Tandy Leather Factory, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020, with nine-month results through that date. Although the request metadata says “2020 Q1,” this filing covers 2020 Q3 and the first nine months of 2020. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context
Tandy sells leather and leathercraft products through company-owned stores and e-commerce websites, with 106 stores reported at September 30, 2020. During Q2, the company centralized U.S. online-order fulfillment at its Fort Worth distribution center. COVID-19 led to temporary store closures, reduced demand, workforce furloughs and cost-cutting measures.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $15.99m | $16.31m | $42.28m | $54.45m |
| Gross profit | $9.29m | $8.85m | $24.40m | $30.46m |
| Gross margin | 58.1% | 54.3% | 57.7% | 55.9% |
| Operating loss | $(1.24)m | $(2.41)m | $(5.88)m | $(1.44)m |
| Net loss | $(0.98)m | $(1.72)m | $(4.50)m | $(1.07)m |
| Diluted loss per share | $(0.11) | $(0.19) | $(0.50) | $(0.12) |
| Operating cash flow | Not presented for the quarter | $(14.27)m | $7.92m |
Q3 sales fell 2.0% year over year, while gross margin improved 3.8 percentage points. Nine-month sales declined 22.3%; the gross margin improvement did not offset lower sales, and the nine-month net loss widened. Nine-month results included $1.08m of impairment expense, primarily for store property and lease assets.
At September 30, cash and cash equivalents were $10.16m, versus $15.91m at December 31, 2019. Current assets were $48.96m and current liabilities $11.55m. Inventory rose to $34.81m from $24.04m at year-end. Operating activities used $14.27m, mainly reflecting the inventory build and other working-capital needs. Cash declined by $5.75m during the nine months; investment cash inflows included sales of U.S. Treasury securities.
Long-term debt was $0.43m, the balance of a Spanish government-backed COVID-19 loan at 1.5%, with interest-only payments for the first two years. The company had no borrowings under its terminated bank credit facilities and reported no outstanding lines of credit. Operating lease liabilities totaled $13.55m. Management also reported cash of $5.9m as of June 30, 2021, a later date than the balance sheet presented here.
Material changes and management commentary
- For the first nine months, management attributed the sales decline to COVID-related store closures, permanent store closures, changes in promotional cadence under its pricing strategy, and shortages of some key items. Q3 same-store sales increased 3.7%, but the year-over-year comparison also reflected closed stores.
- Gross margin gains were attributed to product and customer mix, vendor-purchase optimization and, for the nine-month period, lower freight costs. Lower payroll, occupancy, bonus, insurance and marketing costs helped reduce operating expenses.
- The company closed stores and furloughed 406 employees, approximately two-thirds of its workforce; it also temporarily reduced corporate salaries and negotiated rent relief and extended vendor payment terms. Nine stores were permanently closed during 2020, according to the filing’s COVID-19 discussion.
- A $6m working-capital facility and a $15m real-estate-secured facility were terminated by the primary bank on April 2, 2020 after the company failed to provide required statements and compliance certificates. The company said the filing delays arose from its restatement process.
- COVID-19 was treated as an impairment trigger; the filing records $1.08m of impairment expense for the nine months. Management said further infection-related store closures and economic effects could materially harm future sales. It reported that e-commerce and stores were performing above prior-year sales levels at the time of the later-dated filing, while emphasizing uncertainty.
- No specific revenue or earnings guidance is provided. A new share-repurchase authorization of up to $5m was conditional on completing the restatement and filing delinquent reports; no purchases were made in Q3 2020.
Risks, contingencies and unusual matters
- Management concluded disclosure controls and internal control over financial reporting were ineffective as of September 30, 2020 due to material weaknesses. Prior accounting errors had required restatements, including for 2017, 2018 and Q1 2019. Remediation efforts included a new ERP system, process documentation and accounting staffing changes, but weaknesses were not fully remediated at the period end.
- Nasdaq suspended trading in the shares in August 2020 because the company was not current with SEC filings; the stock later traded OTC as TLFA and was formally delisted from Nasdaq in February 2021. Management said it intended to reapply after making required filings.
- In July 2021, the company settled an SEC investigation into historical accounting practices, agreeing to a $200,000 civil penalty and non-monetary terms. The filing also reports a civil penalty involving its former CEO and CFO.
- The company disclosed no pending ordinary-course litigation expected to materially affect financial position or results. A stockholder class action related to the restatement was withdrawn in April 2020; the filing notes further related litigation could not be ruled out.
- The filing describes a 500,000-share repurchase for $1.7m that closed in February 2021, after the reporting period. It is a subsequent event, not a Q3 2020 cash outflow.
Most important facts for investors to verify
- Whether cash continued to decline after September 2020 and how the company funded operations without its former bank credit lines.
- Whether inventory buildup was converted into sales and cash, and whether any further inventory or store-asset impairments were recorded.
- Whether the company remediated its material weaknesses and restored timely SEC reporting, and the current status of its exchange listing.
- How store closures, e-commerce performance, product availability and customer demand affected subsequent-period sales and margins.
- The full financial and governance implications of the SEC settlement, historical restatements and February 2021 share repurchase.