What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-31 · 476 added, 494 removed, 675 unchanged (59% of the section changed)

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

This discussion is intended to assist in understanding our financial performance and should be read in conjunction with our consolidated financial statements and the notes accompanying those consolidated 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.

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.

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.

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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.

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 sell our products primarily through company-owned stores and through orders generated from our global websites, and through direct account representatives in our commercial division.

We also manufacture leather

lace, cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites.

We also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly.

maintain our principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.

We maintain our

principal offices at 1900 Southeast Loop 820, Fort Worth, Texas 76140.

Currently, the Company operates a total of 103 retail stores.

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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.

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 websites provide 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.

Our focus over the last three years has been on three broad strategic initiative areas:

Improving our brand proposition, with both Retail and Commercial customers

Rebuilding our foundation – the talent, processes, tools and systems needed to serve these customers

Position us for long-term growth – creating the vision and roadmap for the future

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.

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.

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 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.

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.

In 2019, with the arrival of a new management team, we began the process of assessing and reinvigorating the business.

We focused in three broad strategic initiative areas:

1) improving our brand proposition, 2)

rebuilding our foundation:

the talent, processes, tools and systems needed to modernize and efficiently operate the business, and 3) creating a vision and road map for long-term growth.

We had significant achievements in all of these areas

including significantly improving the product quality, breadth of assortment and value, dramatically improving the website and web operations, rebuilding the team, people policies and culture, and replacing all of the key systems, among many

other accomplishments.

We made this steady progress to transform and reinvigorate our business even in the face of two very significant obstacles.

In 2019, as part of the assessment of the business, we discovered errors in accounting

that required a restatement of our financials.

This work was costly and time-consuming, but we successfully completed the restatement in 2021 along with implementation of new accounting systems, redesign of processes and controls, and a

significant upgrade in the team.

In 2020, while making progress against our transformation and still working through our restatement, we temporarily closed all of our retail stores as a result of the COVID-19 pandemic.

With COVID-19 and the restatement behind us and with many of our initiatives taking hold, we are now focused on improving our financial sustainability and profitability.

In the short-term, we are managing

operating expenses and gross margin to deliver free operating cash and operating income even in the face of possible continued economic headwinds.

We will also continue to selectively invest in profitable sales growth where it makes sense, but

rebuilding a durable, profitable business model is the highest priority.

At the time of filing this Form 10-K, the American and world economies have been acutely affected by a combination of factors arising from both the COVID-19 pandemic and the war resulting from

the invasion of Ukraine by Russian military forces.

The current impacts of these events include (but are not limited to) levels of inflation that are the highest in the U.S.

in more than 40 years, highly volatile fuel prices, an extremely tight

labor market with rising wages and competition to attract qualified workers, supply chain disruption, rising rent and other occupancy costs and increases in interest rates.

Purchases of non-essential, discretionary products tend to decline in

periods of uncertainty regarding future economic prospects, such as the current one, as disposable income declines.

The Company believes that these events have continued to dampen its sales through December 2022.

The future remains uncertain,

and continued increased labor, freight, product and other costs as well as weakening customer demand could have a negative impact on the Company’s future financial performance.

Results of Operations

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Operating expenses

Impairment expense

Income (loss) from operations

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 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.

Consolidated net sales decreased by $2.3 million, or 2.8%, from 2021 to 2022.

We believe the decrease in sales was due to continued weaker consumer demand as a result of

inflation and ongoing uncertainty related to global political, economic and public health concerns.

Our store footprint consisted of 103 stores at December 31, 2022 and 106 stores at December 31, 2021.

Since January 1, 2022, we closed one store in San Bruno, CA in March 2022, one store in Oxnard, CA in July 2022, one store in Miami, FL in October 2022 and one store in Cayce, SC in December

In November 2022, we opened one store on the Fort Bragg military base in North Carolina.

We evaluate a number of factors when determining whether to close existing stores, including the 4-wall cash flow trend and longer-term projection

for the store, the long-term sales trend, ongoing cost of store operations, date of lease expiration, quality of the store and location, and the size and potential of the trade area including proximity to other existing stores, among other

We use similar factors to determine whether to open new stores.

Gross profit decreased by $0.5 million, or 1.1%, from 2021 to 2022.

Our gross margin percentage for the year ended December 31, 2022 increased to 57.9% versus 56.9% in the same period in 2021, due to relatively

stronger full-priced selling throughout the year, product and customer mix shifts, and some impact from price increases.

Operating Expenses

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Non-routine items related to restatement

Non-routine items related to CFO transition

Adjusted operating expenses

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Adjusted operating expenses % of sales

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.

Operating expenses increased by $0.4 million in 2022 as compared to the prior year.

This was in part as a result of the write off of $0.4 million of costs associated with the unsuccessful attempt to build a new

web platform.

That vendor, DynamicWeb, has been unable to deliver a working product, and while we seek to recover these costs, that recovery is uncertain.

In addition, increases in operating expenses in the areas of wages, primarily of hourly

employees in retail stores, and corporate marketing and merchandising, equity compensation associated with executive bonus, our store manager conference and other expenses were offset by decreases in cash bonus and credit card fees related to

lower sales, contract labor and rent.

Adjusted operating expenses, which exclude the non-routine items related to the restatement and CFO turnover, increased $1.4 million 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.

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.

For the year ended December 31, 2022, we recognized other income 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.

ended December 31, 2021, we recognized other expense of $0.1 million.

Provision for Income Taxes

Our effective tax rate was 12.9% and 38.3% for the years ended December 31, 2022 and 2021, 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.

Our effective tax rate differs from the federal statutory rate primarily due to U.S.

state income tax

expense, 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.

Capital Resources, Liquidity and Financial Condition

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Our cash balance as of December 31, 2022 totaled $8.0 million.

On January 3, 2023, the Company entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A.

Under the Credit Agreement, the bank will provide the

Company a credit facility of up to $5,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement.

As security for the credit facility, the Company has pledged as collateral certain

of its assets, including the Company’s cash in deposit accounts, inventory and equipment.

As of the date of this filing, no funds had been borrowed under this facility.

During the second quarter of 2020, the Company borrowed $0.4 million from Banco Santander S.A.

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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.

During the second quarter of 2022, we repaid this loan in full.

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 August 9, 2020, the Board of Directors approved a program to repurchase up to $5.0 million of the Company’s common stock on the open market between August 9, 2020 and July 31, 2022.

program expired in July 2022.

As of December 31, 2021, the full $5.0 million of our common stock remained available for repurchase under this program.

On August 8, 2022, the Board of Directors approved a new program to repurchase up to $5.0

million of the Company’s common stock on the open market between that date and August 31, 2024.

As of December 31, 2022, $5.0 million remained available for repurchase under this new program.

On April 11, 2022, we entered into an agreement with two institutional shareholders of the Company, to repurchase 359,500 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 $1.8 million.

The closing of the repurchases took place on April 22, 2022, and these shares were subsequently cancelled.

Prior to the repurchase, the shares represented approximately 4.2% 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.

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 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.

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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

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.

The direct share repurchases described above were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be repurchased under the open-market plan described in the

first paragraph of this subsection.

In July 2022, the Company repurchased 600 shares of stock under the open market plan.

(amounts in thousands)

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Net cash from operating activities

Net cash used in investing activities

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Net decrease in cash and cash equivalents

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

For 2022, we generated $1.1 million of cash from operations driven by net income of $1.2 million, the add-back of non-cash expenses of $5.5 million, including depreciation, amortization, and stock-based

compensation, a $0.9 million decrease in income taxes, net due to collecting $1.4 million of refunds from NOL carryback claims that partially offset current year installment payments and recording the current year income tax provision, and a

decrease in accounts receivable of $0.2 million among other changes, offset by the increase of inventory of $0.3 million (including currency effects), a decrease in accounts payable and accrued expenses of $3.3 million and a decrease in operating

lease liabilities of $3.4 million.

We invested $0.6 million in capital expenditures for the purchase of store fixtures and systems implementations.

We used cash in financing activities to repurchase 360,100 shares of Tandy common stock in

purchases totaling $1.8 million at an average price of $5.00 per share, and to repay the loan from Spain in the amount of $0.4 million.

The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash

of $2.2 million.

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

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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.

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.

We believe that cash flow from operations and our existing cash reserves will be adequate to fund our operations through 2023, taking into account the current effects of the inflationary pressure 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 2023.

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.

There can be no

assurance, however, that the current global economic conditions 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

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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.

The use of estimates is pervasive throughout the Consolidated Financial Statements, but

the accounting policies and estimates considered most critical are as follows.

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.

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.

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 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.

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 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.

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

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 is stated at the lower of first-in, first-out (“FIFO”) cost or net realizable value, and FIFO layers are maintained at the location level.

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.

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 FIFO 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 FIFO 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.

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.

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

(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

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.

Inventory is then adjusted in our

accounting system to reflect actual count results.

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.

We elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes.

For 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.

We recognize rent expense related to our operating leases on a straight-line basis over the lease term.

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.

The net adjustment between rent expense and the actual cash

paid during the fiscal year 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

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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.

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.

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.

None of our lease agreements contain material residual value guarantees or material restrictive covenants.

As of December 31, 2022, we have no sublease agreements and no lease agreements in which we are named as a

We do not have any contingent rental payment agreements.

On September 8, 2022, we entered into a concession agreement for our store on the Fort Bragg military base in which the concession payment is based on a sliding scale percentage

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.

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.

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.

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

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.

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.

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.

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.

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.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

To the Board of Directors and Shareholders of

Tandy Leather Factory, Inc.

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and Subsidiaries (the Company) as of December 31, 2022 and 2021, 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

the related consolidated statements of operations and comprehensive income and cash flows for each of the two years in the period ended December 31, 2022, 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.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each

of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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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

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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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.

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.

we express no such opinion.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial

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

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

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(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

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.

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.

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 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 $38.2 million and cost of sales of approximately $33.8

million as of and for the year ended December 31, 2022.

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.

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.

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.

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.

Management estimates the value of inventory by estimating the capitalizable overhead costs and adjusts the inventory to lower of cost or net realizable value.

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

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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

We evaluated the appropriateness and consistency of management’s methodology and assumptions used in calculating the capitalizable overhead costs allocation ratio.

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

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

We evaluated the appropriateness and consistency of management’s methodology and assumptions used in developing its estimate of the inventory obsolescence

We performed analytical procedures on the current year reserve by comparing it to the prior year reserve and obtaining corroborating evidence to support any

We tested on a sample basis, sales subsequent to year-end 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 .

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Financing lease assets

Deferred income taxes

Other intangibles, net of accumulated amortization of $ 548 at December 31 , 2021 and 2020

Other intangibles, net of accumulated amortization of $ 549 and $ 548 at December 31 , 2022 and 2021 ,

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Accrued expenses and other liabilities

Income taxes payable

Current portion of operating lease liabilities

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STOCKHOLDERS’ EQUITY:

Preferred stock, $ 0.10 par value;

20,000,000 shares authorized;

issued or outstanding;

attributes to be determined on issuance

Common stock, $ 0.0024 par value;

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Tandy Leather Factory, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Consolidated Statements of Operations and Comprehensive Income

(amounts in thousands, except share and per share data)

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Operating expenses

Impairment expense

Income (loss) from operations

Income from operations

Other (income) expense:

Interest expense

Interest (income) expense

Total other (income) expense

Income (loss) before income taxes

Income tax provision (benefit)

Net income (loss)

Income before income taxes

Income tax provision

Foreign currency translation adjustments, net of tax

Comprehensive income (loss)

Net income (loss) per common share:

Comprehensive income

Net income per common share:

Weighted average number of shares outstanding:

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Cash flows from operating activities:

Net income (loss)

Adjustments to reconcile net loss to net cash provided by operating activities:

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Operating lease asset amortization

Impairment of goodwill and long-lived assets

Loss (gain) on disposal of assets

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Deferred income taxes

Exchange (gain) loss

Exchange loss

Changes in operating assets and liabilities:

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Total adjustments

Net cash provided by (used in) operating activities

Net cash from operating activities

Cash flows from investing activities:

Purchase of property and equipment

Proceeds from sales of short-term investments

Proceeds from sales of assets

Net cash provided by (used in) investing activities

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from long-term debt

Payments on long-term debt

Payments of capital lease obligations

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Purchase of vested stock for employee payroll tax

Net cash provided by (used in) financing activities

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

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Supplemental disclosures of non-cash activity:

Change in accruals related to property and equipment

Operating lease assets obtained in exchange for lease liabilities, net

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(amounts in thousands, except share data)

Number of Shares

Stock Outstanding

Retained Earnings

Accumulated Other Comprehensive Income

Paid-in Capital

Treasury Stock

Other Comprehensive

Income (Loss)

Balance, December 31 ,

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Issuance of restricted stock

Purchase of vested stock for employee payroll tax

Repurchase of common stock

Foreign currency translation adjustments, net of tax

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Tandy Leather Factory, Inc.

(“TLFA,” “we,” “our,” “us,” the” Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries)

(“TLF,” “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.

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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 sell our products

primarily through company-owned stores and through orders generated from our global websites, and through direct account representatives in our commercial division.

We also manufacture leather lace, cut leather pieces and most of the

do-it-yourself kits that are sold in our stores and on our websites.

We also offer production services to our business customers such as cutting (“clicking”), splitting, and some assembly.

We maintain our principal offices at 1900 Southeast Loop 820, Fort

Worth, Texas 76140.

We maintain our principal offices at 1900 Southeast

Loop 820, Fort Worth, Texas 76140.

The Company currently operates a total of 103

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There are 92 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.”

The Company’s common shares currently trade on the Nasdaq Capital Market under the symbol “TLF.”

We operate as a single

segment and report on a consolidated basis.

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.

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 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.

SIGNIFICANT ACCOUNTING POLICIES

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All intercompany accounts and transactions have been eliminated in consolidation.

Correction of an error in previously issued financial statements

The consolidated financial statements include an out of period adjustment that is the result of unreconciled inventory receipts for in-transit

inventory, which were identified in the fourth quarter of 2022.

To correct misstatements in the first three quarters of fiscal year 2022, we reduced inventory and accounts payable balances by approximately $ 0.9 million, and adjusted changes to inventory and accounts payable in the operating activities section of the consolidated statements of cash

flows by the same amount.

There is no impact of this adjustment to the consolidated statements of operations and comprehensive income or retained earnings.

Cash and cash equivalents

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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 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).

Our accounts receivable balance as of December 31, 2022, December 31, 2021 and January 1, 2021 was $ 0.4 million, $ 0.6 million, and $ 0.4 million, respectively.

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, 2022, 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).

Accordingly, the allowance for expected credit losses at December 31, 2022, December 31, 2021, and January 1, 2021 each totaled less than $ 0.1 million.

Foreign currency translation and transactions

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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.

For the years ended December 31, 2022 and 2021, we recorded foreign currency translation loss adjustments of less than $ 0.5 million and $ 0.1 million, respectively.

Gains and losses resulting from foreign currency transactions are recorded in other, net within the statements of operations and comprehensive income (loss).

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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,

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

As of December 31, 2022, we had received approximately $ 0.2 million in credit card payments that had not shipped as of the end of the year.

The sales return allowance included in accrued expense and other liabilities was $ 0.1 million, $ 0.2 million, and $ 0.1 million as of December 31, 2022 and 2021 and January 1, 2021 respectively.

estimated value of merchandise expected to be returned included in other current assets was less than $ 0.1 million as

of December 31, 2022 and 2021 and January 1, 2021.

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 .

We include our gift card liability in accrued expenses and other liabilities.

On January 1, 2022, the opening balance of the gift card liability was $ 0.4

During 2022, we issued $ 0.5 million of gift cards, and $ 0.6 million of gift cards were redeemed and recognized as revenue.

At December 31, 2022, our gift card liability balance was $ 0.3 million.

On January 1, 2021, the opening balance of the gift card liability was $ 0.2 million;

we issued $ 0.4 million of gift cards, and $ 0.2 million of gift cards were redeemed and recognized as revenue.

At December 31, 2021, the ending balance of the gift card liability was $ 0.4 million

Disaggregated revenue

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United States

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.

Geographic sales information is based on the location of where the order was fulfilled.

We offer a single retail price level, plus three

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costs are expensed as incurred.

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.

Inventory is stated at the lower of first-in, first-out (“FIFO”) cost or net realizable value, and the FIFO layers are maintained at the location level.

goods held for sale include 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.

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

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Inventory is then adjusted in our accounting system to reflect actual count results.

We lease certain real estate for our retail store locations and warehouse equipment for our Texas distribution center, both under long-term lease agreements.

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.

elected not to record leases with an initial term of 12 months or less on the balance sheet for all our asset classes.

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.

For operating leases, the present value of our lease payments may include:

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We recognize rent expense related to our operating leases on a straight-line basis over the lease term.

Rent expense is recorded in operating expenses.

adjustment between rent expense and the actual cash paid during the fiscal year has been recorded as accrued expense 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

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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.

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 material residual value guarantees or material restrictive covenants.

We do not have any contingent rental payment agreements.

On September 8, 2022, we entered into a short-term concession agreement for our store on the Fort Bragg military base, in which the concession payment is based on a sliding scale percentage of sales.

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.

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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

For the years ended December 31, 2022 and 2021, no

impairment expense was recognized.

Earnings per share

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Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan

Dilutive effect of service-based restricted stock awards granted to employees under the Plan

Diluted weighted-average common shares outstanding

(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

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.

(1) For the years ended December 31, 2022 and 2021, there were 90,748 and 168,735 , respectively,

shares excluded from the diluted EPS calculation because the impact of their assumed vesting would be anti-dilutive.

For additional disclosures regarding restricted stock awards and employee stock options, see Note 10, Stockholders’ Equity –

Equity Compensation Plans .

Other intangible assets

Our intangible assets and related accumulated amortization relate to trademarks and copyrights that 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 2022 and 2021 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.

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Level 3 – significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.

Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value

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.

are recorded as either short-term or long-term on the Consolidated Balance Sheet, based on contractual maturity date.

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 the long-term debt reported in 2021.

December 31, 2022 and 2021, 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, 2022 and 2021.

Income taxes are estimated for each jurisdiction in which we operate.

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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.

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.

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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.

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.

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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

These costs totaled $ 3.1 million and $ 3.2 million for the years ended December 31, 2021 and 2020, respectively.

Costs to ship products from our stores to our customers are included in operating expenses on the Consolidated Statements of

Operations and Comprehensive Income.

Total costs were $ 3.5 million and $ 3.4 million for the years ended December 31, 2022 and 2021, respectively.

Advertising costs include the cost of print, digital, direct mail, community events, trade shows, and our e-commerce platform.

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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.

The Company did not adopt any new accounting guidance that was applicable for the year ended December 31, 2022.

BALANCE SHEET COMPONENTS

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Inventory in transit

Property and Equipment

and Equipment

(in thousands)

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accumulated depreciation

Our property and equipment, net was

located in the following countries:

Our property and equipment, net,

was located in the following countries:

(in thousands)

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United States

United Kingdom

Depreciation expense was $ 1.2 million and $ 1.1 million for the years ended December 31, 2022 and 2021, respectively.

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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.

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 operating lease assets during the year ended December 31, 2022 or December 31, 2021.

Additional information regarding the Company’s operating and finance leases is as follows (in thousands, except for lease term and discount rate information):

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Total lease cost

(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.

(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.

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Operating leases, modifications and remeasurements

Finance leases, initial recognition

Lease Term and Discount Rate

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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”)

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.

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.

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:

This loan was provided for by the Spanish government as part of a COVID-19 relief program and on June 6, 2022, the Company repaid this loan in full.

(in thousands)

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Year Ended December 31,

Income Tax Benefit

Current provision (benefit):

Income Tax Provision

Current provision:

Related to UTP

Deferred provision (benefit):

Total tax provision (benefit)

We have $ 2.2 million of net operating loss (“NOL”)

carryovers which will begin to expire in 2025.

Deferred provision:

Total tax provision

occurring outside the U.S.

are deemed to be indefinitely reinvested outside of the U.S.

to support the Company’s foreign operations.

As a result, if the Company accumulates earnings overseas, they will be used for investment in the Company’s

businesses outside the U.S.

The Company will use cash generated from U.S.

operations and short- and long-term borrowings to meet the Company’s U.S.

The determination of unrecognized deferred tax liabilities for temporary

differences in investments in foreign subsidiaries is not practicable.

The Company has

received $ 1.4 million in tax refund in 2022 as a result of the CARES Act NOL carryback provision and estimates that we will receive

an additional $ 0.2 million in the future.

We have $ 3.7 million of state tax net operating loss (“NOL”) carryovers which will begin to expire in 2025.

We also have a full valuation allowance on $ 0.5 million of foreign tax NOL carryovers that do not expire and therefore no

deferred tax assets.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic.

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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:

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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

a $ 0.3 million decrease to the valuation allowance for deferred income tax assets was necessary as of December 31, 2022, as compared to

Our evaluation considered, among other things, the nature, frequency, and severity of losses, forecasts of future profitability and the duration of statutory carryforward periods.

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:

effective tax rate differs from the federal statutory rate primarily due to U.S.

state income tax expense, 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.

is a reconciliation of our effective tax rate from the statutory rate:

Year Ended December 31,

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UTP at end of year

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.

COMMITMENTS AND CONTINGENCIES

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Company’s Common Stock

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.

After discovery of

the accounting matters described in the previous paragraph and during our resulting financial restatement, the Company did not file its periodic financial reports with the Securities and Exchange Commission.

As a result, Nasdaq suspended

trading of the Company’s stock in August 2020 and formally de-listed the stock from the Nasdaq markets in February 2021.

After being de-listed from Nasdaq, the Company’s stock traded in the Over The Counter Markets until September l, 2022, when

Nasdaq again approved it for listing.

The Company’s stock currently trades on the Nasdaq Capital Market under the symbol TLF.

SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK

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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.

No single customer accounted for more than 0.4% of our consolidated revenues in 2022 or 2021, and sales to our five largest customers represented less than 2.0 %

of consolidated revenues in each of 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.

purchase merchandise and raw materials from over 130 vendors from the United States and approximately 20 foreign countries.

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largest vendors account for approximately 30 % of our inventory purchases.

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.

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.

Due to the large number of customers comprising our customer base, concentrations of credit risk with respect to customer receivables are limited.

The top 2 customers of December 31, 2022 and 2021, represented 10.0 % and 23.7 % of net accounts receivable balance, respectively.

These top two customers were also current as of these same dates.

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.

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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.

The 2013 Plan initially reserved up to 300,000 shares of our common stock for restricted stock and restricted stock unit (“RSU”) awards 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 June 2022, as part of

their annual director compensation, certain of our non-employee directors were granted a total of 14,000 service-based RSUs 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

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

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A summary of the activity for non-vested restricted stock and RSU awards is as follows:

Weighted Average

(in thousands)

Balance, January 1, 2022

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In 2022 and 2021, we issued 140,277 and 114,075 shares,

respectively, resulting from the vesting of restricted stock and RSUs.

respectively net of shares withheld to pay participants’ income taxes, resulting from the vesting of restricted stock and RSUs.

We do not use cash to settle equity instruments issued under stock-based compensation awards.

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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.

This program expired in July 2022.

As of December 31, 2021, the full $ 5.0 million of our common stock remained available for repurchase under this program.

On August 8, 2022, the Board of Directors approved a new program to repurchase up to $ 5.0 million of the Company’s common stock between that date and August 31, 2024.

As of December 31, 2022, $ 5.0 million remained available for repurchase under this new program.

11, 2022, we entered into an agreement with two institutional shareholders of the Company to repurchase 359,500 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 $ 1.8 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.

The closing of the repurchases

took place on April 22, 2022, and these shares were subsequently cancelled.

Prior to the repurchase, the shares represented approximately 4.2 %

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

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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 .

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 .

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.

The direct share repurchase transactions were separately authorized by our Board of Directors and did not reduce the remaining amount authorized to be

repurchased under the plans described above.

In July 2022, the Company repurchased 600 shares of stock under the open market

On January 3, 2023, the Company entered into a credit agreement (the “Credit

Agreement”) with JPMorgan Chase Bank, N.A.

Under the Credit Agreement, the bank will provide the Company a credit facility of up to $ 5,000,000

on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement.

As security for the credit facility, the Company has pledged as collateral certain of its assets, including the Company’s cash in

deposit accounts, inventory and equipment.

As of the date of this filing, no funds had been borrowed under this facility.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis