0001140361-21-042373.txt : 20211220 0001140361-21-042373.hdr.sgml : 20211220 20211220082022 ACCESSION NUMBER: 0001140361-21-042373 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 50 CONFORMED PERIOD OF REPORT: 20210930 FILED AS OF DATE: 20211220 DATE AS OF CHANGE: 20211220 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANDY LEATHER FACTORY INC CENTRAL INDEX KEY: 0000909724 STANDARD INDUSTRIAL CLASSIFICATION: LEATHER & LEATHER PRODUCTS [3100] IRS NUMBER: 752543540 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12368 FILM NUMBER: 211503706 BUSINESS ADDRESS: STREET 1: 1900 SE LOOP 820 CITY: FT WORTH STATE: TX ZIP: 76140 BUSINESS PHONE: 8178723200 MAIL ADDRESS: STREET 1: 1900 SE LOOP 820 CITY: FT WORTH STATE: TX ZIP: 76140 FORMER COMPANY: FORMER CONFORMED NAME: LEATHER FACTORY INC DATE OF NAME CHANGE: 19930723 10-Q 1 brhc10031870_10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
Form 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ______________

Commission File Number 1-12368
graphic
TANDY LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
75-2543540
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

1900 Southeast Loop 820, Fort Worth, Texas  76140
(Address of principal executive offices) (Zip code)

(817) 872-3200
(Registrant’s telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.0024
TLFA
N/A*

*Tandy Leather Factory, Inc.’s common stock previously traded on the NASDAQ Global Market under the symbol “TLF”. On August 13, 2020, Tandy Leather Factory, Inc.’s common stock began trading on the OTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLFA”. Deregistration under Section 12(b) of the Exchange Act of 1934, as amended, became effective on May 10, 2021.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer ☐
Non-accelerated filer
 
Accelerated filer ☐
Smaller reporting company
   
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

As of December 17, 2021, the registrant had 8,543,231 shares of Common Stock, par value $0.0024 per share, outstanding.



 TANDY LEATHER FACTORY, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021

TABLE OF CONTENTS

2
 
2
   
6
 
18
 
28
     
33
 
33
 
33
 
33
 
34
   
36

Cautionary Statement Regarding Forward-Looking Statements and Information

The following discussion, as well as other portions of this Form 10-Q, contains forward-looking statements that reflect our plans, estimates and beliefs.  Any such forward-looking statements (including, but not limited to, statements to the effect that Tandy Leather Factory, Inc. (“TLFA”) or its management “anticipates,” “plans,” “estimates,” “expects,” “believes,” “intends,” and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our Consolidated Financial Statements and related notes contained elsewhere in this report.  These forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and should be read carefully because they involve risks and uncertainties.  We assume no obligation to update or otherwise revise these forward-looking statements, except as required by law.  Specific examples of forward-looking statements include, but are not limited to, statements regarding our forecasts of financial performance, share repurchases, store openings or store closings, capital expenditures and working capital requirements.  Our actual results could materially differ from those discussed in such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and particularly in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.  Unless the context otherwise indicates, references in this Form 10-Q to “TLFA,” “we,” “our,” “us,” the” Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries.
PART I.  FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements.

Tandy Leather Factory, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data and per share data)

   
September 30,
2021
Unaudited
   
 December 31,
2020

 
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
 
$
6,086
   
$
10,329
 
Accounts receivable-trade, net of allowance for doubtful accounts of $14 at September 30, 2021 and December 31, 2020
   
464
     
350
 
Inventory
   
43,725
     
36,779
 
Income tax receivable
   
1,391
     
2,753
 
Prepaid expenses
   
709
     
536
 
Other current assets
   
252
     
265
 
Total current assets
   
52,627
     
51,012
 
                 
Property and equipment, at cost
   
27,950
     
27,468
 
Less accumulated depreciation
   
(15,839
)
   
(15,078
)
Property and equipment, net
   
12,111
     
12,390
 
                 
Operating lease assets
   
10,588
     
11,772
 
Finance lease assets
   
39
     
44
 
Deferred income taxes
   
63
     
82
 
Other intangibles, net of accumulated amortization of $548 at September 30, 2021 and December 31, 2020
   
6
     
6
 
Other assets
   
393
     
387
 
TOTAL ASSETS
 
$
75,827
   
$
75,693
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
Accounts payable-trade
 
$
7,034
   
$
5,737
 
Accrued expenses and other liabilities
   
3,758
     
3,642
 
Current portion of operating lease liabilities
   
3,049
     
3,530
 
Current portion of finance lease liabilities
   
15
     
14
 
Current maturities of long-term debt
    46       -  
Total current liabilities
   
13,902
     
12,923
 
                 
Uncertain tax positions
   
393
     
393
 
Other non-current liabilities
   
463
     
463
 
Operating lease liabilities, non-current
   
8,362
     
9,245
 
Finance lease liabilities, non-current
   
18
     
29
 
Long-term debt, net of current maturities
   
377
     
446
 
                 
COMMITMENT AND CONTINGENCIES (Note 6)
     
     
 
                 
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; 10,088,297 and 10,575,182 shares issued at September 30, 2021 and December 31, 2020, respectively; 8,663,921 and 9,150,806 shares outstanding at September 30, 2021 and December 31, 2020, respectively
   
24
     
25
 
Paid-in capital
   
4,828
     
5,924
 
Retained earnings
   
58,579
     
57,310
 
Treasury stock at cost (1,424,376 shares at September 30, 2021 and December 31, 2020)
   
(9,773
)
   
(9,773
)
Accumulated other comprehensive loss, net of tax
   
(1,346
)
   
(1,292
)
Total stockholders' equity
   
52,312
     
52,194
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
75,827
   
$
75,693
 

The accompanying notes are an integral part of these Consolidated Financial Statements.

Tandy Leather Factory, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
Unaudited
(in thousands, except share and per share data)

   
Three Months Ended September 30,
    Nine Months Ended September 30  
   
2021
   
2020
    2021
    2020
 
                         
Net sales
 
$
19,281
   
$
15,990
    $ 59,241     $ 42,281  
Cost of sales
   
8,192
     
6,701
      24,685       17,883  
Gross profit
   
11,089
     
9,289
      34,556       24,398  
                                 
Operating expenses
   
11,078
     
10,528
      32,856       29,204  
Impairment expense
   
-
     
-
      -       1,078  
                                 
Income (loss) from operations
   
11
     
(1,239
)
    1,700       (5,884 )
                                 
Other (income) expense:
                               
Interest expense
   
2
     
2
      12       2  
Other, net
   
23
     
29
      37       (75 )
Total other (income) expense
   
25
     
31
      49       (73 )
                                 
Income (loss) before income taxes
   
(14
)
   
(1,270
)
    1,651       (5,811 )
                                 
Provision (benefit) for income taxes
   
2
     
(288
)
    382       (1,316 )
                                 
Net income (loss)
 
$
(16
)
 
$
(982
)
  $ 1,269     $ (4,495 )
                                 
Foreign currency translation adjustments, net of tax
   
(90
)
   
133
      (54 )     (83 )
                                 
Comprehensive income (loss)
 
$
(106
)
 
$
(849
)
  $ 1,215     $ (4,578 )
                                 
Net income (loss) per common share:
                               
Basic
 
$
-
   
$
(0.11
)
  $ 0.15     $ (0.50 )
Diluted
 
$
-
   
$
(0.11
)
  $ 0.15     $ (0.50 )
                                 
Weighted average number of shares outstanding:
                               
Basic
   
8,663,921
     
9,042,991
      8,712,939       9,038,415  
Diluted
   
8,663,921
     
9,042,991
      8,718,068       9,038,415  

The accompanying notes are an integral part of these Consolidated Financial Statements.

Tandy Leather Factory, Inc.
Consolidated Statements of Cash Flows
Unaudited
(in thousands)

   
For the Nine Months Ended September 30,
 
   
2021
   
2020
 
Cash flows from operating activities:
           
Net income (loss)
 
$
1,269
   
$
(4,495
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
               
Depreciation and amortization
   
805
     
781
 
Operating lease asset amortization
   
2,408
     
2,425
 
Impairment of long-lived assets
   
-
     
1,078
 
(Gain) loss on disposal of assets
   
(11
)
   
143
 
Stock-based compensation
   
593
     
629
 
Deferred income taxes
   
19
     
(176
)
Exchange (gain) loss
   
23
     
(1
)
Changes in operating assets and liabilities:
               
Accounts receivable-trade
   
(104
)
   
15
 
Inventory
   
(6,584
)
   
(10,757
)
Prepaid expenses
   
(173
)
   
423
 
Other current assets
   
13
     
59
 
Accounts payable-trade
   
830
     
1,481
 
Accrued expenses and other liabilities
   
118
     
244
 
Income taxes, net
   
1,357
     
(1,082
)
Other assets
   
(6
)
   
(2,488
)
Operating lease liabilities
   
(2,585
)
   
(2,548
)
Total adjustments
   
(3,297
)
   
(9,774
)
Net cash used in operating activities
   
(2,028
)
   
(14,269
)
                 
Cash flows from investing activities:
               
Purchase of property and equipment
   
(523
)
   
(1,164
)
Purchase of short-term investments
   
-
     
(1,697
)
Proceeds from sales of assets
   
11
     
1
 
Proceeds from sales of short-term investments
   
-
     
10,910
 
Net cash provided by (used in) investing activities
   
(512
)
   
8,050
 
                 
Cash flows from financing activities:
               
Proceeds from long-term debt
    -       410  
Payment of finance lease obligations
   
(10
)
   
-
 
Purchase of vested stock for employee payroll tax withholding
    (15 )     -  
Purchase of common stock
   
(1,675
)
   
-
 
Net cash provided by (used in) financing activities
   
(1,700
)
   
410
 
                 
Effect of exchange rate changes on cash and cash equivalents
   
(3
)
   
60
 
                 
Net decrease in cash and cash equivalents
   
(4,243
)
   
(5,749
)
Cash and cash equivalents, beginning of period
   
10,329
     
15,905
 
                 
Cash and cash equivalents, end of period
 
$
6,086
   
$
10,156
 

The accompanying notes are an integral part of these Consolidated Financial Statements.

Tandy Leather Factory, Inc.
Consolidated Statements of Stockholders' Equity
Unaudited
(in thousands, except share data)


 
Number of Shares Common Stock Outstanding
   
Par Value
   
Additional Paid-in Capital
   
Treasury Stock
   
Retained Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
 
BALANCE, December 31, 2020
   
9,150,806
   
$
25
   
$
5,924
   
$
(9,773
)
 
$
57,310
   
$
(1,292
)
 
$
52,194
 
Stock-based compensation expense
   
-
     
-
     
183
     
-
     
-
     
-
     
183
 
Issuance of restricted stock
   
16,080
     
-
     
-
     
-
     
-
     
-
     
-
 
Repurchase of common stock
   
(500,000
)
   
(1
)
   
(1,674
)
   
-
     
-
     
-
     
(1,675
)
Net income
   
-
     
-
     
-
     
-
     
745
     
-
     
745
 
Foreign currency translation adjustments, net of tax
   
-
     
-
     
-
     
-
     
-
     
(33
)
   
(33
)
Balance, March 31, 2021
   
8,666,886
   
$
24
   
$
4,433
   
$
(9,773
)
 
$
58,055
   
$
(1,325
)
 
$
51,414
 
Stock-based compensation expense
   
-
     
-
     
204
     
-
     
-
     
-
     
204
 
Purchase of vested stock for employee payroll tax withholding
   
(2,965
)
   
-
     
(15
)
   
-
     
-
     
-
     
(15
)
Net income
   
-
     
-
     
-
     
-
     
540
     
-
     
540
 
Foreign currency translation adjustments, net of tax
   
-
     
-
     
-
     
-
     
-
     
69
     
69
 
Balance, June 30, 2021
   
8,663,921
   
$
24
   
$
4,622
   
$
(9,773
)
 
$
58,595
   
$
(1,256
)
 
$
52,212
 
Stock-based compensation expense
    -
      -
      206
      -
      -
      -
      206
 
Net loss
    -       -       -       -       (16 )     -       (16 )
Foreign currency translation adjustments, net of tax
    -       -       -       -       -       (90 )     (90 )
Balance, September 30, 2021
    8,663,921     $
24     $
4,828     $
(9,773 )   $
58,579     $
(1,346 )   $
52,312  
                                                         
Balance, December 31, 2019
   
9,022,187
   
$
25
   
$
5,037
   
$
(9,773
)
 
$
62,211
   
$
(1,081
)
 
$
56,419
 
Stock-based compensation expense
   
-
     
-
     
228
     
-
     
-
     
-
     
228
 
Issuance of restricted stock
   
20,804
     
-
     
-
     
-
     
-
     
-
     
-
 
Net loss
   
-
     
-
     
-
     
-
     
(1,738
)
   
-
     
(1,738
)
Foreign currency translation adjustments, net of tax
   
-
     
-
     
-
     
-
     
-
     
(346
)
   
(346
)
Balance, March 31, 2020
   
9,042,991
   
$
25
   
$
5,265
   
$
(9,773
)
 
$
60,473
   
$
(1,427
)
 
$
54,563
 
Stock-based compensation expense
   
-
     
-
     
183
     
-
     
-
     
-
     
183
 
Net loss
   
-
     
-
     
-
     
-
     
(1,775
)
   
-
     
(1,775
)
Foreign currency translation adjustments, net of tax
   
-
     
-
     
-
     
-
     
-
     
130
     
130
 
Balance, June 30, 2020
   
9,042,991
   
$
25
   
$
5,448
   
$
(9,773
)
 
$
58,698
   
$
(1,297
)
 
$
53,101
 
Stock-based compensation expense
    -
      -
      218
      -
      -
      -
      218
 
Net loss
    -       -       -       -       (982 )     -       (982 )
Foreign currency translation adjustments, net of tax
    -       -       -       -       -       133       133  
Balance, September 30, 2020
    9,042,991     $
25     $
5,666     $
(9,773 )   $
57,716     $
(1,164 )   $
52,470  

The accompanying notes are an integral part of these Consolidated Financial Statements.

TANDY LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES

Tandy Leather Factory, Inc. (“TLFA,” “we,” “our,” “us,” the” Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries) is one of the world’s largest specialty retailers of leather and leathercraft-related items.  Founded in 1919 in Fort Worth, Texas, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere.  Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.

What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, and a hub for the local leathercrafting community, and our 100-year heritage.  We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate.

We sell our products primarily through company-owned stores and through orders generated from our 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 also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly.  We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.

The Company currently operates a total of 106 retail stores.  There are 95 stores in the U.S., ten stores in Canada and one store in Spain.

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 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. With this filing of our 2021 third quarter Form 10-Q, we are current in our SEC filings and will be reapplying for Nasdaq listing promptly.

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 September 30, 2021 and December 31, 2020, our results of operations for the three and nine month periods ended September 30, 2021 and 2020, our cash flows for the nine month periods ended September 30, 2021 and 2020, and our statements of stockholders’ equity as of September 30, 2021 and 2020.  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 Form 10-K for the year ended December 31, 2020.

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 only online, the Company experienced significant decreases in demand for its products in the second and third quarters 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.  However, under the CARES Act we were eligible to participate in the payroll tax deferral program, and we deferred $0.6 million in payroll tax with $0.3 million to be paid by December 31, 2021, and the remaining $0.3 million to be paid by December 31, 2022. 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.

Nine stores were permanently closed during 2020 as leases expired or early terminations were negotiated, including at locations where we believe we can retain a majority of customers through geographically proximate stores and/or our enhanced website platform.  After these permanent closures, Tandy operates 106 stores, 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.  While customer response to our store reopening has been good, since then, various spikes in local infection rates and the “wave” created by the Delta variant of COVID-19 in the summer of 2021 have forced us to sporadically move stores to short-term “curbside only” operations or closures due to local conditions or staffing issues.  We believe that the rollout of COVID-19 vaccines in 2021 has offset these closures somewhat, but it is difficult to predict whether these vaccines will be adopted by further large numbers of Americans or whether current or future vaccines will remain effective against Delta or other future variants of the virus.  We expect that at least some further infections and temporary store shutdowns will continue for the foreseeable future.

While we previously fulfilled our web orders out of our retail stores, during the second quarter of 2020, we built a centralized web fulfillment capability in our Fort Worth distribution center and have been and expect to continue to fulfill web orders primarily through Fort Worth going forward.  Both our e-commerce business and stores have seen strong sales performance, but the future remains uncertain, and more store closures and/or other ongoing effects of the pandemic on the economy or employment market 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 had created around future operating results represented a triggering event during the first quarter of 2020 and continued throughout the remainder of 2020.

For the nine months ended September 30, 2020, the Company recorded impairment expense of $1.1 million, primarily related to property and equipment and operating lease assets for certain stores that underperformed to a level where the cash flows they generate will not be sufficient to cover their respective asset carry values.  For the nine months ended September 30, 2021, the Company recorded no impairment expense.

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 three methods: (1) at the store counter, (2) shipment of product generally via web sales, and (3) sales of product directly to commercial customers.  We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer.  At the store counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer.  When merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when control passes to the customer.  Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer.  Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales.  Net sales are based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns.

The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales, accordingly.

As of September 30, 2021 and December 31, 2020, we established a sales return allowance of $0.2 million for both period ends, 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 is included in other current assets as of both September 30, 2021 and December 31, 2020.

We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer.  We record revenue and reduce the gift card liability as the customer redeems the gift card.  In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one year.  As of September 30, 2021 and December 31, 2020, our gift card liability, included in accrued expenses and other liabilities, totaled $0.2 million and $0.3 million, respectively.  We recognized gift card revenue of $0.2 million in the nine months ended September 30, 2021 from the December 31, 2020 deferred revenue balance and $0.1 million during the nine months ended September 30, 2020 from the December 31, 2019 deferred revenue balance.

For the three and nine months ended September 30, 2021, we recognized $0.1 million and $0.5 million, respectively, in net sales associated with gift cards.  For the three and nine months ended September 30, 2020, we recognized $0.3 million and $0.4 million, respectively, in net sales associated with gift cards.

Disaggregated Revenue.  In the following table, revenue for the three and nine months ended September 30, 2021 and 2020 is disaggregated by geographic areas as follows:

(in thousands)
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
 
2021
   
2020
   
2021
   
2020
 
United States
 
$
17,118
   
$
14,393
   
$
52,483
   
$
37,781
 
Canada
   
1,782
     
1,216
     
5,470
     
3,500
 
Spain
   
381
     
381
     
1,288
     
1,000
 
Net sales
 
$
19,281
   
$
15,990
   
$
59,241
   
$
42,281
 

Geographic sales information is based on the location of the customer.  As a percentage of our consolidated net sales, excluding Canada, no single foreign country had net sales greater than 2.0% and 2.4%, respectively, for the three months ended September 30, 2021 and 2020, and 2.2% and 2.4%, respectively, for the nine months ended September 30, 2021 and 2020.
Discounts.  We offer a single retail price level, plus three volume-based levels for commercial customers.  Discounts from those price levels are offered to business, military/first 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 is valued on a first‑in, first out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead.  Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the inventory.

We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii) items that need to be removed from our product line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to adequately value our inventory at the lower of cost or net realizable value.

Since the determination of net realizable value of inventory involves both estimation and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset.

The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations.  Goods shipped to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier.

Inventory is physically counted twice annually in the Texas distribution center.  At the store level, inventory is physically counted each quarter.  Inventory is then adjusted in our accounting system to reflect actual count results.

(in thousands)
 
September 30, 2021
   
December 31, 2020
 
On hand:
           
Finished goods held for sale
 
$
38,970
   
$
32,654
 
Raw materials and work in process
   
952
     
828
 
Inventory in transit
   
3,803
     
3,297
 
TOTAL
 
$
43,725
   
$
36,779
 

Leases. We lease certain real estate for our retail store locations and warehouse equipment for our Texas distribution center, both under long-term lease agreements. We determine if an arrangement is a lease at inception and recognize right-of-use (“ROU”) assets and lease liabilities at commencement date based on the present value of the lease payments over the lease term.  We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes.

For operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease or options to purchase leased equipment, when it is reasonably certain we will exercise such an option.  The exercise of lease renewal or purchase option is generally at our discretion.  Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability.  We discount lease payments using our incremental borrowing rate based on information available as of the measurement date.

We recognize rent expense related to our operating leases on a straight-line basis over the lease term.

For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term with rent expense recorded to operating expenses.  We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the consolidated statements of operations and comprehensive income (loss).

The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term.  We also perform interim reviews of our lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable.

None of our lease agreements contain contingent rental payments, material residual value guarantees or material restrictive covenants.  We have no sublease agreements and no lease agreements in which we are named as a lessor.

Impairment of Long-Lived Assets.  We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate the carrying value of certain assets may not be recoverable.  Upon the occurrence of a triggering event, ROU lease assets, property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group's major classifications which in this case are operating lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method.

Fair Value of Financial Instruments.  We measure fair value as an exit price, which is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As a basis for considering such assumptions, accounting standards establish a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 – observable inputs that reflect quoted prices in active markets for identical assets or liabilities.

Level 2 – significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.

Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Our principal financial instruments held consist of short-term investments, accounts receivable, accounts payable, and long-term debt.  As of September 30, 2021 and December 31, 2020, the carrying values of our financial instruments, included in our Consolidated Balance Sheets, approximated or equaled their fair values.  There were no transfers into or out of Levels 1, 2 and 3 during the three and nine months ended September 30, 2021 and 2020.

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.

Income Taxes.  Income taxes are estimated for each jurisdiction in which we operate.  This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes.  Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded.  Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods.

Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse.  The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change.  Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.

A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.  Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.

We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available.  Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.  These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available.  We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made.

We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities.  These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.

Stock-based compensation.  The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards.  Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value.  Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant.  The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date.  Compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards.

Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets.  The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved.  If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized.  If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting.  If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed.  The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied.  We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs.  We do not use cash to settle equity instruments issued under stock-based compensation awards.

Accounts Receivable and Expected Credit Losses.  Our receivables primarily arise from the sale of merchandise to customers that have applied for and been granted credit.  Accounts receivable are stated at amounts due, net of an allowance for doubtful accounts.  Accounts receivable are generally due within 30 days of invoicing.  We estimate expected credit losses based on factors such as the composition of accounts receivable, the age of the accounts, historical bad debt experience, and our evaluation of the financial condition and past collection history of each customer.  Management believes that the historical loss information it has compiled is a reasonable base on which to determine expected credit losses for trade receivables held at September 30, 2021, because the composition of the trade receivables at that date is consistent with that used in developing the historical credit-loss percentages (i.e., the similar risk characteristics of its customers and its credit practices have not changed significantly over time).  Accordingly, the allowance for expected credit losses at September 30, 2021 and December 31, 2020 each totaled less than $0.1 million.

Other Intangible Assets.  Our intangible assets and related accumulated amortization relate to trademarks and copyrights that are definite-lived intangibles and are subject to amortization.  The weighted average amortization period is 15 years for trademarks and copyrights.  Amortization expense related to other intangible assets of less than $0.01 million during both the three and nine months ended September 30, 2021 and 2020 was recorded in operating expenses.  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.

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

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. We adopted this ASU on January 1, 2021; the adoption of this ASU did not have a material effect on the Company’s financial condition, results of operations or cash flows.

2. NOTES PAYABLE AND LONG-TERM DEBT

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.

On April 2, 2020, the Company’s primary bank, BOKF, NA d/b/a Bank of Texas, terminated a $6.0 million working capital line of credit facility secured by inventory and a $15.0 million credit facility secured by the Company’s owned real estate as a result of the failure to provide timely quarterly financial statements and compliance certificates required under the facilities. The delay was the result of the need to restate previously filed financial statements and file subsequent delinquent filings with the SEC. As of the date of the termination, Tandy had no borrowings outstanding under these line of credit facilities or with any other lending institution.

3.  INCOME TAX

Our effective tax rate for the three months ended September 30, 2021 and 2020 was (13.0%) and 22.7%, respectively.  Our effective tax rate for the nine months ended September 30, 2021 and 2020 was 23.1% and 22.6%, respectively.  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, the change in our valuation allowance associated with our deferred tax assets, 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 has evaluated the impact of the CARES Act and estimates the NOL carryback provision of the CARES Act will result in a cash tax benefit in excess of $1.0 million.

4.  STOCK-BASED COMPENSATION

The Tandy Leather Factory, Inc. 2013 Restricted Stock Plan (the “2013 Plan”) was adopted by our Board of Directors in January 2013 and approved by our stockholders in June 2013.  The 2013 Plan initially reserved up to 300,000 shares for restricted stock and restricted stock unit (“RSU”) awards to our executive officers, non-employee directors and other key employees.  In June 2020, our stockholders approved an increase to the plan reserve to 800,000 shares of our common stock and extended the 2013 Plan to June 2023.  As of September 30, 2021, there were 591,138 shares available for future awards.  Awards granted under the 2013 Plan may be service-based awards or performance-based awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years, unless otherwise determined by the Compensation Committee of the Board of Directors that administers the plan.  In February and May 2021, as part of their annual director compensation, certain of our non-employee directors were granted a total of 21,673 and 3,415 service-based RSUs, respectively, under the 2013 Plan, which will vest ratably over the next four years provided that the participant is still on the board on the vesting date.

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 September 30, 2021 and 2020 is presented below:

   
Shares
(in thousands)
   
Weighted Average
Share Price
 
Balance, December 31, 2020
   
522
   
$
7.11
 
Granted
   
25
     
3.88
 
Forfeited
   
(11
)
   
3.53
 
Vested
   
(16
)
   
5.28
 
Balance, September 30, 2021
   
520
   
$
7.08
 
                 
Balance, December 31, 2019
   
606
   
$
7.27
 
Granted
   
33
     
4.38
 
Vested
   
(19
)
   
6.61
 
Balance, September 30, 2020
   
620
   
$
7.14
 

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 $0.6 million for the three and nine month periods, respectively, ended on both September 30, 2021 and 2020.

As of September 30, 2021, the Company has concluded it is not probable that the performance conditions related to performance-based RSUs granted to our CEO will be achieved, and as a result no compensation expense related to performance-based RSUs has been recorded.

As of September 30, 2021, there was unrecognized compensation cost related to non-vested, service-based restricted stock and RSU awards of $1.6 million, which will be recognized in each of the following years:

(in thousands)
     
2021
 
$
205
 
2022
   
784
 
2023
   
538
 
2024
   
24
 
2025
   
5
 
Unrecognized Expense
 
$
1,556
 

We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs.  For the nine months ended September 30, 2021, we issued 16,080 shares resulting from the vesting of restricted stock.  We do not use cash to settle equity instruments issued under stock-based compensation awards.

5.  EARNINGS PER SHARE

Basic earnings per share (“EPS”) are computed based on the weighted average number of common shares outstanding during the period.  Diluted EPS includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s restricted stock plan, had been issued.  Anti-dilutive securities represent potentially dilutive securities which are excluded from the computation of diluted EPS as their impact would be anti-dilutive.  Diluted EPS is computed using the treasury stock method.

The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30, 2021 and 2020:

(in thousands, except share data)
 
Three Months Ended September 30,
    Nine Months Ended September 30,
 
   
2021 (1)
   
2020 (1)
   
2021
   
2020 (1)
 
Numerator:                        
Net income (loss)
 
$
(16
)
 
$
(982
)
  $ 1,269     $ (4,495 )
                                 
Denominator:
                               
Basic weighted-average common shares outstanding
   
8,663,921
     
9,042,991
      8,712,939       9,038,415  
Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan
    -       -       5,129       -  
Diluted weighted-average common shares outstanding
   
8,663,921
     
9,042,991
      8,718,068       9,038,415  

(1)
For the three months ended September 30, 2021, there were 15,326 shares excluded from the diluted EPS calculation, and for the three and nine months ended September 30, 2020, there were 1,875 and 7,422 shares, respectively, excluded from the diluted EPS calculation because the impact of their assumed vesting would be anti-dilutive due to a net loss in those respective periods.

6.  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 process of restating its financial statements as described above.  As a result, on February 18, 2020, the Company received a notice from the Nasdaq Stock Market LLC (“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 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.  With this filing of our 2021 third quarter Form 10-Q, we are current in our SEC filings and will be reapplying for Nasdaq listing promptly.

SEC Investigation

In 2019, the Company self-reported to the SEC information concerning the internal investigation of previously disclosed accounting matters resulting in the restatement for the full year 2017 and full year 2018, including interim quarters in 2018, and the first quarter of 2019.  In response, the Division of Enforcement of the SEC initiated an investigation into the Company’s historical accounting practices.  In July 2021, the Company entered into a settlement agreement with the SEC to conclude this investigation.  Under the terms of the settlement, in addition to other non-monetary settlement terms, (1) the Company paid a civil monetary penalty of $200,000, and (2) the Company’s former Chief Financial Officer and Chief Executive Officer, agreed to pay a civil monetary penalty of $25,000. In accepting the Company’s settlement offer, the SEC took into account remedial actions the Company took promptly after learning of the issues detailed in the SEC’s order.

7.  SHARE REPURCHASE PROGRAM AND SHARE REPURCHASE

On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5.0 million of its common stock between August 9, 2020 and July 31, 2022, subject to the completion of our financial restatement and the filing of all delinquent filings with the SEC. The Company's previous share repurchase program expired in August 2020. As of September 30, 2021 and 2020, the full $5.0 million of our common stock remained available for repurchase under this program.

On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 500,000 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase took place on February 1, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock.

On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 212,690 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $5.00 per share for a total of $1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding common stock. These share repurchases were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plan described in the previous paragraph.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our Business

Tandy Leather Factory, Inc. is one of the world’s largest specialty retailers of leather and leathercraft-related items.  Founded in 1919 in Fort Worth, Texas, and organized in 2005 as a Delaware corporation, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere.  Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking.

What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, and a hub for the local leathercrafting community, and our 100-year heritage.  We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate.

We sell our products primarily through company-owned stores and through orders generated from our 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 also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly. We maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.

Currently, the Company operates a total of 106 retail stores.  There are 95 stores in the United States (“U.S,”), ten stores in Canada and one store in Spain.

New management joined the Company in October 2018 and set new strategic direction for both short and long term.  The overarching goal is to invest in rebuilding a foundation for growth by: 1) improving our brand proposition, 2) reversing the sales decline with business customers, 3) building our talent, processes, tools and systems and 3) positioning us for long-term growth.  A number of key initiatives to achieve these goals were begun in 2019 and continued into 2021.  However, the onset of the COVID-19 pandemic in March of 2020 shifted our strategic focus to company survival and cash preservation.  With all of the retail stores temporarily closed to the public by the end of March, 2020, web sales, digital marketing and centralized web fulfillment became the highest priority.

Key initiatives in 2020 and 2021 included:


Accelerating implementation of our new web platform which supported a significantly improved consumer experience (look-and-feel, searchability, relevant content including video, and product and pricing information) integration of inventory, shipping and other systems, and substantial reduction in the time, manual effort and need for outside resources to make additions and changes;

Accelerating centralization of our web fulfillment activities to our Fort Worth warehouse which provided significant improvement in fulfillment rates and shipping times, and supported early product testing, an increase in product breadth by offering online-only items that required limited inventory investment, and other inventory efficiencies;


Shifting marketing resources from print and in-store activities to digital, with increased investments in SEO, SEM, email, digital advertising, social media, SMS/MMS, and affiliate links;

Accelerating the retail employee training program in the areas of product knowledge, leathercrafting knowledge and selling tools while stores were closed;

Continuing to drive the Commercial Program, through a dedicated team focused on the Company’s largest customers with a business model that meets these customers’ unique needs including dedicated sales representatives, clear and competitive volume-based pricing, personalized service and sourcing, shipping directly to customers from our distribution center, and improved product consistency, quality and availability;

Continuing to improve the quality and assortment of the product offering to better appeal to more advanced leather-crafters and business customers; and

Continuing to build the organization, processes, infrastructure, tools and systems to efficiently execute these strategies.

Delisting of Company Stock

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 OTC Link (previously “Pink Sheets”) operated by OTC Markets Group under the symbol “TLFA.”  Nasdaq denied the Company’s appeal of this decision, resulting in the Company’s stock being formally delisted by Nasdaq on February 9, 2021.  With this filing of our 2021 third quarter Form 10-Q, we are current in our SEC filings and will be reapplying for Nasdaq listing promptly.

COVID-19 and Outlook

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 only online, the Company experienced significant decreases in demand for its products in the second and third quarters 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.  However, under the CARES Act we were eligible to participate in the payroll tax deferral program, and we deferred $0.6 million in payroll tax with $0.3 million to be paid by December 31, 2021, and the remaining $0.3 million to be paid by December 31, 2022.  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.

Nine stores were permanently closed during 2020 as leases expired or early terminations were negotiated, including at locations where we believe we can retain a majority of customers through geographically proximate stores and/or our enhanced website platform.  After these permanent closures, Tandy operates 106 stores, 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 publicWhile customer response to our store reopening has been good, since then, various spikes in local infection rates and the “wave” created by the Delta variant of COVID-19 in the summer of 2021 have forced us to sporadically move stores to short-term “curbside only” operations or closures due to local conditions or staffing issues. We believe that the rollout of COVID-19 vaccines in 2021 has offset these closures somewhat, but it is difficult to predict whether these vaccines will be adopted by further large numbers of Americans or whether current or future vaccines will remain effective against Delta or other future variants of the virus.  We expect that at least some further infections and temporary store shutdowns will continue for the foreseeable future.

While we previously fulfilled our web orders out of our retail stores, during the second quarter of 2020, we built a centralized web fulfillment capability in our Fort Worth distribution center and have been and expect to continue to fulfill web orders primarily through Fort Worth going forward.  Both our e-commerce business and stores have seen strong sales performance, 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 believed the COVID-19 impact on the Company’s results of operations, cash flows and financial position and the ongoing uncertainty the virus had created around future operating results represented a triggering event starting in the first quarter of 2020 and continued throughout the remainder of 2020.

Critical Accounting Policies

A description of our critical accounting policies appears in Item 7 “Management's Discussions and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the year ended December 31, 2020.

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 control passes to the customer.  Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer.  Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales.  Net sales are based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns.  The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales, accordingly.

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 is valued on a first‑in, first out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead.  Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the inventory.  We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii) items that need to be removed from our product line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to adequately value our inventory at the lower of cost or net realizable value.  Since the determination of net realizable value of inventory involves both estimation and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset.  The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations.  Goods shipped to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier.  Inventory is physically counted twice annually in the Texas distribution center.  At the store level, inventory is physically counted each quarter.  Inventory is then adjusted in our accounting system to reflect actual count results.

Leases.  We lease certain real estate for our retail store locations under long-term lease agreements. Starting in 2019, with the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognize a lease asset and lease liability at commencement date based on the present value of the lease payments over the lease term. For our operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably certain we will exercise such an option. The exercise of lease renewal options is generally at our discretion. Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. We discount lease payments using our incremental borrowing rate based on information available as of the measurement date. Rent expense is recorded in operating expenses. The net excess of rent expense over the actual cash paid has been recorded as accrued expenses and other liabilities in the accompanying consolidated balance sheets. For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term with rent expense recorded to operating expenses.  We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The incurred interest expense is recorded in interest expense on the consolidated statements of operations and comprehensive income (loss). As of September 30, 2021, we have 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.

Stock-based Compensation.  The Company’s stock-based compensation primarily relates 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.

Income Taxes.  Income taxes are estimated for each jurisdiction in which we operate.  This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes.  Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income.  To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded.  Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods.  Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse.  The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change.  Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.  A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.  Income tax positions must meet a more-likely-than-not recognition threshold to be recognized.  We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available.  Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.  These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available.  We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities.  These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions.

Results of Operations

Three Months Ended September 30, 2021 and 2020

The following table presents selected financial data:

(in thousands)
 
Three Months Ended September 30,
 
   
2021
   
2020
   
$ Change
   
% Change
 
Sales
 
$
19,281
   
$
15,990
   
$
3,291
     
20.6
%
Gross profit
   
11,089
     
9,289
     
1,800
     
19.4
%
Gross margin percentage
   
57.5
%
   
58.1
%
    -

   
(0.6
%)
Operating expenses
   
11,078
     
10,528
     
550
     
5.2
%
Income (loss) from operations
 
$
11
   
$
(1,239
)
 
$
1,250
     
100.9
%

Net Sales

Consolidated sales for the quarter ended September 30, 2021 increased $3.3 million, or 20.6%, compared to the same period in 2020.  While all of our stores were officially reopened by the end of the third quarter last year, some were primarily curbside, some were on limited hours for some period of time due to staffing shortages, and some were still temporarily closed for part of the quarter.  Sales growth in the third quarter this year compared to last year was driven by having all stores fully reopened, improved retail customer demand, and strong growth with our commercial customers.   

Our store footprint consisted of 106 stores at both September 30, 2021 and September 30, 2020.  We have not opened any new stores during the third quarter of 2021 or 2020.  

Gross Profit

Our gross margin percentage for the quarter ended September 30, 2021 decreased to 57.5%, versus 58.1% in the same period in 2020.  This decrease was a result of a combination of factors including product and customer mix shifts as well as higher costs for warehouse handling and freight costs.

Operating expenses

(in thousands)
 
Three Months Ended September 30,
 
   
2021
   
2020
 
Operating expenses
 
$
11,078
   
$
10,528
 
Non-routine items related to restatement
   
(124
)
   
(1,362
)
Adjusted operating expenses
 
$
10,954
   
$
9,166
 
                 
Operating expenses % of sales
   
57.5
%
   
65.8
%
Adjusted Operating expenses % of sales
   
56.8
%
   
57.3
%

Operating expenses increased $0.6 million or 5.2% compared to the comparable period in 2020, mostly as a result of store labor costs from having all stores fully open this year versus the transition of curbside and reopening that we experienced last year, as well as higher sales-driven expenses like credit card fees and sales-based incentives, and partially offset by higher costs associated with the restatement of our financial statements during the third quarter of 2020.  Adjusted operating expenses, which excludes the non-routine items related to the restatement, increased $1.8 million or 19.5% for the reasons noted above.  Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP measure, included here to provide additional information regarding the Company’s financial performance on a recurring basis.  Non-routine items are primarily legal and accounting costs associated with the restatement.

Income Taxes

Our effective tax rate for the three months ended September 30, 2021 was (13.0%) compared to 22.7% for the same period in 2020.  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, the change in our valuation allowance associated with our deferred tax assets, and differences in tax rates.

Nine Months Ended September 30, 2021 and 2020

The following table presents selected financial data:

(in thousands)
 
Nine Months Ended September 30,
 
   
2021
   
2020
   
$ Change
   
% Change
 
Sales
 
$
59,241
   
$
42,281
   
$
16,960
     
40.1
%
Gross profit
   
34,556
     
24,398
     
10,158
     
41.6
%
Gross margin percentage
   
58.3
%
   
57.7
%
    -

   
0.6
%
Operating expenses
   
32,856
     
29,204
     
3,652
     
12.5
%
Impairment expenses
   
-
     
1,078
     
(1,078
)
   
(100.0
%)
Income (loss) from operations
 
$
1,700
   
$
(5,884
)
 
$
7,584
     
128.9
%

Net Sales

Consolidated sales for the nine months ended September 30, 2021 increased $17.0 million, or 40.1%, compared to the same period in 2020, with almost all of our stores open through the first nine months of this year compared to COVID-related closures in the corresponding prior-year period, in which most of our stores were closed for most of the second quarter and part of the third quarter.

We started 2020 with 115 stores, and during the first quarter of 2020, we closed one store in Beaverton, OR in February 2020.  During the second quarter of 2020, we converted eight stores from temporary closures to permanent closures based on expiring leases, proximity to other stores, and local web sales penetration: Phoenix, AZ; Austin TX; Dallas, TX; Peoria, IL; Henrico (Richmond), VA; Nyack, NY; Johnston, RI and St Leonard (Montreal), QC.  We have not opened any new stores during 2020 or 2021. 

Gross Profit

Our gross margin percentage for the nine months ended September 30, 2021 increased to 58.3%, versus 57.7% in the same period in 2020.  This increase was a result of a combination of factors including product and customer mix shifts as well as refining the process we use to capitalize cost into our inventory value for freight, warehousing and handling expenditures, updating from a manual, higher-level process to a more automated mechanism utilizing our new ERP system, partially offset by higher costs for warehouse handling and freight costs.

Operating expenses

(in thousands)
 
Nine Months Ended September 30,
 
   
2021
   
2020
 
Operating expenses
 
$
32,856
   
$
29,204
 
Non-routine items related to restatement
   
(1,157
)
   
(2,407
)
Non-routine items related to CFO transition
   
-
     
(389
)
Adjusted operating expenses
 
$
31,699
   
$
26,408
 
                 
Operating expenses % of sales
   
55.5
%
   
69.1
%
Adjusted operating expenses % of sales
   
53.5
%
   
62.5
%

Operating expenses increased $3.7 million or 12.5% compared to the comparable period in 2020, mostly as a result of recalling store employees who had been furloughed while stores were closed in 2020 due to the COVID pandemic as well as sales-driven expenses like credit card fees and sales-based incentives, partially offset by $1.3 million in higher costs associated with the restatement of our financial statements and $0.4 million higher CFO transition costs in the prior year period.  Adjusted operating expenses, which excludes the non-routine items related to the restatement and CFO turnover, increased $5.3 million or 20.0% for the reasons noted above.  Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP measure, included here to provide additional information regarding the Company’s financial performance on a recurring basis.  Non-routine items are primarily legal and accounting fees associated with the restatement and recruiting fees, exit costs, interim CFO-related expenses, and expenses for a number of other contract accounting professionals associated with the turnover of our CFO.

Income Taxes

Our effective tax rate for the nine months ended September 30, 2021 was 23.1% compared to 22.6% for the same period in 2020.  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, the change in our valuation allowance associated with our deferred tax assets, and differences in tax rates.

Capital Resources, Liquidity and Financial Condition

We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments.  We expect to fund our operating and liquidity needs primarily from a combination of current cash balances and cash generated from operating activities.  Any excess cash will be invested as determined by our Board of Directors in accordance with its approved investment policy.  Our cash balances as of September 30, 2021 totaled $6.1 million. 

Lines of Credit

On April 2, 2020, the Company’s primary bank terminated a $6.0 million working capital line of credit facility secured by inventory and a $15.0 million credit facility secured by the Company’s owned real estate as a result of the failure to provide timely quarterly financial statements and compliance certificates required under the facilities.  The delay was the result of the need to restate previously filed financial statements and file subsequent delinquent filings with the SEC.   As of the date of the termination, Tandy had no borrowings under these credit facilities or with any other lending institution.

Debt Agreements

During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small and Medium-sized Enterprises in order to facilitate the continuation of employment and to attenuate the economic effects of the COVID-19 virus.  This loan was provided for by the Spanish government as part of a COVID-19 relief program.  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.

Share Repurchase Program and Share Repurchase

In August 2015, our Board of Directors authorized a share repurchase program, pursuant to which we were authorized to repurchase up to 1.2 million shares of our common stock at prevailing market rates through August 2016.  Subsequently, the program was amended to increase the number of shares available for repurchase to 2.2 million and to extend the program through August 2019.  In June 2019, the program was again amended to decrease the number of shares available for repurchase to one million as of such date and to extend the program through August 9, 2020.

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, subject to the completion of our financial restatement and the filing of all delinquent filings with the SEC.  The Company's previous share repurchase program expired in August 2020.

On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 500,000 shares of our common stock, par value $0.0024 in a private transaction separate from our share repurchase program. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase took place on February 1, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock.

On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 212,690 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $5.00 per share for a total of $1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding common stock.

Cash Flows

(in thousands)
 
For the Nine Months Ended September 30,
 
   
2021
   
2020
 
Net cash used in operating activities
 
$
(2,028
)
 
$
(14,269
)
Net cash provided by (used in) investing activities
   
(512
)
   
8,050
 
Net cash provided by (used in) financing activities
   
(1,700
)
   
410
 
Effect of exchange rate changes on cash and cash equivalents
   
(3
)
   
60
 
Net decrease in cash and cash equivalents
 
$
(4,243
)
 
$
(5,749
)

For the nine months ended September 30, 2021, cash from operations used $2.0 million driven by net income of $1.3 million, non-cash expenses of $3.8 million, including depreciation, amortization, and stock-based compensation, a federal income tax refund of $1.0 million related to the 2019 tax year, and $1.0 million of other changes in operating assets and liabilities mostly due to an increase in accounts payable and accrued liabilities of $0.9 million and more than offset by the net buildup of inventory of $6.6 million and a reduction in lease liabilities of $2.6 million.  We invested $0.5 million in capital expenditures primarily related to system implementations.  Cash used in financing activities was primarily due to the purchase of 500,000 shares of our common stock for $3.35 per share, or $1.7 million, from an institutional shareholder of the Company in a private transaction.  The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $4.2 million. 

For the nine months ended September 30, 2020, we used $14.3 million of cash from operations driven by our net loss of $4.5 million offset by non-cash expenses of $4.9 million, including depreciation and amortization, impairments, and stock-based compensation.  Changes in our working capital used $14.7 million of cash primarily for the build-up of inventories.  We invested $1.7 million in U.S. Treasuries and received $10.9 million from the sale of U.S. Treasuries, and we invested $1.2 million in capital expenditures primarily related to the design and implementation of our new enterprise resource planning (“ERP”) system and for the purchase of store fixtures.  We borrowed $0.4 million from the Spanish government as part of a COVID-19 relief program.  The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $5.7 million.

Item 4.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As previously disclosed in our Form 10-K filing for the period ended December 31, 2020, and in  connection with the filing of this Form 10-Q for the period ended September 30, 2021, our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  As a result of this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective due to the material weaknesses described below, which resulted in reporting errors requiring a restatement of our financial statements for the years ended December 31, 2017 and 2018 and for the first quarter ended March 31, 2019.

Management’s Annual Report on Internal Control over Financial Reporting

Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.  Management’s establishing and maintaining adequate internal control over financial reporting is based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”).  A system of internal control over financial reporting should be designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud, and therefore can provide only reasonable assurance with respect to reliable financial reporting.  Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements.

A material weakness is defined as a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  Based on this definition, our management, with the participation of our CEO and CFO, evaluated the effectiveness and design of our internal control over financial reporting against the COSO Framework and concluded that our internal control over financial reporting was not effective as of September 30, 2021 due to material weaknesses arising from flaws in our control environment, risk oversight measures, control activities, information processing and communication and our monitoring systems, each of which is described in more detail below.

Control environment.  We concluded that we did not maintain effective controls in the following areas: (i) managerial functions, procedures and oversight; (ii) organizational structure, delegation of authority and responsibilities; (iii) segregation of duties; (iv) adequacy of trained accounting and financial reporting personnel to ensure that internal control responsibilities were performed effectively and material accounting errors were detected; and (v) maintenance and enforcement of internal control responsibilities, including holding individuals accountable for their internal control responsibilities.

Risk oversight environment.  We did not maintain adequate risk oversight measures related to the (i) identification and assessment of risks that could impact achieving our objectives; and (ii) identification and analysis of the potential changes that could affect our internal controls environment.

Control activities.  We concluded that we did not have effective control activities in the following areas: (i) selecting and developing control policies, procedures and activities to mitigate risks, including with respect to the methodologies used to calculate and report financial information and results; and (ii) selecting and implementing information technology and related systems supportive to our internal control over financial reporting.

Information processing and communication. We identified deficiencies associated with information processing and communication within our internal control framework.  Specifically, we did not effectively communicate objectives and internal control responsibilities throughout the organization which contributed to inadequate documentation of processes and methodologies used to calculate and reconcile regular consolidation adjustments hindering clear communication with management, the Board of Directors and our independent auditors.

In addition, the documentation of inventory purchasing relied on paper-based vendor invoices and multi-step manual data-entry processes, some of which were subject to management override, which resulted in errors at multiple steps of the process, and deficiencies in communicating accurate information to management, the Board of Directors and our independent auditors.

Monitoring activities.  We concluded that we did not design and implement effective monitoring activities related to (i) selecting, developing, and performing separate evaluations of our internal control over financial reporting; and (ii) evaluating and communicating internal control deficiencies in a timely manner to parties responsible for taking corrective actions.

The issues described above resulted in the following errors in our financial statements previously filed with the SEC:


Inventory was not stated on a FIFO basis nor was it stated at the lower of FIFO cost or net realizable value;

Freight-in, warehousing and handling expenditures, factory labor and overhead and freight-out costs were not correctly capitalized;

Warehousing and handling expenditures were incorrectly classified as operating expenses;

Allowance for sales returns was incorrectly calculated and accounted for;

Net gift card liability was not correctly accounted for in 2017;

Lease asset and liability under ASC Topic 842 was incorrectly calculated;

PTO related accrued liabilities were incorrectly calculated;

Provision for income taxes, including adjustments related to the Tax Cuts and Jobs Act (the “Tax Act”), uncertain tax position (UTP) liability and related interest expense, and correction of taxable income on the return of our Canada and Spain foreign subsidiaries; Foreign currency gains and losses associated with the Company’s Canadian subsidiary were incorrectly classified as a component of accumulated other comprehensive loss and the cumulative translation adjustments included in accumulated other comprehensive loss were not tax effected; and

Shares repurchased and subsequently cancelled were incorrectly accounted for as treasury stock.

Remediation Efforts to Address Material Weaknesses

Our management, including our CEO and CFO, has worked with expert accounting consultants and our Audit Committee to design and implement both a short-term and a long-term remediation plan to correct the material weaknesses in our disclosure controls and procedures and our internal control over financial reporting.  The following activities highlight our commitment to remediating our identified material weaknesses:

Since October 2019 and through the filing date of this Form 10-Q, we have taken the following measures, among others:

i.
Hired a new, highly-qualified CFO in January 2021 with extensive public-company experience;

ii.
Replaced critical roles within our accounting team with contract accounting resources and ultimately (ongoing) full-time employees with expertise in GAAP accounting, SEC reporting and disclosure, internal audit and internal controls;

iii.
Replaced our legacy accounting systems with an integrated enterprise resource planning (“ERP”) solution which includes general ledger, warehouse management, factory production and point-of-sale modules designe