Tandy Leather Factory Inc 10-Q for FY2023 Q2
Tandy Leather Factory Inc (TLF)
10-Q
2023-08-14
For: 2023-06-30
View Original
Added on
April 08, 2026
About this 10-Q
Tandy Leather Factory Inc filed this 10-Q on August 14, 2023, covering the quarter ended June 30, 2023 (FY2023 Q2).
Headline figures
Quarter ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $17.48M
- down 5.0% from $18.41M a year earlier
- Net income
- $531K
- compared with a net loss of $589K a year earlier
- Diluted EPS
- $0.06
- compared with -$0.07 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended June 30, 2023
or
For the transition period from __________ to ______________
Commission File Number 1-12368
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(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(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)
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Title of each class
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Trading Symbol
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Name of each exchange on which registered
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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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes
☒ 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.
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Large accelerated filer ☐
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Accelerated filer ☐
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Smaller reporting company
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Emerging growth company
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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 ☒
As of August 12, 2023, the registrant had 8,328,848 shares of Common Stock,
par value $0.0024 per share, outstanding.
TANDY LEATHER FACTORY, INC.
FORM 10-Q
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2
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2
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6
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17
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26
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30
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30
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30
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30
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32
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34
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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. (“TLF”) 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 Condensed 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 Annual Report
on Form 10-K for the fiscal year ended December 31, 2022. Unless the context otherwise indicates, references in this Form 10-Q to “TLF,” “we,” “our,” “us,” “the Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with
its subsidiaries.
| Item 1. |
Condensed Consolidated Financial Statements.
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Tandy Leather Factory, Inc.
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data and per share data)
| June 30, | December 31, | |||||||
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2023
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2022
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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$
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Accounts receivable-trade, net of allowance for doubtful accounts of $
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Inventory
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Income tax receivable
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Prepaid expenses
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Other current assets
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Total current assets
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Property and equipment, at cost
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Less accumulated depreciation
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(
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)
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(
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)
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Property and equipment, net
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Operating lease assets
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Financing lease assets
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Other intangibles, net of accumulated amortization of $
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Other assets
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TOTAL ASSETS
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$
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$
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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||||||||
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CURRENT LIABILITIES:
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||||||||
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Accounts payable-trade
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$
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$
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Accrued expenses and other liabilities
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| Income taxes payable |
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Current portion of operating lease liabilities
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Current portion of finance lease liabilities
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Total current liabilities
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Uncertain tax positions
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Other non-current liabilities
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Operating lease liabilities, non-current
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Finance lease liabilities, non-current
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COMMITMENTS AND CONTINGENCIES (Note 6)
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STOCKHOLDERS’ EQUITY:
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Common stock, $
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Paid-in capital
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Retained earnings
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Treasury stock at cost (
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(
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(
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Accumulated other comprehensive loss, net of tax
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(
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(
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Total stockholders’ equity
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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$
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$
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Tandy Leather Factory, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share data)
(Unaudited)
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Three Months Ended June 30,
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Six Months Ended June 30, | |||||||||||||||
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2023
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2022
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2023 |
2022 |
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Net sales
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$
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$
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$ | $ | ||||||||||
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Cost of sales
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Gross profit
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Operating expenses
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Income (loss) from operations
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Other (income) expense:
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Interest expense
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Other, net
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(
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Total other expense (income)
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(
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Income (loss) before income taxes
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(
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Provision (benefit) for income taxes
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Net Income (Loss)
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$
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$
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(
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$ | $ | |||||||||
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Foreign currency translation adjustments, net of tax
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(
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(
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( |
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Comprehensive income (loss)
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$
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$
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(
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$ | $ | ( |
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Net income (loss) per common share:
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Basic
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$
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$
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(
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$ | $ | |||||||||
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Diluted
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$
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$
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(
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$ | $ | |||||||||
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Weighted average number of shares outstanding:
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Basic
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Diluted
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Tandy Leather Factory, Inc.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)
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For the Six Months Ended June 30,
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2023
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2022
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Cash flows from operating activities:
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Net income
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$
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$
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Adjustments to reconcile net loss to net cash provided by operating activities:
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Depreciation and amortization
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Operating lease asset amortization
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| Loss on disposal of assets |
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Stock-based compensation
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Deferred income taxes
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(
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Changes in operating assets and liabilities
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Accounts receivable-trade
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Inventory
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Prepaid expenses
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Other current assets
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Accounts payable-trade
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Accrued expenses and other liabilities
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(
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Income taxes, net
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Other assets
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Operating lease liabilities
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(
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(
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Total adjustments
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(
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Net cash provided by operating activities
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(
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Cash flows from investing activities:
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Purchase of property and equipment
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(
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(
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Net cash used in investing activities
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(
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(
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Cash flows from financing activities:
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| Payments on long-term debt |
( |
) | ||||||
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Payment of finance lease obligations
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(
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(
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| Repurchase of common stock |
( |
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Net cash used in financing activities
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(
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(
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Effect of exchange rate changes on cash and cash equivalents
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(
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)
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(
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Net increase in cash and cash equivalents
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(
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)
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|||||
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Cash and cash equivalents, beginning of period
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Cash and cash equivalents, end of period
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$
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$
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||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Tandy Leather Factory, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(amounts in thousands, except share data)
(Unaudited)
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Number of
Shares
Common Stock
Outstanding
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Par Value
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Paid-in Capital
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Treasury Stock
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Retained
Earnings
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Accumulated
Other
Comprehensive
Income (Loss)
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Total
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||||||||||||||||||||||
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Balance, December 31, 2022
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$
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$
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$
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(
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)
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$
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$
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(
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)
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$
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|||||||||||||
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Stock-based compensation expense
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-
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Vesting of restricted stock units
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Net income
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-
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|||||||||||||||||||||
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Foreign currency translation
adjustments, net of tax
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-
|
|
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(
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)
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(
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)
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|||||||||||||||||||
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Balance, March 31, 2023
|
|
$
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$
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$
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(
|
)
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$
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$
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(
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)
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$
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|||||||||||||
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Stock-based compensation expense
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- | |||||||||||||||||||||||||||
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Vesting of restricted stock units
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Net income
|
- | |||||||||||||||||||||||||||
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Foreign currency translation
adjustments, net of tax
|
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Balance, June 30, 2023
|
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||||||
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Balance, December 31, 2021
|
|
$
|
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$
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$
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(
|
)
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$
|
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$
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(
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)
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$
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|
|||||||||||||
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Stock-based compensation expense
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-
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|||||||||||||||||||||
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Vesting of restricted stock units
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|||||||||||||||||||||
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Net income
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-
|
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|||||||||||||||||||||
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Foreign currency translation
adjustments, net of tax
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-
|
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|||||||||||||||||||||
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Balance, March 31, 2022
|
|
$
|
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$
|
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$
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(
|
)
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$
|
|
$
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(
|
)
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$
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|
|||||||||||||
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Stock-based compensation expense
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- | |||||||||||||||||||||||||||
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Vesting of restricted stock units
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||||||||||||||||||||||||||||
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Repurchase of common stock
|
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
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Net income
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- | ( |
) | ( |
) | |||||||||||||||||||||||
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Foreign currency translation
adjustments, net of tax
|
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Balance, June 30, 2022
|
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
TANDY LEATHER FACTORY, INC.
(UNAUDITED)
1. BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES
Tandy Leather Factory, Inc. (“TLF,” “we,” “our,” “us,” “the Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries) is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, the Company introduced leathercrafting to millions of American and later
Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our
legacy of inspiring the timeless art and trade of leatherworking.
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience,
a high-touch customer service experience, and a hub for the local leathercrafting community, and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult
for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our global websites, and through direct account representatives in our
commercial division. We also assemble leather lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We also offer production services to our business customers such as cutting (“clicking”),
splitting, and some assembly. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
The Company currently operates a total of 103 retail
stores. There are 92 stores in the United States (“U.S.”), ten stores in Canada and one store in Spain.
The Company’s common shares currently trade on the Nasdaq Capital Market under the symbol “TLF.”
We operate as a segment and report on a
consolidated basis.
The accompanying unaudited Condensed 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 notes required by GAAP for annual audited financial
statements. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements for Tandy Leather Factory, Inc. and its consolidated subsidiaries contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly our financial position as of June 30, 2023 and December 31, 2022, our results of operations and our cash flows for the three and six months ended June 30, 2023 and 2022, and our statements of
stockholders’ equity as of and for the three and six months ended June 30, 2023 and 2022. 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 Company’s conclusions. The Company
continually evaluates the information used to make these estimates as the business and the economic environment changes. Actual results may differ from these estimates, and estimates are subject to change due to modifications in the underlying
conditions or assumptions. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes included in our Form 10-K for the year ended December
31, 2022.
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 ninety days including our T-Bills 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 Condensed Consolidated Statements of Operations and Comprehensive Income
(Loss) under the caption “Foreign currency translation adjustments, net of tax” 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) via web sales, and (3) via sales representatives. 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 are 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. The
sales return allowance included in accrued expense and other liabilities was $0.2 million, $0.1 million, and $0.2 million as of June 30, 2023, December 31,
2022, and January 1, 2022. The estimated value of merchandise expected to be returned included in other current assets was $0.1
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 June 30, 2023, December 31, 2022 and January 1, 2022, our gift card liability, included in accrued expenses and other liabilities, was $0.2 million, $0.3 million and $0.4 million, respectively. We recognized gift card revenue of $0.2 million for the six months ended June 30, 2023 from the December 31, 2022 deferred revenue balance and $0.2 million for the six months ended June 30, 2022 from the December 31, 2021 deferred revenue balance.
For the three months ended June 30, 2023 and 2022, we recognized $0.1 0.3 and $0.4 million, respectively, in net sales associated with gift cards.
Disaggregated Revenue. In the following table, revenue for the three and six months ended
June 30, 2023 and 2022 is disaggregated by geographic areas as follows:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30, | ||||||||||||||
| (in thousands) |
2023
|
2022
|
2023 |
2022 |
||||||||||||
|
United States
|
$
|
|
$
|
|
$ | $ | ||||||||||
|
Canada
|
|
|
||||||||||||||
| Other |
||||||||||||||||
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Net sales
|
$
|
|
$
|
|
$ | $ | ||||||||||
Geographic sales information is based on the location of the customer. As a percentage of our consolidated net sales, our other international net sales, excluding
Canada, were less than 2.0
Discounts. We offer six
classes of customer discounts: 1) Retail, 2) Military/First Responder, 3) Business, 4) Commercial, 5) Commercial Pro, 6) Employees. There are no other classes of discounts and any discounts given will fall into one of these six categories. Such discounts do not convey a material right to these customers since the discounted pricing they receive in a discount class is not
increment to other within the same class and there are no retrospective impact. As a result, sales are reported after deduction of discounts at the point of sale. We do not pay slotting fees or make other payments to resellers.
Operating expenses. 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 to ten years for equipment and machinery,
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 but are capitalized if extend the life of the assets.
Inventory. Inventory is stated at the lower of first-in, first-out (“FIFO”) cost or net realizable value, and FIFO
layers are maintained at the location level. Finished goods held for sale include the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and
delivering merchandise to our stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Assembled 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.
|
(in thousands)
|
June 30, 2023
|
December 31, 2022
|
||||||
|
On hand:
|
||||||||
|
Finished goods held for sale
|
$
|
|
$
|
|
||||
|
Raw materials and work in process
|
|
|
||||||
|
Inventory in transit
|
|
|
||||||
|
TOTAL
|
$
|
|
$
|
|
||||
Leases. We lease certain real estate for our retail store locations and warehouse equipment for our Texas distribution
center under long-term lease agreements. We determine if an arrangement is a lease at inception and recognize right-of-use (“ROU”) assets and lease liabilities at commencement date based on the present value of the lease payments over the lease
term. We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes.
For operating leases, the present value of our lease liabilities 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 assets on a straight-line basis over the lease term. Rent expense is recorded in operating expenses. The net
adjustment between rent expense and the actual cash paid during the fiscal year has been recorded as accrued expenses and other liabilities in the accompanying consolidated balance.
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 interest expense
incurred is recorded in interest expense on the Condensed Consolidated Statements of Operations and 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, 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 financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value
measurement.
Our principal financial instruments held consist of T-Bills as of June 30, 2023 which falls under level 1 of the fair value hierarchy; accounts receivable - trade,
accounts payable - trade, as of June 30, 2023 and December 31, 2022, all of which fall under Level 3 of the fair value hierarchy. As of June 30, 2023 and December 31, 2022, the carrying values of our financial instruments, included in our
Consolidated Balance Sheets, approximated their fair values. There were no
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current
tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable
income. To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also
considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods.
Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The
effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in
the future.
A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not
previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as
increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available. We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued
interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made.
We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as
the timing and amount of deductions and allocation of taxable income to the various jurisdictions.
Stock-based compensation. The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”)
awards. Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over
the requisite service period, based on the closing price of the Company’s stock on the date of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting
date. Compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards.
Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets. The Company records compensation expense for awards with a
performance condition when it is probable that the condition will be achieved. If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized. If the Company changes its assessment in
a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the
performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed. The compensation
expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied. We issue shares from authorized shares upon the
lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards. The payments of the employees’ tax liability for a portion of the vested shares are satisfied by withholding
shares with a fair value equal to the tax liability.
Accounts Receivable - Trade and Expected Credit Losses. Our receivables primarily arise from the sale of merchandise
to customers that have applied for and been granted credit. Accounts receivable are stated at amounts due, net of an allowance for doubtful accounts. Accounts receivable are generally due within 30 days of invoicing. We estimate expected credit
losses based on factors such as the composition of accounts receivable, the age of the accounts, historical bad debt experience, and our evaluation of the financial condition and past collection history of each customer. Management believes that
the historical loss information it has compiled is a reasonable base on which to determine expected credit losses for trade receivables held at June 30, 2023, 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 June
30, 2023, December 31, 2022, and January 1, 2022 each totaled less than $0.1
Other Intangible Assets. Our intangible assets and related accumulated amortization relate to trademarks and
copyrights that are definite-lived intangibles and are subject to amortization. The weighted average amortization period is 15 years
for trademarks and copyrights. Amortization expense related to other intangible assets was less than $0.01 0.01
Comprehensive Income (Loss). Comprehensive income (loss) includes net income (loss) and certain other items that are
recorded directly to stockholders’ equity. The Company’s only source of other comprehensive income (loss) is foreign currency translation adjustments, and those adjustments are presented net of tax.
Reclassifications.
Certain amounts that were identified in the fourth quarter of 2022 as an out-of-period adjustment for unreconciled inventory receipts for in-transit inventory in our 2022 Form 10-K, which have been adjusted in our presentation of the first
quarter 2022 inventory and accounts payable in the operating activities section of the consolidated statement of cash flows. This Q1 2022 adjusted is accounted for in out year-to-date balances for these cash flows items. The impact of this
reclassification was approximately $0.4
2. NOTES PAYABLE AND LONG-TERM DEBT
During the second quarter of 2020, the Company borrowed $0.4
On January 3, 2023, the Company entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. Under the Credit Agreement, the bank has provided the Company a credit facility
of up to $5,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement.
As security for the credit facility, the Company has pledged as collateral certain of its assets, including the Company’s cash in deposit accounts, inventory and equipment. As of the date of this filing, no funds have been borrowed under this facility.
3. INCOME TAX
Our effective tax rate for the three and six months ended June 30, 2023 and 2022 was 32.9 % and 23.2 %, respectively. Our effective tax rate for the six months ended June 30, 2023 and 2022 was 31.1 % and 26.3 %, respectively. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, expenses
that are nondeductible for tax purposes, the change in our valuation allowance associated with our deferred tax assets, and differences in tax rates in foreign jurisdictions.
4. STOCK-BASED
COMPENSATION
The Tandy Leather Factory, Inc. 2013 Restricted Stock Plan (the “2013 Plan”) was adopted by our Board of Directors in January 2013 and approved by our stockholders
in June 2013. The 2013 Plan initially reserved up to 300,000 shares for restricted stock unit (“RSU”) awards to our executive
officers, non-employee directors and other key employees. In June 2020, our stockholders approved an increase to the plan reserve to 800,000
shares of our common stock and extended the 2013 Plan to June 2023. Awards granted under the 2013 Plan may be service-based awards or performance-based awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years , unless otherwise determined by the Compensation Committee of the Board of Directors that administers the plan.
The Tandy Leather Factory, Inc. 2023 Incentive Stock Plan (the “2023 Plan”) was adopted by our Board of Directors in April 2023 and approved by our stockholders in June 2023. The 2023 Plan replaced the 2013 Plan; awards that were outstanding under the 2013 Plan as of June 6, 2023, remained outstanding, but no further awards will be granted under the 2013 Plan after that date. The 2023 Plan initially reserved
In January 2022, we granted a total of 27,249 RSUs to the Company’s Chief Executive
Officer (“CEO”), which vested immediately. These shares were granted in lieu of $0.1 million in salary that the CEO declined in 2020
during the period of COVID-related store closures and business uncertainty. The timing of the grant was conditioned on the Company becoming fully current in its periodic SEC filings, which occurred in December 2021.
In April 2022, we granted a total of 120,231 RSUs to certain key employees which will vest over a three-year service period. In June 2023 and 2022, we granted totals of 14,000 RSUs and 14,000 RSUs, respectively, to the Company’s Board of
Directors which will vest over a four-year
In addition to grants under the Company’s 2013 and 2023 Plans, in October 2018, we granted a total of 644,000 RSUs to the Company’s CEO, of which (i) 460,000 are
service-based RSUs that vest ratably over a period of five years from the grant date based on our CEO’s continued employment in her role, (ii) 92,000 are performance-based RSUs that will vest if the Company’s operating income exceeds $12 million dollars two fiscal years in a row, and (iii) 92,000
are performance-based RSUs that will vest if the Company’s operating income exceeds $14 million dollars in one fiscal year. The Company also grant 14,000 RSUs to board members at their June 2023 board meeting.
A summary of the activity for non-vested restricted stock and RSU awards as of June 30, 2023 is presented below:
|
Shares
(in thousands)
|
Weighted
Average
Share Price
|
|||||||
|
Balance, January 1, 2023
|
|
$
|
|
|||||
|
Granted
|
|
|
||||||
| Forfeited | ||||||||
|
Vested
|
(
|
)
|
|
|||||
|
Balance, June 30, 2023
|
|
$
|
|
|||||
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 and $0.2 million for the three months and $0.4
million and $0.6 million for the six months ended June 30, 2023 and 2022, respectively.
As of June 30, 2023, the Company has concluded it is not probable that the performance conditions related to performance-based RSUs granted to our CEO will be
achieved, and as a result no compensation expense related to performance-based RSUs has been recorded.
As of June 30, 2023, there was unrecognized compensation cost related to non-vested, service-based RSU awards of $0.6 million, which will be recognized in each of the following years (dollars in thousands):
|
Unrecognized Expense
|
||||
|
2023
|
$
|
|
||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
$
|
|
|||
We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs. For the six months ended June 30, 2023 and 2022, we issued 39,199 and 48,277 shares,
respectively, resulting from the vesting of RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards. The payment of the employees’ tax liability for a portion of the vested shares are satisfied by
withholding shares with a fair value equal to the tax liability.
5. 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 EPS for the three and six months ended June 30, 2023 and 2022:
|
Three Months Ended June 30,
|
Six Months Ended June 30, |
|||||||||||||||
|
(in thousands, except share data)
|
2023
|
2022
|
2023
|
2022
|
||||||||||||
| Numerator: | ||||||||||||||||
|
Net income (loss)
|
$
|
|
$
|
(
|
)
|
$ | $ | |||||||||
|
Denominator:
|
||||||||||||||||
|
Basic weighted-average common shares outstanding
|
|
|
||||||||||||||
|
Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan
|
||||||||||||||||
|
Dilutive effect of service-based restricted stock awards granted to employees under the Plan
|
||||||||||||||||
|
Diluted weighted-average common shares outstanding
|
|
|
||||||||||||||
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are periodically involved in litigation that arises in the ordinary course of business and operations. There are no such matters pending that we expect to have a
material impact on our financial position or operating results. Legal costs associated with the resolution of claims, lawsuits and other contingencies are expensed as incurred.
7. SHARE REPURCHASE PROGRAM AND SHARE REPURCHASES
On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5.0 million of the Company’s common stock between August 9, 2020 and July 31, 2022. This program expired in July 2022. On August 8, 2022, the Board of Directors approved a new program to
repurchase up to $5.0 million of the Company’s common stock between that date and August 31, 2024. As of June 30, 2023, approximately
$4.9 million remained available for repurchase under this new program.
On April 11, 2022, we entered into an agreement with two
institutional shareholders of the Company to repurchase 359,500 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $5.00
per share for a total of $1.8 million. The closing of the repurchases took place on April 22, 2022, and these shares were subsequently
cancelled. Prior to the repurchase, the shares represented approximately 4.2 % of our outstanding common stock. The direct share repurchase transactions
were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plans described above.
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
The 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 global websites, and through direct account representatives in our commercial division. We also manufacture leather
lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly. We maintain our
principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
Currently, the Company operates a total of 103 retail stores. There are 92 stores in the United States (“U.S,”), ten stores in Canada and one store in Spain.
Tandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been and continue to be our competitive advantage: where our consumers learn the craft in classes, open table, and
from the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others passionate about leather. Our websites provide inspiration, detailed product descriptions and
specifications, educational information and videos, and a convenient place to also purchase product – especially for those who are far from our retail stores, including a growing international customer base. For many of our retail and web
customers, leatherworking evolves from a passion to a trade. Our Commercial Division is tailored to the needs of those customers who build businesses around leather. With dedicated direct account representatives, a direct-from-our-warehouse
shipping model, bulk and volume-based competitive pricing, customized product development, and production and pre-production services, we are building long-term, strategic relationships with our largest customers.
In 2019, with the arrival of a new management team, we began the process of assessing and reinvigorating the business. We focused in three broad strategic initiative areas: 1) improving our brand proposition, 2)
rebuilding our foundation: the talent, processes, tools and systems needed to modernize and efficiently operate the business, and 3) creating a vision and road map for long-term growth. We had significant achievements in all of these areas
including significantly improving the product quality, breadth of assortment and value, dramatically improving the website and web operations, rebuilding the team, people policies and culture, and replacing all of the key systems, among many
other accomplishments.
We made this steady progress to transform and reinvigorate our business even in the face of two very significant obstacles. In 2019, as part of the assessment of the business, we discovered errors in accounting
that required a restatement of our financials. This work was costly and time-consuming, but we successfully completed the restatement in 2021 along with implementation of new accounting systems, redesign of processes and controls, and a
significant upgrade in the team. In 2020, while making progress against our transformation and still working through our restatement, we temporarily closed all of our retail stores as a result of the COVID-19 pandemic.
With COVID-19 related store closing and the restatement behind us and with many of our initiatives taking hold, we are now focused on improving our financial sustainability and profitability. In the short-term, we
are managing operating expenses and gross margin to deliver free operating cash and operating income even in the face of possible continued economic headwinds. We will also continue to selectively invest in profitable sales growth where it makes
sense, but rebuilding a durable, profitable business model is the highest priority.
Critical Accounting Policies
A description of our critical accounting policies appears in Item 7 “Management's Discussions and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended
December 31, 2022.
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) via web sales, and (3) via sales
representatives. 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 are 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 the 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 first-in, first-out (“FIFO”) cost or net realizable value, and FIFO layers are maintained at the location level. Finished
goods held for sale include the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs
include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process is valued on a FIFO 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 FIFO 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. We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes.
For our operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably
certain we will exercise such an option. The exercise of lease renewal options is generally at our discretion. Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of
measuring the related lease liability. We discount lease payments using our incremental borrowing rate based on information available as of the measurement date.
We recognize rent expense related to our operating leases on a straight-line basis over the lease term. Rent expense is recorded in operating expenses. The net adjustment between rent expense and the actual cash
paid during the fiscal year has been recorded as accrued expenses and other liabilities in the accompanying consolidated balance sheets.
For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term with rent expense recorded to operating
expenses. We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the
consolidated statements of operations and comprehensive income (loss). The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. We also perform interim reviews of our operating lease
assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable.
None of our lease agreements contain material residual value guarantees or material restrictive covenants. As of June 30, 2023, we have no sublease agreements and no lease agreements in which we are named as a
lessor. We do not have any contingent rental payment agreements. On September 8, 2022, we entered into a concession agreement for our store on the Fort Bragg military base in which the concession payment is based on a sliding scale percentage
of sales.
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 relates primarily to restricted stock unit (“RSU”) awards. Accounting guidance requires measurement and
recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing
price of the Company’s stock on the date of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. The total compensation expense is reduced by
actual forfeitures as they occur over the requisite service period of the awards. Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets. The Company records compensation expense for awards with a
performance condition when it is probable that the condition will be achieved. If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized. If the Company changes its assessment
in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the
performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed. The compensation
expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied. We issue shares from authorized shares upon the
lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards.
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences
resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent 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.
Results of Operations
Three Months Ended June 30, 2023 and 2022
The following table presents selected financial data:
|
Three Months Ended June 30,
|
||||||||||||||||
|
(in thousands)
|
2023
|
2022
|
$ Change
|
% Change
|
||||||||||||
|
Sales
|
$
|
17,482
|
$
|
18,410
|
$
|
(928
|
)
|
(5.0
|
)%
|
|||||||
|
Gross profit
|
10,921
|
10,501
|
420
|
4.0
|
%
|
|||||||||||
|
Gross margin percentage
|
62.5
|
%
|
57.0
|
%
|
0
|
5.5
|
%
|
|||||||||
|
Operating expenses
|
10,131
|
11,238
|
(1,107
|
)
|
(9.8
|
)%
|
||||||||||
|
Income (loss) from operations
|
$
|
790
|
$
|
(737
|
)
|
$
|
1,527
|
(207.1
|
)%
|
|||||||
Net Sales
Consolidated net sales for the quarter ended June 30, 2023 decreased $0.9 million, or 5.0%, compared to the corresponding prior year period. We believe the decrease in sales was due to continued weaker consumer
demand resulting from ongoing uncertainty related to global political, economic and other uncontrollable factors, a decline in consumer response to our promotional activities, and the impact of four fewer stores than the prior year.
Our store footprint consisted of 103 and 106 stores at June 30, 2023 and June 30, 2022, respectively.
During the second quarter of 2023, we did not close any existing stores and opened one new stores. We evaluate a number of factors when determining whether to close existing
stores, including the 4-wall cash flow trend and longer-term projection for the store, the long-term sales trend, ongoing cost of store operations, date of lease expiration, quality of the store and location, and the size and potential of the
trade area including proximity to other existing stores, among other variables. We use similar factors to determine whether to open new stores.
Gross Profit
Gross profit increased by $0.4 million, or 4.0%, compared to the same period in 2022, and our gross margin percentage for the quarter ended June 30, 2023 increased 550 basis points to 62.5%. We believe this
increase in gross margin percentage was a result of both weaker consumer responsiveness to our promotional activities and therefore a higher percentage of our product sold at full price, and improvements in warehouse handling and freight costs
that are included as cost of sales.
Operating expenses
|
Three Months Ended June 30,
|
||||||||
|
(in thousands)
|
2023
|
2022
|
||||||
|
Operating expenses
|
$
|
10,131
|
$
|
11,238
|
||||
|
Non-routine items related to restatement
|
-
|
(169
|
)
|
|||||
|
Adjusted operating expenses
|
$
|
10,131
|
$
|
11,069
|
||||
|
Operating expenses % of sales
|
58.0
|
%
|
61.0
|
%
|
||||
|
Adjusted operating expenses % of sales
|
58.0
|
%
|
60.1
|
%
|
||||
Operating expenses decreased $1.1 million or 9.8% compared to the corresponding prior year period, primarily as a result of a decrease in contract labor of $0.3 million, traditional marketing of $0.2 million, store
manager conference expense of $0.2 million, other outside services purchased of $0.3 million, restructuring expenses of $0.1 million, total occupancy expense of $0.1 million, offset by an increase in digital marketing of $0.1 million. 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 2022 legal
and accounting costs associated with the restatement.
Income Taxes
Our effective tax rate for the three months ended June 30, 2023 was 32.9% compared to 23.2% for the same period in 2022. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state
income tax expense, expenses that are nondeductible for tax purposes, the change in our valuation allowance associated with our deferred tax assets, and differences in tax rates in foreign jurisdictions.
Six Months Ended June 30, 2023 and 2022
The following table presents selected financial data:
|
Six Months Ended June 30,
|
||||||||||||||||
|
(in thousands)
|
2023
|
2022
|
$ Change
|
% Change
|
||||||||||||
|
Sales
|
$
|
37,842
|
$
|
38,910
|
$
|
(1,068
|
)
|
(2.7
|
)%
|
|||||||
|
Gross profit
|
22,740
|
22,432
|
308
|
1.4
|
%
|
|||||||||||
|
Gross margin percentage
|
60.1
|
%
|
57.7
|
%
|
0
|
2.4
|
%
|
|||||||||
|
Operating expenses
|
20,969
|
22,339
|
(1,370
|
)
|
(6.1
|
)%
|
||||||||||
|
Income from operations
|
$
|
1,771
|
$
|
93
|
$
|
1,678
|
1,804.3
|
|||||||||
Net Sales
Consolidated net sales for the six months ended June 30, 2023 decreased $1.1 million, or 2.7%, compared to the corresponding prior year period. We believe the decrease in sales was due to continued weaker consumer
demand resulting from ongoing uncertainty related to global political, economic and other uncontrollable factors, a decline in consumer response to our promotional activities, and the impact of four fewer stores than the prior year.
Since January 1, 2023, we closed one store in Baldwin Park, California in March 2023 and opened one new store during the first six months of the year. We evaluate a number of
factors when determining whether to close existing stores, including the 4-wall cash flow trend and longer-term projection for the store, the long-term sales trend, ongoing cost of store operations, date of lease expiration, quality of the
store and location, and the size and potential of the trade area including proximity to other existing stores, among other variables. We use similar factors to determine whether to open new stores.
Gross Profit
Gross profit increased by $0.3 million, or 1.4%, compared to the same period in 2022, and our gross margin percentage for the six months ended June 30, 2023 increased by 240 basis points to 60.1%. We believe this
increase in gross margin percentage was a result of both weaker consumer responsiveness to our promotional activities and therefore a higher percentage of our product sold at full price, and modest improvements in warehouse handling and freight
costs that are included as cost of sales.
Operating expenses
|
Six Months Ended June 30,
|
||||||||
|
(in thousands)
|
2023
|
2022
|
||||||
|
Operating expenses
|
$
|
20,969
|
$
|
22,339
|
||||
|
Non-routine items related to restatement
|
-
|
(246
|
)
|
|||||
|
Adjusted operating expenses
|
$
|
20,969
|
$
|
22,093
|
||||
|
Operating expenses % of sales
|
55.4
|
%
|
57.4
|
%
|
||||
|
Adjusted operating expenses % of sales
|
55.4
|
%
|
56.8
|
%
|
||||
Operating expenses decreased by $1.4 million or 6.1% compared to the corresponding prior year period, primarily as a result of a decrease in contract labor of $0.6 million, traditional marketing of $0.3 million,
store manager conference expense of $0.3 million, other outside services purchased of $0.3 million, restructuring expenses of $0.2 million, offset by an increase in digital marketing of $0.3 million. 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 2022 legal and accounting costs
associated with the restatement.
Income Taxes
Our effective tax rate for the six months ended June 30, 2023 was 31.1% compared to 26.3% for the same period in 2022. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state
income tax expense, expenses that are nondeductible for tax purposes, the change in our valuation allowance associated with our deferred tax assets, and differences in tax rates in foreign jurisdictions.
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 June 30, 2023 totaled $10.0 million.
On January 3, 2023, the Company entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. Under the Credit Agreement, the bank provides the Company a credit facility of up to
$5,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement. As security for the credit facility, the Company has pledged as collateral certain of its assets, including the
Company’s cash in deposit accounts, inventory and equipment. As of the date of this filing, no funds have been borrowed under this facility.
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. During the second quarter of 2022, we repaid this loan in full.
Share Repurchase Program and Share Repurchase
On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5.0 million of the Company’s common stock between August 9, 2020 and July 31, 2022. This program expired in July 2022. On August
8, 2022, the Board of Directors approved a new program to repurchase up to $5.0 million of the Company’s common stock between that date and August 31, 2024. As of June 30, 2023, approximately $5.0 million remained available for repurchase under
this new program.
On April 11, 2022, we entered into an agreement with two institutional shareholders of the Company to repurchase 359,500 shares of our common stock, par value $0.0024 in a private transaction. The purchase price
was $5.00 per share for a total of $1.8 million. The closing of the repurchases took place on April 22, 2022, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 4.2% of our outstanding
common stock. The direct share repurchase transactions were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plans described above.
Cash Flows
|
Six Months Ended June 30,
|
||||||||
|
(amounts in thousands)
|
2023
|
2022
|
||||||
|
Net cash provided by operating activities
|
$
|
2,329
|
$
|
(1,823
|
)
|
|||
|
Net cash used in investing activities
|
(174
|
)
|
(454
|
)
|
||||
|
Net cash used in financing activities
|
(3
|
)
|
(2,204
|
)
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(94
|
)
|
(86
|
)
|
||||
|
Net increase in cash and cash equivalents
|
$
|
2,058
|
$
|
(4,567
|
)
|
|||
For the six months ended June 30, 2023, cash from operations generated $2.3 million driven by a net income of $1.2 million, non-cash expense of $2.7 million, including depreciation, amortization, and stock-based
compensation, a net reduction in inventory of $0.7 million, offset by a change in other assets of $0.1 million, income tax payable of $0.4 million, and a reduction in lease liability payments of $1.7 million. We invested $0.1 million in capital
expenditures primarily related to system modifications and improvements. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $2.0 million.
For the six months ended June 30, 2022, cash from operations used $1.8 million driven by a net investment in inventory of $1.7 million, a reduction in lease liabilities of $1.7 million, income tax payments mostly
related to the 2021 tax year of $0.9 million and net prepaid expenses of $0.6 million, partially offset by net income of $0.1 million, non-cash expenses of $2.8 million, including depreciation, amortization, and stock-based compensation, a net
increase of $0.8 million in accounts payable and accrued expenses, a net decrease of $0.2 million in accounts receivable and other changes in operating assets and liabilities. We invested $0.5 million in capital expenditures primarily related to
system implementations. Cash used in financing activities was primarily due to the purchase of 359,500 shares of our common stock for $5.00 per share, or $1.8 million, from two institutional shareholders of the Company in a private transaction.
We also paid off our loan with Banco Santander S.A. in Spain for $0.4 million during the second quarter. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $4.6 million.
| Item 4. |
Controls and Procedures.
|
Evaluation of Disclosure Controls and Procedures
As part of the filing of this Form 10-Q for the period ended June 30, 2023, our management, with the participation of our Chief Executive Officer (“CEO”), 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 concluded that our disclosure controls and
procedures were not effective due to the material weaknesses described below.
Management’s Annual Report on Internal Control over Financial Reporting
Our management, including our CEO, is responsible for establishing and maintaining adequate internal control over our financial reporting 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, 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 June 30, 2023 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 activities to mitigate risks,
including the development of alternative control activities that address segregation of duties issues; (ii) selecting and implementing information technology and related systems supportive to our internal control over financial reporting; and
(iii) deploying control activities through policies and establishing procedures that put these policies into action, including timely review of account reconciliations and methodologies used to calculate and report financial information and
results, as well as timely periodic management reviews of financial information and results that would help identify misstatements.
Information and communication. We identified deficiencies associated with information and communication within our internal control framework. Specifically, we did not
effectively assign responsibility to personnel for gathering required information nor did we periodically communicate objectives and internal control responsibilities throughout the organization which contributed to inadequate documentation of
processes, untimely review of account reconciliations and calculations involving judgement and delays in the accounting close cycle, hindering timely communication with management, the Board of Directors and our independent auditors.
Monitoring activities. We concluded that we did not design and implement effective monitoring activities related to (i) selecting, developing, and performing separate
evaluations of our internal control over financial reporting; and (ii) evaluating and communicating internal control deficiencies in a timely manner to parties responsible for taking corrective actions.
Remediation Efforts to Address Material Weaknesses
Our management, including our CEO, continues to work with expert accounting consultants and our Audit Committee to design and implement both a short-term and a long-term remediation plan to correct the material
weaknesses in our disclosure controls and procedures and our internal control over financial reporting. The following activities highlight our commitment to remediating our identified material weaknesses:
Since 2020, and through the filing date of this Form 10-Q we have taken the following measures, among others:
| • |
Replaced critical roles within our accounting team with full-time employees with expertise in GAAP accounting, SEC reporting and disclosure, internal audit and internal controls;
|
| • |
Replaced our legacy accounting systems with an integrated enterprise resource planning (“ERP”) solution which includes general ledger, warehouse management and factory production modules designed to calculate inventory on a FIFO basis;
|
| • |
Implemented a new point-of-sale system for most of our stores that is fully integrated with our new ERP system. The remaining two stores will be converted in Q3 of 2023;
|
| • |
Implemented new accounting processes and procedures aligned with our new ERP system that incorporate best practices to minimize errors and putting into action control activities that will prevent misstatements and that address
appropriate segregation of duties;
|
| • |
Updated process narrative documentation in the following areas: (i) fixed assets and lease accounting, (ii) information technology (IT) governance, and (iii) HR and payroll;
|
| • |
Created a risk controls matrix which includes, among other things, a comprehensive list of key and mitigating controls, a description of the risk the control is designed to mitigate, the individual responsible for each control, the
frequency in which the control is performed, and a mapping of each control to the five COSO Framework components (control environment, risk assessment, control activities, information and communication, or monitoring activities);
|
| • |
Established a greater sense of accountability by requiring sub-certifications below the CEO level for certain key accounting, finance and operations personnel.
|
Our continuing plan and additional steps for remediation include:
| • |
Ongoing recruitment and hiring of permanent, qualified public-company accounting personnel;
|
| • |
Converting remaining stores onto our new point-of-sale system;
|
| • |
Continuing to implement new accounting procedures and activities aligned with our new ERP system that improve upon the reliability of financial reporting and the preparation of financial statements in accordance with GAAP;
|
| • |
Continuing to improve the accounting close process, including periodic review and update of our accounting close checklists for completeness of duties, accuracy of owners and deadlines to maintain accountability, timely review of
account reconciliations and calculations involving judgement, and timely reporting of financial results;
|
| • |
Continuing to refine and improve narrative documentation in particular in the following areas: (i) financial reporting, (ii) inventory, (iii) purchasing and accounts payable, (iv) revenue, (v) general accounting, treasury, and
financial planning & analysis, and (vi) tax;
|
| • |
Periodically reviewing our risk controls matrix and process narrative documentation to ensure changes such as personnel, information sources, processes, systems, and frequency in performing the control are properly reflected in a
timely manner;
|
| • |
Reporting the progress and results of our remediation plan to the Audit Committee on a recurring basis, including the identification, status, and resolution of internal control deficiencies; and
|
| • |
Creating a comprehensive approach to regularly evaluate the operating effectiveness of our disclosure controls and procedures and our internal control over financial reporting using the COSO Framework as a guide.
|
Control Environment
Our management, including our CEO, our Audit Committee and our Board of Directors have taken certain steps to 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.
|
| • |
Regular periodic communications from the CEO and other key senior leaders on the Company’s mission, core values, Code of Business Conduct and Ethics, whistleblower policies, and each employee’s individual responsibility for internal
control compliance.
|
| • |
Reorganization of the finance and accounting team to address segregation of duties issues, oversight, and review of work, and recruiting and hiring qualified, competent employees with relevant experience for the roles.
|
| • |
Regular performance evaluations to include position-specific criteria for functional competence, including performance of internal control responsibilities.
|
Risk Oversight Measures
We continue to identify risks and enhance risk oversight measures. In late 2019, we developed an annual strategic planning process designed to identify specific operating objectives for the organization and to
conduct an assessment across the organization of the risks to meeting those objectives, including the risk of fraud. Furthermore, on a quarterly basis, management will review our periodic filings to ensure that 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 have conducted detailed working sessions to document our current and prior finance and accounting policies, procedures, and
step-by-step activities. These sessions have identified specific areas that require improvement and redesign of processes, structure, authorities and controls, and those actions include:
| • |
Completing the implementation of our new point-of-sale system, which is fully integrated with our ERP system.
|
| • |
Continuing to implement functionality in our ERP system to improve on our internal controls over financial reporting, such as implementing the ERP’s bank reconciliation module.
|
| • |
Continuing to implement newly-designed processes, structures, delegation of authority and controls, in accordance with the COSO Framework, including:
|
| o |
Quarterly updates for our Controller regarding upcoming accounting pronouncement and proposed changes to GAAP accounting standards, tax regulations, and other requirements that may impact the Company’s financial reporting;
|
| o |
Timely reviews each quarter of the most significant accounting estimates and judgment;
|
| o |
Validation of results through detailed variance analyses and reconciliation of account balances performed on a timely basis;
|
| 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 with the certification process.
|
Information Processing and Communication
The implementation of our new ERP system eliminated the need for the topside adjustment calculations that had to be performed because our legacy systems were not integrated and many of our accounting processes were
manual. This new ERP system allows us to automate certain accounting processes, reducing the risk of management override, and eliminating the need for topside adjustments outside of the system. In addition, management is developing detailed
policies, procedures and internal controls related to our financial reporting and working to develop regular reporting from our new systems that can validate the quality of our data and provide 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. 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, and we implemented
our new point-of-sale system, which is fully integrated with our ERP system, in most of our U.S. stores with the remaining stores to be converted in 2023. Although we had not fully remediated all material weaknesses in our internal control over
financial reporting as of December 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.
| 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.
| Item 1A. |
Risk Factors.
|
Our Risk Factors are discussed fully in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 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 June 30, 2023:
|
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
|
||||||||||||
|
April 1 – April 30, 2023
|
—
|
—
|
—
|
$
|
4,997,000
|
|||||||||||
|
May 1 – May 31, 2023
|
—
|
—
|
—
|
$
|
4,997,000
|
|||||||||||
|
June 1 – June 30, 2023
|
—
|
—
|
—
|
$
|
4,997,000
|
|||||||||||
|
Total
|
—
|
—
|
—
|
|||||||||||||
| Item 6. |
Exhibits.
|
|
Exhibit
Number
|
Description
|
|
Certificate of Incorporation of The Leather Factory, Inc., and Certificate of Amendment to Certificate of Incorporation of The Leather Factory, Inc. filed as Exhibit 3.1 to Tandy Leather
Factory, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 12, 2005 and incorporated by reference herein.
|
|
|
Bylaws of Tandy Leather Factory, Inc., filed as Exhibit 3.1 to Tandy Leather Factory, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 8,
2021 and incorporated by reference herein.
|
|
|
|
Certificate of Designations of Series A Junior Participating Preferred Stock of Tandy Leather Factory, Inc. filed as Exhibit 3.1 to Tandy Leather Factory’s Inc.’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 10, 2013 and incorporated by reference herein.
|
|
Certificate of Amendment of Certificate of Incorporation, dated March 1, 2023.
|
|
|
Description of Securities filed as Exhibit 4.1 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on June 22, 2021 and incorporated by reference
herein.
|
|
|
Tandy Leather Factory, Inc. 2013 Restricted Stock Plan, filed as Exhibit 10.1 to Tandy Leather Factory’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2013
and incorporated by reference herein.
|
|
|
Amendment #1 to Tandy Leather Factory, Inc. 2013 Restricted Stock Plan filed as Exhibit 10.5 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed with the Securities and Exchange on June 22,
2021 and incorporated by reference herein.
|
|
|
Form of Non-Employee Director Restricted Stock Agreement under Tandy Leather Factory, Inc.’s 2013 Restricted Stock Plan, filed as Exhibit 10.1 to Tandy Leather Factory, Inc.’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2014 and incorporated by reference herein.
|
|
|
Form of Employee Restricted Stock Award Agreement under Tandy Leather Factory, Inc.’s 2013 Restricted Stock Plan, filed as Exhibit 10.7 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on June 22, 2021 and incorporated by reference herein.
|
|
|
Form of Employment Agreement dated October 2, 2018 between the Company and Janet Carr, filed as Exhibit 10.1 to Tandy Leather Factory Inc.’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 5, 2018 and incorporated by reference herein.
|
|
|
Form of Stand-Alone Restricted Stock Unit Agreement dated October 2, 2018 between the Company and Janet Carr, filed as Exhibit 10.2 to Tandy Leather Factor’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 5, 2018 and incorporated by reference herein.
|
|
Form of Stand-Alone Restricted Stock Unit Agreement dated October 2, 2018 between the Company and Janet Carr, filed as Exhibit 10.3 to Tandy Leather Factor’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 5, 2018 and incorporated by reference herein.
|
|
|
Form of Stock Purchase Agreement dated January 28, 2021 between the Company and Central Square Management, filed as Exhibit 10.14 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on June 22, 2021 and incorporated by reference herein.
|
|
|
|
Form of Stock Purchase Agreement dated December 8, 2021 between the Company and Right Lane I, LP, filed as Exhibit 10.14 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 16, 2022 and incorporated by reference herein.
|
|
Tandy Leather Factory, Inc. 2023 Incentive Stock Plan.
|
|
|
Code of Business Conduct and Ethics of Tandy Leather Factory, Inc., adopted by the Board of Directors in May, 2021, filed as Exhibit 14.1 to Tandy Leather Factory, Inc.’s Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on June 22, 2021 and incorporated by reference herein.
|
|
|
Subsidiaries of Tandy Leather Factory, Inc., filed as Exhibit 21.1 to Tandy Leather Factory, Inc.’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on June
22, 2021 and incorporated by reference herein.
|
|
|
13a-14(a) or 15d-14(a) Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2022.
|
|
|
*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: August 14, 2023
|
By: /s/ Janet Carr
|
|
Janet Carr
|
|
|
Chief Executive Officer
|
34
Exhibit 3.4
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
TANDY LEATHER FACTORY, INC.
The undersigned corporation, organized and existing under and by virtue of the General Corporation Law of the State of Delaware does hereby certify:
FIRST: That at a meeting of the Board of Directors of Tandy
Leather Factory, Inc., a Delaware corporation (the “Corporation”), resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling for a
written consent of stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows:
Resolved, that the Certificate of Incorporation of this
corporation be amended by changing the first sentence of the Article thereof numbered “Fourth” so that, as amended, said first sentence shall be and read as follows:
Fourth: The total number of shares of
stock which the Corporation shall have authority to issue is 15,000,000, 14,000,000 of such shares to be classified as common stock, $0.0024 per value per share (the “Common Stock”), and 1,000,000 shares to be classified as preferred stock, $0.10 par
value per share (the “Preferred Stock”).
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a written consent of the stockholders of the Corporation was duly obtained in accordance with Section 2.9 of the Corporation’s Bylaws and Section 228 of the General Corporation Law of the State of Delaware, in which the necessary number of
shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That the outstanding capital of the Corporation shall
not be reduced under or by reason of said amendment.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed this first day of March, 2023.
/s/ Janet Carr
Janet Carr, Chief Executive Officer
Attest:
/s/ Daniel Ross
Daniel Ross, Secretary
Exhibit 10.10
Tandy Leather Factory, Inc.
2023 Incentive Stock Plan
Section 1. Purpose of the Plan
The purpose of the Tandy Leather Factory, Inc. 2023 Incentive Stock Plan (the “Plan”) is to attract, retain and motivate Eligible Persons and to align their
interests and efforts to the long-term interests of the Company’s shareholders. The Plan is effective as of the date on which it is approved by shareholders entitled to vote at the 2023 annual meeting of shareholders of the Company (the “Effective
Date”), and replaces the Tandy Leather Factory, Inc. 2013 Restricted Stock Plan, as amended through the date hereof (the “2013 Plan”), as of such date (provided that the 2013 Plan shall remain in effect solely with respect to awards outstanding
under the 2013 Plan as of the Effective Date).
Section 2. Definitions
As used in the Plan,
“2013 Plan Awards” means awards outstanding under the 2013 Plan as of the
Effective Date.
“Authorized Officer” means the Vice President of Human Resources or any
other officer of the Company as may be designated by the Committee.
“Award” means an award or grant made to a Participant under Sections 6, 7,
8, 9, 10, and/or 11 of the Plan.
“Board” means the Board of Directors of the Company.
“Corporate Transaction” has the meaning set forth in Section 14.3.
“Corporate Transaction Price” has the meaning set forth in Section 14.3.
“Code” means the Internal Revenue Code of 1986, as amended from time to
time.
“Committee” has the meaning set forth in Section 3.2.
“Company” means Tandy Leather Factory, Inc.
“Disability” means such term as defined by the Committee or an Authorized
Officer for purposes of the Plan or an Award or as defined in the applicable Notice of Terms.
“Eligible Persons” has the meaning set forth in Section 5.
“Exchange Act” means the Securities Exchange Act of 1934, as amended from
time to time.
“Fair Market Value” means the closing price (or the average of the high and
low per Share trading prices, or the average of the opening and closing prices, if so determined by the Committee) for a Share on the Stock Market during regular session trading as reported by The Wall Street Journal or such other source the
Committee deems reliable for a single trading day. The Committee may vary its determination of the Fair Market Value as provided in this Section 2 depending on whether Fair Market Value is in reference to the grant, exercise, vesting, settlement or
payout of an Award and, for Awards subject to Section 409A, as provided in Section 409A.
“Grant Date” means the date on which the Committee completes the corporate
action authorizing the grant of an Award or such later date specified by the Committee, provided that conditions to the exercisability or vesting of Awards shall not defer the Grant Date. With respect to any Award of Restricted Stock, Restricted
Stock Units, Performance Restricted Stock, Performance Restricted Stock Units, Options, or Stock Appreciation Rights, or any other stock-based Award, if the foregoing date is not a date on which the Stock Market is open for trading, the “Grant
Date” for such an Award shall be the next following date on which the Stock Market is open for trading.
“Incentive Stock Option” means an Option granted with the intention that it
qualify as an “incentive stock option” as that term is defined in Section 422 of the Code or any successor provision.
“Layoff” means such term as defined by the Committee or an Authorized
Officer for purposes of the Plan or an Award or as defined in the applicable Notice of Terms.
“Nonqualified Stock Option” means an Option other than an Incentive Stock
Option.
“Notice of Terms” has the meaning set forth in Section 6.2.
“Option” means a right to purchase a specified number of Shares granted
under Section 7.
“Other Obligations” has the meaning set forth in Section 12.
“Participant” means any Eligible Person as set forth in Section 5 to whom
an Award is granted.
“Performance Goals” means specified performance targets or goals for a
particular performance period, which may be based on individual performance, performance of the Company (as a whole or with respect to one or more business units, divisions, acquired businesses, minority investments, partnerships, or joint
ventures), and/or other performance criteria established by the Committee pursuant to Section 10, including, but not limited to: sales, profits (including, but not limited to, profit growth, net operating profit or economic profit); profit-related
return ratios; return measures (including, but not limited to, return on assets, capital, equity, or sales); cash flow (including, but not limited to, operating cash flow, adjusted operating cash flow, free cash flow or cash flow return on
capital); earnings (including, but not limited to, net earnings, EBITDA, earnings per share, or earnings before or after taxes); net sales growth; net income (before or after taxes, interest, depreciation and/or amortization); gross or operating
margins; productivity ratios; share price (including, but not limited to, growth measures and total shareholder return); expense targets; margins; operating efficiency; customer satisfaction; and working capital targets. Performance Goals and
underlying performance criteria may be stated in absolute or relative terms, and may be established or adjusted to include or exclude any components of any performance measure, including, without limitation, special charges such as restructuring or
impairment charges, debt refinancing costs, extraordinary or noncash items, unusual, nonrecurring, infrequently occurring or one-time events affecting the Company or its financial statements, the effects of acquisitions or divestitures or other
items deemed not reflective of the Company’s core performance, or changes in law or accounting principles.
2
“Performance Restricted Stock” or “Performance Restricted Stock Unit” has the meaning set forth in Section 10.
“Related Company” means any corporation in which the Company owns, directly
or indirectly, at least 50% of the total combined voting power of all classes of stock, or any other trade, business, or entity (including, but not limited to, partnerships and joint ventures) in which the Company owns, directly or indirectly, at
least 50% of the combined equity thereof. Notwithstanding the foregoing, for purposes of determining whether any individual may be a Participant for purposes of any grant of Incentive Stock Options, the term “Related Company” shall have the meaning
ascribed to the term “subsidiary” in Section 424(f) of the Code, and for purposes of determining whether any individual may be a Participant for purposes of any grant of Options or Stock Appreciation Rights, the term “Related Company” shall mean
any “Service Recipient” as that term is defined for purposes of Section 409A.
“Restricted Stock” means an Award of Shares granted under Section 9, the
rights of ownership of which may be subject to restrictions prescribed by the Committee.
“Restricted Stock Unit” means an Award of a right to receive a Share, the
cash value of a Share, or a combination thereof, granted under Section 9.
“Retirement” means such term as defined by the Committee or an Authorized
Officer for purposes of the Plan or an Award or as defined in the applicable Notice of Terms.
“Section 16 Participants” means nonemployee directors and officers of the
Company who are subject to Section 16 of the Exchange Act.
“Section 409A” means Section 409A of the Code, or any successor provision,
including any proposed and final regulations and other guidance issued thereunder by the Department of the Treasury and/or the Internal Revenue Service.
“Securities Act” means the Securities Act of 1933, as amended from time to
time.
“Shares” means shares of the common stock, par value $0.0024 per share, of
the Company.
“Stock Appreciation Right” or “SAR” has the meaning set forth in Section 8.1.
“Stock Market” means the Nasdaq Capital Market, or such other stock market
or exchange on which the Company’s common stock primarily trades as of an applicable date.
3
“Substitute Awards” means Awards granted or Shares issued by the Company in
assumption of, or in substitution or exchange for, awards previously granted by a company acquired by the Company or any Related Company or with which the Company or any Related Company combines.
“Tax Withholding Obligations” has the meaning set forth in Section 12.
“Termination of Service,” unless otherwise defined by the Committee, an
Authorized Officer or in the applicable Notice of Terms, means a termination of employment or service relationship with the Company or a Related Company for any reason, whether voluntary or involuntary, including by reason of death, Disability,
Retirement or Layoff. Any question as to whether and when there has been a Termination of Service for the purposes of an Award and the cause of such Termination of Service shall be determined by an Authorized Officer or by the Committee with
respect to Section 16 Participants, and any such determination shall be final. Transfer of a Participant’s employment or service relationship between Related Companies, or between the Company and any Related Company, shall not be considered a
Termination of Service for purposes of an Award. Unless the Committee determines otherwise, a Termination of Service shall be deemed to occur if the Participant’s employment or service relationship is with an entity that has ceased to be a Related
Company.
Section 3. Administration
3.1 Administration of the Plan. The Plan shall be administered by the Compensation Committee of the Board; provided, however, that with respect to nonemployee directors, the Plan shall be
administered by the full Board unless otherwise determined by the Board. Each administering committee shall be comprised of at least two directors, each of whom shall qualify as an “independent director” as defined under the Stock Market listing
standards and a “nonemployee director” as defined in Rule 16b-3 promulgated under the Exchange Act. However, the fact that a Committee member shall fail to qualify under the foregoing requirements shall not invalidate any Award made by the
Committee which is otherwise validly made under the Plan.
3.2 Delegation by Committee. Notwithstanding the foregoing, except to the extent prohibited by applicable law or the applicable rules and regulations of any securities exchange on which the
Shares are listed or traded, the Board or the Committee may delegate responsibility for administering the Plan with respect to designated classes of Eligible Persons to different committees consisting of one or more members of the Board, subject
to such limitations as the Board or the Committee deems appropriate, except with respect to benefits to Section 16 Participants. Members of any committee shall serve for such term as the Board may determine, subject to removal by the Board at any
time. To the extent consistent with applicable law, the Board or the Committee may delegate to a person or body the authority to grant Awards to Eligible Persons other than Section 16 Participants, within limits specifically prescribed by the
Board or the Committee; provided, however, that no such person or body shall have or obtain authority to grant Awards to themselves or to any Section 16 Participant. All references in the Plan to the “Committee” shall be, as applicable, to the
Compensation Committee or any other committee, party, person, or body to whom the Board or the Committee has delegated authority to administer the Plan.
4
3.3 Administration and Interpretation by Committee. Except for the terms and conditions explicitly set forth in the Plan, the Committee shall have full power and exclusive authority, subject
to such orders or resolutions not inconsistent with the provisions of the Plan as may be adopted by the Board from time to time, to (a) select the Eligible Persons as set forth in Section 5 to whom Awards may from time to time be granted under
the Plan; (b) determine the type or types of Awards to be granted under the Plan; (c) determine the number of Shares to be covered by each Award granted under the Plan; (d) determine the terms and conditions of any Award granted under the Plan;
(e) approve the forms of Notices of Terms and any other instruments or agreements for use under the Plan; (f) determine whether, to what extent and under what circumstances Awards may be settled in cash, Shares or other property or canceled or
suspended; (g) determine whether, to what extent and under what circumstances cash, Shares, other property and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the Participant, subject to
Section 409A and in accordance with Section 6.3; (h) interpret and administer the Plan, any Award, any Notice of Terms, and any other instrument or agreement entered into under the Plan; (i) establish such rules and regulations and appoint such
agents as it shall deem appropriate for the proper administration of the Plan; (j) delegate ministerial duties to such of the Company’s officers as it so determines; (k) waive any terms, conditions or restrictions applicable to any outstanding
Award and accelerate vesting of any outstanding Award under such circumstances and subject to such terms and conditions as the Committee shall deem appropriate; (l) correct any defect, supply any omission, or reconcile any inconsistency in the
Plan, any Award, any Notice of Terms, or any instrument or agreement relating to an Award, in the manner and to the extent it shall deem desirable to carry the Plan into effect; and (m) make any other determination and take any other action that
the Committee deems necessary or desirable for administration of the Plan. Decisions of the Committee shall be final, conclusive and binding on all persons, including the Company, any Participant, any shareholder and any Eligible Person. Unless
otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan, any Award or any Notice of Terms shall be within the sole and complete discretion of the
Committee.
Section 4. Shares Subject to the Plan
4.1 Authorized Number of Shares.
(a) The aggregate number of Shares authorized for issuance under the Plan, subject to adjustment as provided in Section 4.2 and Section 14, shall be
comprised of:
(i) 800,000 new Shares authorized for issuance under the Plan, plus
(ii) the number of undelivered Shares that were the subject of 2013 Plan Awards outstanding as of the Effective Date which, after the Effective Date,
expire or lapse or are forfeited, surrendered, canceled, terminated, settled in cash in lieu of Shares or are issued and thereafter reacquired by the Company; plus
(iii) the number of Shares tendered by participants in the 2013 Plan to, or retained by, the Company to satisfy any Tax Withholding Obligations with
respect to awards of restricted stock, restricted stock units, performance restricted stock, performance restricted stock units, or performance shares previously granted under the 2013 Plan.
5
(b) Shares which may be issued under the Plan may be either authorized and unissued Shares or issued Shares which have been reacquired by the Company (in
the open-market or in private transactions) and which are being held as treasury shares. The Committee shall determine the manner in which fractional Share value shall be treated.
(c) In the event of a change in the Shares of the Company that is limited to a change in the designation thereof to “Capital Stock” or other similar
designation, or to a change in the par value thereof, or from par value to no par value, without increase or decrease in the number of issued Shares, the Shares resulting from any such change shall be deemed to be Shares for purposes of the Plan.
4.2 Share Usage.
(a) Shares covered by an Award or any portion of an Award shall not be counted as used unless and until they are actually issued and delivered to a
Participant. Any Shares that are subject to Awards that expire or lapse or are forfeited, surrendered, canceled, terminated, settled in cash in lieu of Shares or are issued and thereafter reacquired by the Company shall again be available for
Awards under the Plan, to the extent of such expiration, lapse, forfeiture, surrender, cancelation, termination, settlement or reacquisition of such Awards (as may be adjusted pursuant to Section 14); provided, however, that this provision shall
not be applicable with respect to the cancelation of (i) a Stock Appreciation Right granted in tandem with an Option upon the exercise of the Option or (ii) an Option granted in tandem with a Stock Appreciation Right upon the exercise of the Stock
Appreciation Right. In addition, Shares issued pursuant to Substitute Awards shall not be counted as used under the Plan.
(b) Shares tendered by a Participant or retained by the Company (i) as full or partial payment to the Company for the purchase price of an Award or
(ii) to satisfy any Tax Withholding Obligations with respect to an Award of Options or Stock Appreciation Rights, shall be counted as used and will not be available for issuance under the Plan. Shares tendered by a Participant or retained by the
Company to satisfy any Tax Withholding Obligations with respect to an Award of Restricted Stock, Restricted Stock Units, Performance Restricted Stock, or Performance Restricted Stock Units, or any other stock-based Award other than an Option or
Stock Appreciation Right, shall not be counted as used and will be available for issuance under the Plan.
(c) The Committee shall have the authority to grant Awards as an alternative to or as the form of payment for grants or rights earned or due under other
compensation plans or arrangements of the Company.
(d) The number of Shares available for issuance under the Plan shall be reduced to reflect any dividends or dividend equivalents that are reinvested into
additional Shares or credited as additional Shares subject to or paid with respect to an Award.
4.3 Award Limits. The limits in
this Section 4.3 are subject to adjustment under Section 14 and are subject to the maximum authorized Shares for issuance under the Plan as set forth in Section 4.1.
(a) The aggregate number of Shares that may be subject to Options or Stock Appreciation Rights granted to any Participant in any calendar year under the Plan
shall not exceed 400,000 Shares.
6
(b) The aggregate number of shares that may be subject to Awards of Restricted Stock, Restricted Stock Units, Performance Restricted Stock, Performance
Restricted Stock Units, or any other stock-based Award (other than an Option or SAR) granted to any Participant in any calendar year under the Plan shall not exceed 400,000 shares.
(c) Except with respect to a maximum of 20% of the Shares reserved for issuance under the Plan, Awards of Options, Stock Appreciation Rights, Restricted
Stock, Restricted Stock Units, Performance Restricted Stock, Performance Restricted Stock Units, and any other stock-based Awards shall provide for a minimum vesting period of at least one year from the grant date of the Award; provided that
(i) the Committee may permit, or a Notice of Terms may provide for, acceleration of vesting of such Awards in the event of a Termination of Service due to death, Disability, Retirement, Layoff or other circumstances deemed appropriate; and (ii) the
foregoing limit shall not apply to Substitute Awards or Shares delivered in lieu of fully vested cash obligations.
(d) The aggregate number of Shares that may be subject to Incentive Stock Options granted under the Plan shall not exceed 400,000 Shares.
(e) The aggregate grant date fair value of all Awards granted to any nonemployee director plus the value of any other fees or payments, including cash
retainer fees, to any nonemployee director in a single calendar year, in each case, solely with respect to the individual’s service as a nonemployee director, year shall not exceed $50,000 (or, for a nonexecutive chair of the Board, $100,000).
Section 5. Eligibility
An Award may be granted to any employee, officer or director of the Company or a Related Company whom the Committee from time to time selects, or any
consultant, agent, advisor or independent contractor who is a natural person and who provides bona fide services to the Company or any Related Company (collectively, “Eligible Persons”).
Section 6. Awards
6.1 Form and Grant of Awards. The
Committee shall have the authority, in its sole discretion, to determine the type or types of Awards to be granted under the Plan. Such Awards may be granted either alone, in addition to or in tandem with any other type of Award.
6.2 Notice of Terms. Awards
granted under the Plan to Eligible Persons other than nonemployee directors of the Company shall be evidenced by a written instrument that shall contain such terms, conditions, limitations and restrictions as the Committee shall, in its
discretion, deem advisable (a “Notice of Terms”).
6.3 Deferrals. The Committee may
permit a Participant to defer receipt of the payment of any Award. If any such deferral election is permitted, the Committee, in its sole discretion, shall establish rules and procedures for such payment deferrals, which may include the grant of
additional Awards or provisions for the payment or crediting of interest or dividend equivalents, including converting such credits to deferred stock unit equivalents. The value of the payment so deferred may be allocated to a deferred account
established for a Participant under any deferred compensation plan of the Company designated by the Committee. Notwithstanding the foregoing, any deferral made under this Section 6.3 will be made under a deferred compensation plan of the Company
or pursuant to the terms of an employment agreement, either of which satisfies the requirements for exemption from or complies with Section 409A.
7
6.4 Dividends and Distributions. Participants
holding Awards may, if the Committee so determines, be credited with dividends paid with respect to the underlying Shares or dividend equivalents while the Awards are so held in a manner determined by the Committee in its sole discretion. The
Committee may apply any restrictions to the dividends or dividend equivalents that the Committee deems appropriate. The Committee, in its sole discretion, may determine the form of payment of dividends or dividend equivalents, including cash,
Shares, Restricted Stock or Restricted Stock Units. Notwithstanding the foregoing, (a) in no event will dividends or dividend equivalents be credited or payable in respect of Options or SARs, (b) dividends or dividend equivalents credited/payable
in connection with an Award that is not yet vested shall be subject to the same restrictions and risk of forfeiture as the underlying Award, and shall not be paid until the underlying Award vests and is paid, and (c) the crediting of dividends or
dividend equivalents must comply with or qualify for an exemption under Section 409A.
Section 7. Options
7.1 Grant of Options. The
Committee may grant Options designated as Incentive Stock Options or Nonqualified Stock Options.
7.2 Option Exercise Price. The
exercise price for Shares purchased under an Option shall be as determined by the Committee but shall not be less than 100% of the Fair Market Value of a Share on the Grant Date, except in the case of Substitute Awards.
7.3 Term of Options. Subject to
earlier termination in accordance with the terms of the Plan and the applicable Notice of Terms, the maximum term of an Option shall be ten years from the Grant Date.
7.4 Exercise of Options.
(a) The Committee shall establish and set forth in each applicable Notice of Terms the time at which, or the installments in which, the Option shall vest
and become exercisable, any of which provisions may be waived or modified by the Committee at any time.
(b) To the extent an Option has vested and become exercisable, the Option may be exercised in whole or from time to time in part by delivery as directed
by the Company to the Company or a brokerage firm designated or approved by the Company of a written stock option exercise agreement or notice, in a form and in accordance with procedures established by the Committee, setting forth the number of
Shares with respect to which the Option is being exercised, the restrictions imposed on the Shares purchased under such exercise agreement, if any, and such representations and agreements as may be required by the Committee, accompanied by payment
in full as described in Section 7.5. An Option may be exercised only for whole Shares and may not be exercised for less than a reasonable number of Shares at any one time, as determined by the Committee. Notwithstanding the foregoing, except as
otherwise expressly provided in an applicable Notice of Terms, if on the last day of the term of an Option that is outstanding on such date (i) the closing price of one Share exceeds the per Share exercise price, (ii) the Participant has not
exercised the Option, and (iii) the Option has not been terminated due to the Participant’s termination for cause (as determined by the Committee or an Authorized Officer), the Participant will be deemed to have exercised the Option on such day
with payment made by withholding the Shares otherwise issuable in connection with the exercise of the Option, and the Company shall deliver to the Participant the number of Shares for which the Option was deemed exercised, less the number of Shares
required to be withheld to satisfy the total purchase price and Tax Withholding Obligations.
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(c) No grant of an Option shall include a “reload” feature or any provision entitling the Participant to the automatic grant of an additional Option in
connection with any exercise of the original Option.
7.5 Payment of Exercise Price. Except
as otherwise provided upon a deemed Option exercise as described in section 7.4(b), the exercise price for Shares purchased under an Option shall be paid in full as directed by the Company to the Company or a brokerage firm designated or approved
by the Company by delivery of consideration equal to the product of the Option exercise price and the number of Shares purchased. Such consideration must be paid before the Company will issue the Shares being purchased and must be in a form or a
combination of forms acceptable to the Committee for that purchase and subject to any conditions or limitations established by the Committee, which forms may include: (a) wire transfer; (b) tendering by attestation Shares already owned by the
Participant that on the day prior to the exercise date have a Fair Market Value equal to the aggregate exercise price of the Shares being purchased under the Option; (c) to the extent permitted by applicable law, delivery of a properly executed
exercise notice, together with irrevocable instructions to a brokerage firm designated or approved by the Company to deliver promptly to the Company the aggregate amount of sale or loan proceeds to pay the Option exercise price and any Tax
Withholding Obligations that may arise in connection with the exercise, all in accordance with the regulations of the Federal Reserve Board; (d) a “net exercise” arrangement in which the Company withholds a number of Shares otherwise issuable
upon exercise of an Option having a Fair Market Value equal to the Option exercise price of the Shares being purchased under the Option; or (e) such other consideration as the Committee may permit in its sole discretion.
7.6 Post-Termination Exercise. The
Committee shall establish and set forth in each applicable Notice of Terms whether the Option shall continue to be exercisable, and the terms and conditions of such exercise, after a Termination of Service, any of which provisions may be waived
or modified by the Committee at any time, provided that any such waiver or modification shall satisfy the requirements for exemption under Section 409A.
7.7 Incentive Stock Options. The
terms of any Incentive Stock Options shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. Individuals who are not employees of the Company or one of
its parent or subsidiary corporations (as such terms are defined for purposes of Section 422 of the Code) may not be granted Incentive Stock Options. To the extent that the aggregate Fair Market Value of Shares with respect to which Incentive
Stock Options are exercisable for the first time by a Participant during any calendar year exceeds $100,000 or, if different, the maximum limitation in effect at the time of grant under the Code (the Fair Market Value being determined as of the
Grant Date for the Option), such portion in excess of $100,000 shall be treated as Nonqualified Stock Options. No Incentive Stock Options may be granted more than ten years after the adoption in April 2023 of this Plan by the Board.
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Section 8. Stock Appreciation Rights
8.1 Grant of Stock Appreciation Rights; SAR Grant Price. The Committee may grant stock appreciation rights (“Stock Appreciation Rights” or “SARs”). A SAR may be granted in tandem with an Option or alone (“freestanding”). The grant price of a tandem SAR shall be equal to the
exercise price of the related Option, and the grant price of a freestanding SAR shall be equal to the Fair Market Value of a Share on the Grant Date, except for Substitute Awards. A SAR may be exercised upon such terms and conditions and for the
term as the Committee determines in its sole discretion; provided, however, that, subject to earlier termination in accordance with the terms of the Plan and the applicable Notice of Terms, the term of a freestanding SAR shall be a term not to
exceed ten years from the Grant Date as established for that SAR by the Committee or, if not so established, shall be ten years, and in the case of a tandem SAR, (a) the term shall not exceed the term of the related Option and (b) the tandem SAR
may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option, except that the tandem SAR may be exercised only with respect to the Shares for
which its related Option is then exercisable. Notwithstanding the foregoing, except as otherwise expressly provided in the applicable Notice of Terms, if on the last day of the term of a Stock Appreciation Right that is outstanding on such date
(i) the closing price of one Share exceeds the per Share grant price, (ii) the Participant has not exercised the Stock Appreciation Right, and (iii) the Stock Appreciation Right has not been terminated due to the Participant’s termination for
cause (as determined by the Committee or an Authorized Officer), the Participant will be deemed to have exercised the Stock Appreciation Right on such day, and the Company shall deliver to the Participant the number of Shares for which the Stock
Appreciation Right was deemed exercised, less the number of Shares required to be withheld to satisfy the Tax Withholding Obligations.
8.2 Payment of SAR Amount. Upon
the exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying (a) the difference between the Fair Market Value of a Share on the date of exercise over the grant price by (b) the
number of Shares with respect to which the SAR is exercised. At the discretion of the Committee, the payment upon exercise of a SAR may be in cash, in Shares of equivalent value, in some combination thereof or in any other manner approved by the
Committee in its sole discretion. No grant of a SAR shall include a “reload” feature or any provision entitling the Participant to the automatic grant of an additional SAR in connection with any exercise of the original SAR.
8.3 Post-Termination Exercise. The
Committee shall establish and set forth in each applicable Notice of Terms whether the SAR shall continue to be exercisable, and the terms and conditions of such exercise, after a Termination of Service, any of which provisions may be waived or
modified by the Committee at any time, provided that any such waiver or modification shall satisfy the requirements for exemption under Section 409A.
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Section 9. Restricted Stock and Restricted Stock Units
9.1 Grant of Restricted Stock and Restricted Stock Units. The Committee may grant Restricted Stock and Restricted Stock Units on such terms and conditions and subject to such forfeiture restrictions, if any (which may be based on continuous service with the Company or a Related
Company or the achievement of any Performance Goals), as the Committee shall determine in its sole discretion, which terms, conditions and restrictions shall be set forth in the applicable Notice of Terms.
9.2 Issuance of Shares. Upon the
satisfaction of any terms, conditions and restrictions prescribed with respect to Restricted Stock or Restricted Stock Units, or upon a Participant’s release from any terms, conditions and restrictions of Restricted Stock or Restricted Stock
Units, as determined by the Committee, (a) the Shares of Restricted Stock covered by each Award of Restricted Stock shall become freely transferable by the Participant, and (b) Restricted Stock Units shall be paid in cash, Shares or a combination
of cash and Shares as the Committee shall determine in its sole discretion.
Section 10. Performance Restricted Stock and Performance Restricted Stock Units
The Committee may grant Awards of performance restricted stock and performance restricted stock units (“Performance Restricted Stock” or “Performance
Restricted Stock Units”, as the case may be) and designate the Participants to whom Performance Restricted Stock or Performance Restricted Stock Units are to be awarded and determine the quantity of Performance Restricted Stock or Performance
Restricted Stock Units, the length of the applicable performance period and the other terms and conditions of each such Award. Each Award of Performance Restricted Stock or Performance Restricted Stock Units shall entitle the Participant to a
payment in the form of Shares upon the achievement of Performance Goals and other terms and conditions specified by the Committee. Notwithstanding the achievement of any Performance Goals, the number of Shares issued under an Award of Performance
Restricted Stock or Performance Restricted Stock Units may be adjusted on the basis of such further consideration as the Committee shall determine in its sole discretion. The Committee, in its sole discretion, may make a cash payment equal to the
Fair Market Value of the Shares otherwise required to be issued to a Participant pursuant to an Award of Performance Restricted Stock or Performance Restricted Stock Units.
Section 11. Other Stock or Cash-Based Awards
In addition to the Awards described in Sections 7 through 10, and subject to the terms of the Plan, the Committee may grant other Awards payable in cash or
in Shares under the Plan as it determines to be in the best interests of the Company and subject to such other terms and conditions as it deems appropriate.
Section 12. Withholding
The Company or a Related Company, as appropriate, may require a Participant entitled to receive payment with respect to an Award to remit to the Company
prior to such payment (a) any taxes that the Company is required by applicable federal, state, local or foreign law to withhold with respect to the grant, vesting or exercise of an Award, as applicable (“Tax Withholding Obligations”) and (b) any
amounts due from the Participant to the Company or to any Related Company (“Other Obligations”). The Company shall not be required to issue any Shares or otherwise settle an Award under the Plan until such Tax Withholding Obligations and Other
Obligations are satisfied.
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The Committee may permit or require a Participant to satisfy all or part of his or her Tax Withholding Obligations and Other Obligations by (a) paying cash
to the Company, (b) having the Company withhold an amount from any cash amounts otherwise due or to become due from the Company to the Participant, (c) having the Company withhold a number of Shares that would otherwise be issued to the Participant
(or become vested in the case of Restricted Stock or Performance Restricted Stock) having a Fair Market Value equal to the Tax Withholding Obligations and Other Obligations, or (d) surrendering a number of Shares the Participant already owns having
a value equal to the Tax Withholding Obligations and Other Obligations. The value of the Shares so withheld or tendered to satisfy any Tax Withholding Obligations may exceed the Participant’s minimum required tax withholding rate or such other rate
as may be approved by the Committee (up to the maximum tax withholding rate), so long as such withholding does not result in adverse treatment for financial accounting purposes.
Section 13. Assignability
No Award or Notice of Terms, and no rights or interests herein or therein, shall or may be assigned, transferred, sold, exchanged, encumbered, pledged, or
otherwise hypothecated or disposed of by a Participant or any beneficiary(ies) of any Participant, except (a) by testamentary disposition by the Participant or the laws of intestate succession and (b) that to the extent permitted by the Committee,
in its sole discretion, a Participant may designate one or more beneficiaries (through procedures approved or authorized by the Company) who may receive payment under an Award after the Participant’s death. No such interest shall be subject to
execution, attachment or similar legal process, including, without limitation, seizure for the payment of the Participant’s debts, judgments, alimony, or separate maintenance. Except as provided in this Section 13, during the lifetime of a
Participant, Awards are exercisable only by the Participant or his or her legal representative in the case of physical or mental incapacitation of the Participant as evidenced by legal order.
Section 14. Adjustments
14.1 No Corporate Action Restriction. Notwithstanding any provision of the Plan to the contrary, the existence of the Plan, any Notice of Terms and/or the Awards granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the
shareholders of the Company to make or authorize (a) any adjustment, recapitalization, reorganization or other change in the Company’s or any subsidiary’s capital structure or its business, (b) any merger, consolidation or change in the ownership
of the Company or any subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior preference stocks ahead of or affecting the Company’s or any subsidiary’s capital stock or the rights thereof, (d) any dissolution or liquidation of
the Company or any subsidiary, (e) any sale or transfer of all or any part of the Company’s or any subsidiary’s assets or business, or (f) any other corporate act or proceeding by the Company or any subsidiary. No Participant, beneficiary or any
other person shall have any claim against any member of the Board or the Committee, the Company or any subsidiary, or any employees, officers, shareholders or agents of the Company or any subsidiary, as a result of any such action.
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14.2 Recapitalization Adjustments. Notwithstanding
any provision of the Plan to the contrary, in the event of a dividend or other distribution (whether in the form of cash, Shares, other securities, or other property) other than regular cash dividends, recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination, change in control or exchange of Shares or other securities of the Company, or other corporate transaction or event affects the Shares such that an adjustment is
necessary or appropriate in order to prevent dilution or enlargement of benefits or potential benefits intended to be made available under the Plan, the Board shall equitably adjust (a) the number of Shares or other securities of the Company (or
number and kind of other securities or property) with respect to which Awards may be granted, (b) the maximum Share limitation applicable to each type of Award that may be granted to any individual Participant in any calendar year, (c) the number
of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards, and (d) the exercise price with respect to any Option or the grant price with respect to any Stock Appreciation
Right.
14.3 Corporate Transactions. Notwithstanding
any provision of the Plan to the contrary, if the Company enters into or is involved in any Corporate Transaction, the Board may, prior to such Corporate Transaction and effective upon such Corporate Transaction, take such action as it deems
appropriate, including, but not limited to, replacing outstanding Awards with Substitute Awards in respect of the shares, other securities or other property of the surviving corporation or any affiliate of the surviving corporation on such terms
and conditions, as to the number of shares, pricing and otherwise, which shall substantially preserve the value, rights and benefits of any affected Awards granted hereunder as of the date of the consummation of the Corporate Transaction.
Notwithstanding anything to the contrary in the Plan, if any Corporate Transaction occurs, the Company shall have the right, but not the obligation, to cancel each Participant’s Options and/or Stock Appreciation Rights and to pay to each affected
Participant in connection with the cancelation of such Participant’s Options and/or Stock Appreciation Rights, an amount equal to the excess (if any) of the Corporate Transaction Price (as defined below), as determined by the Board, of the Shares
underlying any unexercised Options or Stock Appreciation Rights (whether then exercisable or not) over the aggregate exercise price of such unexercised Options and/or Stock Appreciation Rights, and make additional adjustments and/or settlements
of other outstanding Awards as it determines to be fair and equitable to affected Participants. Upon receipt by any affected Participant of any such Substitute Award (or payment) as a result of any such Corporate Transaction, such Participant’s
affected Awards for which such Substitute Awards (or payment) were received shall be thereupon canceled without the need for obtaining the consent of any such affected Participant.
For purposes of the Plan,
(a) “Corporate Transaction” means the occurrence of any of the following events: (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s
then-outstanding voting securities; (ii) the consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets; (iii) the consummation of a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the
surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation or
(iv) individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a person other than the Board.
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(b) “Corporate Transaction Price” means the highest price per Share paid in any transaction related to a Corporate Transaction. To the extent that the
consideration paid in any Corporate Transaction consists all or in part of securities or other non-cash consideration, the value of such securities or other non-cash consideration shall be determined in the good-faith discretion of the Board
consistent with provisions of Section 409A and/or other applicable law.
Section 15. Amendment and Termination
15.1 Amendment, Suspension or Termination of the Plan. The Board or the Committee may amend, suspend or terminate the Plan or any portion of the Plan at any time and in such respects as it shall deem advisable or as necessary or advisable to comply with the listing standards
of the Stock Market or any national securities exchange on which the Company’s securities are listed as required under Section 10D of the Exchange Act or any other applicable law, rule, or regulation; provided, however, that, to the extent
required by applicable law, regulation or stock exchange rule, shareholder approval shall be required for any amendment to the Plan; and provided, further, that any amendment that requires shareholder approval may be made only by the Board.
Notwithstanding the foregoing, an amendment that constitutes a “material revision” requiring shareholder approval as defined by the rules of the Stock Market
shall be submitted to the Company’s shareholders for approval. In addition, any revision that increases the number of shares stated in Section 4.1 as available for issuance under the Plan shall be considered a material revision that requires
shareholder approval.
15.2 Term of the Plan. Unless
sooner terminated as provided herein, the Plan shall terminate ten years from the Effective Date. After the Plan is terminated, no future Awards may be granted, but Awards previously granted shall remain outstanding in accordance with their
applicable terms and conditions and the Plan’s terms and conditions.
15.3 Consent of Participant. The
amendment, suspension or termination of the Plan or a portion thereof or the amendment of an outstanding Award shall not, without the Participant’s consent, materially adversely affect any rights under any Award theretofore granted to the
Participant under the Plan. Any change or adjustment to an outstanding Incentive Stock Option shall not, without the consent of the Participant, be made in a manner so as to constitute a “modification” that would cause such Incentive Stock Option
to fail to continue to qualify as an Incentive Stock Option. Notwithstanding the foregoing, any adjustments made pursuant to Section 14 shall not be subject to these restrictions.
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Section 16. General
16.1 Clawbacks. Awards granted
under the Plan and any gross proceeds received by Participants with respect to Awards granted under the Plan shall be subject to any clawback policy adopted by the Company to comply with the listing standards of any national securities exchange
on which the Company’s securities are listed as required under Rule 10D-1 under the Exchange Act or any other applicable law, rule, or regulation. In addition, subject to applicable local law, or except as otherwise expressly provided pursuant to
an applicable Notice of Terms, Awards granted under the Plan and any gross proceeds received by Participants with respect to Awards granted under the Plan shall be subject to clawback and forfeiture (meaning that the Award must be promptly
returned to the Company if already distributed, or that a Participant will lose his or her entitlement to an Award if it has not yet been distributed) in the event a Participant or former Participant engages in any of the following conduct, as
determined by the Company or its delegate in its sole discretion, prior to the second anniversary of the later of the vesting or receipt of payment of the Award: the Participant (a) pleads or admits to, is convicted of, or is otherwise found
guilty of a criminal or indictable offense involving theft, fraud, embezzlement, or other similar unlawful acts against the Company or against the Company’s interests; (b) directly or indirectly engages in competition with any aspect of Company
business with which the Participant was involved or about which the Participant gained Company proprietary or confidential information; (c) induces or attempts to induce, directly or indirectly, any of the Company’s employees, representatives or
consultants to terminate, discontinue or cease working with or for the Company, or to breach any contract with the Company, in order to work with or for, or enter into a contract with, the Participant or any third party; (d) disparages or defames
the Company, its products, or its current or former employees, provided that this clause shall not be construed to prohibit any individual from reporting, in good faith, suspected unlawful conduct in the workplace; or (e) takes, misappropriates,
uses, or discloses Company proprietary or confidential information. Clawback can, if applicable and where permitted by applicable local law, be made by deducting payments that will be due in the future (including salary, bonuses, and other forms
of compensation). A Participant’s acceptance of an Award under the Plan shall constitute such Participant’s acknowledgement and recognition that the Participant’s compliance with this Section 16.1 is a condition for the Participant’s receipt of
the Award. For purposes of this Section 16.1, the Company shall include the Company and all Related Companies.
Nothing in this Section 16.1 will apply to legally protected communications to government agencies or statements made in the course of sworn testimony in
administrative, judicial or arbitral proceedings.
16.2 No Individual Rights. No
individual or Participant shall have any claim to be granted any Award under the Plan, and the Company has no obligation for uniformity of treatment of Participants under the Plan. Furthermore, nothing in the Plan or any Award granted under the
Plan shall be deemed to constitute an employment contract or confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Related Company or limit in any
way the right of the Company or any Related Company to terminate a Participant’s employment or other relationship at any time, with or without cause.
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16.3 Issuance of Shares. Notwithstanding
any other provision of the Plan, the Company shall have no obligation to issue or deliver any Shares under the Plan or make any other distribution of benefits under the Plan unless, in the opinion of the Company’s counsel, such issuance, delivery
or distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act or the laws of any state or foreign jurisdiction) and the applicable requirements of any securities exchange or similar
entity.
The Company shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under the laws of any state or foreign jurisdiction, any Shares, security or interest in a security paid or issued under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made. The
Company may issue certificates for Shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as counsel for the Company deems necessary or desirable for compliance by the Company with federal, state and
foreign securities laws. The Company may also require such other action or agreement by the Participants as may from time to time be necessary to comply with applicable securities laws.
To the extent the Plan or any applicable Notice of Terms provides for issuance of stock certificates to reflect the issuance of Shares, the issuance may be
effected on a noncertificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange.
16.4 Indemnification. Each person
who is or shall have been a member of the Board, or a committee appointed by the Board, or an officer of the Company to whom authority was delegated in accordance with Section 3 shall be indemnified and held harmless by the Company against and
from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to which he or she may be a party or in which he or she may be
involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any
such claim, action, suit or proceeding against him or her; provided, however, that he or she shall give the Company an opportunity, at its own expense, to handle and defend such claim, action, suit or proceeding before he or she undertakes to
handle and defend the same on his or her own behalf, unless such loss, cost, liability or expense is a result of his or her own willful misconduct or except as expressly provided by statute.
The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the
Company’s certificate of incorporation or bylaws, as a matter of law, or otherwise, or of any power that the Company may have to indemnify them or hold them harmless.
16.5 No Rights as a Shareholder. Unless
otherwise provided by the Committee or in the applicable Notice of Terms, no Option or Award denominated in units shall entitle the Participant to any cash dividend, voting or other right of a shareholder unless and until the date of issuance
under the Plan of the Shares that are the subject of such Award.
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16.6 Compliance with Laws and Regulations. Notwithstanding anything in the Plan to the contrary, the Committee, in its sole discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are Section 16 Participants
without so restricting, limiting or conditioning the Plan with respect to other Participants. With respect to Section 16 Participants, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 promulgated
under the Exchange Act.
Additionally, in interpreting and applying the provisions of the Plan, any Option granted as an Incentive Stock Option pursuant to the Plan shall, to the
extent permitted by law, be construed as an “incentive stock option” within the meaning of Section 422 of the Code or any successor provision.
Additionally, notwithstanding anything contained in the Plan to the contrary, it is the Company’s intention that any and all Awards and compensation payable
under the Plan shall satisfy the requirements for exemption under Section 409A and that all terms and provisions shall be interpreted to satisfy such requirements. If the Committee determines that an Award, payment, distribution, deferral election,
transaction or any other action or arrangement contemplated by the provisions of the Plan would, if undertaken, cause a Participant to become subject to Section 409A, the Committee, to the extent it deems necessary or advisable in its sole
discretion, reserves the right , but shall not be required, to unilaterally amend or modify the Plan and any Award granted under the Plan so that the Award qualifies for exemption from or compliance with Section 409A. Awards not deferred under
Section 6.3 and not otherwise exempt from the requirements of Section 409A are intended to qualify for the short-term deferral exemption to Section 409A, and payment shall be made as soon as administratively feasible after the Award became vested,
but in no event shall such payment be made later than 2-1/2 months after the end of the calendar year in which the Award became vested unless otherwise permitted under the exemption provisions of Section 409A. Notwithstanding the foregoing, with
respect to any Award made under the Plan that is determined to be “deferred compensation” (within the meaning of Section 409A), (a) references to Termination of Service will mean the Participant’s “separation from service” (within the meaning of
Section 409A) with the Company or any applicable Related Company, and (b) any payment to be made with respect to such Award in connection with the Participant’s Termination of Service that would be subject to the limitations in
Section 409A(a)(2)(b) of the Code shall be delayed until six months after the Participant’s separation from service (or earlier death) in accordance with the requirements of Section 409A.
16.7 Participants in Other Countries. The Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with provisions of the laws of other countries in which the Company or any Related Company may operate
to ensure the viability of the benefits from Awards granted to Participants employed in such countries, to comply with applicable foreign laws and to meet the objectives of the Plan.
Notwithstanding the provisions of Sections 7.2 and 8.1, where applicable foreign law requires that compensatory stock right be priced based upon a specific
price averaging method and period, a stock right granted in accordance with such applicable foreign law will be treated as meeting the requirements of Sections 7.2 or 8.1, provided that the averaging period does not exceed 30 days.
16.8 No Trust or Fund. The Plan is
intended to constitute an “unfunded” plan. Nothing contained herein shall require the Company to segregate any monies or other property, or Shares, or to create any trusts, or to make any special deposits for any immediate or deferred amounts
payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company.
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16.9 Successors All obligations of
the Company under the Plan with respect to Awards shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all the business and/or assets of the Company.
16.10 Severability. If any
provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Committee’s determination, materially altering the intent of the Plan or the Award, such provision shall be stricken as
to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect.
16.11 Choice of Law. The Plan, all
Awards granted thereunder and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the laws of the United States, shall be governed by and construed in accordance with the laws of the State of
Delaware, without reference to the principles of conflict of laws thereof, except as otherwise expressly provided in an applicable Notice of Terms.
16.12 Acknowledgment. Notwithstanding
anything in the Plan or any Notice of Terms to the contrary, nothing in the Plan or in a Notice of Terms prevents a Participant form providing, without prior notice to the Company, information to governmental authorities regarding possible legal
violations or otherwise testifying or participating in any investigation or proceeding by any governmental authorities regarding possible legal violations, and for purpose of clarity, a Participant is not prohibited from providing information
voluntarily to the Securities and Exchange Commission pursuant to Section 21F of the Exchange Act.
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EXHIBIT 31.1
RULE 13a-14(a) CERTIFICATION
I, Janet Carr, certify that:
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I have reviewed this quarterly report on Form 10-Q of Tandy Leather Factory, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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| 2. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
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| 3. |
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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| a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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| b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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| c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
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| d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
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| 4. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors
(or persons performing the equivalent functions):
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| a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
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| b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
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Date: August 14, 2023
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By:
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/s/ Janet Carr
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Janet Carr
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Chief Executive Officer
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(principal executive officer and principal financial officer)
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EXHIBIT 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Tandy Leather Factory, Inc. (the “Company”) for the quarter ended June 30, 2023 as filed with the United States Securities and Exchange Commission on the date
hereof (the "Report"), each of the undersigned officers of the Company hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| i. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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| ii. |
The information contained in the Report fully presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
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Date: August 14, 2023
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By: /s/ Janet Carr
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Janet Carr
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Chief Executive Officer
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(principal executive officer and principal financial officer)
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