TANDY LEATHER FACTORY INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion is intended to assist in understanding our financial performance and should be read in conjunction with our 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. You are cautioned not to put undue reliance on these forward-looking statements. The Company assumes no obligation to update or otherwise revise these forward-looking statements, except as required by law. More discussion of risks can be found under Item 1A, Risk Factors. Summary The Business and Strategy Tandy Leather Factory, Inc. is one of the world’s largest specialty retailers of leather and leathercraft-related items. Founded in 1919 in Fort Worth, Texas, and organized in 2005 as a Delaware corporation, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking. 17 Table of Contents What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, and a hub for the local leathercrafting community, and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate. We sell our products primarily through company-owned stores and through orders generated from our global websites, and through direct account representatives in our commercial division. We produce 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”) and splitting and some assembly. We maintain our principal offices at 7602 Southwest Loop 820, Suite 101, Benbrook, TX 76126. Currently, the Company operates a total of 101 retail stores. There are 91 stores in the United States (“U.S,”), nine stores in Canada and one store in Spain. Tandy Leather has been introducing people to leatherworking for over 100 years. Our stores have been and continue to be our competitive advantage: where our consumers learn the craft in classes, open table, and from the expertise of our store staff, where they can touch, feel and test the product, and where they can connect and commune with others passionate about leather. Our 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, volume-based competitive pricing, customized product development, and production and pre-production services, we are building long-term, strategic relationships with our largest customers. • Manage our cost base and use of cash and focus on strengthening our sales by: o Leveraging our competitive advantage of our retail stores. o Unlocking store potential by opening new stores and expanding classes, and outreach. o Growing ecommerce in scaling our digital footprint and using marketplaces as acquisition channels. o Launching our new loyalty program optimizing a new buy online and pick up in stores (BOPIS). • Improving our employee product knowledge, customer service level, and in-store and virtual classes and community engagement. • Expanding workshop space in stores with machines are the highest priorities. • Give customers good reasons to visit stores and an excellent return on their time investment when they do. • Improve our overall digital and technological capabilities to include artificial intelligence where applicable across our entire operation and channels. • 18 Table of Contents Results of Operations The following table presents selected financial data: Twelve Months Ended December 31, (in thousands) 2025 2024 $ Change % Change Sales $ 76,324 $ 74,391 $ 1,933 2.6 % Gross profit 43,539 41,804 1,735 4.1 % Gross margin percentage 57.0 % 56.2 % 0.8 % Operating expenses 44,502 41,176 3,326 8.1 % (Loss) Income from operations $ (963 ) $ 628 $ (1,591 ) (253.3 )% Net Sales Consolidated net sales increased by $1.9 million, or 2.6%, from 2024 to 2025. Management believes the increase was primarily attributable to more stable consumer demand compared to prior years, as well as changes in the depth and timing of promotional activity, improved execution in retail stores, and a stronger inventory position across the retail fleet. These factors were partially offset by sales disruptions resulting from the approximately six-week closure of the distribution center and factory in connection with the relocation of those facilities and the corporate offices. Our store footprint consisted of 101 stores at December 31, 2025 and 101 stores at December 31, 2024. We evaluate a number of factors when determining whether to close existing stores, including the 4-wall cash flow trend and longer-term projections 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 variables. We use similar factors to determine whether to open new stores. Gross Profit Gross profit increased by $1.7 million, or 4.1%, from 2024 to 2025. Our gross margin percentage for the year ended December 31, 2025 increased to 57.0% versus 56.2% in the same period in 2024, mainly due to pricing strategies implemented to combat tariffs and cost efficiency gains in our distribution center; offset by tariff increases from various countries where we source our products. Operating Expenses Operating expenses increased by $3.3 million in 2025 as compared to the prior year. The primary drivers of the increase were increased rent driven by total lease cost of our corporate facilities of approximately $1.4 million that was previously owned in 2025, increased retail rent of $0.2 million, bonus expense of $1.0 million for overall achieving acceptable targets in the midst of disruptions and closures of our operations, higher employment costs of approximately $1.0 million for increased healthcare premiums and employee merit increase; offset by a reduction in accrued property tax of $0.2 million, and the reduction in utilities of $0.1 million. 19 Table of Contents Other Income Other income consists primarily of interest income and foreign currency gain. For the year ended December 31, 2025 , we recognized other income of $13.3 million of which $24.9 million was generated from the sales of our corporate headquarters, $0.6 million was related to interest earned on our short term investment; offset by $8.7 in disposal of our building and land and $3.5 million dollar in relocation expenses and other foreign exchange impact. Provision for Income Taxes Our effective tax rate was 26.0% and 24.2% for the years ended December 31, 2025 and 2024, respectively. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, expenses that are nondeductible for tax purposes, and the release of valuation allowance associated with our deferred tax assets in 2024. Capital Resources, Liquidity and Financial Condition We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments. We expect to fund our operating and liquidity needs primarily from a combination of current cash balances, and cash generated from operating activities. Any excess cash will be invested as determined by our Board of Directors in accordance with its approved investment policy. Our cash balance as of December 31, 2025 totaled $16.1 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 provides 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. The interest rate is based on CME term SOFR + 210 basis points and the maturity is 1 year. As of the date of this filing, no funds had been borrowed under this facility, and we are in compliance with all covenants. In the fourth quarter of 2025, the Company renewed the promissory note under its Credit Agreement with JPMorgan Chase Bank, N.A. through October 31, 2026. Under the Credit Agreement, the bank provides the Company a credit facility of up to $4,000,000 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. The interest rate is based on CME term SOFR + 210 basis points, and the credit facility renews annually. As of the date of this filing, no funds had been borrowed under this facility, and we are in compliance with all covenants. Share Repurchase 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 on or prior to August 31, 2024. As of December 31, 2025, the Company had purchased less than $10,000 of shares under this plan. 20 Table of Contents On September 17, 2024, the Board of Directors approved the renewal of the stock plan, and the Company shall be authorized to repurchase up to $5 million (at then-current market value) of the Company’s common stock in open-market transactions at prevailing market prices upon periodic instructions from the Board or an authorized sub-committee of the Board until September 30, 2026. As of December 31, 2025, $5.0 million remained available for repurchase under this new program. On June 17, 2025, the Company entered into a stock purchase agreement with Janet Carr, our former Chief Executive Officer; wherein the Company agreed to purchase 430,897 shares from Ms. Carr at $3.00 per share, for a total of $1,292,691. The transaction was completed on July 18, 2025; accordingly, the Company immediately cancelled the shares and the impact of this transaction is reflected in our cash balance, common shares and additional paid-in-capital in our financial statements as of December 31, 2025. The shares of common stock outstanding shown on the balance sheet and as part of these financial statements have also been updated as of December 31, 2025. Cash Flows (amounts in thousands) 2025 2024 Net cash (used in) provided by operating activities $ (556 ) $ 4,548 Net cash provided by (used in) investing activities 17,360 (2,983 ) Net cash used in financing activities (14,108 ) (1 ) Effect of exchange rate changes on cash and cash equivalents 120 (452 ) Net increase in cash and cash equivalents $ 2,816 $ 1,112 For 2025, we used $0.6 million of cash in operations driven by net loss from operation of $0.9 million which excluded the sale of the building, the add-back of non-cash expenses of $1.3 million, including depreciation, amortization, and stock based compensation, a decrease in inventory of $2.6 million, offset by a decrease in operating lease liabilities payments of $3.1 million and a decrease in account payable of $1.3 million; adjusted by an decrease in deferred tax asset of $0.8 million. Cash provided by investing activities was $17.4 million which included the net proceeds from the sale of our corporate headquarters of $24.9 million, partially offset by the purchase of property and equipment of $7.5 million. Cash used in financing activities was $14.1 million, primarily for dividend payments. These activities, together with the effect of exchange rate changes of $0.2 million, resulted in a net increase in cash of $2.8 million. For 2024, we generated $4.6 million of cash from operations driven by net income of $0.8 million, the add-back of non-cash expenses of $5.4 million, including depreciation, amortization, loss on disposal of fixed assets, stock based compensation, and deferred taxes, a decrease in inventory of $2.0 million, and an increase in accrued expense of $0.3 million; offset by a decrease in operating lease liabilities payments of $3.5 million and an increase in prepaid expense of $0.4 million. We invested $2.9 million in capital expenditures for store build-out and fixtures for new and relocated stores, a new roof for our Fort Worth headquarters building of $1 million, and expenditures related to our ERP and e-commerce systems. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $1.1 million. We believe that cash flow from operations and our existing cash reserves will be adequate to fund our operations through 2026, considering 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 2026. 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. 21 Table of Contents Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements during 2025 or 2024, and we do not currently have any such arrangements. Summary of Critical Accounting Policies The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for the Company’s conclusions. The Company continually evaluates the information used to make these estimates as the business and the economic environment changes. Actual results may differ from these estimates, and estimates are subject to change due to modifications in the underlying conditions or assumptions. The policies discussed below require estimates that contain a significant degree of judgement. The use of estimates is pervasive throughout the Consolidated Financial Statements, but the accounting policies and estimates considered most critical are as follows. 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 through our commercial account representatives. 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. For (2) and (3) above, our performance obligation is met when merchandise is shipped to a customer, and revenue is recognized when control passes to the customer. Shipping terms are normally free on board (“FOB”) shipping point and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales. Net sales are based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns. The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales, accordingly. Under our sales returns policy, merchandise may be returned, under most circumstances, up to 60 days after date of purchase. As merchandise is returned, the company records the sales return against the sales return allowance. We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one year. Inventory. Inventory is stated at the lower of first-in, first-out (“FIFO”) cost or net realizable value, and FIFO layers are maintained at the location level. Finished 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. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Assembled 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 assembly 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. 22 Table of Contents 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. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our accounting system to reflect actual count results. Leases. We lease certain real estate for our retail store locations and periodically lease warehouse equipment for our Texas distribution center, both usually 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. The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. For our operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease when it is reasonably certain we will exercise such an option. The exercise of lease renewal options is generally at our discretion. Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. We discount lease payments using our incremental borrowing rate based on information available as of the measurement date. 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. For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term with rent expense recorded to operating expenses. We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The remaining asset balance in our finance lease is only residual value and only an insignificant interest expense of less than $100 dollars was incurred and is recorded on the consolidated statements of operations and comprehensive income. None of our lease agreements contain material residual value guarantees or material restrictive covenants. As of December 31, 2025, we have no sublease agreements and no lease agreements in which we are named as a lessor. We do not have any contingent rental payment agreements. Impairment of Long-Lived Assets . We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate the carrying value of certain assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use (“ROU”) lease assets, property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group’s major classifications which in this case are operating lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method. 23 Table of Contents Stock-based Compensation. The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards. Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. 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. In February 2025, in connection with hiring Johan Hedberg as the Company’s Chief Executive Officer, the Company granted Mr. Hedberg 100,000 RSU, which will vest in February 2026, and 900,000 RSUs, which will vest upon the Company’s achievement of certain performance and market targets. In June 2025, the Company’s stockholders approved an increase to the plan reserve of an additional 900,000 shares of our common stock for the potential vesting those performance-based and market based RSU grants to Mr. Hedberg. The Company also had a market based award which consist of the Company’s common stock trading on its principal stock market/exchange for 15 consecutive trading days with a daily closing price of $5.50 or more; the Company’s common stock trading on its principal stock market/exchange for 15 consecutive trading days with a daily closing price of $6.50 or more; and the Company’s common stock trading on its principal stock market/exchange for 15 consecutive trading days with a daily closing price of $7.50 or more. The Company determined the grant date fair value under based on the authoritative guidance and recorded the impact as of December 31, 2025. 24 Table of Contents Income Taxes. Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available. We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Tandy Leather Factory, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Tandy Leather Factory, Inc. and subsidiaries (the “Company”) as of December 31, 2025 and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2025, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 25 Table of Contents We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account 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 Significant Accounting Polices to the financial statements. The Company has recorded an inventory balance of approximately $33.2 million and cost of sales of approximately $32.8 million as of and for the year ended December 31, 2025. Additionally, Note 3 Balance Sheet Components to the financial statements provides further detail of the components of the year-end inventory balance. The Company’s merchandise inventories are stated at the lower of cost or net realizable value using a first-in, first-out costing principle. Finished goods inventory costs include the cost of merchandise purchases, the costs to bring the merchandise to the Company’s distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to the Company’s stores. Additionally, to determine if the value of their inventory should be written down, the Company considers many factors, including condition of the product (excessive scars, discoloring or damage from UV light), current and anticipated demand that may cause the product to become slow moving and age of the merchandise to ensure that the product line is considered fresh. If a write-down is warranted, the carrying value of the merchandise is reduced from its original cost to the lower of its cost or net realizable value. 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. 26 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the valuation of inventories included the following, among others: • We obtained an understanding of the controls over the valuation of inventory. • We tested the inventory costs incurred by the Company by reviewing supplier invoices and ensuring that appropriate application of the first-in first-out principle was followed. • We tested the inventory cost layers through computer assisted audit tools to ensure the cost layers were mathematically accurate. • We evaluated the appropriateness and consistency of management’s methodology used in allocating overhead costs to inventory. • 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 by comparing it to the prior year reserve and obtaining corroborating evidence to support any assumptions. • 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/ Whitely Penn LLP We have served as the Company’s auditor since 2024. Dallas, Texas February 24, 2026 27 Table of Contents Tandy Leather Factory, Inc. Consolidated Balance Sheets (amounts in thousands, except share data and per share data) December 31, December 31, 2025 2024 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16,087 $ 13,271 Accounts receivable-trade, net of allowance for credit losses of $ 51 at December 31, 2025 and $ 49 at December 31, 2024 425 331 Inventory 33,238 35,556 Income tax receivable - 384 Prepaid expenses 721 898 Other current assets 111 96 Total current assets 50,582 50,536 Property and equipment, at cost 26,203 31,655 Less accumulated depreciation ( 15,978 ) ( 19,320 ) Property and equipment, net 10,225 12,335 Operating lease assets 24,736 10,323 Deferred income taxes 380 1,213 Other assets 710 517 TOTAL ASSETS $ 86,633 $ 74,924 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable-trade $ 2,154 $ 3,110 Accrued expenses and other liabilities 3,704 3,571 Income taxes payable 428 - Current portion of operating lease liabilities 3,512 3,205 Total current liabilities 9,798 9,886 Uncertain tax positions 227 248 Other non-current liabilities 149 76 Operating lease liabilities, non-current 23,868 7,561 COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS’ EQUITY: Common stock, $ 0.0024 par value; 25,000,000 shares authorized; 9,497,251 and 9,920,957 shares issued at December 31, 2025 and December 31, 2024, respectively; 8,072,875 and 8,496,581 shares outstanding at December 31, 2025 and December 31, 2024, respectively 22 23 Paid-in capital 3,651 4,529 Retained earnings 60,843 64,486 Treasury stock at cost ( 1,424,376 shares at December 31, 2025 and December 31, 2024) ( 9,773 ) ( 9,773 ) Accumulated other comprehensive loss, net of tax ( 2,152 ) ( 2,112 ) Total stockholders’ equity 52,591 57,153 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 86,633 $ 74,924 The accompanying notes are an integral part of these Consolidated Financial Statements. 28 Table of Contents Tandy Leather Factory, Inc. Consolidated Statements of Operations and Comprehensive Income (amounts in thousands, except share and per share data) For the Years Ended December 31, 2025 2024 Net sales $ 76,324 $ 74,391 Cost of sales 32,785 32,587 Gross profit 43,539 41,804 Operating expenses 44,502 41,176 (Loss) Income from operations ( 963 ) 628 Other income (expense): Interest income 552 331 Gain on disposal of headquarter (see footnote 11) 16,225 - Other, net ( 3,514 ) 132 Total other income 13,263 463 Income before income taxes 12,300 1,091 Income tax provision 3,198 264 Net income $ 9,102 $ 827 Foreign currency translation adjustments, net of tax ( 40 ) ( 568 ) Comprehensive income $ 9,062 $ 259 Net income per common share: Basic $ 1.11 $ 0.10 Diluted $ 1.10 $ 0.09 Weighted average number of shares outstanding: Basic 8,234,862 8,493,989 Diluted 8,264,174 8,783,063 The accompanying notes are an integral part of these Consolidated Financial Statements 29 Table of Contents Tandy Leather Factory, Inc. Consolidated Statements of Cash Flows (amounts in thousands) For the Years Ended December 31, 2025 2024 Cash flows from operating activities: Net income $ 9,102 $ 827 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 858 1,183 Operating lease asset amortization 5,302 3,548 Gain on disposal of assets ( 16,225 ) - Stock-based compensation 484 548 Deferred income taxes 834 ( 342 ) Changes in operating assets and liabilities: Accounts receivable-trade ( 90 ) ( 72 ) Inventory 2,606 1,992 Prepaid expenses 178 ( 424 ) Other current assets 55 17 Accounts payable-trade ( 1,294 ) 1,116 Accrued expenses and other liabilities 126 322 Income taxes, net 799 ( 574 ) Other assets ( 190 ) ( 81 ) Operating lease liabilities ( 3,101 ) ( 3,512 ) Total adjustments ( 9,658 ) 3,721 Net cash (used in) provided by operating activities ( 556 ) 4,548 Cash flows from investing activities: Purchase of property and equipment ( 7,537 ) ( 2,983 ) Proceeds from sales of Headquarters assets, net 24,897 - Net cash provided by (used in) investing activities 17,360 ( 2,983 ) Cash flows from financing activities: Payment of finance lease obligations - ( 1 ) Dividend Paid ( 12,745 ) - Repurchase of common stock, net ( 1,363 ) - Net cash used in financing activities ( 14,108 ) ( 1 ) Effect of exchange rate changes on cash and cash equivalents 120 ( 452 ) Net increase in cash and cash equivalents 2,816 1,112 Cash and cash equivalents, beginning of period 13,271 12,159 Cash and cash equivalents, end of period $ 16,087 $ 13,271 The accompanying notes are an integral part of these Consolidated Financial Statements. 30 Table of Contents Tandy Leather Factory, Inc. Consolidated Statements of Cash Flows - continued (amounts in thousands) For the Years Ended December 31, 2025 2024 Supplemental disclosures of cash flow information: Income tax paid during the period, net $ 1,851 $ 1,692 Supplemental disclosures of non-cash activity: Operating lease assets obtained in exchange for lease liabilities, net $ 18,248 $ 4,755 The accompanying notes are an integral part of these Consolidated Financial Statements. 31 Table of Contents Tandy Leather Factory, Inc. Consolidated Statements of Stockholders’ Equity (amounts in thousands, except share data) Number of Shares Common Stock Outstanding Par Value Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance, December 31, 2023 8,399,245 $ 23 $ 3,981 $ ( 9,773 ) $ 63,659 $ ( 1,544 ) 56,346 Stock-based compensation expense - - 548 - - - 548 Vesting of restricted stock units 97,588 - - - - - - Purchase of treasury stock ( 252 ) - - - - Net income - - - - 827 - 827 Foreign currency translation adjustments, net of tax - - - - - ( 568 ) ( 568 ) Balance, December 31, 2024 8,496,581 $ 23 $ 4,529 $ ( 9,773 ) $ 64,486 $ ( 2,112 ) $ 57,153 Stock-based compensation expense - - 484 - - - 484 Vesting of restricted stock units 21,346 - - - - - - Repurchase of common stock ( 445,052 ) ( 1 ) ( 1,362 ) - - ( 1,363 ) Net income - - - - 9,102 - 9,102 Dividend Paid - - - - ( 12,745 ) - ( 12,745 ) Foreign currency translation adjustments, net of tax - - - - - ( 40 ) ( 40 ) Balance, December 31, 2025 8,072,875 22 3,651 ( 9,773 ) 60,843 ( 2,152 ) 52,591 The accompanying notes are an integral part of these Consolidated Financial Statements. 32 Table of Contents TANDY LEATHER FACTORY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2025 and 2024 1. DESCRIPTION OF BUSINESS Tandy Leather Factory, Inc. (“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. Founded in 1919 in Fort Worth, Texas, the Company introduced leathercrafting to millions of American and later Canadian and other international customers and has built a track record as the trusted source of quality leather, tools, hardware, supplies, kits and teaching materials for leatherworkers everywhere. Today, our mission remains to build on our legacy of inspiring the timeless art and trade of leatherworking. What differentiates Tandy from the competition is our high brand awareness and strong brand equity and loyalty, our network of retail stores that provides convenience, a high-touch customer service experience, and a hub for the local leathercrafting community, and our 100-year heritage. We believe that this combination of qualities is unique to Tandy and gives the brand competitive advantages that are difficult for others to replicate. We sell our products primarily through company-owned stores and through orders generated from our global websites, and through direct account representatives in our commercial division. We produce 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”) and splitting and some assembly. We maintain our principal offices at 7602 SW Loop 820, Suite 101, Benbrook, TX 76126. The Company currently operates a total of 101 retail stores. There are 91 stores in the United States (“U.S.”), nine stores in Canada and one store in Spain. The Company’s common shares currently trade on Nasdaq Capital Market under the symbol “TLF.” We operate as a single segment and report on a consolidated basis. 2. SIGNIFICANT ACCOUNTING POLICIES Management estimates and reporting The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires the use of estimates that affect the reported value of assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other factors that are believed to be reasonable under these circumstances, the results of which form the basis for the Company’s conclusions. The Company continually evaluates the information used to make these estimates as the business and the economic environment changes. Actual results may differ from these estimates, and estimates are subject to change due to modifications in the underlying conditions or assumptions. The policies discussed below require estimates that contain a significant degree of judgement. The use of estimates is pervasive throughout the Consolidated Financial Statements, but the accounting policies and estimates considered most significant are as follows. 33 Table of Contents Principles of consolidation Our consolidated financial statements include the accounts of Tandy Leather Factory, Inc. and its active wholly-owned subsidiaries, The Leather Factory, L.P. (a Texas limited partnership), Tandy Leather Company, L.P. (a Texas limited partnership), The Leather Factory of Canada, Ltd. (a Canadian corporation), and Tandy Leather Factory España, S.L. (a Spanish corporation). All intercompany accounts and transactions have been eliminated in consolidation. Cash and cash equivalents The Company considers investments with a maturity when purchased of three months or less to be cash equivalents. All credit card, debit card and electronic transfer transactions that are processed in less than ninety days including our T-Bills are classified as cash and cash equivalents. Accounts receivable and expected credit losses Our receivables primarily arise from the sale of merchandise to customers that have applied for and been granted credit. Accounts receivable are stated at amounts due, net of an allowance for credit losses. Accounts receivable are generally due within 30 days of invoicing. Our accounts receivable balance as of December 31, 2025, December 31, 2024 and January 1, 2024 were $ 0.4 million, $ 0.3 million, and $ 0.3 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, 2025, 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, 2025, December 31, 2024, and January 1, 2024 each totaled less than $ 0.1 million. Foreign currency translation and transactions Foreign currency translation adjustments arise from activities of our foreign subsidiaries. Results of operations are translated into U.S. dollars using the average exchange rates during the period, while assets and liabilities are translated using period-end exchange rates. Foreign currency translation adjustments are recorded in stockholders’ equity, net of tax. For the years ended December 31, 2025 and 2024, we recorded foreign currency translation loss of $ 0.1 million and a loss of $ 0.6 million, respectively. Gains and losses resulting from foreign currency transactions are recorded in other, net within the statements of operations and comprehensive income. 34 Table of Contents Revenue recognition Our revenue is earned from sales of merchandise and generally occurs via three methods: (1) at the store counter, (2) shipment of product generally via web sales, and (3) sales of product directly to commercial customers through our commercial account representatives. 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. Our performance obligation for 2) and 3) are met when merchandise is shipped to a customer, and revenue is recognized when control passes to the customer. Shipping terms are normally free on board (“FOB”) shipping point, and control passes when the merchandise is shipped to the customer. Sales tax and comparable foreign tax is excluded from net sales, while shipping charged to our customers is included in net sales. Net sales is based on the amount of consideration that we expect to receive, reduced by estimates for future merchandise returns. As of December 31, 2025, December 31, 2024, and January 1, 2024, we had received approximately $ 0.1 million, $ 0.3 million, and $ 0.3 million in credit card payments that had not shipped as of the end of the year, and this was recorded in deferred revenue under accrued expenses and other liabilities on the Balance Sheet. The sales return allowance included in accrued expense and other liabilities was $ 0.2 million, $ 0.2 million, and $ 0.2 million as of December 31, 2025 and 2024 and January 1, 2024 respectively. 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 . We include our gift card liability in accrued expenses and other liabilities. On January 1, 2025, the opening balance of the gift card liability was $ 0.3 million. During 2025, we issued $ 0.5 million of gift cards, and $ 0.4 million of gift cards were redeemed and recognized as revenue. At December 31, 2025, our gift card liability balance was $ 0.4 million. On December 31, 2024 and January 1, 2024, the gift card liability was $ 0.3 and $ 0.3 million respectively. Disaggregated revenue In the following table, revenue for the years ended December 31, 2025 and 2024 is disaggregated by geographic areas as follows: For the Years Ended December 31, (in thousands) 2025 2024 United States $ 67,905 $ 66,045 Canada 7,459 7,313 Other 960 1,033 Net sales $ 76,324 $ 74,391 Geographic sales information is based on the location where the order was fulfilled. Discounts We offer six classes of customer discounts: 1) Retail, 2) Military/First Responder, 3) Business, 4) Commercial, 5) Commercial Pro, and 6) Employees. There are no other classes of discounts and any discounts given will fall into one of these six categories. Such discounts are not deemed to be variable consideration nor convey a material right to these customers since the discounted pricing they receive in a discount class is not incremental to others within the same class and there is no retrospective impact of such discounts. As a result, sales are reported after deduction of discounts at the point of sale. We do not pay slotting fees or make other payments to resellers. 35 Table of Contents Operating expense Operating expenses include all selling, general and administrative costs, including wages and benefits, rent and occupancy costs, depreciation, advertising, store operating expenses, outbound freight charges (to ship merchandise to customers), and corporate office costs. Property and equipment, net of accumulated depreciation Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are three to ten years for equipment and machinery, seven to fifteen years for furniture and fixtures, five years for vehicles, and forty years for buildings and related improvements. Leasehold improvements are amortized over the lesser of the life of the lease or the useful life of the asset. Repairs and maintenance costs are expensed as incurred. Inventory Inventory is stated at the lower of first-in, first-out (“FIFO”) cost or net realizable value, and the FIFO layers are maintained at the location level. Finished 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. These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory. Assembled 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 assembly overhead. Carrying values of inventory are analyzed and, to the extent that the cost of inventory exceeds the net realizable value, provisions are made to reduce the carrying amount of the inventory. We regularly review all inventory items to determine if there are (i) damaged goods (e.g., for leather, excessive scars or damage from ultra-violet (“UV”) light), (ii) items that need to be removed from our product line (e.g., slow-moving items, inability of a supplier to provide items of acceptable quality or quantity, and to maintain freshness in the product line) and (iii) pricing actions that need to be taken to adequately value our inventory at the lower of cost or net realizable value. Since the determination of net realizable value of inventory involves both estimation and judgement with regard to market values and reasonable costs to sell, differences in these estimates could result in ultimate valuations that differ from the recorded asset. The majority of inventory purchases and commitments are made in U.S. dollars in order to limit the Company’s exposure to foreign currency fluctuations. Goods shipped to us are recorded as inventory owned by us when the risk of loss shifts to us from the supplier. Inventory is physically counted twice annually in the Texas distribution center. At the store level, inventory is physically counted each quarter. Inventory is then adjusted in our accounting system to reflect actual count results. Leases We lease our corporate headquarters and certain real estate for our retail store locations and periodically lease 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. The depreciable life of related leasehold improvements is based on the shorter of the useful life or the lease term. 36 Table of Contents For operating leases, the present value of our lease payments may include: (1) rental payments adjusted for inflation or market rates, and (2) lease terms with options to renew the lease or options to purchase leased equipment, when it is reasonably certain we will exercise such an option. The exercise of lease renewal or purchase option is generally at our discretion. Payments based on a change in an index or market rate are not considered in the determination of lease payments for purposes of measuring the related lease liability. We discount lease payments using our incremental borrowing rate based on information available as of the measurement date. We recognize rent expense related to our operating leases on a straight-line basis over the lease term. Rent expense is recorded in operating expenses. For finance leases, our right-of-use assets are amortized on a straight-line basis over the earlier of the useful life of the right-of-use asset or the end of the lease term with rent expense recorded to operating expenses. We adjust the lease liability to reflect lease payments made during the period and interest incurred on the lease liability using the effective interest method. The remaining asset balance in our finance lease is only residual value and only an insignificant interest expense of less than $ 100 dollars was incurred and is recorded on the consolidated statements of operations and comprehensive income. None of our lease agreements contain material residual value guarantees or material restrictive covenants. We do not have any contingent rental payment agreements. We have no sublease agreements and no lease agreements in which we are named as a lessor. Refer to Note 4, Leases for further discussion of the Company’s leases. Impairment of long-lived assets We evaluate long-lived assets on a quarterly basis to identify events or changes in circumstances (“triggering events”) that indicate the carrying value of certain assets may not be recoverable. Upon the occurrence of a triggering event, right-of-use (“ROU”) lease assets, property and equipment and definite-lived intangible assets are reviewed for impairment and an impairment loss is recorded in the period in which it is determined that the carrying amount of the assets is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets with such cash flows to be realized over the estimated remaining useful life of the primary asset within the asset group. The Company determined the lowest level of identifiable cash flows that are independent of other asset groups to be primarily at the individual store level. If the estimated undiscounted future net cash flows for a given store are less than the carrying amount of the related store assets, an impairment loss is determined by comparing the estimated fair value with the carrying value of the related assets. The impairment loss is then allocated across the asset group’s major classifications which in this case are operating lease assets and property and equipment. Triggering events at the store level could include material declines in operational and financial performance or planned changes in the use of assets, such as store relocation or store closure. This evaluation requires management to make judgements relating to future cash flows, growth rates and economic and market conditions. The fair value of an asset group is estimated using a discounted cash flow valuation method. For the year ended December 31, 2025, the Company did no t record any impairment. The Company recorded $ 0.02 million in impairment expense for the year ending December 31, 2024. 37 Table of Contents Earnings per share Basic earnings per share (“EPS”) are computed based on the weighted average number of common shares outstanding during the period. Diluted EPS includes additional common shares that would have been outstanding if potential common shares with a dilutive effect, such as stock awards from the Company’s restricted stock plan, had been issued. Anti-dilutive securities represent potentially dilutive securities which are excluded from the computation of diluted EPS as their impact would be anti-dilutive. Diluted EPS is computed using the treasury stock method. (in thousands, except share data) 2025 2024 Numerator: Net income $ 9,102 $ 827 Denominator: Basic weighted-average common shares outstanding 8,234,862 8,493,989 Dilutive effect of service-based restricted stock awards granted to Board of Directors under the Plan 389 5,529 Dilutive effect of service-based restricted stock awards granted to employees under the Plan 28,923 283,545 Diluted weighted-average common shares outstanding 8,264,174 8,783,063 Basic earnings per share 1.11 0.10 Diluted earnings per share 1.10 0.09 For the years ended December 31, 2025 and 2024, there were 24,704 and 38 shares, respectively, excluded from the diluted EPS calculation because the impact of their assumed vesting would be anti-dilutive. The significant change was due to the issuance of the new CEO shares in the first quarter of 2025. 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 2025 and 2024 and was recorded in operating expenses. Based on the current amount of intangible assets subject to amortization, we estimate amortization expense to be less than $ 0.01 million annually over the next five years. Fair value of financial instruments We measure fair value as an exit price, which is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering such assumptions, accounting standards establish a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value: 38 Table of Contents Level 1 – observable inputs that reflect quoted prices in active markets for identical assets or liabilities. Level 2 – significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 – significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. Classification of the financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. Our principal financial instruments consist of our money market investment or T-Bills maturing less than 90 days, accounts receivable, and accounts payable. As of December 31, 2025 and 2024, 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, 2025 and 2024. Income taxes Income taxes are estimated for each jurisdiction in which we operate. This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes. Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income. To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded. Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods. Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in tax rate is recognized through continuing operations in the period that includes the enactment date of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. A tax benefit from an uncertain tax position may be recognized when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. We recognize tax liabilities for uncertain tax positions and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense and the effective tax rate in the period in which new information becomes available. We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. We may be subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions, such as the timing and amount of deductions and allocation of taxable income to the various jurisdictions. 39 Table of Contents Stock-based compensation The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards. Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value. Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant. The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date. Compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards. Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets. The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved. If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized. If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed. The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied. We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards. In February 2025, in connection with hiring Johan Hedberg as the Company’s Chief Executive Officer, the Company granted Mr. Hedberg 100,000 RSU, which will vest in February 2026, and 900,000 RSUs, which will vest upon the Company’s achievement of certain performance and market targets. In June 2025, the Company’s stockholders approved an increase to the plan reserve of an additional 900,000 shares of our common stock for the potential vesting those performance-based and market based RSU grants to Mr. Hedberg. The Company also had a market based award which consist of the Company’s common stock trading on its principal stock market/exchange for 15 consecutive trading days with a daily closing price of $ 5.50 or more; the Company’s common stock trading on its principal stock market/exchange for 15 consecutive trading days with a daily closing price of $ 6.50 or more; and the Company’s common stock trading on its principal stock market/exchange for 15 consecutive trading days with a daily closing price of $ 7.50 or more. The Company determined the grant date fair value under based on the authoritative guidance and recorded the impact as of December 31, 2025. Comprehensive income Comprehensive income includes net income and certain other items that are recorded directly to stockholders’ equity. The Company’s only source of other comprehensive income is foreign currency translation adjustments, and those adjustments are presented net of tax. Shipping and handling costs Costs to ship products to our customers are included in operating expenses on the consolidated statements of operations and comprehensive income. Total costs were $ 3.0 million and $ 3.2 million for the years ended December 31, 2025, and 2024, respectively. 40 Table of Contents Advertising Advertising costs include the cost of print, digital, direct mail, community events, trade shows, and our e-commerce platform. Advertising costs are expensed as incurred. Total advertising expense was $ 1.3 million and $ 1.3 million in 2025 and 2024, respectively. Recently Adopted Accounting Pronouncements The Financial Accounting Standard Board (FASB) issued an Accounting Standard Update ASU 2023-09 Income Taxes (Topic 740) - improvement to income tax disclosure. This guidance requires enhanced annual disclosure of income tax rate reconciliation categories and quantitative thresholds for reconciling items and is effective for fiscal years beginning after December 15, 2024. The new guidance did not have any significant impact on our financial presentation but the Company has adopted as applicable. TheFASB also issued an Accounting Standard Update ASC 220-40 “Income Statement - Reporting Comprehensive Income - Expense Disaggregation disclosures”. This guidance requires public business entities (PBEs) to disaggregate specific expense captions (e.g., COGS, SG&A) into five natural categories—purchases of inventory, employee compensation, depreciation, amortization, and depletion—in annual and interim financial statement notes. It is effective for fiscal years after December 15, 2026 and the Company is evaluating the impact and applicability to our financial reporting. 3. BALANCE SHEET COMPONENTS Inventory (in thousands) December 31, 2025 December 31, 2024 On hand: Finished goods held for sale $ 30,251 $ 31,022 Raw materials and work in process 1,369 1,819 Inventory in transit 1,618 2,715 TOTAL $ 33,238 $ 35,556 Property and Equipment (in thousands) December 31, 2025 December 31, 2024 Building $ - $ 10,289 Land - 1,451 Leasehold improvements 8,273 2,244 Equipment and machinery 9,602 8,937 Furniture and fixtures 8,007 8,556 Vehicles 204 178 Asset Retirement Obligation Asset 117 - 26,203 31,655 Less: accumulated depreciation & impairment ( 15,978 ) ( 19,320 ) TOTAL $ 10,225 $ 12,335 41 Table of Contents Our property and equipment, net, was located in the following countries: (in thousands) December 31, 2025 December 31, 2024 United States $ 10,054 $ 12,182 Canada 152 132 Spain 19 21 $ 10,225 $ 12,335 Depreciation expense was $ 0.9 million and $ 1.2 million for the years ended December 31, 2025 and 2024, respectively. Other Short-term Liabilities Accrued Expenses and Other Liabilities December 31, 2025 December 31, 2024 (in thousands) Accrued employee related costs 1,667 701 Unearned gift card revenue 435 320 Estimated returns 193 190 Other Accrued taxes payable 1,308 546 Accrued vendor payables 101 314 Deferred Assets (1) - 1,500 TOTAL $ 3,704 $ 3,571 (1) This was the earnest money we received as downpayment for the sales of our corporate property and is also a part of our ending cash balance. 4. LEASES The Company leases certain real estate and periodically leases warehouse equipment under long-term lease agreements. 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 did no t recognize any impairment expense related to its operating lease assets during the year ended December 31, 2025 and recognized $ 0.02 million in impairment expense related to its operating lease assets during the year ended December 31, 2024 . Additional information regarding the Company’s operating and finance leases is as follows (in thousands, except for lease term and discount rate information): Leases Balance Sheet Classification December 31, 2025 December 31, 2024 (in thousands) Assets: Operating Operating lease assets $ 24,736 $ 10,323 Total assets $ 24,736 $ 10,323 Liabilities: Current Operating Current portion of operating lease liabilities $ 3,512 $ 3,205 Non-current Operating Operating lease liabilities, non-current 23,868 7,561 Total lease liabilities $ 27,380 $ 10,766 42 Table of Contents Lease Cost Income Statement Classification December 31, 2025 December 31, 2024 (in thousands) Operating lease cost Operating expenses $ 3,101 $ 4,029 Operating lease cost Impairment expense - ( 18 ) Short-term lease cost Operating expenses 58 - Variable lease cost (1) Operating expenses 1,178 914 Total lease cost $ 4,337 $ 4,925 (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. December 31, 2025 Maturity of Lease Liabilities Operating Leases Finance Leases (in thousands) 2026 5,391 - 2027 5,010 - 2028 4,127 - 2029 3,107 - 2030 2,123 - Thereafter 23,374 - Total lease payments $ 43,132 $ - Less: Interest ( 15,752 ) - Present value of lease liabilities $ 27,380 $ - 43 Table of Contents Other Information December 31, 2025 December 31, 2024 (in thousands) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used in operating leases $ 3,101 $ 3,512 Financing cash flows used in finance leases - 1 Operating lease assets obtained in exchange for lease obligations Operating leases, initial recognition 18,248 4,755 Lease Term and Discount Rate December 31, 2025 December 31, 2024 Weighted-average remaining lease term (years): Operating leases 13.0 3.7 Weighted-average discount rate: Operating leases 6.2 % 5.3 % 5. NOTES PAYABLE AND LONG-TERM DEBT 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. The interest rate is based on CME term SOFR + 210 basis points and the maturity is 1 year. As of the date of this filing, no funds had been borrowed under this facility, and we are in compliance with all covenants. In the fourth quarter of 2025, the Company renewed the promissory note under its Credit Agreement with JPMorgan Chase Bank, N.A. through October 31, 2026. Under the Credit Agreement, the bank provides the Company a credit facility of up to $ 4,000,000 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. The interest rate is based on CME term SOFR + 210 basis points, and the credit facility renews annually. As of the date of this filing, no funds had been borrowed under this facility, and we are in compliance with all covenants. 6. EMPLOYEE BENEFIT AND SAVINGS PLANS We have a 401(k) plan to provide retirement benefits for our employees. As allowed under Section 401(k) of the Internal Revenue Code, the plan provides tax-deferred salary contributions for eligible employees and allows employees to contribute a percentage of their annual compensation to the plan on a pretax basis. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. In 2025 and 2024, we matched 100 % of the pretax employee contributions on the first 3 % of eligible earnings and 50 % of the pretax employee contributions on the next 2 % of eligible earnings that are contributed by employees. For the years ended December 31, 2025, and 2024, we recorded employer match expense of $ 0.3 million and $ 0.3 million, respectively. 44 Table of Contents The plan allows employees who meet the age requirements and reach the plan contribution limits to make a catch-up contribution. The catch-up contributions are not eligible for matching contributions. In addition, the plan provides for discretionary matching contributions as determined by the Board of Directors. There were no discretionary matching contributions made in 2025 or 2024. We offer no post-retirement or postemployment benefits to our employees. 7. INCOME TAXES The provision for income taxes consists of the following: (in thousands) Year Ended December 31, Income Tax Provision (Benefits) 2025 2024 Current provision (benefit): Federal $ 2,014 $ 261 State 564 71 Foreign 29 ( 68 ) Related to UTP ( 4 ) ( 31 ) 2,603 233 Deferred provision (benefit): Federal 461 32 State 138 8 Foreign ( 4 ) ( 9 ) 595 31 Total tax provision $ 3,198 $ 264 Earnings 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. cash needs. 45 Table of Contents Income before income taxes was earned in the following tax jurisdictions: (in thousands) Year Ended December 31, Income (Loss) Before Income Taxes 2025 2024 United States $ 12,285 $ 1,382 Canada 38 ( 32 ) Spain ( 23 ) ( 259 ) TOTAL $ 12,300 $ 1,091 The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows: Deferred income tax assets: 2025 2024 (in thousands) Inventory $ 387 $ 391 Stock-based compensation 106 39 Accounts receivable 13 12 Sales returns 78 78 Foreign currency translation gain/loss in OCI 674 726 Goodwill and other intangible assets amortization - 1 Net operating loss (income) 192 184 Accrued expenses 340 41 Leases 660 111 Other 26 - Total deferred income tax assets 2,476 1,583 Less: valuation allowance ( 181 ) ( 156 ) Total deferred income tax assets, net of valuation allowance $ 2,295 $ 1,427 Property and equipment depreciation $ ( 1,915 ) $ ( 214 ) Total deferred income tax liabilities ( 1,915 ) ( 214 ) Net deferred tax asset (liability) $ 380 $ 1,213 We are required to reduce deferred tax assets by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. As of each reporting date, the Company considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2025, management determined that there is sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $ 0.4 million are realizable. 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, foreign income 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: 46 Table of Contents Year Ended December 31, (in thousands) 2025 2024 Statutory rate – Federal U.S. income tax $ 2,592 21.0 % $ 229 21.0 % State and local taxes 557 4.5 % 58 5.3 % Permanent book/tax differences 28 0.2 % 24 2.3 % Change in valuation allowance 24 0.2 % 2 0.2 % Rate differential on UTP reversals ( 4 ) ( 0.0 )% ( 30 ) ( 2.8 )% Income tax credits - 0.0 % - 0.0 % Other, net 1 0.1 % ( 19 ) ( 1.8 )% Effective rate $ 3,198 26.0 % $ 264 24.2 % (in thousands) Income taxes paid by jurisdiction: 2025 US federal tax paid 1550 US federal refunds received - US state tax paid 150 US state tax refunds - Foreign (Canada) tax paid 151 Foreign (Canada) tax refunds - Total taxes (absolute values) $ 1,851 A reconciliation of the beginning and ending amount of uncertain tax positions (“UTP”) is as follows: 2025 2024 UTP at beginning of the year $ 248 $ 388 Gross decrease to tax positions in current period ( 21 ) ( 140 ) UTP at end of year $ 227 $ 248 8. COMMITMENTS AND CONTINGENCIES Legal Proceedings We are periodically involved in various litigation that arises in the ordinary course of business and operations. There are no such matters pending that we expect to have a material impact on our financial position or operating results. Legal costs associated with the resolution of claims, lawsuits, and other contingencies are expensed as incurred. 47 Table of Contents 9. SIGNIFICANT BUSINESS CONCENTRATIONS AND RISK Major Customers Our revenues are derived from a diverse group of customers, from hobbyist crafters to small and large businesses across a wide variety of industries. No single customer accounted for more than 0.6% of our consolidated revenues in 2025 or 2024, 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. Major Suppliers We purchase merchandise and raw materials from nearly 150 suppliers from the United States and approximately 20 foreign countries. In general, our 10 largest suppliers account for approximately 55 % of our inventory purchases, and we had one supplier in 2025 who represented about 12% of our purchases. Credit Risk We maintain a majority of our cash in marketable securities and bank deposit accounts that, at times, may exceed federally insured limits. We have not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk on our cash and cash equivalents. 10. STOCKHOLDERS’ EQUITY Equity Compensation Plans The Tandy Leather Factory, Inc. 2013 Restricted Stock Plan (the “2013 Plan”) was adopted by our Board of Directors in January 2013 and approved by our stockholders in June 2013. The 2013 Plan initially reserved up to 300,000 shares of our common stock for 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. The Tandy Leather Factory, Inc. 2023 Incentive Stock Plan (the “2023 Plan”) was adopted by our Board of Directors in April 2023 and approved by our stockholders in June 2023. The 2023 Plan initially reserved up to 1,000,000 shares of our common stock for a variety of equity awards (including, but not limited to, RSUs, the only type of awards that have been granted to date) to our executive officers, non-employee directors and other key employees. In June 2025, as part of their annual director compensation, certain of our non-employee directors were granted a total of 17,344 service-based RSUs under the 2023 Plan, which will vest ratably over the next four years , subject to each participant’s continued service on the board as of each vesting date. In February 2025, the Company granted to Mr. Hedberg 100,000 service-based RSUs under the 2023 Plan, which will vest in February 2026, subject to his continued employment with the Company on the vesting date. The Company also granted to Mr. Hedberg a total of 900,000 performance-based RSUs, which will vest when and if the Company satisfies certain performance and market conditions; to date none of these performance-based RSUs have vested nor has any of the market condition been met, and the Company cannot predict when such vesting will occur, if at all. 48 Table of Contents The Company also had a market based award which consist of the Company’s common stock trading on its principal stock market/exchange for 15 consecutive trading days with a daily closing price of $ 5.50 or more; the Company’s common stock trading on its principal stock market/exchange for 15 consecutive trading days with a daily closing price of $ 6.50 or more; and the Company’s common stock trading on its principal stock market/exchange for 15 consecutive trading days with a daily closing price of $ 7.50 or more. The Company determined the grant date fair value under based on the authoritative guidance and recorded the impact as of December 31, 2025. On June 17, 2025, the Company entered into a stock purchase agreement with Janet Carr, our former Chief Executive Officer; wherein the Company agreed to purchase 430,897 shares from Ms. Carr at $ 3.00 per share for a total of $ 1,292,691 . A summary of the activity for restricted stock and RSU awards is as follows: Shares (in thousands) Weighted Average Share Price Balance, January 1, 2025 409 $ 4.32 Granted 1,018 3.95 Forfeited ( 347 ) 4.31 Vested ( 21 ) 4.44 Balance, December 31, 2025 1,059 $ 3.97 The Company’s stock-based compensation relates to restricted stock and RSU awards. For these service-based awards, our stock-based compensation expense, included in operating expenses, was $ 0.5 million and $ 0.5 million in 2025 and 2024, respectively. As of December 31, 2025, there was unrecognized compensation cost related to non-vested, service-based awards of $ 0.2 million which will be recognized over 3.1 weighted average years in each of the following years: Unrecognized Expense (in thousands) 2026 $ 172 2027 36 2028 17 2029 7 $ 232 We issue shares from authorized shares upon the lapsing of vesting restrictions on restricted stock and RSUs. In 2025 and 2024, we issued 21,346 and 97,588 shares, 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. 49 Table of Contents Share Repurchase 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 on or prior to August 31, 2024. As of December 31, 2025, the Company had not repurchased any shares under this plan. On September 17, 2024, the Board of Directors approved the renewal of the stock plan, and the Company shall be authorized to repurchase up to $ 5 million (at then-current market value) of the Company’s common stock in open-market transactions at prevailing market prices upon periodic instructions from the Board or an authorized sub-committee of the Board until September 30, 2026. As of December 31, 2025, $ 5.0 million remained available for repurchase under this new program. 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. 11. OTHER RELEVANT MATTERS (Sales of Corporate Offices & New CEO) The Company concluded the sale of our corporate headquarters, and the net proceeds of the sale is recorded on the face of our consolidated statements of operations and comprehensive income as Gain on disposal of Headquarters. On January 22, 2025, the Company finalized the sale of its corporate headquarters and distribution facilities in Fort Worth, Texas for net proceeds of $ 24.9 million after deduction of commission and relevant closing fees. The total net book value disposed was $ 8.7 million, resulting in a gain of $ 16.2 million as the result of the sale and this is included in ‘Other income’ on the face of our consolidated statements of operations and comprehensive income. The Company has elected to include all one-time move expenses of approximately $ 3.5 million in ‘Other income,’ as management deems these are not part of our normal operations. On January 28, 2025, the Company signed a 10 -year lease for new corporate headquarters and distribution facilities in Benbrook, Texas that became effective on July 1, 2025, and the Company has the ability to renew the lease for an additional 10 years at market rate. We also signed a short-term lease through September 1, 2025 for our former facility that was evaluated as a sale leaseback. Due to the short-term nature of the lease, it was not recorded under ASC 842, in accordance with our policy of not recording short-term leases. The Company hired Johan Hedberg as its new Chief Executive Officer as of January 6, 2025. Prior to the hiring of Mr. Hedberg, Janet Carr resigned as Chief Executive Officer, effective January 3, 2025; she remained employed by the Company to assist with transition until March 31, 2025. On February 21, 2025, the Company granted 900,000 restricted stock units (“RSUs”) to its Chief Executive Officer. The RSUs vest upon the achievement of specified market-based conditions, consisting of the Company’s common stock trading for 15 consecutive trading days at or above the following closing price thresholds: $ 5.50 , $ 6.50 , and $ 7.50 per share. Each price target corresponds to one-third of the total award. The RSUs are also subject to a two-year service requirement beginning January 6, 2025. The grant-date fair value of the award was determined using a Monte Carlo simulation model, which incorporates the effect of the market conditions. Total stock-based compensation expense recognized related to this award for the year ended December 31, 2025 was less than $ 0.1 million, which was not material to the Company’s consolidated financial statements. 50 Table of Contents As of December 31, 2025, unrecognized compensation cost related to this award was less than $ 0.1 million and is expected to be recognized over a weighted-average period of approximately 2 years. 12. SUBSEQUENT EVENTS On February 2, 2026, our Board of Directors authorized a $ 0.75 per share special one-time cash dividend that was paid to our stockholders of record at the close of business on February 9, 2026. The dividend, totaling $ 6.1 million, was paid to our stockholders on February 24, 2026. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.