Tandy Leather Factory Inc 10-Q for FY2022 Q3
Tandy Leather Factory Inc (TLF)
10-Q
2022-11-14
For: 2022-09-30
View Original
Added on
April 08, 2026
About this 10-Q
Tandy Leather Factory Inc filed this 10-Q on November 14, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $19.06M
- down 1.2% from $19.28M a year earlier
- Net income
- $723K
- compared with a net loss of $16K a year earlier
- Diluted EPS
- $0.09
- compared with $0.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended September 30, 2022
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 November 12, 2022, the registrant had 8,293,149 shares of Common
Stock, par value $0.0024 per share, outstanding.
TANDY LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022
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2
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2
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6
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| 33 |
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, 2021. 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)
| September 30, | December 31, | |||||||
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2022
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2021
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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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Current portion of operating lease liabilities
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Current portion of finance lease liabilities
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| Current maturities of long-term debt | ||||||||
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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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Long-term debt, net of current maturities
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COMMITMENTS AND CONTINGENCIES (Note 6)
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STOCKHOLDERS’ EQUITY:
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Preferred stock, $
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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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)
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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 September 30,
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Nine Months Ended September 30, | |||||||||||||||
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2022
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2021
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2022 |
2021 |
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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 from operations
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Other (income) expense:
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Interest (income) expense
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Other, net
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(
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Total other (income) expense
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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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( |
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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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Diluted
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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 Nine Months Ended September 30,
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2022
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2021
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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 income to net cash used in operating activities:
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Depreciation and amortization
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Operating lease asset amortization
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| Loss (gain) on disposal of assets |
( |
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Stock-based compensation
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Deferred income taxes
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Exchange (gain) loss
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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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(
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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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(
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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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(
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Net cash used in operating activities
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(
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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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Proceeds from sales of assets
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Net cash used in investing activities
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(
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)
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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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(
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)
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Repurchase of common stock
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(
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)
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(
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)
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| Purchase of vested stock for employee payroll tax |
( |
) | ||||||
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Net cash used in financing activities
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(
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)
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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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)
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Net decrease in cash and cash equivalents
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(
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)
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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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||||||
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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, 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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$
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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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Net income
|
-
|
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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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Vesting of restricted stock units
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||||||||||||||||||||||||||||
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Repurchase of common stock
|
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
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Net loss
|
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Foreign currency translation
adjustments, net of tax
|
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Balance, June 30, 2022
|
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||||||
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Stock-based compensation expense
|
- | |||||||||||||||||||||||||||
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Repurchase of common stock
|
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
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Net income
|
- | |||||||||||||||||||||||||||
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Foreign currency translation
adjustments, net of tax
|
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Balance, September 30, 2022
|
$ | $ |
$ |
( |
) | $ |
$ |
( |
) | $ |
||||||||||||||||||
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Balance, December 31, 2020
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
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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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|||||||||||||||||||||
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Repurchase of common stock
|
(
|
)
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(
|
)
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(
|
)
|
|
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(
|
)
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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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Balance, March 31, 2021
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
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$
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|
|||||||||||||
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Stock-based compensation expense
|
- | |||||||||||||||||||||||||||
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Purchase of vested stock for
employee payroll tax
withholding
|
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
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Net income
|
- | |||||||||||||||||||||||||||
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Foreign currency translation
adjustments, net of tax
|
- | |||||||||||||||||||||||||||
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Balance, June 30, 2021
|
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||||||
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Stock-based compensation expense
|
- | |||||||||||||||||||||||||||
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Net loss
|
- | ( |
) | ( |
) | |||||||||||||||||||||||
|
Foreign currency translation adjustments, net of tax
|
- | ( |
) | ( |
) | |||||||||||||||||||||||
|
Balance, September 30, 2021
|
$ |
$ |
$ |
( |
) | $ |
$ |
( |
) | $ |
||||||||||||||||||
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, 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.
As of September 30, 2022, the Company operates a total of 104
retail stores. There are 93 stores in the U.S., ten stores in Canada and one store in Spain.
The Company’s common shares currently trade on the Nasdaq Capital Market Group 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 footnotes 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 September 30, 2022 and December 31, 2021, our results of operations and our cash flows for the three and nine months ended September 30, 2022 and 2021, and our statements of
stockholders’ equity as of and for the three and nine months ended September 30, 2022 and 2021. 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, 2021.
Significant Accounting Policies
Cash and cash equivalents. The Company considers investments with a maturity when purchased of three months or less to
be cash equivalents. All credit card, debit card and electronic transfer transactions that process in less than seven days are classified as cash and cash equivalents.
Foreign currency translation and transactions. Foreign currency translation adjustments arise from activities of our
foreign subsidiaries. Results of operations are translated into U.S. dollars using the average exchange rates during the period, while assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments
of assets and liabilities are recorded in stockholders’ equity and presented net of tax. Gains and losses resulting from foreign currency transactions are reported in the 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) shipment of product generally via web sales, and (3) sales of product directly to commercial customers. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a
customer. At the store counter, our performance obligation is met, and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met, and revenue is recognized,
when control passes to the customer. Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax 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 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 September 30, 2022, December 31, 2021 and December 31, 2020, our gift card liability, included in accrued expenses and other
liabilities, was $0.1 million, $0.4
million and $0.3 million, respectively. We recognized gift card revenue of $0.1 million for the three months ended September 30, 2022 from the December 31, 2021 deferred revenue balance and $0.1 million for the three months ended September 30, 2021 from the December 31, 2020 deferred revenue balance. We recognized gift card revenue of $0.2 million for the nine months ended September 30, 2022 from the December 31, 2021 deferred revenue balance and $0.2 million for the nine months ended September 30, 2021 from the December 31, 2020 deferred revenue balance.
For the three months ended September 30, 2022 and 2021, we recognized less than $0.1 million and $0.1 million, respectively, in net sales associated with gift cards. For the nine
months ended September 30, 2022 and 2021, we recognized $0.3 million and $0.5 million, respectively, in net sales associated with gift cards.
Disaggregated Revenue. In the following table, revenue for the three and nine months ended
September 30, 2022 and 2021 is disaggregated by geographic areas as follows:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30, | ||||||||||||||
| (in thousands) |
2022
|
2021
|
2022 |
2021 |
||||||||||||
|
United States
|
$
|
|
$
|
|
$ | $ | ||||||||||
|
Canada
|
|
|
||||||||||||||
|
Spain
|
|
|
||||||||||||||
|
Net sales
|
$
|
|
$
|
|
$ | $ | ||||||||||
Geographic sales information is based on the location of the customer. As a percentage of our consolidated net sales, excluding Canada, no single foreign country had
net sales greater than 2.0 2.2
Discounts. We offer a single retail price level, plus three volume-based levels for commercial customers. Discounts from those price levels are offered to business, military/first responders and employee customers. Such discounts do not
convey a material right to these customers since the discounted pricing they receive at the point of sale is not dependent upon any previous or subsequent purchases. As a result, sales are reported after deduction of discounts at the point of
sale. We do not pay slotting fees or make other payments to resellers.
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.
Inventory. Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods
held for sale include the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include
depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process is valued on a first in, first out basis using full absorption accounting which
includes material, labor, and other applicable manufacturing overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of
the inventory.
We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii)
items that need to be removed from our product line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken
to adequately value our inventory at the lower of cost or net realizable value.
Since the determination of net realizable value of inventory involves both estimation and judgement with regard to market values and reasonable costs to sell,
differences in these estimates could result in ultimate valuations that differ from the recorded asset.
The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations. Goods shipped
to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier.
Inventory is physically counted twice annually in the Texas distribution center. At the store level, inventory is physically counted each
quarter. Inventory
is then adjusted in our accounting system to reflect actual count results.
|
(in thousands)
|
September 30, 2022
|
December 31, 2021
|
||||||
|
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, both under long-term lease agreements. We determine if an arrangement is a lease at inception and recognize right-of-use (“ROU”) assets and lease liabilities at commencement date based on the present value of the lease payments over the
lease term. We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes.
For operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options
to renew the lease or options to purchase leased equipment, when it is reasonably certain we will exercise such an option. The exercise of lease renewal or purchase option is generally at our discretion. Payments based on a change in an index or
market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. We discount lease payments using our incremental borrowing rate based on information available as of the measurement
date.
We recognize rent expense related to our operating leases on a straight-line basis over the lease term.
For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the
lease term with rent expense recorded to operating expenses. We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The 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 accounts receivable - trade, accounts payable - trade, and as of December 31, 2021, long-term debt all of which
fall under Level 3 of the fair value hierarchy. As of September 30, 2022 and December 31, 2021, 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 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.
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 September 30, 2022, because the composition of the trade receivables at that date is consistent with
that used in developing the historical credit-loss percentages (i.e., the similar risk characteristics of its customers and its credit practices have not changed significantly over time). Accordingly, the allowance for expected credit losses at
September 30, 2022, December 31, 2021 and December 31, 2020 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 of less than $0.01 0.01
Comprehensive Income (Loss). Comprehensive income (loss) includes net income 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 in the prior year have been reclassified to conform with this year’s presentation.
2. NOTES PAYABLE AND LONG-TERM DEBT
During the second quarter of 2020, the Company borrowed $0.4
3. INCOME TAX
Our effective tax rate for the three months ended September 30, 2022 and 2021 was 26.3 % and 13.0 %, respectively. Our effective tax rate for the nine months ended September 30, 2022 and 2021 was 26.3 % and 23.1 %, 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 and restricted stock unit (“RSU”) awards to
our executive officers, non-employee directors and other key employees. In June 2020, our stockholders approved an increase to the plan reserve to 800,000
shares of our common stock and extended the 2013 Plan to June 2023. As of September 30, 2022, there were 433,151 shares available for
future awards. Awards granted under the 2013 Plan may be service-based awards or performance-based awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years , unless otherwise determined by the Compensation Committee of the Board of Directors that administers the plan.
In 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. And in June 2022, we granted a total of 14,000 RSUs to the Company’s Board of Directors which will vest over a four-year service period.
In addition to grants under the Company’s 2013 Restricted Stock Plan, in October 2018, we granted a total of 644,000 RSUs to the Company’s CEO, of which (i) 460,000 are service-based
RSUs that vest ratably over a period of five years from the grant date based on our CEO’s continued employment in her role, (ii) 92,000 are performance-based RSUs that will vest if the Company’s operating income exceeds $12 million dollars two fiscal years in a row, and (iii) 92,000 are
performance-based RSUs that will vest if the Company’s operating income exceeds $14 million dollars in one fiscal year.
A summary of the activity for non-vested restricted stock and RSU awards as of September 30, 2022 is presented below:
|
Shares
(in thousands) |
Weighted Average
Share Price |
|||||||
|
Balance, January 1, 2022
|
|
$
|
|
|||||
|
Granted
|
|
|
||||||
|
Vested
|
(
|
)
|
|
|||||
|
Balance, September 30, 2022
|
|
$
|
|
|||||
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 $0.8 million and $0.6 million for the nine months ended September 30, 2022 and 2021, respectively.
As of September 30, 2022, 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 September 30, 2022, there was unrecognized compensation cost related to non-vested, service-based RSU awards of $1.3 million, which will be recognized in each of the following years (dollars in thousands):
|
Unrecognized Expense
(in thousands)
|
||||
|
2022
|
$
|
|
||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
|
$
|
|
We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs. For the nine months ended September 30, 2022 and 2021,
we issued 48,277 and 16,080
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 nine months ended September 30, 2022 and 2021:
|
Three Months Ended September 30,
|
Nine Months Ended September 30, |
|||||||||||||||
|
(in thousands, except share data)
|
2022
|
2021
|
2022
|
2021
|
||||||||||||
| Numerator: | ||||||||||||||||
|
Net income (loss)
|
$
|
|
$
|
(
|
)
|
$ | $ | |||||||||
|
Denominator:
|
||||||||||||||||
|
Basic weighted-average common shares ouststanding
|
|
|
||||||||||||||
|
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
|
|
|
||||||||||||||
| Net income (loss) per common share: |
||||||||||||||||
|
Basic
|
$ | $ | $ | $ | ||||||||||||
|
Diluted
|
$ | $ | $ | $ | ||||||||||||
6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are periodically involved in litigation that arise in the ordinary course of business and operations. There are no such matters pending that we expect to have a
material impact on our financial position or operating results. Legal costs associated with the resolution of claims, lawsuits and other contingencies are expensed as incurred.
SEC Investigation
In 2019, the Company self-reported to the SEC information concerning the internal investigation of previously disclosed accounting matters resulting in the
restatement for the full year 2017 and full year 2018, including interim quarters in 2018, and the first quarter of 2019. In response, the Division of Enforcement of the SEC initiated an investigation into the Company’s historical accounting
practices. In July 2021, the Company entered into a settlement agreement with the SEC to conclude this investigation. Under the terms of the settlement, in addition to other non-monetary settlement terms,
(1) the Company paid a civil monetary penalty of $200,000 , and (2) the Company’s former Chief Financial Officer and Chief Executive
Officer, agreed to pay a civil monetary penalty of $25,000 . In accepting the Company’s settlement offer, the SEC took into account
remedial actions the Company took promptly after learning of the issues detailed in the SEC’s order.
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. As of December 31, 2021, the full $5.0 million of our common stock remained available for repurchase under this program. On August 8, 2022, the Board of Directors approved a new
program to repurchase up to $5.0 million of the Company’s common stock between that date and August 31, 2024. As of September 30,
2022, $5.0 million remained available for repurchase under this new program.
On April 11, 2022, we entered into an agreement with two
institutional shareholders of the Company to repurchase 359,500 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $5.00
per share for a total of $1.8 million. The closing of the repurchases took place on April 22, 2022, and these shares were subsequently
cancelled. Prior to the repurchase, the shares represented approximately 4.2 % of our outstanding common stock.
On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company to repurchase 212,690 shares of our common stock, par value $0.0024 in a private transaction. The purchase price
was $5.00 per share for a total of $1.1
million. The closing of the repurchase took place on December 16, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4 % of our outstanding common stock.
On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company to repurchase 500,000 shares of our common stock, par value $0.0024 in a private
transaction. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase took place on February 1, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5 % of our outstanding common stock.
The direct share repurchase transactions were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plans described above.
| 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, 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.
As of September 30, 2022, the Company operates a total of 104 retail stores. There are 93 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 website provides 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.
Our focus over the last three years has been on three broad strategic initiative areas:
| 1. |
Improving our brand proposition, with both retail and commercial customers
|
| 2. |
Rebuilding our foundation – the talent, processes, tools and systems needed to serve these customers
|
| 3. |
Position us for long-term growth – creating the vision and roadmap for the future
|
COVID-19 and Economic Conditions
At the time of filing this Form 10-Q, the American and world economies have been acutely affected by a combination of factors arising from both the COVID-19 pandemic and the war resulting from the invasion of
Ukraine by Russian military forces. The current impacts of these events include (but are not limited to) levels of inflation that are the highest in the U.S. in more than 40 years, highly volatile fuel prices, an extremely tight labor market with
rising wages and competition to attract qualified workers, supply chain disruption, rising rent and other occupancy costs and increases in interest rates. Purchases of non-essential, discretionary products tend to decline in periods of
uncertainty regarding future economic prospects, such as the current one, as disposable income declines. The Company believes that these events have continued to dampen its sales through September 2022. The future remains uncertain, and
continued increased labor, freight, product and other costs as well as weakening customer demand could have a negative impact on the Company’s future financial performance.
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, 2021.
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) shipment of product generally via
web sales, and (3) sales of product directly to commercial customers. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance
obligation is met, and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met, and revenue is recognized when control passes to the customer. Shipping
terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax 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 date of purchase. As merchandise is returned, the company records the sales return against the sales return allowance.
We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift
card. In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one year.
Inventory. Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods held for sale include the cost of merchandise purchases,
the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include depreciation of long-lived assets utilized in acquiring,
warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process is valued on a first-in, first-out basis using full absorption accounting which includes material, labor, and other applicable
manufacturing overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the inventory.
We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii) items that need to be removed from our product
line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to adequately value our inventory at the
lower of cost or net realizable value.
Since the determination of net realizable value of inventory involves both estimation and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate
valuations that differ from the recorded asset.
The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations. Goods shipped to us are recorded as inventory owned by us
when the risk of loss shifts to us from the supplier. Inventory is physically counted twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our
accounting system to reflect actual count results.
Leases. We lease certain real estate for our retail store locations and warehouse equipment for our Texas distribution center, both under long-term lease agreements.
Starting in 2019, with the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognize a lease asset and lease liability at commencement date based on
the present value of the lease payments over the lease term.
For our operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably
certain we will exercise such an option. The exercise of lease renewal options is generally at our discretion. Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of
measuring the related lease liability. We discount lease payments using our incremental borrowing rate based on information available as of the measurement date.
We recognize rent expense related to our operating leases on a straight-line basis over the lease term.
For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term with rent expense recorded to operating
expenses. We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the
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, 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. 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.
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 September 30, 2022 and 2021
The following table presents selected financial data:
| Three Months Ended September 30, | ||||||||||||||||
|
(in thousands)
|
2022
|
2021
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
19,057
|
$
|
19,281
|
$
|
(224
|
)
|
(1.2
|
)%
|
|||||||
|
Gross profit
|
11,596
|
11,089
|
507
|
4.6
|
%
|
|||||||||||
|
Gross margin percentage
|
60.8
|
%
|
57.5
|
%
|
3.3
|
%
|
||||||||||
|
Operating expenses
|
10,620
|
11,078
|
(458
|
)
|
(4.1
|
)%
|
||||||||||
|
Income from operations
|
$
|
976
|
$
|
11
|
$
|
965
|
8,772.7
|
%
|
||||||||
Net Sales
Consolidated net sales for the quarter ended September 30, 2022 decreased $0.2 million, or 1.2%, compared to the corresponding prior year period. We believe the decrease in sales was due to continued weaker
consumer demand as a result of inflation and ongoing uncertainty related to global political, economic and public health concerns.
Our store footprint consisted of 104 and 106 stores at September 30, 2022 and September 30, 2021, respectively.
Since January 1, 2022, we closed one store in San Bruno, CA in March 2022, and one store in Oxnard, CA, in July 2022. 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 $0.5 million, or 4.6%, compared to the same period in 2021, and our gross margin percentage for the quarter ended September 30, 2022 increased to 60.8% compared to 57.5% in the
corresponding prior year period. The higher gross margin rate was due to a combination of factors, including product and customer mix shifts and stronger full-priced selling in combination with our relatively slow inventory turns, high number of
SKUs and high number of inventory locations including 104 retail stores.
Operating expenses
|
Three Months Ended September 30,
|
||||||||||||||||
|
(in thousands)
|
2022
|
2021
|
$ Change
|
% Change
|
||||||||||||
|
Operating expenses
|
$
|
10,620
|
$
|
11,078
|
$
|
(458
|
)
|
(4.1
|
)%
|
|||||||
|
Non-routine items related to restatement
|
-
|
(124
|
)
|
124
|
(100.0
|
)%
|
||||||||||
|
Adjusted operating expenses
|
$
|
10,620
|
$
|
10,954
|
$
|
(334
|
)
|
(3.0
|
)%
|
|||||||
|
Operating expenses % of sales
|
55.7
|
%
|
57.5
|
%
|
||||||||||||
|
Adjusted operating expenses % of sales
|
55.7
|
%
|
56.8
|
%
|
||||||||||||
Operating expenses decreased $0.5 million or 4.1% compared to the corresponding prior year period, primarily as a result of a decrease in bonus expense of $0.5 million, a decrease in services purchased of $0.2
million, a decrease in software costs of $0.1 million and a decrease in stock compensation expense of $0.1 million offset by mainly an increase in total salaries of $0.4 million and an increase in total insurance and other taxes of $0.1 million.
Adjusted operating expenses, which exclude the non-routine items related to the restatement, decreased $0.3 million or 3.0% for the reasons noted above. Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP
measure, included here to provide additional information regarding the Company’s financial performance on a recurring basis. Non-routine items are primarily legal and accounting costs associated with the restatement.
Income Taxes
Our effective tax rate for the three months ended September 30, 2022 was 26.3% compared to 13.0% for the same period in 2021. 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.
Nine months Ended September 30, 2022 and 2021
The following table presents selected financial data:
|
Nine Months Ended September 30,
|
||||||||||||||||
|
(in thousands)
|
2022
|
2021
|
$ Change
|
% Change
|
||||||||||||
|
Net sales
|
$
|
57,967
|
$
|
59,241
|
$
|
(1,274
|
)
|
(2.2
|
)%
|
|||||||
|
Gross profit
|
34,028
|
34,556
|
(528
|
)
|
(1.5
|
)%
|
||||||||||
|
Gross margin percentage
|
58.7
|
%
|
58.3
|
%
|
0.4
|
%
|
||||||||||
|
Operating expenses
|
32,959
|
32,856
|
103
|
0.3
|
%
|
|||||||||||
|
Income from operations
|
$
|
1,069
|
$
|
1,700
|
$
|
(631
|
)
|
(37.1
|
)%
|
|||||||
Net Sales
Consolidated net sales for the nine months ended September 30, 2022 decreased $1.3 million, or 2.2%, compared to the same period in 2021. We believe the decrease in sales was due to continued weaker consumer demand
as a result of inflation and ongoing uncertainty related to global political, economic and public health concerns, coupled with comparison to prior year COVID-era stimulus payments that fueled sales.
Since January 1, 2022, we closed one store in San Bruno, CA in March 2022, and one store in Oxnard, CA, in July 2022. We did not open any new stores for the first nine months of 2022. 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 decreased by $0.5 million, or 1.5%, compared to the same period in 2021, and our gross margin percentage for the nine months ended September 30, 2022 increased to 58.7% compared to 58.3% in the
corresponding prior year period. The gross margin rate remains relatively the same due to a combination of factors, including product and customer mix shifts, stronger full-priced selling with a combination of our relatively slow inventory
turns, high number of SKUs and high number of inventory locations including 104 retail stores.
Operating expenses
|
Nine Months Ended September 30,
|
||||||||||||||||
|
(in thousands)
|
2022
|
2021
|
$ Change
|
% Change
|
||||||||||||
|
Operating expenses
|
$
|
32,959
|
$
|
32,856
|
$
|
103
|
0.3
|
%
|
||||||||
|
Non-routine items related to restatement
|
(246
|
)
|
(1,157
|
)
|
911
|
(78.7
|
)%
|
|||||||||
|
Adjusted operating expenses
|
$
|
32,713
|
$
|
31,699
|
$
|
1,014
|
3.2
|
%
|
||||||||
|
Operating expenses % of sales
|
56.9
|
%
|
55.5
|
%
|
||||||||||||
|
Adjusted operating expenses % of sales
|
56.4
|
%
|
53.5
|
%
|
||||||||||||
Operating expenses were flat compared to the corresponding prior year period, mostly as a result of a decrease in bonus expense by $1.1 million and a decrease in contract labor by $1.1 million offset mainly by an
increase in salaries by $1.1 million, an increase in travel and meeting expenses related to our store manager conference by $0.4 million, an increase in selling expenses of $0.2 million, an increase in office supplies of $0.2 million, an increase
in total services purchased of $0.2 million, and an increase in digital marketing of $0.1 million. Adjusted operating expenses, which exclude the non-routine items related to the restatement, increased $1.0 million, for the reasons noted above.
Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP measure, included here to provide additional information regarding the Company’s financial performance on a recurring basis. Non-routine items are primarily
legal and accounting costs associated with the restatement.
Income Taxes
Our effective tax rate for the nine months ended September 30, 2022 was 26.3% compared to 23.1% for the same period in 2021. 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 September 30, 2022 totaled $3.1 million.
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 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. As of
December 31, 2021, the full $5.0 million of our common stock remained available for repurchase under this program. On August 8, 2022, the Board of Directors approved a new program to repurchase up to $5.0 million of the Company’s common stock
between that date and August 31, 2024. As of September 30, 2022, $5.0 million remained available for repurchase under this new program.
On April 11, 2022, we entered into an agreement with two institutional shareholders of the Company, to repurchase 359,500 shares of our common stock, par value $0.0024 in a private transaction. The purchase price
was $5.00 per share for a total of $1.8 million. The closing of the repurchases took place on April 22, 2022, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 4.2% of our outstanding
common stock.
On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 212,690 shares of our common stock, par value $0.0024 in a private transaction. The purchase price
was $5.00 per share for a total of $1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding
common stock.
On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 500,000 shares of our common stock, par value $0.0024 in a private transaction separate from our
share repurchase program. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase took place on February 1, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares
represented approximately 5.5% of our outstanding common stock.
Cash Flows
|
For the Nine Months Ended September 30,
|
||||||||
|
(amounts in thousands)
|
2022
|
2021
|
||||||
|
Net cash used in operating activities
|
$
|
(3,957
|
)
|
$
|
(2,028
|
)
|
||
|
Net cash used in investing activities
|
(825
|
)
|
(512
|
)
|
||||
|
Net cash used in financing activities
|
(2,198
|
)
|
(1,700
|
)
|
||||
|
Effect of exchange rate changes on cash and cash equivalents
|
(125
|
)
|
(3
|
)
|
||||
|
Net decrease in cash and cash equivalents
|
$
|
(7,105
|
)
|
$
|
(4,243
|
)
|
||
For the nine months ended September 30, 2022, cash from operations used $4.0 million driven by a net investment in inventory of $4.5 million, a net reduction in lease liabilities of $2.5 million, and net change in
income tax expense of $0.3 million and net decrease in prepaid expenses of $0.3 million, partially offset by net income of $0.8 million, noncash expense of $4.1 million, including depreciation, amortization, and stock-based compensation, a net
decrease of $2.0 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 $0.8 million in capital expenditure 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 $7.1 million.
For the nine months ended September 30, 2021, cash from operations used $2.0 million driven by net income of $1.3 million, non-cash expenses of $3.8 million, including depreciation,
amortization, and stock-based compensation, a federal income tax refund of $1.0 million related to the 2019 tax year, and $1.0 million of other changes in operating assets and liabilities mostly due to
an increase in accounts payable and accrued liabilities of $0.9 million and more than offset by the net buildup of inventory of $6.6 million and a reduction in lease liabilities of $2.6 million. We invested $0.5 million in capital expenditure
primarily related to system implementations. Cash used in financing activities was primarily due to the purchase of 500,000 shares of our common stock for $3.35 per share, or $1.7 million, from an institutional shareholder of the Company in a
private transaction. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $4.2 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 September 30, 2022, our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result of this evaluation, our CEO
and CFO concluded that our disclosure controls and procedures were not effective due to the material weaknesses described below.
Management’s Annual Report on Internal Control over Financial Reporting
Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Management’s establishing and maintaining adequate internal control over financial reporting is based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “COSO Framework”). A system of internal control over financial reporting should be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with GAAP.
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud, and therefore can
provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements.
A material weakness is defined as a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or
interim financial statements will not be prevented or detected on a timely basis. Based on this definition, our management, with the participation of our CEO and CFO, evaluated the effectiveness and design of our internal control over financial
reporting against the COSO Framework and concluded that our internal control over financial reporting was not effective as of September 30, 2022 due to material weaknesses arising from flaws in our control environment, risk oversight measures,
control activities, information processing and communication and our monitoring systems, each of which is described in more detail below.
Control environment. We concluded that we did not maintain effective controls in the following
areas: (i) managerial functions, procedures and oversight; (ii) organizational structure, delegation of authority and responsibilities; (iii) segregation of duties; (iv) adequacy of trained accounting 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 and CFO, continue 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:
During 2020, 2021 and through the filing date of this Form 10-Q, we have taken the following measures, among others:
| i. |
Replaced critical roles within our accounting team with contract accounting resources and continue to search for full-time employees with expertise in GAAP accounting, SEC reporting and disclosure, internal audit and internal controls;
|
| ii. |
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;
|
| iii. |
Implemented a new point-of-sale system for 93 U.S. stores that is fully integrated with our new ERP system (the remaining 12 stores will be converted during the remainder of 2022);
|
| iv. |
Created a risk controls matrix which includes, among other things, a comprehensive list of key and mitigating controls, a description of the risk the control is designed to mitigate, the frequency in which the control is performed, and
a mapping of each control to the five COSO Framework components (control environment, risk assessment, control activities, information and communication, or monitoring activities) ;
|
| v. |
Established a greater sense of accountability by requiring sub-certifications below the CEO and CFO level for certain key accounting, finance and operations personnel.
|
Our continuing plan and additional steps for remediation include:
| i. |
Ongoing recruitment and hiring of permanent, qualified public-company accounting personnel;
|
| ii. |
Completing the accountability portion of our risk controls matrix once the permanent accounting team is in place in order to identify the individual responsible for each control;
|
| iii. |
Converting the remaining 12 stores onto our new point-of-sale system;
|
| iv. |
Redesigning our accounting procedures and activities to align with our new ERP system that will include built-in controls to improve upon the reliability of financial reporting and the preparation of financial statements in accordance
with GAAP;
|
| v. |
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;
|
| vi. |
Updating process narrative documentation in the following areas: (i) financial reporting, (ii) inventory, (iii) purchasing and accounts payable, (iv) revenue, (v) fixed assets and lease accounting, (vi) general accounting, treasury and
financial planning & analysis, (vii) tax, (viii) information technology (IT) governance, and (ix) HR and payroll;
|
| vii. |
Periodically reviewing of 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;
|
| viii. |
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
|
| ix. |
Creating a comprehensive approach to regularly evaluate the operating effectiveness of our disclosure controls and procedures and our internal control over financial reporting using the COSO Framework as a guide.
|
Control Environment
Our management, including our CEO and CFO, our Audit Committee and our Board of Directors have taken certain steps to set the proper tone-at-the-top in support of the Company’s values and
climate to develop and maintain an effective internal control environment. These actions include:
| ■ |
Recurring meetings with leadership, finance and accounting and other key functional areas to train staff on processes for oversight and emphasize each individual’s accountability for internal control
compliance, and to create a pattern of regular discussion of such controls.
|
| ■ |
Periodic communications from the CEO, CFO and other key senior leaders on the Company’s mission, core values, Code of Business Conduct and Ethics, whistleblower policies, and each employee’s individual responsibility for internal
control compliance.
|
| ■ |
Reorganization of the finance and accounting team to 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 are conducting detailed working sessions to document our current and prior finance and accounting
policies, procedures and step-by-step activities. These sessions are expected to identify 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, for our remaining 12 stores during the remainder of 2022.
|
| ■ |
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.
|
| ■ |
Creating and implementing newly-designed processes, structures, delegation of authority and controls, in accordance with the COSO Framework, including:
|
| o |
Quarterly updates for the CFO regarding upcoming accounting pronouncement and proposed changes to GAAP accounting standards, tax regulations, and other requirements that may impact the Company’s financial reporting;
|
| o |
Timely reviews each quarter of the most significant accounting estimates and judgements;
|
| 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 and CFO 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 eliminated 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 and CFO. This assessment, any deficiencies and any
remedial actions will be shared and discussed with our Audit Committee and our independent auditors on a quarterly basis.
Cybersecurity
We utilize information technology for internal and external communications with vendors, customers and banks as well as systems technology for reporting and managing our operations. Loss, disruption or compromise
of these systems could significantly impact operations and results. Other than temporary disruption to operations that may be caused by a cybersecurity breach, we believe cash transactions to be the primary risk for potential loss. We work with
our financial institutions to take steps to minimize the risk by requiring multiple levels of authorization, encryption and other controls. The Company utilizes third party intrusion prevention and detection systems and performs periodic
penetration testing to monitor its cybersecurity environment. However, the Company has not performed a formalized risk assessment to address cybersecurity risks or documented internal controls that assist in alleviating such risks.
Changes in Internal Control Over Financial Reporting
As discussed in the remediation section above, we implemented the warehouse management, factory production system and general ledger systems modules as part of our new ERP system implementation which had a go-live
date of September 1, 2020, and we implemented our new point-of-sale system, which is fully integrated with our ERP system, in 93 of our U.S. stores with the remaining 12 stores to be converted during the remainder of 2022. Although we had not
fully remediated all material weaknesses in our internal control over financial reporting as of September 30, 2022, as the phased implementation of this system continues, we are experiencing certain changes to our processes and procedures which,
in turn, result in changes to our internal control over financial reporting. While we expect our new ERP system to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and
reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolves.
| PART II. |
OTHER INFORMATION
|
| Item 1. |
Legal Proceedings.
|
The information contained in Note 6, Commitments and Contingencies to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report is hereby
incorporated into this Item 1 by reference.
| 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, 2021 and incorporated herein by reference.
| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds.
|
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about purchases we have made of our common stock during the quarter ended September 30, 2022:
|
ISSUER PURCHASES OF EQUITY SECURITIES
|
||||||||||||||||
|
Period
|
(a) Total
number of
shares
purchased
|
(b)
Average
price paid
per share
|
(c) Total number of
shares purchased as
part of publicly
announced plans or
programs
|
(d) Maximum value
of shares that may
yet be purchased
under the plans or
programs (1) (2)
|
||||||||||||
|
July 1 – July 31, 2022
|
600
|
$
|
4.70
|
600
|
$
|
4,997,180
|
||||||||||
|
August 1 – August 31, 2022
|
—
|
—
|
—
|
$
|
5,000,000
|
|||||||||||
|
September 1 – September 30, 2022
|
—
|
—
|
—
|
$
|
5,000,000
|
|||||||||||
|
Total
|
600
|
$
|
4.70
|
600
|
||||||||||||
| (1) |
Represents shares which may be purchased through our previous stock repurchase program, adopted by the Company’s Board of Directors on August 9, 2020, which allowed the Company to repurchase up to $5 million value of shares of our
common stock on or prior to July 31, 2022. This program expired on July 31, 2022.
|
| (2) |
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 September 30, 2022, $5.0 million remained available for
repurchase under this new program.
|
| Item 6. |
Exhibits.
|
|
Exhibit
Number
|
Description
|
|
3.1
|
|
|
3.2
|
|
|
3.3
|
|
|
4.1
|
|
|
10.1
|
|
|
10.2
|
|
|
10.3
|
|
|
10.4
|
|
|
10.5
|
|
|
10.6
|
|
|
10.7
|
|
10.8
|
|
|
10.9
|
Form of Stock Purchase Agreement dated December 8, 2021 between the Company and Right Lane I, LP,
filed as Exhibit 10.9 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.
|
|
14.1
|
|
|
21.1
|
|
|
13a-14(a) or 15d-14(a) Certification by Janet Carr, Chief Executive Officer.
|
|
|
13a-14(a) or 15d-14(a) Certification by Cindy McSpadden, interim Chief Financial Officer.
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
*101.INS
|
XBRL Instance Document.
|
|
*101.SCH
|
XBRL Taxonomy Extension Schema Document.
|
|
*101.CAL
|
XBRL Taxonomy Extension Calculation Document.
|
|
*101.DEF
|
XBRL Taxonomy Extension Definition Document.
|
|
*101.LAB
|
XBRL Taxonomy Extension Labels Document.
|
|
*101.PRE
|
XBRL Taxonomy Extension Presentation Document.
|
*Filed herewith.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
TANDY LEATHER FACTORY, INC.
|
|
|
(Registrant)
|
|
|
Date: November 14, 2022
|
By: /s/ Janet Carr
|
|
Janet Carr
|
|
|
Chief Executive Officer
|
|
|
Date: November 14, 2022
|
By: /s/ Cindy McSpadden
|
|
Cindy McSpadden
|
|
|
Interim Chief Financial Officer
|
33
EXHIBIT 31.1
RULE 13a-14(a) CERTIFICATION
I, Janet Carr, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of Tandy Leather Factory, Inc.;
|
| 2. |
| 3. |
| 4. |
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:
|
| 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;
|
| 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
|
| d. |
| 5. |
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):
|
| a. |
| b. |
|
Date: November 14, 2022
|
|
|
Janet Carr
|
|
|
Chief Executive Officer
|
|
EXHIBIT 31.2
RULE 13a-14(a) CERTIFICATION
| 1. |
I have reviewed this quarterly report on Form 10-Q of Tandy Leather Factory, Inc.;
|
| 2. |
| 3. |
| 4. |
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:
|
| 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;
|
| 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
|
| d. |
| 5. |
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):
|
| a. |
| b. |
|
Date: November 14, 2022
|
|
|
Cindy McSpadden
|
|
|
Interim Chief Financial Officer
|
|
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 September 30, 2022 as filed with the United
States Securities and Exchange Commission on the date hereof (the "Report"), Janet Carr, as Chief Executive Officer of the Company, and Cindy McSpadden , as interim Chief Financial Officer of the Company, each 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
|
| 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.
|
|
Date: November 14, 2022
|
|
|
Janet Carr
|
|
|
Chief Executive Officer
|
|
|
Date: November 14, 2022
|
|
|
Cindy McSpadden
|
|
|
Interim Chief Financial Officer
|