Tandy Leather Factory, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial amounts below are in millions of dollars unless stated otherwise. The filing was signed September 2, 2021, and reports that the company was not current with required SEC filings.
Business context and financial results
Tandy sells leather and leathercraft products through company-operated stores, e-commerce sites and commercial customers, and also manufactures some products. Its results were already affected by store closures, pricing changes and product shortages before COVID-19 prompted temporary closures beginning March 18, 2020.
| Metric | Q1 2020 | Q1 2019, restated | Change |
|---|---|---|---|
| Net sales | $17.145 | $20.941 | Down 18.1% |
| Gross profit / margin | $9.866 / 57.5% | $12.245 / 58.5% | Profit down $2.379; margin down 1.0 percentage point |
| Operating expenses | $11.096 | $10.032 | Up 10.6% |
| Impairment expense | $1.069 | — | Recorded in 2020 |
| Operating income (loss) | $(2.299) | $2.213 | Declined $4.512 |
| Net income (loss) | $(1.738) | $1.520 | EPS: $(0.19) vs. $0.17 |
| Operating cash flow | $(4.023) | $3.133 | Declined $7.156 |
Management attributed the sales decline to six store closures, changes in promotional cadence associated with its pricing strategy, and out-of-stocks on key products. Gross margin was lower mainly due to product and customer mix, vendor purchasing optimization and lower freight expenses. Operating expenses included non-routine restatement-related costs of $0.668 million and CFO-transition costs of $0.192 million; excluding these items, management reported adjusted operating expenses of $10.236 million, up 2.0% year over year. This is a non-GAAP measure.
Cash, liquidity and debt
- At March 31, cash and cash equivalents were $11.423 million and short-term U.S. Treasury investments were $9.183 million. Total current assets were $53.444 million versus current liabilities of $13.944 million.
- Inventory was $29.224 million, up $5.182 million from December 31, 2019. The inventory build was the primary working-capital use of cash; operating activities used $4.023 million.
- Cash decreased $4.482 million to $11.423 million during the quarter. Capital expenditures were $0.184 million. Investing cash flow was $(0.180) million, including purchases and maturities of short-term investments; financing cash flow was zero.
- No borrowings were outstanding at March 31. On April 2, 2020, the primary bank cancelled its $6 million working-capital facility and separate credit facility after the company failed to provide timely financial statements and compliance certificates. The company said it had no other credit lines outstanding as of the filing.
- Operating lease liabilities totaled $13.795 million, comprising $3.743 million current and $10.052 million non-current. In Q2 2020, the company later borrowed $0.4 million under a Spanish government COVID-19 relief program, at 1.5% for five years.
Material changes, outlook and risks
- COVID-19: Management began temporary store closures March 18, and all stores were closed to the public by April 2. It described a shift to survival and cash preservation, including furloughing 406 employees, temporary salary reductions, landlord negotiations and extended vendor payment terms. The filing says the company was not eligible for PPP funding and could not obtain CARES Act loans because its SEC filings were delinquent.
- Impairment: Management treated COVID-related uncertainty as a triggering event and recorded $1.069 million of Q1 impairment, primarily for property and equipment and lease assets at underperforming stores.
- Outlook: No quantified guidance was provided. Management warned of uncertainty and potential material sales impact from renewed store closures or economic and employment conditions. Later-period commentary in the filing says e-commerce and stores had been performing above prior-year sales levels, but future results remained uncertain.
- Restatement and controls: The Q1 2019 comparison is restated and should not be confused with previously reported figures. The restatement covered inventory costing and reserves, expense classification, returns, leases, taxes and other matters; the adjustments increased reported Q1 2019 net income by $0.7 million. Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2020 because of material weaknesses. Remediation included accounting personnel changes, process documentation and ERP implementation, but weaknesses were not fully remediated as of the period-end.
- Contingencies and listing: A shareholder class action related to the restatement was withdrawn in April 2020, though the filing noted possible further litigation. The company later settled an SEC investigation in July 2021, including a $200,000 company civil penalty and a $25,000 penalty for each of its former CEO and CFO. Nasdaq suspended trading in August 2020 and formally delisted the shares in February 2021; the filing states the stock traded on OTC Markets.
Important facts for investors to verify
- Restated Q1 2019 comparatives and the full scope and implications of the inventory and financial-reporting restatements.
- Current cash, inventory quality and working-capital needs, especially given the Q1 inventory increase and cash outflow.
- Availability of replacement borrowing facilities after the bank cancelled the credit lines, and the company’s lease obligations.
- Progress in remediating material weaknesses and the status of overdue SEC filings and any relisting plans.
- COVID-related store and e-commerce trends, subsequent store closures, and the impact of the Spanish relief loan and other post-quarter events.