DECEMBER 31, 2016, 2015, and 2014
1. DESCRIPTION OF BUSINESS
Our primary line of business is the sale of leather, leather crafts, and related supplies. We sell our products via company-owned stores throughout the United States, Canada, the United Kingdom, Australia, and Spain. Numerous customers including retailers, wholesalers, assemblers, distributors, and other manufacturers are geographically disbursed throughout the world. We also have light manufacturing facilities in Texas.
2. SIGNIFICANT ACCOUNTING POLICIES
·
|
Management estimates and reporting
|
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Assets and liabilities with reported amounts based on significant estimates include trade accounts receivable, inventory (slow-moving), goodwill, and deferred income taxes.
·
|
Principles of consolidation
|
Our consolidated financial statements include the accounts of Tandy Leather Factory, Inc. and its wholly owned subsidiaries, The Leather Factory, L.P. (a Texas limited partnership) and its corporate partners, Tandy Leather Company, L.P. (a Texas limited partnership) and its corporate partners, Mid-Continent Leather Sales, Inc. (an Oklahoma corporation), Roberts, Cushman & Company, Inc. (a Texas corporation), The Leather Factory of Canada, Ltd. (a Canadian corporation), Tandy Leather Factory UK Limited (a UK corporation), Tandy Leather Factory Australia Pty. Limited (an Australian corporation), and Tandy Leather Factory España, S.L. (a Spanish corporation). All intercompany accounts and transactions have been eliminated in consolidation.
·
|
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. Gains and losses resulting from foreign currency transactions are reported in the statements of income under the caption “Other (Income) Expense”, net, for all periods presented. We recognized foreign currency transaction gains (losses) of $19,000, $24,000, and ($13,900), in 2016, 2015, and 2014, respectively.
Our sales generally occur via two methods: (1) at the store counter, and (2) shipment by common carrier. Sales at the counter are recorded and title passes as transactions occur. Otherwise, sales are recorded and title passes when the merchandise is shipped to the customer. Shipping terms are normally FOB shipping point. Sales tax and comparable foreign tax is excluded from revenue.
We offer an unconditional satisfaction guarantee to all customers and accept all product returns. Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise.
We maintain four price levels on a consistent basis: retail, wholesale, business, and distributor. Gross sales are reported after deduction of discounts. We do not pay slotting fees or make other payments to resellers.
Cost of goods sold includes inbound freight and duty charges from vendors to our central warehouse, freight and handling charges to move merchandise from our central warehouse to our stores, and manufacturing overhead, as appropriate.
Operating expenses include all selling, general and administrative costs including wages and related employee expenses (payroll taxes, health benefits, savings plans, etc.), advertising, outbound freight charges (to ship merchandise to customers), rent, and utilities.
·
|
Property and equipment, net of accumulated depreciation and amortization
|
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are three to ten years for equipment and machinery, seven to fifteen years for furniture and fixtures, five years for vehicles, and forty years for buildings and related improvements. Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.
Inventory is valued at the lower of first-in, first-out cost or market. In addition, the value of inventory is periodically reduced to net realizable value for slow-moving or obsolete inventory based on management\'s review of items on hand compared to their estimated future demand.
·
|
Impairment of long-lived assets
|
We evaluate long-lived assets for indicators of impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. Additionally, for store assets, we evaluate the performance of individual stores for indicators of impairment and underperforming stores are selected for further evaluation of the recoverability of the carrying amounts. The evaluation of long-lived assets is performed at the lowest level of identifiable cash flows, which is at the individual store level. Impairment is determined when estimated future undiscounted cash flows associated with an asset are less than the asset’s carrying value.To date, we have not recognized any impairment of our long-lived assets.
Basic earnings per share are computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share includes, to the extent inclusion of such shares would be dilutive to earnings per share, the effect of outstanding options and warrants, computed using the treasury stock method.
BASIC
|
2016
|
|
2015
|
|
2014
|
Net income
|
$6,402,259
|
|
$6,402,405
|
|
$7,706,921
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
9,301,867
|
|
10,077,506
|
|
10,203,063
|
|
|
|
|
|
|
Earnings per share – basic
|
$0.69
|
|
$0.64
|
|
$0.76
|
|
|
|
|
|
|
DILUTED
|
|
|
|
|
|
Net income
|
$6,402,259
|
|
$6,402,405
|
|
$7,706,921
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
9,301,867
|
|
10,077,506
|
|
10,203,063
|
Effect of restricted stock awards and assumed exercise of stock options
|
19,691
|
|
25,254
|
|
38,058
|
Weighted average common shares outstanding, assuming dilution
|
9,321,558
|
|
10,102,760
|
|
10,241,121
|
|
|
|
|
|
|
Earnings per share - diluted
|
$0.69
|
|
$0.63
|
|
$0.75
|
|
|
|
|
|
|
Outstanding options and restricted stock awards excluded as anti-dilutive
|
31,477
|
|
60,433
|
|
-
|
For additional disclosures regarding the restricted stock awards and the employee stock options, see Note 11. The net effect of converting stock options and restricted stock grants to purchase 90,085, 68,400, and 107,001 shares of common stock at option prices less than the average market prices has been included in the computations of diluted EPS for the years ended December 31, 2016, 2015, and 2014, respectively.
·
|
Goodwill and other intangibles
|
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Goodwill is required to be evaluated for impairment on an annual basis, absent indicators of impairment during the interim. Application of the goodwill impairment test requires exercise of judgment, including the estimation of future cash flows, determination of appropriate discount rates and other important assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit. Goodwill is not amortized, but is evaluated at least annually for impairment. We completed our annual goodwill impairment analysis as of December 31 for each of the years ended December 31, 2016, 2015, and 2014 and determined that no adjustment to the carrying value of goodwill was required.
A summary of changes in our goodwill is as follows:
|
Leather Factory
|
|
Tandy Leather
|
|
Total
|
Balance, January 1, 2015
|
$588,380
|
|
$383,406
|
|
$971,786
|
Foreign exchange gain/loss
|
(18,430)
|
|
-
|
|
(18,430)
|
Balance, December 31, 2015
|
$569,950
|
|
$383,406
|
|
$953,356
|
Foreign exchange gain/loss
|
2,845
|
|
-
|
|
2,845
|
Balance, December 31, 2016
|
$572,795
|
|
$383,406
|
|
$956,201
|
Our intangible assets and related accumulated amortization consisted of the following:
|
As of December 31, 2016
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Trademarks, Copyrights
|
$554,369
|
|
$545,279
|
|
$9,090
|
Non-Compete Agreements
|
175,316
|
|
163,566
|
|
11,750
|
|
$729,685
|
|
$708,845
|
|
$20,840
|
|
As of December 31, 2015
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
Trademarks, Copyrights
|
$554,369
|
|
$544,504
|
|
$9,865
|
Non-Compete Agreements
|
174,665
|
|
157,248
|
|
17,417
|
|
$729,034
|
|
$701,752
|
|
$27,282
|
Excluding goodwill, we have no intangible assets not subject to amortization under U.S. GAAP. Amortization of intangible assets of $6,442 in 2016, $40,744 in 2015, and $45,202 in 2014 was recorded in operating expenses. The weighted average amortization period is 15 years for trademarks and copyrights. Based on the current amount of intangible assets subject to amortization, we estimate amortization expense as follows for the next five years:
|
Leather Factory
|
Tandy Leather
|
Total
|
2017
|
90
|
1,667
|
1,757
|
2018
|
-
|
1,417
|
1,417
|
2019
|
-
|
666
|
666
|
2020
|
-
|
666
|
666
|
2021
|
-
|
666
|
666
|
Thereafter
|
-
|
5,668
|
5,668
|
·
|
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 (unadjusted) for identical assets or liabilities in active markets.
Level 2 – include other inputs that are directly or indirectly observable in the marketplace.
Level 3 – significant unobservable inputs which are supported by little or no market activity.
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 certificates of deposit, accounts receivable, accounts payable, notes payable, and long-term debt. The carrying value of certificates of deposit, accounts receivable and accounts payable approximate their fair value due to the relatively short-term nature of the accounts. The terms of the long-term debt are considered reasonable for this type of financing; therefore, the carrying amount approximates fair value.
We account for income taxes using the asset and liability method. Under this method, the amount of taxes currently payable or refundable is accrued, and deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences that currently exist between the tax basis and the financial reporting basis of our assets and liabilities.
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 position 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 judgment 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 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.
·
|
Share-based compensation
|
We have one stock option plan which permits annual stock option grants to non-employee directors with an exercise price equal to the fair market value of the shares at the date of grant and with a ten year term. These options vest and become exercisable six months from the option grant date. Under this plan, no stock options were awarded in 2016, 2015 or 2014, therefore, we did not recognize any share based compensation expense for these options during those periods.
We also have a restricted stock plan that was adopted by our Board of Directors in January 2013 and approved by our stockholders in June 2013. The plan reserves up to 300,000 shares of our common stock for restricted stock awards to our executive officers, non-employee directors, and other key employees. Awards granted under the plan may be stock awards or performance awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years. The fair value of nonvested restricted common stock awards is the market value of our common stock on the date of grant. Compensation costs for these awards will be recognized on a straight-line basis over the four year vesting period.
Comprehensive income includes net income and certain other items that are recorded directly to Stockholders’ Equity. The Company’s only source of other comprehensive income is foreign currency translation adjustments.
·
|
Shipping and handling costs
|
All shipping and handling costs incurred by us are included in operating expenses on the statements of income. These costs totaled approximately $1,982,000, $2,012,000, and $2,046,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
With the exception of catalog costs, advertising costs are expensed as incurred. Catalog costs are capitalized and expensed over the estimated useful life of the particular catalog in question, which is typically twelve to eighteen months. Such capitalized costs are included in other current assets and totaled $213,000 and $181,000 at December 31, 2016 and 2015, respectively. Total advertising expense was $4,759,000 in 2016; $4,826,000 in 2015; and $4,339,000 in 2014.
·
|
Cash flows presentation
|
For purposes of the statement of cash flows, we consider all highly liquid investments with initial maturities of three months or less from the date of purchase to be cash equivalents.
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.
3. VALUATION AND QUALIFYING ACCOUNTS
·
|
Allowance for uncollectible accounts
|
We maintain allowances for bad debts 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. Write-offs have historically not been material, but are evaluated for write off as they are deemed uncollectible based on a periodic review of accounts. Our allowance for doubtful accounts was approximately $2,400 and $1,700 at December 31, 2016 and 2015, respectively.
·
|
Sales returns and defective merchandise
|
Product returns are generally recorded directly against sales as those returns occur. Historically, the amount of returns is immaterial and as a result, no reserve is recorded in the financial statements.
·
|
Slow-moving and obsolete inventory
|
The majority of inventory items maintained by us have no restrictive shelf life. We review all inventory items annually to determine what items should be eliminated from the product line. Items are selected for several reasons: (1) the item is slow-moving; (2) the supplier is unable to provide an acceptable quality or quantity; or (3) to maintain a freshness in the product line. Reductions in inventory for slow-moving and obsolete inventory are recorded directly against inventory.
4. BALANCE SHEET COMPONENTS
|
December 31, 2016
|
|
December 31, 2015
|
INVENTORY
|
|
|
|
On hand:
|
|
|
|
Finished goods held for sale
|
$30,684,026
|
|
$30,487,764
|
Raw materials and work in process
|
1,034,041
|
|
1,284,567
|
Inventory in transit
|
1,459,472
|
|
1,812,208
|
TOTAL
|
$33,177,539
|
|
$33,584,539
|
PROPERTY AND EQUIPMENT
|
|
|
|
Building
|
$9,105,286
|
|
$9,232,066
|
Land
|
1,451,132
|
|
1,451,132
|
Leasehold improvements
|
1,350,916
|
|
1,192,761
|
Equipment and machinery
|
5,991,343
|
|
5,086,770
|
Furniture and fixtures
|
7,342,642
|
|
6,889,642
|
Vehicles
|
295,033
|
|
139,837
|
|
25,536,352
|
|
23,992,208
|
Less: accumulated depreciation
|
(9,884,559)
|
|
(8,297,155)
|
TOTAL
|
$15,651,793
|
|
$15,695,053
|
|
|
|
|
ACCRUED EXPENSES AND OTHER LIABILITIES
|
|
|
|
Accrued bonuses
|
$2,123,942
|
|
$2,631,971
|
Accrued payroll
|
689,150
|
|
255,058
|
Deferred revenue
|
909,297
|
|
902,236
|
Sales and payroll taxes payable
|
494,720
|
|
383,657
|
Inventory in transit
|
1,432,590
|
|
1,542,352
|
Other
|
287,488
|
|
330,278
|
TOTAL
|
$5,937,187
|
|
$6,045,552
|
Depreciation expense was $1,717,548, $1,520,385, and $1,391,422 for the years ended December 31, 2016, 2015, and 2014, respectively.
Loss (gain) from abandonment and/or disposal of assets, which is included in operating expenses, is as follows, by segment:
Year ended December 31
|
Wholesale
|
Retail
|
International
|
Total
|
2016
|
$13,706
|
$3,993
|
($ 714)
|
$ 16,985
|
2015
|
10,361
|
9,222
|
11,481
|
31,064
|
2014
|
7,681
|
11,089
|
47
|
18,820
|
5. NOTES PAYABLE AND LONG-TERM DEBT
On September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF, NA dba Bank of Texas (“BOKF”), which provides us with a line of credit facility of up to $6,000,000 and is secured by our inventory. On August 25, 2016, this line of credit was amended to extend the maturity from September 18, 2017 to September 18, 2018. The Business Loan Agreement contains covenants that we will maintain a funded debt to EBITDA ratio of no greater than 1.5 to 1 and that we will maintain a Fixed Charge Coverage Ratio greater than or equal to 1.2 to 1. Both ratios are calculated quarterly and are based on a trailing four quarter basis.
Also on September 18, 2015, we executed a Promissory Note with BOKF, which provides us with a line of credit facility of up to $10,000,000 for the purpose of purchasing our common stock. On August 25, 2016, this line of credit was amended to increase the availability from $10,000,000 to $15,000,000 for the purchase of shares of our common stock through the earlier of August 25, 2017 or the date on which the entire amount is drawn. During this time period, we will make monthly interest-only payments. At the end of this time period, the principal balance will be rolled into a 4-year term note. This Promissory Note is secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas. During the year ended December 31, 2016, we drew approximately $3.7 million on this line of credit which was used to purchase approximately 520,500 shares of our common stock. At December 31, 2016, the unused portion of the line of credit was approximately $7.6 million.
Amounts drawn under either Promissory Note accrue interest at the London interbank Eurodollar market rate for U.S. dollars (commonly known as “LIBOR”) plus 1.85% (2.557% and 2.263% at December 31, 2016 and December 31, 2015, respectively).
On July 31, 2007, we entered into a Credit Agreement and Line of Credit Note with JPMorgan Chase Bank, N.A., pursuant to which the bank agreed to provide us with a credit facility of up to $5,500,000 to facilitate our purchase of real estate consisting of a 191,000 square foot building situated on 30 acres of land located at 1900 SE Loop 820 in Fort Worth, Texas. Proceeds in the amount of $4,050,000 were used to fund the purchase of the property that is our corporate headquarters. On April 30, 2008, the principal balance was rolled into a 10-year term note with an interest rate of 7.10% per annum. We paid this note in full in September 2015 and as a result of the early payoff, we incurred a prepayment penalty in the amount of $200,000 which was included in interest expense in the third quarter of 2015.
On July 12, 2012, we executed a Line of Credit Note with JPMorgan Chase Bank, N.A., for a revolving credit facility of up to $4 million, which was subsequently increased to $6 million. The note expired on September 30, 2015. There was no balance owed on the line of credit at the expiration date.
At December 31, the amount outstanding under the above agreements consisted of the following:
|
2016
|
|
2015
|
Business Loan Agreement with BOKF, NA – collateralized by real estate; payable as follows:
|
|
|
|
Line of Credit Note, as amended, in the maximum principal amount of $15,000,000 with features as more fully described above – interest due monthly at LIBOR plus 1.85%;
matures September 18, 2021
|
$7,371,729
|
|
$3,711,225
|
|
|
|
|
Line of Credit Note, as amended, in the maximum principal amount of $6,000,000 with revolving features as more fully described above – interest due monthly at LIBOR plus 1.85%;
matures September 18, 2018
|
-
|
|
-
|
|
$7,371,729
|
|
$3,711,225
|
Less current maturities
|
614,311
|
|
231,952
|
|
$6,757,419
|
|
$3,479,273
|
The terms of the above lines of credit contain various covenants for which we were in compliance as of December 31, 2016 and 2015.
Scheduled maturities of the Company’s notes payable and long-term debt are as follows:
2017
|
$614,311
|
2018
|
1,842,932
|
2019
|
1,842,932
|
2020
|
1,842,932
|
2021
|
1,228,622
|
|
$7,371,729
|
6. CAPITAL LEASE OBLIGATIONS
We lease certain telecommunication equipment under a capital lease agreement. The asset subject to the agreement totaled $227,783, of which $210,904 and $22,152 was included in Property and Equipment at December 31, 2016 and 2015, respectively, and $16,879 and $205,631 which was included in Prepaid Equipment (not placed in service) as of December 31, 2016 and 2015, respectively. Accumulated depreciation on the assets placed in service December 31, 2016 and 2015 were approximately $21,400 and $300, respectively. Amortization of the capitalized cost is charged to depreciation expense.
At December 31, the amounts outstanding under capital lease obligation consisted of the following:
|
2016
|
2015
|
Capital Lease secured by certain telecommunication equipment – total annual principal payments of $72,686, 1.8% interest, maturing January 2018
|
$73,994
|
$156,271
|
Less amount representing interest
|
1,308
|
4,189
|
Total obligation under capital lease
|
72,686
|
152,082
|
Less - Current maturities
|
72,686
|
72,686
|
Long term obligation under capital lease
|
$ -
|
$79,396
|
7. EMPLOYEE BENEFIT AND SAVINGS PLANS
We have a 401(k) plan to provide retirement benefits for our employees. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred salary contributions for eligible employees and allows employees to contribute a percentage of their annual compensation to the plan on a pretax basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. In 2016, 2015, and 2014, we matched 100% of the pretax employee contributions on the first 3% of eligible earnings and 50% of the pretax employee contributions on the next 2% of eligible earnings that are contributed by employees.
Year Ended December 31,
|
Maximum Matching
Contribution per Participant*
|
Total Matching
Contribution
|
2016
|
$10,600
|
$277,753
|
2015
|
$10,600
|
$290,388
|
2014
|
$10,400
|
$286,224
|
* Due to the annual limit on eligible earnings imposed by the Internal Revenue Code
The plan allows employees who meet the age requirements and reach the plan contribution limits to make a catch-up contribution. The catch-up contributions are not eligible for matching contributions. In addition, the plan provides for discretionary matching contributions as determined by the Board of Directors. There were no discretionary matching contributions made in 2016, 2015, or 2014.
We currently offer no postretirement or postemployment benefits to our employees.
8. INCOME TAXES
The provision for income taxes consists of the following:
|
|
2016
|
|
2015
|
|
2014
|
Current provision:
|
|
|
|
|
|
|
|
Federal
|
$3,108,894
|
|
$3,045,292
|
|
$3,368,974
|
|
State
|
486,565
|
|
482,186
|
|
548,225
|
|
|
3,595,459
|
|
3,527,478
|
|
3,917,199
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
Federal
|
183,520
|
|
212,563
|
|
210,343
|
|
State
|
21,591
|
|
76,607
|
|
(26,853)
|
|
|
205,111
|
|
289,170
|
|
183,490
|
|
|
|
|
|
|
|
|
|
$3,800,570
|
|
$3,816,648
|
|
$4,100,689
|
Income before income taxes is earned in the following tax jurisdictions:
|
2016
|
|
2015
|
|
2014
|
United States
|
$9,070,894
|
|
$9,272,854
|
|
$10,339,632
|
United Kingdom
|
(81,987)
|
|
(43,567)
|
|
557,776
|
Canada
|
1,034,027
|
|
813,824
|
|
874,571
|
Australia
|
82,622
|
|
48,633
|
|
102,922
|
Spain
|
97,273
|
|
127,309
|
|
(67,291)
|
|
$10,202,829
|
|
$10,219,053
|
|
$11,807,610
|
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:
|
2016
|
|
2015
|
Deferred income tax assets:
|
|
|
|
Capitalized inventory costs
|
$265,454
|
|
$260,385
|
Warrants and share-based compensation
|
44,151
|
|
44,151
|
Accrued expenses, reserves, and other
|
65,631
|
|
66,444
|
Total deferred income tax assets
|
$375,236
|
|
$370,980
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
Property and equipment depreciation
|
$1,728,265
|
|
$1,529,397
|
Goodwill and other intangible assets amortization
|
227,767
|
|
217,268
|
Total deferred income tax liabilities
|
$1,956,032
|
|
$1,746,665
|
The effective tax rate differs from the statutory rate as follows:
|
2016
|
2015
|
2014
|
Statutory rate – Federal US income tax
|
34%
|
34%
|
34%
|
State and local taxes
|
6%
|
6%
|
5%
|
Non-U.S. income tax at different rates
|
-
|
-
|
(1%)
|
Domestic production activities deduction
|
(1%)
|
(1%)
|
(1%)
|
Other, net
|
(2%)
|
(2%)
|
(2%)
|
Effective rate
|
37%
|
37%
|
35%
|
We file a consolidated U.S. income tax return as well as state tax returns on a consolidated, combined, or stand-alone basis, depending on the jurisdiction. We are no longer subject to U.S. federal income tax examinations by tax authorities for years prior to the tax year ended December 2014. Depending on the jurisdiction, we are no longer subject to state examinations by tax authorities for years prior to the December 2013 and December 2014 tax years.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease our store locations under lease agreements that expire on dates ranging from February 2017 to February 2026. Rent expense on all operating leases for the years ended December 31, 2016, 2015, and 2014, was $4,189,225, $3,844,641, and $3,675,788, respectively.
Future minimum lease payments under noncancelable operating leases at December 31, 2016 were as follows:
Year ending December 31:
|
|
2017
|
$3,914,550
|
2018
|
2,999,262
|
2019
|
2,256,721
|
2020
|
1,701,366
|
2021
|
1,074,070
|
2022
|
545,740
|
2023
|
427,800
|
2024
|
246,698
|
2025
|
180,922
|
2026
|
6,206
|
Total minimum lease payments
|
$13,353,335
|
Legal Proceedings
We are periodically involved in various other litigation that arises in the ordinary course of business and operations. There are no such matters pending that we expect to have a material impact on our financial position and operating results. Legal costs associated with the resolution of claims, lawsuits, and other contingencies are expensed as incurred.
10. SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK
Major Customers
Our revenues are derived from a diverse group of customers primarily involved in the sale of leathercraft. No single customer accounted for more than 1/2% of our consolidated revenues in 2016, 2015, or 2014 and sales to our five largest customers represented 1.4%, 1.3%, and 1.7%, respectively, of consolidated revenues in those years. While we do not believe the loss of one of these customers would have a significant negative impact on our operations, we do believe the loss of several of these customers simultaneously or a substantial reduction in sales generated by them could temporarily affect our operating results.
Major Vendors
We purchase a significant portion of our inventory through one supplier. Due to the number of alternative sources of supply, loss of this supplier would not have an adverse impact on our operations.
Credit Risk
Due to the large number of customers comprising our customer base, concentrations of credit risk with respect to customer receivables are limited. We do not generally require collateral for accounts receivable, but we do perform periodic credit evaluations of our customers and believe the allowance for doubtful accounts is adequate. It is our opinion that if any one or a group of customer receivable balances should be deemed uncollectable, it would not have a material adverse effect on our results of operations or financial condition.
We maintain our cash in bank deposit accounts that, at times, may exceed federally insured limits. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk on our cash and cash equivalents.
11. STOCKHOLDERS' EQUITY
In connection with its 2007 Director Non-Qualified Stock Option Plan for non-employee directors, there are outstanding options to purchase our common stock. The plan, which terminates in March 2017, provides for the granting of non-qualified options at the discretion of the Compensation Committee of the Board of Directors. Options are granted at the fair market value of the underlying common stock at the date of grant and vest after six months. We have reserved 100,000 shares of common stock for issuance under this plan.
All options expire ten years from date of grant and are exercisable at any time after vesting. Of the 100,000 shares available for issuance, there are 21,400 un-optioned shares available for future grants.
A summary of stock option transactions for the years ended December 31 is as follows:
|
2016
|
|
2015
|
|
2014
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
Option
|
|
Exercise
|
|
Option
|
|
Exercise
|
|
Option
|
|
Exercise
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
Outstanding at January 1
|
68,400
|
|
$5.17
|
|
72,400
|
|
$5.16
|
|
84,600
|
|
$5.04
|
Granted
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Forfeited or expired
|
(12,000)
|
|
5.30
|
|
(2,000)
|
|
4.96
|
|
-
|
|
-
|
Exchanged
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Exercised
|
-
|
|
-
|
|
(2,000)
|
|
4.96
|
|
(12,200)
|
|
4.32
|
Outstanding at December 31
|
56,400
|
|
$5.14
|
|
68,400
|
|
$5.17
|
|
72,400
|
|
$5.16
|
Exercisable at end of year
|
56,400
|
|
$5.14
|
|
68,400
|
|
$5.17
|
|
72,400
|
|
$5.16
|
Weighted-average fair value of
|
|
|
|
|
|
|
|
|
|
|
|
options granted during year
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
The following table summarizes all of our outstanding options which are fully vested and exercisable at December 31, 2016:
|
|
Options Outstanding & Exercisable
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
Average
|
|
Average
|
|
|
Option
|
|
Exercise
|
|
Maturity
|
Exercise Price Range
|
|
Shares
|
|
Price
|
|
(Years)
|
$4.41
|
|
20,400
|
|
$4.41
|
|
3.77
|
$4.80
|
|
9,000
|
|
4.80
|
|
4.22
|
$5.30 to $6.87
|
|
27,000
|
|
5.81
|
|
4.95
|
|
|
56,400
|
|
$5.14
|
|
4.41
|
Other information pertaining to option activity during the twelve month periods ended December 31 are as follows:
|
2016
|
2015
|
2014
|
Weighted average grant-date fair value of stock options granted
|
n/a
|
n/a
|
n/a
|
Total fair value of stock options vested
|
n/a
|
n/a
|
n/a
|
Total intrinsic value of stock options exercised
|
$ -
|
$2,953
|
$14,816
|
As of December 31, 2016, there was no unrecognized compensation cost related to non-vested stock options.
Cash received from the exercise of stock options for the years ended December 31, 2016, 2015, and 2014 was $ -, $9,920 and $52,722, respectively.
Because we had no awards of stock options in 2016, 2015 and 2014, we were not required to record compensation cost.
We have a restricted stock plan that was adopted by our Board of Directors in January 2013 and approved by our stockholders in June 2013. The plan reserves up to 300,000 shares of our common stock for restricted stock awards to our executive officers, non-employee directors and other key employees. Awards granted under the plan may be stock awards or performance awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years, unless otherwise determined by the committee that administers the plan.
In February 2014, our Chief Executive Officer, Chief Financial Officer, and Senior Vice President were awarded restricted stock grants consisting of 9,375 shares each. In addition, four of our independent directors were awarded restricted stock grants consisting of 1,619 shares each. In February 2015, our Chief Executive Officer, Chief Financial Officer and Senior Vice President were awarded restricted stock grants consisting of 9,344 shares each. In addition, four of our independent directors were awarded restricted stock grants consisting of 1,613 shares each. In March 2016, our Chief Executive Officer and President were awarded restricted stock grants consisting of 11,765 shares each. In addition, five of our independent directors were awarded restricted stock grants consisting of 2,031 shares each. For these grants in 2016, 2015, and 2014, we recognized share based compensation expense of $199,870, $145,321, and $67,818, respectively, as a component of operating expenses.
A summary of the activity for nonvested restricted common stock awards as of December 31, 2016 and 2015 is as follows:
|
Shares
|
Grant Fair Value
|
Balance, January 1, 2015
|
34,601
|
$8.96
|
Granted
|
34,484
|
8.99
|
Forfeited
|
-
|
-
|
Vested
|
(8,652)
|
8.96
|
Balance, December 31, 2015
|
60,433
|
$8.97
|
|
|
|
Balance, January 1, 2016
|
60,433
|
$8.97
|
Granted
|
33,685
|
7.14
|
Forfeited
|
(8,187)
|
8.97
|
Vested
|
(20,784)
|
8.97
|
Balance, December 31, 2016
|
65,147
|
$8.03
|
As of December 31, 2016, there was unrecognized compensation cost related to non-vested restricted stock awards of $374,040 which will be recognized in each of the following years as follows:
2017
|
$173,136
|
2018
|
123,693
|
2019
|
67,190
|
2020
|
10,021
|
Of the 300,000 shares available for issuance, there are 197,230 shares available for future awards.
On June 9, 2014, our Board of Directors authorized a $0.25 per share special one-time cash dividend to be paid to stockholders of record at the close of business on July 7, 2014. The cash dividend, totaling approximately $2.5 million, was paid to stockholders on August 8, 2014.
Our Board will determine future cash dividends after giving consideration to our then existing levels of profit and cash flow, capital requirements, current and forecasted liquidity, as well as financial and other business conditions existing at the time.
c)
|
Stockholder Rights Plan
|
On June 6, 2013, our Board of Directors authorized and declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of our common stock, par value $0.0024 per share, to stockholders of record at the close of business on June 16, 2013. Each Right entitles the registered holder to purchase from us one one-thousandth of a newly created series of preferred stock at an exercise price of $30.00 per right. The Rights are exercisable in the event any person or group acquires 20% or more of our outstanding common stock (an “Acquiring Person”), or commences a tender offer or exchange offer that would result in such person becoming an Acquiring Person. An exception is included in the Rights Plan in order to ensure that certain owners are not by virtue of their share ownership automatically deemed to be an Acquiring Person upon adoption of the plan unless any such owner subsequently accrues additional shares of our common stock and after giving effect to such acquisition owns 20% or more of our outstanding common stock.
The Rights, as amended, will expire at 5:00 P.M. Eastern on June 6, 2017,
unless such date is advanced or extended or unless the Rights are earlier redeemed or exchanged by our Board.
d)
|
Share Repurchase Program
|
In August 2015, our Board authorized a share repurchase program where we may repurchase up to 1.2 million shares of our common stock through August 2016. On June 7, 2016, the program was amended to increase the number of shares available to purchase from 1.2 million to 2.2 million and to extend the termination date from August 9, 2016 to August 9, 2017. In 2016, we repurchased approximately 520,500 shares of our stock, at an average price of $7.06, totaling $3.7 million. In 2015, we repurchased approximately 529,000 shares of our stock, at an average price of $7.01, totaling $3.7 million. There were no stock repurchases in 2014.
12. SEGMENT INFORMATION
We identify our segments based on the activities of three distinct operations:
a.
|
Wholesale Leathercraft
, which consists of a chain of wholesale stores operating under the name,
The Leather Factory
, located in North America;
|
b.
|
Retail Leathercraft
, which consists of a chain of retail stores operating under the name,
Tandy Leather Company
, located in North America;
|
c.
|
International Leathercraft
, which sells to both wholesale and retail customers. We have four stores. One store is located in each of Northampton, United Kingdom; Sydney, Australia; Jerez, Spain; and Manchester, United Kingdom which opened in October 2015.
|
Our reportable operating segments have been determined as separately identifiable business units and we measure segment earnings as operating earnings, defined as income before interest and income taxes.
|
Wholesale Leathercraft
|
Retail Leathercraft
|
International
Leathercraft
|
Total
|
For the year ended December 31, 2016
|
|
|
|
|
Net Sales
|
$25,371,580
|
$53,670,340
|
$3,882,072
|
$82,923,992
|
Gross Profit
|
18,097,205
|
31,217,798
|
2,398,239
|
51,713,242
|
Operating earnings
|
5,254,227
|
4,970,546
|
75,958
|
10,300,731
|
Interest expense
|
155,189
|
-
|
-
|
155,189
|
Other expense, net
|
(35,290)
|
-
|
(21,997)
|
(57,287)
|
Income before income taxes
|
5,134,328
|
4,970,546
|
97,955
|
10,202,829
|
Depreciation and amortization
|
969,202
|
662,332
|
87,620
|
1,719,154
|
Fixed asset additions
|
869,250
|
740,578
|
87,875
|
1,697,704
|
Total assets
|
$50,067,046
|
$16,435,386
|
$4,150,288
|
$70,652,720
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
|
|
|
Net Sales
|
$26,754,165
|
$53,714,432
|
$3,692,603
|
$84,161,200
|
Gross Profit
|
18,579,494
|
31,258,961
|
2,232,605
|
52,071,060
|
Operating earnings
|
4,663,590
|
5,689,814
|
121,296
|
10,474,700
|
Interest expense
|
330,004
|
-
|
-
|
330,004
|
Other expense, net
|
(63,230)
|
-
|
(11,127)
|
(74,357)
|
Income before income taxes
|
4,396,816
|
5,689,814
|
132,423
|
10,219,053
|
Depreciation and amortization
|
950,174
|
559,418
|
57,580
|
1,567,172
|
Fixed asset additions
|
945,998
|
932,231
|
285,811
|
2,164,040
|
Total assets
|
$42,141,174
|
$17,753,324
|
$4,716,578
|
$64,611,076
|
|
|
|
|
|
For the year ended December 31, 2014
|
|
|
|
|
Net Sales
|
$27,285,884
|
$51,805,944
|
$4,339,084
|
$83,430,912
|
Gross Profit
|
18,393,969
|
30,880,718
|
2,850,070
|
52,124,757
|
Operating earnings
|
5,300,413
|
6,077,345
|
580,271
|
11,958,029
|
Interest expense
|
225,584
|
-
|
-
|
225,584
|
Other expense, net
|
(61,984)
|
-
|
(13,181)
|
(75,165)
|
Income before income taxes
|
5,136,813
|
6,077,345
|
593,452
|
11,807,610
|
Depreciation and amortization
|
911,327
|
460,534
|
64,763
|
1,436,624
|
Fixed asset additions
|
909,260
|
1,243,123
|
51,807
|
2,204,190
|
Total assets
|
$43,000,030
|
$16,608,386
|
$3,265,458
|
$62,873,874
|
Net sales by geographic areas were as follows:
|
2016
|
2015
|
2014
|
United States
|
$70,886,401
|
$72,061,009
|
$69,791,099
|
Canada
|
7,199,155
|
7,543,468
|
8,342,896
|
All other countries
|
4,838,436
|
4,556,723
|
5,296,917
|
|
$82,923,992
|
$84,161,200
|
$83,430,912
|
Geographic sales information is based on the location of the customer. Except for Canada, we had no sales to any single foreign country that was material to our consolidated net sales for the years ended December 31, 2016, 2015, and 2014. We do not have any significant long-lived assets outside of the United States.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606, “Revenue from Contracts with Customers”. The amendments in this ASU are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The amendments in this accounting standard update are effective for interim and annual reporting periods beginning after December 15, 2016. In April 2015, the FASB issued ASU No. 2015-24, Revenue from Contracts with Customers: Deferral of the Effective Date which proposed a deferral of the effective date by one year, and on July 7, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are therefore required to apply the new revenue guidance beginning in our 2018 interim and annual financial statements. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Entities reporting under U.S. GAAP are not permitted to adopt this standard earlier than the original effective date for public entities (that is, no earlier than 2017 for calendar year-end entities.) We are currently evaluating what impact, if any, the adoption of this guidance will have on our financial condition, results of operations, cash flows and financial disclosures. Based on our procedures to date, we believe that the adoption will not have a material impact to our financial condition, results of operations or cash flows although our disclosures will be expanded. We expect to adopt ASU 2014-09 under the modified retrospective method. Given the nature of our business and that our sales generally occur at the counter or by shipment through common carrier at observable transaction prices with little, if any, variable consideration factors, we do not expect there to be significant changes to the amount and timing of revenue recognition. Finally, while we offer an unconditional right of return to our customers, this has historically been immaterial to our financial condition, results of operations and cash flows (annual gross product returns represent less than 0.5% of our net sales).
In November 2015, the FASB issued ASU 2015-17, which requires all deferred tax assets and liabilities to be classified as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. The guidance is effective for annual and interim periods beginning after December 15, 2016, and may be adopted on either a prospective or retrospective basis. We early adopted this guidance on a retrospective basis, and there was no material impact to our financial statements or disclosures in our financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases”, a comprehensive new standard that amends various aspects of existing accounting guidance for leases, including the recognition of a right of use asset and a lease liability for leases with a duration greater than one year. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We have not completed our review of the new guidance; however, we anticipate that upon adoption of the standard, using a modified retrospective approach, we will recognize additional assets and corresponding liabilities related to leases on our balance sheet.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
First
|
Second
|
Third
|
Fourth
|
2016
|
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Net sales
|
|
$20,672,227
|
$19,552,905
|
$18,628,362
|
$24,100,498
|
Gross profit
|
|
12,652,746
|
12,895,790
|
11,644,871
|
14,519,835
|
Net income
|
|
1,520,997
|
1,820,915
|
1,000,350
|
2,059,997
|
Net income per common share:
|
|
|
|
|
|
Basic
|
|
$0.16
|
$0.19
|
$0.11
|
$0.23
|
Diluted
|
|
$0.16
|
$0.19
|
$0.11
|
$0.23
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
Basic
|
|
9,698,951
|
9,209,446
|
9,188,483
|
9,188,483
|
Diluted
|
|
9,718,453
|
9,227,941
|
9,206,382
|
9,301,867
|
|
|
|
|
|
|
|
|
First
|
Second
|
Third
|
Fourth
|
2015
|
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Net sales
|
|
$20,788,764
|
$19,773,528
|
$19,355,937
|
$24,292,971
|
Gross profit
|
|
12,582,927
|
12,814,382
|
11,832,697
|
14,841,054
|
Net income
|
|
1,444,407
|
1,507,896
|
1,111,344
|
2,338,758
|
Net income per common share:
|
|
|
|
|
|
Basic
|
|
$0.14
|
$0.15
|
$0.11
|
$0.24
|
Diluted
|
|
$0.14
|
$0.15
|
$0.11
|
$0.24
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
Basic
|
|
10,211,333
|
10,212,933
|
10,175,650
|
9,692,860
|
Diluted
|
|
10,241,096
|
10,241,164
|
10,199,092
|
9,712,571
|