UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 2016

2017
or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number 1-12368
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, Texas  76140
(Address of principal executive offices) (Zip Code)code)

(817) 872-3200
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]  No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”filer,”  “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):  Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X][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 Exchange Act).
Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
Shares outstanding as of November 11, 2016August 1, 2017
Common Stock, par value $0.0024 per share9,266,4969,270,862




1

TANDY LEATHER FACTORY, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20162017


TABLE OF CONTENTS


 
PAGE NO.
  
PART I.  FINANCIAL INFORMATION 
  
  Item 1.  Financial Statements 
  
   Consolidated Balance Sheets
1 3
Consolidated Statements of Income
2
    Consolidated Statements of Comprehensive Income
3 4
    Consolidated Statements of Cash Flows
4 5
    Consolidated Statements of Stockholders' Equity
5 6
    Notes to Consolidated Financial Statements
6 7
  
  Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
11 12
  
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk
14 17
  
  Item 4.  Controls and Procedures
 1417
  
PART II.  OTHER INFORMATION 
  
  Item 1.  Legal Proceedings
15 17
  
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
15 17
  
  Item 6.  Exhibits
15 18
  
SIGNATURES
15 19
  


2
 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Tandy Leather Factory, Inc.
Consolidated Balance Sheets

September 30,  2016
(unaudited)
 
December 31,  2015
(audited)
 
June 30,
2017
(unaudited)
  
December 31,
2016
(audited)
 
ASSETSASSETS         
CURRENT ASSETS:CURRENT ASSETS:         
Cash$11,448,638 $10,962,615
Accounts receivable-trade, net of allowance for doubtful accounts   
 of $75 and $1,746 in 2016 and 2015, respectively513,591 553,206
Inventory37,122,297 33,584,539
Prepaid income taxes1,237,306 549,277
Deferred income taxes359,802 326,830
Prepaid expenses1,852,230 1,514,887
Other current assets16,261 70,197
  Total current assets52,550,125 47,561,551
Cash $14,841,370  $16,862,304 
Accounts receivable-trade, net of allowance for doubtful accounts        
of $16,209 and $2,404 in 2017 and 2016, respectively  497,317   560,984 
Inventory  37,327,488   33,177,539 
Prepaid income taxes  455,423   964,323 
Prepaid expenses  1,478,762   1,608,860 
Other current assets  140,488   140,232 
Total current assets  54,740,848   53,314,242 
           
PROPERTY AND EQUIPMENT, at costPROPERTY AND EQUIPMENT, at cost25,394,850 23,992,208  26,585,838   25,536,352 
Less accumulated depreciation and amortizationLess accumulated depreciation and amortization (9,460,904) (8,297,155)  (10,831,122)  (9,884,559)
15,933,946 15,695,053  15,754,716   15,651,793 
           
DEFERRED INCOME TAXES  404,615   375,236 
GOODWILLGOODWILL958,630 953,356  959,797   956,201 
OTHER INTANGIBLES, net of accumulated amortization of approximatelyOTHER INTANGIBLES, net of accumulated amortization of approximately           
$708,000 and $702,000 in 2016 and 2015, respectively21,284 27,282
OTHER assets334,778 329,684
$709,000 and $708,000 in 2017 and 2016, respectively  19,954   20,840 
OTHER ASSETS  363,529   334,408 
TOTAL ASSETSTOTAL ASSETS$69,798,763 $64,566,926 $72,243,459  $70,652,720 
           
LIABILITIES AND STOCKHOLDERS’ EQUITYLIABILITIES AND STOCKHOLDERS’ EQUITY           
CURRENT LIABILITIES:CURRENT LIABILITIES:           
Accounts payable-trade$1,981,879 $1,983,376
Accrued expenses and other liabilities6,528,527 6,045,552
Current maturities of capital lease obligations72,686 72,686
Current maturities of long-term debt153,578 231,952
  Total current liabilities8,736,670 8,333,566
Accounts payable-trade $1,484,043  $1,621,884 
Accrued expenses and other liabilities  4,471,813   5,937,187 
Current maturities of capital lease obligations  72,686   72,686 
Current maturities of long-term debt  1,535,778   614,311 
Total current liabilities  7,564,320   8,246,068 
           
DEFERRED INCOME TAXESDEFERRED INCOME TAXES1,753,698 1,702,515  1,838,066   1,956,032 
           
LONG-TERM DEBT, net of current maturitiesLONG-TERM DEBT, net of current maturities7,218,151 3,479,273  5,835,952   6,757,419 
CAPITAL LEASE OBLIGATIONS, net of current maturities72,687 79,396
COMMITMENTS AND CONTINGENCIESCOMMITMENTS AND CONTINGENCIES- -  -   - 
           
STOCKHOLDERS’ EQUITY:STOCKHOLDERS’ EQUITY:           
Preferred stock, $0.10 par value; 20,000,000 shares authorized;   
 none issued or outstanding; attributes to be determined on issuance- -
Common stock, $0.0024 par value; 25,000,000 shares authorized;   
 11,309,326 and 11,275,641 shares issued at 2016 and 2015, respectively;   
 9,266,496 and 9,753,293 shares outstanding at 2016 and 2015, respectively27,142 27,062
Paid-in capital6,324,995 6,168,489
Retained earnings57,409,496 53,067,234
Treasury stock at cost (2,042,830 and 1,522,348 shares at 2016 and 2015, respectively)(10,278,584) (6,602,930)
Accumulated other comprehensive income(1,465,492) (1,687,679)
  Total stockholders’ equity52,017,557 50,972,176
   
Preferred stock, $0.10 par value; 20,000,000 shares authorized;      - 
none issued or outstanding; attributes to be determined on issuance  -     
Common stock, $0.0024 par value; 25,000,000 shares authorized;        
11,313,692 and 11,235,992 shares issued at 2017 and 2016, respectively;        
9,270,862 and 9,193,162 shares outstanding at 2017 and 2016, respectively  27,153   26,966 
Paid-in capital  6,762,832   6,368,455 
Retained earnings  61,728,490   59,469,493 
Treasury stock at cost (2,042,830 shares at 2017 and 2016, respectively)  (10,278,584)  (10,278,584)
Accumulated other comprehensive income  (1,234,770)  (1,893,129)
Total stockholders’ equity  57,005,121   53,693,201 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITYTOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$69,798,763 $64,566,926 $72,243,459  $70,652,720 





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

13
TABLE OF CONTENTSTable of Contents


Tandy Leather Factory, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
For the Three and NineSix Months Ended SeptemberJune 30 2016 and 2015


 THREE MONTHS NINE MONTHS
 2016 2015 2016 2015
NET SALES$18,628,362 $19,355,937 $58,823,494 $59,918,229
        
COST OF SALES6,983,491 7,523,240 21,630,087 22,688,223
        
          Gross profit11,644,871 11,832,697 37,193,407 37,230,006
        
OPERATING EXPENSES10,104,812 9,972,946 30,451,667 30,647,532
        
INCOME FROM OPERATIONS1,540,059 1,859,751 6,741,740 6,582,474
        
OTHER INCOME (EXPENSE):       
          Interest expense(43,493) (228,235) (108,949) (307,160)
          Other, net3,570 38,320 26,965 68,070
               Total other income (expense)(39,923) (189,915) (81,984) (239,090)
        
INCOME BEFORE INCOME TAXES1,500,136 1,669,836 6,659,756 6,343,384
        
PROVISION FOR INCOME TAXES499,786 558,492 2,317,494 2,279,737
        
NET INCOME$1,000,350 $1,111,344 $4,342,262 $4,063,647
        
        
        
NET INCOME PER COMMON SHARE:       
Basic$0.11 $0.11 $0.46 $0.40
Diluted$0.11 $0.11 $0.46 $0.40
        
Weighted Average Number of Shares Outstanding:       
  Basic9,188,483 10,175,650 9,341,364 10,199,841
  Diluted9,206,382 10,199,092 9,359,405 10,226,877

  THREE MONTHS  SIX MONTHS 
  2017  2016  2017  2016 
NET SALES $19,280,770  $19,522,905  $39,430,615  $40,195,132 
                 
COST OF SALES  6,385,236   6,627,115   14,249,036   14,646,596 
                 
          Gross profit  12,895,534   12,895,790   25,181,579   25,548,536 
                 
OPERATING EXPENSES  11,240,097   10,056,899   21,788,651   20,346,855 
                 
INCOME FROM OPERATIONS  1,655,437   2,838,891   3,392,928   5,201,681 
                 
OTHER INCOME (EXPENSE):                
          Interest expense  (53,680)  (42,027)  (90,024)  (65,456)
          Other, net  17,012   23,434   19,663   23,395 
               Total other income (expense)  (36,668)  (18,593)  (70,361)  (42,061)
                 
INCOME BEFORE INCOME TAXES  1,618,769   2,820,298   3,322,567   5,159,620 
                 
PROVISION FOR INCOME TAXES  591,037   999,383   1,063,570   1,817,708 
                 
NET INCOME $1,027,732  $1,820,915  $2,258,997  $3,341,912 
                 
Foreign currency translation adjustments  302,019   (382,762)  658,359   254,753 
COMPREHENSIVE INCOME $1,329,751  $1,438,153  $2,917,356  $3,596,665 
                 
                 
NET INCOME PER COMMON SHARE:                
Basic $0.11  $0.19  $0.24  $0.35 
Diluted $0.11  $0.19  $0.24  $0.35 
                 
Weighted Average Number of Shares Outstanding:                
  Basic  9,225,960   9,209,446   9,212,846   9,418,645 
  Diluted  9,229,129   9,227,941   9,225,474   9,437,620 



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

4


Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30

  2017  2016 
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income $2,258,997  $3,341,912 
Adjustments to reconcile net income to net cash used in operating activities:        
Depreciation and amortization  929,408   831,793 
(Gain) / loss on disposal or abandonment of assets  515   (6,560)
Non-cash stock-based compensation  171,160   113,302 
Deferred income taxes  (147,345)  (4,676)
Foreign currency translation  627,609   256,309 
Net changes in assets and liabilities:        
Accounts receivable-trade  63,667   1,382 
Inventory  (4,149,949)  (2,720,056)
Prepaid expenses  130,098   (108,971)
Other current assets  (256)  (62,788)
Accounts payable-trade  (137,841)  (589,863)
Accrued expenses and other liabilities  (1,465,374)  (1,066,056)
Income taxes payable  508,900   (216,328)
Total adjustments  (3,469,408)  (3,572,512)
                            Net cash used in operating activities  (1,210,411)  (230,600)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of property and equipment  (1,004,906)  (898,007)
Proceeds from sale of assets  100   26,703 
Decrease in other assets  (29,121)  352 
Net cash used in investing activities  (1,033,927)  (870,952)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from notes payable and long term debt  -   3,660,505 
Payments on capital lease obligations  -   (6,710)
Repurchase of common stock (treasury stock)  -   (3,675,654)
Proceeds from exercise of stock options  223,404   - 
Net cash provided by (used in) financing activities  223,404   (21,859)
         
NET DECREASE IN CASH  (2,020,934)  (1,123,411)
         
CASH, beginning of period  16,862,304   10,962,615 
         
CASH, end of period $14,841,370  $9,839,204 
         
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:        
Interest paid during the period $90,024  $65,456 
Income tax paid during the period, net of refunds $554,670  $2,034,036 






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







Tandy Leather Factory, Inc.
Consolidated Statements of Comprehensive Income
Stockholders’ Equity (Unaudited)
For the Three and NineSix Months Ended SeptemberJune 30 2016 and 2015

  
Number of Shares
  
Par
Value
  
Paid-in Capital
  
Treasury
Stock
  
Retained Earnings
  Accumulated Other Comprehensive Income  
Total
 
BALANCE, December 31, 2015  9,753,293  $27,062  $6,168,489  $(6,602,930) $53,067,234  $(1,687,679) $50,972,176 
                             
Purchase of treasury stock  (520,482)  -   -   (3,675,654)  -   -   (3,675,654)
Stock-based compensation  33,685   80   113,222   -   -   -   113,302 
Net income  -   -   -   -   3,341,912   -   3,341,912 
Translation adjustment  -   -   -   -   -   254,753   254,753 
BALANCE, June 30, 2016  9,266,496  $27,142  $6,281,711  $(10,278,584) $56,409,146  $(1,432,926) $51,006,489 
                             
                             
                             
  
Number of Shares
  
Par
Value
  
Paid-in Capital
  
Treasury
Stock
  
Retained Earnings
  Accumulated Other Comprehensive Income  
Total
 
BALANCE, December 31, 2016  9,193,162  $26,966  $6,368,455  $(10,278,584) $59,469,493  $(1,893,129) $53,693,201 
                             
Exercise of stock options  44,400   107   223,297.   -   -   -   223,404 
Stock-based compensation  33,300   80   171,080   -   -   -   171,160 
Net income  -   -   -   -   2,258,997   -   2,258,997 
Translation adjustment  -   -   -   -   -   658,359   658,359 
BALANCE, June 30, 2017  9,270,862  $27,153  $6,762,832  $(10,278,584) $61,728,490  $(1,234,770) $57,005,121 
6


 THREE MONTHS NINE MONTHS
 2016 2015 2016 2015
NET INCOME$1,000,350 $1,111,344 $4,342,262 $4,063,647
        
Foreign currency translation adjustments(32,566) (794,904) 222,187 (961,471)
        
COMPREHENSIVE INCOME$967,784 $316,440 $4,564,449 $3,102,176










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


Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, 2016 and 2015

 2016 2015
CASH FLOWS FROM OPERATING ACTIVITIES:   
 Net income$4,342,262 $4,063,647
 Adjustments to reconcile net income to net cash provided by operating activities:   
  Depreciation and amortization1,273,078 1,163,116
  (Gain) loss on disposal or abandonment of assets(6,306) 25,782
  Non-cash stock-based compensation156,586 106,569
  Deferred income taxes18,211 (67,646)
  Foreign currency translation236,139 (882,354)
  Net changes in assets and liabilities:   
   Accounts receivable-trade, net39,615 40,042
   Inventory(3,537,758) (2,182,520)
   Prepaid expenses(492,234) (310,400)
   Other current assets53,936 (91,331)
   Accounts payable-trade(1,497) 1,242,840
   Accrued expenses and other liabilities482,975 1,002,238
   Income taxes payable(688,029) (531,754)
 Total adjustments(2,465,284) (485,418)
                             Net cash provided by operating activities1,876,978 3,578,229
    
CASH FLOWS FROM INVESTING ACTIVITIES:   
 Purchase of property and equipment(1,385,431) (1,339,098)
 Proceeds from sale of assets26,703 11,372
 Purchase of intangible assets- (10,000)
 (Increase) in other assets(10,368) (2,902)
    Net cash used in investing activities(1,369,096) (1,340,628)
    
CASH FLOWS FROM FINANCING ACTIVITIES:   
 Net (decrease) in revolving credit loans- (3,500,000)
 Proceeds from notes payable and long-term debt3,660,505 3,711,224
 Payments on notes payable and long-term debt- (2,143,125)
 Payments on capital lease obligations(6,710) -
 Repurchase of common stock (treasury stock)(3,675,654) (3,708,862)
 Proceeds from issuance of common stock- 9,920
    Net cash used in financing activities(21,859) (5,630,843)
    
NET CHANGE IN CASH486,023 (3,393,242)
    
CASH, beginning of period10,962,615 10,636,530
    
CASH, end of period$11,448,638 $7,243,288
    
    
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:   
Interest paid during the period$     108,949 $   307,160
Income tax paid during the period$3,005,523 $2,883,552
    




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



Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
For the Nine Months Ended September 30, 2016 and 2015

 
 
Number of Shares
 
 
Par Value
 
 
Paid-in Capital
 
 
Treasury Stock
 
 
Retained Earnings
 
Accumulated Other
Comprehensive Income
 
 
Total
BALANCE, December 31, 201410,245,534 $26,984 $6,013,325 $(2,894,068) $46,664,829 $(688,058) $49,123,012
              
Shares issued – stock option exercise2,000 5 9,915 - - - 9,920
Stock-based compensation34,484 73 106,496 - - - 106,569
Purchase of treasury stock(528,725) - - (3,708,862) - - (3,708,862)
Net income- - - - 4,063,647 - 4,063,647
Translation adjustment- - - - - (961,471) (961,471)
BALANCE, September 30, 20159,753,293 $27,062 $6,129,736 $(6,602,930) $50,728,476 $(1,649,529) $48,632,815
              
              
              
 
 
Number of Shares
 
 
Par Value
 
 
Paid-in Capital
 
 
Treasury Stock
 
 
Retained Earnings
 
Accumulated Other
Comprehensive Income
 
 
Total
BALANCE, December 31, 20159,753,293 $27,062 $6,168,489 $(6,602,930) $53,067,234 $(1,687,679) $50,972,176
              
Purchase of treasury stock(520,482) - - (3,675,654) - - (3,675,654)
Stock-based compensation33,685 80 156,506 - - - 156,586
Net income- - - - 4,342,262 - 4,342,262
Translation adjustment- - - - - 222,187 222,187
BALANCE, September 30, 20169,266,496 $27,142 $6,324,995 $(10,278,584) $57,409,496 $(1,465,492) $52,017,557




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


TANDY LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES
1.    BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES

In the opinion of management, the accompanying consolidated financial statements for Tandy Leather Factory, Inc. and its consolidated subsidiaries contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly its financial position as of SeptemberJune 30, 20162017 and December 31, 2015,2016, and its results of operations and cash flows for the three and nine-monthsix-month periods ended SeptemberJune 30, 20162017 and 2015.2016.  Operating results for the three and nine-monthsix-month periods ended SeptemberJune 30, 20162017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.2017.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

InventoryReclassifications.  Certain prior year amounts have been reclassified to conform to the current year presentation.

Inventory.  Inventory is statedvalued at the lower of first-in, first-out cost or market andmarket.  In addition, the value of inventory is accountedperiodically reduced to net realizable value for slow-moving or obsolete inventory based on the “first in, first out” method.management's review of items on hand compared to their estimated future demand.  Based on negotiations with vendors, title generally passes to us when merchandise is put on board.  Merchandise to which we have title but which have not yet received is recorded as inventory in transit.  In addition, the value of inventory is periodically reduced for slow-moving or obsolete inventory based on management’s review of items on hand compared to their estimated future demand.

The components of inventory consist of the following:

As of
September 30, 2016 December 31, 2015 June 30, 2017  December 31, 2016 
Inventory on hand:         
Finished goods held for sale$33,996,794 $30,487,764 $33,665,227  $30,684,026 
Raw materials and work in process1,297,711 1,284,567  1,574,142   1,034,041 
Inventory in transit1,827,792 1,812,208  2,088,119   1,459,472 
$37,122,297 $33,584,539 $37,327,488  $33,177,539 

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.

A two-step process is used to test for goodwill impairment.  The first phase screens for impairment, while the second phase (if necessary) measures the impairment.  We have elected to perform the annual analysis during the fourth calendar quarter of each year.  As of December 31, 2015,2016, management determined that the present value of the discounted estimated future cash flows of the stores associated with the goodwill is sufficient to support their respective goodwill balances.  No indicators of impairment were identified during the first nine monthshalf  of 2016.2017.

A summary of changesThe only change in our goodwill for the six-month periods ended SeptemberJune 30, 2017 and 2016 resulted from foreign currency translation of $3,596 and 2015 is as follows:

 Leather FactoryTandy LeatherTotal
Balance, January 1, 2015$588,380$383,406$971,786
Acquisitions and adjustments---
Foreign exchange gain/loss(15,202)-(15,202)
Impairments---
Balance, September 30, 2015$573,178$383,406$956,584
 
 
Leather Factory
 
Tandy Leather
 
Total
Balance, January 1, 2016$569,950$383,406$953,356
Acquisitions and adjustments---
Foreign exchange gain/loss5,274-5,274
Impairments---
Balance, September 30, 2016$575,224$383,406$958,630
$6,512, respectively.

Other intangibles consist of the following:

As of September 30, 2016 As of December 31, 2015 June 30, 2017  December 31, 2016 
Gross
Accumulated Amortization
Net Gross
Accumulated Amortization
Net 
Gross
  
Accumulated
Amortization
  
Net
  
Gross
  
Accumulated
Amortization
  
Net
 
Trademarks, Copyrights$554,369$545,085$  9,284 $554,369$544,504$9,865 $554,369  $545,665  $8,704  $554,369  $545,279  $9,090 
Non-Compete Agreements174,665162,66512,000 174,665157,24817,417  175,316   164,066   11,250   175,316   163,566   11,750 
$729,034$707,750$21,284 $729,034$701,752$27,282 $729,685  $709,731  $19,954  $729,685  $708,845  $20,840 

We recorded amortization expense of $5,998$886 during the six months ended June 30, 2017 compared to $5,054 during the first nine monthshalf of 2016 compared to $34,001 during the same period of 2015.2016.  All of our intangible assets, other than goodwill, are subject to amortization under U.S. GAAP.  Based on the current amount of intangible assets subject to amortization, the estimated amortization expense for each of the succeeding 5 years is as follows:

Leather Factory
Tandy Leather
    Total
2016$ 27$   667$    694
2017901,6671,757  871 
2018-1,417  1,417 
2019-666  666 
2020-666  666 
2021  666 
Thereafter$   -$6,084 $5,668 

7
Revenue Recognition.  Our sales generally occur via two methods: (1) at the counter in our stores, 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.  Our shippingShipping terms are normally FOB shipping point.  Sales tax and comparable foreign tax is excluded from revenue.

We offer an unconditional satisfaction guarantee to our customers and accept all product returns.  Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise.

Comprehensive Income (loss) and Accumulated Other Comprehensive Income (loss)(loss). Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-stockholder sources and includes all changes in equity during a period except those resulting from investments by and dividends to stockholders.  Our comprehensive income (loss) consists of our net income and certain other items that are recorded directly to Stockholders’ Equity.  Our only source of other comprehensive income is foreign currency translation adjustments from our international operations.

6
Recent Accounting Pronouncements.  In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, which amends ASC Topic 606, “Revenue from Contracts with Customers”. The amendments in this ASU are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The amendments in this accounting standard update are effective for interim and annual reporting periods beginning after December 15, 2016. In April 2015, the FASB issued ASU No. 2015-24, Revenue from Contracts with Customers: Deferral of the Effective Date which proposed a deferral of the effective date by one year, and on July 7, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are therefore required to apply the new revenue guidance beginning in our 2018 interim and annual financial statements. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Entities reporting under U.S. GAAP are not permitted to adopt this standard earlier than the original effective date for public entities (that is, no earlier than 2017 for calendar year-end entities.) We are currently evaluating what impact, if any, the adoption of this guidance will have on our consolidated financial condition, results of operations, cash flows orand financial disclosures.

In June 2014,  Based on our procedures to date, we believe that the FASB issued ASU No. 2014-12, which amends ASC Topic 718, “Compensation–Stock Compensation.” The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and should not be reflected in the estimate of the grant-date fair value of the award. The guidance is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2015. The guidance can be applied prospectively for all awards granted or modified after the effective date or retrospectively to all awards with performance targets outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The adoption of the new requirements didwill not have a material impact onto our consolidated financial statementscondition, results of operations or disclosures.

In August 2014, the FASB issuedcash flows although our disclosures will be expanded.  We expect to adopt ASU No. 2014-15, “Presentation2014-09 under the modified retrospective method.  Given the nature of Financial Statements – Going Concern”. This ASU codifies management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concernour business and to provide related footnote disclosures. The guidance is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter, and early adoption is permitted. Wethat our sales generally occur at the counter or by shipment through common carrier at observable transaction prices with little, if any, variable consideration factors, we do not expect that our adoption will have a material impact on our consolidated financial statements or disclosures.

In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items”. This ASU simplifies income statement classification by removing the concept of extraordinary items from U.S. GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and early adoption is permitted. The adoption of the new requirements did not have a material impact on our consolidated financial statements or disclosures.

In July 2015, the FASB issued ASU 2015-11, “Inventory – Simplifying the Measurement of Inventory”, which requires entities to measure most inventory “at the lower of cost and net realizable value (“NRV”), thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new guidance eliminates the need to determine replacement cost and evaluate whether it is above the ceiling (NRV) or below the floor (NRV less a normal profit margin). The guidance defines NRV as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation”. The guidance is effective for annual and interim periods beginning after December 15, 2016. Early application is permitted. We do not expect that the adoption of this guidance will have a significant impact on our consolidated financial statements or disclosures.

In November 2015, the FASB issued ASU 2015-17, which requires all deferred tax assets and liabilitiesthere to be classified as non-current onsignificant changes to the balance sheet insteadamount and timing of separating deferred taxes into currentrevenue recognition.  Finally, while we offer an unconditional right of return to our customers, this has historically been immaterial to our financial condition, results of operations and non-current amounts. The guidance is effective for annual and interim periods beginning after December 15, 2016, and may be adopted on either a prospective or retrospective basis. We do not expect thatcash flows (annual gross product returns historically have represent less than 0.5% of our adoption will have a material impact on our consolidated financial statements or disclosures.net sales over the last three years).

In February 2016, the FASB issued ASU 2016-02, “Leases”, a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right of use asset and a lease liability for leases with a duration greater than one year.  The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted.  We have not completed our review of the new guidance; however, we anticipate that upon adoption of the standard, using a modified retrospective approach, we will recognize additional assets and corresponding liabilities related to leases on our consolidated balance sheet.

2.NOTES PAYABLE AND LONG-TERM DEBT
2.  NOTES PAYABLE AND LONG-TERM DEBT

On September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF, NA dbad/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 25, 2016, this line of credit was amended to extend the maturity from September 18, 2017 to September 18, 2018.  The Business Loan Agreement contains covenants that we will maintain a funded debt to EBITDA ratio of no greater than 1.5 to 1, and that we will maintain a Fixed Charge Coverage Ratio greater than or equal to 1.2 to 1.  Both ratios are calculated quarterly and are based on a trailing four quarter basis.

Also on September 18, 2015, we executed a Promissory Note with BOKF, which provides us with a line of credit facility of up to $10,000,000 for the purpose of purchasing shares of our common stock.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 purchase of shares of our common stock through the earlier of August 25, 2017 or the date on which the entire amount is drawn.  During this time period, we willare 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. We are currently working to amend this Promissory Note to extend the drawdown period and conversion date from August 25, 2017 to August 25, 2018 to align with our stock buyback program.  This Promissory Note is secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas.   DuringThere were no amounts drawn on this line during the ninesix months ended SeptemberJune 30, 2017.  For the six months ended June 30, 2016, we drew approximately $3.7 million on this line of credit which was used to purchase approximately 520,500 shares of our common stock.  At SeptemberJune 30, 2016,2017, 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 25, 2016, this line of credit was amended to extend the maturity from September 18, 2017 to September 18, 2018.  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 that we will maintain 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 six month periods ended June 30, 2017 and 2016, there were no amounts drawn on this line.

Amounts drawn under either Promissory Notefacility accrue interest at the London interbank Eurodollar market rate for U.S. dollars (commonly known as “LIBOR”) plus 1.85% (2.382%(2.860% and 2.263%2.557% at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively).

On July 31, 2007, we entered into a Credit Agreement and Line of Credit Note with JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with a credit facility of up to $5,500,000 to facilitate our purchase of real estate consisting of a 191,000 square foot building situated on 30 acres of land located at 1900 SE Loop 820 in Fort Worth, Texas.  Proceeds in the amount of $4,050,000 were used to fund the purchase of the property that is our corporate headquarters.  On April 30, 2008, the principal balance was rolled into a 10-year term note with an interest rate of 7.10% per annum.  We paid this note in full in September 2015 and as a result of the early payoff, we incurred a prepayment penalty in the amount of $200,000 which was included in interest expense in the third quarter of 2015.

On July 12, 2012, we executed a Line of Credit Note with JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with a revolving credit facility of up to $4 million, which was subsequently increased to $6 million.  The note expired on September 30, 2015.  There was no balance owed on the line of credit at the expiration date.

The amount outstanding under the above agreements consisted of the following:

  
6/30/2017
  
12/31/2016
 
Line of Credit, as amended, in the maximum principal amount of $15,000,000 with features as more fully described above –matures September 18, 2021 $7,371,730  $7,371,730 
Line of Credit, as amended, in the maximum principal amount of $6,000,000 with revolving features as more fully described above – matures September 18, 2018  
-
   
-
 
  $7,371,730  $7,371,730 
Less current maturities  1,535,778   614,311 
  $5,835,952  $6,757,419 
 
 September 30, 2016
 
December 31, 2015
Business Loan Agreement with BOKF, NA – 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, 2021
 
$7,371,729
 
 
$3,711,225
    
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, 2018
 
-
 
 
-
 $7,371,729 $3,711,225
Less current maturities153,578 231,952
 $7,218,151 $3,479,273
3.  CAPITAL LEASE OBLIGATIONS

We lease certain telecommunication equipment under a capital lease agreement.  The assetsasset subject to the agreement totaled $227,783, of which $177,043$217,114 and $22,152 are$210,904 is included in Property and Equipment at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively, and $50,176$10,669 and $205,631$16,879 is included in Prepaid Equipmentexpenses (not placed in service) as of SeptemberJune 30, 20162017 and December 31, 2015.2016, respectively.  Accumulated depreciation on the assets placed in service was $22,130approximately $33,300 and $264$21,400 at SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.  Amortization of the capitalized cost is charged to depreciation expense.

The amounts outstanding underfinal installment of our capital lease obligations, consisteddue at the end of the following:2017, is equal to $72,686 and is included in current liabilities as of June 30, 2017.

 
September 30, 2016
December 31, 2015
Capital Lease secured by certain telecommunication equipment – total annual principal payments of $72,686, 1.8% interest, maturing January 2018
 
$149,250
 
$156,271
Less amount representing interest3,8774,189
Total obligation under capital lease145,373152,082
Less current maturities72,68672,686
  $72,687 $79,396

8
4. STOCK-BASED COMPENSATION
We have one stock option plan which permitsthat 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.  Under this plan, no options were awarded to directors during the ninesix months ended SeptemberJune 30, 2017 or 2016 and 2015 and therefore, no share based compensation expense was recorded for those periods.
the six months ended June 30, 2017 or 2016.  During the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, the stock option activity under ourthis now expired stock option plans was as follows:
 
 
Weighted Average Exercise Price
 
# of shares
Weighted Average Remaining
Contractual Term (in years)
 
Aggregate Intrinsic Value
Outstanding, January 1, 2016$5.1768,400  
Granted--  
Cancelled(5.30)(12,000)  
Exercised--  
Outstanding, September 30, 2016$6.2756,4004.47$70,545
Exercisable, September 30, 2016$6.2756,4004.47$70,545
     
Outstanding, January 1, 2015$5.1672,400  
Granted--  
Cancelled(4.96)(2,000)  
Exercised(4.96)(2,000)  
Outstanding, September 30, 2015$5.1768,4005.70$83,933
Exercisable, September 30, 2015$5.1768,4005.70$83,933

Other information pertaining to option activity during the nine-month periods ended September 30, 2016 and 2015 are as follows:
September 30, 2016
September 30, 2015
Weighted average grant-date fair value of stock options grantedN/AN/A
Total fair value of stock options vestedN/AN/A
Total intrinsic value of stock options exercisedN/A$2,953

There was no unrecognized compensation cost pertaining to stock option grants as of September 30, 2016 and 2015.
  
Weighted Average Exercise
Price
  
#
of
shares
  Weighted Average Remaining Contractual Term (in years)  
Aggregate Intrinsic Value
 
Outstanding, January 1, 2017 $5.14   56,400       
Granted  -   -       
Cancelled $5.14   (12,000)      
Exercised $5.14   (44,400)  3.99  $155,606 
Outstanding, June 30, 2017 $-   -   -  $- 
Exercisable, June 30, 2017 $-   -   -  $- 
                 
Outstanding, January 1, 2016 $5.17   68,400         
Granted  -   -         
Cancelled  -   -         
Exercised  -   -         
Outstanding, June 30, 2016 $5.17   68,400   4.99  $83,933 
Exercisable, June 30, 2016 $5.17   68,400   4.99  $83,933 

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.

In February 2015,2017, our Chief Executive Officer, Chief Financial Officer and Senior Vice President were awarded restricted stock grants consisting of 9,343 shares each. In addition, four of ourfive independent directors were awarded restricted stock grants consisting of 1,6131,801 shares each. The grants will vest in equal annual amounts over a four-year period.  The fair value of non-vested restricted common stock awards is the market value of our common stock on the date of grant.  Compensation costs for these awards, net of forfeitures, will be recognized on a straight-line basis over the four year vesting period.

In March 2016, our Chief Executive Officer and President were awarded restricted stock grants consisting of 11,765 shares each. In addition,each, and our five independent directors were awarded restricted stock grants consisting of 2,031 shares each. TheAll of these grants will vest in equal annual amounts over a four-year period.  The fair value of non-vestedthese restricted common stock awardsgrants is based on the market value of our common stock on the date of grant.  Compensation costs for these awards will beis recognized on a straight-line basis over the four yearfour-year vesting period.

On June 6, 2017, vesting for certain restricted stock grants to three of our independent directors whose Board service had just completed were accelerated which resulted in $104,000 of compensation expense that was recognized in the three and six months ended June 30, 2017.

A summary of the activity for non-vested restricted common stock awards as of SeptemberJune 30, 20162017 and 20152016 is presented below:
 
Shares
  
Award
Fair Value
 
Balance, January 1, 2017  62,046  $8.24 
Granted  9,005   8.05 
Forfeited  (5,403)  8.05 
Vested  (28,847)  7.84 
Unvested Balance, June 30, 2017  36,801  $7.93 
 
Shares
Award
Fair Value
        
Balance, January 1, 201660,433$8.97  60,433  $8.97 
Granted33,685$7.14  33,685   7.14 
Forfeited(8,187)8.97  (8,187)  8.97 
Vested(20,784)$8.97  (20,784)  8.97 
Unvested Balance, September 30, 201665,147$8.03
  
Balance, January 1, 201534,601$8.96
Granted34,484$8.99
Forfeited--
Vested(8,652)$8.96
Unvested Balance, September 30, 201560,433$8.97
Unvested Balance, June 30, 2016  65,147  $8.03 

TotalAs of June 30, 2017, unrecognized compensation expense for thecost related to non-vested restricted stock awards aswas $241,242 which we expect will be recognized in each of September 30, 2016 and 2015 totals $417,326 and, $445,650, respectively.  As of September 30, 2016, compensation expense is expected to be recognizedthe following years as follows:

2016 Award2015 Award2014 AwardTotal
2016$15,032$14,126$14,127$43,285
201760,12856,50256,506173,136 $66,928 
201860,12856,5027,063123,693  100,127 
201960,1287,063-67,191  58,126 
202010,021-10,021  14,853 
$205,437$134,193$77,696$417,326
2021  1,208 

5. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (“EPS”): for the three and six months ended June 30:

Three Months Ended Nine Months Ended Three Months Ended  Six Months Ended 
September 30, September 30, June 30,  June 30, 
 2016 2015 2016 2015 2017  2016  2017  2016 
Numerator:        
Net income $1,027,732  $1,820,915  $2,258,997  $3,341,912 
Numerator for basic and diluted earnings per share  1,027,732   1,820,915   2,258,997   3,341,912 
Net income$1,000,350 $1,111,344 $4,342,262 $4,063,647                
Numerator for basic and diluted earnings per share1,000,350 1,111,344 4,342,262 4,063,647
Denominator:        
Weighted-average shares outstanding-basic9,188,483 10,175,650 9,341,364 10,199,841
Denominator for basic EPS: weighted-average shares  9,225,960   9,209,446   9,212,846   9,418,645 
                        
Effect of dilutive securities:Effect of dilutive securities:                        
Stock options16,933 23,442 17,279 27,036
Stock options  -   18,495   9,810   18,975 
Restricted stock Restricted stock 966 - 762 -  3,169   -   2,818   - 
Dilutive potential common sharesDilutive potential common shares 17,899 23,442 18,041 27,036  3,169   18,495   12,628   18,975 
Denominator for diluted EPS-weighted-average shares  9,229,129   9,227,941   9,225,474   9,437,620 
Denominator for diluted earnings per share-
weighted-average shares
 
9,206,382
 
 
10,199,092
 
 
9,359,405
 
 
10,226,877
                
        
Basic earnings per share$0.11 $0.11 $0.46 $0.40
Diluted earnings per share$0.11 $0.11 $0.46 $0.40
Basic earnings per share $0.11  $0.19  $0.24  $0.35 
Diluted earnings per share $0.11  $0.19  $0.24  $0.35 

The net effect of assuming the exercise of all potentially dilutive common share equivalents, including stock options to purchase common stock at exercise prices less than the average market prices and restricted stock awards of an aggregate of 121,56236,801 and 130,833133,562 shares of common stock have been included in the computations of diluted EPS for the quarters ended SeptemberJune 30, 2017 and 2016, and 2015, respectively.

6. COMMITMENTS AND CONTINGENCIES

Legal Proceedings.  We are periodically involved in 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 andor operating results.  Legal costs associated with the resolution of claims, lawsuits and other contingencies are expensed as incurred.

7. SEGMENT INFORMATION

We identifyEffective January 1, 2017, we updated our reporting segments based onto better reflect how management analyzes the activities of three distinct operations:business and allocates resources, as follows:

a.  Prior Reporting StructureNew Reporting Structure
1. Wholesale Leathercraft, which consists of a – chain of wholesale stores operating under the name, The Leather Factory,, located in North America;America
1. North America – chain of stores located in North America (combined prior Wholesale and Retail)

b.  
2. Retail Leathercraft, which consists of a – chain of retail stores operating under the name, Tandy Leather Company,, located in North America; andAmerica

c.  
2. International Leathercraft, which sells to both wholesale and retail customers.  We have – no change
3. International – four stores, operating2 located in this segment:  oneUK, 1 in Northampton, United Kingdom; oneSpain and 1 in Manchester, United Kingdom (which opened in October 2015); one in Sydney, Australia; and one in Jerez, Spain.  These stores carry the same products as our North American stores.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.  The 2016 segment information has been restated to conform to the current segment structure.
  North America  International  Total 
For the quarter ended June 30, 2017         
Net sales $18,427,425  $853,345  $19,280,770 
Gross profit  12,449,202   446,332   12,895,534 
Operating income (loss)  1,814,887   (159,450)  1,655,437 
Interest (expense)  (53,680)  -   (53,680)
Other income (expense), net  15,195   1,817   17,012 
Income (loss) before income taxes  1,776,402   (157,633)  1,618,769 
             
     Depreciation and amortization  448,788   22,502   471,290 
     Fixed asset additions  387,054   18,095   405,149 
     Total assets $67,412,189  $4,831,270  $72,243,459 
             
For the quarter ended June 30, 2016            
Net sales $18,558,938  $963,967  $19,522,905 
Gross profit  12,155,311   740,479   12,895,790 
Operating income  2,714,312   124,579   2,838,891 
Interest (expense)  (42,027)  -   (42,027)
Other income (expense), net  8,986   14,448   23,434 
Income before income taxes  2,681,271   139,027   2,820,298 
             
     Depreciation and amortization  394,943   22,622   417,565 
     Fixed asset additions  242,235   48,840   291,075 
     Total assets $61,820,547  $4,797,768  $66,618,315 

 Wholesale LeathercraftRetail LeathercraftInt’l Leathercraft Total
For the quarter ended September 30, 2016    
Net sales$5,625,427$12,119,703$883,232$18,628,362
Gross profit3,798,5697,325,700520,60211,644,871
Operating earnings (loss)468,5891,120,482(49,012)1,540,059
Interest (expense)(43,493)--(43,493)
Other income (expense), net7,052-(3,482)3,570
Income (loss) before income taxes432,1481,120,482(52,494)1,500,136
     
     Depreciation and amortization245,381173,71022,194441,285
     Fixed asset additions179,469305,8782,077487,424
     Total assets$49,897,968$16,062,997$3,837,798$69,798,763
     
For the quarter ended September 30, 2015    
Net sales$6,114,793$12,328,599$912,545$19,355,937
Gross profit4,180,1817,118,111534,40511,832,697
Operating earnings682,4611,122,22255,0681,859,751
Interest expense(228,235)--(228,235)
Other income (expense), net9,408-28,91238,320
Income before income taxes463,6341,122,22283,9801,669,836
     
     
     Depreciation and amortization200,147141,58211,931353,660
     Fixed asset additions122,549124,5023,816250,867
     Total assets$40,209,669$18,113,696$4,277,115$62,600,480

Wholesale LeathercraftRetail LeathercraftInt’l LeathercraftTotal North America  International  Total 
For the nine months ended September 30, 2016  
For the six months ended June 30, 2017         
Net sales$18,187,330$37,856,229$2,779,935$58,823,494 $37,659,139  $1,771,476  $39,430,615 
Gross profit12,977,73722,386,6521,829,01837,193,407  24,202,159   979,420   25,181,579 
Operating earnings3,143,1513,501,44197,1486,741,740
Operating income (loss)  3,626,450   (233,522)  3,392,928 
Interest (expense)  (90,024)  -   (90,024)
Other income (expense), net  32,849   (13,186)  19,663 
Income (loss) before income taxes  3,569,275   (246,708)  3,322,567 
            
Depreciation and amortization  885,069   44,339   929,408 
Fixed asset additions  984,880   20,026   1,004,906 
Total assets $67,412,189  $4,831,270  $72,243,459 
            
For the six months ended June 30, 2016            
Net sales $38,298,429  $1,896,703  $40,195,132 
Gross profit  24,240,120   1,308,416   25,548,536 
Operating income  5,055,521   146,160   5,201,681 
Interest (expense)(108,949)-(108,949)  (65,456)  -   (65,456)
Other income (expense), net21,784-5,18126,965  14,732   8,663   23,395 
Income before income taxes3,055,9863,501,441102,3296,659,756  5,004,797   154,823   5,159,620 
              
Depreciation and amortization709,370477,62086,0881,273,078  788,535   43,258   831,793 
Fixed asset additions764,460565,98654,9851,385,431  845,099   52,908   898,007 
Total assets$49,897,968$16,062,997$3,837,798$69,798,763 $61,820,547  $4,797,768  $66,618,315 
  
For the nine months ended September 30, 2015  
Net sales$19,234,375$37,970,423$2,713,431$59,918,229
Gross profit13,076,72322,512,7361,640,54737,230,006
Operating earnings2,602,8683,862,343117,2636,582,474
Interest expense(307,160)-(307,160)
Other income (expense), net46,570-21,50068,070
Income before income taxes2,342,2783,862,343138,7636,343,384
  
Depreciation and amortization714,401412,17936,5361,163,116
Fixed asset additions706,995608,81723,2861,339,098
Total assets$40,209,669$18,113,696$4,277,115$62,600,480

Net sales for geographic areas were as follows:

Three months ended September 30,20162015
Three months ended June 30, 2017  2016 
United States$15,955,084$16,558,873 $16,546,075  $16,610,634 
Canada1,597,6521,693,958  1,646,224   1,746,547 
All other countries1,075,6261,103,106  1,088,471   1,165,724 
$18,628,362$19,355,937 $19,280,770  $19,522,905 
         
Nine months ended September 30,20162015
Six months ended June 30,  2017   2016 
United States$50,293,346$51,144,236 $33,828,738  $34,338,263 
Canada5,085,9555,432,724  3,419,734   3,488,303 
All other countries3,444,1933,341,269  2,182,143   2,368,566 
$58,823,494$59,918,229 $39,430,615  $40,195,132 

Geographic sales information is based on the location of the customer.  No single foreign country, except for Canada, accounted for any material amount of our consolidated net sales for the three and nine-monthsix-month periods ended SeptemberJune 30, 20162017 and 2015.2016.  We do not have any significant long-lived assets outside of the United States.


Item 2.Management’s Discussion and Analysis of Financial Conditionand Results of Operations.Operations.

Our Business

We are the world’s largest specialty retailer and wholesale distributor of leather and leathercraft related items.  We marketsell our products to our growing list of customers through company-owned retailstores and wholesale stores.through orders generated from our website, www.tandyleather.com.  We are a Delaware corporation, and our common stock trades on the NASDAQ Global Market under the symbol “TLF.”  We operatehave built our business by offering our customers quality products 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 new locations and by increasing sales in our existing locations.  We are also focusing on improving our customer experience, increasing our brand awareness, and strengthening our store performance.   In early 2017, we announced a district restructuring with our store footprint divided into fifteen districts.   Each district contains six to ten stores, reporting to a district manager who is tasked with growing traffic and sales, as well as training the next generation of store managers to better serve our customers and succeed in today’s retail environment.  As of August 1, 2017, we have placed twelve of our fifteen district managers.

We operate in two segments:  North America and International.  Prior to January 1, 2017, we operated in three segments:  Wholesale, Leathercraft, which operates stores inRetail and International.  To better reflect how management analyzes the business and allocates resources, we combined Wholesale and Retail into North America undereffective January 1, 2017, while International remains the trade name, The Leather Factory,Retail Leathercraft, which operates stores insame. All prior year data discussed throughout this Form 10Q has been restated to conform to the new reporting segment structure.  There is no change to our consolidated financial position or results.

As of August 1, 2017, our North America under the trade name, Tandy Leather Company, and International Leathercraft, which operates stores outside of North America under the trade name, Tandy Leather Factory.  See Note 7 to the Consolidated Financial Statements for additional information concerning our segments, as well as our foreign operations.

Our Wholesale Leathercraft segment operates 27115 company-owned wholesale stores located in 1842 U.S. states and three Canadian provinces.  These stores are engaged primarily in the distribution of leather and related items, including leatherworking tools, buckles and belt adornments, leather dyes and finishes, saddle and tack hardware, and do-it-yourself kits, to retailers, manufacturers, and end users.

Our Retail Leathercraft segment operates company-owned Tandy Leather Company stores in 38 states and six7 Canadian provinces.  Tandy Leather Company, one of the best-known suppliers of leather and related supplies used in theFactory has long been known for its specialty retail leathercraft industry, has been a primary leathercraft resource for decades.  Tandy Leather Company’s products includestore chain, offering quality tools, leather, accessories, kits and teaching materials. In 2002,We expect to grow the number of stores to approximately 150 in the future.  Our pace of store openings has recently picked up due to a change in strategy with a focus on growth.  To date in 2017, we began expanding our industry presence by opening stores.  As of November 11, 2016, we were operating 82 Tandy Leather Company stores located throughout North America with plans to open several morehave reopened one store in Harrisburg, PA and opened new stores in Allen, TX; Miami, FL; and McAllen, TX.  We expect more North America new store openings in the near term.future.

Our International Leathercraft segment operates 4four company-owned stores all located outsidein each of North America.  These stores operate as combination retail / wholesale stores and consist of one store in Northampton, United Kingdom; one store in Manchester, United Kingdom; one store in Sydney, Australia,Australia; and one store in Jerez, Spain.  We expect to continue opening international stores in the future, but do not intend to open any new International stores in 2016 or 2017.

Critical Accounting Policies

A description of our critical accounting policies appears in Item 7 “Management's Discussions and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2016.

Forward-Looking Statements

Certain statements contained in this report and other materials we file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made or to be made by us, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements generally are accompanied by words such as “may,” “will,” “could,” “should,” “anticipate,” “believe,” “budgeted,” “expect,” “intend,” “plan,” “project,” “potential,” “estimate,” “continue,” or “future” variations thereof or other similar statements. There are certain important risks that could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of the important risks, including, without limitation, those described below, could cause actual results to differ materially from those suggested by the forward-looking statements.  Please refer also to our Annual Report on Form 10-K for fiscal year ended December 31, 20152016 for additional information concerning these and other uncertainties that could negatively impact the Company. Potential factors, which could cause our actual results of operations to differ materially from those in the forward-looking statements include, among others:

ØGeneral economic conditions in the United States and abroad;
ØIncreased pressure on margins;
ØIncreases in the cost of the products we sell or a reduction in availability of those products;
ØFailure to open additional storesChallenges in North America;implementing our planned expansion and district restructuring program;
ØFailure to hire and train qualified personnel to operate new and existing stores;
ØFailure to protect our trademarks and other proprietary intellectual property rights;
ØNegative impact of foreign currency fluctuations on our financial condition and results of operations;
ØInformation technology system failures or network disruptions;
ØSignificant data security or privacy breach of our information systems;
ØLoss or prolonged disruption in the operation of our centralized distribution center; and
ØDamage to our brand image.brand.

We assume no obligation to update or otherwise revise our forward-looking statements even if experience or future changes make it clear that any projected results, express or implied, will not be realized.

Results of Operations

Three Months Ended SeptemberJune 30, 20162017 and 20152016

The following tables present selected financial data offor each of our three segments:

 Quarter Ended September 30, 2016 Quarter Ended September 30, 2015
 Sales Income from Operations Sales Income from Operations
Wholesale Leathercraft$5,625,427 $468,589 $6,114,793 $682,461
Retail Leathercraft12,119,703 1,120,482 12,328,599 1,122,222
Int’l Leathercraft883,232 (49,012) 912,545 55,068
Total Operations$18,628,362 $1,540,059 $19,355,937 $1,859,751
  Quarter Ended June 30, 2017  Quarter Ended June 30, 2016 
  
Net Sales
  Income from Operations  
Net Sales
  Income from Operations 
North America $18,427,425  $1,814,887  $18,558,938  $2,714,312 
International  853,345   (159,450)  963,967   124,579 
Total $19,280,770  $1,655,437  $19,522,905  $2,838,891 

Consolidated net sales for the quarter ended SeptemberJune 30, 20162017 decreased approximately $728,000,$242,135, or 3.8%1.2%, compared to the same period in 2015.  Wholesale Leathercraft, Retail Leathercraft2016.  North America and International Leathercraft reported sales decreasesdeclines of 8%, 2%,0.7% and 3%11.5%, respectively.   Income from operations on a consolidated basis for the quarter ended SeptemberJune 30, 20162017 decreased 17%, or approximately $320,000,$1,183,454, from the thirdsecond quarter of 20152016 primarily due to the decrease in sales and gross profit and an increase in operating expenses.expenses, primarily related to the six new stores opened since October 2016, as well as investments in our district manager program.

The following table shows in comparative form our consolidated net income for the third quarter:second quarter of 2017 and 2016:
  
2017
  
2016
  
% change
 
Net income $1,027,732  $1,820,915   (43.6%)

Additional information appears below for each segment (see also the information contained in Note 7 to the consolidated financial statements included in Item 1 of this Report).

 2016 2015% change
Net income$1,000,350 $1,111,344(10)%
North America

Our WholesaleNorth America consisted of 115 stores at June 30, 2017 and Retail Leathercraft segments were profitable in109 stores at June 30, 2016.  Six new stores opened since the thirdbeginning of the second quarter of 2016, offsetting the loss from our International Leathercraft segment.    Additional information follows forwith one each segment.


Wholesale Leathercraft

in Philadelphia, PA (October 2016); Lyndhurst, NJ (November 2016); Johnston, RI (December 2016); Allen, TX (April 2017); Miami, FL (May 2017); and McAllen, TX (May 2017).  Our Wholesale Leathercraft operation consists of 27 wholesale stores (one store closed in April 2016). Net sales decreased 8%, or approximately $489,000, for the third quarter of 2016 compared to the third quarter of 2015 as follows:
 # StoresQtr Ended 09/30/16 # StoresQtr Ended 09/30/15 $ Change% Change
Same store sales27$5,625,427 27$5,958,309 ($332,882)(5.6)%
Closed store sales-- 1156,484 (156,484)(100)%
Total sales $5,625,427  $6,114,793 $(489,366)(8.0)%

The following table presents the combined sales mix by customer categories:

 Quarter ended
Customer Group09/30/16 09/30/15
  RETAIL (end users, consumers, individuals)
45% 46%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
3% 3%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
46% 44%
  MANUFACTURERS6% 7%
 100% 100%

Sales were down across all customer groups.  Income from operations for Wholesale Leathercraft during the current quarter decreased by 31.3% or $214,000 from the comparative 2015 quarter.  A decrease in gross profit of $382,000, offset by a decrease in operating expenses of $168,000, contributed to the decrease in income from operations.  Gross profit as a percentage of sales decreased from 68.4% in the third quarter of 2015 to 67.5% in the third quarter of 2016, due to customer and product mix.  Operating expenses decreased 4.8% compared to last year’s comparable period.  The most significant expense decreases occurred in advertising, other outside services, repairs and maintenance, and store relocation expenses.

Retail Leathercraft

Our Retail Leathercraft operation consisted of 81 and 82 stores at September 30, 2016 and 2015, respectively.  Net sales decreased 1.7% for the third quarter of 2016 over the same quarter last year.  In March 2016, one newHarrisburg, PA store was opened in Nyack, NY and one store wastemporarily closed in Tucson, AZ.  Infrom April 2016 one store was closed in Allentown, PA.to December 2016.  A store is categorized as “new” until it is operating for the full comparable period in the prior year.

 # StoresQtr Ended 09/30/16 # StoresQtr Ended 09/30/15 $ Change% Change
Same store sales80$11,836,141 80$11,975,960 ($139,819)(1.2%)
New store sales1283,562 -- 283,562N/A
Closed store sales2- 2352,639 (352,639)(100%)
Total sales $12,119,703  $12,328,599 ($208,896)(1.7%)

  # Stores  
Qtr Ended
06/30/17
  
#
Stores
  
Qtr Ended
06/30/16
  
$
Change
  % Change 
Same stores  108  $17,861,074   108  $18,485,428  $ (624,354)  (3.4%)
New stores  6   447,059       -   447,059   N/A 
Temp closed store  1   119,292   1   73,510   45,782   62.3%
Total net sales  115  $18,427,425   109  $18,558,938  $ (131,513)  (0.7)%
The following table presents our sales mix by customer categories for our Retail Leathercraft operation:the quarters ended June 30:

Quarter ended
Customer Group09/30/16 09/30/152017 2016
RETAIL (end users, consumers, individuals)
56% 56%56% 53%
INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
3% 3%4% 4%
WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
38% 39%37% 39%
MANUFACTURERS3% 2%3% 4%
100% 100%100% 100%

SalesNet sales decreased 0.7%, or $132,000, for the second quarter of 2017 compared to the second quarter of 2016, primarily due to unfavorable currency exchange fluctuations in the Canadian dollar and soft sales in April 2017.  By customer group, sales to our institution and manufacturer customer groupsretail customers increased overin the thirdsecond quarter of 2015,2017 compared to the second quarter of 2016, while sales to our retailwholesale and wholesale customer group declined relative to the same period last year.  manufacturer groups declined.

Income from operations decreased approximately $1,700, or 0.2%, infor North America during the quarter ended SeptemberJune 30, 20162017 decreased by $899,000 from the comparative 20152016 quarter due to increase in operating expenses of $1,193,000 offset by an increase in gross profit of $294,000. Gross profit as a percentage of sales improved from 65.5% in the second quarter of 2016 to 67.6% in the second quarter of 2017, due to an increase in operatingsales of higher margin products compared to last year’s second quarter and customer mix with more retail than business sales.  Operating expenses offset mostly by anincreased 12.6% compared to last year’s comparable period.  The most significant expense increases occurred in personnel, occupancy and selling costs related to the six new stores that have opened since October 2016 as well as the increase in gross profit.  Our gross profit increased by approximately $208,000 fromour store manager salaries and the comparable 2015 quarter due to higher portioninvestment in our district manager program.  We believe these investments in personnel and new stores are laying the foundation for future profitable growth.

13
International Leathercraft

International Leathercraft consists of all stores located outside of North America.  As of SeptemberJune 30, 2017 and 2016, the segment contained four stores, two of which are located in United Kingdom (one of which opened in October 2015) and one each in Australia and Spain.Spain (there were no new or closed stores). This segment’s sales totaled $883,000approximately $853,000 for the thirdsecond quarter of 2017, compared to approximately $964,000 in the second quarter of 2016, compared to $913,000 in the third quarter of 2015, a decrease of 3.2%.$111,000 or 11.5%, primarily due to lower average tickets and unfavorable foreign currency exchange rates in the UK and to a lesser extent, Spain.  These unfavorable exchange rates also negatively impacted our gross profit margin which declined from 77% in 2016 to 52% in 2017.  The impact of changes in foreign currency exchange rates in the UK and Spain makes our products more expensive and compresses gross profit.  International’s operating expenses of $606,000 for the second quarter of 2017 decreased by $10,000 compared to second quarter of 2016, primarily due to lower accrued bonus as a result of the unfavorable operating income performance quarter over quarter. Overall, advertising and marketing expenses are this segment’s largest expense, followed by employee compensation, rent, travel, and shipping costs to customers.

 # StoresQtr Ended 09/30/16 # StoresQtr Ended 09/30/15 $ Change% Change
Same store sales3$749,161 3$912,545 ($163,384)(17.9%)
New store sales1134,071 -- 134,071N/A
Total sales $883,232  $912,545 ($29,313)(3.2)%
Other Expenses

We experienced a $49,012 loss from operations forpaid $54,000 in interest on our bank debt in the thirdsecond quarter of 2017, compared to $42,000 in the second quarter of 2016 due to a slightly higher interest rate and higher weighted average outstanding balance in 2017 compared to 2016.  We recorded income from operations of $55,068$17,000 for currency fluctuations in the second quarter of 2017, compared to $23,000 in the second quarter of 2016.

Six Months Ended June 30, 2017 and 2016

The following tables present selected financial data for each of our segments:

  Six Months Ended June 30, 2017  Six Months Ended June 30, 2016 
  
Net Sales
  Income from Operations  
Net Sales
  Income from Operations 
North America $37,659,139  $3,626,450  $38,298,429  $5,055,521 
International  1,771,476   (233,522)  1,896,703   146,160 
Total $39,430,615  $3,392,928  $40,195,132  $5,201,681 

Consolidated net sales for the six months ended June 30, 2017 decreased $764,517, or 1.9%, compared to the same period in 20152016.  North America and International reported sales declines of 1.7% and 6.6%, respectively.  Income from operations on a consolidated basis for the six months ended June 30, 2017 decreased 35%, or $1,808,753, from the first half of 2016 primarily due to the decrease in sales and an increase in operating expenses, primarily related to seven new stores opened since the beginning of 2016, as well as investments in our district manager program.

The following table shows in comparative form our consolidated net income for the first half of 2017 and 2016:

  
2017
  
2016
  
% change
 
Net income $2,258,997  $3,341,912   (32.4%)

Additional information appears below for each segment (see also the information contained in Note 7 to the consolidated financial statements included in Item 1 of this Report).

North America

In addition to the six new stores mentioned previously, Nyack, NY opened in March 2016 and is considered a new store in the table below:

  
# Stores
  
Six Months Ended
06/30/17
  
#
Stores
  
Six Months Ended
06/30/16
  
$
Change
  
% Change
 
Same stores  107  $36,501,344   107  $37,401,837  $ (900,493)  (2.4%)
New stores  7   952,325   1   338,774   613,551   181.1%
Closed/temp closed stores  3   205,470   3   557,818   (352,348)  (63.2%)
Total net sales  115  $37,659,139   109  $38,298,429  $ (639,290)  (1.7)%

The following table presents our sales mix by customer categories for the six months ended June 30:

Customer Group
2017 2016
  RETAIL (end users, consumers, individuals)
58% 55%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
3% 3%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
36% 38%
  MANUFACTURERS3% 4%
 100% 100%

Net sales decreased 1.7%, or $639,000, for the first half of 2017 compared to the first half of 2016, primarily due to a soft start to the year and an overall lower average ticket as sales to our retail customers increased, while sales to our wholesale and manufacturer groups declined.   However, we have seen an uptick in the number of sales transactions in May and June, compared to the same periods in 2016.   We expect that this trend will continue into the second half of 2017 as our we roll out new products and our district managers continue to work with our store managers to develop local business and drive sales to our wholesale and manufacturer groups.

Income from operations for North America for the six months ended June 30, 2017 decreased $1,429,000 from the comparative 2016 period.  A decrease in gross profit of $38,000 and an increase in operating expenses.  Ourexpenses of $1,391,000 contributed to the decline in income from operations.  Gross profit as a percentage of sales increased from 63.3% in the first half of 2016 to 64.3% in the first half of 2017, due to an increase in sales of higher margin products compared to last year’s first half and customer mix.  Operating expenses increased 7.3% compared to last year’s comparable period.  The most significant expense increases occurred in personnel, occupancy and selling costs related to the seven new stores opened as well as the increase in our store manager salaries and the investment in our district manager program.  We believe these investments in personnel and new stores are laying the foundation for future profitable growth.

International Leathercraft

International’s sales totaled approximately $1,771,000 for the first half of 2017, compared to approximately $1,897,000 in the first half of 2016, a decrease of $125,000 or 6.6%, primarily due to lower average tickets and unfavorable foreign currency exchange rates in the UK and to a lesser extent, Spain.  These unfavorable exchange rates also negatively impacted our gross profit margin increased slightlywhich declined from 58.6% in 2015 to 58.9%69.0% in 2016 whileto 55.3% in 2017.   The impact of changes in foreign currency exchange rates in the UK and Spain makes our products more expensive and compresses gross profit.  International’s operating expenses increased by $90,000.$51,000 due to higher rent and advertising costs.  Operating expenses totaled $569,000approximately $1,213,000 in the third quarterfirst half of 2016,2017, up from $479,000approximately $1,162,000 in the third quarterfirst half of 2015, primarily due to the new store that opened in October 2015.  Advertising2016.  Overall, advertising and marketing expenses are this segment’s largest expense, followed by employee compensation, rent, travel, and shipping costs to customers.

Other Expenses

We paid approximately $43,000 in interest on our bank debt in the third quarter of 2016, compared to $228,000 in the same quarter of 2015.  The decrease is due to the 2015 period having a prepayment penalty of $200,000 paid in the third quarter of 2015, resulting from the early payoff of the debt with JPMorgan Chase Bank. We recorded a loss of approximately $3,600 for currency fluctuations in the third quarter of 2016.  Comparatively, in the third quarter of 2015, we recorded income of approximately $29,000 for currency fluctuations.


Nine Months Ended September 30, 2016 and 2015

The following table presents selected financial data of each of our three segments:

 Nine Months Ended September 30, 2016 Nine Months Ended September 30, 2015
 Sales Operating Income Sales Operating Income
Wholesale Leathercraft
$18,187,330
 $3,143,151 
$19,234,375
 $2,602,868
Retail Leathercraft37,856,229 3,501,441 37,970,423 3,862,343
Inter’l Leathercraft2,779,935 97,148 2,713,431 117,263
Total Operations$58,823,494 $6,741,740 $59,918,229 $6,582,474

Consolidated net sales for the nine months ended September 30, 2016 were down 1.8% compared to the same period in 2015, decreasing approximately $1,095,000.  The sales decline was primarily due to the Wholesale Leathercraft segment’s sales decrease of $1,047,000 and the Retail Leathercraft segment’s $114,000 sales decrease, offset by a sales increase of $66,000 in International Leathercraft.  Operating income on a consolidated basis for the nine months ended September 30, 2016 increased approximately $159,000, or 2%, compared to the first nine months of 2015.

The following table shows in comparative form our consolidated net income for the first three quarters:

 2016 2015% change
Net income$4,342,262 $4,063,6476.9%
Wholesale Leathercraft

Net sales decreased 5.4%, or approximately $1,047,000, for the first three quarters of 2016 as follows:
 # StoresNine Months Ended 09/30/16 # StoresNine Months Ended 09/30/15 $ Change% Change
Same store sales27$17,998,925 27$18,739,934 ($741,009)(4.0)%
Closed store sales1188,405 1494,441 (306,036)(61.9)%
Total sales $18,187,330  $19,234,375 ($1,047,045)(5.4)%
The following table presents the combined sales mix by customer categories:

 Nine Months Ended
Customer Group09/30/16 09/30/15
  RETAIL (end users, consumers, individuals)
46% 46%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
3% 3%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
44% 44%
  MANUFACTURERS7% 7%
 100% 100%

Operating income for Wholesale Leathercraft for the first three quarters of 2016 increased by approximately $540,000 from the comparative 2015 period, or 21%, due to an improvement in gross profit and a decrease operating expenses.  For the first nine months, gross profit margin improved from 68.0% in 2015 to 71.4% in 2016.  Further, operating expenses decreased approximately $639,000 for the first nine months of 2016, decreasing to 54.1% of sales compared to 54.5% of sales in the first nine months of 2015.  The most significant expense decrease occurred in advertising, store relocations, and other outside services.

Retail Leathercraft

Net sales were down 0.3% for the first nine months of 2016 over the same period last year:
 # StoresNine Months Ended 09/30/16 # StoresNine Months Ended 09/30/15 $ Change% Change
Same store sales80$36,864,480 80$36,934,411 ($  69,931)(0.2%)
New store sales1622,336 -- 622,336N/A
Closed store sales2369,413 21,036,012 (666,599)(64.3%)
Total sales $37,856,229  $37,970,423 ($114,194)(0.3%)

The following table presents sales mix by customer categories:

 Nine Months Ended
Customer Group09/30/16 09/30/15
  RETAIL (end users, consumers, individuals)
56% 56%
  INSTITUTION (prisons, prisoners, hospitals, schools, youth organizations, etc.)
3% 3%
  WHOLESALE (resellers & distributors, saddle & tack shops, authorized dealers, etc.)
38% 38%
  MANUFACTURERS3% 3%
 100% 100%

The retail stores averaged approximately $51,200 in sales per month in the first nine months of 2016 compared to $51,300 for the same period in 2015.

Operating income for the first nine months of 2016 decreased approximately $361,000 from the comparative 2015 period, decreasing as a percentage of sales from 10.2% in the first three quarters of 2015 to 9.3% in the first three quarters of 2016.  Gross margin decreased minimally from 59.3% to 59.1% due to customer and product mix.  The ratio of retail sales, which brings a higher margin, to non-retail sales, which brings a lower margin, can affect gross profit margin positively or negatively.  Similarly, the ratio of leather sales, which brings a lower margin, to non-leather sales, which brings a higher margin, can cause gross profit to rise or fall. Operating expenses as a percentage of sales were 49.9% for the first nine months of 2016, increasing from 49.1% for the first three quarters of 2015.

International Leathercraft

Net sales improved 2.5% for the first nine months of 2016 over the same period last year:

 # StoresNine Months Ended 09/30/16 # StoresNine Months Ended 09/30/15 $ Change% Change
Same store sales3$2,346,662 3$2,713,431 $(336,769)(13.5)%
New store sales1433,273 --     433,273N/A
Total sales $2,779,935  $2,713,431 $   66,5042.5%

Operating income for the first nine months of 2016 decreased approximately $20,000 from the comparative 2015 period due to higher operating expenses of $208,000, offset by an increase in gross profit of $188,000.  Gross profit margin as a percentage of sales increased from 60.5% in the first three quarters of 2015 to 65.8% in the first three quarters of 2016.  Operating expenses totaled approximately $1.7 million in the first nine months of 2016, compared to $1.5 million in the first nine months of 2015.  The increase in operating expenses primarily relates to the new store that opened in October 2015.
Other Expenses

We paid approximately $109,000$90,000 in interest on our bank debt in the first ninesix months of 2016,2017, compared to approximately $307,000$65,000 in the first ninesix months of 2015.  The decrease is due to the one-time prepayment penalty paid in 2015 when we paid off our debt with JPMorgan Chase Bank early.2016.  We recorded approximately $3,600$4,400 in interest income on our cash balances in the ninesix months ended SeptemberJune 30, 20162017 compared to approximately $2,900$3,100 in the ninesix months ended SeptemberJune 30, 2015.2016.  We recorded incomeexpense of $1,700$15,000 for currency fluctuations in the first three quartershalf of 2016.2017.  Comparatively, in the first three quartershalf of 2015,2016, we recorded income of approximately $34,000$5,400 for currency fluctuations.

Capital Resources, Liquidity and Financial Condition

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 $10,000,000 for the purpose of purchasing 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 purchase of shares of our common stock through the earlier of August 25, 2017 or the date on which the entire amount is drawn.  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. We are currently working to amend this Promissory Note to extend the drawdown period and conversion date from August 25, 2017 to August 25, 2018 to align with our stock buyback program.  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 the six months ended June 30, 2017.  For the six months ended June 30, 2016, we drew approximately $3.7 million on this line which was used to purchase approximately 520,500 shares of our common stock.  At June 30, 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 25, 2016, this line of credit was amended to extend the maturity from September 18, 2017 to September 18, 2018.  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 that we will maintain 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 six month periods ended June 30, 2017 and 2016, there were no amounts drawn on this line.

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% (2.860% and 2.557% at June 30, 2017 and December 31, 2016, respectively).

On our consolidated balance sheet, total assets increased from approximately $64.6$70.7 million at year-end 20152016 to approximately $69.8$72.2 million at SeptemberJune 30, 2016.2017.  Total stockholders’ equity increased from approximately $51.0$53.7 million at December 31, 20152016 to approximately $52.0$57.0 million at SeptemberJune 30, 2016, with the increase attributable2017, primarily due to net income earned in the first three quartershalf of 2016, partially offset by2017, the increase in treasury stock.exercise of stock options and impact of foreign currency translation.  Our current ratio increased from 5.76.5 at December 31, 20152016 to 6.07.2 at SeptemberJune 30, 20162017 due primarily to the reduction in accrued liabilities for bonuses paid in the first half of 2017 and an increase in cash and inventory from year-end 2015 and the reduction in current maturities of long-term debt.inventory.


As of SeptemberJune 30, 2016,2017, our investment in inventory increased by approximately $3.5$4.1 million from year-end 2015.2016, as we stocked up following the holiday sales and invest in our new stores and new products.  Inventory turnover reached an annualized rate of 2.2 times during the first three quartershalf of 2016, down2017, decreasing from 2.4 in2.3 times for the first three quartershalf of 2015.2016.  Inventory turnover was 2.5 times for all of 2015.2016.  We compute our inventory turns as sales divided by average inventory.

Trade accounts receivable was approximately $514,000 at September 30, 2016, down approximately $39,000 from approximately $553,000 at year-end 2015.  The average days to collect accounts for the first nine months of 2016 were 33 days, which is similar to that achieved in the first nine months of 2015.  We monitor our customer accounts closely in an effort to minimize the risk of uncollectible accounts.

Accounts payable was relatively flat atdecreased approximately $2.0$138,000 to $1.5 million at both SeptemberJune 30, 2017 compared to $1.6 million at year-end 2016 and December 31, 2015.due to timing of payments. Accrued expenses increaseddecreased from approximately $6.0$5.9 million at December 31, 20152016 to approximately $6.5$4.5 million at SeptemberJune 30, 2017.  The payment of the 2016 manager bonuses during the first half of 2017 primarily due to an increase in accrued payroll.accounted for the reduction.

During the first nine monthshalf of 2016,2017, cash flow provided byused in operating activities was approximately $1.9 million.  Net$1.2 million, composed of net income of approximately $4.3$2.3 million, plus $929,000 of depreciation and amortization, expenseplus $628,000 of approximately $1.3 million,foreign currency translation, offset by the increasechanges in working capital including purchases of inventory and payments of $3.5 million accounts for the operating cash provided during the first three quarters of 2016.2016 bonus.

By comparison, during the first nine monthshalf of 2015,2016, cash flow provided byused in operating activities was approximately $3.6 million.  Net$231,000, composed of net income of approximately $4.1$3.3 million, plus $832,000 of depreciation and amortization, expense of approximately $1.2 million, the increase in Accounts Payable and Accrued Expenses totaling $2.2 million, offset by the decrease in inventory of $2.2 million and $0.9 millionplus $256,000 of foreign currency translation, offset by the increase in inventory and decrease in accounts for the operating cash provided during the first three quarters of 2015.payable and accrued expenses totaling $4.4 million.

Cash flow used in investing activities totaled approximately $1.4 million$1,034,000 and $871,000 in the first nine monthshalf of 2017 and 2016, compared to $1.3 millionrespectively, 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 $223,000 of cash provided by financing activities in the first nine monthshalf of 2015.  Both periods’ capital expenditures are primarily for2017, related to proceeds from the purchaseexercise of store fixtures and computer equipment.

Cash flowstock options, compared to $22,000 used in financing activities totaled $22,000 in the first nine monthshalf of 2016.  In 2016, consisting ofwe purchased $3.7 million of treasury stock, purchases, funded primarily through drawdowns on our line of credit with BOKF. Cash flow used in financing activities totaled approximately $5.6 million in the first nine months of 2015, consisting of net debt repayments and the repurchase ofBOKF, as well as made a scheduled payment on our stock.capital lease obligation for $6,710.

We expect to fund our operating and liquidity needs as well as our store growth from a combination of current cash balances and internally generated funds.





Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

For disclosures about market risk affecting us, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for fiscal year ended December 31, 2015.2016.  We believe that our exposure to market risks has not changed significantly since December 31, 2015.  We expect that our exposure to foreign currency exchange risk will increase as our international presence increases.2016.

Item 4.  Controls and Procedures.Procedures.

Evaluation of Disclosure Controls and Procedures

Our management team, under the supervision and with the participation of our principal executive officer and our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the last day of the fiscal period covered by this report, SeptemberJune 30, 2016.2017. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of SeptemberJune 30, 2016,2017, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended SeptemberJune 30, 20162017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

14
PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.Proceedings.

The information contained in Note 6 to the consolidated financial statements included in Item 1 of this Report is hereby incorporated into this Item 1 by reference.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

PurchasesThere were no unregistered sales of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information about purchases we have made of our common stockequity securities during the quarter ended SeptemberJune 30, 2016:2017.   Further, there were no purchases of equity securities during the quarter ended June 30, 2017.

ISSUER PURCHASES OF EQUITY SECURITIES (1)
Period(a) Total Number of Shares  Purchased(b) Average Price Paid per Share(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d) Maximum Number of Shares that
May Yet Be Purchased Under the Plans or Programs
July 1 – July 31---1,150,793
August 1- August 31---1,150,793
September 1 – September 30---1,150,793
Total---1,150,793


(1)  Represents shares purchased through a stock repurchase program, announced on August 10, 2015, permitting us to repurchase up to 1.2 million shares of our common stock at prevailing market prices.  On June 7, 2016, this program was amended to increase the number of shares from 1.2 million to 2.2 million and to extend the termination date from August 9, 2016 to August 9, 2017.  Purchases under the program commenced on August 24, 2015 and will terminate on August 9, 2017.







Item 6. Exhibits.

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 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 (Commission File No. 001-12368) filed by Tandy Leather Factory, Inc (f/k/a The Leather Factory, Inc.) with the Securities and Exchange Commission on July 14, 2004 and incorporated by reference herein.
 
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 FactoryFactory’s Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013 and incorporated by reference herein.
 4.1
Rights Agreement, dated as of June 6, 20143, between Tandy Leather Factory, Inc. and Broadridge Corporate Issuer Solutions, inc., as Rights Agent (including the Certificate of Designations of Series A Junior Preferred STock attached thereto as Exhibit A, the form of Right Certificate attached thereto as Exhibit B and the Summary of Rights attached thereto as Exhibit C), filed as Exhibit 4.1 to Tandy Leather Factory Inc.'s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013 and incorporate by reference herein.
10.1
$6,000,000 Promissory Note, dated August 25, 2016, 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 September 21, 2016 and incorporated by reference herein.
10.2
$15,000,000 Promissory Note, dated August 25, 2016, 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 September 21, 2016 and incorporated by reference herein.
 
*31.1
13a-14(a) or 15d-14(a) Certification by Shannon L. Greene, Chief Executive Officer.
 
*31.2
13a-14(a) or 15d-14(a) Certification by ShannonTina L. Greene,Castillo, Chief Financial Officer and Treasurer.
 
*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.INS*101.INS
XBRL Instance Document.
 
*101.SCH
XBRL Taxonomy Extension Schema Document.
 
*101.CAL
XBRL Taxonomy Extension Calculation Document.
 
*101.DEF
XBRL Taxonomy Extension Definition Document.
 
*101.LAB
XBRL Taxonomy Extension Labels Document.
 
*101.PRE
XBRL Taxonomy Extension Presentation Document.
____________ 
*Filed herewith.
 















SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 TANDY LEATHER FACTORY, INC.
 (Registrant)
  
Date:  November 14, 2016August 3, 2017
By:  /s/ Shannon L. Greene
 Shannon L. Greene
 Chief Executive Officer
 
Date:  August 3, 2017
By:  /s/ Tina L. Castillo
Tina L. Castillo
Chief Financial Officer



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 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 by Tandy Leather Factory, Inc (f/k/a The Leather Factory, Inc.) with the Securities and Exchange Commission on July 14, 2004 and incorporated by reference herein.
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’s Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2013 and incorporated by reference herein.
*31.1
13a-14(a) or 15d-14(a) Certification by Shannon L. Greene, Chief Executive Officer.
*31.2
13a-14(a) or 15d-14(a) Certification by Tina L. Castillo, Chief Financial Officer and Treasurer (Chief Accounting Officer)Treasurer.
*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.INS
XBRL Instance Document.
*101.SCH
XBRL Taxonomy Extension Schema Document.
*101.CAL
XBRL Taxonomy Extension Calculation Document.
*101.DEF
XBRL Taxonomy Extension Definition Document.
*101.LAB
XBRL Taxonomy Extension Labels Document.
*101.PREXBRL Taxonomy Extension Presentation Document.
____________
*Filed herewith.

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