TANDY LEATHER FACTORY INC

Previous wording

Currently, the Company operates a total of 102 retail stores. There are 91 stores in the United States (“U.S,”), ten stores in Canada and one store in Spain.

Current wording

Currently, the Company operates a total of 101 retail stores. There are 91 stores in the United States (“U.S,”), ten stores in Canada and one store in Spain.

Previous wording

The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales, accordingly. The sales return allowance included in accrued expense and other liabilities was $0.1 million, $0.1 million, and $0.2 million as of March 31, 2024, December 31, 2023, and January 1, 2023. The estimated value of merchandise expected to be returned included in other current assets was $0.1 million as of March 31, 2024, December 31, 2023, and January 1, 2023.

Current wording

The sales return allowance is based each year on historical customer return behavior and other known factors and reduces net sales and cost of sales, accordingly. The sales return allowance included in accrued expense and other liabilities was $0.2 million, $0.1 million, and $0.2 million as of June 30, 2024, December 31, 2023, and January 1, 2023. The estimated value of merchandise expected to be returned included in other current assets was less than $0.1 million as of June 30, 2024, December 31, 2023, and January 1, 2023.

Previous wording

We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one year. As of March 31, 2024, December 31, 2023 and January1, 2023, our gift card liability, included in accrued expenses and other liabilities, was $0.2 million, $0.3 million and $0.3 million, respectively. We recognized gift card revenue of $0.2 million for the three months ended March 31, 2024 and 2023.

Current wording

We record a gift card liability for the unfulfilled performance obligation on the date we issue a gift card to a customer. We record revenue and reduce the gift card liability as the customer redeems the gift card. In addition, for gift card breakage, we recognize a proportionate amount for the expected unredeemed gift cards over the expected customer redemption period, which is one year. As of June 30, 2024, December 31, 2023 and January1, 2023, our gift card liability, included in accrued expenses and other liabilities, was $0.1 million, $0.3 million and $0.3 million, respectively. We recognized gift card revenue of $0.2 million for the six months ended June 30, 2024 and 2023.

Previous wording

Leases. We lease certain real estate for our retail store locations and may lease warehouse equipment for our Texas distribution center under long-term lease agreements; however, as of the end of December 31, 2024, we did not have any warehouse equipment lease. 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.

Current wording

Leases. We lease real estate for our retail store locations and may lease warehouse equipment for our Texas distribution center under long-term lease agreements; however, as of the end of June 30, 2024, we did not have any warehouse equipment leases. 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.

Previous wording

We recognize rent expense related to our operating leases assets on a straight-line basis over the lease term. Rent expense is recorded in operating expenses. The net adjustment between rent expense and the actual cash paid during the fiscal year has been recorded as accrued expenses and other liabilities in the accompanying consolidated balance.

Current wording

We recognize rent expense related to our operating leases assets on a straight-line basis over the lease term. Rent expense is recorded in operating expenses.

Previous wording

Consolidated net sales for the quarter ended March 31, 2024 decreased $1.1 million, or 5.3%, compared to the corresponding prior year period. We believe the decrease in sales was due to ongoing weak consumer demand compared to a year ago.

Current wording

Consolidated net sales for the quarter ended June 30, 2024 decreased $0.2 million, or 1.1%, compared to the corresponding prior year period. We believe the decrease in sales was due to ongoing weak consumer demand compared to a year ago resulting from ongoing uncertainty related to global political, economic and other uncontrollable factors.

Previous wording

Our store footprint consisted of 102 and 102 stores at March 31, 2024 and March 31, 2023, respectively.

Current wording

Our store footprint consisted of 101 and 103 stores at June 30, 2024 and June 30, 2023, respectively.

Previous wording

Gross profit decreased by $0.9 million, or 7.6%, compared to the same period in 2023, and our gross margin percentage for the quarter ended March 31, 2024, decreased year over year by 140 basis points due to increased promotional activity to compensate for weaker consumer demand.

Current wording

Gross profit for the quarter decreased by $0.9 million, or 8.3%, compared to the same period in 2023, and our gross margin percentage for the quarter ended June 30, 2024, decreased year over year by 450 basis points due to a one-time accounting adjustment in cost of sales as reported in our 2023 second quarter 10-Q.

Previous wording

Operating expenses decreased $0.6 million or 5.2% compared to the corresponding prior year period, primarily as a result of a decrease in retail store salary of $0.2 million combined, $0.1 million temporary reduction in corporate salary, RSU and bonus expenses of $0.6 million, and a decrease in freight to customers of $0.1 million, offset by an increase in occupancy expense, marketing expense and supplies of $0.3 million.

Current wording

Operating expenses for the quarter decreased $0.2 million or 1.7% compared to the corresponding prior year period, primarily as a result of a decrease in employment costs of $0.4 million and a decrease in office supplies of $0.1 million partially offset by an increase in medical group insurance of about $0.1 million, increase in other outside services of $0.1 million, and an increase in marketing of $0.1 million.

Previous wording

Since January 1, 2023, we closed one store in Baldwin Park, CA in March 2023. We evaluate a number of factors when determining whether to close existing stores, including the 4-wall cash flow trend and longer-term projection for the store, the long-term sales trend, ongoing cost of store operations, date of lease expiration, quality of the store and location, and the size and potential of the trade area including proximity to other existing stores, among other variables. We use similar factors to determine whether to open new stores.

Current wording

We opened one store and closed one store in the six months ending June 30, 2024. We evaluate a number of factors when determining whether to close existing stores, including the 4-wall cash flow trend and longer-term projection for the store, the long-term sales trend, ongoing cost of store operations, date of lease expiration, quality of the store and location, and the size and potential of the trade area including proximity to other existing stores, among other variables. We use similar factors to determine whether to open new stores.

Previous wording

Our effective tax rate for the three months ended March 31, 2024 was 25.7% compared to 29.5% for the same period in 2023. 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 change in our valuation allowance associated with our deferred tax assets.

Current wording

Our effective tax rate for the six months ended June 30, 2024 was 26.9% compared to 31.1% for the same period in 2023. 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 change in our valuation allowance associated with our deferred tax assets.

Previous wording

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 balances as of March 31, 2024 totaled $12.3 million.

Current wording

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 balances as of June 30, 2024 totaled $11.5 million.

Previous wording

For the three months ended March 31, 2024, cash from operations generated $1.1 million driven by a net income of $0.5 million, non-cash expense of $1.4 million, including depreciation, amortization, and stock-based compensation, a net reduction in inventory of $1.2 million and a decrease in prepaid expense of $0.1 million, partially offset by a reduction to working capital including a net $1.1 million decrease in accrued expense and other liabilities, a reduction in lease liability payments of $0.9 million, and a decrease in accounts payable trade of $0.1 million. We invested $1.2 million in capital expenditure primarily related to replacing a new roof at our corporate headquarters and other new capital investments due to new store openings and store relocations. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $0.2 million.

Current wording

For the six months ended June 30, 2024, cash from operations generated $0.6 million driven by a net income of $0.6 million, non-cash expense of $2.8 million, including depreciation, amortization, and stock-based compensation, a net reduction in inventory of $0.8 million partially offset by a reduction in lease liability payments of $1.8 million, decrease in accrued expense and other liabilities of $0.7 million, an increase in prepaid expense of $0.4 million, and an increase in accounts receivable of $0.1 million. We invested $1.4 million in capital expenditure primarily related to replacing a new roof at our corporate headquarters and other new capital investments due to new store openings and store relocations. The activities above, in addition to the effect of exchange rate changes, resulted in a net decrease in cash of $0.6 million.

Previous wording

For the three months ended March 31, 2023, cash from operations generated $0.8 million driven by a net income of $0.7 million, non-cash expense of $1.4 million, including depreciation, amortization, and stock-based compensation, a net reduction in inventory of $2.4 million that includes adjustments, offset by a reduction to working capital including a net $2.8 million decrease in accounts payable and accrued liabilities mostly due to bonus accrual and contract liabilities, and a reduction in lease liability payments of $0.9 million. We invested $0.1 million in capital expenditure primarily related to system modifications and improvements. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $0.7 million.

Current wording

For the six months ended June 30, 2023, cash from operations generated $2.3 million driven by a net income of $1.2 million, non-cash expense of $2.7 million, including depreciation, amortization, and stock-based compensation, a net reduction in inventory of $0.7 million, offset by a change in other assets of $0.1 million, income tax payable of $0.4 million, and a reduction in lease liability payments of $1.7 million. We invested $0.1 million in capital expenditures primarily related to system modifications and improvements. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $2.0 million.