| BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES | 1. BASIS OF PRESENTATION AND CERTAIN SIGNIFICANT ACCOUNTING POLICIES Tandy Leather Factory, Inc. (“TLF,” “we,” “our,” “us,” “the Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries) 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, 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, through orders generated from our global websites, and through direct account representatives in our
commercial division. 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 101 retail
stores. There are 90 stores in the United States (“U.S.”), ten stores in Canada and one store in Spain. The Company’s common shares currently trade on the Nasdaq Capital Market under the symbol “TLF.” We operate as a single The accompanying unaudited Condensed 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 unaudited Condensed 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 June 30, 2024 and December 31, 2023, our results of operations and our cash flows for the six months ended June 30, 2024 and 2023, and our statements of stockholders’ equity
as of and for the six months ended June 30, 2024 and 2023. 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 unaudited Condensed 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, 2023. Significant Accounting Policies Cash and cash equivalents Foreign currency translation and transactions Revenue Recognition. 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. The
sales return allowance included in accrued expense and other liabilities was $0.1 million, $0.1 million, and $0.2 million as of June 30, 2024, December 31,
2023, and January 1, 2023. The estimated value of merchandise expected to be returned included in other current assets was less than $0.1
million as of June 30, 2024, December 31, 2023, and January 1, 2023. 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 June 30, 2024, December 31, 2023 and January 1, 2023, our gift card liability, included in accrued expenses and other liabilities, was $0.1 million, $0.3 million and $0.3 million, respectively. We recognized gift card revenue of $0.2 million for the six months ended June 30, 2024 and 2023. For the three months ended June 30, 2024 and 2023, we recognized $0.1
million and $0.2 million respectively in net sales associated with gift cards. For the six months ended June 30, 2024 and 2023, we recognized $0.2
million and $0.3 million respectively in net sales associated with gift cards. Disaggregated Revenue. In the following table, revenue for the three and six months ended June 30,
2024 and 2023 is disaggregated by geographic areas as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in thousands)
2024
2023
2024 2023
United States
$
15,300
$
15,566 $ 32,386 $ 33,665
Canada
1,737
1,591 3,633
3,498
Other 249 325 542 679
Net sales
$
17,286
$
17,482 $ 36,561 $ 37,842 Geographic sales information is based on the location of the customer. As a percentage of our consolidated net sales, excluding Canada, our other international net
sales were less than 2.0% for the three and six months ended June 30, 2024, and 2023 respectively. Discounts Operating expenses Property and equipment, net of accumulated depreciation three seven 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 partially during each quarter and fully at year-end in the Texas distribution center. At the store level,
inventory is partially counted each quarter for high value items and fully at year-end. Inventory is then adjusted in our accounting system to reflect actual count results.
(in thousands)
June 30, 2024
December 31, 2023
On hand:
Finished goods held for sale
$
32,640
$
33,350
Raw materials and work in process
1,358
1,774
Inventory in transit
3,193
2,869
TOTAL
$
37,191
$
37,993 Leases 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 liabilities 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 assets on a straight-line basis over the lease term. Rent expense is recorded in operating expenses. 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 interest expense
incurred is recorded in interest expense on the Condensed Consolidated Statements of Operations and Comprehensive Income. 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 Fair Value of Financial Instruments
•
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 T-Bills as of June 30, 2024 and December 31, 2023 which fall under level 1 of the fair value hierarchy; accounts
receivable - trade, accounts payable - trade, as of June 30, 2024 and December 31, 2023, all of which fall under Level 3 of the fair value hierarchy. As of June 30, 2024 and December 31, 2023, the carrying values of our financial instruments
included in our Consolidated Balance Sheets approximated their fair values. There were no transfers into or out of Levels 1, 2
and 3 during the six months ended June 30, 2024 and 2023. Income Taxes 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 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. The payments of the employees’ tax liability for a portion of the vested shares are satisfied by withholding
shares with a fair value equal to the tax liability. Accounts Receivable - Trade and Expected Credit Losses Other Intangible Assets Comprehensive Income |
