Tandy Leather Factory, Inc. — Q3 2021 Form 10-Q
Business context and period. The unaudited report covers the quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Tandy sells leather and leathercraft products through 106 stores and four websites, and also serves commercial customers. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $19.281m | $15.990m | $59.241m | $42.281m |
| Gross profit | $11.089m | $9.289m | $34.556m | $24.398m |
| Gross margin | 57.5% | 58.1% | 58.3% | 57.7% |
| Operating income (loss) | $0.011m | $(1.239)m | $1.700m | $(5.884)m |
| Net income (loss) | $(0.016)m | $(0.982)m | $1.269m | $(4.495)m |
| Cash from operating activities | Not presented by quarter | $(2.028)m | $(14.269)m |
- Q3 sales rose 20.6% year over year; nine-month sales increased 40.1%. Management attributed the gains mainly to stores being more fully open than in the 2020 comparison period, improved retail demand, and commercial-customer growth.
- Q3 gross margin fell 0.6 percentage point, which management attributed to product and customer mix and higher warehouse-handling and freight costs. Nine-month gross margin rose 0.6 point, partly reflecting changes to inventory cost capitalization processes.
- At September 30, cash was $6.086m and current assets were $52.627m, against current liabilities of $13.902m (working capital of $38.725m). Inventory was $43.725m, up from $36.779m at December 31, 2020.
- Debt totaled approximately $0.423m, including current maturities; the Spanish government-backed loan bears fixed interest of 1.5%. Operating and finance lease liabilities are separate obligations. The company’s $6m working-capital line and $15m real-estate facility were terminated in April 2020; there were no borrowings under them at termination.
- Nine-month investing cash use was $0.512m and financing cash use was $1.700m. Cash declined $4.243m to $6.086m during the period. The operating cash outflow included a $6.584m inventory build and a $2.585m reduction in operating lease liabilities.
Material changes and unusual items
- Compared with 2020, nine-month results improved from a net loss to net income, and operating results improved from a $5.884m loss to $1.700m income. The comparison includes $1.078m of impairment expense in 2020 and none in 2021.
- Operating expenses increased 5.2% in Q3 and 12.5% for the nine-month period. Management’s non-GAAP adjusted operating expenses, excluding specified restatement and CFO-transition costs, increased 19.5% in Q3 and 20.0% year to date.
- The company repurchased and cancelled 500,000 shares for $1.675m in February 2021, separately from its $5m repurchase authorization. No shares were bought under that program in Q3. A further 212,690-share repurchase for $1.1m closed on December 16, 2021, after the reporting date.
- In July 2021, the company settled an SEC investigation related to historical accounting matters, paid a $200,000 civil penalty, and agreed to non-monetary terms. Former senior executives separately agreed to pay penalties.
Outlook, risks, and controls
- No numerical earnings or sales guidance is provided. Management expects to fund operating and liquidity needs primarily with existing cash and cash generated from operations. It says further COVID-related infections, temporary store closures, staffing constraints, or broader economic effects could materially hurt future sales; intermittent operating restrictions continued during the Delta-variant period.
- Management reports that disclosure controls and internal control over financial reporting were not effective at September 30, 2021 because of material weaknesses. The weaknesses relate to the control environment, risk oversight, control activities, information processing and communication, and monitoring. Remediation efforts include staffing changes, an ERP system, process documentation, and planned point-of-sale integration; remediation was not complete.
- The company’s stock was delisted from Nasdaq in February 2021 and traded OTC as TLFA. Management said it intended to reapply for Nasdaq listing after becoming current in SEC filings. The cover page, however, marks “No” for having filed all required reports in the preceding 12 months and for submitting all required Interactive Data Files, creating a point to reconcile with management’s statement.
- Management states there were no pending ordinary-course legal matters expected to have a material impact. A previously filed stockholder class action was withdrawn in 2020. The filing also notes that the company has not completed a formal cybersecurity risk assessment or documented related internal controls.
Key facts for investors to verify
- Reconcile the cover-page “No” responses on filing and Interactive Data File compliance with management’s assertion that SEC filings were current.
- Track remediation and independent testing of the disclosed material weaknesses, including completion of point-of-sale and ERP integration.
- Assess whether the inventory build, negative operating cash flow, and available liquidity remain manageable as sales and store operations normalize.
- Confirm the status of the Nasdaq reapplication and the terms and funding of the post-quarter share repurchase.
- Monitor COVID-related disruptions, freight and handling costs, and commercial-customer demand, which management identifies as relevant to sales and margins.