(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.
(1) As described in Note 2 to these Consolidated Financial Statements, we have restated the Consolidated Financial Statements
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
|
BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES
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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, the Company introduced leathercrafting to millions of
American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains
to build on our legacy of inspiring the timeless art and trade of leatherworking.
What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, a hub
for the local leathercrafting community, and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are very difficult for others to replicate.
We sell our products primarily through company-owned stores and through orders generated from our four websites: tandyleather.com, tandyleather.ca, tandyleather.eu and tandyleather.com.au. We also manufacture leather
lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.
As of June 30, 2019, the Company operated a total of 116 retail stores. There were 104 stores in the United States (“U.S.”), 11 stores in Canada and one store in Spain. All e-commerce sales through our websites
were fulfilled and recognized through our network of retail stores. The Company operates a total of 106 retail stores as of May 2021. There are 95 stores in the U.S., ten stores in Canada and one store in Spain. During the second quarter of
2020, we consolidated U.S. e-commerce web order fulfillment from the stores to our Fort Worth distribution center.
Nasdaq Stock Market LLC (“Nasdaq”) suspended trading in the Company’s shares as of August 13, 2020 due to the Company not being current with its SEC filings. Our stock has since traded on the Over-the-Counter
Markets’ “Pink Sheets” under the symbol “TLFA.” Nasdaq denied our appeal of this decision, resulting in our stock being formally delisted on February 9, 2021. We intend to reapply for Nasdaq listing once the Company has made the required filings.
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with
the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual audited financial statements. In the opinion of management, the accompanying
Consolidated Financial Statements for Tandy Leather Factory, Inc. and its consolidated subsidiaries contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly our financial position as of June 30, 2019 and
December 31, 2018, our results of operations for the three and six-month periods ended June 30, 2019 and 2018, our cash flows for the six-month periods ended June 30, 2019 and 2018, and our statements of stockholders equity as of March 31, and June
30, 2019 and 2018. 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 Consolidated Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements and accompanying notes included in our Comprehensive Form 10-K for the year ended December 31, 2019.
Comments and discussion as well as all financials and other data presented here have been updated to reflect the restatement adjustments detailed in the Restatement Footnote.
As of January 1, 2019, we operate as a single segment and report on a consolidated basis. Prior to January 1, 2019, we operated and reported in two segments - North America and International. In early 2019, we
announced several strategic initiatives to drive future sales growth and long-term profitability, which resulted in the Company closing two of its three stores outside of North America. This left Spain as our
only store outside of North America, and our chief operating decision maker (“CODM”) was no longer making operating performance assessments and resource allocation decisions for this single store. As a result, we no longer report International
as a reportable segment. All prior year data discussed throughout this Comprehensive Form 10-K has been retrospectively revised to conform to the new single-reportable segment structure. There is no change to our consolidated financial
position or results based on the change in segment reporting.
Certain reclassifications unrelated to the restatement of prior period financials were made to previously reported prior period amounts in order to conform to the current period presentation, including a reclass of
$0.8 million from accrued expenses to accounts payable-trade as of December 31, 2018.
Significant Accounting Policies
Cash and cash equivalents. The Company considers investments with a maturity when purchased of three months or less to be cash equivalents. All credit card, debit
card and electronic transfer transactions that process in less than seven days are classified as cash and cash equivalents.
Foreign currency translation and transactions. Foreign currency translation adjustments arise from activities of our foreign subsidiaries. Results of operations are
translated into U.S. dollars using the average exchange rates during the period, while assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments of assets and liabilities are recorded in
stockholders’ equity and presented net of tax. Gains and losses resulting from foreign currency transactions are reported in the statements of income under the caption “Other (Income) Expense, net,” for all periods presented.
Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via two methods: (1) at the store counter and (2) shipment of product
generally via web sales. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance obligation is met and revenue is recognized when a
sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when title passes to the customer. Shipping terms are normally free on board (“FOB”) shipping point
and title passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales. Net sales is based on the amount of consideration
that we expect to receive, reduced by estimates for future merchandise returns.
The 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. As of June 30, 2019 and December 31, 2018, we have
established a sales return allowance of $0.2 million and $0.3 million, respectively, based on historical customer return behavior and other known factors. The sales return allowance is included in accrued expenses and other liabilities, while an
estimated value of the merchandise expected to be returned of $0.1 million has been included in other current assets in the accompanying Consolidated Balance Sheet at both June 30, 2019 and December 31, 2018.
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. At both June 30, 2019 and December 31, 2018, our gift card liability,
included in accrued expenses and other liabilities, totaled $0.2 million.
During 2019, we ended our wholesale pricing club program where customers received lower prices in exchange for a yearly membership fee. Under this program, the yearly membership fee when paid is recorded as deferred
revenue and is recognized in net sales throughout the one-year period. As of June 30, 2019 and December 31, 2018, our deferred revenue associated with this program and included in accrued expenses and other liabilities was $0.1 million and $0.6
million, respectively. We recognized gift card revenue of $0.1 million in the six-month period ended June 30, 2019 from the December 31, 2018 deferred revenue balance, and $0.1 million in the six-month period ended June 30, 2018 from the December
31, 2017 deferred revenue balance.
For the three and six months ended June 30, 2019 we recognized $0.8 million, and $1.2 million, respectively, and for the three and six months ended June 30, 2018 we recognized $0.9 million and $1.3 million,
respectively, in net sales associated with gift cards and the wholesale pricing club membership fees.
Disaggregated Revenue. In the following table, revenue for the three and six months ended June 30, 2019 and 2018 is disaggregated by geographic areas as follows:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
Restated
|
|
|
United States
|
|
$
|
15,056,236
|
|
|
$
|
16,674,013
|
|
|
$
|
33,379,988
|
|
|
$
|
34,463,443
|
|
|
Canada
|
|
|
1,395,257
|
|
|
|
1,612,327
|
|
|
|
3,127,722
|
|
|
|
3,351,817
|
|
|
All other countries
|
|
|
745,322
|
|
|
|
900,882
|
|
|
|
1,630,427
|
|
|
|
1,872,540
|
|
|
Net sales
|
|
$
|
17,196,815
|
|
|
$
|
19,187,222
|
|
|
$
|
38,138,137
|
|
|
$
|
39,687,800
|
|
Geographic sales information is based on the location of the customer. Excluding Canada, no single foreign country had net sales greater than 1.7% of our consolidated net sales for the three or six-month periods
ended June 30, 2019 and 2018.
Discounts. Prior to 2019, we maintained five price levels: retail, wholesale gold, wholesale elite, business, and manufacturer. Since May of 2019 (April of 2019 in
Canada), 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 Responder 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 expense. Operating expenses include all selling, general and administrative costs, including wages and
benefits, rent and occupancy costs, depreciation, advertising, store operating expenses, outbound freight charges (to ship merchandise to customers), and corporate office costs.
Property and equipment, net of accumulated depreciation. Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which are three to ten years for equipment and machinery, seven to fifteen years for furniture and fixtures, five years for vehicles, and forty years for buildings and related improvements. Leasehold
improvements are amortized over the lesser of the life of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred.
Inventory. Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods held for sale includes the cost of merchandise
purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include depreciation of long-lived assets utilized in
acquiring, warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process are 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.
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Restated
|
|
|
On hand:
|
|
|
|
|
|
|
|
Finished goods held for sale
|
|
$
|
25,001,014
|
|
|
$
|
31,263,806
|
|
|
Raw materials and work in process
|
|
|
688,776
|
|
|
|
919,202
|
|
|
Inventory in transit
|
|
|
499,265
|
|
|
|
1,119,541
|
|
|
TOTAL
|
|
$
|
26,189,055
|
|
|
$
|
33,302,549
|
|
Leases. We lease certain real estate for our retail store locations under long-term lease agreements. Starting in 2019, with the adoption of Accounting Standards
Update (“ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognized an operating lease asset and lease liability at commencement date based on the present value of the lease payments over the
lease term. The present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably certain we will exercise such an option. The
exercise of lease renewal options is generally at our discretion. Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. We discount
lease payments using our incremental borrowing rate based on information available as of the measurement date.
Prior to 2019, rent expense on operating leases, including rent holidays and scheduled rent increases, was recorded on a straight‑line basis over the term of the lease, commencing on the date we took possession of
the leased property. Rent expense is recorded in operating expenses. The net excess of rent expense over the actual cash paid was recorded as accrued expenses and other liabilities in the accompanying consolidated balance sheets.
As of December 31, 2019, we have no finance leases, no sublease agreements, and no lease agreements in which we are named as a lessor. Subsequent to the recognition of our operating lease assets and lease
liabilities, we recognize lease expense related to our operating leases on a straight-line basis over the lease term. The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. We also
perform interim reviews of our operating lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable.
Impairment of Long-Lived Assets. We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate
the carrying value of certain assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use (“ROU”) lease assets, property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment
loss is recorded in the period in which it is determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the
lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company
determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying
amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group's major classifications which in
this case are operating lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or
store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method.
Goodwill and Other Intangible Assets. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination.
Goodwill is allocated across one reporting unit: Tandy Leather Factory. Goodwill is not amortized but is evaluated at least annually for impairment. At the reporting unit level, the Company tests goodwill for impairment on an annual basis as of
December 31 of each year, or more frequently if events or changes in circumstances, referred to as triggering events, indicate the carrying value of goodwill may not be recoverable and that a potential impairment exists. Application of the
goodwill impairment test requires exercise of judgement, including the estimation of future cash flows, determination of appropriate discount rates and other Level 3 assumptions (significant unobservable inputs which are supported by little or no
market activity). Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for the reporting unit.
During the first six months of 2019, no indicators of impairment were identified. Further, the only change in our goodwill for the six-month periods ended June 30, 2019 and 2018 resulted from a foreign currency
translation loss of less than $0.1 million and a foreign currency translation gain of $0.3 million, respectively, and recorded in accumulated other comprehensive loss.
Our intangible assets, excluding goodwill, and related accumulated amortization consisted of the following:
|
|
|
June 30, 2019
|
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Trademarks/copyrights
|
|
$
|
554,369
|
|
|
$
|
547,035
|
|
|
$
|
7,334
|
|
|
Non-compete agreements
|
|
|
153,000
|
|
|
|
145,167
|
|
|
|
7,833
|
|
|
TOTAL
|
|
$
|
707,369
|
|
|
$
|
692,202
|
|
|
$
|
15,167
|
|
|
|
|
December 31, 2018
Restated
|
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Trademarks/copyrights
|
|
$
|
554,369
|
|
|
$
|
546,702
|
|
|
$
|
7,667
|
|
|
Non-compete agreements
|
|
|
153,000
|
|
|
|
144,167
|
|
|
|
8,833
|
|
|
TOTAL
|
|
$
|
707,369
|
|
|
$
|
690,869
|
|
|
$
|
16,500
|
|
All our intangible assets, other than goodwill, 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 million during both the six months ended June 30, 2019 and 2018 was recorded in operating expenses, and non-compete intangible assets were fully amortized during 2019 upon the expiration
of such agreements. Based on the current amount of intangible assets subject to amortization, we estimate amortization expense to be less than $0.01 million annually over the next five years.
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 short-term investments, accounts receivable, accounts payable, and long-term debt. As of June 30, 2019, and December 31, 2018, the carrying values of our financial
instruments, included in our Consolidated Balance Sheets, approximated their fair values. There were no transfers into or out of Levels 1, 2 and 3 during the three and six months ended June 30, 2019 and during the year ended December 31, 2018.
Short-Term Investments. We determine the appropriate classification of investments at the time of purchase, and we re-evaluate that determination at each balance sheet
date. Investments are recorded as either short-term or long-term on the Consolidated Balance Sheet, based on contractual maturity date.
As of June 30, 2019, we held investments in U.S. Treasuries with maturity values of $9.1 million and maturities less than one year. We have classified these investments in debt securities as held-to-maturity. Such
investments are recorded at amortized cost with book value approximating fair value which is based on Level 1 inputs for these investments.
The Company believes there is no current expected credit allowance necessary for our short-term investments as: 1) Treasury securities typically are the most highly rated securities among rating agencies; 2)
Treasury securities have a long history of no credit losses; and 3) Treasury securities are guaranteed by a sovereign entity (the U.S. Government) that can print its own money and whose currency (the U.S. dollar) is the reserve currency.
Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences
resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent recovery is deemed not
likely, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future
profitability and the duration of statutory carryforward periods.
Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is
recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.
A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.
We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Due to the complexity of
some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the
effective tax rate in the period in which new information becomes available. We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become
payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made.
We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation
of taxable income to the various jurisdictions.
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.
We had one stock option plan that expired in March 2017. This plan permitted 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. These options vested and became exercisable six months from the option grant date. Under this plan, no stock options were awarded in 2015 or after, therefore, we did not recognize any stock-based compensation expense for these options
during those periods.
Accounts Receivable and Allowance for Uncollectible Accounts. 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 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
receivables are evaluated for write off as they are deemed uncollectible based on a periodic review of accounts.
Comprehensive Income (Loss). Comprehensive income (loss) includes net income (loss) and certain other items that are recorded
directly to stockholders’ equity. The Company’s only source of other comprehensive income (loss) is foreign currency translation adjustments, and those adjustments are presented net of tax.
Recently Adopted Accounting Pronouncements
Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying
the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill with its carrying amount as part of Step 2 of
the goodwill impairment test referenced in ASC Topic 350, Intangibles - Goodwill and Other. As a result, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019, including any interim impairment tests within those annual periods, with early application permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We elected early adoption of ASU 2017-04 as of October 1, 2019. As a result, we removed Step 2 of the goodwill impairment test as part of our annual
impairment assessment of goodwill as of December 31, 2019. See section above: Goodwill and other intangibles.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (“Topic 842”), which amends the accounting guidance on leases and establishes
an ROU model that requires a lessee to record an ROU asset and a lease liability on the Consolidated Balance Sheet for all leases with terms longer than 12 months. The Company adopted Topic 842 and all subsequent amendments on January 1, 2019,
using the optional transition method applied to leases existing at January 1, 2019, with no restatement of comparative periods. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts
have not been adjusted and continue to be reported in accordance with the Company’s historical accounting policies under Accounting Standard Codification Topic 840, Leases (“ASC 840”).
The Company elected the package of practical expedients available under the transition guidance within Topic 842, which among other things, permits the Company to carry forward its historical lease classification.
The Company also elected other practical expedients under Topic 842 to: (1) apply hindsight when determining its reasonably certain lease terms or assessing impairment of its ROU assets at transition, (2) not record leases with an initial term of
12 months or less on the Consolidated Balance Sheet, and (3) combine and account for both lease and non-lease components within a contract as a single component for its sole asset class, real estate leases.
Upon adoption of Topic 842, the Company recognized operating ROU assets (referred herein as “lease assets”) and lease liabilities based on the present value of its remaining minimum rental payments for existing
operating leases as of the adoption date, utilizing the Company’s applicable incremental borrowing rate as of the adoption date. The adoption of Topic 842 resulted in the Company recognizing $17.6 million and $18.1 million of operating lease
assets and lease liabilities, respectively, as of January 1, 2019. The difference between the lease assets and lease liabilities is primarily due to the recognition of a $0.5 million pre-tax cumulative effect adjustment to retained earnings on
January 1, 2019, resulting from the impairment of certain operating lease assets upon transition which was based on fair value using Level 3 inputs. The Company had no finance leases at the time of adoption of Topic 842, previously termed capital
leases under ASC 840. The adoption of Topic 842 had no material impact on the Company’s Consolidated Statements of Comprehensive Income (Loss) or Consolidated Statements of Cash Flows and did not impact the Company’s compliance with its debt
covenants under its debt agreements. For further details, see Note 8, Leases.
During the six months ended June 30, 2019, the Company recognized no impairment loss related to its operating lease assets.
Recent Accounting Standards Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which
simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending
existing guidance. This guidance will be effective for entities for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 on a prospective basis, with early adoption permitted. We do not believe that the
adoption of this standard will have a material impact on our financial condition, results of operations or cash flows.
Internal-Use Software
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update provides additional guidance to ASU No.
2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which was issued in April 2015. The amendments in this ASU align the requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).
This ASU is effective for annual reporting periods beginning on or after December 15, 2019, and interim periods within those annual periods with early adoption permitted in any interim period for which financial statements have not yet been
issued. We do not believe that the adoption of this standard will have a material effect on our financial condition, results of operations or cash flows.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments,” which requires entities to measure
impairment of certain financial instruments, including trade receivables, based on expected losses rather than incurred losses. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is
permitted. The Company does not expect the adoption of this standard will have a material impact on the Company’s financial condition, results of operations or cash flows.
|
2.
|
RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
|
We are filing this Quarterly Report on Form 10-Q for the three and six-month periods ended June 30, 2019 as part of our efforts to become current in our filing obligations under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). This Form 10-Q contains our unaudited consolidated financial statements as of and for the three and six months ended June 30, 2019 as well as restatements of the comparable periods, specifically: (i) our audited
Consolidated Balance Sheet as of December 31, 2018, (ii) our unaudited Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2018, (iii) our unaudited Consolidated Statement of Cash Flows for the six
months ended June 30, 2018, and (iv) our unaudited Consolidated Statements of Stockholders’ Equity as of December 31, 2017, March 31, June 30, and December 31, 2018 and March 31, 2019.
Restatement Background
As previously disclosed, on October 14, 2019, as a result of the findings of the Independent Investigation and the Company's ongoing reviews, the Company, in consultation
with the Audit Committee, determined that Tandy's previously issued Consolidated Financial Statements as of and for (i) the years ended December 31, 2018 and 2017, (ii) the three and six-month periods ended June 30, 2018, (iii) the three and
nine-month periods ended September 30, 2018, and (iv) the three-month period ended March 31, 2019, should no longer be relied upon due to misstatements related to our accounting processes for inventory transactions, and we would make the necessary
accounting corrections and restate such financial statements. In addition to inventory misstatements, management identified additional areas that required restatement adjustments as described below, with all such restatement items constituting the
“Restatement Process.” The restatement adjustments described below pertain to all restatement periods noted above, and restatement adjustments specific to the periods reported in this Form 10-Q are reflected in the tables below.
Such errors included: (i) methods used by the Company in the valuation and expensing of costs related to inventory which was not correctly stated and was not consistent with the first-in, first-out (“FIFO”)
methodology, (ii) warehousing and handling expenditures which were not properly capitalized during the first and third quarters but were subsequently corrected on a semi-annual basis in the second and fourth quarters resulting in the understatement
of inventory and net income in the first and third quarters and the overstatement of net income in the second and fourth quarters, (iii) warehouse and handling expenditures which were improperly classified in operating expenses in all quarters
resulting in an overstatement of operating expenses in all restated periods, (iv) freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out costs which were being capitalized to inventory using historical
standard rates that were not based on the actual costs incurred in each period resulting in misstatements of inventory value, (v) inventory reserve levels which did not reflect the Company’s accounting policy of carrying inventory at the lower of
cost or net realizable value resulting in misstatements of inventory value, (vi) sales returns were not accounted for until November 2018, and through year end 2017 gift cards were initially recorded to net sales causing net sales to be overstated,
(vii) lease accounting errors upon the adoption of Topic 842 on January 1, 2019, which resulted in the understatement of operating lease assets and operating lease liabilities, (viii) the income tax effect of pre-tax restatement adjustments as well
as correction of income tax misstatements related to tax effected items recognized in the 2018 income tax provision but related to the previous 2017 tax year, including adjustments related to the Tax Cuts and Jobs Act (“TCJA”) and recognition of
uncertain tax position (“UTP”) liability and related interest expense, and (ix) other smaller matters as described further below.
All financial statements, schedules and footnotes impacted indicate the restated amounts under the caption “Restated.” In connection with process of restating our financial statements, we are also undergoing
remediation efforts to fix the internal control failures that contributed to these misstatements. See Item 4 – Controls and Procedures for further detail on remediation efforts.
Description of Restatement Adjustments
Following is a comprehensive list of all restatement adjustments made during the Restatement Process. Some of the adjustments may apply to periods other than those applicable to this particular filing.
Inventory
Under the Company’s inventory accounting policy, inventory is stated using the FIFO methodology for cost, and such cost includes merchandise purchases, the costs to bring the merchandise to its Texas distribution
center (freight-in), warehousing and handling expenditures, factory labor and overhead for items that are internally manufactured, and distributing and delivering merchandise to stores (freight-out). The Company carries inventory at the lower of
this cost or net realizable value.
The inventory restatement adjustments below were first identified by management as a result of a deeper analysis of legacy systems and practices that were in place for many years and which the Company is working to
replace. Management identified the following areas in which the accounting for inventory did not adhere to the Company’s inventory accounting policy:
|
(1)
|
FIFO adjustment: inventory was not correctly stated and was not consistent with the FIFO methodology;
|
|
(2)
|
Freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out adjustment:
|
|
i.
|
warehousing and handling expenditures were not properly capitalized during the first and third quarters but were subsequently corrected on a semi-annual basis in the second and fourth quarters resulting in the understatement of inventory
and net income in the first and third quarters and the overstatement of net income in the second and fourth quarters; and
|
|
ii.
|
freight-in, warehousing and handling expenditures, factory labor and overhead, and freight-out costs were being capitalized to inventory using historical standard rates that were not based on the actual costs incurred in each period
resulting in misstatements;
|
|
(3)
|
Inventory reserve adjustment: Tandy’s accounting policy is to carry inventory at the lower of cost or net realizable value. Management noted inventory reserve levels did not reflect the Company’s accounting policy of carrying inventory
at the lower of cost or net realizable value. This resulted in cumulative understatements of inventory.
|
Sales Returns, Gift Card Liabilities and Class Fees
|
(4)
|
Sales returns: management noted estimates for sales returns had not been accounted for until November 2018. Using historical sales return trends for 2017 and 2018, management has estimated a sales return liability along with a
corresponding inventory asset for all restatement periods. In addition, estimated sales returns previously recorded in the fourth quarter of 2018 were incorrectly presented on a net basis in cost of sales and have since been restated to
reflect accounting on a gross basis in both net sales and cost of sales.
|
Gift cards: for the restatement year 2017, management noted sales of gift cards were initially recorded to net sales causing net sales to be overstated. Management has estimated a gift card
liability as of December 31, 2017 based on historical gift card issuances and the redemption activity. Starting January 1, 2018, management noted the Company had begun to account for the sale of gift cards properly by recording a gift card
liability on the date a gift card is issued to a customer and recognizing revenue with a corresponding reduction to the gift card liability as the customer redeems the gift card.
Class fees: for the restatement year 2018, management noted fees paid to instructors for in-store classes were initially netted against net sales causing operating expense and net sales to be
understated. These fees incurred have been properly recorded to operating expense. There was no impact to net income (loss) related to this reclassification.
Warehouse and Handling Reclassifications
|
(5)
|
Warehousing and handling expenditures were classified as operating expenses, resulting in overstatement of operating expenses in all periods. These costs have been reclassified to cost of sales since the inventory restatement in
adjustment (2) above is properly adjusting the inventory balance for such costs with the offset recorded to cost of sales. There was no impact to net income (loss) related to this reclassification.
|
Income Tax
|
(6)
|
Management noted the 2018 income tax provision included tax effected items related to the previous 2017 tax year, including adjustments related to the TCJA which was enacted on December 22, 2017, among other smaller tax correcting
adjustments. Management noted the 2017 income tax provision had misstatements related not only to TCJA but also related to the recognition of UTP liability and related interest expense among other smaller tax correcting adjustments. Also,
income tax restatement adjustments were made to reflect the tax effect of the pre-tax restatement adjustments for 2018 and 2017.
|
The 2018 tax provision restatement adjustments consisted of a $0.6 million increase to income tax expense for the tax effect of pre-tax restatement adjustments and offset by a $0.5 million decrease
to income tax expense primarily for the correction of the 2017 tax related items noted above ($0.4 million) along with smaller adjustments to correct return to provision amounts and correction of tax on income earned from wholly-owned foreign
subsidiaries ($0.1 million).
The 2017 provision restatement adjustments consisted of a $0.2 million decrease to income tax expense for the tax effect of pre-tax restatement adjustments and a $1.3 million increase to income tax
expense for the correction of the TCJA misstatement noted above ($0.9 million) and other corrections such as uncertain tax position (UTP) liability and related interest expense ($0.2 million), correction of taxable income on the return of our
Canada and Spain foreign subsidiaries ($0.2 million), and other smaller correcting adjustments.
For the three and six months ended June 30, 2018, restatement adjustments related to the tax effect of pre-tax restatement adjustments totaled less than $0.1 million of tax benefit for both
periods. Restatement adjustments related to correction of tax related misstatements totaled less than $0.1 million of income tax expense for the three months ended June 30, 2018 and $0.1 million of income tax expense for the six months ended June
30, 2018.
Accruals and Other
|
(7)
|
There were misstatements related to the recognition of accrued paid-time-off (“PTO”) resulting in understatement of accrued expenses and other liabilities as well as other misstatements primarily related to recognition of other accrued
operating expenses, payroll related costs, long-term debt classification and cash cutoff for outstanding checks, break out impairment expense previously included in operating expenses, and reclass of leasehold improvements from prepaid
expenses to property and equipment, all of which are being corrected in connection with the restatement of previously issued financial statements.
|
Leases
|
(8)
|
During the first quarter of 2019, we adopted the new lease accounting standard under Topic 842. Management noted as part of the adoption that the Company did not ensure the appropriateness of inputs being used to calculate the present
value of lease payments over the lease terms. This resulted in the misstatement of operating lease assets, and the current and long-term portion of operating lease liabilities upon initial recognition on January 1, 2019.
|
Foreign Currency Gains & Losses and Cumulative Translation Adjustments
|
(9)
|
Foreign currency gains and losses associated with the activity of the Company’s Canadian subsidiary were incorrectly classified as a component of accumulated other comprehensive income (loss). These gains and losses have been restated
and are included in net income (loss).
|
Cumulative translation adjustments (“CTA”) included in accumulated other comprehensive income (loss) were not tax effected. Management has corrected this error by tax effecting CTA and by
presenting CTA net of tax within accumulated other comprehensive income (loss).
Common Stock
|
(10)
|
A number of shares of the Company’s common stock were repurchased by the Company and cancelled prior to 2010. Management noted these repurchases were incorrectly accounted for as treasury stock. The number of shares issued, and the
number of shares held in treasury, were both overstated by 993,623 shares. The number of shares outstanding has been properly presented in all periods. This correction will not result in any change to net stockholders’ equity, nor will it
affect any weighted average shares outstanding calculations used in the determination of earnings per share.
|
Restatement Reconciliation Tables
The following tables present a reconciliation of our Consolidated Balance Sheet as previously reported as of December 31, 2018 to the restated amounts shown in this filing. We have also presented a reconciliation of
our Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2018, and Consolidated Statement of Cash Flows for the six months ended June 30, 2018, as previously reported to the restated amounts shown in
this filing. The following restatement adjustment footnote numbers correspond to the restatement adjustment descriptions above.
Tandy Leather Factory, Inc.
Consolidated Balance Sheet
|
|
|
December 31, 2018
|
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
As Restated
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
24,070,351
|
|
|
$
|
-
|
|
|
|
|
$
|
24,070,351
|
|
|
Accounts receivable-trade, net of allowance for doubtful accounts of $15,703
|
|
|
408,170
|
|
|
|
-
|
|
|
|
|
|
408,170
|
|
|
Inventory
|
|
|
33,867,276
|
|
|
|
(564,727
|
)
|
|
|
(1) (2)(3)(4)(7)
|
|
|
33,302,549
|
|
|
Prepaid income taxes
|
|
|
383,478
|
|
|
|
36,430
|
|
|
|
(6)
|
|
|
419,908
|
|
|
Prepaid expenses
|
|
|
1,244,754
|
|
|
|
39,041
|
|
|
|
(7)
|
|
|
1,283,795
|
|
|
Other current assets
|
|
|
161,208
|
|
|
|
170,597
|
|
|
|
(7)
|
|
|
331,805
|
|
|
Total current assets
|
|
|
60,135,237
|
|
|
|
(318,659
|
)
|
|
|
|
|
|
59,816,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
28,005,563
|
|
|
|
134,782
|
|
|
|
(7)
|
|
|
28,140,345
|
|
|
Less accumulated depreciation
|
|
|
(13,606,266
|
)
|
|
|
(18,995
|
)
|
|
|
(7)
|
|
|
(13,625,261
|
)
|
|
Property and equipment, net
|
|
|
14,399,297
|
|
|
|
115,787
|
|
|
|
|
|
|
14,515,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
248,228
|
|
|
|
844,065
|
|
|
|
(6)
|
|
|
1,092,293
|
|
|
Goodwill
|
|
|
954,765
|
|
|
|
-
|
|
|
|
|
|
|
954,765
|
|
|
Other intangibles, net of accumulated amortization of $690,869
|
|
|
16,500
|
|
|
|
-
|
|
|
|
|
|
|
16,500
|
|
|
Other assets
|
|
|
386,107
|
|
|
|
-
|
|
|
|
|
|
|
386,107
|
|
|
TOTAL ASSETS
|
|
|
76,140,134
|
|
|
|
641,193
|
|
|
|
|
|
|
76,781,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable-trade
|
|
|
1,978,840
|
|
|
|
175,554
|
|
|
|
(7)
|
|
|
2,154,394
|
|
|
Accrued expenses and other liabilities
|
|
|
4,176,479
|
|
|
|
1,225,029
|
|
|
|
(4)(7)
|
|
|
5,401,508
|
|
|
Current maturities of long-term debt
|
|
|
747,335
|
|
|
|
(227,819
|
)
|
|
|
(7)
|
|
|
519,516
|
|
|
Total current liabilities
|
|
|
6,902,654
|
|
|
|
1,172,764
|
|
|
|
|
|
|
8,075,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions
|
|
|
-
|
|
|
|
1,415,715
|
|
|
|
(6)
|
|
|
1,415,715
|
|
|
Deferred income taxes
|
|
|
1,556,493
|
|
|
|
(1,556,493
|
)
|
|
|
(6)(9)
|
|
|
-
|
|
|
Other non-current liabilities
|
|
|
-
|
|
|
|
555,296
|
|
|
|
(6)
|
|
|
555,296
|
|
|
Long-term debt, net of current maturities
|
|
|
8,220,683
|
|
|
|
227,819
|
|
|
|
(7)
|
|
|
8,448,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
Preferred stock, $0.10 par value; 20,000,000 shares authorized; none issued or outstanding; attributes to be determined on issuance
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
Common stock, $0.0024 par value; 25,000,000 shares authorized; 10,353,155 shares issued
|
|
|
27,232
|
|
|
|
(2,384
|
)
|
|
|
(10)
|
|
|
24,848
|
|
|
Paid-in capital
|
|
|
7,158,821
|
|
|
|
(2,891,683
|
)
|
|
|
(10)
|
|
|
4,267,138
|
|
|
Retained earnings
|
|
|
65,716,761
|
|
|
|
(1,240,383
|
)
|
|
|
(1) (2)(3)(4)(6)(7)(9)
|
|
|
64,476,378
|
|
|
Treasury stock at cost (1,292,594 shares)
|
|
|
(11,931,850
|
)
|
|
|
2,894,067
|
|
|
|
(10)
|
|
|
(9,037,783
|
)
|
|
Accumulated other comprehensive loss (net of tax of $480,112)
|
|
|
(1,510,660
|
)
|
|
|
66,475
|
|
|
|
(9)
|
|
|
(1,444,185
|
)
|
|
Total stockholders' equity
|
|
|
59,460,304
|
|
|
|
(1,173,908
|
)
|
|
|
|
|
|
58,286,396
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
76,140,134
|
|
|
|
641,193
|
|
|
|
|
|
|
76,781,327
|
|
Tandy Leather Factory, Inc.
Consolidated Statement of Comprehensive Income (Loss)
Unaudited
|
|
|
Three Months Ended June 30, 2018
|
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
19,177,767
|
|
|
$
|
9,455
|
|
|
|
(4)
|
|
$
|
19,187,222
|
|
|
Cost of sales
|
|
|
6,059,325
|
|
|
|
894,405
|
|
|
|
(1)(2)(3)(4)(5)
|
|
|
6,953,730
|
|
|
Gross profit (loss)
|
|
|
13,118,442
|
|
|
|
(884,950
|
)
|
|
|
|
|
|
12,233,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
11,136,961
|
|
|
|
(485,575
|
)
|
|
|
(5)(7)
|
|
|
10,651,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
1,981,481
|
|
|
|
(399,375
|
)
|
|
|
|
|
|
1,582,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
78,182
|
|
|
|
-
|
|
|
|
|
|
|
78,182
|
|
|
Other, net
|
|
|
(46,741
|
)
|
|
|
(85,101
|
)
|
|
|
(9)
|
|
|
(131,842
|
)
|
|
Total other (income) expense
|
|
|
31,441
|
|
|
|
(85,101
|
)
|
|
|
|
|
|
(53,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,950,040
|
|
|
|
(314,274
|
)
|
|
|
|
|
|
1,635,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
509,948
|
|
|
|
(31,925
|
)
|
|
|
(6)
|
|
|
478,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,440,092
|
|
|
$
|
(282,349
|
)
|
|
|
|
|
$
|
1,157,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax
|
|
|
(294,598
|
)
|
|
|
9,824
|
|
|
|
(9)
|
|
|
(284,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
1,145,494
|
|
|
$
|
(272,525
|
)
|
|
|
|
|
$
|
872,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
$
|
0.13
|
|
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,180,076
|
|
|
|
9,180,076
|
|
|
|
|
|
|
9,180,076
|
|
|
Diluted
|
|
|
9,180,727
|
|
|
|
9,182,527
|
|
|
|
|
|
|
9,182,527
|
|
Tandy Leather Factory, Inc.
Consolidated Statement of Comprehensive Income (Loss)
Unaudited
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
39,466,685
|
|
|
$
|
221,115
|
|
|
|
(4)
|
|
$
|
39,687,800
|
|
|
Cost of sales
|
|
|
13,505,281
|
|
|
|
1,259,967
|
|
|
|
(1)(2)(3)(4)(5)(7)
|
|
|
14,765,248
|
|
|
Gross profit (loss)
|
|
|
25,961,404
|
|
|
|
(1,038,852
|
)
|
|
|
|
|
|
24,922,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
22,210,962
|
|
|
|
(924,653
|
)
|
|
|
(5)(7)
|
|
|
21,286,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
3,750,442
|
|
|
|
(114,199
|
)
|
|
|
|
|
|
3,636,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
142,824
|
|
|
|
-
|
|
|
|
|
|
|
142,824
|
|
|
Other, net
|
|
|
(85,613
|
)
|
|
|
(199,607
|
)
|
|
|
(9)
|
|
|
(285,220
|
)
|
|
Total other (income) expense
|
|
|
57,211
|
|
|
|
(199,607
|
)
|
|
|
|
|
|
(142,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
3,693,231
|
|
|
|
85,408
|
|
|
|
|
|
|
3,778,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
979,520
|
|
|
|
124,720
|
|
|
|
(6)
|
|
|
1,104,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,713,711
|
|
|
$
|
(39,312
|
)
|
|
|
|
|
$
|
2,674,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax
|
|
|
(272,807
|
)
|
|
|
(70,959
|
)
|
|
|
(9)
|
|
|
(343,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
2,440,904
|
|
|
$
|
(110,271
|
)
|
|
|
|
|
$
|
2,330,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.01
|
|
|
|
|
|
$
|
0.29
|
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.01
|
|
|
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,222,028
|
|
|
|
9,222,028
|
|
|
|
|
|
|
9,222,028
|
|
|
Diluted
|
|
|
9,222,533
|
|
|
|
9,223,086
|
|
|
|
|
|
|
9,223,086
|
|
Tandy Leather Factory, Inc.
Consolidated Statement of Cash Flows
Unaudited
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
As Restated
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,713,711
|
|
|
$
|
(39,312
|
)
|
|
|
|
$
|
2,674,399
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
878,955
|
|
|
|
1,139
|
|
|
|
(7)
|
|
|
880,094
|
|
|
(Gain) loss on disposal of assets
|
|
|
4,556
|
|
|
|
-
|
|
|
|
|
|
|
4,556
|
|
|
Stock-based compensation
|
|
|
52,688
|
|
|
|
-
|
|
|
|
|
|
|
52,688
|
|
|
Deferred income taxes
|
|
|
(96,057
|
)
|
|
|
(58,586
|
)
|
|
|
(6)(9)
|
|
|
(154,643
|
)
|
|
Exchange (gain) loss
|
|
|
(268,321
|
)
|
|
|
52,455
|
|
|
|
(9)
|
|
|
(215,866
|
)
|
|
Changes in operating assets and liablities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable-trade
|
|
|
(35,043
|
)
|
|
|
12,509
|
|
|
|
(7)
|
|
|
(22,534
|
)
|
|
Inventory
|
|
|
(709,072
|
)
|
|
|
20,638
|
|
|
|
(1)(2)(4)
|
|
|
(688,434
|
)
|
|
Prepaid expenses
|
|
|
98,203
|
|
|
|
67,654
|
|
|
|
(6)(7)
|
|
|
165,857
|
|
|
Other current assets
|
|
|
113,570
|
|
|
|
(113,570
|
)
|
|
|
(7)
|
|
|
-
|
|
|
Accounts payable-trade
|
|
|
(189,928
|
)
|
|
|
911,645
|
|
|
|
(7)
|
|
|
721,717
|
|
|
Accrued expenses and other liabilities
|
|
|
(1,258,506
|
)
|
|
|
(662,391
|
)
|
|
|
(4)(7)
|
|
|
(1,920,897
|
)
|
|
Income taxes
|
|
|
(255,695
|
)
|
|
|
53,044
|
|
|
|
(6)
|
|
|
(202,651
|
)
|
|
Other assets
|
|
|
(3,910
|
)
|
|
|
426,212
|
|
|
|
(7)
|
|
|
422,302
|
|
|
Total adjustments
|
|
|
(1,668,560
|
)
|
|
|
710,749
|
|
|
|
|
|
|
(957,811
|
)
|
|
Net cash provided by operating activities
|
|
|
1,045,151
|
|
|
|
671,437
|
|
|
|
|
|
|
1,716,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(421,861
|
)
|
|
|
-
|
|
|
|
|
|
|
(421,861
|
)
|
|
Proceeds from sales of assets
|
|
|
7,028
|
|
|
|
-
|
|
|
|
|
|
|
7,028
|
|
|
Net cash used in investing activities
|
|
|
(414,833
|
)
|
|
|
-
|
|
|
|
|
|
|
(414,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
982,938
|
|
|
|
-
|
|
|
|
|
|
|
982,938
|
|
|
Repurchase of treasury stock
|
|
|
(995,186
|
)
|
|
|
-
|
|
|
|
|
|
|
(995,186
|
)
|
|
Net cash used in financing activities
|
|
|
(12,248
|
)
|
|
|
-
|
|
|
|
|
|
|
(12,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
-
|
|
|
|
(417,036
|
)
|
|
|
(9)
|
|
|
(417,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
618,070
|
|
|
|
254,401
|
|
|
|
|
|
|
872,471
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
18,337,258
|
|
|
|
(254,401
|
)
|
|
|
|
|
|
18,082,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
18,955,328
|
|
|
$
|
-
|
|
|
|
|
|
$
|
18,955,328
|
|
|
3.
|
NOTES PAYABLE AND LONG-TERM DEBT
|
As previously disclosed, on October 14, 2019, our management, in consultation with the Audit Committee, determined that Tandy's previously issued Consolidated Financial Statements as of and for (i) the years ended
December 31, 2018 and 2017, (ii) the three and six-month periods ended June 30, 2018, (iii) the three and nine-month periods ended September 30, 2018, and (iv) the three-month period ended March 31, 2019, should no longer be relied upon due to
misstatements related to our accounting processes for inventory transactions, and we would restate such financial statements as part of the Restatement Process. See the Restatement Footnote for further information around the Restatement Process.
As a result, the Company did not timely file with the SEC its Quarterly Reports on Form 10-Q for the periods ended June 30, and September 30, 2019, March 31, June 30, and September 30, 2020, and March 31, 2021, or its Annual Report on Form 10-K for
fiscal 2019 and fiscal 2020 (collectively, the “Delinquent Filings”). Under the terms of the Promissory Note agreements the Company had in place with its primary bank, BOKF, NA d/b/a Bank of Texas (“BOKF”), we were required to provide BOKF
quarterly financial statements and compliance certificates. We were unable to provide these financial statements and compliance certificates for the Delinquent Filings noted above. In response, on April 2, 2020, BOKF provided notice under the
terms of the Promissory Note agreements that such Promissory Notes were cancelled. As of the date of cancellation, Tandy had no borrowings outstanding under these credit facilities or with any other lending institution.
On September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF which provided us with a working capital line of credit facility of up to $6 million which was secured by our inventory. On
August 20, 2018, this line of credit was amended to extend the maturity to September 18, 2020 and to reduce the interest rate by 0.35%, and on September 18, 2019, the maturity date was further extended through September 18, 2021. The Business Loan
Agreement contained covenants that required us to maintain a funded debt to EBITDA ratio of no greater than 1.5 to 1 and a Fixed Charge Coverage Ratio greater than or equal to 1.2 to 1. Both ratios were calculated quarterly on a trailing four
quarter basis. As of June 30, 2019 and December 31, 2018, there were no amounts drawn on this line of credit.
Also, on September 18, 2015, we executed a Promissory Note and Business Loan Agreement with BOKF which provided us with a line of credit facility of up to $10 million for the purpose of repurchasing shares of our
common stock pursuant to our stock repurchase program, announced in August 2015 and subsequently amended, which permitted us to repurchase up to 2.2 million shares of our common stock at prevailing market prices through August 2020. Subsequently,
this line of credit was amended to increase the availability from $10 million to $15 million for the repurchase of shares of our common stock pursuant to our stock repurchase program through the end of the draw down period which was the earlier of
August 9, 2020 or the date on which the entire amount was drawn. In addition, this Promissory Note was amended on August 20, 2018 to reduce the interest rate by 0.35%, and on September 18, 2019, the maturity date was further extended through
September 18, 2024. We were required to make monthly interest-only payments through September 18, 2020. After this date, the principal balance would have rolled into a 4-year term note with principal and interest paid on a monthly basis with a
maturity date of September 18, 2024. This Promissory Note was secured by a Deed of Trust on the real estate located at 1900 SE Loop 820, Fort Worth, Texas. For the six months ended June 30, 2018, we drew $1.0 million on this line which was used
to purchase 129,745 shares of our common stock pursuant to our stock repurchase program. As of December 31, 2018, the outstanding balance on this line of credit was $9.0 million. During the quarter ended March 31, 2019, we paid off this line of
credit with no pre-payment penalties incurred.
Prior to August 20, 2018, amounts drawn under either Promissory Note accrued interest at the London Interbank Offered Rate for U.S. dollars (commonly known as “LIBOR”) plus 1.85%. Beginning August 20, 2018, the
notes accrued interest at LIBOR plus 1.5% (3.931% at June 30, 2019). Neither line of credit carried commitment fees.
The amount outstanding under the above agreements consisted of the following:
|
|
|
June 30,
2019
|
|
|
December 31,
2018
Restated
|
|
|
Business loan agreement with BOKF – 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 1.5%;
matures September 18, 2024
|
|
$
|
-
|
|
|
$
|
8,968,018
|
|
|
|
|
|
|
|
|
|
|
|
|
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 1.5%; matures September 18, 2021
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
-
|
|
|
$
|
8,968,018
|
|
|
Less current maturities
|
|
|
-
|
|
|
|
519,516
|
|
|
TOTAL
|
|
$
|
-
|
|
|
$
|
8,448,502
|
|
During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small and Medium-sized Enterprises in order to facilitate the
continuation of employment and to attenuate the economic effects of the coronavirus (“COVID-19”) virus. This loan was provided for by the Spanish government as part of a COVID-19 relief program. The term of the agreement is five years and the
interest rate is fixed at 1.5%. Based on the terms of the loan agreement, we are required to make monthly interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement.
Our restated effective tax rate for the three and six-months ended June 30, 2019 was 26.6% and 26.6%, respectively, compared to 29.2% (restated) for the same periods in 2018. Our effective tax rate differs from the
federal statutory rate primarily due to U.S. state income tax expense, the difference in tax rates for loss carryback periods, foreign income/loss positions, expenses that are nondeductible for tax purposes, and differences in tax rates.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (“NOL”)
carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate
a refund of previously paid income taxes. The Company is evaluating the impact of the CARES Act and expects that the NOL carryback provision of the CARES Act will result in a cash tax benefit to the Company.
|
5.
|
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 of our common stock for restricted stock and restricted stock unit (“RSU”) awards, on or prior to June 2018, to our executive officers, non-employee directors and other key employees (of which, there were 167,593 shares available
for future awards as of June 30, 2019). 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 March 2019 and 2020, as part of their annual director compensation, certain of our non-employee directors were granted a total of 28,191 and 24,010
service-based RSUs, respectively, under the 2013 Plan which will vest ratably over the next three years provided that the participant is still on the board on the vesting date. In December 2019 certain of our key employees were granted a total of
17,988 service-based RSUs under the 2013 Plan which will vest ratably over the next three years provided that the participants are employed on the vesting date.
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 through June 2023.
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 Chief Executive Officer (“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 June 30, 2019 and 2018 is presented below:
|
|
|
Shares
|
|
|
Grant Fair Value
|
|
|
Balance, December 31, 2018
|
|
|
657,717
|
|
|
$
|
7.39
|
|
|
Granted
|
|
|
28,191
|
|
|
|
5.64
|
|
|
Forfeited
|
|
|
(5,319
|
)
|
|
|
5.64
|
|
|
Vested
|
|
|
(1,408
|
)
|
|
|
7.72
|
|
|
Balance, June 30, 2019
|
|
|
679,181
|
|
|
$
|
7.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
36,803
|
|
|
$
|
7.93
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Vested
|
|
|
(16,648
|
)
|
|
|
8.22
|
|
|
Balance, June 30, 2018
|
|
|
20,155
|
|
|
$
|
7.93
|
|
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 $0.4 million for the
three and six-month periods ended June 30, 2019, respectively, and less than $0.1 million and $0.1 million for the three and six-month periods ended June 30, 2018, respectively.
As of June 30, 2019, the Company has concluded it is not probable that the performance conditions related to performance-based RSUs will be achieved, and as a result no compensation expense related to
performance-based RSUs has been recorded.
As of June 30, 2019, there was unrecognized compensation cost related to non-vested, service-based restricted stock and RSU awards of $3.2 million which will be recognized in each of the following years:
|
Unrecognized Expense
|
|
|
2019
|
|
$
|
404,977
|
|
|
2020
|
|
|
777,537
|
|
|
2021
|
|
|
758,325
|
|
|
2022
|
|
|
721,284
|
|
|
2023
|
|
|
509,910
|
|
|
|
|
$
|
3,172,033
|
|
We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs. For the six months ended June 30, 2019, we issued 1,408 shares resulting from the vesting of restricted
stock. We do not use cash to settle equity instruments issued under stock-based compensation awards.
Basic earnings per share (“EPS”) are computed based on the weighted average number of common shares outstanding during the period. Diluted EPS includes additional common shares that would have been outstanding if
potential common shares with a dilutive effect, such as stock awards from the Company’s restricted stock plan, had been issued. Anti-dilutive securities represent potentially dilutive securities which are excluded from the computation of diluted
EPS as their impact would be anti-dilutive. Diluted EPS is computed using the treasury stock method.
The following table sets forth the computation of basic and diluted EPS for the three and six months ended June 30, 2019 and 2018:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2019
(1)
|
|
|
2018
Restated
|
|
|
2019
|
|
|
2018
Restated
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(875,667
|
)
|
|
$
|
1,157,743
|
|
|
$
|
644,144
|
|
|
$
|
2,674,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares ouststanding
|
|
|
8,933,648
|
|
|
|
9,180,076
|
|
|
|
8,971,490
|
|
|
|
9,222,028
|
|
|
Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan
|
|
|
-
|
|
|
|
18
|
|
|
|
3,510
|
|
|
|
-
|
|
|
Dilutive effect of service-based restricted stock awards granted to employees under the Plan
|
|
|
-
|
|
|
|
2,433
|
|
|
|
-
|
|
|
|
1,058
|
|
|
Diluted weighted-average common shares outstanding
|
|
|
8,933,648
|
|
|
|
9,182,527
|
|
|
|
8,975,000
|
|
|
|
9,223,086
|
|
(1) For the three months ended June 30, 2019, there were 2,290 shares excluded from the diluted EPS calculation because the impact of their assumed vesting would be
anti-dilutive due to a net loss in those periods.
|
7.
|
COMMITMENTS AND CONTINGENCIES
|
Legal Proceedings
We are periodically involved in various litigation that arises in the ordinary course of business and operations. There are no such matters pending that we expect to have a material impact on our financial position
or operating results. Legal costs associated with the resolution of claims, lawsuits, and other contingencies are expensed as incurred.
In November 2019, a class action lawsuit seeking unspecified damages was brought by a stockholder in the Federal District Court in Los Angeles, California, and subsequently transferred to the Federal District Court
for the Northern District of Texas, against the Company and members of its current and former management relating to our announcement of the circumstances leading to our restatement. We believe that suit was without merit, and the suit was
withdrawn by the plaintiff in April 2020; however, there can be no assurance that additional litigation against the Company and/or its management or Board of Directors might not be threatened or brought in connection with matters related to our
restatement.
Delisting of Company’s Common Stock
As previously disclosed, the Company was unable to timely file the Delinquent Filings due to the Restatement Process. As a result, on February 18, 2020, the Company received a notice from Nasdaq indicating that, unless the Company timely
requested a hearing before a Nasdaq Hearings Panel (the “Panel”), the Company’s common stock would be subject to suspension and delisting from Nasdaq due to non-compliance with Nasdaq Listing Rule 5250(c)(1). On May 1, 2020, the Panel granted the
Company’s request to remain listed on Nasdaq, subject to the Company filing all current and overdue quarterly and annual reports with the Securities and Exchange Commission on or before August 10, 2020. Because the Restatement Process was not
complete by such date, Nasdaq suspended trading in our shares on Nasdaq as of August 13, 2020. Our stock has since traded on the OTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLFA”. Nasdaq denied our appeal of
this decision, resulting in our stock being formally delisted on February 9, 2021. We intend to reapply for Nasdaq listing once the Company has made the required Exchange Act filings.
SEC Investigation
The Company has self-reported to the SEC information concerning the internal investigation of accounting matters described in the Explanatory Note and in Note 2, “Restatement of Previously Issued Consolidated
Financial Statements” of this Form 10-Q. Subsequently, the Division of Enforcement of the SEC informed the Company that it had initiated an investigation into the Company’s historical accounting practices. The Company is fully cooperating with
the investigation and is in discussions with the SEC regarding a possible negotiated resolution. In October 2020, an agreement (which was updated on May 12, 2021) in principle was reached on the material terms of such a resolution, which includes
an agreement by the Company to pay a $0.2 million penalty. However, this provisional resolution is still subject to finalizing the necessary documents and obtaining final approval from the SEC, which cannot be assured. Accordingly, as of December
31, 2020, a $0.2 million liability has been recorded in accrued expenses and other liabilities on our Consolidated Balance Sheet.
The Company leases certain real estate for its retail store locations under long-term lease agreements. For leases effective on or after January 1, 2019, the Company determines if an arrangement is a lease at
inception and recognizes operating lease assets and lease liabilities at commencement date based on the present value of lease payments over the lease term. The present value of the Company’s 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 the Company will exercise such an option. The exercise of lease renewal options is generally at the Company’s discretion.
Payments based on a change in an index or market rates are not considered in the determination of lease payments for purposes of measuring the related lease liability. The Company discounts lease payments using its incremental borrowing rate based
on information available as of the measurement date. Subsequent to the recognition of its operating lease assets and lease liabilities, the Company recognizes lease expense related to its operating leases on a straight-line basis over the lease
term.
None of the Company’s lease agreements contain contingent rental payments, material residual value guarantees or material restrictive covenants. The depreciable life of related leasehold improvements is based on the
shorter of the useful life or the lease term. As of September 30, 2020, the Company had no finance leases, no sublease agreements, and no lease agreements in which it is named as a lessor. During the fourth quarter of 2020, the Company entered
into a few small finance leases.
The Company performs interim reviews of its long-lived assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable. Excluding the January 1,
2019 impairment charge to retained earnings upon the adoption of Topic 842, no impairment expense associated with operating lease assets was recognized during the three and six months ended June 30, 2019.
Additional information regarding the Company’s operating leases is as follows:
|
Leases
|
Balance Sheet Classification
|
|
June 30, 2019
|
|
|
Assets:
|
|
|
|
|
|
Non-current
|
Operating lease assets
|
|
$
|
15,657,859
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Current
|
Operating lease liabilities
|
|
$
|
3,993,352
|
|
|
Non-current
|
Operating lease liabilities, noncurrent
|
|
|
12,204,359
|
|
|
Total lease liabilities
|
|
|
$
|
16,197,711
|
|
|
Lease Cost
|
Income Statement Classification
|
|
Three Months Ended
June 30, 2019
|
|
|
Six Months Ended
June 30, 2019
|
|
|
Operating lease cost
|
Operating expenses
|
|
$
|
1,042,057
|
|
|
$
|
2,088,711
|
|
|
Variable lease cost (1)
|
Operating expenses
|
|
|
218,190
|
|
|
|
468,994
|
|
|
Total lease cost
|
|
|
$
|
1,260,247
|
|
|
$
|
2,557,705
|
|
(1) Variable lease cost includes payments for certain real estate taxes, insurance, common area maintenance, and other charges related to lease agreements, which are not included in the measurement of the operating
lease liabilities.
|
Maturity of Lease Liabilities
|
|
June 30, 2019
|
|
|
2019
|
|
$
|
2,048,191
|
|
|
2020
|
|
|
3,888,665
|
|
|
2021
|
|
|
3,279,719
|
|
|
2022
|
|
|
2,408,708
|
|
|
2023
|
|
|
1,721,031
|
|
|
Thereafter
|
|
|
5,001,634
|
|
|
Total lease payments (2)
|
|
$
|
18,347,948
|
|
|
Less: Interest
|
|
|
(2,150,237
|
)
|
|
Present value of lease liabilities
|
|
$
|
16,197,711
|
|
|
(2) Operating lease payments exclude $0.3 million of legally binding minimum lease payments for leases signed, but not yet commenced as of June 30, 2019.
|
As of June 30, 2019, the weighted average remaining lease term for our operating leases was 6.2 years, and the weighted average discount rate used to measure our operating leases was 4.1%.
|
Other Information
|
|
Three Months Ended
June 30, 2019
|
|
|
Six Months Ended
June 30, 2019
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
Operating cash flows used in operating leases
|
|
$
|
1,016,719
|
|
|
$
|
2,032,013
|
|
|
|
|
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease obligations
|
|
|
-
|
|
|
|
18,076,962
|
|
COVID-19
In late 2019, COVID-19 was detected in Wuhan, China and has since spread to other parts of the world, including the U.S. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic.
Federal, state, and local governments implemented various restrictions, including travel restrictions, border closings, restrictions on public gatherings, quarantining of people who may have been exposed to the virus, shelter-in-place restrictions
and limitations on business operations. As previously announced and for the health and safety of employees and customers, on March 17, 2020, the Company made the decision to begin temporary store closures. The
onset of the COVID-19 pandemic in March 2020 temporarily shifted our strategic focus to company survival and cash preservation. We began closing stores on March 18, 2020 and by April 2, 2020, we temporarily
closed all stores to the public. While we pivoted to serve customers online, the Company experienced significant decreases in demand for its products in Q2 and Q3 of 2020, negatively impacting net sales.
In response, we took immediate action to mitigate the impact of temporary store closures on our cash flows by: (i) furloughing 406 Tandy employees, comprising two-thirds of the
Tandy work force, (ii) temporarily cutting corporate salaries, with deeper cuts for the Executive Leadership Team, (iii) negotiating abatements, deferrals and other favorable lease terms with landlords, and (iv) negotiating longer payment terms
with our key product vendors.
Due to our size, we were not eligible for the Paycheck Protection Program administered through the Small Business Administration. Also, due to our not being current on financial
filings with the SEC, we were not able to obtain loans under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. During the second quarter of 2020, the Company borrowed $0.4 million through the Spanish
government’s Institute of Official Credit Guarantee for Small and Medium-sized Enterprises, a COVID-19 relief program. The term of the agreement is for five years and the interest rate is fixed at 1.5%. Based on the terms of the loan agreement,
we make interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement. In Canada, we participated in the Canada Emergency Commercial Rent Assistance (“CECRA”) program for
rent relief. This program provided for a 75% reduction in the store rent for included stores for the months of April, May and June 2020. We received total rent abatements under the program of $0.05 million.
During the second quarter of 2020 as leases expired or early terminations were negotiated, we permanently closed eight stores where we believe we can retain a majority of customers through geographically proximate
stores and/or our enhanced website platform, creating additional savings in operating expenses. After these permanent closures, 106 stores remained, including ten in Canada and one in Spain.
On May 22, 2020, our Fort Worth flagship store reopened to the public, the beginning of a phased approach to reopening our stores with limited hours, new protocols for sanitizing,
social distancing, wearing masks and taking daily temperatures of employees. During the third quarter of 2020, all 106 of Tandy’s stores had reopened to the public and the store re-openings were well received by our employees and
customers. During the fourth quarter of 2020 through the present, we have continued to manage through the pandemic as we have seen periodic spikes in COVID-19 infections and have been forced to close certain
stores or move certain stores to “curbside only” operations.
While we previously fulfilled our web orders out of our retail stores, we have built a centralized web fulfillment capability in our Fort Worth distribution center and will be fulfilling web
orders primarily through Fort Worth going forward. Both our e-commerce business and stores, during the limited period since reopening, have been performing above last year sales levels, but the future remains uncertain, and more store closures
and/or the ongoing unemployment crisis could cause a material negative impact on future sales.
As part of the Company’s accounting policy for long-lived asset impairments, we believe the COVID-19 impact on the Company’s results of operations, cash flows and financial position and the ongoing uncertainty the
virus has created around future operating results represented a triggering event during the first quarter of 2020 and continuing throughout the remainder of 2020. For fiscal year 2020, the Company expects to record impairment expense of $1.1
million, primarily related to property and equipment and operating lease assets for certain stores that are projected to underperform to a level where the cash flows they generate will not be sufficient to cover their respective asset carry values.
Share Repurchase Program
On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5 million of its common stock between August 9, 2020 and July 31, 2022. The Company's previous share repurchase program expired
in August 2020. The Company will be able to resume share repurchases in the open market following completion of the Company's financial restatement and making all required periodic filings with the SEC.
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 of these shares took place on February 1, 2021. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock.