| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
OurThe Business and Strategy
Tandy Leather Factory, Inc. is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, and organized in 2005 as a Delaware corporation, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, and a hub for the local leathercrafting community, and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our four websites: tandyleather.com, tandyleather.ca, tandyleather.eu and tandyleather.com.au. We also manufacture leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites.
We also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
Currently, the Company operates a total of
106105 retail stores. There are
9594 stores in the United States (“U.S,”), ten stores in Canada and one store in Spain.
New management joinedTandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been and continue to be our competitive advantage: where our consumers learn the
Companycraft in
October 2018classes, open table, and
set new strategic directionfrom the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others passionate about leather. Our website provides inspiration, detailed product descriptions and specifications, educational information and videos, and a convenient place to also purchase product – especially for
both short and long term. The overarching goal is to invest in rebuilding a foundation for growth by: 1) improvingthose who are far from 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 2021. 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 closedincluding a growing international customer base. For many of our retail and web customers, leatherworking evolves from a passion to a trade. Our Commercial Division is tailored to the
public by the endneeds of
March, 2020, web sales, digital marketingthose customers who build businesses around leather. With dedicated direct account representatives, a direct-from-our-warehouse shipping model, bulk and
centralized web fulfillment became the highest priority.volume-based competitive pricing, customized product development, and production and pre-production services, we are building long-term, strategic relationships with our largest customers.
Key initiatives in 2020 and 2021 included:Our focus over the last three years has been on three broad strategic initiative areas:
| ■1. | Accelerating implementation ofImproving our new web platform which supported a significantly improved consumer experience (look-and-feel, searchability, relevant content including video,brand proposition, with both Retail 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;Commercial customers
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| ■2. | Accelerating centralization ofRebuilding our web fulfillment activitiesfoundation – the talent, processes, tools and systems needed to our Fort Worth warehouse which provided significant improvement in fulfillment ratesserve these customers
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| 3. | Position us for long-term growth – creating the vision 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;roadmap for the future |
| ■ | 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;
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| ■ | Continuing to improve the quality and assortment of the product offering to better appeal to more advanced leather-crafters and business customers; and
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| ■ | Continuing to build the organization, processes, infrastructure, tools and systems to efficiently execute these strategies.
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Delisting of Company Stock
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 the Company’s appeal of this decision, resulting in the Company’s stock being formally delisted by Nasdaq on February 9, 2021. With this filing of our 2021 third quarter Form 10-Q, we are current in our SEC filings and will be reapplying for Nasdaq listing promptly.
COVID-19 and OutlookEconomic Conditions
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, weWe took immediate action to mitigate thethis impact through temporary employee furloughs and salary cuts, renegotiation of temporary store closures oncosts with 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, deferralsvendors 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,measures. We also known as the CARES Act. However, under the CARES Act we were eligible to participatedeveloped a centralized web fulfillment capability in the payroll tax deferral program, and we deferred $0.6 million in payroll tax with $0.3 million to be paid by December 31, 2021, and the remaining $0.3 million to be paid by December 31, 2022. During the second quarter of 2020, the Company borrowed $0.4 million through the Spanish government’s Institute of Official Credit Guarantee for Small and Medium-sized Enterprises, a COVID-19 relief program. 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 beginningdistribution center, replacing our prior system 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. shipping from stores.
During the third quarter of 2020, all 106 of Tandy’s stores had reopened to the public,. While customer response and the store re-openings were well received by our employees and customers. We have continued to our store reopening has been good, since then, variousmanage through the pandemic during intermittent spikes in localCOVID-19 infections, continued to see varying levels of infection rates, and the “wave” created by the Delta variant of COVID-19 in the summer of 2021 have at time been forced us to sporadicallytemporarily close or move certain stores to short-term “curbside only” operations or closures due to local conditions or staffing issues. 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.operations. We expect that at least some further infections and temporary store shutdowns will continue for the foreseeable future.
While we previously fulfilled our web orders outIn addition, specifically at the time of our retail stores, duringfiling this Form 10-Q, the second quarter of 2020, we built a centralized web fulfillment capability in our Fort Worth distribution centerAmerican and world economies have been acutely affected by a combination of factors arising from both the COVID-19 pandemic and expectthe war resulting from the invasion of Ukraine by Russian military forces. The current impacts of these events include (but are not limited to) levels of inflation that are the highest in the U.S. in more than 40 years, fuel prices at or near record highs, an extremely tight labor market with rising wages and competition to continueattract qualified workers, rising real estate prices and increases in interest rates. Purchases of non-essential, discretionary products tend to fulfill web orders primarily through Fort Worth going forward. Both our e-commerce business and storesdecline in periods of uncertainty regarding future economic prospects, such as the current one, as disposable income declines. The Company believes that these events have seen strong sales performance, but thedampened its first quarter sales. The future remains uncertain, and more store closures and/or the ongoing unemployment crisiscontinued increased labor, freight, product and other costs as well as weakening customer demand could causehave a material negative impact on future sales.
As part of the Company’s accounting policy for long-lived asset impairments, we believed the COVID-19 impact on the Company’s results of operations, cash flows andfuture financial position and the ongoing uncertainty the virus had created around future operating results represented a triggering event starting in the first quarter of 2020 and continued throughout the remainder of 2020.performance.
Critical Accounting Policies
A description of our critical accounting policies appears in Item 7 “Management's“Management’s Discussions and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2020.2021.
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via twothree methods: (1) at the store counter, and (2) shipment of product generally via web sales.sales, and (3) sales of product directly to commercial customers. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance obligation is met, and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met, and revenue is recognized when control passes to the customer. Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales. Net sales are based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns. The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales, accordingly. Under our sales returns policy, merchandise may be returned, under most circumstances, up to 60 days after date of purchase. As merchandise is returned, the company records the sales return against the sales return allowance. We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one year.
Inventory.Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods held for sale includes the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process is valued on a first‑in, first outfirst-out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the inventory. We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii) items that need to be removed from our product line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to adequately value our inventory at the lower of cost or net realizable value. Since the determination of net realizable value of inventory involves both estimation and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset. The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations. Goods shipped to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier. Inventory is physically counted twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our accounting system to reflect actual count results. Leases. We lease certain real estate for our retail store locations and warehouse equipment for our Texas distribution center, both under long-term lease agreements. Starting in 2019, with the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognize a lease asset and lease liability at commencement date based on the present value of the lease payments over the lease term. For our operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably certain we will exercise such an option. The exercise of lease renewal options is generally at our discretion. Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. We discount lease payments using our incremental borrowing rate based on information available as of the measurement date. Rent expense is recorded in operating expenses. The net excess of rent expense over the actual cash paid has been recorded as accrued expenses and other liabilities in the accompanying consolidated balance sheets. For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term with rent expense recorded to operating expenses. We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the consolidated statements of operations and comprehensive income (loss).income. As of September 30, 2021,March 31, 2022, we have no sublease agreements and no lease agreements in which we are named as a lessor. Subsequent to the recognition of our operating lease assets and lease liabilities, we recognize lease expense related to our operating leases on a straight-line basis over the lease term. The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. We also perform interim reviews of our operating lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable.
Impairment of Long-Lived Assets. We evaluate long-lived assets 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'sgroup’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 CompensationCompensation.. The Company’s stock-based compensation relates 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. CompensationThe total compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards. Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets. The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved. If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized. If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed. The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied. We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards.
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available. We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.
Three Months Ended September30,March 31, 2022 and 2021 and 2020
The following table presents selected financial data:
| | | | Three Months Ended March 31, | |
| (in thousands) | | Three Months Ended September 30, | | | 2022 | | 2021 | | $ Change | | % Change | |
| | | 2021 | | | 2020 | | | $ Change | | | % Change | | |
| Sales | | $ | 19,281 | | $ | 15,990 | | $ | 3,291 | | 20.6 | % | | $ | 20,500 | | $ | 21,394 | | $ | (894 | ) | | (4.2 | )% |
| Gross profit | | 11,089 | | 9,289 | | 1,800 | | 19.4 | % | | 11,931 | | 12,186 | | (255 | ) | | (2.1 | )% |
| Gross margin percentage | | 57.5 | % | | 58.1 | % | | -
|
| | (0.6 | %) | | 58.2 | % | | 57.0 | % | | | | 1.2 | % |
| Operating expenses | | | 11,078 | | | 10,528 | | | 550 | | | 5.2 | % | | | 11,102 | | | 11,221 | | | (119 | ) | | | (1.1 | )% |
| Income (loss) from operations | | $ | 11 | | $ | (1,239 | ) | | $ | 1,250 | | | 100.9 | % | |
| Income from operations | | | $ | 829 | | $ | 965 | | $ | (136 | ) | | | (14.1 | )% |
Consolidated net sales for the quarter ended September 30, 2021 increased $3.3March 31, 2022 decreased $0.9 million, or 20.6%4.2%, compared to the same period in 2020. While all of2021. The decrease in sales was partly impacted by our stores were officially reopened bychange in promotional cadence during the end ofquarter versus prior year. However, we believe the third quarter last year, some were primarily curbside, some were on limited hours for some period of timelarger impact was due to staffing shortages,lower consumer demand as a result of inflation and some were still temporarily closed for part of the quarter. Sales growth in the third quarter thisother global events coupled with comparison to prior year compared to last year was driven by having all stores fully reopened, improved retail customer demand, and strong growth with our commercial customers.
COVID-era stimulus payments that fueled sales.
Our store footprint consisted of 106 stores at both
September 30, 2021March 31, 2022 and
September 30, 2020. We have not opened any new stores during the third quarter of 2021 or 2020. March 31, 2021.
Gross Profit
Gross profit decreased by $0.3 million, or 2.1%, compared to the same period in 2021, as a result of the lower level of sales. Our gross margin percentage for the quarter ended September 30, 2021 decreasedMarch 31, 2022 increased to 57.5%, versus 58.1% in the same period in 2020. This decrease was a result of a combination of factors including product and customer mix shifts as well as higher costs for warehouse handling and freight costs.
Operating expenses
| (in thousands) | | Three Months Ended September 30, | |
| | | 2021 | | | 2020 | |
| Operating expenses | | $ | 11,078 | | | $ | 10,528 | |
| Non-routine items related to restatement | | | (124 | ) | | | (1,362 | ) |
| Adjusted operating expenses | | $ | 10,954 | | | $ | 9,166 | |
| | | | | | | | | |
| Operating expenses % of sales | | | 57.5 | % | | | 65.8 | % |
| Adjusted Operating expenses % of sales | | | 56.8 | % | | | 57.3 | % |
Operating expenses increased $0.6 million or 5.2%58.2% compared to the comparable period in 2020, mostly as a result of store labor costs from having all stores fully open this year versus the transition of curbside and reopening that we experienced last year, as well as higher sales-driven expenses like credit card fees and sales-based incentives, and partially offset by higher costs associated with the restatement of our financial statements during the third quarter of 2020. Adjusted operating expenses, which excludes the non-routine items related to the restatement, increased $1.8 million or 19.5% for the reasons noted above. Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP measure, included here to provide additional information regarding the Company’s financial performance on a recurring basis. Non-routine items are primarily legal and accounting costs associated with the restatement.
Income Taxes
Our effective tax rate for the three months ended September 30, 2021 was (13.0%) compared to 22.7% for the same period in 2020. 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.
Nine Months Ended September30, 2021 and 2020
The following table presents selected financial data:
| (in thousands) | | Nine Months Ended September 30, | |
| | | 2021 | | | 2020 | | | $ Change | | | % Change | |
| Sales | | $ | 59,241 | | | $ | 42,281 | | | $ | 16,960 | | | | 40.1 | % |
| Gross profit | | | 34,556 | | | | 24,398 | | | | 10,158 | | �� | | 41.6 | % |
| Gross margin percentage | | | 58.3 | % | | | 57.7 | % | | | -
|
| | | 0.6 | % |
| Operating expenses | | | 32,856 | | | | 29,204 | | | | 3,652 | | | | 12.5 | % |
| Impairment expenses | | | - | | | | 1,078 | | | | (1,078 | ) | | | (100.0 | %) |
| Income (loss) from operations | | $ | 1,700 | | | $ | (5,884 | ) | | $ | 7,584 | | | | 128.9 | % |
Net Sales
Consolidated sales for the nine months ended September 30, 2021 increased $17.0 million, or 40.1%, compared to the same period in 2020, with almost all of our stores open through the first nine months of this year compared to COVID-related closures57.0% in the corresponding prior-year period, in which most of our stores were closed for most of the second quarter and part of the third quarter.
We started 2020 with 115 stores, and during the first quarter of 2020, we closed one store in Beaverton, OR in February 2020. During the second quarter of 2020, we converted eight stores from temporary closures to permanent closures based on expiring leases, proximity to other stores, and local web sales penetration: Phoenix, AZ; Austin TX; Dallas, TX; Peoria, IL; Henrico (Richmond), VA; Nyack, NY; Johnston, RI and St Leonard (Montreal), QC. We have not opened any new stores during 2020 or 2021.
Gross Profit
Our gross margin percentage for the nine months ended September 30, 2021 increased to 58.3%, versus 57.7% in the same period in 2020. This increase was a result of a combination of factors, including product and customer mix shifts as well as refining the process we use to capitalize cost into our inventory value for freight, warehousing and handling expenditures, updating from a manual, higher-level process to a more automated mechanism utilizingusing our new ERP system, partially offset by higher costs for warehouse handling and freight costs. Due to our use of the FIFO method of valuation of inventory and our relatively low inventory turns, increases in product-related costs, including product itself, freight, and warehouse handling costs, will not flow through to cost of sales immediately; there will be a lag in the impact of these increased costs on our gross margin.
Operating expenses
| | | | Three Months Ended March 31, | |
| (in thousands) | | Nine Months Ended September 30, | | | 2022 | | 2021 | |
| | | 2021 | | | 2020 | | |
| Operating expenses | | $ | 32,856 | | | $ | 29,204 | | | $ | 11,102 | | $ | 11,221 | |
| Non-routine items related to restatement | | | (1,157 | ) | | | (2,407 | ) | | | (77 | ) | | | (707 | ) |
| Non-routine items related to CFO transition | | | - | | | | (389 | ) | |
| Adjusted operating expenses | | $ | 31,699 | | | $ | 26,408 | | | $ | 11,025 | | $ | 10,514 | |
| | | | | | | | | | | | | | |
| Operating expenses % of sales | | | 55.5 | % | | | 69.1 | % | | 54.2 | % | | 52.4 | % |
| Adjusted operating expenses % of sales | | | 53.5 | % | | | 62.5 | % | | 53.8 | % | | 49.1 | % |
Operating expenses increased $3.7decreased $0.1 million or 12.5%1.1% compared to the comparablecorresponding prior year period, in 2020, mostly as a result of recalling store employees who had been furloughed while stores were closed in 2020 due to the COVID pandemic as well as sales-driven expenses like credit card fees and sales-based incentives, partially offset by $1.3lower costs of $0.6 million in higher costs associated with the restatement of our financial statements and $0.4mostly offset by increases in store labor and occupancy costs of $0.2 million, higher CFO transition costsstock compensation of $0.2 million and $0.1 million in the prior year period.professional fees associated with our application for re-listing on Nasdaq and external auditor fees. Adjusted operating expenses, which excludes the non-routine items related to the restatement, and CFO turnover, increased $5.3$0.5 million or 20.0%4.9% for the reasons noted above. Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP measure, included here to provide additional information regarding the Company’s financial performance on a recurring basis. Non-routine items are primarily legal and accounting feescosts associated with the restatement and recruiting fees, exit costs, interim CFO-related expenses, and expenses for a number of other contract accounting professionals associated with the turnover of our CFO.restatement.
Income Taxes
Our effective tax rate for the
ninethree months ended
September 30, 2021March 31, 2022 was
23.1%23.4% compared to
22.6%23.0% for the same period in
2020.2021. 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.
Capital Resources, Liquidity and Financial Condition
We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments. We expect to fund our operating and liquidity needs primarily from a combination of current cash balances and cash generated from operating activities. Any excess cash will be invested as determined by our Board of Directors in accordance with its approved investment policy. Our cash balances as of
September 30, 2021March 31, 2022 totaled
$6.1$10.3 million.
Lines of Credit
On April 2, 2020, the Company’s primary bank terminated a $6.0 million working capital line of credit facility secured by inventory and a $15.0 million credit facility secured by the Company’s owned real estate as a result of the failure to provide timely quarterly financial statements and compliance certificates required under the facilities. The delay was the result of the need to restate previously filed financial statements and file subsequent delinquent filings with the SEC. As of the date of the termination, Tandy had no borrowings 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.
Share Repurchase Program and Share Repurchase
In August 2015, our Board of Directors authorized a share repurchase program, pursuant to which we were authorized to repurchase up to 1.2 million shares of our common stock at prevailing market rates through August 2016. Subsequently, the program was amended to increase the number of shares available for repurchase to 2.2 million and to extend the program through August 2019. In June 2019, the program was again amended to decrease the number of shares available for repurchase to one million as of such date and to extend the program through August 9, 2020.
On August 9, 2020, the Board of Directors approved a new program to repurchase up to
$5$5.0 million of its common stock between August 9, 2020 and July 31, 2022, subject to the completion of our financial restatement and the filing of all delinquent filings with the SEC. The
Company'sCompany’s previous share repurchase program expired in August 2020.
On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 500,000 shares of our common stock, par value $0.0024 in a private transaction separate from our share repurchase program. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase took place on February 1, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock.
On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 212,690 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $5.00 per share for a total of $1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding common stock.
26On April 11, 2022, we entered into an agreement with two institutional shareholders of the Company, to repurchase 359,500 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $5.00 per share for a total of $1.8 million. The closing of the repurchase took place on April 22, 2022, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 4.2% of our outstanding common stock.
Cash Flows
| (in thousands) | | For the Nine Months Ended September 30, | |
| | | 2021 | | | 2020 | |
| Net cash used in operating activities | | $ | (2,028 | ) | | $ | (14,269 | ) |
| Net cash provided by (used in) investing activities | | | (512 | ) | | | 8,050 | |
| Net cash provided by (used in) financing activities | | | (1,700 | ) | | | 410 | |
| Effect of exchange rate changes on cash and cash equivalents | | | (3 | ) | | | 60 | |
| Net decrease in cash and cash equivalents | | $ | (4,243 | ) | | $ | (5,749 | ) |
| | | Three Months Ended March 31, | |
| (amounts in thousands) | | 2022 | | | 2021 | |
| Net cash provided by operating activities | | $ | 277 | | | $ | 2,205 | |
| Net cash used in investing activities | | | (164 | ) | | | (116 | ) |
| Net cash used in financing activities | | | (4 | ) | | | (1,678 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | | 71 | | | | 21 | |
| Net increase in cash and cash equivalents | | $ | 180 | | | $ | 432 | |
For the ninethree months ended September 30, 2021,March 31, 2022, cash from operations used $2.0generated $0.3 million driven by net income of $1.3$0.7 million, non-cash expenses of $3.8$1.5 million, including depreciation, amortization, and stock-based compensation, a net reduction in inventory of $0.4 million, mostly offset by a reduction to working capital including a $1.4 million decrease in accounts payable and accrued liabilities and a $0.1 million increase in accounts receivable, and a reduction in lease liabilities of $0.8 million. We invested $0.2 million in capital expenditures primarily related to system implementations. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $0.2 million.
For the three months ended March 31, 2021, cash from operations provided $2.2 million driven by our net income of $0.7 million and non-cash expenses of $1.3 million, including depreciation, amortization and stock-based compensation. Changes in operating assets and liabilities provided $0.2 million with a federal income tax refund of $1.0 million related to the 2019 tax year and $1.0 million of other changes in operating assets and liabilities mostly due to an increaseincreases in accounts payable, and accrued liabilities of $0.9 million and more thanpartially offset by the net buildup ofinvestment in inventory of $6.6 million and a reduction in lease liabilities of $2.6 million.liabilities. We invested $0.5$0.1 million in capital expenditures primarily related to system implementations. Cash used in financing activities was primarily due to the purchaserepurchase of 500,000 shares of our common stock for $3.35 per share, or $1.7 million, from an institutional shareholder of the Company in a private transaction. The activities above, in addition to the effect of exchange rate changes, resulted in a net decreaseincrease in cash of $4.2 million.
For the nine months ended September 30, 2020, we used $14.3 million of cash from operations driven by our net loss of $4.5 million offset by non-cash expenses of $4.9 million, including depreciation and amortization, impairments, and stock-based compensation. Changes in our working capital used $14.7 million of cash primarily for the build-up of inventories. We invested $1.7 million in U.S. Treasuries and received $10.9 million from the sale of U.S. Treasuries, and we invested $1.2 million in capital expenditures primarily related to the design and implementation of our new enterprise resource planning (“ERP”) system and for the purchase of store fixtures. We borrowed $0.4 million from the Spanish government as part of a COVID-19 relief program. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $5.7 million.
Item 4.Item4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
As
previously disclosed in our Form 10-K filing for the period ended December 31, 2020, and in connection withpart of the filing of this Form 10-Q for the period ended
September 30, 2021,March 31, 2022, our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result of this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective due to the material weaknesses described
below, which resulted in reporting errors requiring a restatement of our financial statements for the years ended December 31, 2017 and 2018 and for the first quarter ended March 31, 2019.below.
Management’s Annual Report on Internal Control over Financial Reporting
Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management’s establishing and maintaining adequate internal control over financial reporting is based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). A system of internal control over financial reporting should be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud, and therefore can provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements.
A material weakness is defined as a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Based on this definition, our management, with the participation of our CEO and CFO, evaluated the effectiveness and design of our internal control over financial reporting against the COSO Framework and concluded that our internal control over financial reporting was not effective as of September 30, 2021March 31, 2022 due to material weaknesses arising from flaws in our control environment, risk oversight measures, control activities, information processing and communication and our monitoring systems, each of which is described in more detail below.
Control environment.We concluded that we did not maintain effective controls in the following areas: (i) managerial functions, procedures and oversight;oversight; (ii) organizational structure, delegation of authority and responsibilities;responsibilities; (iii) segregation of duties;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;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;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; anddevelopment of alternative control activities that address segregation of duties issues; (ii) selecting and implementing information technology and related systems supportive to our internal control over financial reporting.reporting; and (iii) deploying control activities through policies and establishing procedures that put these policies into action, including timely review of account reconciliations and methodologies used to calculate and report financial information and results, as well as timely periodic management reviews of financial information and results that would help identify misstatements.
Information processing and communication.We identified deficiencies associated with information processing and communication within our internal control framework. Specifically, we did not effectively assign responsibility to personnel for gathering required information nor did we periodically communicate objectives and internal control responsibilities throughout the organization which contributed to inadequate documentation of processes, untimely review of account reconciliations and methodologies used to calculatecalculations involving judgement and reconcile regular consolidation adjustmentsdelays in the accounting close cycle, hindering cleartimely 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;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 workedcontinue to work with expert accounting consultants and our Audit Committee to design and implement both a short-termshort- 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 2019During 2020, 2021 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)continue to search for full-time employees with expertise in GAAP accounting, SEC reporting and disclosure, internal audit and internal controls;controls; |
| iii.ii. | Replaced our legacy accounting systems with an integrated enterprise resource planning (“ERP”) solution which includes general ledger, warehouse management and factory production and point-of-sale modules designed to calculate inventory on a FIFO basis;basis; |
| iii. | Implemented a new point-of-sale system for 93 U.S. stores that is fully integrated with our new ERP system (the remaining 12 stores will be converted during the remainder of 2022); |
| iv. | Created a risk controls matrix which includes, among other things, a comprehensive list of key and mitigating controls, a description of the risk the control is designed to mitigate, the frequency in which the control is performed, and a mapping of each control to the five COSO Framework components (control environment, risk assessment, control activities, information and communication, or monitoring activities); |
| v. | Established a greater sense of accountability by requiring sub-certifications below the CEO and CFO level for certain key accounting, finance and operations personnel. |
Our continuing plan and additional steps for remediation include:
| i. | Ongoing recruitment and hiring of permanent, qualified public-company accounting personnel; |
| ii. | Completing the accountability portion of our risk controls matrix once the permanent accounting team is in place in order to identify the individual responsible for each control; |
| iii. | Converting the remaining 12 stores onto our new point-of-sale system; |
| iv. | Made improvementsRedesigning 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;
|
| v. | Continuing to improve the accounting close process, including a formalizedperiodic review and update of our accounting close checklist establishingchecklists for completeness of duties, accuracy of owners and deadlines to maintain accountability, for oversighttimely review of account reconciliations and review;calculations involving judgement, and timely reporting of financial results; |
| v.vi. | DocumentedUpdating process narrativesnarrative documentation in the following areas: (i) financial reporting, (ii) inventory, (iii) purchasing and accounts payable, (iv) revenue, (v) fixed assets and lease accounting, (vi) general accounting, treasury and financial planning & analysis, (vii) tax, (viii) information technology (IT) governance, and (ix) HR and payroll; 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;payroll;
|
| ii.vii. | Point-of-salePeriodically reviewing of our risk controls matrix and process narrative documentation to ensure changes such as personnel, information sources, processes, systems, implementation that will be fully integrated with our new ERP system;and frequency in performing the control are properly reflected in a timely manner;
|
| iii.viii. | 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;deficiencies; and |
| v.ix. | 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 appropriateaddress segregation of duties issues, oversight and review of work, and recruiting and hiring qualified, competent employees with relevant experience for the roles. |
| ■ | Regular performance evaluations to include position-specific criteria for functional competence.competence, including performance of internal control responsibilities. |
Risk Oversight Measures
We continue to identify risks and enhance risk oversight measures. In late 2019, we developed an annual strategic planning process designed to identify specific operating objectives for the organization and to conduct an assessment across the organization of the risks to meeting those objectives, including the risk of fraud. Furthermore, on a quarterly basis, management will review our periodic filings to ensure that identified risks have been appropriately disclosed. In the areas of reporting and compliance objectives, we are also developing a process to conduct monthly business reviews by functional area that would include risk assessments of reporting accuracy based on complexity and transaction levels as well as compliance with GAAP and other regulatory requirements, in order to evaluate whether our existing control activities appropriately mitigate such risks or if additional controls need to be employed.
Control Activities
We continue to redesign and implement our internal control activities. Specifically, we conductedare conducting 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.activities. These sessions identifiedare expected to identify specific areas that required short-termrequire 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 implementedCompleting the warehouse management, factory production system and general ledger systems modules as partimplementation 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 beis fully integrated with our ERP system, and with a phased implementation acrossfor our fleet ofremaining 12 stores throughout 2021 and intoduring the first halfremainder of 2022.
|
| ■ | CreationContinuing to implement functionality in our ERP system to improve on our internal controls over financial reporting, such as implementing the ERP’s bank reconciliation module.
|
| ■ | Creating and implementation ofimplementing 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;reporting; |
| o | QuarterlyTimely reviews each quarter of the most significant accounting estimates and judgements;judgements;
|
| o | Validation of results through detailed variance analyses and reconciliation of account balances;balances performed on a timely basis; |
| o | Monthly business review of actual financial performance compared to forecasts with participation from leadership across the organization;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 eliminateeliminated 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 eliminateeliminated the need for topside adjustments outside of the system. In addition, management is developing detailed policies, procedures and internal controls related to our financial reporting and working with our ERP vendor to develop regular reporting from our new systems that can validate the quality of our data and provide accurate information to support internal and external reporting and audit requirements.
Monitoring Activities
In addition to the items noted above, as we continue to evaluate, remediate, and improve our internal control over financial reporting, our management expects to continue to implement additional measures to address control deficiencies and further refine and improve the remediation efforts described above. Specifically, we are developing a checklist of activities based on the criteria established in the COSO Framework against which we will assess the design of entity-level and activity-level controls, and the operational effectiveness of such controls. Deficiencies identified in this process will be addressed by management, including our CEO and CFO. This assessment, any deficiencies and any remedial actions will be shared and discussed with our Audit Committee and our independent auditors on a quarterly basis.
Cybersecurity
We utilize information technology for internal and external communications with vendors, customers and banks as well as systems technology for reporting and managing our operations. Loss, disruption or compromise of these systems could significantly impact operations and results. Other than temporary disruption to operations that may be caused by a cybersecurity breach, we believe cash transactions to be the primary risk for potential loss. We work with our financial institutions to take steps to minimize the risk by requiring multiple levels of authorization, encryption and other controls. The Company utilizes third party intrusion prevention and detection systems and performs periodic penetration testing to monitor its cybersecurity environment. However, the Company has not performed a formalized risk assessment to address cybersecurity risks or documented internal controls that assist in alleviating such risks.
Changes in Internal Control Over Financial Reporting
As discussed in the remediation section above, we implemented the warehouse management, factory production system and general ledger systems modules as part of our new ERP system implementation which had a go-live date of September 1, 2020. We are still in the process of implementing2020, and we implemented our new point-of-sale system, which is fully integrated with a phased implementation throughout 2021 and intoour ERP system, in 93 of our U.S. stores with the first halfremaining 12 stores to be converted during the remainder of 2022. Also, during January 2021, we hired a new highly-qualified CFO with public company experience.2022. Although we had not fully remediated theall material weaknesses in our internal control over financial reporting as of September 30, 2021,March 31, 2022, as the phased implementation of this system continues, we are experiencing certain changes to our processes and procedures which, in turn, result in changes to our internal control over financial reporting. While we expect our new ERP system to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolves.
PART
II.II. OTHER INFORMATION
| Item 1. | Legal Proceedings. |
The information contained in Note 6, Commitments and Contingencies to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report is hereby incorporated into this Item 1 by reference.
Our Risk Factors are discussed fully in our Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 and incorporated herein by reference.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about purchases we have made of our common stock during the quarter ended September 30, 2021:March 31, 2022:
| 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 value of shares that may yet be purchased under the plans or programs (1) | |
July 1 – July 31, 2021 | | | — | | | | — | | | | — | | | $ | 5,000,000 | |
August 1 – August 31, 2021 | | | — | | | | — | | | | — | | | $ | 5,000,000 | |
September 1 – September 30, 2021 | | | — | | | | — | | | | — | | | $ | 5,000,000 | |
Total | | | — | | | | — | | | | — | | | | | |
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | | (a) Total number of shares purchased | | | (b) Average price paid per share | | | (c) Total number of shares purchased as part of publicly announced plans or programs | | | (d) Maximum value of shares that may yet be purchased under the plans or programs (1) | |
January 1 – January 31, 2022 | | | — | | | | — | | | | — | | | $ | 5,000,000 | |
February 1 – February 28, 2022 | | | — | | | | — | | | | — | | | $ | 5,000,000 | |
March 1 – March 31, 2022 | | | — | | | | — | | | | — | | | $ | 5,000,000 | |
Total | | | — | | | | — | | | | — | | | | | |
| (1) | Represents shares which may be purchased through our stock repurchase program, adopted by the Company’s Board of Directors on August 9, 2020, which established 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) once the Company has filed all outstanding periodic reports with the SEC. |
Exhibit Number | Description |
| |
3.1 | |
| | |
3.2 | |
| | |
3.3 | |
| | |
4.1 | |
| |
|
10.1 | |
| | |
10.2 | |
| | |
10.3 | |
| | |
10.4 | |
| | |
10.5 | |
| | |
10.6 | |
| | |
10.7
| |
10.8 | |
| | |
| |
| | |
14.1 | |
| | |
21.1 | |
| | |
| 13a-14(a) or 15d-14(a) Certification by Janet Carr, Chief Executive Officer. |
| | |
| 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. |
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: December 20, 2021May 16, 2022 | By: | /s/ Janet Carr |
| | Janet Carr |
| | Chief Executive Officer |
| | | |
Date: December 20, 2021May 16, 2022 | By: | /s/ Michael Galvan |
| | Michael Galvan |
| | Chief Financial Officer |
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