UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FormFORM 10-K
         (Mark(Mark One)
☒
        [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

        [  ]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
graphic
TANDY LEATHER FACTORY, INC.
Tandy Leather Factory, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 75-2543540
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

1900 Southeast Loop 820
Fort Worth, TXTexas  76140
 817/872-3200
76140
(Address of Principal Executive Offices and Zip Code)Offices) (Registrant’s telephone number, including area code)
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 classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.0024
TLF
NASDAQ Global
The Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act:   NONE


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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (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$18,217,065 at June 30, 20172022 (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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  As of March 7, 2018,31, 2023, there were 9,270,8628,300,627 shares of the registrant'sregistrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 5, 2018, are incorporated by reference in Part III of this report.NONE


TABLE OF CONTENTS

Item
 
Page
   
Part 1  
1
Business
   1
1A
Risk Factors
   4
1B
Unresolved Staff Comments
   6
2
Properties
   6
3
Legal Proceedings
   6
4
Mine Safety Disclosures
   6
   
Part II  
5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
   7
6
Selected Financial Data
   7
7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   7
7A
Quantitative and Qualitative Disclosures about Market Risk
 12
8
Financial Statements and Supplementary Data
 13
9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 28
9A
Controls Procedures
 28
9B
Other Information
 28
   
Part III  
10
Directors, Executive Officers and Corporate Governance
 28
11
Executive Compensation
 28
12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 28
13
Certain Relationships and Related Transactions and Director Independence
 28
14
Principal Accounting Fees and Services
 28
   
Part IV  
15
Exhibits, Financial Statement Schedules
 28
16
Form 10-K Summary
 29
PART I
3
ITEM 1.  BUSINESS
3
ITEM 1A.  RISK FACTORS
9
ITEM 1B.  UNRESOLVED STAFF COMMENTS
16
ITEM 2.  PROPERTIES
16
ITEM 3.  LEGAL PROCEEDINGS
17
ITEM 4.  MINE SAFETY DISCLOSURES
17
PART II
18
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
18
ITEM 6.  SELECTED FINANCIAL DATA
18
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
19
ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
27
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
52
ITEM 9A.  CONTROLS AND PROCEDURES
52
ITEM 9B.  OTHER INFORMATION
56
PART III
57
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE*
57
ITEM 11.  EXECUTIVE COMPENSATION*
57
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS*
57
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE*
57
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES*
57
PART IV
58
EXHIBIT INDEX
59
ITEM 16.  FORM 10-K SUMMARY
61
SIGNATURES
62


ii
Table of Contents
PART I

ITEM 1.BUSINESS
ITEM 1.  BUSINESS

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. (“TLF”) 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”,“TLF,” “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

With $82.3 million of sales in 2017 (of which 14% were export sales), Tandy Leather Factory, Inc. (“TLF,” “we,” “our,” “us,” the” Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries) 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.
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.global websites, and through direct account representatives in our commercial division.  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.  Our
The Company’s common stock tradesshares currently trade on the NASDAQ GlobalNasdaq Capital Market  under the symbol "TLF."“TLF.”


Our company was founded in 1980 as Midas Leathercraft Tool
3
Retail Fleet
The Company currently operates a Texas corporation (“Midas”), which focused on the distributiontotal of leathercraft tools.  In addition, the founders of Midas entered into an agreement with Brown Group, Inc., a major footwear retailer, to develop a chain of wholesale stores known as "The Leather Factory."  In 1985, Midas purchased the assets related to The Leather Factory stores from Brown Group, Inc., which then consisted of six103 retail stores. In 1993, we changed our name to The Leather Factory, Inc.  We reincorporated in the state of Delaware in 1994.  In 2005, we changed our name to Tandy Leather Factory, Inc.

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 new stores and by making numerous acquisitions 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 4There are 92 stores in the United Kingdom, AustraliaStates (“U.S.”), ten stores in Canada and one store in Spain.

The following tablesAll Tandy locations, other than our corporate headquarters (which includes our flagship store, corporate offices, distribution center, and manufacturing facility) are leased.
Business Strategy
Tandy Leather has been introducing people to leatherworking for over 100 years.  Our stores have been, and continue to be, our competitive advantage: where our consumers learn the craft in classes, open table, and from the expertise of our store staff, where they can touch, feel, and test the product, and where they can connect and commune with others passionate about leather.  Our websites provide store countinspiration, detailed product descriptions and expansionspecifications, educational information by segmentand videos, and a convenient place to also purchase product – especially for those who are far from our retail stores, including a growing international customer base.  For many of our retail and web customers, leatherworking evolves from a passion to a trade.  Our commercial division is tailored to the last five years:needs of those customers who build businesses around leather.  With dedicated direct account representatives, a direct-from-our-warehouse shipping model, bulk and volume-based competitive pricing, customized product development, and production and pre-production services, we are building long-term, strategic relationships with our largest customers.

 
North America
International
Year ended
Opened
Closed
Total
Opened
Closed
Total
201332108--3
201431110--3
2015--1101-4
201643*111--4
20174*-115--4
*1 storeIn 2019, with the arrival of a new management team, we began the process of assessing and reinvigorating the business.  We focused in three broad strategic initiative areas: 1) improving our brand proposition, 2) rebuilding our foundation: the talent, processes, tools and systems needed to modernize and efficiently operate the business, and 3) creating a vision and road map for long-term growth.  We had significant achievements in all of these areas including significantly improving the product quality, breadth of assortment and value, dramatically improving the website and web operations, rebuilding the team, people policies and culture, and replacing all of the key systems, among many other accomplishments.
We made this steady progress to transform and reinvigorate our business even in the face of two very significant obstacles.  In 2019, as part of the assessment of the business, we discovered errors in accounting that required a restatement of our financials.  This work was costly and time-consuming, but we successfully completed the restatement in 2021 along with implementation of new accounting systems, redesign of processes and controls, and a significant upgrade in the team.  In 2020, while making progress against our transformation and still working through our restatement, we temporarily closed in April 2016 and reopened in January 2017

We believe that the key to our success is our ability to profitably grow our base business.  We expect to grow that business by opening new stores and by increasing sales in our existing stores. Our initiatives to increase sales include new merchandising with an expanded product line intended to increaseall of our retail customer base,stores as a refocusresult of the COVID-19 pandemic.
With COVID-19-related impacts and the restatement behind us and with many of our initiatives taking hold, we are now focused on improving our financial sustainability and profitability.  In the short term, we are managing operating expenses and gross margin to deliver cash from operations and operating income even in the face of possible continued economic headwinds.  We will also continue to selectively invest in profitable sales growth where it makes sense, but rebuilding a durable, profitable business developmentmodel is the highest priority.
COVID-19 and Economic Conditions
At the time of filing this Form 10-K, the American and world economies continue to our wholesalebe acutely affected by a combination of factors arising from both the COVID-19 pandemic and manufacturer groups, improvementsthe war resulting from the invasion of Ukraine by Russian military forces. The current impacts of these events include (but are not limited to) levels of inflation that are the highest in the U.S. in more than 40 years, highly volatile fuel prices, an extremely tight labor market with rising wages and competition to our digitalattract qualified workers, supply chain disruption, rising rent and e-commerce channels,other occupancy costs and increases in interest rates.  Purchases of non-essential, discretionary products tend to decline in periods of uncertainty regarding future economic prospects, such as the current one, as disposable income declines.  The Company believes that these events have continued to dampen its sales through December 2022.  The future remains uncertain, and continued increased labor, freight, product, and other costs as well as increasing our average ticket.  Weweakening customer demand could 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.

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, one of the oldest and one of the best-known suppliers of leather and related products used in the leathercraft industry.  Tandy has long been known for its commitment to promoting 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 people 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.  As of March 7, 2018, we have filled twelve of our fifteen district manager positions.

Customers

Our customer base is diverse, with individual retail customers as our largest customer group, representing approximately 60% of our 2017 sales.  The remaining portion of our 2017 sales were to our wholesale, manufacturer 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. 

We serve our customers through various means including walk-in traffic, phone, mail order, and orders generated 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, web 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 events 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.the Company’s future financial performance.

14
We offer an unconditional satisfaction guaranteeCustomers
Our customers fall into 2 broad categories: those who shop in retail stores and on our website (“Retail Customers”) and those whom we serve through our commercial division (“Commercial Customers”).  Retail Customers range from hobbyists to institutions (schools, camps, and other groups) to small businesses.  Affinity groups like Military and First Responders and smaller and larger businesses who purchase in our customers.  Simply stated, we will accept product returns for any reason.  We believe this liberal policy promotes customer loyalty.  We offer credit termsretail stores receive special pricing or general discounts.  To be served through our commercial division, customers generally need to our non-retail customers upon receipt of a credit applicationspend more than $20,000 per year and approval by our credit manager.  Generally, our open accounts are net 30 days.  receive pricing based on their purchasing levels.

Merchandise

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, machines, 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,LeatherTM, Eco-FloTM, CraftoolTM, CraftoolProTM and Dr. Jackson'sTM brands.Jackson’sTM brands, along with our premium TandyPro® line of 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:Operations

Product Category
2017 Sales Mix
 
2016 Sales Mix
 
2015 Sales Mix
Belts strips and straps4% 4% 4%
Books, patterns, videos1% 1% 2%
Buckles2% 3% 3%
Conchos^2% 2% 2%
Craft supplies2% 2% 2%
Dyes, finishes, glues7% 7% 7%
Hand tools20% 18% 16%
Hardware8% 8% 8%
Kits6% 6% 6%
Lace3% 3% 3%
Leather40% 41% 42%
Stamping tools5% 5% 5%
 100% 100% 100%
^A concho is a metal adornment attached to clothing, belts, saddles, etc., usually made into a pattern of some southwestern or geometric object.

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.

Information regarding net sales, gross profit, operating income, and total assets attributable to each of our segments, is included within Item 7.7, 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.Data.

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.

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.

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 a store beingat approximately 4,0003,500 square feet. The types of premises utilized for our storesOur Fort Worth flagship store is approximately 22,000 square feet.  Stores 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.

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.

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”.

25
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.

Distribution

Our stores receive the majority of their inventory from our central warehousedistribution center located in Fort Worth, Texas, although occasionally,in weekly or, increasingly, bi-monthly shipments, using third-party transportation providers.  Occasionally, merchandise is shipped to stores directly from the vendor.  Inventory is typically shipped to the storesWe now fulfill all of our U.S. and many of our international web orders from our central warehouse once a week in order to seek to meet customer demand without sacrificing inventory turns.  CustomerFort Worth distribution center.  Canada web orders are typically filled as received,fulfilled out of our 10 Canada stores, and European web orders are fulfilled out of our Spain store.  We have a global customer service team that handles web order inquiries and phone orders.  Our goal is to optimize the tradeoff between the sales and market share we do not typically have backlogs.

We attempt to maintain the optimum number of items in ourrealize from having a broad product line in orderagainst the safety stock required to seek to minimize out-of-stock situations against carrying costs involved with such an inventory level.support those items.  We generally maintain higher inventories of imported or long-lead-time items to seek to ensure a continuous supply.  TheOur inventory levels have grown as we have increased our product assortment to improve conversion and retention of customers and to mitigate out-of-stocks, especially during the supply chain disruptions over the last 2 years.  In the face of overall supply chain challenges, we have opportunistically taken advantage of some vendor offers on key items, accounting for some increase in inventory. And we have also been executing a number of products offered changes every year duestrategic initiatives to the introductiontest smaller quantities of new items online, buying into them only when we are certain of their success, to tailor product assortments to the needs of local customers in each store, and the discontinuance of others.to ship directly from vendors to customers.  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.

Competition

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.

Suppliers

We purchase merchandise and raw materials from approximately 150over 130 vendors dispersed throughoutfrom the United States and in approximately 20 foreign countries.  In 2017,general, our 10 largest vendors accountedaccount for approximately 72%30% of our inventory purchases.

Because leather is sold internationally, market conditions abroad are likely to affect the price of leather in the United States.U.S.  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.

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 numberbrand.  The most acute supply chain shocks resulting from the pandemic have mostly moderated, with increases in lead times, product costs and ocean freight costs flattening and even declining in some areas.  However, trucking costs and reliability remain volatile and tight labor markets continue to pressure costs across all areas.
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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, 2017,2022, we employed 656605 people, 550494 of whom were employed on a full-time basis.  We are not a party to any collective bargaining agreements.  Overall, we believe that relations with employees are good.

Intellectual Property

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 includingand 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 inThe 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.

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.

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.

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Information about our Executive Officers of the Registrant

The following table sets forth information concerning our executive officers as of March 7, 2018:December 31, 2022:

Name and Age
Position
Served as Executive Officer Since
Shannon L. Greene, 52Chief Executive Officer2000
Mark J. Angus, 57President2008
Tina L. Castillo, 48
Chief Financial Officer and Treasurer2017
William M. Warren, 74Secretary and Corporate Counsel1993
Name Age Executive Since Position
Janet Carr 61 2018 Chief Executive Officer


Shannon L. Greene
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Janet Carrhas 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 our Chief Financial Officerthe 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 Treasurer from May 2000 – February 2017.retail for all of their brands.  Prior to Caleres, Ms. Greene, a certified public accountant, also serves on our 401(k) Plan committee.

Mark J. Angus has served 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 ViceCarr was the President of Merchandisingthe Handbag Division of Nine West Group Inc. from January 1993 – June 2008.2013 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.

Tina Castillo has served as Chief Financial Officer and Treasurer since February 2017; previously, Ms. Castillo served as Controller from February 2016 to January 2017.  Ms. Castillo has served as 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.
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William M. Warren has served as Secretary and General Counsel since 1993.  Since 1979, Mr. Warren has been President and Director
Table of Loe, Warren, Rosenfield, Kaitcer, Hibbs, Windsor & Lawrence, P.C., a law firm located in Fort Worth, Texas.Contents

All officers are elected annually by the Board of Directors to serve for the ensuing year.

ITEM 1A.RISK FACTORS
ITEM 1A.   RISK FACTORS

Risks Related to our Business and Business Strategy
The successful execution of our multi-year transformation and operational efficiency initiatives is key to the long-term growth of our business.

The Company continues to implement a large number of initiatives to transform the Company’s business, improve sales long term and improve operational efficiency.  These include the realignment of the Company’s retail division management structure, the closing of underperforming stores, the formation of a new division focused on serving commercial customers, pricing and marketing initiatives, systems improvements, and other changes.  The Company believes that long-term growth will be realized through these transformational efforts over time, however there is no assurance that such efforts will be successful.  Actual costs incurred and the timeline of these initiatives may differ from our expectations.  If these initiatives are unsuccessful, our business, financial condition and results of operation could be materially adversely affected.

Our Industrybusiness 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;
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;
compliance by us and our independent manufacturers and suppliers with labor laws and other foreign governmental regulations;
imposition of additional duties, taxes, and other charges on imports or exports;
embargoes against products originating in countries from which we source;
increases in the cost of labor, fuel (including volatility in the price of oil), travel and transportation;
compliance by our independent manufacturers and suppliers with our Code of Business Conduct and Ethics and our Animal Welfare Policy;
political unrest;
unforeseen public health crises, such as pandemic (e.g., the COVID-19 pandemic) and epidemic diseases;
natural disasters or other extreme weather events, whether as a result of climate change or otherwise; and
acts of war or terrorism and other external factors over which we have no control.

Increases in the price of leather and other items we sell or a reduction in availability of those products could increase our cost of goods and decrease our profitability.

The prices we pay our suppliers for our products are dependent in part on the market price for leather, metals, and other products.  The cost of these items may fluctuate substantially, depending on a variety of factors, including demand, supply conditions, transportation and fuel costs, government regulation, economic climates, war or other political considerations, and other unpredictable factors.  Leather prices worldwide have been relatively stable for the past several years although the outlook for future prices is uncertain.  Increases in these costs, together with other factors, would make it difficult for us to sustain the gross margin level we have achieved in recent years and result in a decrease in our profitability unless we are able to pass higher prices on to our customers or reduce costs in other areas.  Changes in consumers’ product preferences or lack of acceptance of our products whose costs have increased may prohibit us from passing those increases on to customers, which could cause our gross margin to decline.  If our product costs increase and our sale prices do not, our future operating results could be adversely affected unless we are able to offset such gross margin declines with comparable reductions in operating costs.  Accordingly, such increases in costs could adversely affect our business and our results of operations.

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Further, involvement by the United States in war and other military operations abroad could disrupt international trade and affect our inventory sources.  Finally, livestock diseases, such as mad cow, could reduce the availability of hides and leathers or increase their cost.  The occurrence of any of these events could adversely affect our business and our results of operations.

We are subject to risks associated with leasing retail space under long-term and non-cancelable leases.  We may be unable to renew leases on acceptable terms.  If we close a leased retail space, we might remain obligated under the applicable lease.

We lease the majority of our retail store locations under long-term, non-cancelable leases, which have initial or renewed terms typically ranging from three years to ten years and may include lease renewal options.  We believe that most of the lease agreements we will enter into in the future will likely be long-term and non-cancelable.  Generally, our leases are “net” leases, which require us to pay our proportionate share of the cost of insurance, taxes, maintenance, and utilities.  We generally cannot cancel these leases at our option.  If we determine that it is no longer economical to operate a retail store subject to a lease and decide to close it, as we have done in the past and will do in the future, we would generally remain obligated under the applicable lease for, among other things, payment of the base rent, common charges, and other net payments for the balance of the lease term.  In some instances, we may be unable to close an underperforming retail store without a significant financial penalty due to continuous operation clauses in our lease agreements.  In addition, as each of our leases expire, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close retail stores in desirable locations.  Our inability to secure desirable retail space or favorable lease terms could impact our ability to grow.  Likewise, our obligation to continue making lease payments in respect of leases for closed retail spaces could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to sustain our financial performance or our past growth, which could have a material adverse effect on our future operating results.

In 2020, we experienced declines in sales and operating income primarily resulting from the COVID-19 pandemic.  In 2022, we also experienced declines primarily resulting the longer-term economic effects of COVID-19 and the added economic impact of the war in Ukraine.  Many other specialty retailers have experienced declining sales and losses due to the overall challenging retail environment.  Our sales and profits may continue to be negatively affected in the future.  We anticipate that our financial performance will depend on a number of factors, including consumer preferences, the strength and protection of our brand, the introduction of new products, and the success of our new business strategy.

Competition, including internet-based competition, could negatively impact our business.

The retail industry is competitive, which could result in the reduction of our prices and loss of our market share. We must remain competitive in the areas of quality, price, breadth of selection, customer service, and convenience.  We compete with smaller retailers focused on leather and leather crafting, some of whom have been able to offer competitive products at lower prices than ours.  We also compete with larger specialty retailers (e.g., Michaels Stores, Inc. and Hobby Lobby Stores, Inc.) that dedicate a small portion of their selling space to products that compete with ours but are larger and have greater financial resources than we do.  The Company also faces competition from internet-based retailers, in addition to traditional store-based retailers.  This could result in increased price competition, since our customers can more readily search and compare products from internet-based retailers who do not need to support a physical store fleet and may be able to undercut our prices for products.  The growth of internet retailers has also significantly reduced traffic to many shopping centers and physical stores, which, if not countered by an increase in our own online retailing, could have a material adverse effect on our in-store or overall sales.

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Declines in foot traffic in our retail store locations could negatively impact our sales and profits.

The success of our retail stores is affected by (1) the location of the store within its community or shopping center; (2) surrounding tenants or vacancies; (3) increased competition in areas where shopping centers are located; (4) the amount spent on advertising and promotion to attract consumers to the stores; and (5) a shift towards online shopping resulting in a decrease in retail store traffic.  Many of our stores are located in light industrial areas, where foot traffic tends to be lower than in traditional retail shopping areas.  Furthermore, our initiatives to service our larger customers through a dedicated Commercial Program rather than primarily through local stores may also lead to a decline in the traffic to our store locations.  Declines in consumer traffic could have a negative impact on our net sales and could materially adversely affect our financial condition and results of operations.  Furthermore, declines in traffic could result in store impairment charges if expected future cash flows of the related asset group do not exceed the carrying value.

Our business could be harmed if we are unable to maintain our brand image.

Tandy Leather is one of the most recognized brand names in our industry. Our success to date has been due in large part to the strength of that brand.  If we are unable to provide quality products and exceptional customer service to our customers, including education, which Tandy Leather has traditionally been known for, our brand name may be impaired which could adversely affect our operating results.

Changes in customer demand could materially adversely affect our sales, results of operations and cash flow.

Our success depends on our ability to anticipate and respond in a timely manner to changing customer demands and preferences for leather and leathercraft-related items.  If we misjudge the market, we might significantly overstock unpopular products and be forced to take significant inventory markdowns, or experience shortages of key items, either of which could have a material adverse impact on our operating results and cash flow.  In addition, adverse weather conditions, economic or political instability and consumer confidence volatility could have material adverse impacts on our sales and operating results.

Our success depends, in part, on attracting, developing and retaining qualified employees, including key personnel.

The ability to successfully execute against our goals is heavily dependent on attracting, developing and retaining qualified employees, including our senior management team.  Competition in our industry to attract and retain these employees is intense and is influenced by our ability to offer competitive compensation and benefits, employee morale, our reputation, recruitment by other employers, perceived internal opportunities, non-competition and non-solicitation agreements and macro unemployment rates.

We depend on the guidance of our senior management team and other key employees who have significant experience and expertise in our industry and our operations.  The unexpected loss of one or more of our key personnel or any negative public perception with respect to these individuals could have a material adverse effect on our business, results of operations and financial condition.  We do not maintain key-person or similar life insurance policies on any of senior management team or other key personnel.

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Disruptions in the operation of our Fort Worth distribution center or manufacturing facility due to disease, including COVID-19, natural disaster, fire, or other crises, could have an adverse effect on our ability to supply our retail stores, fulfill web orders and/or manufacture product, resulting in possible decreases in sales and margin.

We are dependent on a limited number of distribution and sourcing centers, primarily the center located at our Fort Worth, Texas headquarters.  Our ability to meet the needs of our customers and our retail stores and e-commerce sites depends on the proper operation of these centers.  If any of these centers were to shut down or otherwise become inoperable or inaccessible for any reason, we could suffer a substantial loss of inventory and/or disruptions of deliveries to our retail and wholesale customers.  While we have business continuity and contingency plans for our sourcing and distribution center sites, significant disruption of manufacturing or distribution for any of the above reasons could interrupt product supply, result in a substantial loss of inventory, increase our costs, disrupt deliveries to our customers and our retail stores, and, if not remedied in a timely manner, could have a material adverse impact on our business.
Risks Related to Owning our Common Stock

Material weaknesses in our system of internal controls were identified during our investigation and financial restatement.  These material weaknesses are still in the process of remediation.  If not remediated, these material weaknesses could result in additional material misstatements in our Consolidated Financial Statements.  We may be unable to develop, implement and maintain appropriate controls in future periods.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies evaluate and report on their systems of internal control over financial reporting.  As disclosed in Part II, Item 9A, Controls and Procedures of this Form 10-K, our management, including our Chief Executive Officer, has determined that we continue to have material weaknesses in the Company’s internal control over financial reporting as of December 31, 2022.    As a result of the material weaknesses, the Company’s management, under the supervision of the Audit Committee and with participation of the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2022.
Although we are working to remedy the ineffectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures, there can be no assurance as to when the remediation plan will be fully implemented.  Until our remediation plan is fully implemented, our management will continue to devote significant time, attention and financial resources to these efforts.  If we do not complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that our future Consolidated Financial Statements could contain undetected errors.  Further and continued determinations that there are one or more material weaknesses in the effectiveness of the Company’s internal control over financial reporting could adversely affect our business, reputation, revenues, results of operations, financial condition and stock price and limit our ability to access the capital markets through equity or debt issuances.  For more information relating to the Company’s internal control over financial reporting, the material weaknesses that existed as of December 31, 2022 and the remediation activities undertaken by us, see Part II, Item 9A, Controls and Procedures of this Form 10-K.
Risks Related to Cash Flow and Capitalization

If our cash from operations falls short and we are unable to raise additional working capital, we might be unable to fully fund our operations or to otherwise execute our business plan. 

Historically, the Company has funded its business primarily with cash from operations and has utilized only small lines of working capital for seasonal expenditures.    In 2023, we obtained a line of credit facility through JP Morgan Chase Bank to provide working capital as needed; as of the date of this report, we have not borrowed any amounts under this facility.  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 are unable to borrow sufficient 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 cannot guarantee that we will be able to secure all of the additional cash or working capital we might require to continue our operations.
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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.
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Moreover, our failure to adequately invest in new technology or adapt to technological developments and industry trends, particularly with respect to digital commerce capabilities, could result in a loss of customers and related market share.  If our digital commerce platforms do not meet customers’ expectations in terms of security, speed, attractiveness or ease of use, customers may be less inclined to return to such digital commerce platforms, which could negatively impact our business.
Risks Related to the Macroeconomic Environment
Our business may be negatively impacted by general economic conditions in the United States and abroad.

Our performance is subject to global economic conditions and their impact on levels of consumer spending that affect not only the ultimate consumer, but also small businesses and other retailers.  Specialty retail, and retail in general, is heavily influenced by general economic cycles.  Specifically, at the time of filing this Form 10-K, the American and world economies have been acutely affected by a combination of factors resulting from both the COVID-19 pandemic and the war resulting from the invasion of Ukraine by Russian military forces.  The current impacts of these events include (but are not limited to) levels of inflation that are the highest in the U.S. in more than 40 years, fuel prices at or near record highs, an extremely tight labor market with rising wages and competition to attract qualified workers, rising real estate prices and increases in interest rates.
Purchases of non-essential, discretionary products tend to decline in periods (such as the current one) of recession or uncertainty regarding future economic prospects, as disposable income declines.  During these periods of economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, maintain our earnings from operations as a percentage of net sales, or generate sufficient cash flows to fund our operational and liquidity needs.  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 continued downward trends or uncertainty in the United States or global economies.

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.
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 we are ableinventory carrying cost, or limit our ability to pass higher pricessatisfy customer demand and potentially lose market share.
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The COVID-19 pandemic has had, and likely may continue to have, a material adverse effect on to our customers or reduce costs in other areas.  Accordingly, such increases in costs could adversely affect our business and liquidity.
The COVID-19 pandemic had an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties.  These uncertainties include, but are not limited to, the material adverse effect of the pandemic on the economy, our supply chain partners, our employees and customers, customer sentiment in general, and our stores.  Since 2020, we have continued to manage through the pandemic as we continue to see varying levels of infection rates in various locations and have at times been forced periodically to temporarily close or limit operations in certain stores.  We are unable to ensure that our sales will meet or exceed current levels or if additional periods of store closures will be needed or mandated.  In addition, our merchandise vendors may have been negatively impacted by the pandemic and the financial difficulties of other retailers, thereby creating concerns about our vendors’ ability to provide us with payment terms or merchandise that is suitable to our brand.  The effects of the pandemic have materially adversely impacted our revenues, earnings, liquidity and cash flows.
The continuing impact of the pandemic on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak (including new variants) and availability and acceptance rates of vaccines within the U.S. and Canada and our key sourcing markets.  The pandemic has had, and may continue to have, a material adverse impact on our financial position, cash flows, liquidity and results of operations.  This situation continues to change, and additional impacts may arise that we are not aware of currently.
Risks Related to Legal, Regulatory and Compliance
If the United States maintains current tariffs on products manufactured in China, or if additional tariffs or trade restrictions are implemented by other countries or by the U.S., the cost of our products manufactured in China or other countries and imported into the U.S. or other countries could increase.  This could in turn adversely affect the profitability for these products and have an adverse effect on our business, financial condition and results of operations.

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.

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.

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.

Foreign currency fluctuations could adversely impact our financial condition and results of operations.

We generally purchase our products in U.S. dollars.  However, we source a large portion of our products from countries other than the United States.  The cost of these products may be affected by changes in the value of the applicable currencies.  Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated 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.

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.

We may be subject to information technology system failures or network disruptions, or our information systems may prove inadequate, resulting in damage to our reputation, business operations and financial condition.

We depend on our information systems for many aspects of our business, including in designing, manufacturing, marketing and distributing our products, as well as processing transactions, managing inventory and accounting for and reporting our results. Therefore, it is critical that we maintain uninterrupted operation of our information systems.  Even with our preventative efforts, we may be subject to information technology system failures 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, or similar events 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.

A significant data security or privacy breach of our information systems could affect our business.

The protection of our customer, employee and other data is important to us, and our customers and employees expect that their personal information will be adequately protected. In addition, the regulatory environment surrounding information security and privacy is becoming increasingly demanding, with evolving requirements in the various jurisdictions in which we do business. Although we have developed and implemented systems and processes that are designed to protect personal and Company information and prevent data loss and other security breaches, such measures cannot provide absolute security. Additionally, our increased use and reliance on web-based hosted (i.e., cloud computing) applications and systems for the storage, processing and transmission of information, including customer and employee information, could expose us, our employees and our customers to a risk of loss or misuse of such information. Our efforts to protect personal and Company information may also be adversely impacted by data security or privacy breaches that occur at our third-party vendors. We cannot control these vendors and therefore cannot guarantee that a data security or privacy breach of their systems will not occur in the future. A significant breach of customer, employee or Company data could damage our reputation, relationships with customers, and our brand and could result in lost sales, sizable fines, significant breach-notification costs and lawsuits as well as adversely affect results of operations. We may also incur additional costs in the future related to the implementation of additional security measures to protect against new or enhanced data security and privacy threats, to comply with state, federal and international laws that may be enacted to address those threats or to investigate or address potential or actual data security or privacy breaches.

515
The loss or a prolonged disruption in the operation of our centralized distribution center could adversely affect its business and operations.

We maintain a distribution center in Fort Worth, Texas dedicated to warehousing merchandise to handle worldwide store replenishment and process some direct-to-customer orders. Although we believe that we have appropriate contingency plans, unforeseen disruptions impacting our centralized distribution center for a prolonged period of time may result in delays in the delivery of merchandise to stores or in fulfilling customer orders.

Other uncertainties, which are difficult to predict and many of which are beyond our control, may occur as well and may adversely affect our business and our results of operations.

ITEM 1B.UNRESOLVED STAFF COMMENTS
ITEM 1B.   UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.PROPERTIES
ITEM 2.   PROPERTIES

We lease our store locations, with the exception of our flagship store located in Fort Worth, Texas.  The majority of our stores have initial lease terms of at least five years.  The leases are generally renewable, with increases in lease rental rates in some cases.  We believe that all of our properties are adequately covered by insurance.  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. LocationsU.S. LocationsU.S. Locations
Alabama1 Montana11    Missouri  3  
Alaska1 Nebraska11    Montana  1  
Arizona4 Nevada23    Nebraska  1  
Arkansas1 New Mexico21    Nevada  2  
California11 New York28    New Mexico  2  
Colorado4 New Jersey14    New York  1  
Connecticut1 North Carolina21    New Jersey  1  
Florida5 Ohio34    North Carolina  3  
Georgia1 Oklahoma22    Ohio  3  
Idaho1 Oregon31    Oklahoma  2  
Illinois2 Pennsylvania31    Oregon  2  
Indiana2 Rhode Island11    Pennsylvania  3  
Iowa1 South Carolina11    South Dakota  1  
Kansas1 South Dakota11    Tennessee  3  
Kentucky1 Tennessee31    Texas  16 
Louisiana2 Texas182    Utah  4  
Maryland1 Utah41    Washington  3  
Massachusetts1 Virginia11    Wisconsin  1  
Michigan2 Washington32    Wyoming  1  
Minnesota2 Wisconsin12      
Missouri3 Wyoming1
      
Canadian locations: Canadian locations:
Alberta 3    Ontario  3  
British Columbia 1    Saskatchewan  1  
Manitoba 1        
Nova Scotia 1    International locations:  
  Spain  1  


Canadian locations:
Alberta1
British Columbia1
Manitoba1
Nova Scotia1
Ontario3
Quebec1
Saskatchewan1

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International locations:
United Kingdom2
Australia1
Spain1

In 2021, we experienced sporadic and limited temporary store closures as a result of COVID-19 staff illnesses.  In 2022, temporary store closures as a direct result of COVID-19 illnesses were even more limited.  However, the broader economic impact of the pandemic and the war in Ukraine has put pressure on store profitability with higher wages and staffing challenges, rising retail rents, and increases in other retail store operating costs.  We regularly review recent and future projected store 4-wall cash flow taking these forecasted costs as well as projected consumer demand, other nearby stores and a number of other factors into consideration when making decisions to close or open stores in a given location.  In 2022, we closed four store locations that met a number of the criteria for closure, three of which were at the end of the lease, and one of which we paid a negotiated early lease termination.  We renewed leases for 23 existing locations and opened one new location on the Fort Bragg military base, a new format that we are testing.
ITEM 3.LEGAL PROCEEDINGS
ITEM 3.   LEGAL PROCEEDINGS

In 2019, the Company self-reported to the SEC information concerning the internal investigation of certain accounting matters resulting in the restatement for the full year 2017 and full year 2018, including interim quarters in 2018, and the first quarter of 2019.  In response, the Division of Enforcement of the SEC initiated an investigation into the Company’s historical accounting practices.  In July 2021, the Company entered into a settlement agreement with the SEC to conclude this investigation.  Under the terms of the settlement, in addition to other non-monetary settlement terms, (1) the Company paid a civil monetary penalty of $200,000, and (2) the Company’s former Chief Financial Officer and Chief Executive Officer, agreed to pay a civil monetary penalty of $25,000.  In accepting the Company’s settlement offer, the SEC took into account remedial actions the Company took promptly after learning of the issues detailed in the SEC’s order.
We are periodically involved in various litigation that arises in the ordinary course of business and operations.  There are no such matters pending that we expect to have a material impact on our financial position or operating results. See discussion of Legal Proceedings in Note 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.

ITEM 4.MINE SAFETY DISCLOSURES
ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.




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PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is tradedtrades on the NASDAQ GlobalNasdaq Capital Market usingunder the symbol “TLF.”  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 299283 stockholders of record on March 7, 2018.February 28, 2023.

We did not sell any shares of our equity securities during our fiscal year ended December 31, 20172022 that were not registered under the Securities Act.

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.

Our Board of Directors did not authorize any dividends during the fiscal years ended December 31, 20172022 or 2016.2021.  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.

 
We did not repurchase any shares of our common stocks during the fourth quarter of fiscal year 2022.
ITEM 6.SELECTED FINANCIAL DATA
We are a smaller reporting company as defined in Item 10(f)(1) of SEC Regulation S-K and are not required to provide information under this item.
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ITEM 6.  SELECTED FINANCIAL DATA

The selected financial data presented below are derived from and should be read in conjunction with our Consolidated Financial Statements and related notes.  This information should also be read in conjunction with "Item 7 - Management’s Discussion and Analysis of Financial Condition and 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.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We intend for the followingThis 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.

This discussion should be read in conjunction with our consolidated financial statements and the notes accompanying those consolidated 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.
Summary

To our knowledge, we areThe Business and Strategy
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, and organized in 2005 as a wide rangeDelaware corporation, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, 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.global websites, and through direct account representatives in our commercial division.  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 customersprincipal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
Currently, the Company operates a broad selectiontotal of quality products combined with knowledgeable store associates,103 retail stores.  There are 92 stores in one location, at competitive prices.

We believe that the key to our success is our ability to profitably grow our base business.  We expect to grow that business by opening newUnited States (“U.S,”), ten stores and by increasing sales in our existing stores.  In 2017, we reopenedCanada and one store in Harrisburg, PASpain.
Tandy Leather has been introducing people to leatherworking for over 100 years.  Our stores have been and opened newcontinue to be our competitive advantage: where our consumers learn the craft in classes, open table, and from the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others passionate about leather.  Our websites provide inspiration, detailed product descriptions and specifications, educational information and videos, and a convenient place to also purchase product – especially for those who are far from our retail stores, in Allen, TX; Miami, FL;including a growing international customer base.  For many of our retail and McAllen, TX.

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.

As of March 7, 2018, our North America segment operates 115 company-owned stores located in 42 U.S. states and 7 Canadian provinces.  We expect to grow the number of stores in North America to approximately 150 in the future.  Our pace of store openings has recently picked up dueweb customers, leatherworking evolves from a passion to a change in strategy withtrade.  Our Commercial Division is tailored to the needs of those customers who build businesses around leather.  With dedicated direct account representatives, a focus on growth.

Our International segment operates four company-owned stores with one located in each of Northampton, United Kingdom; Manchester, United Kingdom; Sydney, Australia;direct-from-our-warehouse shipping model, bulk 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.

Prior to 2015,volume-based competitive pricing, customized product development, and production and pre-production services, we had experienced stable to steady increases in revenue and net income.  In 2016, our net sales declined by 1.5%, although through cost controls, net income was relatively flat.  To address the weakness 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 restructuringare building long-term, strategic relationships 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.  As of March 7, 2018, we have filled twelve of our fifteen district manager positions.

In addition to the district manager program, 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 overall net sales continued to be weak with a 0.7% decrease compared to 2016, despite contributions from new stores and the investments in our 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:

·Grow sales by increasing the average ticket, expanding store hours and providing more incentive-based compensation to associates;
·Improve our stores’ financial performance with an initial focus on correcting underperforming stores;
·Upgrade our technology platform to provide more insightful data and analytics;
·Attract, motivate and retain associates through a pay for performance culture and enhanced training;
·Focus on product innovation including new classes and formats, as well as adding higher ticket products;
·Maximize channels, including print, digital and e-commerce to attract new customers while retaining our established customers; and
·Evaluate the District Manager program’s effectiveness to improve the overall return on investment.

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 sales for the three years ended December 31, 2017, 2016 and 2015 were as follows:

 
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%

Consolidated 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%, while 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 retaillargest 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.
 
819
In 2016,2019, with the arrival of a new management team, we began the process of assessing and reinvigorating the business.  We focused in three broad strategic initiative areas: 1) improving our International segment reportedbrand proposition, 2) rebuilding our foundation: the talent, processes, tools and systems needed to modernize and efficiently operate the business, and 3) creating a vision and road map for long-term growth.  We had significant achievements in all of these areas including significantly improving the product quality, breadth of assortment and value, dramatically improving the website and web operations, rebuilding the team, people policies and culture, and replacing all of the key systems, among many other accomplishments.
We made this steady progress to transform and reinvigorate our business even in the face of two very significant obstacles.  In 2019, as part of the assessment of the business, we discovered errors in accounting that required a restatement of our financials.  This work was costly and time-consuming, but we successfully completed the restatement in 2021 along with implementation of new accounting systems, redesign of processes and controls, and a significant upgrade in the team.  In 2020, while making progress against our transformation and still working through our restatement, we temporarily closed all of our retail stores as a result of the COVID-19 pandemic.
With COVID-19 and the restatement behind us and with many of our initiatives taking hold, we are now focused on improving our financial sustainability and profitability.  In the short-term, we are managing operating expenses and gross margin to deliver free operating cash and operating income even in the face of possible continued economic headwinds.  We will also continue to selectively invest in profitable sales increase comparedgrowth where it makes sense, but rebuilding a durable, profitable business model is the highest priority.
COVID-19
At the time of filing this Form 10-K, the American and world economies have been acutely affected by a combination of factors arising from both the COVID-19 pandemic and the war resulting from the invasion of Ukraine by Russian military forces. The current impacts of these events include (but are not limited to) levels of inflation that are the highest in the U.S. in more than 40 years, highly volatile fuel prices, an extremely tight labor market with rising wages and competition to 2015 while our North America segment reportedattract qualified workers, supply chain disruption, rising rent and other occupancy costs and increases in interest rates.  Purchases of non-essential, discretionary products tend to decline in periods of uncertainty regarding future economic prospects, such as the current one, as disposable income declines.  The Company believes that these events have continued to dampen its sales through December 2022.  The future remains uncertain, and continued increased labor, freight, product and other costs as well as weakening customer demand could have a negative impact on the Company’s future financial performance.
Results of Operations
The following table presents selected financial data:
(in thousands) 2022  2021  $ Change  % Change 
Sales $80,335  $82,661  $(2,326)  (2.8)%
Gross profit  46,497   46,999   (502)  (1.1)%
Gross margin percentage  57.9%  56.9%      1.0%
Operating expenses  45,109   44,699   410   0.9%
Income (loss) from operations $1,388  $2,300  $(912)  39.7%

20
Net Sales
Consolidated net sales declinedecreased by $2.3 million, or 2.8%, from 2021 to 2022.  We believe the decrease in sales was due to continued weaker consumer demand as a declineresult of inflation and ongoing uncertainty related to global political, economic and public health concerns.
Our store footprint consisted of 103 stores at December 31, 2022 and 106 stores at December 31, 2021.
Since January 1, 2022, we closed one store in sameSan Bruno, CA in March 2022, one store in Oxnard, CA in July 2022, one store in Miami, FL in October 2022 and one store in Cayce, SC in December 2022.  In November 2022, we opened one store on the Fort Bragg military base in North Carolina.  We evaluate a number of factors when determining whether to close existing stores, including the 4-wall cash flow trend and longer-term projection for the store, the long-term sales and losstrend, ongoing cost of sales from closed stores.  The increase in sales for our International segment was primarily due to the full year impactstore operations, date of lease expiration, quality of the UK store that opened in October 2015, offset byand location, and the change in UK foreign currency rates between 2016size and 2015.potential of the trade area including proximity to other existing stores, among other variables.  We use similar factors to determine whether to open new stores.
 
Gross Profit

On a consolidated basis,Gross profit decreased by $0.5 million, or 1.1%, from 2021 to 2022. Our gross profit margins were 63.3%margin percentage for the year ended December 31, 2022 increased to 57.9% versus 56.9% in 2017, 62.4%the same period in 2016, and 61.9% in 2015.  In general, our gross profit margin fluctuates based on the mix of customers we serve, the mix of products we sell, and our ability to source products globally.  Our negotiations with suppliers for lower 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 customers2021, due to relatively stronger full-priced selling throughout the difference in pricing levels.  Therefore, as retail sales increase in the overall salesyear, product and customer 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.shifts, and some impact from price increases.

Operating Expenses

(in thousands) 2022  2021 
Operating expenses $45,109  $44,699 
Non-routine items related to restatement  (246)  (1,252)
Adjusted operating expenses $44,863  $43,447 
         
Operating expenses % of sales  56.2%  54.1%
Adjusted operating expenses % of sales  55.8%  52.6%

Our consolidated operatingOperating expenses forincreased by $0.4 million in 2022 as compared to the three years ended December 31, 2017, 2016prior year.  This was in part as a result of the write off of $0.4 million of costs associated with the unsuccessful attempt to build a new web platform.  That vendor, DynamicWeb, has been unable to deliver a working product, and 2015 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%

The $3.4 million increasewhile we seek to recover these costs, that recovery is uncertain.  In addition, increases in operating expenses in 2017 comparedthe areas of wages, primarily of hourly employees in retail stores, and corporate marketing and merchandising, equity compensation associated with executive bonus, our store manager conference and other expenses were offset by decreases in cash bonus and credit card fees related to 2016 was primarily due to $1.3 million in costslower sales, contract labor and rent.  Adjusted operating expenses, which exclude the non-routine items related to the seven new stores that have opened / reopened since October 2016, $1.1 million related to the district manager program, $0.2restatement and CFO turnover, increased $1.4 million for the increased base salary for our store managers, $0.2 million in increased advertisingreasons noted above.  Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP measure, included here to provide additional information regarding the Company’s financial performance on a recurring basis.  Non-routine items are primarily legal and marketing related to our national sponsorship of the Pinners program,accounting fees associated with the remaining increase related to increases in credit card processing fees, occupancy costs across our store footprint, and home office wages.restatement.

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.
21

Other Income/(Income) Expense (net)

Other Income/Expense(income) expense consists primarily of currency exchange fluctuations,interest expense, interest income and interest expense.  In 2017,foreign currency (gain) loss.  For the year ended December 31, 2022, we incurredrecognized other expenses (net)income of approximately $79,000 compared to$0.1 million.  During the year ended December 31, 2021, we recognized other expenses (net)expense of approximately $98,000 in 2016.  In 2017, we earned approximately $7,000 in interest income on our cash and paid approximately $205,000 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.

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.$0.1 million.
 
Provision for Income Taxes

Our effective tax rate was 38%, 37%,12.9% and 37%38.3% for the years ended December 31, 2017, 20162022 and 2015,2021, respectively.   The difference between ourOur effective tax rate differs from the federal statutory rates and our effective rate are primarily due to the domestic production activities deduction that we receive for our light manufacturing facility in Fort Worth, Texas and the country mix of earnings.

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 an additional $340,782 of netstate income tax expense, inforeign income/loss positions, expenses that are nondeductible for tax purposes, the fourth quarter of 2017 as follows:

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 
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:

  # 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)%

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:

  # 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)%

In 2015, there were no changeschange in our store footprint (no store openings or closures).  The overall sales declinevaluation allowance associated with our deferred tax assets, and differences 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:

Customer Group
2017
2016
2015
Retail60%57%55%
Institution2%2%3%
Wholesale34%36%38%
Manufacturers4%5%4%
 100%100%100%

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,.

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.tax rates.
 
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:

 
 
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%

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.

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, and internallycash generated funds.  Ourfrom operating activities.  Any excess cash balances at December 31, 2017 totaled $18.3 million.  In addition, we have available a $6 million line of credit,will be invested as more fully described below.

In August 2015,determined by our Board of Directors authorizedin accordance with its approved investment policy.  Our cash balance as of December 31, 2022 totaled $8.0 million.
On January 3, 2023, the Company entered into a share repurchasecredit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A.  Under the Credit Agreement, the bank will provide the Company a credit facility of up to $5,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement.  As security for the credit facility, the Company has pledged as collateral certain of its assets, including the Company’s cash in deposit accounts, inventory and equipment.  As of the date of this filing, no funds had been borrowed under this facility.
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.  During the second quarter of 2022, we repaid this loan in full.
Share Repurchase Program
On August 9, 2020, the Board of Directors approved a program pursuant to which we are authorized to repurchase up to 1.2$5.0 million of the Company’s common stock on the open market between August 9, 2020 and July 31, 2022. This program expired in July 2022. As of December 31, 2021, the full $5.0 million of our common stock remained available for repurchase under this program.  On August 8, 2022, the Board of Directors approved a new program to repurchase up to $5.0 million of the Company’s common stock on the open market between that date and August 31, 2024.  As of December 31, 2022, $5.0 million remained available for repurchase under this new program.
On April 11, 2022, we entered into an agreement with two institutional shareholders of the Company, to repurchase 359,500 shares of our common stock, at prevailing market rates through August 2016.  Subsequently,par value $0.0024 in a private transaction. The purchase price was $5.00 per share for a total of $1.8 million. The closing of the program was amended to increase the number of shares available for repurchase to 2.2 millionrepurchases took place on April 22, 2022, and to extend the program through August 2018.  In 2017, nothese shares were repurchased, while 520,500subsequently cancelled. Prior to the repurchase, the shares were repurchased during in 2016.   At December 31, 2017, there are 1,150,793 shares available for repurchase under the plan.represented approximately 4.2% of our outstanding common stock.

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On September 18, 2015,December 8, 2021, we executed a Promissory Note and Business Loan Agreemententered into an agreement with BOKF, NA d/b/a Bankan institutional shareholder of Texas (“BOKF”) which provided us with a line of credit facility of upthe Company to $10,000,000 for the purpose of repurchasingrepurchase 212,690 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 $5.00 per share for a total of credit was amended to increase the availability from $10,000,000 to $15,000,000 for$1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding common stock.
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, pursuantpar value $0.0024 in a private transaction. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase of these shares took place on February 1, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5% of our stock repurchase program throughoutstanding common stock.
The direct share repurchases described above were separately authorized by our Board of Directors and did not reduce the earlier of August 25, 2017 orremaining amount authorized to be repurchased under the date on whichopen-market plan described in 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 endfirst paragraph of this time period,subsection.  In July 2022, the Company repurchased 600 shares of stock under the open market plan.
Cash Flows
(amounts in thousands) 2022  2021 
Net cash from operating activities $1,154  $3,716 
Net cash used in investing activities  (625)  (1,001)
Net cash used in financing activities  (2,171)  (2,777)
Effect of exchange rate changes on cash and cash equivalents  (538)  (112)
Net decrease in cash and cash equivalents $(2,180) $(174)

For 2022, we expectgenerated $1.1 million of cash from operations driven by net income of $1.2 million, the add-back of non-cash expenses of $5.5 million, including depreciation, amortization, and stock-based compensation, a $0.9 million decrease in income taxes, net due to collecting $1.4 million of refunds from NOL carryback claims that partially offset current year installment payments and recording the principal balance will be rolled intocurrent year income tax provision, and a 4-year term note. This Promissory Note is secureddecrease in accounts receivable of $0.2 million among other changes, offset by the increase of inventory of $0.3 million (including currency effects), a Deeddecrease in accounts payable and accrued expenses of Trust on$3.3 million and a decrease in operating lease liabilities of $3.4 million.  We invested $0.6 million in capital expenditures for the real estate locatedpurchase of store fixtures and systems implementations.  We used cash in financing activities to repurchase 360,100 shares of Tandy common stock in  purchases totaling $1.8 million at 1900 SE Loop 820, Fort Worth, Texas.   There were no amounts drawn on this linean average price of $5.00 per share, and to repay the loan from Spain in 2017.  In 2016,the amount of $0.4 million. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $2.2 million.
For 2021, we drew approximatelygenerated $3.7 million on this line which was usedof cash from operations driven by net income of $1.4 million, non-cash expenses of $5.2 million, including depreciation, amortization, and stock-based compensation, a reduction to repurchase approximately 520,500 sharesincome tax receivable 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.

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 $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 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$1.8 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 neta federal income earned during 2017,tax refund of $1.0 million related to the exercise2019 tax year and $0.8 million in income tax expense from expected taxable income generation in 2021, and $1.6 million of stock optionsother changes in operating assets 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 primarilyliabilities mostly attributable to an increase in cashaccounts payable and accrued liabilities of $1.9 million, and partially offset by the net buildup of inventory of $2.8 million and a reduction in lease liabilities of $3.4 million.  We invested $1.0 million in capital expenditures for the purchase of store fixtures and systems implementations.  We used cash in financing activities to repurchase 712,690 shares of Tandy common stock in two private purchases totaling $2.7 million at an average price of $3.84 per share.  The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in accrued liabilities.cash of $0.2 million.

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 lower levels of inventory in transit.

In 2017, cash flow provided by operating activities was $3.0 million, composed of net income of $4.5 million, plus $1.9 million of depreciation and amortization, plus $0.9 million of foreign currency translation, offset by changes in working capital including purchases of inventory and payments of accrued expenses.


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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 $1.7 million and $1.5 million in 2017 and 2016, respectively, consisting primarily of the purchase of 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 of 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 $3.7 million of treasury stock, funded primarily through drawdowns on our line of credit with BOKF, as well as made a scheduled payment on our capital lease obligation of $80,710.

We believe that cash flow from operations and our existing cash reserves will be adequate to fund our operations in 2018, while also fundingthrough 2023, taking into account the current effects of the inflationary pressure 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 2023.  There can be no assurance, however, that the current global economic conditions 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, 2016,2022 or 2015,2021, and we do not currently have any such arrangements.

Summary of Critical Accounting Policies

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,as follows.
Revenue Recognition.  Our revenue is earned from sales of merchandise and how they are reportedgenerally occurs via three methods: (1) at the store counter, (2) shipment of product generally via web sales, and disclosed in our financial statements.  Following is a summary(3) sales of our more significant accounting policies.

Revenue Recognition.product directly to commercial customers.  We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer.  At the store counter, our performance obligation is met, and revenue is recognized when a sales transaction occurs with a customer.  When merchandise is shipped to a customer, our performance obligation is met, and revenue is recognized when control passes to the customer.  Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer.  Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales.  Net sales are based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns.
The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales, accordingly.  Under our sales returns policy, merchandise may be returned, under most circumstances, up to 60 days after date of purchase.  As merchandise is returned, the company records the sales return against the sales return allowance.
We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer.  We record revenue and reduce the gift card liability as the customer redeems the gift card.  In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the 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 first-in, first-out (“FIFO”) cost or net realizable value, and FIFO layers are maintained at the location level.  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 in, first out” method.  This means that salesa FIFO 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.
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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 FIFO 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 and warehouse equipment for our Texas distribution center, both under long-term lease agreements. Starting in 2019, with the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognize a lease asset and lease liability at commencement date based on the present value of the lease payments over the lease term.  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 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.
We recognize rent expense related to our operating leases on a straight-line basis over the lease term. Rent expense is recorded in operating expenses. The net adjustment between rent expense and the actual cash paid during the fiscal year 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). 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.
None of our lease agreements contain material residual value guarantees or material restrictive covenants.  As of December 31, 2022, we have no sublease agreements and no lease agreements in which we are named as a lessor.  We do not have any contingent rental payment agreements.  On September 8, 2022, we entered into a concession agreement for our store on the Fort Bragg military base in which the concession payment is based on a sliding scale percentage of sales.
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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 value. To date, we have not recognized anyamount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of our long-livedthe related assets.  The impairment loss is then allocated across the asset group’s major classifications which in this case are operating lease assets and property and equipment.  Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or store closure.  This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions.  The fair value of an asset group is estimated using a discounted cash flow valuation method.
 
Stock-based Compensation.  The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards.  Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value.  Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant.  The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date.  The total compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards.  Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets.  The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved.  If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized.  If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting.  If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed.  The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied.  We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs.  We do not use cash to settle equity instruments issued under stock-based compensation awards.
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 recoveryit is deemedmore-likely-than-not that all or a portion of a deferred tax asset will not likely,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.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Tandy Leather Factory, Inc.
Consolidated Balance Sheets

  
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 








The accompanying notes are an integral part of these financial statements.



Tandy Leather Factory, Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31


  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 










The accompanying notes are an integral part of these financial statements.

Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31

  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 




The accompanying notes are an integral part of these financial statements.


Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31


  
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 





























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

·Management estimates and reporting

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.

· Principles of consolidation

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 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.  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.

·Revenue recognition

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.

·Discounts

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.

·Expense categories

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, net of accumulated depreciation and amortization

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 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.

·Impairment of long-lived assets

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.

·Earnings per share

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.


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 

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 and other intangibles

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:

  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 

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:

2018 $1,417 
2019  666 
2020  666 
2021  666 
2022  666 
Thereafter  5,141 

·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 (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.

·Income taxes

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.

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.

·Share-based compensation
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

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.

·Shipping and handling costs

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.

·Advertising

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.

·Cash flows presentation

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.

·Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.


1926
3.  VALUATION AND QUALIFYING ACCOUNTS

·ITEM 8.
Allowance for uncollectible 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.

·Sales returns and defective merchandise

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.

·Slow-moving and obsolete inventory

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

  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 

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:

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 


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:

  
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 

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:

2018 $614,311 
2019  1,842,932 
2020  1,842,932 
2021  1,842,932 
2022  1,228,623 
  $7,371,730 

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.

 
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 

* 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:

  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 

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:

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 
*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:

  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 

The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:

  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 

The effective tax rate differs from the statutory rate as follows:

  201720162015
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%

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:

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 

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

a)Stock Option Plan

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:

  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     

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:
  
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 

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:

2018 $100,127 
2019  58,126 
2020  14,853 
2021  1,208 

Of the 300,000 shares available for issuance, there are 188,225 shares available for future awards.

b)Cash DividendCONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
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.

d)Share Repurchase Program

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:

Prior Reporting StructureNew Reporting Structure
1. Wholesale – chain of wholesale stores operating under the name, The Leather Factory, located in North America
1. North America – chain of stores located in North America (combined prior Wholesale and Retail)
2. Retail – chain of retail stores operating under the name, Tandy Leather Company, located in North America
2. International – no change
3. International – four stores, 2 located in UK, 1 in Spain and 1 in Australia

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.

  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 
Net sales by geographic areas were as follows:

  
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 
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)

  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


To the Board of Directors and Shareholders of
Tandy Leather Factory, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Tandy Leather Factory, Inc. and Subsidiaries (the Company) as of December 31, 20172022 and 2016,2021, and the related consolidated statements of operations and comprehensive income stockholders’ equity and cash flows for each of the threetwo years in the period ended December 31, 2017,2022, 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, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the two years in the three-year period ended December 31, 2017,2022, 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”("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’sentity's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 
Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Valuation of Inventory
The Company’s accounting policy for the recognition of inventory and cost of sales is described in Note
2 to the consolidated financial statements. The Company has recorded an inventory balance of approximately $38.2 million and cost of sales of approximately $33.8 million as of and for the year ended December 31, 2022. Additionally, Note 3 to the consolidated financial statements provides further detail of the components of the year-end inventory balance.
The Company’s merchandise inventories are stated at the lower of cost or net realizable value using a first-in first-out costing principle. Finished goods inventory costs include the cost of merchandise purchases, the costs to bring the merchandise to the Company’s distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to the Company’s stores. Manufacturing inventory, raw materials and work-in-process are also valued on a first-in, first-out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead. The determination of amounts that are required to be capitalized to inventory resulting from manufacturing labor and overhead costs, warehouse and handling expenditures and transportation costs (together “overhead costs”) are subjective and are generally based on an allocation ratio calculated by the Company using the previous year’s actual overhead costs and the value of inventory handled during that year, subject to adjustment for current economic or market conditions. Additionally, to determine if the value of their inventory should be written down, the Company considers many factors, including condition of the product (excessive scars, discoloring or damage from UV light), current and anticipated demand that may cause the product to become slow moving and age of the merchandise to ensure that the product line is considered fresh. If a write-down is warranted, the carrying value of the merchandise is reduced from its original cost to the lower of its cost or net realizable value.

Management estimates the value of inventory by estimating the capitalizable overhead costs and adjusts the inventory to lower of cost or net realizable value. Our audit procedures to evaluate these items involved a higher degree of auditor judgment and the involvement of more senior members of the engagement team in executing, supervising, and reviewing the results of the procedures.

How the Critical Audit Matter Was Addressed in the Audit

 Our audit procedures related to the valuation of inventories included the following, among others:
We obtained an understanding of the controls over the valuation of inventory.
We tested the inventory costs incurred by the Company by reviewing supplier invoices and ensuring that appropriate application of the first-in first-out principle was followed.
We evaluated the appropriateness and consistency of management’s methodology and assumptions used in calculating the capitalizable overhead costs allocation ratio.
We evaluated the appropriateness of the capitalized overhead costs by analyzing them against actual overhead costs incurred during the year.
We tested the mathematical accuracy of the Company’s inventory obsolescence reserve calculation.
We evaluated the appropriateness and consistency of management’s methodology and assumptions used in developing its estimate of the inventory obsolescence reserve.
We performed analytical procedures on the current year reserve by comparing it to the prior year reserve and obtaining corroborating evidence to support any assumptions.
We tested on a sample basis, sales subsequent to year-end 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.


Fort Worth, TexasOklahoma City, Oklahoma
March 8, 2018
31, 2023

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Tandy Leather Factory, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data and per share data)

  December 31,
  December 31,
 
  2022  2021 
ASSETS      
CURRENT ASSETS:      
Cash and cash equivalents $7,975  $10,155 
Accounts receivable-trade, net of allowance for doubtful accounts of $56 and $24 at December 31, 2022  and 2021, respectively
  370   614 
Inventory  38,227   38,084 
Income tax receivable
  302   972 
Prepaid expenses  272   483 
Other current assets  106   141 
Total current assets  47,252   50,449 
         
Property and equipment, at cost  28,124   27,750 
Less accumulated depreciation  (16,962)  (15,989)
Property and equipment, net  11,162   11,761 
         
Operating lease assets  9,742   10,438 
Financing lease assets  31   37 
Other intangibles, net of accumulated amortization of $549 and $548 at December 31, 2022 and 2021, respectively
  5   6 
Other assets  387   394 
TOTAL ASSETS $68,579  $73,085 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
CURRENT LIABILITIES:        
Accounts payable-trade $3,082  $4,786 
Accrued expenses and other liabilities  2,681   4,302 
Income taxes payable  211   - 
Current portion of operating lease liabilities  2,881   3,025 
Current portion of finance lease liabilities
  15   15 
Current maturities of long-term debt
  -   79 
Total current liabilities  8,870   12,207 
         
Uncertain tax positions  450   415 
Other non-current liabilities  326   417 
Operating lease liabilities, non-current  7,469   8,194 
Finance lease liabilities, non-current
  1   15 
Long-term debt, net of current maturities  -   336 
         
COMMITMENTS AND CONTINGENCIES (Note 8)      
         
STOCKHOLDERS’ EQUITY:        
Common stock, $0.0024 par value; 25,000,000 shares authorized; 9,717,525 and 9,971,711 shares issued at December 31, 2022 and 2021, respectively; 8,293,149 and 8,547,335 shares outstanding at December 31, 2022 and 2021, respectively
  23   24 
Paid-in capital  3,222   3,959 
Retained earnings  59,891   58,664 
Treasury stock at cost (1,424,376 shares at December 31, 2022 and 2021)
  (9,773)  (9,773)
Accumulated other comprehensive loss, net of tax  (1,900)  (1,373)
Total stockholders’ equity  51,463   51,501 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $68,579  $73,085 

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Tandy Leather Factory, Inc.
Consolidated Statements ofOperations and Comprehensive Income
(amounts in thousands, except share and per share data)

  For the Years Ended December 31, 
  2022
  2021
 
       
Net sales $80,335  $82,661 
Cost of sales  33,838   35,662 
Gross profit  46,497   46,999 
         
Operating expenses  45,109   44,699 
         
Income from operations
  1,388   2,300 
         
Other (income) expense:        
Interest (income) expense
  (9)  16
 
Other, net  (11)  91 
Total other (income) expense
  (20)  107 
         
Income before income taxes
  1,408   2,193 
         
Income tax provision
  181   839 
         
Net income
 $1,227  $1,354 
         
Foreign currency translation adjustments, net of tax  (527)  (81)
         
Comprehensive income
 $700  $1,273 
         
Net income per common share:
        
Basic $0.15  $0.16 
Diluted $0.15  $0.16 
         
Weighted average number of shares outstanding:        
Basic  8,363,390   8,709,866 
Diluted  
8,394,567
   8,720,469 

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)

  For the Years Ended December 31, 
  2022
  2021
 
Cash flows from operating activities:      
Net income
 $1,227  $1,354 
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization  1,201   1,105 
Operating lease asset amortization  3,230   3,202 
Loss (gain) on disposal of assets  9   (8)
Stock-based compensation  1,060   797 
Deferred income taxes  (10)  83 
Exchange loss
  -   23 
Changes in operating assets and liabilities:        
Accounts receivable-trade  244   (325)
Inventory  (328)  (2,777)
Prepaid expenses  210   83 
Other current assets  34   (8)
Accounts payable-trade  (1,739)  1,143 
Accrued expenses and other liabilities  (1,527)  743 
Income taxes, net  905   1,775 
Other assets  -   (52)
Operating lease liabilities  (3,362)  (3,422)
Total adjustments  (73)  2,362 
Net cash from operating activities
  1,154   3,716 
         
Cash flows from investing activities:        
Purchase of property and equipment  (635)  (1,001)
Proceeds from sales of assets  10   - 
Net cash used in investing activities
  (625)  (1,001)
         
Cash flows from financing activities:        
Payments on long-term debt  (359)  - 
Payments of capital lease obligations
  (14)  (14)
Repurchase of common stock  (1,798)  (2,738)
Purchase of vested stock for employee payroll tax
  -   (25)
Net cash used in financing activities
  (2,171)  (2,777)
         
Effect of exchange rate changes on cash and cash equivalents  (538)  (112)
         
Net decrease in cash and cash equivalents  (2,180)  (174)
         
Cash and cash equivalents, beginning of period  10,155
   10,329
 
Cash and cash equivalents, end of period $7,975  $10,155 

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows - continued
(amounts in thousands)

  For the Years Ended December 31, 
  2022
  2021
 
Supplemental disclosures of cash flow information:      
Interest paid during the period $15  $16 
Income tax paid (refunded) during the period, net
 $(430) $(994)
         
Supplemental disclosures of non-cash activity:
        
Operating lease assets obtained in exchange for lease liabilities, net
 $3,884  $1,853 

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders’ Equity
(amounts in thousands, except share data)

  
Number of
Shares
Common Stock
Outstanding
  Par Value  Paid-in Capital  Treasury Stock  
Retained
Earnings
  
Accumulated
Other Comprehensive
Income (Loss)
  Total 
Balance, December 31, 2020
  9,150,806
  $25  $5,924  $(9,773) $57,310  $(1,292) $
52,194 
Stock-based compensation expense  -   -   797   -   -   -   797 
Issuance of restricted stock  114,075   -   -   -   -   -   - 
Purchase of vested stock for employee payroll tax  (4,856)  -   (25)  -   -   -   (25)
Repurchase of common stock  (712,690)  (1)  (2,737)  -   -   -   (2,738)
Net income  -   -   -   -   1,354  -   1,354
Foreign currency translation adjustments, net of tax  -   -   -   -   -   (81)  (81)
Balance, December 31, 2021
  8,547,335  $24  $3,959  $(9,773) $58,664  $(1,373) $51,501 
Stock-based compensation expense  -   -   1,060   -   -   -   1,060 
Issuance of restricted stock  140,277   -   -   -   -   -   - 
Purchase of vested stock for employee payroll tax
  (34,362)  -   -  -   -   -   -
Repurchase of common stock  (360,100)  (1)  (1,797)  -   -   -   (1,798)
Net income
  -   -   -   -   1,227   -   1,227 
Foreign currency translation adjustments, net of tax  -   -   -   -   -   (527)  (527)
Balance, December 31, 2022
  8,293,150  $23  $3,222  $(9,773) $59,891  $(1,900) $51,463 

The accompanying notes are an integral part of these Consolidated Financial Statements.

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TANDY LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021

1.  DESCRIPTION OF BUSINESS

Tandy Leather Factory, Inc. (“TLF,” “we,” “our,” “us,” the “Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries) is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere.  Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.

What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, and a hub for the local leathercrafting community, and our 100-year heritage.  We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate.

We sell our products primarily through company-owned stores and through orders generated from our global websites, and through direct account representatives in our commercial division.  We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites.  We also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly.  We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.

The Company currently operates a total of 103 retail stores. There are 92 stores in the United States (“U.S.”), ten stores in Canada and one store in Spain.

The Company’s common shares currently trade on the Nasdaq Capital Market under the symbol “TLF.”

We operate as a single segment and report on a consolidated basis.

2.  SIGNIFICANT ACCOUNTING POLICIES

Management estimates and reporting

The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses.  These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s conclusions.  The Company continually evaluates the information used to make these estimates as the business and the economic environment changes.  Actual results may differ from these estimates, and estimates are subject to change due to modifications in the underlying conditions or assumptions.  The policies discussed below require estimates that contain a significant degree of judgement.  The use of estimates is pervasive throughout the Consolidated Financial Statements, but the accounting policies and estimates considered most significant are as follows.

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Principles of consolidation

Our Consolidated Financial Statements include the accounts of Tandy Leather Factory, Inc. and its active wholly-owned subsidiaries, The Leather Factory, L.P. (a Texas limited partnership), Tandy Leather Company, L.P. (a Texas limited partnership), The Leather Factory of Canada, Ltd. (a Canadian corporation), Tandy Leather Factory UK Limited (a UK corporation), Tandy Leather Factory Australia Pty. Limited (an Australian corporation), and Tandy Leather Factory España, S.L. (a Spanish corporation).  All intercompany accounts and transactions have been eliminated in consolidation.

Correction of an error in previously issued financial statements

The consolidated financial statements include an out of period adjustment that is the result of unreconciled inventory receipts for in-transit inventory, which were identified in the fourth quarter of 2022.  To correct misstatements in the first three quarters of fiscal year 2022, we reduced inventory and accounts payable balances by approximately $0.9 million, and adjusted changes to inventory and accounts payable in the operating activities section of the consolidated statements of cash flows by the same amount. There is no impact of this adjustment to the consolidated statements of operations and comprehensive income or retained earnings.

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.  Our accounts receivable balance as of December 31, 2022, December 31, 2021 and January 1, 2021 was $0.4 million, $0.6 million, and $0.4 million, respectively.

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, 2022, 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, 2022, December 31, 2021, and January 1, 2021 each 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 are recorded in stockholders’ equity, net of tax.  For the years ended December 31, 2022 and 2021, we recorded foreign currency translation loss adjustments of less than $0.5 million and $0.1 million, respectively.

Gains and losses resulting from foreign currency transactions are recorded in other, net within the statements of operations and comprehensive income (loss). We did not recognize a foreign currency transaction gain or (loss) in the years ended December 31, 2022 and 2021.

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Revenue recognition

Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) shipment of product generally via web sales, and (3) sales of product directly to commercial customers.  We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer.  When merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when control passes to the customer.  Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer.  Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales.  Net sales is based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns. As of December 31, 2022, we had received approximately $0.2 million in credit card payments that had not shipped as of the end of the year.

The sales return allowance included in accrued expense and other liabilities was  $0.1 million, $0.2 million, and $0.1 million as of December 31, 2022 and 2021 and January 1, 2021 respectively. The estimated value of merchandise expected to be returned included in other current assets was less than $0.1 million as of December 31, 2022 and 2021 and January 1, 2021.

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. We include our gift card liability in accrued expenses and other liabilities.  On January 1, 2022, the opening balance of the gift card liability was $0.4 million.  During 2022, we issued $0.5 million of gift cards, and $0.6 million of gift cards were redeemed and recognized as revenue.  At December 31, 2022, our gift card liability balance was $0.3 million. On January 1, 2021, the opening balance of the gift card liability was $0.2 million; we issued $0.4 million of gift cards, and $0.2 million of gift cards were redeemed and recognized as revenue.  At December 31, 2021, the ending balance of the gift card liability was $0.4 million

Disaggregated revenue

In the following table, revenue for the years ended December 31, 2022 and 2021 is disaggregated by geographic areas as follows:

(in thousands) 2022
  2021
 
United States $71,665  $73,546 
Canada  7,393   7,470 
Other  1,277   1,645 
Net sales $80,335  $82,661 

Geographic sales information is based on the location of where the order was fulfilled.

Discounts

We offer a single retail price level, plus three volume-based levels for commercial customers. Discounts from those price levels are offered to business, military/first responder and employee customers. Such discounts do not convey a material right to these customers since the discounted pricing they receive at the point of sale is not dependent upon any previous or subsequent purchases. As a result, sales are reported after deduction of discounts at the point of sale. We do not pay slotting fees or make other payments to resellers.

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Operating expense

Operating expenses include all selling, general and administrative costs, including wages and benefits, rent and occupancy costs, depreciation, advertising, store operating expenses, outbound freight charges (to ship merchandise to customers), and corporate office costs.

Property and equipment, net of accumulated depreciation

Property and equipment are stated at cost.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are three to ten years for equipment and machinery, seven to fifteen years for furniture and fixtures, five years for vehicles, and forty years for buildings and related improvements.  Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the asset.  Repairs and maintenance costs are expensed as incurred.

Inventory

Inventory is stated at the lower of first-in, first-out (“FIFO”) cost or net realizable value, and the FIFO layers are maintained at the location level.  Finished goods held for sale include the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores.  These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory.  Manufacturing inventory including raw materials and work-in-process is valued on a first-in, first-out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead.  

Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the inventory.

We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii) items that need to be removed from our product line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to adequately value our inventory at the lower of cost or net realizable value.  Since the determination of net realizable value of inventory involves both estimation and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset.

The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations.  Goods shipped to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier.

Inventory is physically counted twice annually in the Texas distribution center.  At the store level, inventory is physically counted each quarter.  Inventory is then adjusted in our accounting system to reflect actual count results.


Leases

We lease certain real estate for our retail store locations and warehouse equipment for our Texas distribution center, both under long-term lease agreements.  We determine if an arrangement is a lease at inception and recognize right-of-use (“ROU”) assets and lease liabilities at commencement date based on the present value of the lease payments over the lease term.  We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes. 

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For operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease or options to purchase leased equipment, when it is reasonably certain we will exercise such an option.  The exercise of lease renewal or purchase option is generally at our discretion.  Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability.  We discount lease payments using our incremental borrowing rate based on information available as of the measurement date. 

We recognize rent expense related to our operating leases on a straight-line basis over the lease term.  Rent expense is recorded in operating expenses.  The net adjustment between rent expense and the actual cash paid during the fiscal year has been recorded as accrued expense 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).

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 material residual value guarantees or material restrictive covenants.  We do not have any contingent rental payment agreements. On September 8, 2022, we entered into a short-term concession agreement for our store on the Fort Bragg military base, in which the concession payment is based on a sliding scale percentage of sales. 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.

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For the years ended December 31, 2022 and 2021, no impairment expense was recognized.

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) 
 2022 (1)
  
2021 (1)
 
       
Numerator:      
Net income (loss)
 $1,227  $1,354
         
Denominator:        
Basic weighted-average common shares ouststanding
  
8,363,390
   8,709,866 
Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan
  
8,735
   10,603 
Dilutive effect of service-based restricted stock awards granted to employees under the Plan  22,442   - 
Diluted weighted-average common shares outstanding  8,394,567   8,720,469 

(1) For the years ended December 31, 2022 and 2021, there were 90,748 and 168,735, respectively, shares excluded from the diluted EPS calculation because the impact of their assumed vesting would be anti-dilutive.

For additional disclosures regarding restricted stock awards and employee stock options, see Note 10, Stockholders’ Equity – Equity Compensation Plans.

Other intangible assets

Our intangible assets and related accumulated amortization relate to trademarks and copyrights that are definite-lived intangibles and are subject to amortization. The weighted average amortization period is 15 years for trademarks and copyrights.  Amortization expense related to other intangible assets was less than $0.01 million in each of 2022 and 2021 and was recorded in operating expenses.  Based on the current amount of intangible assets subject to amortization, we estimate amortization expense to be less than $0.01 million annually over the next five years.

Fair value of financial instruments

We measure fair value as an exit price, which is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As a basis for considering such assumptions, accounting standards establish a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

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Level 1 – observable inputs that reflect quoted prices in active markets for identical assets or liabilities.


Level 2 – significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.


Level 3 – significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.

Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Our principal financial instruments held consist of accounts receivable, accounts payable, and the long-term debt reported in 2021. As of December 31, 2022 and 2021, 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, 2022 and 2021.

Income taxes

Income taxes are estimated for each jurisdiction in which we operate.  This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes.  Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income.  To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded.  Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods.

Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse.  The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change.  Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.

A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.  Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.

We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available.  Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.  These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available.  We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made.

We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.

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Stock-based compensation

The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards.  Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value.  Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant.  The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. Compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards.

Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets.  The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved.  If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized.  If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting.  If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed.  The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied.  We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs.  We do not use cash to settle equity instruments issued under stock-based compensation awards.

Comprehensive income (loss)

Comprehensive income (loss) includes net income (loss) and certain other items that are recorded directly to stockholders’ equity.  The Company’s only source of other comprehensive income (loss) is foreign currency translation adjustments, and those adjustments are presented net of tax.

Shipping and handling costs

Costs to ship products from our stores to our customers are included in operating expenses on the Consolidated Statements of Operations and Comprehensive Income. Total costs were $3.5 million and $3.4 million for the years ended December 31, 2022 and 2021, respectively.

Advertising

Advertising costs include the cost of print, digital, direct mail, community events, trade shows, and our e-commerce platform.  Advertising costs are expensed as incurred.  Total advertising expense was $1.2 million and $1.0 million in 2022 and 2021, respectively.

Recently Adopted Accounting Pronouncements

The Company did not adopt any new accounting guidance that was applicable for the year ended December 31, 2022.

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3.  BALANCE SHEET COMPONENTS

Inventory

(in thousands) December 31, 2022  December 31, 2021 
On hand:      
Finished goods held for sale $35,234  $34,928 
Raw materials and work in process  925   828 
Inventory in transit  2,068   2,328 
TOTAL $38,227  $38,084 

Property and Equipment

(in thousands) December 31, 2022  December 31, 2021 
Building $9,266  $9,257 
Land  1,451   1,451 
Leasehold improvements  1,870   1,833 
Equipment and machinery  7,931   7,704 
Furniture and fixtures  7,471   7,350 
Vehicles  135   155 
   28,124   27,750 
Less: accumulated depreciation  (16,962)  (15,989)
TOTAL $11,162  $11,761 

Our property and equipment, net, was located in the following countries:

(in thousands) December 31, 2022  December 31, 2021 
United States $10,989  $11,508 
Canada  173   252 
Spain  -   1 
  $11,162  $11,761 

Depreciation expense was $1.2 million and $1.1 million for the years ended December 31, 2022 and 2021, respectively.

Short-term Liabilities

Accrued Expenses and Other Liabilities December 31, 2022  December 31, 2021 
(in thousands)      
Accrued employee related costs
  1,432   2,508 
Unearned gift card revenue  256   351 
Estimated returns  72   242 
Sales and payroll taxes payable  693   987 
Accrued vendor payables  228   214 
TOTAL $2,681  $4,302 

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4.  LEASES

The Company leases certain real estate and warehouse equipment under long-term lease agreements.

The Company performs interim reviews of its operating and finance lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable. The Company recognized no impairment expense related to its operating lease assets during the year ended December 31, 2022 or December 31, 2021.

Additional information regarding the Company’s operating and finance leases is as follows (in thousands, except for lease term and discount rate information): 

Leases Balance Sheet Classification December 31, 2022  December 31, 2021 
(in thousands)        
Assets:        
Operating 
Operating lease assets
 
$
9,742
  
$
10,438
 
Finance 
Financing lease assets
  
31
   
37
 
Total assets   $9,773  $10,475 
           
Liabilities:          
Current          
Operating 
Current portion of operating lease liabilities
 
$
2,881
  
$
3,025
 
Finance 
Current portion of finance lease liabilities
  
15
   
15
 
Non-current          
Operating 
Operating lease liabilities, non-current
  
7,469
   
8,194
 
Finance 
Finance lease liabilities, non-current
  
1
   
15
 
Total lease liabilities   $10,366  $11,249 


Lease CostIncome Statement Classification December 31, 2022  December 31, 2021 
(in thousands)       
Operating lease costOperating expenses $3,737  $3,664 
Operating lease costImpairment expense  -   - 
Short-term lease cost
Operating expenses  38   45 
Variable lease cost (1)Operating expenses  797   946 
Finance: (2)
         
Amortization of lease assets
Operating expenses  7   7 
Interest on lease liabilities
Interest expense  1   2 
Total lease cost  $4,580  $4,664 

(1) Variable lease cost includes payment for certain real estate taxes, insurance, common area maintenance, and other charges related to lease agreements, which are not included in the measurement of the operating lease liabilities.
(2) Finance lease costs were less than $1,000 during the 2020 year.

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  December 31, 2022 
Maturity of Lease Liabilities Operating Leases  Finance Leases 
(in thousands)      
2022 $3,482  $16 
2023  2,821   -
 
2024  1,930   - 
2025  1,499   - 
2026  1,080   - 
Thereafter  1,357   - 
Total lease payments $12,169  $16 
Less:  Interest  (1,819)  - 
Present value of lease liabilities $10,350  $16 

Other Information December 31, 2022  December 31, 2021 
(in thousands)      
Cash paid for amounts included in the measurement of lease liabilities:      
Operating cash flows used in operating leases $3,871  $3,876 
Operating cash flows used in finance leases  1   2 
Financing cash flows used in finance leases  14   14 
         
Operating lease assets obtained in exchange for lease obligations        
Operating leases, initial recognition
  3,122   1,653 
Operating leases, modifications and remeasurements  762   200 

Lease Term and Discount Rate December 31, 2022  December 31, 2021 
Weighted-average remaining lease term (years):      
Operating leases  4.8
   5.3
 
Finance leases  0.9
   1.9
 
Weighted-average discount rate:        
Operating leases  5.0
%
  4.5
%
Finance leases  6.0
%
  6.5
%

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 coronavirus (“COVID-19”) virus. This loan was provided for by the Spanish government as part of a COVID-19 relief program and on June 6, 2022, the Company repaid this loan in full.

      December 31, 
(in thousands) 2022
  2021
 
       
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
 $-  $336 
  $-  $336 
Less current maturities  -   79 
TOTAL $-  $415 

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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 2022 and 2021, 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, 2022 and 2021, we recorded employer match expense of $0.3 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 2022 or 2021.

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 Provision
 2022
  2021
 
Current provision:      
Federal $16  $640 
State  41   98 
Foreign  96   - 
Related to UTP  28   19 
   181   757 
         
Deferred provision:        
Federal  -   - 
State  -   - 
Foreign  -   82 
   -   82 
         
Total tax provision
 $181  $839 

Earnings occurring outside the U.S. are deemed to be indefinitely reinvested outside of the U.S. to support the Company’s foreign operations.  As a result, if the Company accumulates earnings overseas, they will be used for investment in the Company’s businesses outside the U.S.  The Company will use cash generated from U.S. operations and short- and long-term borrowings to meet the Company’s U.S. cash needs.  The determination of unrecognized deferred tax liabilities for temporary differences in investments in foreign subsidiaries is not practicable.

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The Company has received $1.4 million in tax refund in 2022 as a result of the CARES Act NOL carryback provision and estimates that we will receive an additional $0.2 million in the future.  We have $3.7 million of state tax net operating loss (“NOL”) carryovers which will begin to expire in 2025.  We also have a full valuation allowance on $0.5 million of foreign tax NOL carryovers that do not expire and therefore no deferred tax assets.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic.  The CARES Act, among other things, permits net operating loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021.  In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes.

Income (loss) before income taxes was earned in the following tax jurisdictions:

(in thousands) Year Ended December 31, 
Income (Loss) Before Income Taxes 2022
  2021
 
United States $733  $2,552 
Spain  (83)  (135)
Canada  758   (229)
Australia  -   (1)
United Kingdom  -   6 
TOTAL $1,408  $2,193 

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The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:

Deferred income tax assets: 2022
  2021
 
(in thousands)      
Inventory $471  $464 
Stock-based compensation  93   59 
Accounts receivable  14   4 
Sales returns  47   125 
Foreign currency translation gain/loss in OCI  689   342 
Goodwill and other intangible assets amortization  -   - 
Net operating loss  261   646 
Accrued expenses  63   359 
Leases  152   195 
Other  -   2 
Total deferred income tax assets  1,790   2,196 
Less:  valuation allowance  (1,151)  (1,489)
Total deferred income tax assets, net of valuation allowance $639  $707 
         
Property and equipment depreciation $639  $707 
Total deferred income tax liabilities  639   707 
         
Net deferred tax asset (liability) $-  $- 

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 $0.3 million decrease to the valuation allowance for deferred income tax assets was necessary as of December 31, 2022, as compared to 2021. 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, 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, 
  2022  2021 
Statutory rate – Federal U.S. income tax  21.0%  21.0%
State and local taxes  (0.6)%  9.0%
Permanent book/tax differences  11.3%  3.0%
Difference in tax rates in loss carryback periods  0.0%  0.0%
Change in valuation allowance  (20.3)%  6.0%
Rate differential on UTP reversals  2.0%  1.0%
Other, net  (0.5)%  (1.7)%
Effective rate  12.9%  38.3%

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We file a consolidated U.S. income tax return as well as state tax returns on a consolidated, combined, or stand-alone basis, depending on the jurisdiction.  We are no longer subject to U.S. federal income tax examinations by tax authorities for years prior to the tax year ended December 2017.  Depending on the jurisdiction, we are no longer subject to state examinations by tax authorities for years prior to the December 2016 and December 2017 tax years. We file tax returns in a limited number of foreign jurisdictions.  With few exceptions, we are no longer subject to non-U.S. income tax examinations for years before 2016.

A reconciliation of the beginning and ending amount of uncertain tax positions (“UTP”) is as follows:


 2022  
2021
 
UTP at beginning of the year $415  $393 
Gross increase to tax positions in current period  7   3 
Interest expense  28   19 
UTP at end of year $450  $415 

8.  COMMITMENTS AND CONTINGENCIES

Legal Proceedings

We are periodically involved in various litigation that arises in the ordinary course of business and operations. There are no such matters pending that we expect to have a material impact on our financial position or operating results.  Legal costs associated with the resolution of claims, lawsuits, and other contingencies are expensed as incurred.

SEC Investigation

In 2019, the Company self-reported to the SEC information concerning the internal investigation of previously disclosed accounting matters resulting in the restatement for the full year 2017 and full year 2018, including interim quarters in 2018, and the first quarter of 2019.  In response, the Division of Enforcement of the SEC initiated an investigation into the Company’s historical accounting practices.  In July 2021, the Company entered into a settlement agreement with the SEC to conclude this investigation.  Under the terms of the settlement, in addition to other non-monetary settlement terms, (1) the Company paid a civil monetary penalty of $200,000, and (2) the Company’s former Chief Financial Officer and Chief Executive Officer agreed to pay a civil monetary penalty of $25,000.  In accepting the Company’s settlement offer, the SEC took into account remedial actions the Company took promptly after learning of the issues detailed in the SEC’s order.

Delisting of the Company’s Common Stock

After discovery of the accounting matters described in the previous paragraph and during our resulting financial restatement, the Company did not file its periodic financial reports with the Securities and Exchange Commission. As a result, Nasdaq suspended trading of the Company’s stock in August 2020 and formally de-listed the stock from the Nasdaq markets in February 2021. After being de-listed from Nasdaq, the Company’s stock traded in the Over The Counter Markets until September l, 2022, when Nasdaq again approved it for listing. The Company’s stock currently trades on the Nasdaq Capital Market under the symbol TLF.
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9.  SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK

Major Customers

Our revenues are derived from a diverse group of customers, from hobbyist crafters to small and large businesses across a wide variety of industries.  No single customer accounted for more than 0.4% of our consolidated revenues in 2022 or 2021, and sales to our five largest customers represented less than 2.0% of consolidated revenues in each of those years.  While we do not believe the loss of one of these customers would have a significant negative impact on our operations, we do believe the loss of several of these customers simultaneously or a substantial reduction in sales generated by them could temporarily affect our operating results.

Major Suppliers
We purchase merchandise and raw materials from over 130 vendors from the United States and approximately 20 foreign countries.  In general, our 10 largest vendors account for approximately 30% of our inventory purchases.
Credit Risk

Due to the large number of customers comprising our customer base, concentrations of credit risk with respect to customer receivables are limited. The top 2 customers of December 31, 2022 and 2021, represented 10.0% and 23.7% of net accounts receivable balance, respectively. These top two customers were also current as of these same dates. 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 to our executive officers, non-employee directors and other key employees.   In June 2020, our stockholders approved an increase to the plan reserve to 800,000 shares of our common stock and extended the 2013 Plan through June 2023.  Awards granted under the 2013 Plan may be service-based awards or performance-based awards and may be subject to a graded vesting schedule with a minimum vesting period of four years, unless otherwise determined by the Compensation Committee of the Board of Directors that administers the plan.  In June 2022, as part of their annual director compensation, certain of our non-employee directors were granted a total of 14,000 service-based RSUs under the 2013 Plan, which will vest ratably over the next four years provided that the participant is still on the board on the vesting date.
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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  Weighted Average
 
  (in thousands)
  Share Price
 
       
Balance, January 1, 2022
  423  $7.03 
Granted  161   5.01 
Forfeited  -   - 
Vested  (143)  6.56 
Balance, December 31, 2022
  441  $6.46 

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 $1.1 million and $0.8 million in 2022 and 2021, respectively.

As of December 31, 2022, 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, 2022, there was unrecognized compensation cost related to non-vested, service-based awards of $1.1 million which will be recognized over 1.1 weighted average years in each of the following years:

Unrecognized Expense 
2023
 $752 
2024
  239 
2025
  89 
2026
  7 
  $1,087 

We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs.  In 2022 and 2021, we issued 140,277 and 114,075 shares, respectively net of shares withheld to pay participants’ income taxes, resulting from the vesting of restricted stock and RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards.

Share Repurchase Program

On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5.0 million of its common stock between August 9, 2020 and July 31, 2022.  This program expired in July 2022. As of December 31, 2021, the full $5.0 million of our common stock remained available for repurchase under this program. On August 8, 2022, the Board of Directors approved a new program to repurchase up to $5.0 million of the Company’s common stock between that date and August 31, 2024.  As of December 31, 2022, $5.0 million remained available for repurchase under this new program.    

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On April 11, 2022, we entered into an agreement with two institutional shareholders of the Company to repurchase 359,500 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $5.00 per share for a total of $1.8 million. The closing of the repurchases took place on April 22, 2022, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 4.2% of our outstanding common stock.
On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 212,690 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $5.00 per share for a total of $1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding common stock.  These share repurchases were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plan described in the previous paragraph.

On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 500,000 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase of these shares took place on February 1, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock.

The direct share repurchase transactions were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plans described above.  In July 2022, the Company repurchased 600 shares of stock under the open market plan.

11.  SUBSEQUENT EVENT

On January 3, 2023, the Company entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A.  Under the Credit Agreement, the bank will provide the Company a credit facility of up to $5,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement.  As security for the credit facility, the Company has pledged as collateral certain of its assets, including the Company’s cash in deposit accounts, inventory and equipment.  As of the date of this filing, no funds had been borrowed under this facility.

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


None.


ITEM 9A.CONTROLS AND PROCEDURES
ITEM 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

OurAs part of the filing of this Form 10-K for the period ended December 31, 2022, our management, with the participation of our Chief Executive Officer and Chief Financial Officer,(“CEO”), 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 controls and procedures, our Chief Executive Officer and Chief Financial Officer haveCEO concluded that theour disclosure controls and procedures were not effective as ofdue to the date of such evaluation in ensuring that information required to be disclosed in 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.material weaknesses described below.

Management’s Annual Report on Internal Control over Financial Reporting

Our management, including our CEO, 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.

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.
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 may not prevent or detect all misstatements.
A material weakness is effective based ondefined as a deficiency, or combination of deficiencies in internal control over financial reporting, such that criteria.

This annual report does not include an attestation reportthere is a reasonable possibility that a material misstatement of our registered publicannual or interim financial statements will not be prevented or detected on a timely basis. Based on this definition, our management, with the participation of our CEO, evaluated the effectiveness and design of our internal control over financial reporting against the COSO Framework and concluded that our internal control over financial reporting was not effective as of December 31, 2022 due to material weaknesses arising from flaws in our control environment, risk oversight measures, control activities, information processing and communication and our monitoring systems, each of which is described in more detail below.
Control environment.  We concluded that we did not maintain effective controls in the following areas: (i) managerial functions, procedures and oversight; (ii) organizational structure, delegation of authority and responsibilities; (iii) segregation of duties; (iv) adequacy of trained accounting firm regardingand financial reporting personnel to ensure that internal control responsibilities were performed effectively and material accounting errors were detected; and (v) maintenance and enforcement of internal control responsibilities, including holding individuals accountable for their internal control responsibilities.
Risk oversight environment.  We did not maintain adequate risk oversight measures related to the (i) identification and assessment of risks that could impact achieving our objectives and (ii) identification and analysis of the potential changes that could affect our internal controls environment.
Control activities.  We concluded that we did not have effective control activities in the following areas: (i) selecting and developing control activities to mitigate risks, including the development of alternative control activities that address segregation of duties issues; (ii) selecting and implementing information technology and related systems supportive to our internal control over financial reporting; and (iii) deploying control activities through policies and establishing procedures that put these policies into action, including timely review of account reconciliations and methodologies used to calculate and report financial information and results, as well as timely periodic management reviews of financial information and results that would help identify misstatements.
52
Information and communication.  We identified deficiencies associated with information and communication within our internal control framework.  Specifically, we did not effectively assign responsibility to personnel for gathering required information nor did we periodically communicate objectives and internal control responsibilities throughout the organization which contributed to inadequate documentation of processes, untimely review of account reconciliations and calculations involving judgement and delays in the accounting close cycle, hindering timely communication with management, the Board of Directors and our independent auditors.
Monitoring activities.  We concluded that we did not design and implement effective monitoring activities related to (i) selecting, developing, and performing separate evaluations of our internal control over financial reporting; and (ii) evaluating and communicating internal control deficiencies in a timely manner to parties responsible for taking corrective actions.
Remediation Efforts to Address Material Weaknesses
Our management, including our CEO, continues to work with expert accounting consultants and our Audit Committee to design and implement both a short-term and a long-term remediation plan to correct the material weaknesses in our disclosure controls and procedures and our internal control over financial reporting.  Management’s report is not subjectThe following activities highlight our commitment to attestation byremediating our registered public accounting firm pursuantidentified material weaknesses:
Since 2020, and through the filing date of this Form 10-K, we have taken the following measures, among others:

•Replaced critical roles within our accounting team with full-time employees with expertise in GAAP accounting, SEC reporting and disclosure, internal audit and internal controls;

•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;

•Implemented a new point-of-sale system for most of our stores that is fully integrated with our new ERP system.  All 12 of the remaining stores will be converted in 2023;

•Implemented new accounting processes and procedures aligned with our new ERP system that incorporate best practices to minimize errors and putting into action control activities that will prevent misstatements and that address appropriate segregation of duties;

•Updated process narrative documentation in the following areas: (i) fixed assets and lease accounting, (ii) information technology (IT) governance, and (iii) HR and payroll;

•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);

•Established a greater sense of accountability by requiring sub-certifications below the CEO level for certain key accounting, finance and operations personnel.
Our continuing plan and additional steps for remediation include:

•Ongoing recruitment and hiring of permanent, qualified public-company accounting personnel;

•Converting remaining stores onto our new point-of-sale system;
53

•Continuing to implement new accounting procedures and activities aligned with our new ERP system that improve upon the reliability of financial reporting and the preparation of financial statements in accordance with GAAP;

•Continuing to improve the accounting close process, including periodic review and update of our accounting close checklists for completeness of duties, accuracy of owners and deadlines to maintain accountability, timely review of account reconciliations and calculations involving judgement, and timely reporting of financial results;

•Continuing to refine and improve narrative documentation in particular in the following areas: (i) financial reporting, (ii) inventory, (iii) purchasing and accounts payable, (iv) revenue, (v) general accounting, treasury, and financial planning & analysis, (vi) tax,

•Periodically reviewing our risk controls matrix and process narrative documentation to ensure changes such as personnel, information sources, processes, systems, and frequency in performing the control are properly reflected in a timely manner;

•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

•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, our Audit Committee and our Board of Directors have taken certain steps to rulesset the proper tone-at-the-top in support of the SecuritiesCompany’s values and Exchange Commissionclimate 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.

•Regular periodic communications from the CEO and other key senior leaders on the Company’s mission, core values, Code of Business Conduct and Ethics, whistleblower policies, and each employee’s individual responsibility for internal control compliance.

•Reorganization of the finance and accounting team to address segregation of duties issues, oversight, and review of work, and recruiting and hiring qualified, competent employees with relevant experience for the roles.

•Regular performance evaluations to include position-specific criteria for functional competence, including performance of internal control responsibilities.
Risk Oversight Measures
We continue to identify risks and enhance risk oversight measures.  In late 2019, we developed an annual strategic planning process designed to identify specific operating objectives for the organization and to conduct an assessment across the organization of the risks to meeting those objectives, including the risk of fraud.  Furthermore, on a quarterly basis, management will review our periodic filings to ensure that permitidentified 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.
54
Control Activities
We continue to redesign and implement our internal control activities.  Specifically, we have conducted detailed working sessions to document our current and prior finance and accounting policies, procedures, and step-by-step activities.  These sessions have identified specific areas that require improvement and redesign of processes, structure, authorities and controls, and those actions include:

•Completing the implementation of our new point-of-sale system, which is fully integrated with our ERP system.

•Continuing to implement functionality in our ERP system to improve on our internal controls over financial reporting, such as implementing the ERP’s bank reconciliation module.

•Continuing to implement newly-designed processes, structures, delegation of authority and controls, in accordance with the COSO Framework, including:

oQuarterly updates for our Controller regarding upcoming accounting pronouncement and proposed changes to GAAP accounting standards, tax regulations, and other requirements that may impact the Company’s financial reporting;

oTimely reviews each quarter of the most significant accounting estimates and judgments;

oValidation of results through detailed variance analyses and reconciliation of account balances performed on a timely basis;

oMonthly business review of actual financial performance compared to forecasts with participation from leadership across the organization; and

oEstablishing 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 with the certification process.
Information Processing and Communication
The implementation of our new ERP system eliminated the need for the topside adjustment calculations that had to be performed because our legacy systems were not integrated and many of our accounting processes were manual.  This new ERP system allows us to automate certain accounting processes, reducing the risk of management override, and eliminating the need for topside adjustments outside of the system.  In addition, management is developing detailed policies, procedures and internal controls related to our financial reporting and working to develop regular reporting from our new systems that can validate the quality of our data and provide only management’s reportaccurate 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 Annual Reportprocess will be addressed by management, including our CEO.  This assessment, any deficiencies and any remedial actions will be shared and discussed with our Audit Committee and our independent auditors on Form 10-K.a quarterly basis.

55
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 controlInternal Control Over Financial Reporting

There was no changeAs 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, and we implemented our new point-of-sale system, which is fully integrated with our ERP system, in most of our U.S. stores with the remaining stores to be converted in early 2023. Although we had not fully remediated all material weaknesses in our internal control over financial reporting that occurred during the fiscal quarter endedas of December 31, 2017 that has materially affected, or is reasonably likely2022, as the phased implementation of this system continues, we are experiencing certain changes to materially affect,our processes and procedures which, in turn, result in changes to our internal control over financial reporting. While we expect our new ERP system to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolves.

ITEM 9B.OTHER INFORMATION
ITEM 9B.  OTHER INFORMATION

None.
 
56
PART III*III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE*
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE*

ITEM 11.  EXECUTIVE COMPENSATION*
ITEM 11.EXECUTIVE COMPENSATION*

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS*
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS*

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE*
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE*

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES*
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES*
* The information required by Items 10, 11, 12, 13, and 14 is or will be set forth in the definitive proxy statement relating to the 20182023 Annual Meeting of Stockholders of Tandy Leather Factory, Inc., which is to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.  This definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by Items 10, 11, 12, 13, and 14 are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.

57
PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)The following are filed as part of this Form 10-K:

(a)The following are filed as part of this Annual Report on Form 10-K:

1.  Financial Statements

The following consolidated financial statementsConsolidated Financial Statements are included in Item 8:8, Financial Statements and Supplementary Data:
·Consolidated Balance Sheets at December 31, 2017 and 2016
·Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 410)
·Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
·Consolidated Statements of Stockholders' Equity for the years ended December 31, 2017, 2016, and 2015
Consolidated Balance Sheets as of December 31, 2022 and 2021

Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2022 and 2021
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.


 
2858


3.  Exhibits

 
TANDY LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number
Description
3.1
3.1
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.
 
3.2
Bylaws of The Leather Factory, Inc. (n/k/a Tandy Leather Factory, Inc.), filed as Exhibit 3.53.1 to theTandy Leather Factory, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 14, 2004December 8, 2021 and incorporated by reference herein.
 
3.3
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.
 10.1
*3.4
$6,000,000 Promissory Note, dated August 10, 2017, by and betweenCertificate of Amendment of Certificate of Incorporation of Tandy Leather Factory, Inc. and BOKF, NA dba Bankdated March 1, 2023.
4.1
Description of Texas,Securities filed as Exhibit 10.14.1 to Tandy Leather Factory’s CurrentFactory, Inc.’s Quarterly Report on Form 8-K10-Q filed with the Securities and Exchange Commission on August 14, 2017June 22, 2021 and incorporated by reference herein.
 10.2
$15,000,000 Promissory Note, dated August 10, 2017, by and between Tandy Leather Factory, Inc. and BOKF, NA dba Bank of Texas, filed as Exhibit 10.2 to Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 14, 2017 and incorporated by reference herein.
10.1
10.3
Deed of Trust, dated as of September 18, 2015, by and among Tandy Leather Factory, Inc., Jeffrey L Seasor and BOKF, NA dba Bank of Texas, filed as Exhibit 10.1 to Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2015 and incorporated by reference herein.
10.4
Form of Change of Control Agreement between the Company and each of Jon Thompson, Shannon Greene and Mark Angus, each effective as of December 3, 2012, filed as Exhibit 10.1 to Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 2012 and incorporated by reference herein.
10.5
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.
 10.6
10.2
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.
 
10.3
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.

59
10.4
10.7
Form of Employee Restricted Stock Award Agreement under Tandy Leather Factory, Inc.’s 2013 Restricted Stock Plan, filed as Exhibit 10.610.7 to Tandy Leather Factory, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2014 and incorporated by reference herein.
 14.1
10.5
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.
 
10.6
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.
10.7
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.
*10.8
Credit Agreement dated October 26, 2022 between the Company and JP Morgan Chase Bank, N.A.
14.1
Code of Business Conduct and Ethics of TheTandy Leather Factory, Inc., adopted by the Board of Directors on February 26, 2004,December 4, 2018, filed as Exhibit 14.1 to the AnnualTandy Leather Factory, Inc.’s Quarterly Report on Form 10-K of The Leather Factory, Inc. (Commission File No. 1-12368)10-Q filed with the Securities and Exchange Commission on March 29, 2004June 22, 2021 and incorporated by reference herein.
 
*21.1
Subsidiaries of Tandy Leather Factory, Inc.
 
*23.1
Consent of Independent Registered Public Accounting FirmFirm.

60
*31.1
*31.1
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.
 *31.2
Certification by the Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
*32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 20022002.
  
*101.INSXBRL Instance Document.
  
101.INSXBRL Instance Document
*101.SCHXBRL Taxonomy Extension Schema DocumentDocument.
  
*101.CALXBRL Taxonomy Extension Calculation DocumentDocument.
  
*101.DEFXBRL Taxonomy Extension Definition DocumentDocument.
  
*101.LABXBRL Taxonomy Extension Labels DocumentDocument.
  
*101.PREXBRL Taxonomy Extension Presentation Document
Document.
___________
    *Filed Herewith

ITEM 16.FORM 10-K SUMMARY
ITEM 16.  FORM 10-K SUMMARY
None.



2961

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

TANDY LEATHER FACTORY, INC.
TANDY LEATHER FACTORY, INC.
 By:/s/ Shannon GreeneJanet Carr
 Shannon GreeneJanet Carr
 Chief Executive Officer
  
Dated:  March 31, 2023 
Dated:  March 8, 2018


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.

SignatureTitleDate
   
/s/ JeffJefferson GrammChairman of the BoardMarch 8, 201831, 2023
JeffJefferson Gramm  
   
/s/ Shannon L. GreeneJanet CarrChief Executive Officer, DirectorMarch 8, 201831, 2023
Shannon L. GreeneJanet Carr(principal executive officer) 
   
/s/ Mark J. AngusPresident, Assistant Secretary, and DirectorMarch 8, 2018
Mark J. Angus
/s/ Tina L. CastilloChief Financial Officer and TreasurerMarch 8, 2018
Tina L. Castillo(principal financial officer and principal accounting officer)
/s/ William M. WarrenSecretary, General Counsel, and DirectorMarch 8, 201831, 2023
William M. Warren  
   
/s/ James PappasDirectorMarch 8, 201831, 2023
James Pappas  
   
/s/ Vicki CantrellDirectorMarch 8, 201831, 2023
Vicki Cantrell
/s/ Sharon LeiteDirectorMarch 8, 2018
Sharon Leite  
   
/s/ Sejal PatelDirectorMarch 8, 201831, 2023
Sejal Patel  
   
/s/ Brent BeshoreElaine D. CrowleyDirectorMarch 8, 201831, 2023
Brent BeshoreElaine D. Crowley  




62



TANDY LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number
Description
3.1
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.
3.2
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 filed with the Securities and Exchange Commission on July 14, 2004 and incorporated by reference herein.
3.3
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.
10.1
$6,000,000 Promissory Note, dated August 10, 2017, by and between Tandy Leather Factory, Inc. and BOKF, NA dba Bank of Texas, filed as Exhibit 10.1 to Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 14, 2017 and incorporated by reference herein.
10.2
$15,000,000 Promissory Note, dated August 10, 2017, by and between Tandy Leather Factory, Inc. and BOKF, NA dba Bank of Texas, filed as Exhibit 10.2 to Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 14, 2017 and incorporated by reference herein.
10.3
Deed of Trust, dated as of September 18, 2015, by and among Tandy Leather Factory, Inc., Jeffrey L Seasor and BOKF, NA dba Bank of Texas, filed as Exhibit 10.1 to Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 24, 2015 and incorporated by reference herein.
10.4
Form of Change of Control Agreement between the Company and each of Shannon Greene and Mark Angus, each effective as of December 3, 2012, filed as Exhibit 10.1 to Tandy Leather Factory’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 2012 and incorporated by reference herein.
10.5
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.
10.6
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.
10.7
Form of Employee Restricted Stock Award Agreement under Tandy Leather Factory, Inc.’s 2013 Restricted Stock Plan, filed as Exhibit 10.6 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.
14.1
Code of Business Conduct and Ethics of The Leather Factory, Inc., adopted by the Board of Directors on February 26, 2004, filed as Exhibit 14.1 to the Annual Report on Form 10-K of The Leather Factory, Inc. (Commission File No. 1-12368) filed with the Securities and Exchange Commission on March 29, 2004 and incorporated by reference herein.
*21.1
Subsidiaries of Tandy Leather Factory, Inc.
*23.1 Consent of Independent Registered Public Accounting Firm
*31.1
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
*31.2
Certification by the Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
*32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Document
101.DEFXBRL Taxonomy Extension Definition Document
101.LABXBRL Taxonomy Extension Labels Document
101.PREXBRL Taxonomy Extension Presentation Document
___________
    *Filed Herewith

31