TANDY LEATHER FACTORY INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion is intended to assist in understanding our financial performance and should be read in conjunction with our financial statements and the notes accompanying those financial statements included elsewhere in this Form 10-K, including the information under the caption “Summary of Critical Accounting Policies.” In addition to historical financial information, the following management’s discussion and analysis may contain forward-looking statements. These statements reflect our expectations or estimates based on the information we have today but are not guarantees or predictions of future performance. They involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results to differ materially from the statements contained here. You are cautioned not to put undue reliance on these forward-looking statements. The Company assumes no obligation to update or otherwise revise these forward-looking statements, except as required by law. More discussion of risks can be found under Item 1A, Risk Factors . Summary The Business and Strategy Tandy Leather Factory, Inc. is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, and organized in 2005 as a Delaware corporation, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking. 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, and 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 and through orders generated from our four websites: tandyleather.com, tandyleather.ca, tandyleather.eu and tandyleather.com.au. 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. Currently, the Company operates a total of 106 retail stores. There are 95 stores in the United States (“U.S,”), ten stores in Canada and one store in Spain. Tandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been and continue to be our competitive advantage: where our consumers learn the craft in classes, open table, and from the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others passionate about leather. Our website provides inspiration, detailed product descriptions and specifications, educational information and videos, and a convenient place to also purchase product – especially for those who are far from our retail stores, including a growing international customer base. For many of our retail and web customers, leatherworking evolves from a passion to a trade. Our Commercial Division is tailored to the needs of those customers who build businesses around leather. With dedicated direct account representatives, a direct-from-our-warehouse shipping model, bulk and volume-based competitive pricing, customized product development, and production and pre-production services, we are building long-term, strategic relationships with our largest customers. 21 Table of Contents Our focus over the last three years has been on three broad strategic initiative areas: 1. Improving our brand proposition, with both Retail and Commercial customers 2. Rebuilding our foundation – the talent, processes, tools and systems needed to serve these customers 3. Position us for long-term growth – creating the vision and roadmap for the future COVID-19 The onset of the COVID-19 pandemic in March 2020 temporarily shifted our strategic focus to company survival and cash preservation. We began closing stores on March 18, 2020, and by April 2, 2020, we temporarily closed all stores to the public. While we pivoted to serve customers only online, the Company experienced significant decreases in demand for its products in the second and third quarters of 2020, negatively impacting net sales. In response, w e took immediate action to mitigate the impact of temporary store closures on our cash flows by: (i) furloughing 406 Tandy employees, comprising two-thirds of the Tandy work force, (ii) temporarily cutting corporate salaries, with deeper cuts for the Executive Leadership Team, (iii) negotiating abatements, deferrals and other favorable lease terms with landlords, and (iv) negotiating longer payment terms with our key product vendors. Due to our size, we were not eligible for the Paycheck Protection Program administered through the Small Business Administration. Also, due to our not being current on financial filings with the SEC, we were not able to obtain loans under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. However, under the CARES Act we were eligible to participate in the payroll tax deferral program, and we deferred $0.6 million in payroll tax with $0.3 million to be paid by December 31, 2021, and the remaining $0.3 million to be paid by December 31, 2022. During the second quarter of 2020, the Company borrowed $0.4 million through the Spanish government’s Institute of Official Credit Guarantee for Small and Medium-sized Enterprises, a COVID-19 relief program. In Canada, we participated in the Canada Emergency Commercial Rent Assistance (“CECRA”) program for rent relief, receiving total rent abatements under the program of $0.05 million. During the third quarter of 2020, all of Tandy’s stores reopened to the public, and the store re-openings were well received by our employees and customers. We have continued to manage through the pandemic during intermittent spikes in COVID-19 infections, continued to see varying levels of infection rates, and have at time been forced to temporarily close or move certain stores to “curbside only” operations. We expect that at least some further infections and temporary store shutdowns will continue for the foreseeable future. 22 Table of Contents While we previously fulfilled our web orders out of our retail stores, during the second quarter of 2020, we built a centralized web fulfillment capability in our Fort Worth distribution center and have been and expect to continue to fulfill web orders primarily through Fort Worth going forward. Both our e-commerce business and stores have been performing above last year sales levels, but the future remains uncertain, and more store closures and/or other ongoing effects of the pandemic on the economy or employment market could cause a material negative impact on future sales. As part of the Company’s accounting policy for long-lived asset impairments, we believe the COVID-19 impact on the Company’s results of operations, cash flows and financial position and the ongoing uncertainty the virus has created around future operating results represented a triggering event starting in the first quarter of 2020 which continued throughout the remainder of 2020. Impairment charges recognized during 2020 totaled $1.1 million and primarily related to property and equipment and operating lease assets for certain stores that are projected to underperform to a level where the cash flows they generate will not be sufficient to cover their respective asset carry values. Results of Operations The following table presents selected financial data: (in thousands) 2021 2020 $ Change % Change Sales $ 82,661 $ 64,084 $ 18,577 29.0 % Gross profit 46,999 36,058 10,941 30.3 % Gross margin percentage 56.9 % 56.3 % 0.6 % Operating expenses 44,699 41,328 3,371 8.2 % Impairment expense - 1,078 (1,078 ) (100.0 )% Income (loss) from operations $ 2,300 $ (6,348 ) $ 8,648 136.2 % Net Sales Consolidated net sales increased by $18.6 million, or 29.0%, from 2021 to 2020. This sales growth is a reflection of continued strong demand from customers in all channels of distribution: retail stores, our website and our Commercial Division. While staffing challenges and sporadic store closures due to COVID-19 limited sales upside in some areas, consumers continued to invest COVID-era stimulus payments in their leatherworking interests, especially in our retail stores. At the same time, we believe our improved product quality, broader assortment, improved in-store expertise and service, and focused and efficient marketing communications were continuing to work together to drive sales. Our store footprint consisted of 106 stores at both December 31, 2021 and December 31, 2020. Gross Profit Gross profit increased by $10.9 million, or 30.3%, from 2021 to 2020 as a result of higher net sales as well as improved gross margin. Our gross margin percentage for the year ended December 31, 2021 increased to 56.9%, versus 56.3% in the same period in 2020. This increase was a result of a combination of factors, including product and customer mix shifts as well as refining the process we use to capitalize cost into our inventory value for freight, warehousing and handling expenditures, updating from a manual, higher-level process to a more automated mechanism using our new ERP system, partially offset by higher costs for warehouse handling and freight costs. 23 Table of Contents Operating Expenses (in thousands) 2021 2020 Operating expenses $ 44,699 $ 41,328 Non-routine items related to restatement (1,252 ) (3,587 ) Non-routine items related to CFO transition - (388 ) Adjusted operating expenses $ 43,447 $ 37,353 Operating expenses % of sales 54.1 % 64.5 % Adjusted operating expenses % of sales 52.6 % 58.3 % Operating expenses increased by $3.4 million in 2021 as compared to the corresponding prior year. This was mostly as a result of recalling store employees who had been furloughed while stores were closed in 2020 due to the COVID pandemic as well as sales-driven expenses like credit card fees and sales-based incentives, partially offset by $2.3 million in higher costs associated with the restatement of our financial statements and $0.4 million higher CFO transition costs in the prior year period. Adjusted operating expenses, which excludes the non-routine items related to the restatement and CFO turnover, increased $6.1 million or 16.3% for the reasons noted above. Adjusted operating expenses excluding non-routine items as shown above is a non-GAAP measure, included here to provide additional information regarding the Company’s financial performance on a recurring basis. Non-routine items are primarily legal and accounting fees associated with the restatement and recruiting fees, exit costs, interim CFO-related expenses, and expenses for a number of other contract accounting professionals associated with the turnover of our CFO in 2020. Impairment Expense During the first quarter of 2020, we determined the economic impact from the COVID-19 pandemic created a triggering event for our fleet of stores, and we performed recoverability testing at the store level with 26 stores failing recoverability testing and resulting in impairment expense of $1.1 million during the 2020 year. For the year ended December 31, 2021, no impairment expense was recognized. See Note 2, Significant Accounting Policies – Impairment of long-lived assets of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data of this Form 10-K for further detail. Other (Income) Expense Other (income) expense consists primarily of interest expense, interest income and foreign currency (gain) loss. For the year ended December 31, 2021, we recognized other expense of $0.1 million. During the year ended December 31, 2020, we recognized other income of $0.1 million. We incurred higher levels of interest expense in 2021 as compared to the prior year as a result of a $0.4 million loan provided for by the Spanish government as part of a COVID-19 relief program. Provision for Income Taxes Our effective tax rate was 38.3% and (21.9%) for the years ended December 31, 2021 and 2020, respectively. For 2021 and 2020, the difference between our statutory rates and our effective rate are primarily due to state income taxes, the difference in tax rates for loss carryback periods, items that are nondeductible for income tax purposes, and the change in valuation allowance against U.S. deferred tax assets and certain foreign net operating losses. 24 Table of Contents Capital Resources, Liquidity and Financial Condition We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments. We expect to fund our operating and liquidity needs primarily from a combination of current cash balances and cash generated from operating activities. Any excess cash will be invested as determined by our Board of Directors in accordance with its approved investment policy. Our cash balance as of December 31, 2021 totaled $10.2 million. Spain Loan During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small and Medium-sized Enterprises in order to facilitate the continuation of employment and to attenuate the economic effects of the COVID-19 virus. This loan was provided for by the Spanish government as part of a COVID-19 relief program. The term of the agreement is five years, and the interest rate is fixed at 1.5%. Based on the terms of the loan agreement, we are required to make monthly interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement. Share Repurchase Program On August 9, 2020, the Board of Directors approved a new program to repurchase up to $5.0 million of our common stock between August 9, 2020 and July 31, 2022. The Company’ s previous share repurchase program expired in August 2020. As of December 31, 2021 and 2020, the full $5.0 million of our common stock remained available for repurchase under this program. On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company to repurchase 500,000 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $3.35 per share for a total of $1.7 million. The closing of the repurchase of these shares took place on February 1, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5% of our outstanding common stock. On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company to repurchase 212,690 shares of our common stock, par value $0.0024 in a private transaction. The purchase price was $5.00 per share for a total of $1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4% of our outstanding common stock. These share repurchases were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plan described in the previous paragraph. Cash Flows (amounts in thousands) 2021 2020 Net cash provided by (used in) operating activities $ 3,716 $ (12,527 ) Net cash provided by (used in) investing activities (1,001 ) 6,256 Net cash provided by (used in) financing activities (2,777 ) 416 Effect of exchange rate changes on cash and cash equivalents (112 ) 279 Net decrease in cash and cash equivalents $ (174 ) $ (5,576 ) 25 Table of Contents For 2021, we generated $3.7 million of cash from operations driven by net income of $1.4 million, non-cash expenses of $5.2 million, including depreciation, amortization, and stock-based compensation, a reduction to income tax receivable of $1.8 million due to a federal income tax refund of $1.0 million related to the 2019 tax year and $0.8 million in income tax expense from expected taxable income generation in 2021, and $1.6 million of other changes in operating assets and liabilities mostly attributable to an increase in accounts payable and accrued liabilities of $1.9 million, and partially offset by the net buildup of inventory of $2.8 million and a reduction in lease liabilities of $3.4 million. We invested $1.0 million in capital expenditures for the purchase of store fixtures and systems implementations. We used cash in financing activities to repurchase 712,690 shares of Tandy common stock in two private purchases totaling $2.7 million at an average price of $3.84 per share. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $0.2 million. For the year ended 2020, we used $12.6 million of cash from operations driven by our net loss of $4.9 million which was offset by non-cash expenses of $6.7 million, including depreciation and amortization, impairments, and stock-based compensation. Working capital used $14.3 million of cash, primarily from the build-up of inventory. We received $7.5 million from the sale of short-term U.S. Treasuries. We invested $1.3 million in capital expenditures for the purchase of store fixtures and systems implementations. We borrowed $0.4 million as part of a COVID-19 relief program sponsored by the Spanish government. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $5.6 million. We believe that cash flow from operations and our existing cash reserves will be adequate to fund our operations through 2022, taking into account the current effects of the COVID-19 pandemic on our business and cash flow and our current business performance. In addition, we anticipate that this cash flow and our current cash reserves will enable us to meet our contractual obligations and commercial commitments throughout 2022. There can be no assurance, however, that the COVID-19 pandemic would not result in further restrictions on our business operations in a manner that would more materially impact our cash flow. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements during 2021 or 2020, and we do not currently have any such arrangements. Summary of Critical Accounting Policies The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States 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. The policies discussed below require estimates that contain a significant degree of judgement. The use of estimates is pervasive throughout the Consolidated Financial Statements, but the accounting policies and estimates considered most critical are as follows. 26 Table of Contents Revenue Recognition. Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) shipment of product generally via web sales, and (3) sales of product directly to commercial customers. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when control passes to the customer. Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales. Net sales are based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns. 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. Under our sales returns policy, merchandise may be returned, under most circumstances, up to 60 days after date of purchase. As merchandise is returned, the company records the sales return against the sales return allowance. 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. Inventory. Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods held for sale includes the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process is valued on a first‑in, first-out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the 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 twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our accounting system to reflect actual count results. Leases. We lease certain real estate for our retail store locations and warehouse equipment for our Texas distribution center, both under long-term lease agreements. Starting in 2019, with the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), once we have determined an arrangement is a lease, at inception we recognize a lease asset and lease liability at commencement date based on the present value of the lease payments over the lease term. For our operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably certain we will exercise such an option. The exercise of lease renewal options 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. Rent expense is recorded in operating expenses. The net excess of rent expense over the actual cash paid has been recorded as accrued expenses and other liabilities in the accompanying consolidated balance sheets. 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 incurred interest expense is recorded in interest expense on the consolidated statements of comprehensive income (loss). As of December 31, 2021, we have no sublease agreements and no lease agreements in which we are named as a lessor. Subsequent to the recognition of our operating lease assets and lease liabilities, we recognize lease expense related to our operating leases on a straight-line basis over the lease term. 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 operating lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable. 27 Table of Contents Impairment of Long-Lived Assets . We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate the carrying value of certain assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use (“ROU”) lease assets, property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group’s major classifications which in this case are operating lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method. Stock-based Compensation . The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards. Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. The total compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards. 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. 28 Table of Contents Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. 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 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. 29 Table of Contents ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Tandy Leather Factory, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Tandy Leather Factory, Inc. and Subsidiaries (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive income (loss) and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of Inventory The Company’s accounting policy for the recognition of inventory and cost of sales is described in Note 2 to the consolidated financial statements. The Company has recorded an inventory balance of approximately $38.1 million and cost of sales of approximately $35.7 million as of and for the year ended December 31, 2021. Additionally, Note 3 to the consolidated financial statements provides further detail of the components of the year-end inventory balance. The Company’s merchandise inventories are stated at the lower of cost or net realizable value using a first-in first-out costing principle. Finished goods inventory costs include the cost of merchandise purchases, the costs to bring the merchandise to the Company’s distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to the Company’s stores. Manufacturing inventory, raw materials and work-in-process are also valued on a first‑in, first-out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead. The determination of amounts that are required to be capitalized to inventory resulting from manufacturing labor and overhead costs, warehouse and handling expenditures and transportation costs (together “overhead costs”) are subjective and are generally based on an allocation ratio calculated by the Company using the previous year’s actual overhead costs and the value of inventory handled during that year, subject to adjustment for current economic or market conditions. Additionally, to determine if the value of their inventory should be written down, the Company considers many factors, including condition of the product (excessive scars, discoloring or damage from UV light), current and anticipated demand that may cause the product to become slow moving and age of the merchandise to ensure that the product line is considered fresh. If a write-down is warranted, the carrying value of the merchandise is reduced from its original cost to the lower of its cost or net realizable value. Management estimates the value of inventory by estimating the capitalizable overhead costs and adjusts the inventory to lower of cost or net realizable value. Our audit procedures to evaluate these items involved a higher degree of auditor judgment and the involvement of more senior members of the engagement team in executing, supervising, and reviewing the results of the procedures. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the valuation of inventories included the following, among others: • We obtained an understanding of the controls over the valuation of inventory. • We tested the inventory costs incurred by the Company by reviewing supplier invoices and ensuring that appropriate application of the first-in first-out principle was followed. • We evaluated the appropriateness and consistency of management’s methodology and assumptions used in calculating the capitalizable overhead costs allocation ratio. • We evaluated the appropriateness of the capitalized overhead costs by analyzing them against actual overhead costs incurred during the year. • We tested the mathematical accuracy of the Company’s inventory obsolescence reserve calculation. • We evaluated the appropriateness and consistency of management’s methodology and assumptions used in developing its estimate of the inventory obsolescence reserve. • We performed analytical procedures on the current year reserve rates (by product category) by comparing them to prior year rates and then obtaining corroborating evidence for any significant fluctuations. • We tested on a sample basis, sales subsequent to yearend of the written-down items to ensure that the net realizable value was not lower than the previously written down value. /s/ WEAVER AND TIDWELL, L.L.P . We have served as the Company’s auditor since 2003. Oklahoma City, Oklahoma March 31, 2022 31 Table of Contents Tandy Leather Factory, Inc. Consolidated Balance Sheets (amounts in thousands, except share data and per share data) December 31, 2021 December 31, 2020 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 10,155 $ 10,329 Accounts receivable-trade, net of allowance for doubtful accounts of $ 24 and $ 14 at December 31 , 2021 and 2020 , respectively 614 350 Inventory 38,084 36,779 Income tax receivable 972 2,753 Prepaid expenses 483 536 Other current assets 141 265 Total current assets 50,449 51,012 Property and equipment, at cost 27,750 27,468 Less accumulated depreciation ( 15,989 ) ( 15,078 ) Property and equipment, net 11,761 12,390 Operating lease assets 10,438 11,772 Financing lease assets 37 44 Deferred income taxes - 82 Other intangibles, net of accumulated amortization of $ 548 at December 31 , 2021 and 2020 6 6 Other assets 394 387 TOTAL ASSETS $ 73,085 $ 75,693 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable-trade $ 4,786 $ 5,737 Accrued expenses and other liabilities 4,302 3,642 Current portion of operating lease liabilities 3,025 3,530 Current portion of finance lease liabilities 15 14 Current maturities of long-term debt 79 - Total current liabilities 12,207 12,923 Uncertain tax positions 415 393 Other non-current liabilities 417 463 Operating lease liabilities, non-current 8,194 9,245 Finance lease liabilities, non-current 15 29 Long-term debt, net of current maturities 336 446 COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS’ EQUITY: Preferred stock, $ 0.10 par value; 20,000,000 shares authorized; none issued or outstanding; attributes to be determined on issuance - - Common stock, $ 0.0024 par value; 25,000,000 shares authorized; 9,971,711 and 10,575,182 shares issued at December 31 , 2021 and 2020 , respectively; 8,547,335 and 9,150,806 shares outstanding at December 31, 2021 and 2020 , respectively 24 25 Paid-in capital 3,959 5,924 Retained earnings 58,664 57,310 Treasury stock at cost ( 1,424,376 shares at December 31 , 2021 and 2020 ) ( 9,773 ) ( 9,773 ) Accumulated other comprehensive loss, net of tax ( 1,373 ) ( 1,292 ) Total stockholders’ equity 51,501 52,194 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 73,085 $ 75,693 The accompanying notes are an integral part of these Consolidated Financial Statements. 32 Table of Contents Tandy Leather Factory, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (amounts in thousands, except share and per share data) For the Years Ended December 31, 2021 2020 Net sales $ 82,661 $ 64,084 Cost of sales 35,662 28,026 Gross profit 46,999 36,058 Operating expenses 44,699 41,328 Impairment expense - 1,078 Income (loss) from operations 2,300 ( 6,348 ) Other (income) expense: Interest expense 16 7 Other, net 91 ( 76 ) Total other (income) expense 107 ( 69 ) Income (loss) before income taxes 2,193 ( 6,279 ) Income tax provision (benefit) 839 ( 1,378 ) Net income (loss) $ 1,354 $ ( 4,901 ) Foreign currency translation adjustments, net of tax ( 81 ) ( 211 ) Comprehensive income (loss) $ 1,273 $ ( 5,112 ) Net income (loss) per common share: Basic $ 0.16 $ ( 0.54 ) Diluted $ 0.16 $ ( 0.54 ) Weighted average number of shares outstanding: Basic 8,709,866 9,062,598 Diluted 8,720,469 9,062,598 The accompanying notes are an integral part of these Consolidated Financial Statements. 33 Table of Contents Tandy Leather Factory, Inc. Consolidated Statements of Cash Flows (amounts in thousands) For the Years Ended December 31, 2021 2020 Cash flows from operating activities: Net income (loss) $ 1,354 $ ( 4,901 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,105 1,021 Operating lease asset amortization 3,202 3,193 Impairment of goodwill and long-lived assets - 1,078 Loss (gain) on disposal of assets ( 8 ) 59 Stock-based compensation 797 887 Deferred income taxes 83 442 Exchange (gain) loss 23 ( 5 ) Changes in operating assets and liabilities: Accounts receivable-trade ( 325 ) 86 Inventory ( 2,777 ) ( 12,686 ) Prepaid expenses 83 675 Other current assets ( 8 ) 1,574 Accounts payable-trade 1,143 ( 440 ) Accrued expenses and other liabilities 743 1,022 Income taxes, net 1,775 ( 1,120 ) Other assets ( 52 ) ( 41 ) Operating lease liabilities ( 3,422 ) ( 3,371 ) Total adjustments 2,362 ( 7,626 ) Net cash provided by (used in) operating activities 3,716 ( 12,527 ) Cash flows from investing activities: Purchase of property and equipment ( 1,001 ) ( 1,313 ) Proceeds from sales of short-term investments - 7,523 Proceeds from sales of assets - 46 Net cash provided by (used in) investing activities ( 1,001 ) 6,256 Cash flows from financing activities: Proceeds from long-term debt - 416 Payments of capital lease obligations ( 14 ) - Repurchase of common stock ( 2,738 ) - Purchase of vested stock for employee payroll tax ( 25 ) - Net cash provided by (used in) financing activities ( 2,777 ) 416 Effect of exchange rate changes on cash and cash equivalents ( 112 ) 279 Net decrease in cash and cash equivalents ( 174 ) ( 5,576 ) Cash and cash equivalents, beginning of period 10,329 15,905 Cash and cash equivalents, end of period $ 10,155 $ 10,329 The accompanying notes are an integral part of these Consolidated Financial Statements. 34 Table of Contents Tandy Leather Factory, Inc. Consolidated Statements of Cash Flows - continued (amounts in thousands) For the Years Ended December 31, 2021 2020 Supplemental disclosures of cash flow information: Interest paid during the period $ 16 $ 17 Income tax paid (refunded) during the period, net $ ( 994 ) $ 56 Supplemental disclosures of non-cash activity: Change in accruals related to property and equipment $ - $ ( 105 ) Operating lease assets obtained in exchange for lease liabilities, net $ 1,853 $ 1,702 The accompanying notes are an integral part of these Consolidated Financial Statements. 35 Table of Contents Tandy Leather Factory, Inc. Consolidated Statements of Stockholders’ Equity (amounts in thousands, except share data) Number of Shares Common Stock Outstanding Par Value Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance, December 31 , 2019 9,022,187 $ 25 $ 5,037 $ ( 9,773 ) $ 62,211 $ ( 1,081 ) 56,419 Stock-based compensation expense - - 887 - - - 887 Issuance of restricted stock 128,619 - - - - - - Net loss - - - - ( 4,901 ) - ( 4,901 ) Foreign currency translation adjustments, net of tax - - - - - ( 211 ) ( 211 ) Balance, December 31 , 2020 9,150,806 $ 25 $ 5,924 $ ( 9,773 ) $ 57,310 $ ( 1,292 ) $ 52,194 Stock-based compensation expense - - 797 - - - 797 Issuance of restricted stock 114,075 - - - - - - Purchase of vested stock for employee payroll tax ( 4,856 ) - ( 25 ) - - - ( 25 ) Repurchase of common stock ( 712,690 ) ( 1 ) ( 2,737 ) - - - ( 2,738 ) Net income - - - - 1,354 - 1,354 Foreign currency translation adjustments, net of tax - - - - - ( 81 ) ( 81 ) Balance, December 31 , 2021 8,547,335 $ 24 $ 3,959 $ ( 9,773 ) $ 58,664 $ ( 1,373 ) $ 51,501 The accompanying notes are an integral part of these Consolidated Financial Statements. 36 Table of Contents TANDY LEATHER FACTORY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021and 2020 1. DESCRIPTION OF BUSINESS Tandy Leather Factory, Inc. (“TLFA,” “we,” “our,” “us,” the” Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries) is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking. 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, and 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 and through orders generated from our four websites: tandyleather.com, tandyleather.ca, tandyleather.eu and tandyleather.com.au. 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 106 retail stores. There are 95 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 OTC Pink Market operated by OTC Markets Group under the symbol “TLFA.” We operate as a single segment and report on a consolidated basis. COVID-19 The onset of the COVID-19 pandemic in March 2020 temporarily shifted our strategic focus to company survival and cash preservation. We began closing stores on March 18, 2020, and by April 2, 2020, we temporarily closed all stores to the public. While we pivoted to serve customers only online, the Company experienced significant decreases in demand for its products in the second and third quarters of 2020, negatively impacting net sales. In response, w e took immediate action to mitigate the impact of temporary store closures on our cash flows by: (i) furloughing 406 Tandy employees, comprising two-thirds of the Tandy work force, (ii) temporarily cutting corporate salaries, with deeper cuts for the Executive Leadership Team, (iii) negotiating abatements, deferrals and other favorable lease terms with landlords, and (iv) negotiating longer payment terms with our key product vendors. 37 Table of Contents Due to our size, we were not eligible for the Paycheck Protection Program administered through the Small Business Administration. Also, due to our not being current on financial filings with the SEC, we were not able to obtain loans under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. However, under the CARES Act we were eligible to participate in the payroll tax deferral program, and we deferred $ 0.6 million in payroll tax with $ 0.3 million paid on December 31, 2021, and the remaining $ 0.3 million to be paid by December 31, 2022. During the second quarter of 2020, the Company borrowed $ 0.4 million through the Spanish government’s Institute of Official Credit Guarantee for Small and Medium-sized Enterprises, a COVID-19 relief program. The term of the agreement is for five years and the interest rate is fixed at 1.5 %. Based on the terms of the loan agreement, we make interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement. In Canada, we participated in the Canada Emergency Commercial Rent Assistance (“CECRA”) program for rent relief, receiving total rent abatements under the program of $ 0.05 million. Nine stores were permanently closed during 2020 as leases expired or early terminations were negotiated, including at locations where we believe we can retain a majority of customers through geographically proximate stores and/or our enhanced website platform. After these permanent closures, Tandy operates 106 stores, including ten in Canada and one in Spain. During the third quarter of 2020, all of Tandy’s stores reopened to the public. While customer response to our store reopening has been good, since then, various spikes in local infection rates and the “wave” created by the Delta variant of COVID-19 in the summer of 2021 have forced us to sporadically move stores to short-term “curbside only” operations or closures due to local conditions or staffing issues. We expect that at least some further infections and temporary store shutdowns will continue for the foreseeable future. While we previously fulfilled our web orders out of our retail stores, during the second quarter of 2020, we built a centralized web fulfillment capability in our Fort Worth distribution center and have been and expect to continue to fulfill web orders primarily through Fort Worth going forward. Both our e-commerce business and stores have seen strong sales performance, but the future remains uncertain, and more store closures and/or other ongoing effects of the pandemic on the economy or employment market could cause a material negative impact on future sales. As part of the Company’s accounting policy for long-lived asset impairments, we believe the COVID-19 impact on the Company’s results of operations, cash flows and financial position and the ongoing uncertainty the virus has created around future operating results represented a triggering event during the first quarter of 2020 and continued throughout 2020. For fiscal year 2020, the Company recorded impairment expense of $ 1.1 million, primarily related to property and equipment and operating lease assets for certain stores that underperformed to a level where the cash flows they generate will not be sufficient to cover their respective asset carry values. 2. SIGNIFICANT ACCOUNTING POLICIES Management estimates and reporting The preparation of the Company’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“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. The policies discussed below require estimates that contain a significant degree of judgement. The use of estimates is pervasive throughout the Consolidated Financial Statements, but the accounting policies and estimates considered most significant are as follows. 38 Table of Contents Principles of consolidation Our Consolidated Financial Statements include the accounts of Tandy Leather Factory, Inc. and its active wholly-owned subsidiaries, The Leather Factory, L.P. (a Texas limited partnership), Tandy Leather Company, L.P. (a Texas limited partnership), The Leather Factory of Canada, Ltd. (a Canadian corporation), Tandy Leather Factory UK Limited (a UK corporation), Tandy Leather Factory Australia Pty. Limited (an Australian corporation), and Tandy Leather Factory España, S.L. (a Spanish corporation). All intercompany accounts and transactions have been eliminated in consolidation. Cash and cash equivalents The Company considers investments with a maturity when purchased of three months or less to be cash equivalents. All credit card, debit card and electronic transfer transactions that process in less than seven days are classified as cash and cash equivalents. Accounts Receivable and Expected Credit Losses Our receivables primarily arise from the sale of merchandise to customers that have applied for and been granted credit. Accounts receivable are stated at amounts due, net of an allowance for doubtful accounts. Accounts receivable are generally due within 30 days of invoicing. We estimate expected credit losses based on factors such as the composition of accounts receivable, the age of the accounts, historical bad debt experience, and our evaluation of the financial condition and past collection history of each customer. Management believes that the historical loss information it has compiled is a reasonable base on which to determine expected credit losses for trade receivables held at December 31, 2021, because the composition of the trade receivables at that date is consistent with that used in developing the historical credit-loss percentages (i.e., the similar risk characteristics of its customers and its credit practices have not changed significantly over time). Foreign currency translation and transactions Foreign currency translation adjustments arise from activities of our foreign subsidiaries. Results of operations are translated into U.S. dollars using the average exchange rates during the period, while assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments are recorded in stockholders’ equity, net of tax. For the years ended December 31, 2021 and 2020, we recorded foreign currency translation loss adjustments of $ 0.1 million and $ 0.2 million, respectively. Gains and losses resulting from foreign currency transactions are recorded in other, net within the statements of operations and comprehensive income (loss). We did no t recognize a foreign currency transaction gain or loss in the years ended December 31, 2021 and 2020. 39 Table of Contents Revenue recognition Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) shipment of product generally via web sales, and (3) sales of product directly to commercial customers. We recognize revenue when we satisfy the performance obligation of transferring control of product merchandise over to a customer. At the store counter, our performance obligation is met and revenue is recognized when a sales transaction occurs with a customer. When merchandise is shipped to a customer, our performance obligation is met and revenue is recognized when control passes to the customer. Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales. Net sales is based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns. 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 $ 0.2 million as of December 31, 2021 and 2020. The estimated value of merchandise expected to be returned included in other current assets was $ 0.1 million as of December 31, 2021 and 2020. 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 December 31, 2021 and 2020, our gift card liability, included in accrued expenses and other liabilities, was $ 0.4 million and $ 0.3 million, respectively. We recognized gift card revenue of $ 0.2 million during 2021 from the December 31, 2020 deferred revenue balance and $ 0.2 million during 2020 from the December 31, 2019 deferred revenue balance. For the years ended December 31, 2021 and 2020, we recognized $ 0.7 million and $ 0.6 million, respectively, in net sales associated with gift cards. Disaggregated revenue In the following table, revenue for the years ended December 31, 2021 and 2020 is disaggregated by geographic areas as follows: (in thousands) 2021 2020 United States $ 73,546 $ 56,877 Canada 7,470 5,798 Spain 1,645 1,409 Net sales $ 82,661 $ 64,084 Geographic sales information is based on the location of the store. Excluding Canada, no single foreign country had net sales greater than 2.2 % of our consolidated net sales in 2021 or 2020. Discounts We offer a single retail price level, plus three volume-based levels for commercial customers. Discounts from those price levels are offered to Business, Military/First Responder and Employee customers. Such discounts do not convey a material right to these customers since the discounted pricing they receive at the point of sale is not dependent upon any previous or subsequent purchases. As a result, sales are reported after deduction of discounts at the point of sale. We do not pay slotting fees or make other payments to resellers. Operating expense Operating expenses include all selling, general and administrative costs, including wages and benefits, rent and occupancy costs, depreciation, advertising, store operating expenses, outbound freight charges (to ship merchandise to customers), and corporate office costs. 40 Table of Contents Property and equipment, net of accumulated depreciation Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are three to ten years for equipment and machinery, seven to fifteen years for furniture and fixtures, five years for vehicles, and forty years for buildings and related improvements. Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred. Inventory Inventory is stated at the lower of cost (first-in, first-out) or net realizable value. Finished goods held for sale includes the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Manufacturing inventory including raw materials and work-in-process is valued on a first‑in, first out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the 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 twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our accounting system to reflect actual count results. Leases We lease certain real estate for our retail store locations and warehouse equipment for our Texas distribution center, both under long-term lease agreements. We determine if an arrangement is a lease at inception and recognize right-of-use (“ROU”) assets and lease liabilities at commencement date based on the present value of the lease payments over the lease term. We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes. 41 Table of Contents For operating leases, the present value of our lease payments 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 on a straight-line basis over the lease term. 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 incurred interest expense is recorded in interest expense on the consolidated statements of comprehensive income (loss). 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. Refer to Note 4, Leases for further discussion of the Company’s leases. Impairment of long-lived assets We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate the carrying value of certain assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use (“ROU”) lease assets, property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group’s major classifications which in this case are operating lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method. During the first quarter of 2020, we determined the economic impact from the COVID-19 pandemic created a triggering event for our fleet of stores, and we performed recoverability testing at the store level with 26 stores failing recoverability testing and resulting in impairment expense of $ 1.1 million during the 2020 year. For the year ended December 31, 2021, no impairment expense was recognized 42 Table of Contents Earnings per share Basic earnings per share (“EPS”) are computed based on the weighted average number of common shares outstanding during the period. Diluted EPS includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s restricted stock plan, had been issued. Anti-dilutive securities represent potentially dilutive securities which are excluded from the computation of diluted EPS as their impact would be anti-dilutive. Diluted EPS is computed using the treasury stock method. (in thousands, except share data) 2021 2020 (1) Numerator: Net income (loss) $ 1,354 $ ( 4,901 ) Denominator: Basic weighted-average common shares ouststanding 8,709,866 9,062,598 Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan 10,603 - Diluted weighted-average common shares outstanding 8,720,469 9,062,598 (1) For the year ended December 31, 2020, there were 6,401 shares excluded from the diluted EPS calculation because the impact of their assumed vesting would be anti-dilutive due to a net loss in that period. For additional disclosures regarding restricted stock awards and employee stock options, see Note 10, Stockholders’ Equity – Equity Compensation Plans. Other intangibles All our intangible assets are definite-lived intangibles and are subject to amortization. The weighted average amortization period is 15 years for trademarks and copyrights. Amortization expense related to other intangible assets was less than $ 0.01 million in each of 2021 and 2020 and was recorded in operating expenses. Based on the current amount of intangible assets subject to amortization, we estimate amortization expense to be less than $ 0.01 million annually over the next five years. Fair value of financial instruments We measure fair value as an exit price, which is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering such assumptions, accounting standards establish a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: • 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. 43 Table of Contents 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 accounts receivable, accounts payable, and long-term debt. As of December 31, 2021 and 2020, 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 years ended December 31, 2021 and 2020. Short-term investments We determine the appropriate classification of investments at the time of purchase, and we re-evaluate that determination at each balance sheet date. Investments are recorded as either short-term or long-term on the Consolidated Balance Sheet, based on contractual maturity date. Income taxes Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. 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. 44 Table of Contents Stock-based compensation The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards. Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. Compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards. 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. Comprehensive income (loss) Comprehensive income (loss) includes net income (loss) and certain other items that are recorded directly to stockholders’ equity. The Company’s only source of other comprehensive income (loss) is foreign currency translation adjustments, and those adjustments are presented net of tax. Shipping and handling costs Costs to ship products from our stores to our customers are included in operating expenses on the Consolidated Statements of Operations and Comprehensive Income (Loss). These costs totaled $ 3.1 million and $ 3.2 million for the years ended December 31, 2021 and 2020, respectively. Advertising Advertising costs include the cost of print, digital, direct mail, community events, trade shows, and our e-commerce platform. Advertising costs are expensed as incurred. Total advertising expense was $ 1.0 million and $ 1.1 million in 2021 and 2020, respectively. Recently Adopted Accounting Pronouncements Simplifying the Accounting for Income Taxes In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. We adopted this ASU on January 1, 2021; the adoption of this ASU did not have a material effect on the Company’s financial condition, results of operations or cash flows. 45 Table of Contents 3. BALANCE SHEET COMPONENTS Inventory (in thousands) December 31, 2021 December 31, 2020 On hand: Finished goods held for sale $ 34,928 $ 32,654 Raw materials and work in process 828 828 Inventory in transit 2,328 3,297 TOTAL $ 38,084 $ 36,779 Property and Equipment (in thousands) December 31, 2021 December 31, 2020 Building $ 9,257 $ 9,240 Land 1,451 1,451 Leasehold improvements 1,833 1,853 Equipment and machinery 7,704 7,361 Furniture and fixtures 7,350 7,339 Vehicles 155 224 27,750 27,468 Lesss: accumulated depreciation ( 15,989 ) ( 15,078 ) TOTAL $ 11,761 $ 12,390 Our property and equipment, net was located in the following countries: (in thousands) December 31, 2021 December 31, 2020 United States $ 11,508 $ 12,077 Canada 252 309 United Kingdom - 2 Spain 1 2 $ 11,761 $ 12,390 Depreciation expense was $ 1.1 million and $ 1.0 million for the years ended December 31, 2021 and 2020, respectively. Short-term Liabilities Accrued Expenses and Other Liabilities December 31, 2021 December 31, 2020 (in thousands) Accrued employee related costs 2,508 1,121 Unearned gift card revenue 351 301 Estimated returns 242 241 Sales and payroll taxes payable 987 935 Accrued vendor payables 214 1,044 TOTAL $ 4,302 $ 3,642 46 Table of Contents 4. LEASES The Company leases certain real estate and warehouse equipment under long-term lease agreements. On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) (“Topic 842”), and all subsequent amendments, using the optional transition method applied to leases existing on January 1, 2019, with no restatement of comparative periods. The Company performs interim reviews of its operating and finance lease assets for impairment when evidence exists that the carrying value of an asset group, including a lease asset, may not be recoverable. The Company recognized no impairment expense related to its lease assets during the year ended December 31, 2021. During the years ended December 31, 2020, the Company recognized impairment expense of approximately $ 0.6 million associated with certain operating lease assets. Additional information regarding the Company’s operating and finance leases is as follows (in thousands, except for lease term and discount rate information): Leases Balance Sheet Classification December 31, 2021 December 31, 2020 (in thousands) Assets: Operating Operating lease assets $ 10,438 $ 11,772 Finance Financing lease assets 37 44 Total assets $ 10,475 $ 11,816 Liabilities: Current Operating Current portion of operating lease liabilities $ 3,025 $ 3,530 Finance Current portion of finance lease liabilities 15 14 Non-current Operating Operating lease liabilities, non-current 8,194 9,245 Finance Finance lease liabilities, non-current 15 29 Total lease liabilities $ 11,249 $ 12,818 Lease Cost Income Statement Classification December 31, 2021 December 31, 2020 (in thousands) Operating lease cost Operating expenses $ 3,664 $ 3,809 Operating lease cost Impairment expense - 601 Short-term lease cost Operating expenses 45 - Variable lease cost (1) Operating expenses 946 937 Finance: (2) Amortization of lease assets Operating expenses 7 - Interest on lease liabilities Interest expense 2 - Total lease cost $ 4,664 $ 5,347 (1) Variable lease cost includes payment for certain real estate taxes, insurance, common area maintenance, and other charges related to lease agreements, which are not included in the measurement of the operating lease liabilities. (2) Finance lease costs were less than $ 1,000 during the 2020 year. 47 Table of Contents December 31, 2021 Maturity of Lease Liabilities Operating Leases Finance Leases (in thousands) 2022 $ 3,488 $ 17 2023 2,665 $ 15 2024 2,021 $ - 2025 1,386 $ - 2026 1,114 $ - Thereafter 2,218 $ - Total lease payments $ 12,892 $ 32 Less: Interest ( 1,673 ) ( 2 ) Present value of lease liabilities $ 11,219 $ 30 Other Information December 31, 2021 December 31, 2020 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used in operating leases $ 3,876 $ 3,866 Operating cash flows used in finance leases 2 - Financing cash flows used in finance leases 14 - Operating lease assets obtained in exchange for lease obligations Operating leases, initial recognition 1,653 317 Operating leases, modifications and remeasurements 200 1,340 Finance leases, initial recognition - 45 Lease Term and Discount Rate December 31, 2021 December 31, 2020 Weighted-average remaining lease term (years): Operating leases 5.3 5.9 Finance leases 1.9 2.9 Weighted-average discount rate: Operating leases 4.5 % 4.4 % Finance leases 6.5 % 6.5 % 5. NOTES PAYABLE AND LONG-TERM DEBT During the second quarter of 2020, the Company borrowed $ 0.4 million from Banco Santander S.A. under the Institute of Official Credit Guarantee for Small and Medium-sized Enterprises in order to facilitate the continuation of employment and to attenuate the economic effects of the coronavirus (“COVID-19”) virus. This loan was provided for by the Spanish government as part of a COVID-19 relief program and was denominated in Euros. The term of the agreement is five years and the interest rate is fixed at 1.5 %. Based on the terms of the loan agreement, we are required to make monthly interest-only payments for the first two years and monthly principal and interest payments for the remainder of the term of the agreement. On April 2, 2020, the Company’s primary bank, BOKF, NA d/b/a Bank of Texas, terminated a $ 6.0 million working capital line of credit facility secured by inventory and a $ 15.0 million credit facility secured by the Company’s owned real estate as a result of the failure to provide timely quarterly financial statements and compliance certificates required under the facilities. The delay was the result of the need to restate previously filed financial statements and file subsequent delinquent filings with the SEC. As of the date of the termination, Tandy had no borrowings outstanding under these line of credit facilities or with any other lending institution. 48 Table of Contents The amount outstanding under the above agreement consisted of the following with changes in the year over year balance solely due to foreign currency translation: (in thousands) 2021 2020 Institute of Official Credit (“ICO”) Guarantee for Small and Medium-sized Enterprises with Banco Santander S.A. (Spain) as described more fully above - interest due monthly at 1.50 %; matures June 4, 2025 $ 336 $ 446 $ 336 $ 446 Less current maturities 79 - TOTAL $ 415 $ 446 6. EMPLOYEE BENEFIT AND SAVINGS PLANS We have a 401(k) plan to provide retirement benefits for our employees. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred salary contributions for eligible employees and allows employees to contribute a percentage of their annual compensation to the plan on a pretax basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. In 2021 and 2020, we matched 100 % of the pretax employee contributions on the first 3 % of eligible earnings and 50 % of the pretax employee contributions on the next 2 % of eligible earnings that are contributed by employees. For the years ended December 31, 2021 and 2020, we recorded employer match expense of $ 0.3 million and $ 0.2 million, respectively. The plan allows employees who meet the age requirements and reach the plan contribution limits to make a catch-up contribution. The catch-up contributions are not eligible for matching contributions. In addition, the plan provides for discretionary matching contributions as determined by the Board of Directors. There were no discretionary matching contributions made in 2021 or 2020. We offer no postretirement or postemployment benefits to our employees. 49 Table of Contents 7. INCOME TAXES The provision for income taxes consists of the following: (in thousands) Year Ended December 31, Income Tax Benefit 2021 2020 Current provision (benefit): Federal $ 640 $ ( 1,385 ) State 98 65 Foreign - 6 Related to UTP 19 20 757 ( 1,294 ) Deferred provision (benefit): Federal - ( 62 ) State - ( 3 ) Foreign 82 ( 19 ) 82 ( 84 ) Total tax provision (benefit) $ 839 $ ( 1,378 ) We have $ 2.2 million of net operating loss (“NOL”) carryovers which will begin to expire in 2025. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has evaluated the impact of the CARES Act and estimates the NOL carryback provision of the CARES Act will result in a cash tax benefit in excess of $ 1.0 million. Income (loss) before income taxes was earned in the following tax jurisdictions: (in thousands) Year Ended December 31, Income (Loss) Before Income Taxes 2021 2020 United States $ 2,552 $ ( 6,222 ) Spain ( 135 ) 161 Canada ( 229 ) ( 204 ) Australia ( 1 ) ( 7 ) United Kingdom 6 ( 7 ) TOTAL $ 2,193 $ ( 6,279 ) 50 Table of Contents The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows: Deferred income tax assets: 2021 2020 (in thousands) Inventory $ 464 $ 498 Stock-based compensation 59 63 Accounts receivable 4 4 Sales returns 125 105 Foreign currency translation gain/loss in OCI 342 323 Goodwill and other intangible assets amortization - 5 Net operating loss 646 665 Accrued expenses 359 170 Leases 195 250 Other 2 1 Total deferred income tax assets 2,196 2,084 Less: valuation allowance ( 1,489 ) ( 1,320 ) Total deferred income tax assets, net of valuation allowance $ 707 $ 764 Property and equipment depreciation $ 707 $ 682 Total deferred income tax liabilities 707 682 Net deferred tax asset (liability) $ - $ 82 We are required to reduce deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. We determined a $ 0.2 million increase to the valuation allowance for deferred income tax assets was necessary as of December 31, 2021, as compared to 2020. Our evaluation considered, among other things, the nature, frequency, and severity of losses, forecasts of future profitability and the duration of statutory carryforward periods. 51 Table of Contents Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, the difference in tax rates for loss carryback periods for the 2020 tax year, foreign income/loss positions, expenses that are nondeductible for tax purposes, the change in our valuation allowance associated with our deferred tax assets, and differences in tax rates. Below is a reconciliation of our effective tax rate from the statutory rate: Year Ended December 31, 2021 2020 Statutory rate – Federal U.S. income tax 21 % 21 % State and local taxes 9 % 3 % Permanent book/tax differences 3 % ( 2 )% Difference in tax rates in loss carryback periods 0 % 8 % Change in valuation allowance 6 % ( 10 )% Rate differential on UTP reversals 1 % 0 % Other, net ( 2 )% 2 % Effective rate 38 % 22 % We file a consolidated U.S. income tax return as well as state tax returns on a consolidated, combined, or stand-alone basis, depending on the jurisdiction. We are no longer subject to U.S. federal income tax examinations by tax authorities for years prior to the tax year ended December 2017. Depending on the jurisdiction, we are no longer subject to state examinations by tax authorities for years prior to the December 2015 and December 2016 tax years. We file tax returns in a limited number of foreign jurisdictions. With few exceptions, we are no longer subject to non-U.S. income tax examinations for years before 2015. A reconciliation of the beginning and ending amount of uncertain tax positions (“UTP”) is as follows: 2021 2020 UTP at beginning of the year $ 393 $ 296 Gross increase to tax positions in current period 3 77 Interest expense 19 20 UTP at end of year $ 415 $ 393 Included in the balance of UTPs as of December 31, 2021 and 2020 are $ 0.1 million of tax benefits that, if recognized, would affect the effective tax rate. Also included in the balance of UTPs as of December 31, 2021 and 2020 are $ 0.3 million of tax benefits that, if recognized, would result in adjustments primarily to deferred taxes. 8. COMMITMENTS AND CONTINGENCIES Legal Proceedings We are periodically involved in various litigation that arises in the ordinary course of business and operations. There are no such matters pending that we expect to have a material impact on our financial position or operating results. Legal costs associated with the resolution of claims, lawsuits, and other contingencies are expensed as incurred. SEC Investigation In 2019, the Company self-reported to the SEC information concerning the internal investigation of previously disclosed accounting matters resulting in the restatement for the full year 2017 and full year 2018, including interim quarters in 2018, and the first quarter of 2019. In response, the Division of Enforcement of the SEC initiated an investigation into the Company’s historical accounting practices. In July 2021, the Company entered into a settlement agreement with the SEC to conclude this investigation. Under the terms of the settlement, in addition to other non-monetary settlement terms, (1) the Company paid a civil monetary penalty of $ 200,000 , and (2) the Company’s former Chief Financial Officer and Chief Executive Officer agreed to pay a civil monetary penalty of $ 25,000 . In accepting the Company’s settlement offer, the SEC took into account remedial actions the Company took promptly after learning of the issues detailed in the SEC’s order. 52 Table of Contents Delisting of the Company’s Common Stock As previously disclosed, the Company was unable to timely file the delinquent Exchange Act filings due to the process of restating its financial statements as described above. Because the restatement process was not complete, Nasdaq suspended trading in our stock on Nasdaq as of August 13, 2020, and subsequently delisted it in February 2021. Since August 13, 2020, our stock has traded on the Pink Market operated by OTC Markets Group under the symbol “TLFA.” We have reapplied for Nasdaq listing but cannot be certain when or if that application will be approved. 9. SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK Major Customers Our revenues are derived from a diverse group of customers, from hobbyist crafters to small and large businesses across a wide variety of industries. No single customer accounted for more than 0.7% of our consolidated revenues in 2021 or 2020, and sales to our five largest customers represented 2.0 % and 1.1 %, respectively, of consolidated revenues in those years. While we do not believe the loss of one of these customers would have a significant negative impact on our operations, we do believe the loss of several of these customers simultaneously or a substantial reduction in sales generated by them could temporarily affect our operating results. Major Suppliers We purchase merchandise and raw materials from over 170 vendors from the United States and approximately 20 foreign countries. In general, our 10 largest vendors account for approximately 60 - 75 % of our inventory purchases. Credit Risk Due to the large number of customers comprising our customer base, concentrations of credit risk with respect to customer receivables are limited, although as of December 31, 2021 and 2020, two customers’ balances represented 23.7 % and 29.9 % of net accounts receivable balance, respectively. We do not generally require collateral for accounts receivable, but we do perform periodic credit evaluations of our customers and believe the allowance for doubtful accounts is adequate. It is our opinion that if any one or a group of customer receivable balances should be deemed uncollectable, it would not have a material adverse effect on our results of operations or financial condition. We maintain a majority of our cash in bank deposit accounts that, at times, may exceed federally insured limits. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk on our cash and cash equivalents. 53 Table of Contents 10. STOCKHOLDERS’ EQUITY Equity Compensation Plans Restricted Stock Plan The Tandy Leather Factory, Inc. 2013 Restricted Stock Plan (the “2013 Plan”) was adopted by our Board of Directors in January 2013 and approved by our stockholders in June 2013. The 2013 Plan initially reserved up to 300,000 shares of our common stock (of which, there were 591,138 shares available for future awards as of December 31, 2021) for restricted stock and restricted stock unit (“RSU”) awards, on or prior to June 2018, to our executive officers, non-employee directors and other key employees. In June 2020, our stockholders approved an increase to the plan reserve to 800,000 shares of our common stock and extended the 2013 Plan through June 2023. Awards granted under the 2013 Plan may be service-based awards or performance-based awards, and may be subject to a graded vesting schedule with a minimum vesting period of four years , unless otherwise determined by the Compensation Committee of the Board of Directors that administers the plan. In February and May 2021, as part of their annual director compensation, certain of our non-employee directors were granted a total of 21,673 and 3,415 service-based RSUs, respectively, under the 2013 Plan, which will vest ratably over the next four years provided that the participant is still on the board on the vesting date. In addition to grants under the Company’s 2013 Restricted Stock Plan, in October 2018 we granted a total of 644,000 RSUs to the Company’s Chief Executive Officer (“CEO”), of which (i) 460,000 are service-based RSUs that vest ratably over a period of five years from the grant date based on our CEO’s continued employment in her role, (ii) 92,000 are performance-based RSUs that will vest if the Company’s operating income exceeds $ 12 million dollars two fiscal years in a row, and (iii) 92,000 are performance-based RSUs that will vest if the Company’s operating income exceeds $ 14 million dollars in one fiscal year. A summary of the activity for non-vested restricted stock and RSU awards is as follows: Balance, January 1, 2021 522 $ 7.11 Granted 25 3.88 Forfeited ( 10 ) 3.53 Vested ( 114 ) 7.00 Balance, December 31 , 2021 423 $ 7.03 The Company’s stock-based compensation relates to restricted stock and RSU awards. For these service-based awards, our stock-based compensation expense, included in operating expenses, was $ 0.8 million and $ 0.9 million in 2021 and 2020, respectively. As of December 31, 2021, the Company has concluded it is not probable that the performance conditions related to performance-based RSUs will be achieved, and as a result no compensation expense related to performance-based RSUs has been recorded. 54 Table of Contents As of December 31, 2021, there was unrecognized compensation cost related to non-vested, service-based awards of $ 1.4 million which will be recognized over 1.6 weighted average years in each of the following years: Unrecognized Expense 2022 $ 784 2023 537 2024 24 2025 5 $ 1,350 We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs. In 2021 and 2020, we issued 114,075 and 128,619 shares, respectively, resulting from the vesting of restricted stock and RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards. Share Repurchase Program On August 9, 2020, the Board of Directors approved a new program to repurchase up to $ 5.0 million of its common stock between August 9, 2020 and July 31, 2022. The Company’s previous share repurchase program expired in August 2020. As of December 31, 2021 and 2020, the full $ 5.0 million of our common stock remained available for repurchase under this program. On January 28, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 500,000 shares of our common stock, par value $ 0.0024 in a private transaction. The purchase price was $ 3.35 per share for a total of $ 1.7 million. The closing of the repurchase of these shares took place on February 1, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 5.5 % of our outstanding common stock. On December 8, 2021, we entered into an agreement with an institutional shareholder of the Company, to repurchase 212,690 shares of our common stock, par value $ 0.0024 in a private transaction. The purchase price was $ 5.00 per share for a total of $ 1.1 million. The closing of the repurchase took place on December 16, 2021, and these shares were subsequently cancelled. Prior to the repurchase, the shares represented approximately 2.4 % of our outstanding common stock. These share repurchases were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the plan described in the previous paragraph . 55 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.