1.	BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES

Tandy Leather Factory, Inc. (we, us, our, Tandy, or the Company) is a specialty retailer of leather and leathercraft related items, offering a broad range of leather, quality tools, hardware, accessories, liquids, lace, kits and teaching materials. We sell our products through company-owned stores and through orders generated from our website, www.tandyleather.com. We also manufacture some of the leather lace and do-it-yourself kits that are sold in our stores and website.

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

March 31, 2019

and

December 31, 2018,

and our results of operations and cash flows for the

three

-month periods ended

March 31, 2019

and

2018.

Operating results for the

three

-month period ended

March 31, 2019

are

not

necessarily indicative of the results that

may

be expected for the year ending

December 31, 2019.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form

-K for the year ended

December 31, 2018.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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. Key actions include developing a new operating model to better serve our retail and commercial customers, as well as reducing our store management structure from

eleven

districts reporting to

two

regional mangers into

eight

zones reporting to a single vice president. As a result of these changes in the management of our retail stores and our decision to substantially close all of our international stores, with only

one

international store expected to remain open in Spain, we have concluded that there is currently only

one

reportable segment. All prior year data discussed throughout this Form

-Q has been retrospectively revised to conform to the new reporting structure. There is

change to our consolidated financial position or results.

Inventory

Inventory is stated at the lower of cost (

first

-in,

first

out) or net realizable value. The calculation of cost includes merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the expected selling prices less reasonable costs to sell, provisions are made to reduce the carrying amount of the inventory.

We regularly review all inventory items to determine if there are damaged goods (e.g. for leather, excessive scars or damage from UV light), to determine what items should be eliminated from the product line (e.g. item is slow moving, supplier is unable provide acceptable quality or quantity, and to maintain freshness in the product line) and to ensure that all necessary pricing actions are taken to adequately value our inventory at the lower of cost or net realizable value by recording permanent markdowns on our on-hand inventory.

Since the determination of net realizable value of inventory involves both estimation and judgment 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 at substantially all locations at least

two

-to-

four

times annually, at which time actual results are reflected in the financial statements.

	March 31, 20 1 9		December 31, 20 1 8
Inventory on hand:
Finished goods held for sale	$	28,829,685	$	31,718,769
Raw materials and work in process		891,541		917,966
Inventory in transit		732,096		1,119,541
Merchandise expected to be returned		111,000		111,000
Total inventory	$	30,564,322	$	33,867,276

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

not

amortized, but is 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. During the

first

quarter of

2019,

indicators of impairment were identified. Further, the only change in our goodwill for the

three

-month periods ended

March 31, 2019

and

2018

resulted from foreign currency translation of

$2,180

and

$2,596,

respectively.

Other intangibles consist of trademarks and non-compete agreements which are amortized on a straight-line basis. Amortization expense for each of the succeeding

years is estimated to be less than

$3,000

per year.

Revenue Recognition

Our revenue is earned from sales of merchandise and generally occur via

two

methods: (

) at the store counter, and (

) 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 are excluded from revenue, while shipping charged to our customers is included in revenue.

Prior to

November 2018,

we offered an unconditional satisfaction guarantee to all customers and accepted all product returns. Net sales represent gross sales less negotiated price allowances, product returns, and allowances for defective merchandise. Beginning in

November 2018,

we changed our policy for returns to allow merchandise to be returned under most circumstances up to

days after purchase. At

March 31, 2019,

we have established a sales return reserve of

$184,000

based on historical customer return behavior, included in Accrued Expenses and Other Liabilities, while an estimated value of the merchandise expected to be returned of

$111,000

has been included in Inventory in the accompanying Consolidated Balance Sheet.

Effective

January 1, 2018,

in conjunction with the adoption of Accounting Standards Codification

606,

"Revenue from Contracts with Customers" ("ASC

606"

), we began recording a gift card liability on the date we issue a gift card to a customer, of which

$168,311

was recognized on

January 1, 2018

as the cumulative effect of an accounting change. We record revenue and reduce gift card liability as customers redeem gift cards. In addition, for gift card breakage, we recognize a proportionate amount for expected unredeemed gift cards over the expected customer redemption period, which is

one

year. At

March 31, 2019,

our gift card liability, included in accrued expenses and other liabilities, totaled

$119,492.

Disaggregated Revenue

In the following table, revenue is disaggregated by our major customer groups for the

three

months ended

March 31:

	201 9			201 8
RETAIL (end users, consumers, individuals)		62	%		62	%
NON-RETAIL (hospitals, youth organizations, resellers, distributors, businesses)		38	%		38	%
		100	%		100	%

Net sales for geographic areas were as follows for the

three

months ended

March 31:

	201 9		201 8
United States	$	17,899,150	$	17,348,173
Canada		1,742,897		1,743,174
All other countries		1,142,605		1,197,571
	$	20,784,652	$	20,288,918

Geographic sales information is based on the location of the customer.

single foreign country, except for Canada, accounted for any material amount of our consolidated net sales for the

three

-month periods ended

March 31, 2019

and

2018.

Short Term Investments.

We determine the appropriate classification of investments in debt securities at the time of purchase, and we re-evaluate that determination at each balance sheet date. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded as either short term or long term on the consolidated balance sheet, based on contractual maturity date, and are stated at amortized cost.

March 2019,

we purchased

$5.0

million of US Treasuries with maturities less than

year, and we have classified these debt securities as held to maturity. Such investments are presented in the accompanying consolidated balance sheet as short term, as their maturities are less than

year and are recorded at amortized cost.

Other than the initial purchase of these securities in early

March 2019,

there have been

other transactions (e.g.

other purchases or sales).

Comprehensive Income (

loss

Comprehensive income includes net income and certain other items that are recorded directly to Stockholders’ Equity. Our only source of other comprehensive income is foreign currency translation adjustments.

Recent Accounting Pronouncements.

We adopted the ASU

2016

02,

“Leases,” as of

January 1, 2019

using the current period adjustment method and recorded a cumulative effect adjustment to our

January 1, 2019

opening balance of retained earnings. We elected the package of practical expedients permitted under the transition guidance, which, among other things, allowed us to carry forward the historical lease classification. In addition, we elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases which resulted in the determination that most renewal options would

not

be reasonably certain in determining the expected lease term. We also made an accounting policy election to keep leases with an initial term of

months or less off of the balance sheet, as well as to include executory costs (e.g. real estate taxes, insurance and maintenance) when fixed in the lease contract as part of the minimal lease payments. We also elected the practical expedient to

not

assess whether existing or expired land easements that were

not

previously accounted for as leases are or contain a lease.

Adoption of this new lease standard resulted in the recording of operating lease assets and lease liabilities of approximately

$6.1

million and

$6.5

million, respectively, as of

January 1, 2019.

The difference between these amounts was recorded as an adjustment to retained earnings. This lease standard will

not

materially affect our consolidated net income and will have

impact on our cash flow or our compliance with debt covenants under our current agreements.

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 is currently evaluating the expected impact of this guidance on the Company’s consolidated financial statements.

January 2017,

the FASB issued ASU

2017

04,

“Intangibles and Other (Topic

350

): Simplifying the Test for Goodwill Impairment”, which eliminates the requirement to calculate the implied fair value of goodwill but rather requires an entity to record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after

December 15, 2019.

Early adoption is permitted. The Company does

not

expect the adoption of this guidance will have a material impact on its consolidated financial statements.