UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2020
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)
(817) 872-3200
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, par value $0.0024 | TLFA | N/A* |
*Tandy Leather Factory, Inc.’s common stock previously traded on the NASDAQ Global Market under the symbol “TLF”. On August 13, 2020, Tandy Leather Factory, Inc.’s common stock began trading on the OTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLFA”. Deregistration under Section 12(b) of the Exchange Act of 1934, as amended, became effective on May 10, 2021.
Indicate by check mark 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X ] Emerging growth company [ ]
| Large accelerated filer ☐ | Non-accelerated filer ☒ | |
| Accelerated filer ☐ | Smaller reporting company ☒ | |
| 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]☒
Common Stock, par value $0.0024 per share, outstanding.
TANDY LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017MARCH 31, 2020
| EXPLANATORY NOTE | ||
| Restatement Background | 1 | |
| 3 | ||
| 3 | ||
| 7 | ||
| 35 | ||
| 40 | ||
| 43 | ||
Tandy Leather Factory, Inc. is restating in this Form 10-Q the prior year three month period ended March 31, 2019. As previously disclosed, on October 14, 2019, as a result of the findings of an independent investigation by the Company’s independent Audit Committee and the Company’s ongoing financial reporting reviews, the Company, in consultation with the Audit Committee, determined that the Company’s previously issued financial statements for (i) the years ended December 31, 2018, 2017 and 2016 included in the Company’s most recent Annual Report on Form 10-K, (ii) the quarterly and year-to-date periods within fiscal 2017 and 2018 included in the Company’s Quarterly Reports on Form 10-Q, and (iii) the three months ended March 31, 2019 included in the Company’s Quarterly Report on Form 10-Q, should no longer be relied upon due to material misstatements of one or more of the following categories in all or certain of these periods: the value of inventory and calculation of cost of sales, gross profit, operating expenses, operating income, net income, and earnings per share (“EPS”) as described below.
Such errors included: (i) methods used by the Company in the valuation and expensing of costs related to inventory which was not correctly stated and was not consistent with the first-in, first-out (“FIFO”) methodology, (ii) warehousing and handling expenditures which were not properly capitalized during the first and third quarters but were subsequently corrected on a semi-annual basis in the second and fourth quarters resulting in the understatement of inventory and net income in the first and third quarters and the overstatement of net income in the second and fourth quarters, (iii) warehouse and handling expenditures which were improperly classified in operating expenses in all quarters resulting in an overstatement of operating expenses in all restated periods, (iv) freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out costs which were being capitalized to inventory using historical standard rates that were not based on the actual costs incurred in each period resulting in misstatements of inventory value, (v) inventory reserve levels which did not reflect the Company’s accounting policy of carrying inventory at the lower of cost or net realizable value resulting in misstatements of inventory value, (vi) sales returns had not been accounted for using historical sales return trends, (vii) lease accounting errors upon the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”) on January 1, 2019, which resulted in the understatement of operating lease assets and operating lease liabilities, (viii) the income tax effect of pre-tax restatement adjustments as well as correction of income tax misstatements related to recognition of uncertain tax position (“UTP”) liability and related interest expense, and (ix) other smaller matters. All financial statements, schedules and footnotes impacted indicate the restated amounts under the caption “Restated.” In connection with the process of restating the first quarter 2019 financial statements, we are also undergoing remediation efforts to fix the internal control failures that contributed to these misstatements. See Item 4 – Controls and Procedures for further detail on the Company’s remediation efforts.
This Form 10-Q also reflects Management’s Discussion and Analysis of Financial Condition and Results of Operations based on the restated financial information.
Nasdaq Stock Market LLC (“Nasdaq”) suspended trading in the Company’s shares as of August 13, 2020 due to the Company not being current with its SEC filings. Our stock has since traded on the OTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLFA.” Nasdaq denied our appeal of this decision, resulting in our stock being formally delisted on February 9, 2021.
Cautionary Statement Regarding Forward-Looking Statements and Information
The following discussion, as well as other portions of this Form 10-Q, contains forward-looking statements that reflect our plans, estimates and beliefs. Any such forward-looking statements (including, but not limited to, statements to the effect that Tandy Leather Factory, Inc. (“TLFA”) or its management “anticipates,” “plans,” “estimates,” “expects,” “believes,” “intends,” and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our Consolidated Financial Statements and related notes contained elsewhere in this report. These forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and should be read carefully because they involve risks and uncertainties. We assume no obligation to update or otherwise revise these forward-looking statements, except as required by law. Specific examples of forward-looking statements include, but are not limited to, statements regarding our forecasts of financial performance, share repurchases, store openings or store closings, capital expenditures and working capital requirements. Our actual results could materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and particularly in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Comprehensive Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Unless the context otherwise indicates, references in this Form 10-Q to “TLFA,” “we,” “our,” “us,” the” Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries.
Tandy Leather Factory, Inc.
September 30, 2017 (unaudited) | December 31, 2016 (audited) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 12,179,384 | $ | 16,862,304 | ||||
| Accounts receivable-trade, net of allowance for doubtful accounts | ||||||||
| of $10,637 and $2,404 in 2017 and 2016, respectively | 529,378 | 560,984 | ||||||
| Inventory | 41,148,059 | 33,177,539 | ||||||
| Prepaid income taxes | 947,507 | 964,323 | ||||||
| Prepaid expenses | 1,652,367 | 1,608,860 | ||||||
| Other current assets | 352,759 | 140,232 | ||||||
| Total current assets | 56,809,454 | 53,314,242 | ||||||
| PROPERTY AND EQUIPMENT, at cost | 27,062,582 | 25,536,352 | ||||||
| Less accumulated depreciation and amortization | (11,298,871 | ) | (9,884,559 | ) | ||||
| 15,763,711 | 15,651,793 | |||||||
| DEFERRED INCOME TAXES | 447,308 | 375,236 | ||||||
| GOODWILL | 963,852 | 956,201 | ||||||
| OTHER INTANGIBLES, net of accumulated amortization of approximately | ||||||||
| $710,000 and $708,000 in 2017 and 2016, respectively | 19,509 | 20,840 | ||||||
| OTHER ASSETS | 368,007 | 334,408 | ||||||
| TOTAL ASSETS | $ | 74,371,841 | $ | 70,652,720 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable-trade | $ | 2,569,016 | $ | 1,621,884 | ||||
| Accrued expenses and other liabilities | 4,613,402 | 5,937,187 | ||||||
| Current maturities of capital lease obligations | 72,686 | 72,686 | ||||||
| Current maturities of long-term debt | 153,578 | 614,311 | ||||||
| Total current liabilities | 7,408,682 | 8,246,068 | ||||||
| DEFERRED INCOME TAXES | 1,814,012 | 1,956,032 | ||||||
| LONG-TERM DEBT, net of current maturities | 7,218,152 | 6,757,419 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| 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; | ||||||||
| 11,313,692 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 | 6,797,052 | 6,368,455 | ||||||
| Retained earnings | 62,249,904 | 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 | (864,530 | ) | (1,893,129 | ) | ||||
| Total stockholders’ equity | 57,930,995 | 53,693,201 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 74,371,841 | $ | 70,652,720 | ||||
(amounts in thousands, except share data and per share data)
| March 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Unaudited | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 11,423 | $ | 15,905 | ||||
| Short-term investments | 9,183 | 9,152 | ||||||
| Accounts receivable-trade, net of allowance for doubtful accounts of $16 at March 31, 2020 and December 31, 2019, respectively | 339 | 409 | ||||||
| Inventory | 29,224 | 24,042 | ||||||
| Income tax receivable | 1,969 | 1,629 | ||||||
| Prepaid expenses | 1,160 | 1,082 | ||||||
| Other current assets | 146 | 297 | ||||||
| Total current assets | 53,444 | 52,516 | ||||||
| Property and equipment, at cost | 26,985 | 27,471 | ||||||
| Less accumulated depreciation | (14,730 | ) | (14,552 | ) | ||||
| Property and equipment, net | 12,255 | 12,919 | ||||||
| Operating lease assets | 12,613 | 13,897 | ||||||
| Deferred income taxes | 691 | 427 | ||||||
Other intangibles, net of accumulated amortization of $547 at March 31, 2020 and December 31, 2019, respectively | 7 | 7 | ||||||
| Other assets | 354 | 345 | ||||||
| TOTAL ASSETS | $ | 79,364 | $ | 80,111 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable-trade | $ | 7,898 | $ | 5,753 | ||||
| Accrued expenses and other liabilities | 2,303 | 2,656 | ||||||
| Operating lease liabilities | 3,743 | 3,823 | ||||||
| Total current liabilities | 13,944 | 12,232 | ||||||
| Deferred income taxes | 296 | 296 | ||||||
| Other non-current liabilities | 509 | 509 | ||||||
| Operating lease liabilities, non-current | 10,052 | 10,655 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 7) | ||||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock, $0.10 par value; 20,000,000 shares authorized; none issued or outstanding; attributes to be determined on issuance | - | - | ||||||
| Common stock, $0.0024 par value; 25,000,000 shares authorized; 10,467,367 and 10,446,563 shares issued at March 31, 2020 and December 31, 2019, respectively | 25 | 25 | ||||||
| Paid-in capital | 5,265 | 5,037 | ||||||
| Retained earnings | 60,473 | 62,211 | ||||||
| Treasury stock at cost (1,424,376 shares at March 31, 2020 and December 31, 2019, respectively) | (9,773 | ) | (9,773 | ) | ||||
| Accumulated other comprehensive loss (net of tax of $476 and $359 at March 31, 2020 and December 31, 2019, respectively) | (1,427 | ) | (1,081 | ) | ||||
| Total stockholders' equity | 54,563 | 56,419 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 79,364 | $ | 80,111 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Tandy Leather Factory, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
Unaudited
(in thousands, except share and per share data)
| Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Restated (1) | ||||||||
| Net sales | $ | 17,145 | $ | 20,941 | ||||
| Cost of sales | 7,279 | 8,696 | ||||||
| Gross profit | 9,866 | 12,245 | ||||||
| Operating expenses | 11,096 | 10,032 | ||||||
| Impairment expense | 1,069 | - | ||||||
| Income (loss) from operations | (2,299 | ) | 2,213 | |||||
| Other (income) expense: | ||||||||
| Interest expense | - | 32 | ||||||
| Other, net | (53 | ) | 110 | |||||
| Total other (income) expense | (53 | ) | 142 | |||||
| Income (loss) before income taxes | (2,246 | ) | 2,071 | |||||
| Provision (benefit) for income taxes | (508 | ) | 551 | |||||
| Net income (loss) | $ | (1,738 | ) | $ | 1,520 | |||
| Foreign currency translation adjustments, net of tax | (346 | ) | 314 | |||||
| Comprehensive income (loss) | $ | (2,084 | ) | $ | 1,834 | |||
| Net income (loss) per common share: | ||||||||
| Basic | $ | (0.19 | ) | $ | 0.17 | |||
| Diluted | $ | (0.19 | ) | $ | 0.17 | |||
| Weighted average number of shares outstanding: | ||||||||
| Basic | 9,029,212 | 9,009,752 | ||||||
| Diluted | 9,029,212 | 9,011,107 | ||||||
(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements for the three months ended March 31, 2019
The accompanying notes are an integral part of these consolidated financial statements.
| THREE MONTHS | NINE MONTHS | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| NET SALES | $ | 18,388,381 | $ | 18,628,362 | $ | 57,818,996 | $ | 58,823,494 | ||||||||
| COST OF SALES | 6,753,050 | 6,983,491 | 21,002,086 | 21,630,087 | ||||||||||||
| Gross profit | 11,635,331 | 11,644,871 | 36,816,910 | 37,193,407 | ||||||||||||
| OPERATING EXPENSES | 10,985,056 | 10,104,812 | 32,773,707 | 30,451,667 | ||||||||||||
| INCOME FROM OPERATIONS | 650,275 | 1,540,059 | 4,043,203 | 6,741,740 | ||||||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest expense | (53,141 | ) | (43,493 | ) | (143,165 | ) | (108,949 | ) | ||||||||
| Other, net | 95,936 | 3,570 | 115,599 | 26,965 | ||||||||||||
| Total other income (expense) | 42,795 | (39,923 | ) | (27,566 | ) | (81,984 | ) | |||||||||
| INCOME BEFORE INCOME TAXES | 693,070 | 1,500,136 | 4,015,637 | 6,659,756 | ||||||||||||
| PROVISION FOR INCOME TAXES | 171,656 | 499,786 | 1,235,226 | 2,317,494 | ||||||||||||
| NET INCOME | $ | 521,414 | $ | 1,000,350 | $ | 2,780,411 | $ | 4,342,262 | ||||||||
| Foreign currency translation adjustments | 370,240 | (32,566 | ) | 1,028,599 | 222,187 | |||||||||||
| COMPREHENSIVE INCOME | $ | 891,654 | $ | 967,784 | $ | 3,809,010 | $ | 4,564,449 | ||||||||
| NET INCOME PER COMMON SHARE: | ||||||||||||||||
| Basic | $ | 0.06 | $ | 0.11 | $ | 0.30 | $ | 0.46 | ||||||||
| Diluted | $ | 0.06 | $ | 0.11 | $ | 0.30 | $ | 0.46 | ||||||||
| Weighted Average Number of Shares Outstanding: | ||||||||||||||||
| Basic | 9,270,862 | 9,188,483 | 9,232,397 | 9,341,364 | ||||||||||||
| Diluted | 9,273,950 | 9,206,382 | 9,246,066 | 9,359,405 | ||||||||||||
Tandy Leather Factory, Inc.
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 2,780,411 | $ | 4,342,262 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 1,466,534 | 1,273,078 | ||||||
| Loss / (gain) on disposal or abandonment of assets | 10,484 | (6,306 | ) | |||||
| Non-cash stock-based compensation | 205,380 | 156,586 | ||||||
| Deferred income taxes | (214,092 | ) | 18,211 | |||||
| Foreign currency translation | 961,860 | 236,139 | ||||||
| Net changes in assets and liabilities: | ||||||||
| Accounts receivable-trade | 31,606 | 39,615 | ||||||
| Inventory | (7,970,520 | ) | (3,537,758 | ) | ||||
| Prepaid expenses | (43,507 | ) | (492,234 | ) | ||||
| Other current assets | (212,527 | ) | 53,936 | |||||
| Accounts payable-trade | 947,132 | (1,497 | ) | |||||
| Accrued expenses and other liabilities | (1,323,785 | ) | 482,975 | |||||
| Income taxes payable | 16,816 | (688,029 | ) | |||||
| Total adjustments | (6,124,619 | ) | (2,465,284 | ) | ||||
| Net cash (used in) provided by operating activities | (3,344,208 | ) | 1,876,978 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (1,530,547 | ) | (1,385,431 | ) | ||||
| Proceeds from sale of assets | 699 | 26,703 | ||||||
| Decrease in other assets | (32,268 | ) | (10,368 | ) | ||||
| Net cash used in investing activities | (1,562,116 | ) | (1,369,096 | ) | ||||
| 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) INCREASE IN CASH | (4,682,920 | ) | 486,023 | |||||
| CASH, beginning of period | 16,862,304 | 10,962,615 | ||||||
| CASH, end of period | $ | 12,179,384 | $ | 11,448,638 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| Interest paid during the period | $ | 143,165 | $ | 108,949 | ||||
| Income tax paid during the period, net of refunds | $ | 1,218,410 | $ | 3,005,523 | ||||
(in thousands)
| For the Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| Restated (1) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (1,738 | ) | $ | 1,520 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 335 | 494 | ||||||
| Operating lease asset amortization | 898 | 865 | ||||||
| Impairment of long-lived assets | 1,069 | - | ||||||
| (Gain) loss on disposal of assets | 6 | (4 | ) | |||||
| Stock-based compensation | 228 | 186 | ||||||
| Deferred income taxes | (264 | ) | 184 | |||||
| Exchange (gain) loss | (3 | ) | 136 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable-trade | 88 | (56 | ) | |||||
| Inventory | (5,302 | ) | 3,172 | |||||
| Prepaid expenses | 27 | 33 | ||||||
| Other current assets | 46 | (194 | ) | |||||
| Accounts payable-trade | 3,107 | (1,281 | ) | |||||
| Accrued expenses and other liabilities | (385 | ) | (1,156 | ) | ||||
| Income taxes, net | (293 | ) | 109 | |||||
| Other assets | (952 | ) | (41 | ) | ||||
| Operating lease liabilities | (890 | ) | (834 | ) | ||||
| Total adjustments | (2,285 | ) | 1,613 | |||||
| Net cash provided by (used in) operating activities | (4,023 | ) | 3,133 | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (184 | ) | (31 | ) | ||||
| Purchase of short-term investments | (1,697 | ) | (5,000 | ) | ||||
| Proceeds from sales of short-term investments | 1,700 | - | ||||||
| Proceeds from sales of assets | 1 | 13 | ||||||
| Net cash used in investing activities | (180 | ) | (5,018 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on long-term debt | - | (8,968 | ) | |||||
| Repurchase of treasury stock | - | (715 | ) | |||||
| Net cash used in financing activities | - | (9,683 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | (279 | ) | 177 | |||||
| Net decrease in cash and cash equivalents | (4,482 | ) | (11,391 | ) | ||||
| Cash and cash equivalents, beginning of period | 15,905 | 24,070 | ||||||
| Cash and cash equivalents, end of period | $ | 11,423 | $ | 12,679 | ||||
(1) As described in Note 2 to these Consolidated Financial Statements, of Stockholders’ Equity (Unaudited)
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 | 156,506 | - | - | - | 156,586 | |||||||||||||||||||||
| Net income | - | - | - | - | 4,342,262 | - | 4,342,262 | |||||||||||||||||||||
| Translation adjustment | - | - | - | - | - | 222,187 | 222,187 | |||||||||||||||||||||
| BALANCE, September 30, 2016 | 9,266,496 | $ | 27,142 | $ | 6,324,995 | $ | (10,278,584 | ) | $ | 57,409,496 | $ | (1,465,492 | ) | $ | 52,017,557 | |||||||||||||
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 | 205,300 | - | - | - | 205,380 | |||||||||||||||||||||
| Net income | - | - | - | - | 2,780,411 | - | 2,780,411 | |||||||||||||||||||||
| Translation adjustment | - | - | - | - | - | 1,028,599 | 1,028,599 | |||||||||||||||||||||
| BALANCE, September 30, 2017 | 9,270,862 | $ | 27,153 | $ | 6,797,052 | $ | (10,278,584 | ) | $ | 62,249,904 | $ | (864,530 | ) | $ | 57,930,995 | |||||||||||||
consolidated financial statements for the three months ended March 31, 2019
The accompanying notes are an integral part of these consolidated financial statements.
Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders' Equity
Unaudited
(in thousands, except share data)
Number of Shares Common Stock Outstanding | Par Value | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||
| BALANCE, December 31, 2019 | 9,022,187 | $ | 25 | $ | 5,037 | $ | (9,773 | ) | $ | 62,211 | $ | (1,081 | ) | $ | 56,419 | |||||||||||||
| Stock-based compensation expense | - | - | 228 | - | - | - | 228 | |||||||||||||||||||||
| Issuance of restricted stock | 20,804 | - | - | - | - | - | - | |||||||||||||||||||||
| Net loss | - | - | - | - | (1,738 | ) | - | (1,738 | ) | |||||||||||||||||||
| Foreign currency translation adjustments, net of tax | - | - | - | - | - | (346 | ) | (346 | ) | |||||||||||||||||||
| Balance, March 31, 2020 | 9,042,991 | $ | 25 | $ | 5,265 | $ | (9,773 | ) | $ | 60,473 | $ | (1,427 | ) | $ | 54,563 | |||||||||||||
| Balance, December 31, 2018 | 9,060,561 | 25 | 4,267 | (9,038 | ) | 64,476 | (1,444 | ) | $ | 58,286 | ||||||||||||||||||
| Cumulative effect of accounting change, net of tax - ASC 842 | - | - | - | - | (362 | ) | - | (362 | ) | |||||||||||||||||||
| Stock-based compensation expense | - | - | 186 | - | - | - | 186 | |||||||||||||||||||||
| Issuance of restricted stock | 1,408 | - | - | - | - | - | - | |||||||||||||||||||||
| Purchase of treasury stock | (127,945 | ) | - | - | (714 | ) | - | - | (714 | ) | ||||||||||||||||||
| Net income | - | - | - | - | 1,520 | - | 1,520 | |||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | - | - | - | - | - | 314 | 314 | |||||||||||||||||||||
| Balance, March 31, 2019 as Restated (1) | 8,934,024 | 25 | $ | 4,453 | $ | (9,752 | ) | $ | 65,634 | $ | (1,130 | ) | $ | 59,230 | ||||||||||||||
(1) As described in Note 2 to these Consolidated Financial Statements, w e have restated the consolidated financial statements for the three months ended March 31, 2019
The accompanying notes are an integral part of these consolidated financial statements.
TANDY LEATHER FACTORY, INC.
| 1. | BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES |
Tandy Leather Factory, Inc. (“TLFA,” “we,” “our,” “us,” the” Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries.) is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, a hub for the local leathercrafting community, and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our four websites: tandyleather.com, tandyleather.ca, tandyleather.eu and tandyleather.com.au. We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
The Company currently operates a total of 106 retail stores. There are 95 stores in the U.S., ten stores in Canada and one store in Spain. During the second quarter of 2020, we centralized U.S. e-commerce web order fulfillment from the stores to our Fort Worth distribution center.
Nasdaq Stock Market LLC (“Nasdaq”) suspended trading in the Company’s shares as of August 13, 2020 due to the Company not being current with its SEC filings. Our stock has since traded on the OTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLFA.” Nasdaq denied our appeal of this decision, resulting in our stock being formally delisted on February 9, 2021. We intend to reapply for Nasdaq listing once the Company has made the required Exchange Act filings.
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual audited financial statements. In the opinion of management, the accompanying consolidated financial statementsConsolidated Financial Statements for Tandy Leather Factory, Inc. and its consolidated subsidiaries contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly itsour financial position as of September 30, 2017March 31, 2020 and December 31, 2016, and its2019, our results of operations for the three month periods ended March 31, 2020 and 2019, our cash flows for the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 2016. Operating2019, and our statements of stockholders equity as of March 31, 2020 and 2019. The preparation of financial statements in accordance with GAAP requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the threeCompany’s conclusions. The Company continually evaluates the information used to make these estimates as the business and nine-month periods ended September 30, 2017the economic environment changes. Actual results may differ from these estimates, and estimates are not necessarily indicative ofsubject to change due to modifications in the results that may be expected for the year ending December 31, 2017.underlying conditions or assumptions. These consolidated financial statementsConsolidated Financial Statements should be read in conjunction with the audited consolidated financial statementsConsolidated Financial Statements and accompanying notes included in our Annual Report onComprehensive Form 10-K for the year ended December 31, 2016.2019.
COVID-19
In late 2019, COVID-19 was detected in Wuhan, China and has since spread to other parts of the world, including the U.S. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Federal, state, and local governments implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions and limitations on business operations. As previously announced and for the health and safety of employees and customers, on March 17, 2020, the Company made the decision to begin temporary store closures. The onset of the COVID-19 pandemic in March 2020 temporarily shifted our strategic focus to company survival and cash preservation. We began closing stores on March 18, 2020, and by April 2, 2020, we temporarily closed all stores to the public. While we pivoted to serve customers only online, the Company experienced significant decreases in demand for its products in the second and third quarters of 2020, negatively impacting net sales.
In response, we took immediate action to mitigate the impact of temporary store closures on our cash flows by: (i) furloughing 406 Tandy employees, comprising two-thirds of the Tandy work force, (ii) temporarily cutting corporate salaries, with deeper cuts for the Executive Leadership Team, (iii) negotiating abatements, deferrals and other favorable lease terms with landlords, and (iv) negotiating longer payment terms with our key product vendors.
Due to our size, we were not eligible for the Paycheck Protection Program administered through the Small Business Administration. Also, due to our not being current on financial filings with the SEC, we were not able to obtain loans under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. During the second quarter of 2020, the Company borrowed $0.4 million through the Spanish government’s Institute of Official Credit Guarantee for Small and Medium-sized Enterprises, a COVID-19 relief program. The term of the agreement is for five years and the interest rate is fixed at 1.5%. Based on the terms of the loan agreement, we make interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement. In Canada, we participated in the Canada Emergency Commercial Rent Assistance (“CECRA”) program for rent relief. This program provided for a 75% reduction in the store rent for included stores for the months of April, May and June 2020. We received total rent abatements under the program of $0.05 million.
Nine stores were permanently closed during 2020 as leases expired or early terminations were negotiated, including at locations where we believe we can retain a majority of customers through geographically proximate stores and/or our enhanced website platform. After these permanent closures, Tandy operates 106 stores, including ten in Canada and one in Spain.
On May 22, 2020, our Fort Worth flagship store reopened to the public, the beginning of a phased approach to reopening our stores with limited hours, new protocols for sanitizing, social distancing, wearing masks and taking daily temperatures of employees. During the third quarter of 2020, all 106 of Tandy’s stores had reopened to the public, and the store re-openings were well received by our employees and customers. During the fourth quarter of 2020 and into the present, we continue to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection rates, and have been forced to close certain stores or move certain stores to “curbside only” operations. With the rapid spread of the Delta variant of COVID-19 during the third quarter of 2021, we have experienced an increasing number of these shutdowns. We believe that the rollout of COVID-19 vaccines in 2021 has offset these closures somewhat, but it is difficult to predict whether these vaccines will be adopted by further large numbers of Americans or whether current or future vaccines will remain effective against Delta or other future variants of the virus. We expect that at least some further infections and temporary store shutdowns will continue for the foreseeable future.
While we previously fulfilled our web orders out of our retail stores, during the second quarter of 2020, we built a centralized web fulfillment capability in our Fort Worth distribution center and have been and expect to continue to fulfill web orders primarily through Fort Worth going forward. Both our e-commerce business and stores have been performing above last year sales levels, but the future remains uncertain, and more store closures and/or other ongoing effects of the pandemic on the economy or employment market could cause a material negative impact on future sales.
As part of the Company’s accounting policy for long-lived asset impairments, we believe the COVID-19 impact on the Company’s results of operations, cash flows and financial position and the ongoing uncertainty the virus has created around future operating results represented a triggering event during the first quarter of 2020 and continuing throughout the remainder of 2020.
For the three months ended March 31, 2020, the Company recorded impairment expense of $1.1 million, primarily related to property and equipment and operating lease assets for certain stores that underperformed to a level where the cash flows they generate will not be sufficient to cover their respective asset carry values.
Significant Accounting Policies
Cash and cash equivalents. The Company considers investments with a maturity when purchased of three months or less to be cash equivalents. All credit card, debit card and electronic transfer transactions that process in less than seven days are classified as cash and cash equivalents.
Foreign currency translation and transactions. Foreign currency translation adjustments arise from activities of our foreign subsidiaries. Results of operations are translated into U.S. dollars using the average exchange rates during the period, while assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments of assets and liabilities are recorded in stockholders’ equity and presented net of tax. Gains and losses resulting from foreign currency transactions are reported in the statements of income under the caption “Other (Income) Expense, net,” for all periods presented.
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) shipment of product generally via web sales, and (3) sales of product directly to commercial customers. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when control passes to the customer. Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales. Net sales is based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns.
The preparationsales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of financial statementssales, accordingly.
As of March 31, 2020 and December 31, 2019, we have established a sales return allowance of $0.2 million and $0.3 million, respectively, based on historical customer return behavior and other known factors. The sales return allowance is included in accordance with accounting principles generally acceptedaccrued expenses and other liabilities, while an estimated value of the merchandise expected to be returned of $0.1 million and $0.1 million is included in other current assets as of March 31, 2020 and December 31, 2019, respectively.
We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one year. As of March 31, 2020 and December 31, 2019, our gift card liability, included in accrued expenses and other liabilities, totaled $0.2 million and $0.3 million, respectively. We recognized gift card revenue of $0.1 million in the United States requires management to make estimatesfirst quarter of 2020 from the December 31, 2019 deferred revenue balance and assumptions that affect$0.1 million during the amounts reportedfirst quarter of 2019 from the December 31, 2018 deferred revenue balance.
During 2019, we ended our wholesale pricing club program where customers received lower prices in exchange for a yearly membership fee. Under this program, the financial statementsyearly membership fee when paid was recorded as deferred revenue and accompanying notes. Actual results could differ from those estimates.recognized in net sales throughout the one-year period.
For the three months ended March 31, 2020 and 2019, we recognized $0.2 million and $0.4 million, respectively, in net sales associated with gift cards and the wholesale pricing club membership fees.
| (in thousands) | Three Months Ended March 31, | |||||||
| 2020 | 2019 | |||||||
| United States | $ | 15,333 | $ | 18,324 | ||||
| Canada | 1,493 | 1,732 | ||||||
| Spain | 319 | 353 | ||||||
| All other countries | - | 532 | ||||||
| Net sales | $ | 17,145 | $ | 20,941 | ||||
Geographic sales information is based on the location of the customer. Excluding Canada, no single foreign country had net sales greater than 1.9% of our consolidated net sales for the three-month periods ended March 31, 2020 and 2019.
Discounts. Certain prior year amounts have been reclassifiedPrior to conform2019, we maintained five price levels: retail, wholesale gold, wholesale elite, business, and manufacturer. Since May of 2019 (April of 2019 in Canada), we now offer a single retail price level, plus three volume-based levels for commercial customers. Discounts from those price levels are offered to Business, Military/First Responder and Employee customers. Such discounts do not convey a material right to these customers since the current year presentation.discounted pricing they receive at the point of sale is not dependent upon any previous or subsequent purchases. As a result, sales are reported after deduction of discounts at the point of sale. We do not pay slotting fees or make other payments to resellers.
Operatingexpense. Operating expenses include all selling, general and administrative costs, including wages and benefits, rent and occupancy costs, depreciation, advertising, store operating expenses, outbound freight charges (to ship merchandise to customers), and corporate office costs.
Property and equipment, net of accumulated depreciation. Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are three to ten years for equipment and machinery, seven to fifteen years for furniture and fixtures, five years for vehicles, and forty years for buildings and related improvements. Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.
Inventory. Inventory is valuedstated at the lower of first-in, first-outcost (first-in, first-out) or net realizable value. Finished goods held for sale includes the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process is valued on a first‑in, first out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the inventory.
We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii) items that need to be removed from our product line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to adequately value our inventory at the lower of cost or market. In addition,net realizable value.
Since the determination of net realizable value of inventory is periodically reducedinvolves both estimation and judgement with regard to net realizable value for slow-moving or obsoletemarket values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset.
The majority of inventory based on management's review of items on hand comparedpurchases and commitments are made in U.S. dollars in order to their estimated future demand. Based on negotiations with vendors, title generally passeslimit the Company’s exposure to foreign currency fluctuations. Goods shipped to us when merchandise is put on board. Merchandise to which we have title but have not yet received isare recorded as inventory in transit.
| September 30, 2017 | December 31, 2016 | |||||||
| Inventory on hand: | ||||||||
| Finished goods held for sale | $ | 38,789,949 | $ | 30,684,026 | ||||
| Raw materials and work in process | 1,616,499 | 1,034,041 | ||||||
| Inventory in transit | 741,611 | 1,459,472 | ||||||
| $ | 41,148,059 | $ | 33,177,539 | |||||
| (in thousands) | March 31, 2020 | December 31, 2019 | ||||||
| On hand: | ||||||||
| Finished goods held for sale | $ | 24,741 | $ | 20,575 | ||||
| Raw materials and work in process | 792 | 717 | ||||||
| Inventory in transit | 3,691 | 2,750 | ||||||
| TOTAL | $ | 29,224 | $ | 24,042 | ||||
Leases. We lease certain real estate for goodwill impairment. The first phase screensour retail store locations and warehouse equipment for impairment, while the second phase (if necessary) measures the impairment.our Texas distribution center, both under long-term lease agreements. We have elected to perform the annual analysis during the fourth calendar quarter of each year. As of December 31, 2016, management determined thatdetermine if an arrangement is a lease at inception and recognize right-of-use (“ROU”) assets and lease liabilities at commencement date based on the present value of the discountedlease payments over the lease term. We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes.
For operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease or options to purchase leased equipment, when it is reasonably certain we will exercise such an option. The exercise of lease renewal or purchase option is generally at our discretion. Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. We discount lease payments using our incremental borrowing rate based on information available as of the measurement date.
We recognize rent expense related to our operating leases on a straight-line basis over the lease term.
For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term with rent expense recorded to operating expenses. We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the consolidated statements of comprehensive income (loss).
The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. We also perform interim reviews of our lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable.
None of our lease agreements contain contingent rental payments, material residual value guarantees or material restrictive covenants. We have no sublease agreements and no lease agreements in which we are named as a lessor.
Impairment of Long-Lived Assets. We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate the carrying value of certain assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use (“ROU”) lease assets, property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group's major classifications which in this case are operating lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method.
Fair Value of Financial Instruments. We measure fair value as an exit price, which is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering such assumptions, accounting standards establish a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 – observable inputs that reflect quoted prices in active markets for identical assets or liabilities.
Level 2 – significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.
Classification of the stores associatedfinancial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Our principal financial instruments held consist of short-term investments, accounts receivable, accounts payable, and long-term debt. As of March 31, 2020 and December 31, 2019, the carrying values of our financial instruments, included in our Consolidated Balance Sheets, approximated or equaled their fair values. There were no transfers into or out of Levels 1, 2 and 3 three months ended March 31, 2020 and March 31, 2019.
Short-Term Investments. We determine the appropriate classification of investments at the time of purchase, and we re-evaluate that determination at each balance sheet date. Investments are recorded as either short-term or long-term on the Consolidated Balance Sheet, based on contractual maturity date.
As of both March 31, 2020 and December 31, 2019, we held investments in U.S. Treasuries with the goodwillmaturity values of $9.2 million and maturities less than one year. We have classified these investments in debt securities as held-to-maturity. Such investments are recorded at amortized cost with book value approximating fair value which is sufficient to support their respective goodwill balances. No indicators of impairment were identified during the first nine months of 2017.based on Level 1 inputs for these investments.
The onlyCompany believes there is no current expected credit allowance necessary for our short-term investments as: 1) Treasury securities typically are the most highly rated securities among rating agencies; 2) Treasury securities have a long history of no credit losses; and 3) Treasury securities are guaranteed by a sovereign entity (the U.S. Government) that can print its own money and whose currency (the U.S. dollar) is the reserve currency.
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent it is more likely than not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods.
Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.
A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our goodwilljudgement changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available. We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made.
We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.
Stock-based compensation. The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards. Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the nine-month periods ended Septemberrequisite service period, based on the closing price of the Company’s stock on the date of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. Compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards.
Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets. The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved. If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized. If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed. The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied. We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards.
Accounts Receivable and Expected Credit Losses. Our receivables primarily arise from the sale of merchandise to customers that have applied for and been granted credit. Accounts receivable are stated at amounts due, net of an allowance for doubtful accounts. Accounts receivable are generally due within 30 2017days of invoicing. We estimate expected credit losses based on factors such as the composition of accounts receivable, the age of the accounts, historical bad debt experience, and 2016 resulted from foreign currency translationour evaluation of $7,651the financial condition and $5,274, respectively.past collection history of each customer. Management believes that the historical loss information it has compiled is a reasonable base on which to determine expected credit losses for trade receivables held at March 31, 2020, because the composition of the trade receivables at that date is consistent with that used in developing the historical credit-loss percentages (i.e., the similar risk characteristics of its customers and its credit practices have not changed significantly over time). Accordingly, the allowance for expected credit losses at March 31, 2020 totaled less than $0.1 million.
Other intangibles consistIntangible Assets. Our intangible assets and related accumulated amortization consisted of the following:
| September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
| Trademarks, Copyrights | $ | 554,369 | $ | 545,860 | $ | 8,509 | $ | 554,369 | $ | 545,279 | $ | 9,090 | ||||||||||||
| Non-Compete Agreements | 175,316 | 164,316 | 11,000 | 175,316 | 163,566 | 11,750 | ||||||||||||||||||
| $ | 729,685 | $ | 710,176 | $ | 19,509 | $ | 729,685 | $ | 708,845 | $ | 20,840 | |||||||||||||
| (in thousands) | March 31, 2020 | |||||||||||
| Gross | Accumulated Amortization | Net | ||||||||||
| Trademarks/copyrights | $ | 554 | $ | 547 | $ | 7 | ||||||
| TOTAL | $ | 554 | $ | 547 | $ | 7 | ||||||
| December 31, 2019 | ||||||||||||
| Gross | Accumulated Amortization | Net | ||||||||||
| Trademarks/copyrights | $ | 554 | $ | 547 | $ | 7 | ||||||
| TOTAL | $ | 554 | $ | 547 | $ | 7 | ||||||
| 2017 | 426 | |||
| 2018 | 1,417 | |||
| 2019 | 666 | |||
| 2020 | 666 | |||
| 2021 | 666 | |||
| Thereafter | $ | 5,668 |
Comprehensive Income (loss(Loss). Comprehensive income (loss) includes net income (loss) and certain other items that are recorded directly to Stockholders’ Equity. Ourstockholders’ equity. The Company’s only source of other comprehensive income (loss) is foreign currency translation adjustments, and those adjustments are presented net of tax.
Internal-Use Software
In May 2014,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update provides additional guidance to ASU No. 2014-09,2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which amends ASC Topic 606, “Revenue from Contracts with Customers”.was issued in April 2015. The amendments in this ASU are intendedalign the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to providedevelop or obtain internal-use software (and hosting arrangements that include an internal use software license). We adopted this ASU on January 1, 2020; the adoption of this ASU did not have a more robust framework for addressing revenue issues, improve comparabilitymaterial effect on the Company’s financial condition, results 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. operations or cash flows.
In April 2015,June 2016, the FASB issued ASU No. 2015-24, Revenue from Contracts with Customers: Deferral2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments,” which requires entities to measure impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. We adopted this ASU on January 1, 2020; the Effective Dateadoption of this ASU did not have a material effect on the Company’s financial condition, results of operations or cash flows.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which proposed a deferralsimplifies the accounting for income taxes by removing certain exceptions to the general principles in topic 740. The amendments also improve consistent application of the effective dateand simplify GAAP for other areas of Topic 740 by one year,clarifying and on July 7, 2015, FASB decided to delay the effective date by one year. The deferral results in the new revenue standard beingamending existing guidance. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.2020 on a prospective basis, with early adoption permitted. 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 aredo 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,believe that the adoption of this guidancestandard will have on our financial condition, results of operations, cash flows and financial disclosures. Based on our procedures to date, we believe that the adoption will not have a material impact toon our financial condition, results of operations or cash flows although our disclosures will be expanded. We expect to adopt ASU No. 2014-09 under the modified retrospective method. Given the nature of our business and that 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 there to be significant changes to the amount and timing of revenue 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 cash flows (annual gross product returns historically have represent less than 0.5% of our net sales over the last three years).
| 2. | RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS |
Our unaudited Consolidated Financial Statements as of and for the three months ended March 31, 2019 were restated.
Restatement Background
As previously disclosed, on October 14, 2019, as a result of the findings of the Independent Investigation and the Company’s ongoing reviews, the Company, in consultation with the Audit Committee, determined that Tandy’s previously issued Consolidated Financial Statements as of and for (i) the years ended December 31, 2018 and 2017, (ii) the three and six-month periods ended June 30, 2018, (iii) the three and nine-month periods ended September 30, 2018, and (iv) the three-month period ended March 31, 2019, should no longer be relied upon due to misstatements related to our accounting processes for inventory transactions, and we would make the necessary accounting corrections and restate such financial statements. In addition to inventory misstatements, management identified additional areas that required restatement adjustments as described below, with all such restatement items constituting the “Restatement Process.” The restatement adjustments described below pertain to all restatement periods noted above, and restatement adjustments specific to the three months ended March 31, 2019 are reflected in the tables below.
Such errors included: (i) methods used by the Company in the valuation and expensing of costs related to inventory which was not correctly stated and was not consistent with the first-in, first-out (“FIFO”) methodology, (ii) warehousing and handling expenditures which were not properly capitalized during the first and third quarters but were subsequently corrected on a semi-annual basis in the second and fourth quarters resulting in the understatement of inventory and net income in the first and third quarters and the overstatement of net income in the second and fourth quarters, (iii) warehouse and handling expenditures which were improperly classified in operating expenses in all quarters resulting in an overstatement of operating expenses in all restated periods, (iv) freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out costs which were being capitalized to inventory using historical standard rates that were not based on the actual costs incurred in each period resulting in misstatements of inventory value, (v) inventory reserve levels which did not reflect the Company’s accounting policy of carrying inventory at the lower of cost or net realizable value resulting in misstatements of inventory value, (vi) sales returns were not accounted for until November 2018, and through year end 2017 gift cards were initially recorded to net sales causing net sales to be overstated, (vii) lease accounting errors upon the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”) on January 1, 2019, which resulted in the understatement of operating lease assets and operating lease liabilities, (viii) the income tax effect of pre-tax restatement adjustments as well as correction of income tax misstatements related to tax effected items recognized in the 2018 income tax provision but related to the previous 2017 tax year, including adjustments related to the Tax Cuts and Jobs Act (“TCJA”) and recognition of uncertain tax position (“UTP”) liability and related interest expense, and (ix) other smaller matters described further below.
Description of Restatement Adjustments
Inventory
Under the Company’s inventory accounting policy, inventory is stated using the FIFO methodology for cost, and such cost includes merchandise purchases, the costs to bring the merchandise to its Texas distribution center (freight-in), warehousing and handling expenditures, factory labor and overhead for items that are internally manufactured, and distributing and delivering merchandise to stores (freight-out). The Company carries inventory at the lower of this cost or net realizable value. The inventory restatement adjustments below were first identified by management as a result of a deeper analysis of legacy systems and practices that were in place for many years and which the Company is working to replace. Management identified the following areas in which the accounting for inventory did not adhere to the Company’s inventory accounting policy:
(1) FIFO adjustment: inventory was not correctly stated and was not consistent with the FIFO methodology;
(2) Freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out adjustment:
i. warehousing and handling expenditures were not properly capitalized during the first and third quarters but were subsequently corrected on a semi-annual basis in the second and fourth quarters resulting in the understatement of inventory and net income in the first and third quarters and the overstatement of net income in the second and fourth quarters; and
ii. freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out costs were being capitalized to inventory using historical standard rates that were not based on the actual costs incurred in each period resulting in misstatements;
(3) Inventory reserve adjustment: Tandy’s accounting policy is to carry inventory at the lower of cost or net realizable value. Management noted inventory reserve levels did not reflect the Company’s accounting policy of carrying inventory at the lower of cost or net realizable value. This resulted in cumulative understatements of inventory.
Sales Returns
(4) Sales returns: management noted estimates for sales returns had not been accounted for using historical sales return trends. Management has estimated a sales return liability along with a corresponding inventory asset for the first quarter of 2019. In addition, estimated sales returns previously recorded in the first quarter of 2019 were incorrectly presented on a net basis in cost of sales and have since been restated to reflect accounting on a gross basis in both net sales and cost of sales.
Warehouse and Handling Reclassifications
(5) Warehousing and handling expenditures were classified as operating expenses, resulting in overstatement of operating expenses in all periods. These costs have been reclassified to cost of sales since the inventory restatement in adjustment (2) above is properly adjusting the inventory balance for such costs with the offset recorded to cost of sales. There was no impact to net income (loss) related to this reclassification.
Income Tax
(6) Management noted the income tax provision for the three months ended March 31, 2019 had misstatements related to the recognition of UTP liability and related interest expense among other smaller tax correcting adjustments. Also, income tax restatement adjustments were made to reflect the tax effect of the pre-tax restatement adjustments for the three months ended March 31, 2019.
Accruals and Other
(7) There were misstatements related to the recognition of accrued paid-time-off (“PTO”) resulting in understatement of accrued expenses and other liabilities as well as other misstatements primarily related to recognition of other accrued operating expenses, payroll related costs, long-term debt classification, cash cutoff for outstanding checks, break out of impairment expense previously included in operating expenses, and reclass of leasehold improvements from prepaid expenses to property and equipment, all of which are being corrected in connection with the restatement of previously issued financial statements.
Leases
(8) During the first quarter of 2019, we adopted the new lease accounting standard under Topic 842. Management noted as part of the adoption that the Company did not ensure the appropriateness of inputs being used to calculate the present value of lease payments over the lease terms. This resulted in the misstatement of operating lease assets, and the current and long-term portion of operating lease liabilities upon initial recognition on January 1, 2019.
Foreign Currency Gains & Losses and Cumulative Translation Adjustments
(9) Foreign currency gains and losses associated with the activity of the Company’s Canadian subsidiary were incorrectly classified as a component of accumulated other comprehensive income (loss). These gains and losses have been restated and are included in net income (loss).
Cumulative translation adjustments (“CTA”) included in accumulated other comprehensive income (loss) were not tax effected. Management has corrected this error by tax effecting CTA and by presenting CTA net of tax within accumulated other comprehensive income (loss).
Common Stock
(10) A number of shares of the Company’s common stock were repurchased by the Company and cancelled prior to 2010. Management noted these repurchases were incorrectly accounted for as treasury stock. The number of shares issued, and the number of shares held in treasury, were both overstated by 993,623 shares. The number of shares outstanding has been properly presented in all periods. This correction will not result in any change to net stockholders’ equity, nor will it affect any weighted average shares outstanding calculations used in the determination of earnings per share.
The net effect of the adjustments on the Consolidated Statements of Comprehensive Income (Loss) was to increase net income by $0.7 million for the three months ended March 31, 2019.
Restatement Reconciliation Tables
The following tables present a reconciliation of our Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Cash Flows for the three months ended March 31, 2019, as previously reported to the restated amounts shown in this filing. The following restatement adjustment footnote numbers correspond to the restatement adjustment descriptions above.
Tandy Leather Factory, Inc.
Consolidated Statement of Operations and Comprehensive Income
Unaudited
| For the Three Months Ended March 31, 2019 | ||||||||||||||
| As Reported | Adjustments | As Restated | ||||||||||||
| Net sales | $ | 20,785 | $ | 156 | (4) | $ | 20,941 | |||||||
| Cost of sales | 8,334 | 362 | (1)(2)(2)(3)(4)(5)(7) | 8,696 | ||||||||||
| Gross profit | 12,451 | (206 | ) | 12,245 | ||||||||||
| Operating expenses | 11,282 | (1,250 | ) | (5)(7)(8) | 10,032 | |||||||||
| Income from operations | 1,169 | 1,044 | 2,213 | |||||||||||
| Other (income) expense: | ||||||||||||||
| Interest expense | 32 | - | 32 | |||||||||||
| Other, net | (33 | ) | 143 | (7)(9) | 110 | |||||||||
| Total other (income) expense | (1 | ) | 143 | 142 | ||||||||||
| Income before income taxes | 1,170 | 901 | 2,071 | |||||||||||
| Income tax expense | 301 | 250 | (6) | 551 | ||||||||||
| Net income | $ | 869 | $ | 651 | $ | 1,520 | ||||||||
| Foreign currency translation adjustments, net of tax | 287 | 27 | (9) | 314 | ||||||||||
| Comprehensive income | $ | 1,156 | $ | 678 | $ | 1,834 | ||||||||
| Net income per common share: | ||||||||||||||
| Basic | $ | 0.10 | $ | 0.07 | $ | 0.17 | ||||||||
| Diluted | $ | 0.10 | $ | 0.07 | $ | 0.17 | ||||||||
| Basic | 9,009,752 | 9,009,752 | 9,009,752 | |||||||||||
| Diluted | 9,010,037 | 9,011,107 | 9,011,107 | |||||||||||
Tandy Leather Factory, Inc.
Consolidated Statement of Cash Flows
Unaudited
| For the Three Months Ended March 31, 2019 | ||||||||||||||
| As Reported | Adjustments | As Restated | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income | $ | 869 | $ | 651 | $ | 1,520 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | 495 | (1 | ) | (7) | 494 | |||||||||
| Right-of-use asset amortization | - | 865 | (8) | 865 | ||||||||||
| (Gain) loss on disposal of assets | (4 | ) | - | (4 | ) | |||||||||
| Stock-based compensation | 186 | - | 186 | |||||||||||
| Deferred income taxes | (34 | ) | 218 | (6)(9) | 184 | |||||||||
| Exchange (gain) loss | 2 | 134 | (7)(9) | 136 | ||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Accounts receivable-trade | (48 | ) | (8 | ) | (7) | (56 | ) | |||||||
| Inventory | 3,303 | (131 | ) | (1)(2)(3)(4) | 3,172 | |||||||||
| Prepaid expenses | (293 | ) | 326 | (7) | 33 | |||||||||
| Other current assets | (13 | ) | (181 | ) | (7) | (194 | ) | |||||||
| Accounts payable-trade | (318 | ) | (963 | ) | (7) | (1,281 | ) | |||||||
| Accrued expenses and other liabilities | (1,205 | ) | 49 | (4)(7) | (1,156 | ) | ||||||||
| Income taxes | 96 | 13 | (6) | 109 | ||||||||||
| Other assets | 7 | (48 | ) | (7) | (41 | ) | ||||||||
| Operating lease liability | - | (834 | ) | (8) | (834 | ) | ||||||||
| Total adjustments | 2,174 | (561 | ) | 1,613 | ||||||||||
| Net cash provided by operating activities | 3,043 | 90 | 3,133 | |||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Purchase of property and equipment | (31 | ) | - | (31 | ) | |||||||||
| Purchase of short-term investments | (5,000 | ) | - | (5,000 | ) | |||||||||
| Proceeds from sales of assets | 13 | - | 13 | |||||||||||
| Net cash used in investing activities | (5,018 | ) | - | (5,018 | ) | |||||||||
| Cash flows from financing activities: | ||||||||||||||
| Payments on long-term debt | (8,968 | ) | - | (8,968 | ) | |||||||||
| Repurchase of treasury stock | (715 | ) | - | (715 | ) | |||||||||
| Net cash used in financing activities | (9,683 | ) | - | (9,683 | ) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 267 | (90 | ) | (9) | 177 | |||||||||
| Net decrease in cash and cash equivalents | (11,391 | ) | - | (11,391 | ) | |||||||||
| Cash and cash equivalents, beginning of period | 24,070 | - | 24,070 | |||||||||||
| Cash and cash equivalents, end of period | $ | 12,679 | $ | - | $ | 12,679 | ||||||||
| 3. | NOTES PAYABLE AND LONG-TERM DEBT |
During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small and Medium-sized Enterprises in order to facilitate the continuation of employment and to attenuate the economic effects of the coronavirus (“COVID-19”) virus. This loan was provided for by the Spanish government as part of a COVID-19 relief program. The term of the agreement is five years and the interest rate is fixed at 1.5%. Based on the terms of the loan agreement, we are required to make monthly interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement.
We restated our previously issued audited financial statements as of and for the years ended December 31, 2018 and 2017 as well as the quarterly and year-to-date periods within fiscal 2018 included in the Company’s previously filed Quarterly Reports on Form 10-Q, and the three months ended March 31, 2019, included in the Company’s previously filed Quarterly Report on Form 10-Q. Under the terms of the Promissory Note agreements we had in place with our primary bank, BOKF, NA d/b/a Bank of Texas (“BOKF”), we were required to provide BOKF quarterly financial statements and compliance certificates. We were unable to provide these financial statements and compliance certificates for the Delinquent Filings noted above. In response, on April 2, 2020, BOKF provided notice under the terms of the Promissory Note agreements that such Promissory Notes were cancelled. As of the date of cancellation, Tandy had no borrowings outstanding under these credit facilities or with any other lending institution. As of the date of this filing, Tandy has no lines of credit outstanding. Details of the terms of the Promissory Note agreements with BOKF are as follows.
On September 18, 2015, we executed a Promissory Note and Business Loan Agreementagreement with BOKF NA d/b/a Bank of Texas (“BOKF”) which providesprovided us with a working capital line of credit facility of up to $10,000,000 for the purpose of repurchasing shares of our common stock pursuant to our stock repurchase program, announced in August 2015 and subsequently amended,$6 million which permits us to repurchase up to 2.2 million shares of our common stock at prevailing market prices through August 2018. On August 25, 2016, this line of credit was amended to increase the availability from $10,000,000 to $15,000,000 for the repurchase of shares of our common stock through the earlier of August 25, 2017 or the date on which the entire amount is drawn. On August 10, 2017, this line of credit was further amended to extend the drawdown period and conversion date from August 25, 2017 to August 18, 2018 to align with our stock repurchase program. During this time period, we are required to make monthly interest-only payments. At the end of this time period, we expect that the principal balance will be rolled into a 4-year term note. This Promissory Note is secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas. There were no amounts drawn on this line during the nine months ended September 30, 2017. For the nine months ended September 30, 2016, we drew approximately $3.7 million on this line which was used to repurchase approximately 520,500 shares of our common stock. At September 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 agreement with BOKF which provided us with a line of credit facility accrue interest atof up to $10 million for the London interbank Eurodollar market rate for U.S. dollars (commonly known as “LIBOR”) plus 1.85% (3.086% and 2.557% at September 30, 2017 and December 31, 2016, respectively).
9/30/2017 | 12/31/2016 | |||||||
| Line of Credit, as amended, up to $15,000,000 with features as more fully described above –matures September 18, 2022 | $ | 7,371,730 | $ | 7,371,730 | ||||
| Line of Credit, as amended, up to $6,000,000 with features as more fully described above – matures September 18, 2019 | - | - | ||||||
| $ | 7,371,730 | $ | 7,371,730 | |||||
| Less current maturities | 153,578 | 614,311 | ||||||
| $ | 7,218,152 | $ | 6,757,419 | |||||
| 4. | INCOME TAX |
Our effective tax rate for the three months ended March 31, 2020 and 2019 was 22.6% and 26.6%, respectively. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, the difference in tax rates for loss carryback periods, foreign income/loss positions, expenses that are nondeductible for tax purposes, the change in our valuation allowance associated with our deferred tax assets, and differences in tax rates.
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, Sept 30, 2017 | $ | - | - | - | $ | - | ||||||||||
| Exercisable, Sept 30, 2017 | $ | - | - | - | $ | - | ||||||||||
| Outstanding, January 1, 2016 | $ | 5.17 | 68,400 | |||||||||||||
| Granted | - | - | ||||||||||||||
| Cancelled | (5.30 | ) | (12,000 | ) | ||||||||||||
| Exercised | - | - | ||||||||||||||
| Outstanding, Sept 30, 2016 | $ | 6.27 | 56,400 | 4.47 | $ | 70,545 | ||||||||||
| Exercisable, Sept 30, 2016 | $ | 6.27 | 56,400 | 4.47 | $ | 70,545 | ||||||||||
| 5. | STOCK-BASED COMPENSATION |
In February 2017,June 2020, our five independent directors were awarded restricted stock grants consisting of 1,801stockholders approved an increase to the plan reserve to 800,000 shares each. In March 2016, our Chief Executive Officer and President were awarded restricted stock grants consisting of 11,765 shares each, and our five independent directors were awarded restricted stock grants consisting of 2,031 shares each. All of these grants vest in equal annual amounts over a four-year period. The fair value of these restricted stock grants is based on the market value of our common stock onand extended the date of grant. Compensation costs for these awards is recognized on a straight-line basis over the four-year vesting period.2013 Plan to June 2023.
A summary of the activity for non-vested restricted common stock and RSU awards as of September 30, 2017March 31, 2020 and 20162019 is presented below:
Shares | Award Fair Value | Shares (in thousands) | Weighted Average Share Price | |||||||||||||
| Balance, January 1, 2017 | 62,046 | $ | 8.24 | |||||||||||||
| Balance, December 31, 2019 | 606 | $ | 7.27 | |||||||||||||
| Granted | 24 | 4.78 | ||||||||||||||
| Vested | (19 | ) | 6.61 | |||||||||||||
| Balance, March 31, 2020 | 611 | $ | 7.27 | |||||||||||||
| Balance, December 31, 2018 | 658 | $ | 7.39 | |||||||||||||
| Granted | 9,005 | 8.05 | 28 | 5.64 | ||||||||||||
| Forfeited | (5,403 | ) | 8.05 | (5 | ) | 5.64 | ||||||||||
| Vested | (28,847 | ) | 7.84 | (1 | ) | 7.72 | ||||||||||
| Unvested Balance, September 30, 2017 | 36,801 | $ | 7.93 | |||||||||||||
| Balance, January 1, 2016 | 60,433 | $ | 8.97 | |||||||||||||
| Granted | 33,685 | 7.14 | ||||||||||||||
| Forfeited | (8,187 | ) | 8.97 | |||||||||||||
| Vested | (20,784 | ) | 8.97 | |||||||||||||
| Unvested Balance, September 30, 2016 | 65,147 | $ | 8.03 | |||||||||||||
| Balance, March 31, 2019 (Restated) | 680 | $ | 7.39 | |||||||||||||
The Company’s stock-based compensation relates primarily to RSU awards. For these service-based awards, our stock-based compensation expense, included in operating expenses, was $0.2 million for both the three-month periods ended March 31, 2020 and 2019.
As of September 30, 2017,March 31, 2020, the Company has concluded it is not probable that the performance conditions related to performance-based RSUs will be achieved, and as a result no compensation expense related to performance-based RSUs has been recorded.
As of March 31, 2020, there was unrecognized compensation cost related to non-vested, service-based restricted stock and RSU awards was $208,533of $2.7 million which we expect will be recognized in each of the following years as follows:years:
| 2017 | $ | 34,219 | ||
| 2018 | 100,127 | |||
| 2019 | 58,126 | |||
| 2020 | 14,853 | |||
| 2021 | 1,208 |
| (in thousands) | ||||
| 2020 | $ | 594 | ||
| 2021 | 797 | |||
| 2022 | 760 | |||
| 2023 | 516 | |||
| Unrecognized Expense | $ | 2,667 | ||
We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs. For the three months ended March 31, 2020, we issued 20,804 shares resulting from the vesting of restricted stock. We do not use cash to settle equity instruments issued under stock-based compensation awards.
| 6. | EARNINGS PER SHARE |
Basic earnings per share (“EPS”) are computed based on the weighted average number of common shares outstanding during the period. Diluted EPS includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s restricted stock plan, had been issued. Anti-dilutive securities represent potentially dilutive securities which are excluded from the computation of diluted EPS as their impact would be anti-dilutive. Diluted EPS is computed using the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per share (“EPS”)EPS for the three and nine months ended September 30:March 31, 2020 and 2019:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net income | $ | 521,414 | $ | 1,000,350 | $ | 2,780,411 | $ | 4,342,262 | ||||||||
| Numerator for basic and diluted earnings per share | 521,414 | 1,000,350 | 2,780,411 | 4,342,262 | ||||||||||||
| Denominator for basic EPS: weighted-average shares | 9,270,862 | 9,188,483 | 9,232,397 | 9,341,364 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Stock options | - | 16,933 | 9,810 | 17,279 | ||||||||||||
| Restricted stock | 3,088 | 966 | 3,859 | 762 | ||||||||||||
| Dilutive potential common shares | 3,088 | 17,899 | 13,669 | 18,041 | ||||||||||||
| Denominator for diluted EPS-weighted-average shares | 9,273,950 | 9,206,382 | 9,246,066 | 9,359,405 | ||||||||||||
| Basic earnings per share | $ | 0.06 | $ | 0.11 | $ | 0.30 | $ | 0.46 | ||||||||
| Diluted earnings per share | $ | 0.06 | $ | 0.11 | $ | 0.30 | $ | 0.46 | ||||||||
| (in thousands, except share data) | Three Months Ended March 31, | |||||||
| 2020 | 2019 | |||||||
| (1) | Restated | |||||||
| Numerator: | ||||||||
| Net income (loss) | $ | (1,738 | ) | $ | 1,520 | |||
| Denominator: | ||||||||
| Basic weighted-average common shares outstanding | 9,029,212 | 9,009,752 | ||||||
| Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan | - | 1,355 | ||||||
| Diluted weighted-average common shares outstanding | 9,029,212 | 9,011,107 | ||||||
| (1) For the three months ended March 31, 2020, there were 492 shares excluded from the diluted EPS calculation because the impact of their assumed vesting would be anti-dilutive due to a net loss in that period. | ||||||||
| 7. | COMMITMENTS AND CONTINGENCIES |
As previously disclosed, the Company was unable to timely file the Delinquent Filings due to the process of restating its financial statements as described above. As a result, on February 18, 2020, the Company received a notice from the Nasdaq Stock Market LLC (“Nasdaq”) indicating that, unless the Company timely requested a hearing before a Nasdaq Hearings Panel (the “Panel”), the Company’s common stock would be subject to suspension and delisting from Nasdaq due to non-compliance with Nasdaq Listing Rule 5250(c)(1). On May 1, 2020, the Panel granted the Company’s request to remain listed on Nasdaq, subject to the Company filing all current and overdue quarterly and annual reports with the Securities and Exchange Commission on or before August 10, 2020. Because the restatement process was not complete by such date, Nasdaq suspended trading in our shares as of August 13, 2020. Our stock has since traded on the OTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLFA”. Nasdaq denied our appeal of this decision, resulting in our stock being formally delisted on February 9, 2021. We intend to reapply for Nasdaq listing once the Company has made the required Exchange Act filings.
SEC Investigation
| North America | International | Total | ||||||||||
| For the quarter ended September 30, 2017 | ||||||||||||
| Net sales | $ | 17,421,013 | $ | 967,368 | $ | 18,388,381 | ||||||
| Gross profit | 11,037,486 | 597,845 | 11,635,331 | |||||||||
| Operating income (loss) | 649,797 | 478 | 650,275 | |||||||||
| Interest (expense) | (53,141 | ) | - | (53,141 | ) | |||||||
| Other income (expense), net | 94,196 | 1,740 | 95,936 | |||||||||
| Income (loss) before income taxes | 690,852 | 2,218 | 693,070 | |||||||||
| Depreciation and amortization | 513,250 | 23,876 | 537,126 | |||||||||
| Fixed asset additions | 523,546 | 2,095 | 525,641 | |||||||||
| Total assets | $ | 70,083,363 | $ | 4,288,478 | $ | 74,371,841 | ||||||
| For the quarter ended September 30, 2016 | ||||||||||||
| Net sales | $ | 17,745,130 | $ | 883,232 | $ | 18,628,362 | ||||||
| Gross profit | 11,124,269 | 520,602 | 11,644,871 | |||||||||
| Operating income (loss) | 1,589,071 | (49,012 | ) | 1,540,059 | ||||||||
| Interest (expense) | (43,493 | ) | - | (43,493 | ) | |||||||
| Other income (expense), net | 7,052 | (3,482 | ) | 3,570 | ||||||||
| Income (loss) before income taxes | 1,552,630 | (52,494 | ) | 1,500,136 | ||||||||
| Depreciation and amortization | 419,091 | 22,194 | 441,285 | |||||||||
| Fixed asset additions | 485,347 | 2,077 | 487,424 | |||||||||
| Total assets | $ | 65,960,965 | $ | 3,837,798 | $ | 69,798,763 | ||||||
| North America | International | Total | ||||||||||
| For the nine months ended September 30, 2017 | ||||||||||||
| Net sales | $ | 55,080,152 | $ | 2,738,844 | $ | 57,818,996 | ||||||
| Gross profit | 35,239,645 | 1,577,265 | 36,816,910 | |||||||||
| Operating income (loss) | 4,276,247 | (233,044 | ) | 4,043,203 | ||||||||
| Interest (expense) | (143,165 | ) | - | (143,165 | ) | |||||||
| Other income (expense), net | 127,045 | (11,446 | ) | 115,599 | ||||||||
| Income (loss) before income taxes | 4,260,127 | (244,490 | ) | 4,015,637 | ||||||||
| Depreciation and amortization | 1,398,319 | 68,215 | 1,466,534 | |||||||||
| Fixed asset additions | 1,508,426 | 22,121 | 1,530,547 | |||||||||
| Total assets | $ | 70,083,363 | $ | 4,288,478 | $ | 74,371,841 | ||||||
| For the nine months ended September 30, 2016 | ||||||||||||
| Net sales | $ | 56,043,559 | $ | 2,779,935 | $ | 58,823,494 | ||||||
| Gross profit | 35,364,389 | 1,829,018 | 37,193,407 | |||||||||
| Operating income | 6,644,592 | 97,148 | 6,741,740 | |||||||||
| Interest (expense) | (108,949 | ) | - | (108,949 | ) | |||||||
| Other income (expense), net | 21,784 | 5,181 | 26,965 | |||||||||
| Income before income taxes | 6,557,427 | 102,329 | 6,659,756 | |||||||||
| Depreciation and amortization | 1,186,990 | 86,088 | 1,273,078 | |||||||||
| Fixed asset additions | 1,330,446 | 54,985 | 1,385,431 | |||||||||
| Total assets | $ | 65,960,965 | $ | 3,837,798 | $ | 69,798,763 | ||||||
| 8. | SUBSEQUENT EVENTS |
| Three months ended September 30, | 2017 | 2016 | ||||||
| United States | $ | 15,551,725 | $ | 15,955,084 | ||||
| Canada | 1,653,051 | 1,597,652 | ||||||
| All other countries | 1,183,605 | 1,075,626 | ||||||
| $ | 18,388,381 | $ | 18,628,362 | |||||
| Nine months ended September 30, | 2017 | 2016 | ||||||
| United States | $ | 49,380,463 | $ | 50,293,346 | ||||
| Canada | 5,072,785 | 5,085,955 | ||||||
| All other countries | 3,365,748 | 3,444,193 | ||||||
| $ | 57,818,996 | $ | 58,823,494 | |||||
Share Repurchase Program
On January 28, 2021, we entered into an agreement with an institutional shareholder of the customer. No single foreign country, except for Canada, accounted for any material amountCompany, to repurchase 500,000 shares of our consolidated net salescommon stock, par value $0.0024 in a private transaction. The purchase price was $3.35 per share for the three and nine-month periods ended September 30, 2017 and 2016. We do not have any significant long-lived assets outsidea total of $1.7 million. The closing of the United States.repurchase of these shares took place on February 1, 2021. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock. This repurchase was separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plan described in the previous paragraph.
| Item 2. |
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, a hub for the local leathercrafting community and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our website, www.tandyleather.com.four websites: tandyleather.com, tandyleather.ca, tandyleather.eu and tandyleather.com.au. We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
Currently, the Company operates a Delaware corporation,total of 106 retail stores. There are 95 stores in the United States (“U.S,”), ten stores in Canada and one store in Spain. During the second quarter of 2020, we centralized U.S. e-commerce web order fulfillment from the stores to our commonFort Worth distribution center.
We launched a new Commercial Program in April 2019 to better serve larger business customers, a majority of these customers and their sales were also recognized in retail stores through most of 2019. For 2019, the Company operated as a single reportable segment and all reporting herein is presented on a consolidated basis.
New management joined the Company in October 2018 and set new strategic directions for both short and long term. The overarching goal is to invest in rebuilding a foundation for growth by: 1) improving our brand proposition, 2) reversing the sales decline with business customers, 3) building our talent, processes, tools and systems and 3) positioning us for long-term growth. A number of key initiatives to achieve these goals were begun in 2019 and continued into 2020. However, the onset of the COVID-19 pandemic in March of 2020 shifted our strategic focus to company survival and cash preservation. With all of the retail stores temporarily closed to the public by the end of March, 2020, web sales, digital marketing and centralized web fulfillment became the highest priority.
Key initiatives in 2020 and 2021 included:
| ■ | Accelerating implementation of our new web platform which supported a significantly improved consumer experience (look-and-feel, searchability, relevant content including video, and product and pricing information) integration of inventory, shipping and other systems, and substantial reduction in the time, manual effort and need for outside resources to make additions and changes; |
| ■ | Accelerating centralization of our web fulfillment activities to our Fort Worth warehouse which provided significant improvement in fulfillment rates and shipping times, and supported early product testing, an increase in product breadth by offering online-only items that required limited inventory investment, and other inventory efficiencies; |
| ■ | Shifting marketing resources from print and in-store activities to digital, with increased investments in SEO, SEM, email, digital advertising, social media, SMS/MMS, and affiliate links; |
| ■ | Accelerating the retail employee training program in the areas of product knowledge, leathercrafting knowledge and selling tools while stores were closed; |
| ■ | Continuing to drive the Commercial Program, through a dedicated team focused on the Company’s largest customers with a business model that meets these customers’ unique needs including dedicated sales representatives, clear and competitive volume-based pricing, personalized service and sourcing, shipping directly to customers from our distribution center, and improved product consistency, quality and availability; |
| ■ | Continuing to improve the quality and assortment of the product offering to better appeal to more advanced leather-crafters and business customers; and |
| ■ | Continuing to build the organization, processes, infrastructure, tools and systems to efficiently execute these strategies. |
Nasdaq suspended trading in the Company’s shares as of August 13, 2020 due to the Company not being current with its SEC filings. Our stock tradeshas since traded on the NASDAQ Global MarketOTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLF.“TLFA.” Nasdaq denied the Company’s appeal of this decision, resulting in the Company’s stock being formally delisted by Nasdaq on February 9, 2021. We intend to reapply for Nasdaq listing once the Company has made the required Exchange Act filings.
COVID-19 and Outlook
In late 2019, COVID-19 was detected in Wuhan, China and has since spread to other parts of the world, including the U.S. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Federal, state, and local governments implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have builtbeen exposed to the virus, shelter-in-place restrictions and limitations on business operations. As previously announced and for the health and safety of employees and customers, on March 17, 2020, the Company made the decision to begin temporary store closures. The onset of the COVID-19 pandemic in March 2020 temporarily shifted our businessstrategic focus to company survival and cash preservation. We began closing stores on March 18, 2020, and by offering ourApril 2, 2020, we temporarily closed all stores to the public. While we pivoted to serve customers qualityonly online, the Company experienced significant decreases in demand for its products in one location at competitive prices.the second and third quarters of 2020, negatively impacting net sales.
In response, we took immediate action to mitigate the impact of temporary store closures on our cash flows by: (i) furloughing 406 Tandy employees, comprising two-thirds of the Tandy work force, (ii) temporarily cutting corporate salaries, with deeper cuts for the Executive Leadership Team, (iii) negotiating abatements, deferrals and other favorable lease terms with landlords, and (iv) negotiating longer payment terms with our key product vendors.
Due to our size, we were not eligible for the Paycheck Protection Program administered through the Small Business Administration. Also, due to our not being current on financial filings with the SEC, we were not able to obtain loans under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. During the second quarter of 2020, the Company borrowed $0.4 million through the Spanish government’s Institute of Official Credit Guarantee for Small and Medium-sized Enterprises, a COVID-19 relief program. The term of the agreement is for five years and the interest rate is fixed at 1.5%. Based on the terms of the loan agreement, we make interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement. In Canada, we participated in the Canada Emergency Commercial Rent Assistance (“CECRA”) program for rent relief. This program provided for a 75% reduction in the store rent for included stores for the months of April, May and June 2020. We operatereceived total rent abatements under the program of $0.05 million.
Nine stores were permanently closed during 2020 as leases expired or early terminations were negotiated, including at locations where we believe we can retain a majority of customers through geographically proximate stores and/or our enhanced website platform. After these permanent closures, Tandy operates 106 stores, including ten in two segments: North AmericaCanada and International. Prior to January 1, 2017, we operatedone in three segments: Wholesale, Retail and International. To better reflect how management analyzes the business and allocates resources, we combined Wholesale and Retail into North America effective January 1, 2017, while International remains the same. All prior year data discussed throughout this Form 10Q has been restated to conformSpain.
On May 22, 2020, our Fort Worth flagship store reopened to the public, the beginning of a phased approach to reopening our stores with limited hours, new reporting segment structure. There is no changeprotocols for sanitizing, social distancing, wearing masks and taking daily temperatures of employees. During the third quarter of 2020, all 106 of Tandy’s stores had reopened to the public, and the store re-openings were well received by our consolidated financial positionemployees and customers. During the fourth quarter of 2020 and into the present, we continue to manage through the pandemic as we saw increased spikes in COVID-19 infections, and continue to see varying levels of infection rates, and have been forced to close certain stores or results.
move certain stores to “curbside only” operations. With the rapid spread of the Delta variant of COVID-19 during the third quarter of 2021, we have experienced an increasing number of these shutdowns. We believe that the keyrollout of COVID-19 vaccines in 2021 has offset these closures somewhat, but it is difficult to our success is our ability to profitably grow our base business.predict whether these vaccines will be adopted by further large numbers of Americans or whether current or future vaccines will remain effective against Delta or other future variants of the virus. We expect to grow that business by opening new locationsat least some further infections and by increasing salestemporary store shutdowns will continue for the foreseeable future.
While we previously fulfilled our web orders out of our retail stores, during the second quarter of 2020, we built a centralized web fulfillment capability in our existing locations. To date in 2017, weFort Worth distribution center and have reopened one store in Harrisburg, PAbeen and opened new stores in Allen, TX; Miami, FL; and McAllen, TX.
As part of the Company’s accounting policy for long-lived asset impairments, we believe the COVID-19 impact on the Company’s results of operations, cash flows and financial position and the ongoing uncertainty the virus has created around future operating results represented a triggering event starting in the future, but do not intend to open any new international stores in 2017 or 2018.
2020.
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 onComprehensive Form 10-K for the fiscal year ended December 31, 2016.
2019.
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via two methods: (1) at the store counter and (2) shipment of product generally via web sales. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when control passes to the customer. Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales. Net sales are based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns. The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales, accordingly.
Gift cards. We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one year.
Inventory.Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods held for sale includes the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process is valued on a first‑in, first out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the inventory. We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii) items that need to be removed from our product line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to adequately value our inventory at the lower of cost or net realizable value. Since the determination of net realizable value of inventory involves both estimation and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset. The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations. Goods shipped to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier. Inventory is physically counted twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our accounting system to reflect actual count results.
Leases. We lease certain real estate for our retail store locations under long-term lease agreements. Starting in 2019, with the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognize an operating lease asset and lease liability at commencement date based on the present value of the lease payments over the lease term. The present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably certain we will exercise such an option. The exercise of lease renewal options is generally at our discretion. Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. We discount lease payments using our incremental borrowing rate based on information available as of the measurement date. Prior to 2019, rent expense on operating leases, including rent holidays and scheduled rent increases, was recorded on a straight‑line basis over the term of the lease, commencing on the date we took possession of the leased property. Rent expense is recorded in operating expenses. The net excess of rent expense over the actual cash paid was recorded as accrued expenses and other liabilities in the accompanying consolidated balance sheets. As of December 31, 2019, we have no finance leases, no sublease agreements, and no lease agreements in which we are named as a lessor. Subsequent to the recognition of our operating lease assets and lease liabilities, we recognize lease expense related to our operating leases on a straight-line basis over the lease term. The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. We also perform interim reviews of our operating lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable.
Impairment of Long-Lived Assets. We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate the carrying value of certain assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use (“ROU”) lease assets, property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group's major classifications which in this case are operating lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method.
Stock-based Compensation. The Company’s stock-based compensation primarily relates to restricted stock unit (“RSU”) awards. Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. Compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards. Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets. The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved. If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized. If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed. The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied. We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards.
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent recovery is deemed not likely, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available. We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.
Three Months Ended September 30, 2017March 31, 2020 and 20162019
The following tables presenttable presents selected financial data for each of our segments:data:
| Quarter Ended Sept 30, 2017 | Quarter Ended Sept 30, 2016 | |||||||||||||||
Net Sales | Income from Operations | Net Sales | Income from Operations | |||||||||||||
| North America | $ | 17,421,013 | $ | 649,797 | $ | 17,745,130 | $ | 1,589,071 | ||||||||
| International | 967,368 | 478 | 883,232 | (49,012 | ) | |||||||||||
| Total | $ | 18,388,381 | $ | 650,275 | $ | 18,628,362 | $ | 1,540,059 | ||||||||
| (in thousands) | Three Months Ended March 31, | |||||||||||||||
| 2020 | 2019 | $ Change | % Change | |||||||||||||
| Restated | ||||||||||||||||
| Sales | $ | 17,145 | $ | 20,941 | $ | (3,796 | ) | (18.1 | %) | |||||||
| Gross profit | 9,866 | 12,245 | (2,379 | ) | (19.4 | %) | ||||||||||
| Gross margin percentage | 57.5 | % | 58.5 | % | (1.0% | ) | (1.7 | %) | ||||||||
| Operating expenses | 11,096 | 10,032 | 1,064 | 10.6 | % | |||||||||||
| Impairment expenses | 1,069 | - | 1,069 | N/A | ||||||||||||
| Income (loss) from operations | $ | (2,299 | ) | $ | 2,213 | $ | (4,512 | ) | (203.9 | %) | ||||||
Net Sales
Consolidated net sales for the quarter ended September 30, 2017March 31, 2020 decreased $239,981,$3.8 million, or 1.3%18.1%, compared to the same period in 2016. International reported a sales increase of 9.5%, while North America reported a sales decline of 1.8%. Income from operations on a consolidated basis for the quarter ended September 30, 2017 decreased $889,784, from the third quarter of 2016 primarily2019, due to the decreaseimpact of closing six stores, the change in sales and an increase in operating expenses, primarily related to the six new stores opened since October 2016, as well as the additional expensespromotional cadence associated with our new district manager structure.pricing strategy that simplified our pricing and adjusted our highest pricing tier to be competitive EDLP, and inventory shortages on key items that resulted in some out-of-stock conditions.
2017 | 2016 | % change | ||||||||||
| Net income | $ | 521,414 | $ | 1,000,350 | (47.9 | %) | ||||||
| # Stores | Qtr Ended 09/30/17 | # Stores | Qtr Ended 09/30/16 | $ Change | % Change | |||||||||||||||||||
| Same stores | 108 | $ | 16,786,811 | 108 | $ | 17,745,130 | $ | (958,319 | ) | (5.4 | %) | |||||||||||||
| New stores | 6 | 518,777 | - | 518,777 | N/A | |||||||||||||||||||
| Temp closed store | 1 | 115,425 | 1 | - | 115,425 | N/A | ||||||||||||||||||
| Total net sales | 115 | $ | 17,421,013 | 109 | $ | 17,745,130 | $ | (324,117 | ) | (1.8 | )% | |||||||||||||
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.) | 35% | 37% | |
| MANUFACTURERS | 4% | 5% | |
| 100% | 100% |
| (in thousands, | Three Months Ended March 31, | |||||||||||||||||||||||
| except store data) | 2020 | 2019 | 2019 vs 2018 | |||||||||||||||||||||
| Restated | ||||||||||||||||||||||||
| # Stores | Sales | # Stores | Sales | $ Change | % Change | |||||||||||||||||||
| Same stores | 114 | $ | 17,090 | 114 | $ | 20,107 | $ | (3,017 | ) | (15.0 | )% | |||||||||||||
| New stores | - | - | - | - | - | |||||||||||||||||||
| Closed stores | 1 | 55 | 3 | 834 | (779 | ) | (93.4 | )% | ||||||||||||||||
| Total at year-end | 114 | $ | 17,145 | 117 | $ | 20,941 | $ | (3,796 | ) | |||||||||||||||
| Nine Months Ended Sept 30, 2017 | Nine Months Ended Sept 30, 2016 | |||||||||||||||
Net Sales | Income from Operations | Net Sales | Income from Operations | |||||||||||||
| North America | $ | 55,080,152 | $ | 4,276,247 | $ | 56,043,559 | $ | 6,644,592 | ||||||||
| International | 2,738,844 | (233,044 | ) | 2,779,935 | 97,148 | |||||||||||
| Total | $ | 57,818,996 | $ | 4,043,203 | $ | 58,823,494 | $ | 6,741,740 | ||||||||
2017 | 2016 | % change | ||||||||||
| Net income | $ | 2,780,411 | $ | 4,342,262 | (36.0 | %) | ||||||
| (in thousands) | Three Months Ended March 31, | |||||||
| 2020 | 2019 | |||||||
| Restated | ||||||||
| Operating expenses | $ | 11,096 | $ | 10,032 | ||||
| Non-routine items related to restatement | (668 | ) | - | |||||
| Non-routine items related to CFO transition | (192 | ) | - | |||||
| Adjusted operating expenses | $ | 10,236 | $ | 10,032 | ||||
| Operating expenses % of sales | 64.7 | % | 47.9 | % | ||||
| Adjusted Operating expenses % of sales | 59.7 | % | 47.9 | % | ||||
# Stores | Nine Months Ended 09/30/17 | # Stores | Nine Months Ended 09/30/16 | $ Change | % Change | |||||||||||||||||||
| Same stores | 107 | $ | 53,196,638 | 107 | $ | 54,863,405 | $ | (1,666,767 | ) | (3.0 | %) | |||||||||||||
| New stores | 7 | 1,562,619 | 1 | 622,336 | 940,283 | 151.1 | % | |||||||||||||||||
| Closed/temp closed stores | 3 | 320,895 | 3 | 557,818 | (236,923 | ) | (42.5 | %) | ||||||||||||||||
| Total net sales | 115 | $ | 55,080,152 | 109 | $ | 56,043,559 | $ | (963,407 | ) | (1.7 | )% | |||||||||||||
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.) | 35% | 37% | |
| MANUFACTURERS | 4% | 5% | |
| 100% | 100% |
Other Expenses
We had no interest expense during the three months ended March 31, 2020. During the first quarter of 2019 we paid approximately $143,000less than $0.1 million in interest on our bank debt in the first nine monthsdebt.
32
Income Taxes
Our effective tax rate of 31% for the ninethree months ended September 30, 2017March 31, 2020 was 22.6%, compared to 35%26.6% for the same period in 2016 was2019. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, the reversal ofdifference in tax rates for loss carryback periods, foreign income/loss positions, expenses that are nondeductible for tax purposes, the change in our valuation allowance associated with our deferred tax position for fixed assets.assets, and differences in tax rates.
Capital Resources, Liquidity and Financial Condition
We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments, and to service our outstanding debt.investments. We expect to fund our operating and liquidity needs as well as our store growthprimarily from a combination of current cash balances, cash generated from operating activities and internally generated funds.a future working capital bank line of credit that we are negotiating. Any excess cash will be invested as determined by our Board of Directors in accordance with its approved investment policy. Our cash balances at Septemberas of March 31, 2020 totaled $11.4 million, and as of June 30, 20172021 our cash balance totaled $12.$5.9 million.
Lines of Credit
On April 2, million. In addition, we have available2020, the Company’s primary bank terminated a $6 million working capital line of credit more fully described below.facility secured by inventory and a $10 million credit facility secured by the Company’s owned real estate as a result of the failure to provide timely quarterly financial statements and compliance certificates required under the facilities. The delay was the result of the need to restate previously filed financial statements and file subsequent delinquent filings with the SEC. As of the date of the termination, Tandy had no borrowings under these credit facilities or with any other lending institution.
Debt Agreements
During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small and Medium-sized Enterprises in order to facilitate the continuation of employment and to attenuate the economic effects of the COVID-19 virus. This loan was provided for by the Spanish government as part of a COVID-19 relief program. The term of the agreement is five years and the interest rate is fixed at 1.5%. Based on the terms of the loan agreement, we are required to make monthly interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement.
In August 2015, our Board of Directors authorized a share repurchase program, wherepursuant to which we maywere authorized to repurchase up to 1.2 million shares of our common stock at prevailing market rates through August 2016. Subsequently, the program was amended to increase the number of shares available for repurchase to 2.2 million and to extend the program throughAugust 2018. Forthrough August 2019. In June 2019, the nine months ended September 30, 2017, no shares were repurchased, while 520,500 shares were repurchased duringprogram was again amended to decrease the nine months ended September 30, 2016. At September 30, 2017, there are 1,150,793number of shares available for repurchase underto one million as of such date and to extend the plan.program through August 9, 2020.
On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5 million of its common stock between August 9, 2020 and July 31, 2022, subject to the completion of our financial restatement and the filing of all delinquent filings with the SEC. The Company's previous share repurchase program expired in August 2020.
On September 18, 2015,January 28, 2021, we executed a Promissory Note and Business Loan Agreemententered into an agreement with BOKF, NA d/b/a Bankan institutional shareholder of Texas (“BOKF”) which provided us with a line of credit facility of upthe Company, to $10,000,000 for the purpose of repurchasingrepurchase 500,000 shares of our common stock, pursuant to our stock repurchase program. On August 25, 2016, this linepar value $0.0024 in a private transaction. The purchase price was $3.35 per share for a total of credit was amended to increase the availability from $10,000,000 to $15,000,000 for$1.7 million. The closing of the repurchase of these shares took place on February 1, 2021. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock throughstock.
Cash Flows
| (in thousands) | Three Months Ended March 31, | |||||||
| 2020 | 2019 | |||||||
| Net cash provided by (used in) operating activities | $ | (4,023 | ) | $ | 3,133 | |||
| Net cash used in investing activities | (180 | ) | (5,018 | ) | ||||
| Net cash used in financing activities | - | (9,683 | ) | |||||
| Effect of exchange rate changes on cash and cash equivalents | (279 | ) | 177 | |||||
| Net decrease in cash and cash equivalents | $ | (4,482 | ) | $ | (11,391 | ) | ||
For the earlier of August 25, 2017 or the date on which the entire amount is drawn. On August 10, 2017, this line of credit was further amended to extend the drawdown period and conversion date from August 25, 2017 to August 18, 2018 to align with our stock repurchase program. During this time period, we are required to make monthly interest-only payments. At the end of this time period, we expect that the principal balance will be rolled into a 4-year term note. This Promissory Note is secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas. There were no amounts drawn on this line during the ninethree months ended September 30, 2017. ForMarch 31, 2020, we used $4.1 million of cash from operations driven by our net loss of $1.7 million offset by non-cash expenses of $2.3 million, including depreciation and amortization, impairments, and stock-based compensation. Changes in our working capital used $4.6 million of cash primarily from the nine months ended September 30, 2016, we drew approximately $3.7build-up of inventory. We invested $1.7 million on this line which was usedin the purchase of short- term U.S. Treasuries and sold short-term U.S. Treasuries at maturity for $1.7 million. We invested $0.2 million in capital expenditures for the purchase of store fixtures and systems implementations. The activities above, in addition to repurchase approximately 520,500 sharesthe effect of our common stock. At September 30, 2017, the unused portionexchange rate changes, resulted in a net decrease in cash of the line of credit was approximately $7.6$4.5 million.
| Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Management’s Annual Report on Internal Control over Financial Reporting
Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management’s establishing and maintaining adequate internal control over financial reporting is based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). A system of internal control over financial reporting should be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud, and therefore can provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements.
A material weakness is defined as a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable assurance level.possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on this definition, our management, with the participation of our CEO and CFO, evaluated the effectiveness and design of our internal control over financial reporting against the COSO Framework and concluded that our internal control over financial reporting was not effective as of March 31, 2020 due to material weaknesses arising from flaws in our control environment, risk oversight measures, control activities, information processing and communication and our monitoring systems, each of which is described in more detail below.
Control environment. We concluded that we did not maintain effective controls in the following areas: (i) managerial functions, procedures and oversight; (ii) organizational structure, delegation of authority and responsibilities; (iii) segregation of duties; (iv) adequacy of trained accounting and financial reporting personnel to ensure that internal control responsibilities were performed effectively and material accounting errors were detected; and (v) maintenance and enforcement of internal control responsibilities, including holding individuals accountable for their internal control responsibilities.
Risk oversight environment. We did not maintain adequate risk oversight measures related to the (i) identification and assessment of risks that could impact achieving our objectives; and (ii) identification and analysis of the potential changes that could affect our internal controls environment.
Control activities. We concluded that we did not have effective control activities in the following areas: (i) selecting and developing control policies, procedures and activities to mitigate risks, including with respect to the methodologies used to calculate and report financial information and results; and (ii) selecting and implementing information technology and related systems supportive to our internal control over financial reporting.
Information processing and communication. We identified deficiencies associated with information processing and communication within our internal control framework. Specifically, we did not effectively communicate objectives and internal control responsibilities throughout the organization which contributed to inadequate documentation of processes and methodologies used to calculate and reconcile regular consolidation adjustments hindering clear communication with management, the Board of Directors and our independent auditors.
In addition, the documentation of inventory purchasing relied on paper-based vendor invoices and multi-step manual data-entry processes, some of which were subject to management override, which resulted in errors at multiple steps of the process, and deficiencies in communicating accurate information to management, the Board of Directors and our independent auditors.
Monitoring activities. We concluded that we did not design and implement effective monitoring activities related to (i) selecting, developing, and performing separate evaluations of our internal control over financial reporting; and (ii) evaluating and communicating internal control deficiencies in a timely manner to parties responsible for taking corrective actions.
The issues described above resulted in the following errors in our financial statements previously filed with the SEC:
Inventory was not stated on a FIFO basis nor was it stated at the lower of FIFO cost or net realizable value;
Freight-in, warehousing and handling expenditures, factory labor and overhead and freight-out costs were not correctly capitalized;
Warehousing and handling expenditures were incorrectly classified as operating expenses;
Allowance for sales returns was incorrectly calculated and accounted for;
Net gift card liability was not correctly accounted for in 2017;
Lease asset and liability under ASC Topic 842 was incorrectly calculated;
PTO related accrued liabilities were incorrectly calculated;
Provision for income taxes, including adjustments related to the Tax Cuts and Jobs Act (the “Tax Act”), uncertain tax position (UTP) liability and related interest expense, and correction of taxable income on the return of our Canada and Spain foreign subsidiaries; Foreign currency gains and losses associated with the Company’s Canadian subsidiary were incorrectly classified as a component of accumulated other comprehensive loss and the cumulative translation adjustments included in accumulated other comprehensive loss were not tax effected; and
Shares repurchased and subsequently cancelled were incorrectly accounted for as treasury stock
Remediation Efforts to Address Material Weaknesses
Our management, including our CEO and CFO, has worked with expert accounting consultants and our Audit Committee to design and implement both a short-term and a long-term remediation plan to correct the material weaknesses in our disclosure controls and procedures and our internal control over financial reporting. The following activities highlight our commitment to remediating our identified material weaknesses:
Since October 2019 and through the filing date of this Form 10-Q, we have taken the following measures, among others:
| i. | Hired a new, highly-qualified CFO in January 2021 with extensive public-company experience; |
| ii. | Replaced critical roles within our accounting team with contract accounting resources and ultimately (ongoing) full-time employees with expertise in GAAP accounting, SEC reporting and disclosure, internal audit and internal controls; |
| iii. | Replaced our legacy accounting systems with an integrated enterprise resource planning (“ERP”) solution which includes general ledger, warehouse management and factory production modules designed to calculate inventory on a FIFO basis; |
| iv. | Made improvements to our accounting close process, including a formalized accounting close checklist establishing accountability for oversight and review; |
| v. | Documented process narratives in the following areas: (i) financial reporting, (ii) inventory, (iii) purchasing and accounts payable, (iv) revenue, (v) fixed assets and lease accounting, (vi) general accounting, treasury and financial planning & analysis, (vii) tax, (viii) information technology (IT) governance, and (ix) HR and payroll; and |
| vi. | Created a risk controls matrix which includes, among other things, a comprehensive list of key and mitigating controls, a description of the risk the control is designed to mitigate, the individual responsible for each control, the frequency in which the control is performed, and a mapping of each control to the five COSO Framework components (control environment, risk assessment, control activities, information and communication, or monitoring activities). |
Our continuing plan for remediation includes:
| i. | Ongoing recruitment and hiring of permanent, qualified public-company accounting personnel; |
| ii. | Point-of-sale systems implementation that will be fully integrated with our new ERP system; |
| iii. | Redesigning our accounting procedures and activities to align with our new ERP system that will include built-in controls to improve upon the reliability of financial reporting and the preparation of financial statements in accordance with GAAP; |
| iv. | Reporting the progress and results of our remediation plan to the Audit Committee on a recurring basis, including the identification, status, and resolution of internal control deficiencies; and |
| v. | Creating a comprehensive approach to regularly evaluate the operating effectiveness of our disclosure controls and procedures and our internal control over financial reporting using the COSO Framework as a guide. |
Control Environment
Our management, including our CEO and CFO, our Audit Committee and our Board of Directors have taken certain steps to set the proper tone-at-the-top in support of the Company’s values and climate to develop and maintain an effective internal control environment. These actions include:
| ■ | Recurring meetings with leadership, finance and accounting and other key functional areas to train staff on processes for oversight and emphasize each individual’s accountability for internal control compliance, and to create a pattern of regular discussion of such controls. |
| ■ | Periodic communications from the CEO, CFO and other key senior leaders on the Company’s mission, core values, Code of Business Conduct and Ethics, whistleblower policies, and each employee’s individual responsibility for internal control compliance. |
| ■ | Reorganization of the finance and accounting team to ensure appropriate segregation of duties, oversight and review of work, and recruiting and hiring qualified, competent employees with relevant experience for the roles. |
| ■ | Regular performance evaluations to include position-specific criteria for functional competence. |
Risk Oversight Measures
We continue to identify risks and enhance risk oversight measures. In late 2019, we developed an annual strategic planning process designed to identify specific operating objectives for the organization and to conduct an assessment across the organization of the risks to meeting those objectives, including the risk of fraud. Furthermore, on a quarterly basis, management will review our periodic filings to ensure that identified risks have been appropriately disclosed. In the areas of reporting and compliance objectives, we are also developing a process to conduct monthly business reviews by functional area that would include risk assessments of reporting accuracy based on complexity and transaction levels as well as compliance with GAAP and other regulatory requirements, in order to evaluate whether our existing control activities appropriately mitigate such risks or if additional controls need to be employed.
Control Activities
We continue to redesign and implement our internal control activities. Specifically, we conducted detailed working sessions to document our current and prior finance and accounting policies, procedures and step-by-step activities as a prerequisite to selecting a new systems vendor. These sessions identified specific areas that required short-term improvement and long-term redesign of processes, structure, authorities and controls, and those actions include:
| ■ | New systems designed to calculate inventory at FIFO and create efficiency and accuracy through integration: we implemented the warehouse management, factory production system and general ledger systems modules as part of our new ERP system implementation which went live on September 1, 2020. We are still in the process of implementing our new point-of-sale system, which will be fully integrated with our ERP system and with a phased implementation across our fleet of stores throughout 2021. |
| ■ | Creation and implementation of newly-designed processes, structures, delegation of authority and controls, in accordance with the COSO Framework, including: |
| o | The creation of a risk controls matrix; |
| o | Driving a greater sense of accountability by requiring sub-certifications below the CEO and CFO level for certain key accounting, finance and operations personnel; |
| o | Quarterly updates for the CFO regarding upcoming accounting pronouncement and proposed changes to GAAP accounting standards, tax regulations, and other requirements that may impact the Company’s financial reporting; |
| o | Quarterly reviews of the most significant accounting estimates and judgements; |
| o | Validation of results through detailed variance analyses and reconciliation of account balances; |
| o | Monthly business review of actual financial performance compared to forecasts with participation from leadership across the organization; and |
| o | Establishing a disclosure committee comprised of key management throughout the different areas of the organization to evaluate the appropriateness of disclosures in the Company’s periodic filings on Forms 10-K and 10-Q and to support the CEO and CFO with the certification process. |
Information Processing and Communication
The implementation of our new ERP system is expected to eliminate the need for many of the topside adjustment calculations that had to be performed because our legacy systems were not integrated and many of our accounting processes were manual. This new ERP system allows us to automate certain accounting processes, reducing the risk of management override, and over time will eliminate the need for topside adjustments outside of the system. In addition, management is developing detailed policies, procedures and internal controls related to our financial reporting and working with our ERP vendor to develop regular reporting from our new systems that can validate the quality of our data and provide accurate information to support internal and external reporting and audit requirements.
Monitoring Activities
In addition to the items noted above, as we continue to evaluate, remediate, and improve our internal control over financial reporting, our management expects to continue to implement additional measures to address control deficiencies and further refine and improve the remediation efforts described above. Specifically, we are developing a checklist of activities based on the criteria established in the COSO Framework against which we will assess the design of entity-level and activity-level controls, and the operational effectiveness of such controls. Deficiencies identified in this process will be addressed by management, including our CEO and CFO. This assessment, any deficiencies and any remedial actions will be shared and discussed with our Audit Committee and our independent auditors on a quarterly basis.
Cybersecurity
We utilize information technology for internal and external communications with vendors, customers and banks as well as systems technology for reporting and managing our operations. Loss, disruption or compromise of these systems could significantly impact operations and results. Other than temporary disruption to operations that may be caused by a cybersecurity breach, we believe cash transactions to be the primary risk for potential loss. We work with our financial institutions to take steps to minimize the risk by requiring multiple levels of authorization, encryption and other controls. The Company utilizes third party intrusion prevention and detection systems and performs periodic penetration testing to monitor its cybersecurity environment. However, the Company has not performed a formalized risk assessment to address cybersecurity risks or documented internal controls that assist in alleviating such risks.
Changes in Internal Control Over Financial Reporting
| Item 1. |
The information contained in Note 67, Commitments and Contingencies to the consolidated financial statementsConsolidated Financial Statements included in Part I, Item 1 of this Report is hereby incorporated into this Item 1 by reference.
| Item 1A. |
Our Risk Factors are discussed fully in our Comprehensive Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and incorporated herein by reference.
| Item 2. |
Purchases of Equity Securities by the Issuer and Use of ProceedsAffiliated Purchasers
| ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
| Period (2) | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of publicly announced plans or programs | (d) Maximum number of shares that may yet be purchased under the plans or programs (1) | ||||||||||||
January 1 – January 31, 2020 | — | — | — | 996,163 | ||||||||||||
February 1 – February 29, 2020 | — | — | — | 996,163 | ||||||||||||
March 1 – March 31, 2020 | — | — | — | 996,163 | ||||||||||||
Total | — | — | — | |||||||||||||
| (1) | Represents shares which may be purchased through our stock repurchase program, amended in June 2019, permitting us to repurchase up to 1.0 million shares of our common stock at prevailing market prices and the program was extended through, and expired on, August 9, 2020. On August 9, 2020, the Company’s Board of Directors approved a new stock repurchase program allowing the Company to repurchase up to $5 million value of shares of our common stock on or prior to July 31, 2022. |
| (2) | The Company suspended repurchasing any shares under its program beginning in July 2019, because of the lack of publicly-available financial information of the Company during this period. Management expects to resume the Company’s repurchase program (as conditions allow) following completion of our financial restatement and making all outstanding periodic filings with the SEC. |
| Item 6. |
Exhibit Number | Description | ||
3.2 | |||
3.3 | |||
4.1 | |||
10.1 | |||
10.2 | |||
10.4 | |||
10.5 | |||
10.6 | |||
10.7 | |||
10.8 | |
10.9 | |
10.10 | |
10.11 | |
10.12 | |
14.1 | |
21.1 | |
| 13a-14(a) or 15d-14(a) Certification by | |
| 13a-14(a) or 15d-14(a) Certification by Michael Galvan, Chief Financial Officer. | |
| Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
*101.INS | XBRL Instance Document. |
*101.SCH | XBRL Taxonomy Extension Schema Document. |
*101.CAL | XBRL Taxonomy Extension Calculation Document. |
*101.DEF | XBRL Taxonomy Extension Definition Document. |
*101.LAB | XBRL Taxonomy Extension Labels Document. |
*101.PRE | XBRL Taxonomy Extension Presentation Document. |
| Filed herewith. |
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: September 2, 2021 | By: | /s/ Janet Carr |
| Janet Carr | ||
| Chief Executive Officer | ||
Date: September 2, 2021 | By: | /s/ Michael Galvan |
| Michael Galvan | ||
| Chief Financial Officer | ||