10-Q, and the three months ended March 31, 2019, included in the Company’s previously filed Quarterly Report on Form 10-Q. Under the terms of the Promissory Note agreements we had in place with our primary bank, BOKF, NA d/b/a Bank of Texas (“BOKF”), we were required to provide BOKF quarterly financial statements and compliance certificates. We were unable to provide these financial statements and compliance certificates for the Delinquent Filings noted above. In response, on April 2, 2020, BOKF provided notice under the terms of the Promissory Note agreements that such Promissory Notes were cancelled. As of the date of cancellation, Tandy had no borrowings outstanding under these credit facilities or with any other lending institution. As of the date of this filing, Tandy has no lines of credit outstanding. Details of the terms of the Promissory Note agreements with BOKF are as follows.
On September 18, 2015, we executed a Promissory Note agreement with BOKF which provided us with a working capital line of credit facility of up to $6 million which was secured by our inventory. On August 20, 2018, this line of credit was amended to extend the maturity to September 18, 2020 and to reduce the interest rate by 0.35%, and on September 18, 2019, the maturity date was further extended through September 18, 2021. The Business Loan Agreement contained covenants that required us to maintain a funded debt to EBITDA ratio of no greater than 1.5 to 1 and a Fixed Charge Coverage Ratio greater than or equal to 1.2 to 1. Both ratios were calculated quarterly on a trailing four quarter basis. For the years ended December 31, 2020 and 2019, there were no amounts drawn on this line of credit.
Also, on September 18, 2015, we executed a Promissory Note agreement with BOKF which provided us with a line of credit facility of up to $10 million for the purpose of repurchasing shares of our common stock pursuant to our stock repurchase program, announced in August 2015 and subsequently amended, which permitted us to repurchase up to 2.2 million shares of our common stock through August 2020. Subsequently, this line of credit was amended to increase the availability from $10 million to $15 million for the repurchase of shares of our common stock pursuant to our stock repurchase program through the end of the draw down period which was the earlier of August 9, 2020 or the date on which the entire amount was drawn. In addition, this Promissory Note was amended on August 20, 2018 to reduce the interest rate by 0.35%, and on September 18, 2019, the maturity date was further extended through September 18, 2024. We were required to make monthly interest-only payments through September 18, 2020. After this date, the principal balance would have rolled into a 4-year term note with principal and interest paid on a monthly basis with a maturity date of September 18, 2024. This Promissory Note was secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas. During the first quarter of 2019, we paid $9.0 million to pay off this line of credit with no pre-payment penalties incurred. There were no amounts outstanding on this line of credit as of December 31, 2020 and 2019.
The amount outstanding under the above agreement consisted of the following:
| December 31, | ||||||||
| (in thousands) | 2020 | 2019 | ||||||
| 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 | $ | 446 | $ | - | ||||
| $ | 446 | $ | - | |||||
| Less current maturities | - | - | ||||||
| TOTAL | $ | 446 | $ | - | ||||
6. EMPLOYEE BENEFIT AND SAVINGS PLANS
We have a 401(k) plan to provide retirement benefits for our employees. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred salary contributions for eligible employees and allows employees to contribute a percentage of their annual compensation to the plan on a pretax basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. In 2020, and 2019, 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, 2020 and 2019, we recorded employer match expense of $0.2 million and $0.3 million, respectively.
The plan allows employees who meet the age requirements and reach the plan contribution limits to make a catch-up contribution. The catch-up contributions are not eligible for matching contributions. In addition, the plan provides for discretionary matching contributions as determined by the Board of Directors. There were no discretionary matching contributions made in 2020 or 2019.
We offer no postretirement or postemployment benefits to our employees.
7. INCOME TAXES
The provision for income taxes consists of the following:
| (in thousands) | Year Ended December 31, | |||||||
| Income Tax Benefit | 2020 | 2019 | ||||||
| Current provision (benefit): | ||||||||
| Federal | $ | (1,385 | ) | $ | (582 | ) | ||
| State | 65 | 7 | ||||||
| Foreign | 6 | (10 | ) | |||||
| Related to UTP | 20 | 26 | ||||||
| (1,294 | ) | (559 | ) | |||||
| Deferred provision (benefit): | ||||||||
| Federal | (62 | ) | (94 | ) | ||||
| State | (3 | ) | (24 | ) | ||||
| Foreign | (19 | ) | (13 | ) | ||||
| (84 | ) | (131 | ) | |||||
| Total tax benefit | $ | (1,378 | ) | $ | (690 | ) | ||
We have $4.6 million of net operating loss (“NOL”) carryovers and carrybacks 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 NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company is evaluating the impact of the CARES Act and expects that the NOL carryback provision of the CARES Act will result in a cash tax benefit to the Company.
Income (loss) before income taxes was earned in the following tax jurisdictions:
| (in thousands) | Year Ended December 31, | |||||||
| Income (Loss) Before Income Taxes | 2020 | 2019 | ||||||
| United States | $ | (6,222 | ) | $ | (1,959 | ) | ||
| Spain | 161 | 21 | ||||||
| Canada | (204 | ) | (131 | ) | ||||
| Australia | (7 | ) | (170 | ) | ||||
| United Kingdom | (7 | ) | (354 | ) | ||||
| TOTAL | $ | (6,279 | ) | $ | (2,593 | ) | ||
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: | 2020 | 2019 | ||||||
| (in thousands) | ||||||||
| Inventory | $ | 498 | $ | 468 | ||||
| Stock-based compensation | 63 | 51 | ||||||
| Accounts receivable | 4 | 5 | ||||||
| Sales returns | 105 | 119 | ||||||
| Foreign currency translation gain/loss in OCI | 323 | 359 | ||||||
| Goodwill and other intangible assets amortization | 5 | 33 | ||||||
| Net operating loss | 665 | 459 | ||||||
| Accrued expenses | 170 | - | ||||||
| Leases | 250 | 145 | ||||||
| Other | 1 | - | ||||||
| Total deferred income tax assets | 2,084 | 1,639 | ||||||
| Less: valuation allowance | (1,320 | ) | (382 | ) | ||||
| Total deferred income tax assets, net of valuation allowance | $ | 764 | $ | 1,257 | ||||
| Property and equipment depreciation | $ | 682 | $ | 740 | ||||
| Accrued expenses | - | 90 | ||||||
| Total deferred income tax liabilities | 682 | 830 | ||||||
| Net deferred tax asset (liability) | $ | 82 | $ | 427 | ||||
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 $0.9 million increase to the valuation allowance for deferred income tax assets was necessary as of December 31, 2020, as compared to 2019. Our evaluation considered, among other things, the nature, frequency, and severity of losses, forecasts of future profitability and the duration of statutory carryforward periods.
Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, the difference in tax rates for loss carryback periods, foreign income/loss positions, expenses that are nondeductible for tax purposes, 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:
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Statutory rate – Federal U.S. income tax | 21 | % | 21 | % | ||||
| State and local taxes | 3 | % | 0 | % | ||||
| Permanent book/tax differences | (2 | )% | (6 | )% | ||||
| Difference in tax rates in loss carryback periods | 8 | % | 3 | % | ||||
| Change in valuation allowance | (10 | )% | (5 | )% | ||||
| Rate differential on UTP reversals | 0 | % | 13 | % | ||||
| Other, net | 2 | % | 1 | % | ||||
| Effective rate | 22 | % | 27 | % | ||||
We file a consolidated U.S. income tax return as well as state tax returns on a consolidated, combined, or stand-alone basis, depending on the jurisdiction. We are no longer subject to U.S. federal income tax examinations by tax authorities for years prior to the tax year ended December 2016. Depending on the jurisdiction, we are no longer subject to state examinations by tax authorities for years prior to the December 2015 and December 2016 tax years.
A reconciliation of the beginning and ending amount of uncertain tax positions (“UTP”) is as follows:
| Fiscal Year | 2020 | 2019 | ||||||
| UTP at beginning of the year | $ | 296 | $ | 1,416 | ||||
| Gross increase (decrease) to tax positions in current period | 77 | (1,146 | ) | |||||
| Interest expense | 20 | 26 | ||||||
| Lapses in statute | - | - | ||||||
| UTP at end of year | $ | 393 | $ | 296 | ||||
We file tax returns in the U.S. and a limited number of foreign jurisdictions. With few exceptions, we are no longer subject to federal, state and local, or non-U.S. income tax examinations for years before 2015. Included in the balance of UTPs as of December 31, 2020 and 2019 are $0.1 million and $0.1 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of UTPs as of December 31, 2020 and 2019 are $0.3 million and $.02 million, respectively, 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.
In November 2019, a class action lawsuit seeking unspecified damages was brought by a stockholder in the Federal District Court in Los Angeles, California, and subsequently transferred to the Federal District Court for the Northern District of Texas, against the Company and members of its current and former management relating to our announcement of the circumstances leading to our restatement. We believe that suit was without merit, and the suit was withdrawn by the plaintiff in April 2020; however, there can be no assurance that additional litigation against the Company and/or its management or Board of Directors might not be threatened or brought in connection with matters related to our restatement.
Delisting of the Company’s Common Stock
As previously disclosed, the Company was unable to timely file the Delinquent Filings due to the process of restating its financial statements as described above. As a result, on February 18, 2020, the Company received a notice from Nasdaq indicating that, unless the Company timely requested a hearing before a Nasdaq Hearings Panel (the “Panel”), the Company’s common stock would be subject to suspension and delisting from Nasdaq due to non-compliance with Nasdaq Listing Rule 5250(c)(1). On May 1, 2020, the Panel granted the Company’s request to remain listed on Nasdaq, subject to the Company filing all current and overdue quarterly and annual reports with the Securities and Exchange Commission on or before August 10, 2020. Because the restatement process was not complete by such date, Nasdaq suspended trading in our stock on Nasdaq as of August 13, 2020. Our stock has since traded on the OTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLFA.” Nasdaq denied our appeal of this decision, and our stock was formally delisted on February 9, 2021. We intend to reapply for Nasdaq listing once the Company has made the required Exchange Act filings.
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.
9. CHANGES INSIGNIFICANT BUSINESS CONCENTRATIONS AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDRISK
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 0.3% of our consolidated revenues in 2020 or 2019, and sales to our five largest customers represented 1.1% and 1.7%, respectively, of consolidated revenues in those years. While we do not believe the loss of one of these customers would have a significant negative impact on our operations, we do believe the loss of several of these customers simultaneously or a substantial reduction in sales generated by them could temporarily affect our operating results.
Major Vendors
We purchase a significant portion of our inventory through one supplier. Due to the number of alternative sources of supply, we do not believe that the loss of this supplier would have an adverse impact on our operations.
Credit Risk
Due to the large number of customers comprising our customer base, concentrations of credit risk with respect to customer receivables are limited, although as of December 31, 2020 and 2019, two customers’ balances represented 29.9% and 35.3% 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.
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 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 (of which, there were 606,712 shares available for future awards as of December 31, 2020). Awards granted under the 2013 Plan may be service-based awards or performance-based awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years, unless otherwise determined by the Compensation Committee of the Board of Directors that administers the plan. In March 2020, as part of their annual director compensation, certain of our non-employee directors were granted a total of 24,010 service-based RSUs under the 2013 Plan which will vest ratably over the next 3 years provided that the participant is employed on the vesting date. In July 2020, our new CFO was granted a total of 9,063 service-based RSUs under the 2013 Plan which were scheduled to vest ratably over the next 3 years, provided that the participant is employed on the vesting date. This award was forfeited in January 2021when the grantee left the employ of the Company. In December 2020, certain of our key employees were granted a total of 18,255 service-based RSUs which vested immediately, under the 2013 Plan.
In addition to grants under the Company’s 2013 Restricted Stock Plan, in October 2018 we granted a total of 644,000 RSUs to the Company’s Chief Executive Officer (“CEO”), of which (i) 460,000 are service-based RSUs that vest ratably over a period of five years from the grant date based on our CEO’s continued employment in her role, (ii) 92,000 are performance-based RSUs that will vest if the Company’s operating income exceeds $12 million dollars two fiscal years in a row, and (iii) 92,000 are performance-based RSUs that will vest if the Company’s operating income exceeds $14 million dollars in one fiscal year.
A summary of the activity for non-vested restricted stock and RSU awards is as follows:
Shares (in thousands) | Weighted Average Share Price | |||||||
| Balance, January 1, 2019 | $ | 658 | $ | 7.39 | ||||
| Granted | 46 | 5.67 | ||||||
| Forfeited | (5 | ) | 5.64 | |||||
| Vested | (93 | ) | 7.39 | |||||
| Balance, December 31, 2019 | $ | 606 | $ | 7.27 | ||||
| Balance, January 1, 2020 | $ | 606 | $ | 7.27 | ||||
| Granted | 51 | 3.94 | ||||||
| Vested | (135 | ) | 6.63 | |||||
| Balance, December 31, 2020 | $ | 522 | $ | 7.11 | ||||
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 $0.9 million and $0.8 million in 2020 and 2019, respectively.
As of December 31, 2020, the Company has concluded it is not probable that the performance conditions related to performance-based RSUs will be achieved, and as a result no compensation expense related to performance-based RSUs has been recorded.
As of December 31, 2020, there was unrecognized compensation cost related to non-vested, service-based awards of $2.1 million which will be recognized over 1.9 weighted average years in each of the following years:
| Unrecognized Expense | ||||
| 2021 | $ | 811,580 | ||
| 2022 | 759,540 | |||
| 2023 | 516,286 | |||
| $ | 2,087,406 | |||
We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs. In 2020 and 2019, we issued 128,619 and 93,408 shares, respectively, resulting from the vesting of restricted stock. We do not use cash to settle equity instruments issued under stock-based compensation awards.
Share Repurchase Program
In August 2015, our Board of Directors authorized a share repurchase program, pursuant to which we were authorized to repurchase up to 1.2 million shares of our common stock at prevailing market rates through August 2016. Subsequently, the program was amended to increase the number of shares available for repurchase to 2.2 million and to extend the program through August 2019. In June 2019, the program was again amended to increase the number of shares available to one million as of such date and to extend the program through August 9, 2020.
For the years ended December 31, 2020 and 2019, we repurchased the following shares:
Year ended December 31, | Total shares repurchased | Average price per share | ||||||
| 2020 | - | $ | - | |||||
| 2019 | 131,782 | $ | 5.58 | |||||
As of December 31, 2020, we could repurchase $5,000,000 of our common stock.
On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5.0 million of its common stock between August 9, 2020 and July 31, 2022, subject to the completion of our financial restatement and the filing of all Delinquent Filings with the SEC. The Company’s previous share repurchase program expired in August 2020. As of December 31, 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. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock. This repurchase was 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.
11. SEGMENT INFORMATION
As of January 1, 2019, we operate as a single segment and report on a consolidated basis. Prior to January 1, 2019, we operated and reported in two segments, North America and International. In early 2019, we announced several strategic initiatives to drive future sales growth and long-term profitability, which resulted in the Company closing two of its three stores outside of North America. This left Spain as our only store outside of North America, and our chief operating decision maker was no longer making operating performance assessments and resource allocation decisions for this one single store. As a result, we no longer report International as a reportable segment.
12. QUARTERLY FINANCIAL DISCLOSUREDATA (UNAUDITED)
The Company is providing quarterly and year-to-date unaudited consolidated financial information for interim periods occurring within the years ended December 31, 2020 and 2019 in order to comply with SEC requirements.
(in thousands, except share and per share data) 2020 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Net sales | $ | 17,145 | $ | 9,146 | $ | 15,990 | $ | 21,803 | ||||||||
| Gross profit | 9,866 | 5,243 | 9,289 | 11,660 | ||||||||||||
| Net loss | (1,738 | ) | (1,775 | ) | (982 | ) | (406 | ) | ||||||||
| Net loss per common share: | ||||||||||||||||
| Basic | $ | (0.19 | ) | $ | (0.20 | ) | $ | (0.11 | ) | $ | (0.04 | ) | ||||
| Diluted (1) | $ | (0.19 | ) | $ | (0.20 | ) | $ | (0.11 | ) | $ | (0.04 | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | 9,029,212 | 9,042,991 | 9,042,991 | 9,134,621 | ||||||||||||
| Diluted | 9,029,212 | 9,042,991 | 9,042,991 | 9,134,621 | ||||||||||||
(1) For the three months ended March 31, 2020, June 30, 2020, September 30, 2020, and December 31, 2020, there were 492, 2,290, 1,875 and 3,300 shares, respectively, excluded from the diluted EPS calculation because the impact of their assumed exercise would be anti-dilutive due to a net loss in those periods.
(in thousands, except share and per share data) 2019 | First Quarter Restated | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Net sales | $ | 20,941 | $ | 17,197 | $ | 16,311 | $ | 20,469 | ||||||||
| Gross profit | 12,244 | 9,371 | 8,849 | 11,495 | ||||||||||||
| Net income (loss) | 1,520 | (875 | ) | (1,719 | ) | (830 | ) | |||||||||
| Net income (loss) per common share: | ||||||||||||||||
| Basic | $ | 0.17 | $ | (0.10 | ) | $ | (0.19 | ) | $ | (0.09 | ) | |||||
| Diluted (2) | $ | 0.17 | $ | (0.10 | ) | $ | (0.19 | ) | $ | (0.09 | ) | |||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | 9,009,752 | 8,933,648 | 8,932,246 | 9,020,187 | ||||||||||||
| Diluted | 9,011,107 | 8,933,648 | 8,932,246 | 9,020,187 | ||||||||||||
(2) For the three months ended June 30, 2019, September 30, 2019 and December 31, 2019, there were 2,290, 2,704 and 8,387 shares, respectively, excluded from the diluted EPS calculation because the impact of their assumed exercise would be anti-dilutive due to a net loss in those periods.
| ITEM 9. |
None.
| ITEM 9A. |
Evaluation of Disclosure Controls and Procedures
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. Ourreporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management’s establishing and maintaining adequate internal control system was designed to provide reasonable assurance to our management and our board of directors regarding the reliability of the preparation and fair presentation of our published financial statements.
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of December 31, 2017,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 is effective based on that criteria.may not prevent or detect all misstatements.
Control environment. We concluded that has materially affected, or is reasonably likelywe 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 materiallyensure 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.
Risk oversight environment. We did not maintain adequate risk oversight measures related to the (i) identification and assessment of risks that could impact achieving our objectives and (ii) identification and analysis of the potential changes that could affect our internal controls environment.
Control activities. We concluded that we did not have effective control activities in the following areas: (i) selecting and developing control policies, procedures and activities to mitigate risks, including with respect to the methodologies used to calculate and report financial information and results; and (ii) selecting and implementing information technology and related systems supportive to our internal control over financial reporting.
Information processing and communication. We identified deficiencies associated with information processing and communication within our internal control framework. Specifically, we did not effectively communicate objectives and internal control responsibilities throughout the organization which contributed to inadequate documentation of processes and methodologies used to calculate and reconcile regular consolidation adjustments hindering clear communication with management, the Board of Directors and our independent auditors.
In addition, the documentation of inventory purchasing relied on paper-based vendor invoices and multi-step manual data-entry processes, some of which were subject to management override, which resulted in errors at multiple steps of the process, and deficiencies in communicating accurate information to management, the Board of Directors and our independent auditors.
Monitoring activities. We concluded that we did not design and implement effective monitoring activities related to (i) selecting, developing, and performing separate evaluations of our internal control over financial reporting; and (ii) evaluating and communicating internal control deficiencies in a timely manner to parties responsible for taking corrective actions.
The issues described above resulted in the following errors in our financial statements previously filed with the SEC:
Inventory was not stated on a FIFO basis nor was it stated at the lower of FIFO cost or net realizable value;
Freight-in, warehousing and handling expenditures, factory labor and overhead and freight-out costs were not correctly capitalized;
Warehousing and handling expenditures were incorrectly classified as operating expenses;
Allowance for sales returns was incorrectly calculated and accounted for;
Net gift card liability was not correctly accounted for in 2017;
Lease asset and liability under ASC Topic 842 was incorrectly calculated;
PTO related accrued liabilities were incorrectly calculated;
Provision for income taxes, including adjustments related to the Tax Cuts and Jobs Act (the “Tax Act”), uncertain tax position (UTP) liability and related interest expense, and correction of taxable income on the return of our Canada and Spain foreign subsidiaries;
Foreign currency gains and losses associated with the Company’s Canadian subsidiary were incorrectly classified as a component of accumulated other comprehensive loss and the cumulative translation adjustments included in accumulated other comprehensive loss were not tax effected; and
Shares repurchased and subsequently cancelled were incorrectly accounted for as treasury stock.
Remediation Efforts to Address Material Weaknesses
Our management, including our CEO and CFO, has worked with expert accounting consultants and our Audit Committee to design and implement both a short-term and a long-term remediation plan to correct the material weaknesses in our disclosure controls and procedures and our internal control over financial reporting. The following activities highlight our commitment to remediating our identified material weaknesses:
Since October 2019 and through the filing date of this Form 10-K, we have taken the following measures, among others:
| i. | Hired a new, highly-qualified CFO in January 2021 with extensive public-company experience; |
| ii. | Replaced critical roles within our accounting team with contract accounting resources and ultimately (ongoing) full-time employees with expertise in GAAP accounting, SEC reporting and disclosure, internal audit and internal controls; |
| iii. | Replaced our legacy accounting systems with an integrated enterprise resource planning (“ERP”) solution which includes general ledger, warehouse management and factory production modules designed to calculate inventory on a FIFO basis; |
| iv. | Made improvements to our accounting close process, including a formalized accounting close checklist establishing accountability for oversight and review; |
| v. | Documented process narratives in the following areas: (i) financial reporting, (ii) inventory, (iii) purchasing and accounts payable, (iv) revenue, (v) fixed assets and lease accounting, (vi) general accounting, treasury and financial planning & analysis, (vii) tax, (viii) information technology (IT) governance, and (ix) HR and payroll; |
| vi. | Created a risk controls matrix which includes, among other things, a comprehensive list of key and mitigating controls, a description of the risk the control is designed to mitigate, the individual responsible for each control, the frequency in which the control is performed, and a mapping of each control to the five COSO Framework components (control environment, risk assessment, control activities, information and communication, or monitoring activities). |
Our continuing plan and additional steps for remediation include:
| i. | Ongoing recruitment and hiring of permanent, qualified public-company accounting personnel; |
| ii. | Point-of-sale systems implementation that will be fully integrated with our new ERP system; |
| iii. | Redesigning our accounting procedures and activities to align with our new ERP system that will include built-in controls to improve upon the reliability of financial reporting and the preparation of financial statements in accordance with GAAP; |
| iv. | Reporting the progress and results of our remediation plan to the Audit Committee on a recurring basis, including the identification, status, and resolution of internal control deficiencies; and |
| v. | Creating a comprehensive approach to regularly evaluate the operating effectiveness of our disclosure controls and procedures and our internal control over financial reporting using the COSO Framework as a guide. |
Control Environment
Our management, including our CEO and CFO, our Audit Committee and our Board of Directors have taken certain steps to set the proper tone-at-the-top in support of the Company’s values and climate to develop and maintain an effective internal control environment. These actions include:
| ◾ | Recurring meetings with leadership, finance and accounting and other key functional areas to train staff on processes for oversight and emphasize each individual’s accountability for internal control compliance, and to create a pattern of regular discussion of such controls. |
| ◾ | Periodic communications from the CEO, CFO and other key senior leaders on the Company’s mission, core values, Code of Business Conduct and Ethics, whistleblower policies, and each employee’s individual responsibility for internal control compliance. |
| ◾ | Reorganization of the finance and accounting team to ensure appropriate segregation of duties, oversight and review of work, and recruiting and hiring qualified, competent employees with relevant experience for the roles. |
| ◾ | Regular performance evaluations to include position-specific criteria for functional competence, including performance of internal control responsibilities. |
Risk Oversight Measures
We continue to identify risks and enhance risk oversight measures. In late 2019, we developed an annual strategic planning process designed to identify specific operating objectives for the organization and to conduct an assessment across the organization of the risks to meeting those objectives, including the risk of fraud. Furthermore, on a quarterly basis, management will review our periodic filings to ensure that identified risks have been appropriately disclosed. In the areas of reporting and compliance objectives, we are also developing a process to conduct monthly business reviews by functional area that would include risk assessments of reporting accuracy based on complexity and transaction levels as well as compliance with GAAP and other regulatory requirements, in order to evaluate whether our existing control activities appropriately mitigate such risks or if additional controls need to be employed.
Control Activities
We continue to redesign and implement our internal control activities. Specifically, we conducted detailed working sessions to document our current and prior finance and accounting policies, procedures and step-by-step activities as a prerequisite to selecting a new systems vendor. These sessions identified specific areas that required short-term improvement and long-term redesign of processes, structure, authorities and controls, and those actions include:
| ◾ | New systems designed to calculate inventory at FIFO and create efficiency and accuracy through integration: we implemented the warehouse management, factory production system and general ledger systems modules as part of our new ERP system implementation which went live on September 1, 2020. We are still in the process of implementing our new point-of-sale system, which will be fully integrated with our ERP system and with a phased implementation across our fleet of stores throughout 2021. |
| ◾ | Creation and implementation of newly-designed processes, structures, delegation of authority and controls, in accordance with the COSO Framework, including: |
| o | The creation of a risk controls matrix; |
| o | Driving a greater sense of accountability by requiring sub-certifications below the CEO and CFO level for certain key accounting, finance and operations personnel; |
| o | Quarterly updates for the CFO regarding upcoming accounting pronouncement and proposed changes to GAAP accounting standards, tax regulations, and other requirements that may impact the Company’s financial reporting; |
| o | Quarterly reviews of the most significant accounting estimates and judgements; |
| o | Validation of results through detailed variance analyses and reconciliation of account balances; |
| o | Monthly business review of actual financial performance compared to forecasts with participation from leadership across the organization; and |
| o | Establishing a disclosure committee comprised of key management throughout the different areas of the organization to evaluate the appropriateness of disclosures in the Company’s periodic filings on Forms 10-K and 10-Q and to support the CEO and CFO with the certification process. |
Information Processing and Communication
The implementation of our new ERP system is expected to eliminate the need for many of the topside adjustment calculations that had to be performed because our legacy systems were not integrated and many of our accounting processes were manual. This new ERP system allows us to automate certain accounting processes, reducing the risk of management override, and over time will eliminate the need for topside adjustments outside of the system. In addition, management is developing detailed policies, procedures and internal controls related to our financial reporting and working with our ERP vendor to develop regular reporting from our new systems that can validate the quality of our data and provide accurate information to support internal and external reporting and audit requirements.
Monitoring Activities
In addition to the items noted above, as we continue to evaluate, remediate, and improve our internal control over financial reporting, our management expects to continue to implement additional measures to address control deficiencies and further refine and improve the remediation efforts described above. Specifically, we are developing a checklist of activities based on the criteria established in the COSO Framework against which we will assess the design of entity-level and activity-level controls, and the operational effectiveness of such controls. Deficiencies identified in this process will be addressed by management, including our CEO and CFO. This assessment, any deficiencies and any remedial actions will be shared and discussed with our Audit Committee and our independent auditors on a quarterly basis.
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. We are still in the process of implementing our new point-of-sale system, with a phased implementation throughout 2021. Also, during January 2021, we hired a new highly-qualified CFO with public company experience. Although we had not fully remediated the material weaknesses in our internal control over financial reporting as of December 31, 2020, 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. |
None.
| ITEM 10. |
GENERAL INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS
| Name | Age | Director/Executive Officer Since | Position | |||
| Janet Carr | 60 | 2018 | Director, Chief Executive Officer | |||
| Michael Galvan | 52 | 2021 | Chief Financial Officer | |||
| Vicki Cantrell | 63 | 2017 | Director | |||
| Elaine D. Crowley | 62 | 2021 | Director | |||
| Jefferson Gramm | 46 | 2014 | Chairman of the Board of Directors | |||
| Sharon M. Leite | 59 | 2017 | Director | |||
| James Pappas | 40 | 2016 | Director | |||
| Sejal Patel | 42 | 2017 | Director | |||
| William M. Warren | 76 | 2013 | Director |
Janet Carr, 60, has served as our Chief Executive Officer and as a member of our Board of Directors since October 2018. Prior to her current role, Ms. Carr served as the Senior Vice-President of Global Business Development for Caleres Inc. (formerly Brown Shoe Company Inc.) from 2016 to 2017. While there, she was responsible for international wholesale and retail for all of their brands. Prior to Caleres, Ms. Carr was the President of the Handbag Division of Nine West Group Inc. from 2013 to 2014, where she was responsible for all aspects of design, development and sales in both wholesale and retail. Ms. Carr has deep experience in strategy and consumer insights in various roles at a number of prominent retailers, including Tapestry, Inc. (formerly Coach, Inc.), Gap Inc. and Safeway.
Elaine D. Crowley, 62, served as Chief Restructuring Officer of Stage Stores, Inc. from May 2020 to October 2020 and served as a member of its Board of Directors from 2014 to 2020. From 2010 until her retirement in 2012, Ms. Crowley served as Executive Vice President and Chief Financial Officer for Mattress Giant Corporation, a mattress retailer. From 2008 to 2010, Ms. Crowley served as Executive Vice President and Chief Financial Officer and Senior Vice President, Controller and Chief Accounting Officer/Chief Financial Officer for Michaels Stores, Inc., an arts and crafts retailer. From August 1990 to September 2007, Ms. Crowley was employed by The Bombay Company, Inc., a furniture and home goods retailer, most recently as Senior Vice President, Chief Financial Officer and Treasurer. She held that title for administrative purposes while also having served as Liquidation Trustee for the Bombay Liquidation Trust from September 2007 to December 2017. She has 11 years of public accounting experience principally with Price Waterhouse. She holds a B.B.A. in accounting from Texas Christian University and is licensed as a certified public accountant in Texas. Ms. Crowley’s tenure in senior executive and financial roles with other retailers and experience as a Certified Public Accountant in the practice of public accounting provides the Board with valuable leadership experience and financial and retail expertise.
Jefferson Gramm, 46, is a portfolio manager at Bandera Partners LLC, which might be deemed to be an affiliate of ours by virtue of holding approximately 33% of our outstanding common stock. See “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS*MANAGEMENT” for information regarding Bandera Partners LLC’s ownership of our common stock. Mr. Gramm has been in his present position with Bandera since 2006. His prior experience includes serving as Managing Director of Arklow Capital, LLC, a hedge fund manager focused on distressed and value investments, from October 2004 to July 2006. He has been a Director of Rubicon Technology since November 2017. He also served as a Director of Ambassadors Group from May 2014 until October 2015 and of Morgan’s Foods Inc. from April 2013 to March 2014. He served as a Director of Peerless Systems Corp from June 2009 to November 2010. He received an M.B.A. from Columbia University in 2003 and a B.A. in Philosophy from University of Chicago in 1996. Mr. Gramm provides a unique and valuable perspective with respect to corporate governance, our stockholder base and stockholder issues in general.
Sejal Patel, 42, is a Portfolio Manager at Skale Investments since January 2019. From July 2015 through September 2018, she was a Partner/Advisor at Lake Trail Capital, a private investment firm. Her prior work experience includes serving as Vice President of Indus Capital, a hedge fund manager focused on Asian and Japanese equities, from 2012 to 2015 and Director for Kelusa Capital Management, a hedge fund manager focused on Asian equities, from 2006 to 2012. She served on the Boards of Value Quest Capital, a value fund based in India, since 2014 and the Tiger Foundation, a non-profit organization based in New York, from 2009 to 2018. She received a B.S. in Economics from the University of Pennsylvania. Ms. Patel brings a strong financial and business background to our Board.
William M. Warren, 76, is president and sole Director of William M. Warren, PLLC, an independent law firm. He also serves as of Counsel to Loe Warren P.C., a law firm located in Fort Worth Texas, where he was President and Director from 1979 until December 2019. He has served as one of our directors from 1993 to 2003 and since 2013 and also served as our Secretary and General Counsel from 1993 until 2018. Mr. Warren brings to our Board extensive legal and industry experience, as well as a long history with, and deep institutional knowledge of, the Company.
The information relating to the 2018 Annual Meetingoccupations and security holdings of Stockholdersour directors and nominees is based upon information received from them.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Sections 16(a) 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.amended, requires our directors, executive officers and holders of more than 10% of our common stock to file reports regarding their ownership and changes in ownership of our securities with the SEC. Based solely on a review of the copies of such reports and amendments thereto furnished to us with respect to fiscal 2020 and written representations from our directors and executive officers, we believe that, during fiscal 2020, our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements, except that a Form 3 and Form 4 were not filed reporting Steven Swank’s initial ownership upon joining the Company as Chief Financial Officer and an initial grant of restricted stock units made to him (which was reported on a Form 8-K).
CODE OF ETHICS
The Company’s Board of Directors has adopted the Tandy Leather Factory, Inc. Code of Business Conduct and Ethics, which applies to the Company’s Chief Executive Officer, Chief Financial Officer, Controller and all other employees and Directors of the Company. This definitive proxy statement relatesCode can be found at the Company’s website, www.tandyleather.com, under the Investor Relations/Corporate Governance tabs.
AUDIT COMMITTEE
The Audit Committee’s basic role is to assist the Board of Directors in fulfilling its fiduciary responsibility pertaining to our accounting policies and reporting practices. Among other duties, the Audit Committee is to be the Board of Directors’ principal agent in assuring the independence of our outside auditor, the integrity of management, and the adequacy of disclosures to stockholders. The Audit Committee has been structured to comply with the requirements of Section 3(a)(58)(A) of the Exchange Act. The Board of Directors has determined that all members of the Audit Committee are “independent” under the applicable rules of the Nasdaq and that James Pappas, Chairman of the Audit Committee, qualifies as an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K. The Board of Directors has adopted a meetingwritten charter for the Audit Committee, which is available on our website at www.tandyleather.com. The Audit Committee met seven times during 2020. The Report of the Audit Committee for the fiscal year ended December 31, 2020 appears below.
Report of the Audit Committee
As members of the Audit Committee, we oversee Tandy Leather Factory, Inc.’s financial reporting process on behalf of the Board of Directors. Management is responsible for the preparation, presentation, and integrity of our financial statements, accounting and financial reporting principles, internal controls, and procedures designed to ensure compliance with accounting standards, applicable laws, and regulations.
During 2020 we recommended, and the Board of Directors approved, the appointment of Weaver as independent auditors for the year ended December 31, 2020. Our auditors are responsible for performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States.
The Audit Committee has received from Weaver the written disclosures and the letter required by the applicable requirements of the PCAOB regarding Weaver’s communications with the Audit Committee concerning independence and the Audit Committee has discussed with Weaver their independence from us and our management.
As previously disclosed, in October 2019 the Company’s management, in consultation with the Audit Committee, determined that the Company’s previously issued Consolidated Financial Statements for the years 2017 and 2018 and quarterly periods between January 1, 2017 and March 31, 2019 should no longer be relied upon due to misstatements related to the Company’s accounting processes for inventory transactions. The Company undertook to make the necessary accounting corrections and restate such financial statements.
The foregoing report was submitted by the Audit Committee and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A promulgated by the SEC or Section 18 of the Exchange Act.
| AUDIT COMMITTEE: | |
James Pappas, Chairman | |
| Elaine D. Crowley | |
| Sharon M. Leite | |
| Sejal Patel |
| ITEM 11. |
COMPENSATION DISCUSSION AND ANALYSIS
The primary focus of our executive compensation programs is to improve our performance year over year and over a longer-term period. The compensation programs were designed to provide the tools necessary to hire executives with the skills needed to manage Tandy Leather Factory, Inc. to meet these goals and to retain them over the long-term. In developing the programs, a key consideration was to have plans that were easy to understand and administer, while being competitive with companies of similar size and philosophy. Over the past several years, management and the Compensation Committee have worked to refine the compensation programs used to ensure that they support these goals and our ongoing business objectives. Our philosophy has been to reward team performance, measured by our overall results. Each executive officer’s compensation is linked to their individual contribution toward increases in the size of our operations, our income, and increases in stockholder value. At the 2020 Annual Meeting, stockholders were asked to approve Tandy Leather Factory, Inc.’s 2019 executive compensation programs. Approximately 99% of the shares voted approved the program. In consideration of these results and other factors the Compensation Committee evaluates on a regular basis, the Compensation Committee concluded that Tandy Leather Factory, Inc.’s existing executive compensation programs continue to be appropriate to support Tandy Leather Factory, Inc.’s compensation philosophy and objectives described in this discussion.
Compensation for our executive officers consists of the following components:
Base salary;
Annual incentive bonus;
Restricted stock unit grants;
Retirement and other benefits, and
Employment Agreements.
Each of these elements of pay is described below.
Company Performance. In 2020, Tandy Leather Factory, Inc.’s sales decreased approximately 15% from 2019, as the Company’s entire fleet of stores was temporarily shut down by the COVID-19 pandemic. Because of the ongoing financial restatement, the Company has not yet announced (as of the date of this information statement) its full-year gross profits or operating expenses for 2020.
Base Salary
Base salaries are intended to reward our executive officers based upon their roles within Tandy Leather Factory, Inc. and for their performance in those roles. Base salaries are established when an executive officer is hired, based on prior experience and compared to salaries for comparable positions in other companies. Base salaries are generally increased annually, if market factors dictate such increases and assuming our financial performance is satisfactory. The Company did not increase, and temporarily lowered because of the COVID-19 pandemic, base salaries for its executive officers during 2020.
Bonuses
We award discretionary bonuses to our executive officers, as determined by the Compensation Committee. We determine these bonuses on a subjective basis, considering business prospects for the upcoming year and the improvement in our net income and financial position for the year in question. These discretionary bonuses are awarded annually and paid in the first quarter of the following year. We did not award any bonuses to our executive officers for 2020.
Restricted Stock Unit Grants
We award restricted stock unit grants to promote long-term retention of executive officers and permit them to accumulate equity ownership in Tandy Leather Factory, Inc., so that the interests of our management team are directly aligned with the interest of our stockholders. We believe it is important to have an element of compensation that is focused directly on retaining talent so that we can minimize potential loss of company and industry knowledge and the disruption inherent in unplanned turnovers. Restricted stock unit grants also align our executive officers with our stockholders by making them stockholders themselves. Retaining talent and aligning interests encourages our executive officers to take actions to enhance the value of our business and increase stockholder value. Time-based restricted stock unit awards generally vest equally over four years. We did not grant any restricted stock units to our Chief Executive Officer during 2020. In July 2020, the Company awarded Steven Swank, its Chief Financial Officer, a new-hire grant of restricted stock units valued at $30,000, which were scheduled to vest one year after the grant date; these units were cancelled when Mr. Swank left the Company in March 2021.
Retirement and Other Benefits
Our benefits program includes a retirement plan and a group insurance program. The objective of the program is to provide executive officers with reasonable and competitive levels of protection against the four contingencies (retirement, death, disability and ill health) that could interrupt the executive officer’s employment and/or income received as an active employee. Our retirement plans are designed to provide a competitive level of retirement income to our executive officers and to reward them for continued service with Tandy Leather Factory, Inc. The retirement program for executive officers consists of a tax-qualified 401(k) Plan that covers all full-time employees. The group insurance program consists of life and health insurance benefits plans that cover all full-time employees.
Employment Agreement with Ms. Carr
We have entered into an employment agreement with Janet Carr, CEO, dated as of October 2, 2018. Under this agreement, Ms. Carr is entitled to receive an annual base salary of $500,000 and is eligible to receive an annual discretionary bonus, as determined by the Board. Also under this agreement, On October 2, 2018, Ms. Carr received: (i) a time-based equity grant of 460,000 restricted stock units (“RSUs”) that vest over five years from the date of the grant; (ii) a performance-based equity grant of 92,000 RSUs that will vest if/when the Company’s operating income exceeds $12 million dollars two fiscal years in a row; and (iii) a performance-based equity grant of 92,000 RSUs that will vest if/when the Company’s operating income exceeds $14 million dollars in one fiscal year. Ms. Carr was also reimbursed for reasonable costs and expenses in connection with her commute and relocation from New York to Texas in 2019. If Ms. Carr’s employment is terminated by the Company without Cause or by Ms. Carr for Good Reason (each as defined in her employment agreement), Ms. Carr would receive twelve months of base salary and an annual reimbursement of COBRA payments and vest in a pro-rata portion of the time-based RSUs, based on the number of days that Ms. Carr is employed. Any unvested performance-based RSUs would be forfeited. In the event that Ms. Carr’s employment is terminated by the Company without Cause or by Ms. Carr for Good Reason within six months prior to or one year after a Change in Control (as defined in her employment agreement), Ms. Carr would receive thirty-six months of base salary and an annual reimbursement of COBRA payments and vest in a pro-rata portion of the time-based RSUs, based on the number of days that Ms. Carr had been employed. Any unvested performance-based RSUs would be forfeited. Under this agreement, a “Change in Control” is a defined term that includes a merger, a sale of all or substantially all of our assets or a similar transaction involving us, a third party acquiring more than 50% of our shares which includes, in general, a person or entity becoming a 50% or greater stockholder of us, a covered removal of directors on our board of directors, or our liquidation or dissolution.
Change in Control Effect on other Restricted Stock Units
Our 2013 Restricted Stock Plan (which does not govern the electiongrants to Ms. Carr described above) also provides for accelerated vesting in the event of a “change of control”, whose meaning is materially the same as a Change in Control described above for Ms. Carr’s employment agreement. Except to the extent that the Compensation Committee provides a result more favorable to holders of awards, in the event of a change of control, restricted stock units that are not vested before a change of control will vest on the date of the change of control.
Separation and Release Agreement with Steven Swank
We entered into a Separation and Release Agreement with Steven Swank, the Company’s Chief Financial Officer from July 2020 until January 2021, dated as of January 6, 2021. Pursuant to this agreement, Mr. Swank remained with the Company until March 5, 2021 (the “Separation Date”) to assist with transition. During this period, Mr. Swank continued to receive his base salary of $275,000 per year and continued to participate in all company health and retirement plans and other benefits programs. The Company also agreed not to seek reimbursement from Mr. Swank for relocation or health insurance-related payments totaling $44,544 made to Mr. Swank at the time of his hire.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis (“CD&A”) with management.
The foregoing report was submitted by the Compensation Committee and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A promulgated by the SEC, other than as provided in Item 407 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act.
| COMPENSATION COMMITTEE: | |
Sharon M. Leite, Chair Vicki Cantrell Jefferson Gramm |
COMPENSATION TABLES AND OTHER INFORMATION
The following table includes information required by Item 402 of Regulation S-K promulgated by the SEC. The amounts shown represent the compensation paid to our named executive officers for each fiscal year noted in the table, for services rendered to us. For a more complete discussion of the elements of compensation included in this table, please refer to the discussion reflected in “Compensation Discussion and Analysis” above.
SUMMARY COMPENSATION TABLE
Name and Principal Position | Year | Salary | Bonus | Restricted Stock Awards | All Other Compensation | Total | |||||||||||||||||||
Janet Carr, Chief Executive Officer (1) | 2020 2019 2018 | $ $ $ | 361,574 500,000 113,010 | $ | - - - | $ $ | - - 4,759,160 | $ $ | 10,000 20,230 | (3) (3) - | $ $ $ | 371,574 520,230 4,872,170 | |||||||||||||
| Steven Swank, Chief Financial Officer (2) | 2020 | $ | 123,077 | $ | - | $ | 30,000 | $ | 44,544 | (4) | $ | 197,621 | |||||||||||||
| (1) | In October 2018, Ms. Carr was appointed CEO with an annual salary of $500,000. In addition, Ms. Carr was granted 644,000 restricted stock units; the amount reported as the value of these restricted stock units is based on the grant date fair value of $7.39 per share, computed in accordance with FASB ASC Topic 718. |
| (2) | In July 2020, Mr. Swank was granted restricted stock units valued on the grant date at $30,000 based on the grant date fair value of $3.31 per share, computed in accordance with FASB ASC Topic 718. Mr. Swank’s position as an executive officer of the Company terminated in January 2021, although he continued to remain employed by the Company in a non-executive-officer capacity until March 2021, at which time these restricted stock units were cancelled. |
| (3) | For 2019, represents Company-reimbursed moving expenses for Ms. Carr. For 2020, represents matching funds contributed to Ms. Carr’s Company 401(k) plan. |
| (4) | Represents $42,376 paid by the Company to Mr. Swank for his relocation to Texas and $2,168 reimbursed to Mr. Swank for extending his health insurance coverage from his prior employer. |
GRANTS OF PLAN-BASED AWARDS
The Company did not grant any plan-based or non-plan-based equity awards to its Chief Executive Officer during 2020. In July 2020, the Company awarded Steven Swank, its Chief Financial Officer, a new-hire grant of restricted stock units valued at $30,000, which were scheduled to vest one year after the grant date; these units were cancelled when Mr. Swank left the Company in March 2021.
OUTSTANDING STOCK AWARDS
as of December 31, 2020
Name | Number of shares of stock that have not vested (#) | Market value of shares of stock that have not vested ($) | ||||||
| Janet Carr (1) | 460,000 | $ | 1,472,000 | |||||
| Steven Swank (2) | 9,063 | $ | 29,002 | |||||
| (1) | Vesting is subject to Ms. Carr’s continued employment with the Company and to the achievement of performance criteria set forth in 184,000 performance-based restricted stock award units granted to her in 2018. |
| (2) | All stock awards held by Mr. Swank were cancelled upon his departure from the Company in March 2021. |
EQUITY COMPENSATION PLANS
The following table sets forth information regarding our equity compensation plans (including individual compensation arrangements) that authorize the issuance of shares of our common stock. The information is aggregated in two categories: plans previously approved by our stockholders and plans not approved by our stockholders. The table includes information for officers, directors, employees and non-employees. All information is as of December 31, 2020.
Plan Category | Column (A) Number of Securities to be issued upon exercise of outstanding options, warrants and rights | Column (B) Weighted-average exercise price of outstanding options, warrants and rights | Column (C) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column (A) | |||||||||
Equity compensation plans approved by stockholders | 61,215 | $ | - | 630,202 | ||||||||
| Equity compensation plans not approved by stockholders | 460,000 | - | - | |||||||||
| TOTAL | 521,215 | $ | - | 630,202 | ||||||||
DIRECTOR COMPENSATION
Compensation of non-employee directors is determined by the Board. Our non-employee directors are paid an annual cash retainer of $16,000; in addition, the Chairman of the Audit Committee is paid an additional annual retainer of $5,000, and other members of the Audit Committee are paid an additional retainer of $2,000. All directors are reimbursed for reasonable expenses incurred in connection with their service on our Board of Directors, including the committees thereof.
We generally award restricted stock units annually to each non-employee director in accordance with our 2013 Restricted Stock Plan; these grants generally have a value equal to approximately $14,000 (based on the fair market value of our common stock as of the date of grant) and vest equally over a four-year period from the date of grant. Between February 2017 and the end of 2018, we did not award any equity to our non-employee directors, and the portions therefrom requiredBoard has determined that this was an oversight that should be corrected with increased grants in 2019 and 2020. Accordingly, in February 2020, we awarded each non-employee director other than Mr. Gramm (who voluntarily declined this equity grant) an increased grant of restricted stock units with a fair market value equal to be$23,000 as of the grant date; the shares underlying the 2020 awards will vest equally over a three-year period from the date of grant. In February 2021, we awarded each non-employee director other than Mr. Gramm (who voluntarily declined this equity grant) a grant of restricted stock units with a fair market value equal to $14,000 as of the grant date; the shares underlying the 2021 awards will vest equally over a four-year period from the date of grant. Upon joining the Board in May 2021, Elaine Crowley was awarded a grant of restricted stock units with these same terms.
The goal of our restricted stock unit grants to directors is to attract and retain competent non-employee personnel to serve on our Board of Directors by offering them long-term equity incentives. Each of our non-employee directors is eligible to participate in this plan.
DIRECTOR COMPENSATION TABLE
The table below summarizes the compensation paid by us to our non-employee directors for their service on the Board during the year ended December 31, 2020. Our directors who are also employees receive no additional compensation for serving as directors.
Name | Fees Earned or Paid in Cash ($) | Restricted Stock Awards($) | Total ($) | |||||||||
| Vicki Cantrell | $ | 16,000 | $ | 23,000 | $ | 39,000 | ||||||
| Jefferson Gramm | 16,000 | - | 16,000 | |||||||||
| Sharon M. Leite | 18,000 | 23,000 | 41,000 | |||||||||
| James Pappas | 21,000 | 23,000 | 44,000 | |||||||||
| Sejal Patel | 18,000 | 23,000 | 41,000 | |||||||||
| William Warren | 16,000 | 23,000 | 39,000 | |||||||||
| ITEM 12. |
The following table sets forth information regarding the following as of May 20, 2021, the record date for the Annual Meeting:
Beneficial owners of more than 5 percent of the outstanding shares of our common stock, other than our officers and directors;
Beneficial ownership by our current directors and nominees and the named executive officers set forth in this Form 10-Kthe Summary Compensation table below; and
Beneficial ownership by Items 10, 11, 12, 13,all our current directors and 14 are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.executive officers as a group, without naming them.
The percentage of beneficial ownership is calculated on the basis of 8,663,921 shares of our common stock outstanding as of July 31, 2021. The information provided in the table is based on our records, information filed with the SEC, and information provided to us, except where otherwise noted.
Security Ownership of Certain Beneficial Owners
Title of Class | Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership (1) | Percent of Class | |||||||
| Common Stock | Bandera Partners LLC (2) 50 Broad Street, Suite 1820 New York, NY 10004 | 2,857,936 | 33.0 | % | ||||||
Common Stock | JCP Investment Partnership, LP (3) 1177 West Loop South, Suite 1650 Houston, TX 77027 | 859,197 | 9.9 | % | ||||||
Security Ownership of Management
Title of Class | Name of Beneficial Owner | Amount and Nature of Beneficial Ownership (1)(4) | Percent of Class | |||||||
| Common Stock | Janet Carr | 192,800 | 2.2 | % | ||||||
| Common Stock | Michael Galvan | - | * | |||||||
| Common Stock | Vicki Cantrell | 3,374 | * | |||||||
| Common Stock | Elaine D. Crowley | - | * | |||||||
| Common Stock | Jefferson Gramm(2) | 2,864,055 | 33.1 | % | ||||||
| Common Stock | Sharon M. Leite | 3,374 | * | |||||||
| Common Stock | James Pappas (3) | 863,922 | 10.0 | % | ||||||
| Common Stock | Sejal Patel | 3,374 | * | |||||||
| Common Stock | William Warren | 28,516 | * | |||||||
| All Current Directors and Executive Officers as a Group (9 persons) | 3,959,415 | 45.7 | % | |||||||
* Represents beneficial ownership of less than 1% of our outstanding shares of common stock.
| (1) | All shares of common stock are owned beneficially, and such owner has sole voting and investment power, unless otherwise stated. The inclusion herein of shares listed as beneficially owned does not constitute an admission of beneficial ownership. |
| (2) | Holdings shown for Jefferson Gramm and Bandera Partners, LLC are based on a Schedule 13D/A filed on February 5, 2021 by Mr. Gramm and Bandera Partners, LLC. Bandera Partners, LLC is the investment manager of Bandera Master Fund L.P. in whose name 2,857,936 of our shares are held. Messrs. Gregory Bylinksy and Jefferson Gramm are Managing Partners, Managing Directors and Portfolio Managers of Bandera Partners LLC. Bandera Master Fund L.P. has delegated to Bandera Partners the sole and exclusive authority to vote and dispose of the securities held by Bandera Master Fund. As a result, each of Bandera Partners and Messrs. Bylinksy and Gramm may be deemed to beneficially own the shares held by Bandera Master Fund. |
| (3) | Holdings shown JCP Investment Management, LLC are based on a Schedule 13D/A filed on December 6, 2018 by JCP Investment Management, LLC. Mr. Pappas, one of our Directors, is a Managing Member and Owner of JCP Investment Management, LLC. As a result, Mr. Pappas may be deemed to beneficially own the shares held by JCP Investment Management, LLC. Ownership percentages in the table are rounded to the nearest 1/10%; actual ownership percentage for Mr. Pappas is 9.97%. |
| (4) | To our knowledge, none of these shares have been pledged. |
| ITEM 13. |
On January 28, 2021, the Company entered into an agreement with Central Square Management (the “Seller”), an institutional shareholder of more than 5% of the Company’s common stock, to repurchase 500,000 shares of the Company’s common stock in a private transaction. The purchase price was $3.35 per share and $1,675,000 in total. The closing of the repurchase of those shares took place on February 1, 2021. Prior to the repurchase, the Shares represented approximately 5.5% of the Company’s outstanding common stock. The Company believes that the transaction was an arm’s length transaction, at the then-current market price for the Company’s common stock and otherwise on favorable terms to the Company.
For our last two fiscal years, there have been no other transactions, and there is no currently proposed transaction, in which we were or are to be a participant and the amount involved exceeds the lesser of $120,000 or one percent (1%) of the average of our total assets at year-end for our last two most recently completed fiscal years, and in which any related person, as defined under Item 404(a) of Regulation S-K, had or will have a direct or indirect material interest. Such related persons include our directors, executive officers, nominees for director, any beneficial owner of more than five percent (5%) of our common stock, and their immediate family members.
Our Code of Business Conduct, which applies to all employees, including our executive officers and our directors, provides that our employees and officers and members of our Board of Directors are expected to use sound judgement to help us maintain appropriate compliance procedures and to carry out our business with honesty and in compliance with law and high ethical standards. In addition, our directors and officers are expected to report any potential related party transactions to the Board of Directors. Our Audit Committee, on behalf of the Board of Directors, reviews the material facts of all reported matters, by taking into account, among other factors it deems appropriate, whether a transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related person’s interest in the transaction to determine whether an actual conflict of interest exists. No director may participate in any discussion or approval of a matter for which he or she is a related party. An annual review and assessment of any ongoing relationship with a related party is performed by the Audit Committee and reported to the Board of Directors.
| ITEM 14. |
Weaver & Tidwell performed the audit of our 2018 financial statements, as well as the reviews of the financial statements included in our Forms 10-Q during 2018 and the first quarter of 2019. They also have performed services in connection with the pending restatement of our 2017 – 2018 financial statements and with the pending preparation of financial statements for periods since January 1, 2019. The amounts shown below are the aggregate amounts paid to Weaver during 2020 and 2019 for services in the categories indicated.
Types of Fees | 2020 | 2019 | ||||||
| Audit fees | $ | 352,691 | $ | 125,850 | ||||
| Audit-related fees | - | - | ||||||
| Tax fees | - | - | ||||||
| All other fees | - | - | ||||||
| Total | $ | 352,691 | $ | 125,850 | ||||
In accordance with the charter of our Audit Committee as in effect at the relevant times and the rules of the SEC, the Audit Committee approved all of the fees indicated above before the services were provided, except for the portions of the 2019 and 2020 fees relating to the financial restatement of the prior years, which were not able to be determined before the services were begun. The Audit Committee considered the services listed above to be compatible with maintaining Weaver’s independence.
| ITEM 15. |
| (a) | The following are filed as part of this Form 10-K: |
1. Financial Statements
The following consolidated financial statementsConsolidated Financial Statements are included in Item 8:8, Financial Statements and Supplementary Data:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019
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 statementsConsolidated Financial Statements or notes thereto.
80
3. Exhibits
TANDY LEATHER FACTORY, INC. AND SUBSIDIARIES EXHIBIT INDEX | |||
Exhibit Number | Description | ||
Certificate of Incorporation of The Leather Factory, Inc., and Certificate of Amendment to Certificate of Incorporation of The Leather Factory, Inc. filed as Exhibit 3.1 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2005 and incorporated by reference herein. | |||
Bylaws of The Leather Factory, Inc. (n/k/a Tandy Leather Factory, Inc.), filed as Exhibit 3.5 to the Current Report on Form 8-K (Commission File No. 001-12368) filed by Tandy Leather Factory, Inc (f/k/a The Leather Factory, Inc.) with the Securities and Exchange Commission on July 14, 2004 and incorporated by reference herein. | |||
Certificate of Designations of Series A Junior Participating Preferred Stock of Tandy Leather Factory, Inc. filed as Exhibit 3.1 to Tandy Leather Factory, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013 and incorporated by reference herein. | |||
Description of Securities filed as Exhibit 4.1 to Tandy Leather Factory, Inc. | |||
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 | |||
Form of Employment Agreement dated October 2, 2018 between the Company and Janet Carr, filed as Exhibit 10.1 to Tandy Leather Factory Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2018 and incorporated by reference herein. | |||
Form of Stand-Alone Restricted Stock Unit Agreement dated October 2, 2018 between the Company and Janet Carr, filed as Exhibit 10.2 to Tandy Leather Factory Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2018 and incorporated by reference herein. | |||
Form of Stand-Alone Restricted Stock Unit Agreement dated October 2, 2018 between the Company and Janet Carr, filed as Exhibit 10.3 to Tandy Leather Factory Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2018 and incorporated by reference herein. | |||
Form of 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. | |||
| 14.1 | Code of Business Conduct and Ethics of | ||
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 as amended. | |||
| Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of | |||
| *101.INS | XBRL Instance Document. | ||
| *101.SCH | XBRL Taxonomy Extension Schema | ||
| *101.CAL | XBRL Taxonomy Extension Calculation | ||
| *101.DEF | XBRL Taxonomy Extension Definition | ||
| *101.LAB | XBRL Taxonomy Extension Labels | ||
| *101.PRE | XBRL Taxonomy Extension Presentation | ||
| Document. | |||
| ITEM 16. |
None.
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 Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| TANDY LEATHER FACTORY, INC. | ||
| By: | ||
| Janet Carr | ||
| Chief Executive Officer | ||
| Dated: September 2, 2021 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ | September 2, 2021 | |||
| /s/ | Chief Executive Officer, Director | September 2, 2021 | ||
| Janet Carr | (principal executive officer) | |||
| /s/ Michael Galvan | Chief Financial Officer | September 2, 2021 | ||
| (principal financial officer and | ||||
| principal accounting officer) | ||||
| /s/ William M. Warren | Director | September 2, 2021 | ||
| William M. Warren | ||||
| /s/ James Pappas | Director | September 2, 2021 | ||
| James Pappas | ||||
| /s/ Vicki Cantrell | Director | September 2, 2021 | ||
| Vicki Cantrell | ||||
| /s/ Sharon M. Leite | Director | September 2, 2021 | ||
| Sharon M. Leite | ||||
| /s/ Sejal Patel | Director | September 2, 2021 | ||
| Sejal Patel | ||||
| /s/ | Director | September 2, 2021 | ||