Tandy Leather Factory, Inc. — Q1 2021 Form 10-Q
Period: Three months ended March 31, 2021; comparisons are with Q1 2020. The company sells leather and leathercraft products through 106 stores and four websites. This report was signed September 21, 2021, and the company indicated it was not current with all required SEC filings.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $21.394 million | $17.145 million |
| Gross profit / margin | $12.186 million / 57.0% | $9.866 million / 57.5% |
| Operating expenses | $11.221 million | $11.096 million |
| Impairment expense | None | $1.069 million |
| Operating income (loss) | $0.965 million | $(2.299) million |
| Net income (loss) | $0.745 million | $(1.738) million |
| Diluted EPS | $0.08 | $(0.19) |
| Operating cash flow | $2.205 million | $(4.023) million |
| Capital expenditures | $0.116 million | $0.184 million |
Sales rose 24.8%. Management attributed the increase primarily to stores being open for most of Q1 2021 versus COVID-related closures in the prior-year quarter, strong store and web demand, and growth in the commercial channel. Gross margin declined 0.5 percentage points, which management attributed to product and customer mix, higher warehouse handling costs, and higher freight costs.
Liquidity, debt, and capital
At March 31, 2021, cash was $10.761 million, current assets were $52.725 million, and current liabilities were $14.883 million. Inventory was $38.891 million, up from $36.779 million at year-end 2020. Cash increased $0.432 million during the quarter.
The balance sheet reported $0.429 million of long-term debt, net of current maturities, relating to a Spanish government-backed loan originally borrowed for $0.4 million in 2020 at 1.5%. The company’s $6 million working-capital line and $15 million real-estate credit facility had been terminated in April 2020; there were no borrowings on those facilities when terminated. Operating lease liabilities totaled $12.185 million, including current and non-current portions.
The company used $1.675 million to repurchase and cancel 500,000 shares in a private transaction at $3.35 per share. This was separate from its announced $5 million repurchase program, which remained available subject to stated conditions.
Outlook, risks, and unusual matters
- No specific financial guidance or quantified forecast is provided. Management said the outlook remained uncertain and expected some COVID-related infections and temporary store closures to continue. Further closures or ongoing employment-market effects could materially hurt sales.
- COVID-19 disruption led to temporary store closures in 2020 and nine permanent closures during 2020. All 106 stores had reopened by Q3 2020, though some later faced temporary closures or curbside-only operations.
- Disclosure controls and internal control over financial reporting were reported ineffective as of March 31, 2021, due to material weaknesses. Management cited prior reporting errors that required restatements, including inventory costing, lease accounting, returns, gift cards, and tax matters. Remediation efforts included a new ERP system and finance staffing changes, but weaknesses were not fully remediated.
- Nasdaq formally delisted the stock on February 9, 2021, following the company’s delayed SEC filings. Shares traded on OTC Link under TLFA; management said it intended to reapply for Nasdaq listing after required filings were completed.
- In July 2021, after the quarter, the company agreed to an SEC settlement that included a $200,000 civil penalty and non-monetary terms. Former senior executives also agreed to pay penalties. The filing states the settlement concluded the SEC investigation into historical accounting practices.
- The company disclosed no pending ordinary-course litigation expected to materially affect financial position or results. It noted that additional litigation connected with the restatement could not be ruled out. Uncertain tax positions were $0.393 million.
Most important facts for investors to verify
- Whether sales growth and positive operating cash flow persisted after the unusually weak, COVID-disrupted Q1 2020 comparison.
- Whether the company completed delinquent SEC filings, remediated material weaknesses, and regained eligibility to seek Nasdaq listing.
- Whether cash generation can support inventory needs and lease obligations without the terminated credit facilities.
- Whether gross-margin pressure, pandemic-related store disruptions, or inventory valuation estimates materially changed in subsequent periods.
- The timing and financial impact of the SEC settlement and any other consequences of the historical restatement.