Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2024

For the transition period ________ to ________

Commission File Number 1-12368

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐ No ☒

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   ☐

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $15,218,690 at December 31, 2024 (based on the price at which the common stock was last traded on the last business day of its most recently completed second fiscal quarter).

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  As of February 26, 2024, there were 8,496,581 shares of the registrant’s common stock outstanding.

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PART I

 

ITEM 1.

BUSINESS

 

The following discussion, as well as other portions of this Form  10-K, contains forward-looking statements that reflect our plans, estimates and beliefs.  Any such forward-looking statements (including, but not limited to, statements to the effect that Tandy Leather Factory, Inc. (“TLF”) or its management “anticipates,” “plans,” “estimates,” “expects,” “believes,” “intends,” and other similar expressions) that are not statements of historical fact should be considered forward-looking statements and should be read in conjunction with our Consolidated Financial Statements and related notes contained elsewhere in this report.  These forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and should be read carefully because they involve risks and uncertainties.  We assume no obligation to update or otherwise revise these forward-looking statements, except as required by law.  Specific examples of forward-looking statements include, but are not limited to, statements regarding our forecasts of financial performance, share repurchases, store openings or store closings, capital expenditures and working capital requirements.  Our actual results could materially differ from those discussed in such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Form  10-K and particularly in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Unless the context otherwise indicates, references in this Form  10-K to “TLF,” “we,” “our,” “us,” the “Company,” “Tandy,” or “Tandy Leather” mean Tandy Leather Factory, Inc., together with its subsidiaries.

 

General

 

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 equity, 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 plus 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.

 

 

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

 

Retail Fleet

 

 

As of December 31, 2024, all Tandy locations, other than our corporate headquarters facilities (which includes our flagship store, corporate offices, distribution center, and production facility) were leased.  Since January 22, 2025, when the Company completed the sale of its corporate headquarters facilities in Fort Worth, Texas, all Tandy locations are leased.

 

Business Strategy

 

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 assembly and pre-assembly services, we are building long-term, strategic relationships with our largest customers.

 

Going forward, our strategy is to continue to:

 

 

 

 

Economic Conditions

 

Over the past 3 years, as post-covid inflation had significant impact on food and housing costs, our customers have pulled back on discretionary spending.  At the time of filing this Form 10-K, the American and world economies continue to be affected by a combination of factors arising from the continuing war in Ukraine, the more recent and worsening crisis in Israel and the Middle East, and continued tensions between the U.S. and China.  Furthermore, it is not clear how a new U.S. administration will affect inflation, employment, cost of goods through tariffs, tax policy and other external factors that may have an impact on our employees, our customers or the financial performance of Tandy.

 

Customers

 

Our customers fall into two broad categories: those who shop in retail stores and on our website (“Retail Customers”) and those whom we serve through our commercial division (“Commercial Customers”).  Retail Customers range from hobbyists to institutions (schools, camps, and other groups) to small businesses.  Affinity groups like Military and First Responders and smaller and larger businesses who purchase in our retail stores receive special pricing or general discounts.  To be served through our commercial division, customers generally need to spend more than $20,000 annually.

 

Merchandise

 

We carry a wide assortment of products organized into a number of categories including leather, hand tools, hardware, kits, liquids, machines, and other supplies.  We operate a production facility in Fort Worth, Texas, where we produce kits, thread lace, belt strips and straps, and Craftaid® tooling templates, and provide some custom production services for commercial and business customers.  The factory produces approximately 10% of our products.  We distribute product under the Tandy LeatherTM, Eco-FloTM, CraftoolTM, CraftoolProTM and Dr. Jackson’sTM brands, along with our premium TandyPro® line of products.  We develop and invest in new products through the ideas and referrals of customers and store personnel as well as the analysis of trends in the market and sales performance at retail.  In addition, we have been focused on broadening our assortment through strategic partnerships with key brands to drive category growth and better meet the needs of our customers.

 

Operations

 

Information regarding net sales, gross profit, operating income, and total assets is included within Item  7, Management’s Discussion and Analysis of financial condition and results of operations, and within Item  8, Financial Statements and Supplementary Data.

 

Our stores offer a broad selection of products combined with leathercraft expertise in a one-stop shop.  Not only can customers purchase leather, related accessories and supplies necessary to complete their projects from a single source, but many of our store associates are also leathercrafters themselves and can provide suggestions and advice on our customers’ projects.  Customers value the expertise and high level of customer service from our store associates, the convenience of taking their purchases immediately, as well as the ability to touch, feel and choose their individual pieces of leather, an organic product in which each piece is unique.  We also offer numerous classes and open workbenches where customers can work on projects together with the leathercrafting community, and test new tools and techniques.

 

Most of our stores range in size from 1,300 square feet to 9,000 square feet, with the average at approximately 3,500 square feet. Our Fort Worth flagship store is approximately 22,000 square feet.  Stores are located in light industrial warehouse spaces or older strip shopping centers in proximity to major freeways or well-known crossroads.  We believe that many of our customers view our stores as a destination: customers interested in leathercrafting seek us out, reducing the value of paying high rents for high foot-traffic locations.

 

Historically, we generate slightly more sales in the fourth quarter of each year due to the holiday shopping season (approximately 28-30% of annual sales), while the other three quarters average approximately 22-24% of annual sales each quarter.

 

Distribution

 

Our stores receive the majority of their inventory from our central distribution center located in Fort Worth, Texas, in weekly or, increasingly, bi-monthly shipments, using third-party transportation providers.  Occasionally, merchandise is shipped to stores directly from the vendor.  We now fulfill all of our U.S. and many of our international web orders from our Fort Worth distribution center.  Canada web orders are fulfilled out of our 9 Canada stores, and European web orders are fulfilled out of our Spain store.  We have a global customer service team that handles web order inquiries and phone orders.  Our goal is to optimize the tradeoff between the sales and market share we realize from having a broad product line against the safety stock required to support those items.  We generally maintain higher inventories of imported or long-lead-time items to ensure a continuous supply. Increased product assortment and some supply chain disruptions over the past several years have put upward pressure on inventory, offset by better sell-throughs, test-and-learn buying, and strategic partnerships with vendors.   We have been executing a number of strategic initiatives to test smaller quantities of new items online, buying into them only when we are certain of their success, to tailor product assortments to the needs of local customers in each store, and to ship directly from vendors to customers.  We carry about 6,500 stock-keeping units (SKUs) in our current product line and continue to refine both the line, the lead times and safety stock levels required to meet customer demand, online vs. in-store assortment, and overall total inventory levels needed to grow sales and market share.

 

Competition

 

Our competitors include smaller, independently-owned brick-and-mortar retailers, internet-based retailers including those selling on platforms like Amazon and eBay, national craft chains like Michaels Stores, Inc. and Hobby Lobby Stores, Inc., some wholesale-focused distributors, and two mid-sized competitors – Weaver Leather and Springfield Leather – who have one store and an online business.  All of these competitors carry a more limited line of leathercraft products compared to Tandy.  We are competitive on convenience, price, availability of merchandise, customer service, depth of our product line, and delivery time.  Tandy Leather is the only multi-store chain specializing in leathercraft, which we believe provides a competitive advantage over internet-based retailers, the large general craft retailers, and the mid-sized competitors.  We also believe that our large size relative to most competitors gives us an advantage in sourcing as well as deep product and leathercrafting expertise among our employees.

 

Suppliers

 

 

Because leather is sold internationally, market conditions abroad are likely to affect the price of leather in the U.S.  Aside from increasing purchases when we anticipate price increases (or possibly delaying purchases if we foresee price declines), we do not attempt to hedge our inventory costs.

 

Our supply chain and vendor relationships remain strong.  We are focused on continuing to align our product and sourcing strategies to elevate the overall quality, consistency, and agility to meet the diverse needs of our existing consumers and attract new ones to the brand.  While pandemic-related supply chain shocks have been resolved, freight costs and reliability remain volatile and tight labor markets and rising wages continue to pressure costs across all areas.

 

Compliance with Environmental Laws

 

Our compliance with federal, state and local environmental protection laws has not had, and is not expected to have, a material effect on our capital expenditures, earnings, or competitive position.

 

Employees

 

As of December 31, 2024, we employed 542 people, 414 of whom were employed on a full-time basis.  We are not a party to any collective bargaining agreements.  Overall, we believe that our relations with employees are good.

 

Intellectual Property

 

The Company owns all the material trademark rights used in connection with the production, marketing, distribution and sale of all Tandy-branded products.  In addition, we license a limited number of our trademarks and copyrights used in connection with the production, marketing and distribution of certain categories of goods and limited edition co-branded projects.  Major trademarks include federal trade name registrations for “Tandy Leather Factory,” “Tandy Leather Company,” and “Tandy.”  The Company is not dependent on any one particular trademark or design patent, although it believes that the “Tandy” and “Tandy Leather” names are important for its business.  In addition, Tandy owns several patents for specific belt buckles and leather-working equipment.  Tandy monitors its trademarks and trade names and where appropriate pursues infringers.  The Company expects that its material trademarks will remain in full force and effect for as long as we continue to use and renew them.

 

Foreign Sales

 

Information regarding our sales from the United States and abroad and our long-lived assets is found in Note 2, Significant Accounting Policies: Revenue Recognition and Note 3, Balance Sheet Components, of the notes to the consolidated financial statements.  For a description of some of the risks related to our foreign operations, see Item 1A, Risk Factors.

 

Available Information

 

We file reports with the SEC. These reports include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these filings.  These reports are available on the Securities and Exchange Commission’s website at  www.sec.gov.

 

Our corporate website is located at www.tandyleather.com.  We make copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and any amendments thereto filed with or furnished to the SEC available to investors on or through our website free of charge as soon as reasonably practicable after we electronically file them with or furnish them to the SEC.  Our SEC filings can be found on the Investor Relations page of our website through the “SEC Filings” link.  In addition, certain other corporate governance documents are available on our website through the “Corporate Governance” link.  No information contained on any of our websites is intended to be included as part of, or incorporated by reference into, this Form 10-K.

 

Information about our Executive Officers

 

The following table sets forth information concerning our executive officers as of December 31, 2024:

 

Janet Carr has served as our Chief Executive Officer and as a member of our Board of Directors since October 2018.  Prior to her current role, Ms. Carr served as the Senior Vice-President of Global Business Development for Caleres Inc. (formerly Brown Shoe Company Inc.) from 2016 to 2017.  While there, she was responsible for international wholesale and retail for all of their brands.  Prior to Caleres, Ms. Carr was the President of the Handbag Division of Nine West Group Inc. from 2013 to 2014, where she was responsible for all aspects of design, development and sales in both wholesale and retail.  Ms. Carr has deep experience in strategy and consumer insights in various roles at a number of prominent retailers, including Tapestry, Inc. (formerly Coach, Inc.), Gap Inc. and Safeway.

 

Ms. Carr resigned as Chief Executive Officer and was replaced on January 6, 2025, by Johan Hedberg.   See note on “Subsequent Events” below.

 

ITEM 1A.

RISK FACTORS

 

Risks Related to our Business and Business Strategy

 

The successful execution of our multi-year transformation and operational efficiency initiatives is key to the long-term growth of our business.

The Company continues to implement a large number of initiatives to transform the Company’s business, improve sales long term and improve operational efficiency.  These include the closing or relocation of underperforming stores and opening of new store concepts, the further development of our new division focused on serving commercial customers, pricing and marketing initiatives, systems improvements, and other changes.  The Company believes that long-term growth will be realized through these transformational efforts over time, however there is no assurance that such efforts will be successful.  Actual costs incurred and the timeline of these initiatives may differ from our expectations.  If these initiatives are unsuccessful, our business, financial condition and results of operation could be materially adversely affected.

Our business is subject to the risks inherent in global sourcing activities.

As a Company engaged in sourcing on a global scale, we are subject to the risks inherent in such activities, including, but not limited to:

Increases in the price of leather and other items we sell or a reduction in availability of those products could increase our cost of goods and decrease our profitability.

The prices we pay our suppliers for our products are dependent in part on the market price for leather, metals, and other products.  The cost of these items may fluctuate substantially, depending on a variety of factors, including demand, supply conditions, transportation and fuel costs, government regulation including potential trade barriers such as tariffs, economic climates, war or other political considerations, and other unpredictable factors.  Leather prices worldwide have been relatively stable for the past several years although the outlook for future prices is uncertain.  Increases in these costs, together with other factors, would make it difficult for us to sustain the gross margin level we have achieved in recent years and result in a decrease in our profitability unless we are able to pass higher prices on to our customers or reduce costs in other areas.  Changes in consumers’ product preferences or lack of acceptance of our products whose costs have increased may prohibit us from passing those increases on to customers, which could cause our gross margin to decline.  If our product costs increase and our sale prices do not, our future operating results could be adversely affected unless we are able to offset such gross margin declines with comparable reductions in operating costs.  Accordingly, such increases in costs could adversely affect our business and our results of operations.

Further, involvement by the United States in war and other military operations abroad could disrupt international trade and affect our inventory sources.  Finally, livestock diseases, such as mad cow, could reduce the availability of hides and leathers or increase their cost.  The occurrence of any of these events could adversely affect our business and our results of operations.

Relocation of the Company’s headquarters and main distribution facility in 2025 might cause significant disruption to the Company’s business and operations.

In January 2025, the Company completed the sale of its headquarters facilities, including its main distribution facility and flagship store, in Fort Worth, Texas.  The Company plans to relocate these operations to new spaces beginning around the third quarter of 2025.  These relocation activities will inevitably cause disruption to the Company’s business and operations, including (but not limited to) requiring the Company set up temporary fulfillment centers for web orders while the move is in progress and establishing new facilities and procedures for distribution of products to stores and all customers during and after this period.  The Company is actively working to plan for and manage these transitions, but we cannot assure you that these processes will be completed as planned, that they will not cost significantly more than expected, or that we will not encounter unforeseen problems or challenges.  These issues could have a material adverse effect on the Company’s business and operations in 2025 or beyond.

We are subject to risks associated with leasing retail, distribution and office space under long-term and non-cancelable leases.  We may be unable to renew leases on acceptable terms.  If we close a leased retail space, we might remain obligated under the applicable lease.

We lease our retail store locations under long-term, non-cancelable leases, which have initial or renewed terms typically ranging from three years to ten years and may include lease renewal options.  In addition, we have signed a lease for the Company’s future principal offices and distribution center (including some factory production) that will run through September 2035.  We believe that most of the lease agreements we will enter into in the future will be long-term and non-cancelable.  Generally, our leases are “net” leases, which require us to pay our proportionate share of the cost of insurance, taxes, maintenance, and utilities.  We generally cannot cancel these leases at our option.  If we determine that it is no longer economical to operate a retail store or other facility subject to a lease and decide to close it, as we have done in the past and will do in the future, we would generally remain obligated under the applicable lease for, among other things, payment of the base rent, common charges, and other net payments for the balance of the lease term.  In some instances, we may be unable to close an underperforming retail store without a significant financial penalty due to continuous operation clauses in our lease agreements.  In addition, as each of our leases expire, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close retail stores in desirable locations.  Our inability to secure desirable retail space or favorable lease terms could impact our ability to grow.  Likewise, our obligation to continue making lease payments in respect of leases for closed retail or other spaces could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to sustain our financial performance or our past growth, which could have a material adverse effect on our future operating results.

In 2020, we experienced declines in sales and operating income primarily resulting from the COVID-19 pandemic.  In 2024, we also experienced declines, which management believes were primarily resulting from macroeconomic factors, including inflation (particularly higher food, fuel, housing and transportation costs), higher interest rates and lower government subsidies, all of which impacted the specialty retail industry and impacts our customers’ ability to make discretionary purchases such as our products.  Many other specialty retailers have experienced declining sales and losses due to the overall challenging retail environment.  Our sales and profits may continue to be negatively affected in the future.  We anticipate that our financial performance will depend on a number of factors, including consumer preferences, the strength and protection of our brand, the introduction of new products, and the success of our business strategy.

Competition, including internet-based competition, could negatively impact our business.

The retail industry is competitive, which could result in the reduction of our prices and loss of our market share. While we remain competitive in the areas of quality, price, breadth of selection, customer service, and convenience, we compete with smaller and larger retailers focused on leather and leather crafting, some of whom have been able to offer competitive products at lower prices than ours.  We also compete with larger specialty retailers (e.g., Michaels Stores, Inc., and Hobby Lobby Stores, Inc.) that dedicate a small portion of their selling space to products that compete with ours but are larger and have greater financial resources than we do.  The Company also faces competition from internet-based retailers, in addition to traditional store-based retailers.  This could result in increased price competition since our customers can more readily search and compare products from internet-based retailers who do not need to support a physical store fleet and may be able to undercut our prices for products.  The growth of internet retailers has also significantly reduced traffic to many shopping centers and physical stores, which, if not countered by an increase in our own online retailing, could have a material adverse effect on our in-store or overall sales.

Declines in foot traffic in our retail store locations could negatively impact our sales and profits.

The success of our retail stores is affected by (1) the location of the store within its community or shopping center; (2) surrounding tenants or vacancies; (3) increased competition in areas where shopping centers are located; (4) the amount spent on advertising and promotion to attract consumers to the stores; and (5) a shift towards online shopping resulting in a decrease in retail store traffic.  Many of our stores are located in light industrial areas, where foot traffic tends to be lower than in traditional retail shopping areas.  Furthermore, our initiatives to service our larger customers through a dedicated Commercial Program rather than primarily through local stores may also lead to a decline in the traffic to our store locations.  Declines in consumer traffic could have a negative impact on our net sales and could materially adversely affect our financial condition and results of operations.  Furthermore, declines in traffic could result in store impairment charges if expected future cash flows of the related asset group do not exceed the carrying value.

Our business could be harmed if we are unable to maintain our brand image.

Tandy Leather is one of the most recognized brand names in our industry.  Our success to date has been due in large part to the strength of that brand.  If we are unable to provide quality products and exceptional customer service to our customers, including education, which Tandy Leather has traditionally been known for, our brand name may be impaired which could adversely affect our operating results.

Changes in customer demand could materially adversely affect our sales, results of operations and cash flow.

Our success depends on our ability to anticipate and respond in a timely manner to changing customer demands and preferences for leather and leathercraft-related items.  If we misjudge the market, we might significantly overstock unpopular products and be forced to take significant inventory markdowns, or experience shortages of key items, either of which could have a material adverse impact on our operating results and cash flow.  In addition, adverse weather conditions, economic or political instability and consumer confidence volatility could have material adverse impacts on overall customer demand, which may impact our sales and operating results.

Our success depends, in part, on attracting, developing and retaining qualified employees, including key personnel.

The ability to successfully execute our goals is heavily dependent on attracting, developing and retaining qualified employees, including our senior management team.  Competition in our industry to attract and retain these employees is intense and is influenced by our ability to offer competitive compensation and benefits, employee morale, our reputation, recruitment by other employers, perceived internal opportunities, non-competition and non-solicitation agreements and macro unemployment rates.

We depend on the guidance of our senior management team and other key employees who have significant experience and expertise in our industry and our operations.  The unexpected loss of one or more of our key personnel or any negative public perception with respect to these individuals could have a material adverse effect on our business, results of operations and financial condition.  We do not maintain key-person or similar life insurance policies on any of senior management team or other key personnel.

Disruptions in the operation of our Fort Worth distribution center or assembly facility could have an adverse effect on our ability to supply our retail stores, fulfill web orders and/or manufacture product, resulting in possible decreases in sales and margin.

 

We are dependent on a limited number of distribution and sourcing centers, primarily the center located at our Fort Worth, Texas headquarters, which will be relocated during 2025 as referenced above and in Note 11 of this document.  Our ability to meet the needs of our customers and our retail stores and e-commerce sites depends on the proper operation of these centers.  If any of these centers were to shut down or otherwise become inoperable or inaccessible for any reason, we could suffer a substantial loss of inventory and/or disruptions of deliveries to our retail and wholesale customers.  We anticipate, and are planning for, a period of disruption in 2025 while we move our distribution facilities to their new location near Fort Worth, but we cannot be sure that this disruption will not exceed our forecast or interfere with our ability to allocate or distribute products as needed.  While we have business continuity and contingency plans for our sourcing and distribution center sites, significant disruption of assembly or distribution for any of the above reasons could interrupt product supply, result in a substantial loss of inventory, increase our costs, disrupt deliveries to our customers and our retail stores, and, if not remedied in a timely manner, could have a material adverse impact on our business.

 

Risks Related to Cash Flow and Capitalization

 

If our cash from operations falls short and we are unable to raise additional working capital, we might be unable to fully fund our operations or to otherwise execute our business plan.

 

Historically, the Company has funded its business primarily with cash from operations and has utilized only small lines of working capital for seasonal expenditures.  In 2023, we obtained a line of credit facility through JP Morgan Chase Bank to provide working capital as needed; as of the date of this report, we have not borrowed any amounts under this facility.  However, should (1) our costs and expenses prove to be greater than we currently anticipate, or (2) seasonal fluctuations in sales or inventory purchases result in needing additional capital, and (3) we are unable to borrow sufficient short- or long-term capital, the depletion of our working capital would be accelerated and could leave us unable to make required payments.  We may also seek capital through the private issuance of debt or equity securities. We cannot guarantee that we will be able to secure all of the additional cash or working capital we might require to continue our operations.

 

Risks Related to Technology, Data Security and Privacy

 

Failure to protect the integrity and security of personal information of our customers and employees could result in substantial costs, expose us to litigation and damage our reputation.

 

We receive and maintain certain personal, financial, and other information about our customers, employees, and vendors.  In addition, our vendors receive and maintain certain personal, financial, and other information about our employees and customers.  The use and transmission of this information is regulated by evolving and increasingly demanding laws and regulations across various jurisdictions.  If our security and information systems are compromised as a result of data corruption or loss, cyber-attack or a network security incident or if our employees or vendors fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could result in liabilities and penalties and could damage our reputation, cause us to incur substantial costs and result in a loss of customer confidence, which could materially affect our results of operations and financial condition.  Additionally, we could be subject to litigation and government enforcement actions because of any such failure.

 

Further, data privacy is subject to frequently changing rules and regulations, which sometimes conflict among the various jurisdictions and countries where we operate.  For example, the General Data Protection Regulation (“GDPR”), which was adopted by the European Union effective May 2018, requires companies to meet new requirements regarding the handling of personal data.  In addition, the State of California enacted the California Consumer Privacy Act (the “CCPA”), which became effective January 2020 and requires companies that process information on California residents to, among other things, provide new disclosures and options to consumers about data collection, use and sharing practices.

 

Moreover, each of the GDPR and the CCPA confer a private right-of-action on certain individuals and associations.  Our failure to adhere to or successfully implement appropriate processes to adhere to the requirements of GDPR, CCPA and other evolving laws and regulations in this area could result in financial penalties, legal liability and could damage our reputation, which could have a material adverse effect on our business, financial condition and results of operations.

 

A cybersecurity incident and other technology disruptions could negatively affect our business and our relationships with customers.

We use technology in substantially all aspects of our business operations.  The widespread use of technology, including mobile devices, cloud computing, and the internet, gives rise to cybersecurity risks, including security breaches, espionage, system disruption, theft and inadvertent release of information.  Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including information relating to customers and suppliers, private information about employees, and financial and strategic information about us and our business partners.  The Company has implemented measures to prevent cybersecurity breaches and incidents, as described in Item 1C below.  However, we cannot guarantee that these preventative measures and incident response efforts will be entirely effective.  If we fail to effectively assess and identify cybersecurity risks associated with the use of technology in our business operations, we may become increasingly vulnerable to such risks.  The theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation of privacy laws, loss of customers, potential liability and competitive disadvantage.

We rely heavily on information technology systems in the conduct of our business, some of which are managed, and/or hosted by third parties, including, for example, point-of-sale processing in our stores, management of our supply chain, and various other processes and procedures.  These systems are subject to damage, interruption or failure due to theft, fire, power outages, telecommunications failure, computer viruses, security breaches, malicious cyber-attacks or other catastrophic events.  Certain technology systems may also be unreliable or inefficient, and technology vendors may limit or terminate product support and maintenance, which could impact the reliability of critical systems operations.  If our information technology systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them and may experience loss of critical data and interruptions or delays in our ability to manage inventories or process transactions, which could result in lost sales, customer or employee dissatisfaction, or negative publicity that could negatively impact our reputation, results of operations and financial condition.

 

Moreover, our failure to adequately invest in new technology or adapt to technological developments and industry trends, particularly with respect to digital commerce capabilities, could result in a loss of customers and related market share.  If our digital commerce platforms do not meet customers’ expectations in terms of security, speed, attractiveness or ease of use, customers may be less inclined to return to such digital commerce platforms, which could negatively impact our business.

 

Risks Related to the Macroeconomic Environment

 

Our business may be negatively impacted by general economic conditions in the United States and abroad.

 

Our performance is subject to global economic conditions and their impact on levels of consumer spending that affect not only the ultimate consumer, but also small businesses and other retailers.  Specialty retail, and retail in general, is heavily influenced by general economic cycles.  Specifically, at the time of filing this Form 10-K, the American and world economies have been acutely affected by a combination of factors resulting from post-pandemic inflation and weak economic growth, multiple major military conflicts, and tensions with key U.S. trade partners caused by the uncertainty of a new administration.  The impacts of these events over the last year include (but are not limited to) continued high food and housing costs as a result of multiple years of high inflation, continued higher wages as a result of multiple years high employment and the associated wage growth, rising real estate prices and continued high interest rates.

 

Purchases of non-essential, discretionary products tend to decline in periods (such as the current one) of recession or uncertainty regarding future economic prospects, as disposable income declines.  During these periods of economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, maintain our earnings from operations as a percentage of net sales, or generate sufficient cash flows to fund our operational and liquidity needs.  As a result, our operating results may be adversely and materially affected by continued downward trends or uncertainty in the United States or global economies.

 

Foreign currency fluctuations could adversely impact our financial condition and results of operations.

 

We generally purchase our products in U.S. dollars.  However, we source a large portion of our products from countries other than the United States.  The cost of these products may be affected by changes in the value of the applicable currencies.  Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated sales that occur in other countries (currently Canada and the European Union).  This revenue, when translated into U.S. dollars for consolidated reporting purposes, could be materially affected by fluctuations in the U.S. dollar, negatively impacting our results of operations and our ability to generate revenue growth.

 

We face risks related to the effect of economic uncertainty.

 

​During events of economic downturn and slow recovery, our growth prospects, results of operations, cash flows and financial condition could be adversely impacted.  Our stores offer leather and leathercraft-related items, which are viewed as discretionary items.  Pressure on discretionary income brought on by economic downturns and slow recoveries, including housing market declines, rising energy prices and weak labor markets, may cause consumers to reduce the amount they spend on discretionary items.  The inherent uncertainty related to predicting economic conditions makes it difficult for us to accurately forecast future demand trends, which could cause us to purchase excess inventories, resulting in increases in our inventory carrying cost, or limit our ability to satisfy customer demand and potentially lose market share.

 

While the impact of the COVID-19 pandemic has mostly receded, there are residual effects such as higher consumer prices and interest rates.  Furthermore, another serious outbreak of coronavirus or other deadly disease could also have a material adverse effect on our business and liquidity.

 

The COVID-19 pandemic had an unprecedented and lasting impact on the U.S. economy, some of which continues to today. The possibility of another outbreak of a coronavirus variant or other deadly disease that would have material adverse effect on the economy, our supply chain partners, our employees and our customers is now all too real.  While we are better prepared to handle a future pandemic, it could impact our ability to keep our stores open, to obtain merchandise or payment terms from our vendors, to transport merchandise to and from our warehouse, to operate our warehouse, factory and other facilities that require on-site activities, and thus materially adversely affect our revenues, earnings, liquidity and cash flows.

 

Risks Related to Legal, Regulatory and Compliance

 

If the United States maintains current tariffs on products manufactured in China, or if additional tariffs or trade restrictions are implemented by other countries or by the U.S., the cost of our products manufactured in China or other countries and imported into the U.S. or other countries could increase.  This could in turn adversely affect the profitability for these products and have an adverse effect on our business, financial condition and results of operations.

 

In addition, the violation of labor, environmental or other laws by an independent manufacturer or supplier, or divergence of an independent manufacturer’s or supplier’s labor practices from those generally accepted as ethical or appropriate in the U.S., could interrupt or otherwise disrupt the shipment of our products, harm our trademarks or damage our reputation.  The occurrence of any of these events could materially adversely affect our business, financial condition and results of operations.

 

Our success depends on the continued protection of our trademarks and other proprietary intellectual property rights.

 

Our trademarks and other intellectual property rights are important to our success and competitive position, and the loss of or inability to enforce our trademark and other proprietary intellectual property rights could harm our business.  We devote substantial resources to the establishment and protection of our trademark and other proprietary intellectual property rights on a worldwide basis.  Despite any precautions we may take to protect our intellectual property, policing unauthorized use of our intellectual property is difficult, expensive, and time consuming, and we may be unable to adequately protect our intellectual property or determine the extent of any unauthorized use.  Our efforts to establish and protect our trademark and other proprietary intellectual property rights may not be adequate to prevent imitation or counterfeiting of our products by others, which may not only erode sales of our products but may also cause significant damage to our brand name.  Further, we could incur substantial costs in legal actions relating to our use of intellectual property or the use of our intellectual property by others.  Even if we are successful in these actions, the costs we incur could have a material adverse effect on us.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

ITEM 2.

PROPERTIES

 

We lease our store locations, with the exception of our flagship store located in Fort Worth, Texas which we still owned as of December 31, 2024.  The majority of our stores have initial lease terms of at least five years.  The leases are generally renewable, with increases in lease rental rates in some cases.  We believe that all of our properties are adequately covered by insurance.  As of December 31, 2024, we owned the 22,000 square foot building that houses our flagship store.  Further, we owned our corporate headquarters, which includes our central distribution center and production facility, sales, marketing, administrative, and executive offices.  The facility consists of 191,000 square feet located on approximately 30 acres.  In January 2025, the Company completed the sale of its flagship store and corporate headquarters buildings, and those spaces have also been leased since that time as referenced in our “Subsequent Events” footnote below.

 

The following table summarizes the locations of our leased premises as of the date of this filing:

 

The broader economic impact of the pandemic and the war in Ukraine and the Middle East have put pressure on store profitability with dampened demand, higher wages and staffing challenges, rising retail rents, and increases in other retail store operating costs.  We regularly review recent and future projected store 4-wall cash flow taking these forecasted costs as well as projected consumer demand, other nearby stores and a number of other factors into consideration when making decisions to close or open stores in a given location.

 

ITEM 3.

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. See discussion of legal proceedings in note  8, Commitments and Contingencies of the notes to the consolidated financial statements included in Item  8 of this Form 10-K.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

 

Our common stock trades on the Nasdaq Capital Market under the symbol “TLF.”

 

There were approximately 271 stockholders of record on February 26, 2025.

 

We did not sell any shares of our equity securities during our fiscal year ended December 31, 2024 that were not registered under the Securities Act.

 

On January 24, 2025, our Board of Directors authorized a $1.50 per share special one-time cash dividend that was paid to our stockholders of record at the close of business on February 3, 2025.    The dividend, totaling $12.7 million, was paid to our stockholders on February 18, 2025.

 

Our Board of Directors may consider future cash dividends after giving consideration to our profitability, cash flow, capital requirements, current and forecasted liquidity, as well as financial and other business conditions existing at the time.  This policy is subject to change based on future industry and market conditions, as well as other factors.

 

We did not repurchase any shares of our common stocks during the fourth quarter of fiscal year 2024.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

We are a smaller reporting company as defined in Item 10(f)(1) of SEC Regulation S-K and are not required to provide information under this item.

 

 

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.

 

 

 

Currently, the Company operates a total of 101 retail stores.  There are 91 stores in the United States (“U.S,”), 9 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.

 

Going forward, our strategy is to continue to manage our cost base and use of cash and focus on strengthening our sales by leveraging our competitive advantage of our retail stores.  Improving our employee product knowledge, customer service level, in-store and virtual classes and community engagement as well as expanding workshop space in stores with machines are the highest priorities.  We need to continue to give customers good reasons to visit stores, and an excellent return on their time investment when they do.

 

Results of Operations

 

The following table presents selected financial data:

 

Net Sales

 

Consolidated net sales decreased by $1.8 million, or 2.4%, from 2023 to 2024.   We believe the decrease in sales was due to ongoing weak consumer demand compared to a year ago, resulting from continued weakness in consumer discretionary spending related to sustained increases in key non-discretionary items like food and housing, exacerbated by temporary store closures and moves.

Our store footprint consisted of 101 stores at December 31, 2024 and 102 stores at December 31, 2023.

 

Since January 1, 2024, we closed two stores and opened one store.    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 decreased by $3.4 million, or 7.4%, from 2023 to 2024. Our gross margin percentage for the year ended December 31, 2024 decreased to 56.2% versus 59.2% in the same period in 2023, due to higher freight and warehouse overhead throughout the year, and increased promotional activity to compensate for weak consumer discretionary spending.

Operating Expenses

 

Operating expenses increased by $0.4 million in 2024 as compared to the prior year.  The primary drivers of the increase were higher employment costs of approximately $1.4 million for full time employees across the Company, and an increase in occupancy and utilities of $0.4 million due to the renewal of our store leases; offset by reduction in accrued bonus of $0.9 million, the expiration and forfeiture of RSUs of $0.2 million, a reduction in credit card fees of $0.2 million, a reduction in office supplies of $0.1 million, and a reduction in repair and maintenance of $0.1 million.

 

Other Income

 

Other income consists primarily of interest income and foreign currency gain.  For the year ended December 31, 2024 and 2023, we recognized other income of $0.5 million of which $0.3 million was related to interest earned on our short term investment and $0.3 million in foreign currency exchange gain offset by $0.1 million in foreign tax penalties.

 

Provision for Income Taxes

 

Our effective tax rate was 24.2% and 17.1% for the years ended December 31, 2024 and 2023, 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 2023.

 

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, 2024 totaled $13.3 million.

 

 

 

 

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, 2024, the Company had purchased less than $10,000  of 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, 2024, $5.0  million remained available for repurchase under this new program.

 

Cash Flows

 

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.

 

For 2023, we generated $4.5 million of cash from operations driven by net income of $3.8 million, the add-back of non-cash expenses of $4.5 million, including depreciation, amortization, loss on disposal of fixed assets, stock based compensation, and deferred taxes, an increase in accrued expenses and other liabilities of $0.5 million, a decrease in inventory of $0.2 million and a decrease in accounts receivable of $0.1 million; offset by a decrease in operating lease liabilities payments of $3.6 million, a decrease in accounts payable of $0.8 million, and an increase in prepaid expenses of $0.2 million. We invested $0.6 million in capital expenditures for the purchase of store fixtures and systems implementations. The activities above, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $4.2 million.

 

We believe that cash flow from operations and our existing cash reserves will be adequate to fund our operations through 2025, 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 2025.  There can be no assurance, however, that the current global economic conditions would not result in further restrictions on our business operations in a manner that would more materially impact our cash flow.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements during 2024 or 2023, 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 includes the cost of merchandise purchases, the costs to bring the merchandise to our Texas distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to our stores.  These costs include depreciation of long-lived assets utilized in acquiring, warehousing and distributing inventory.  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.

 

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.

 

 

 

None of our lease agreements contain material residual value guarantees or material restrictive covenants.  As of December 31, 2024, 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.

 

Stock-based Compensation.  The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards.  Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value.  Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant.  The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date.  The total compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards.  Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets.  The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved.  If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized.  If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting.  If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed.  The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied.  We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs.  We do not use cash to settle equity instruments issued under stock-based compensation awards.

 

Income Taxes.  Income taxes are estimated for each jurisdiction in which we operate.    This involves assessing current tax exposure together with temporary differences resulting from differing treatment of items for tax and financial statement accounting purposes.    Any resulting deferred tax assets are evaluated for recoverability based on estimated future taxable income.    To the extent it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized, a valuation allowance is recorded.  Our evaluation regarding whether a valuation allowance is required or should be adjusted also considers, among other things, the nature, frequency, and severity of recent losses, forecasts of future profitability and the duration of statutory carryforward periods.  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.

 

We have audited the accompanying consolidated balance sheets of Tandy Leather Factory, Inc. and Subsidiaries (the Company) as of December 31, 2023 and 2022, and the related consolidated statements of operations and comprehensive income, cash flows, and stockholders’ equity for each of the two years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the 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 audits 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 audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the 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 matters or on the accounts or disclosures to which it relates.

The Company’s accounting policy for the recognition of inventory and cost of sales is described in Note 2 to the financial statements. The Company has recorded an inventory balance of approximately $37.9 million and cost of sales of approximately $31.0 million as of and for the year ended December 31, 2023. Additionally, Note 3 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. The determination of amounts that are required to be capitalized to inventory resulting from warehouse and handling expenditures and transportation costs (together “overhead costs”) are subjective and are generally based on an allocation ratio calculated by the Company using the previous year’s actual overhead costs and the value of inventory handled during that year, subject to adjustment for current economic or market conditions. Additionally, to determine if the value of their inventory should be written down, the Company considers many factors, including condition of the product (excessive scars, discoloring or damage from UV light), current and anticipated demand that may cause the product to become slow moving and age of the merchandise to ensure that the product line is considered fresh. If a write-down is warranted, the carrying value of the merchandise is reduced from its original cost to the lower of its cost or net realizable value.

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.

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

Consolidated Statements of Operations and Comprehensive Income

		For the Years Ended December 31,
		2024				2023
Net sales		$	74,391			$	76,229
Cost of sales			32,587				31,066
Gross profit			41,804				45,163
Operating expenses			41,176				40,753
Income from operations			628				4,410
Other income:
Interest income			331				93
Other, net			132				42
Total other income			463				135
Income before income taxes			1,091				4,545
Income tax provision			264				777
Net income		$	827			$	3,768
Foreign currency translation adjustments, net of tax			(568	)			356
Comprehensive income		$	259			$	4,124
Net income per common share:
Basic		$	0.10			$	0.45
Diluted		$	0.09			$	0.45
Weighted average number of shares outstanding:
Basic			8,493,989				8,339,658
Diluted			8,783,063				8,369,976

The accompanying notes are an integral part of these Consolidated Financial Statements Consolidated Statements of Cash Flows

		For the Years Ended December 31,
		2024				2023
Cash flows from operating activities:
Net income		$	827			$	3,768
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,183				1,199
Operating lease asset amortization			3,548				3,427
Stock-based compensation			548				770
Deferred income taxes			(342	)			(902	)
Changes in operating assets and liabilities:
Accounts receivable-trade			(72	)			107
Inventory			1,992				231
Prepaid expenses			(424	)			(202	)
Other current assets			17				(12	)
Accounts payable-trade			1,116				(752	)
Accrued expenses and other liabilities			322				462
Income taxes, net			(574	)			84
Other assets			(81	)			(45	)
Operating lease liabilities			(3,512	)			(3,598	)
Total adjustments			3,721				769
Net cash provided by operating activities			4,548				4,537
Cash flows from investing activities:
Purchase of property and equipment			(2,983	)			(576	)
Net cash used in investing activities			(2,983	)			(576	)
Cash flows from financing activities:
Payment of finance lease obligations			(1	)			(15	)
Repurchase of common stock			-				(11	)
Net cash used in financing activities			(1	)			(26	)
Effect of exchange rate changes on cash and cash equivalents			(452	)			249
Net increase in cash and cash equivalents			1,112				4,184
Cash and cash equivalents, beginning of period			12,159				7,975
Cash and cash equivalents, end of period		$	13,271			$	12,159

TANDY LEATHER FACTORY, INC.

DECEMBER 31, 2024 and 2023

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.

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

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.

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, 2024, the opening balance of the gift card liability was $0.3 million.  During 2024, we issued $0.5 million of gift cards, and $0.4 million of gift cards were redeemed and recognized as revenue. At December 31, 2024, our gift card liability balance was $0.3 million. On December 31, 2023 and January 1, 2023, the gift card liability was $0.2 and $0.3 million respectively.

Disaggregated revenue

In the following table, revenue for the years ended December 31, 2024 and 2023 is disaggregated by geographic areas as follows:

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.

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 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.

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.

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, 2024, the Company recorded $0.02 million in impairment of two stores whereas there was no impairment expense recognized as of December 31, 2023.

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.

For the years ended December 31, 2024 and 2023, there were 38 and 65,075 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 expiration and forfeiture of the CEO and board member shares as of December 31, 2024.

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:

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.

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.

Stock-based compensation

The Company’s stock-based compensation relates primarily to restricted stock unit (“RSU”) awards.  Accounting guidance requires measurement and recognition of compensation expense at an amount equal to the grant date fair value.  Compensation expense is recognized for service-based stock awards on a straight-line basis or ratably over the requisite service period, based on the closing price of the Company’s stock on the date of grant.  The service-based awards typically vest ratably over the requisite service period, provided that the participant is employed on the vesting date.  Compensation expense is reduced by actual forfeitures as they occur over the requisite service period of the awards.

Performance-based RSUs vest, if at all, upon the Company satisfying certain performance targets.  The Company records compensation expense for awards with a performance condition when it is probable that the condition will be achieved.  If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized.  If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting.  If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed.  The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied.  We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs.  We do not use cash to settle equity instruments issued under stock-based compensation awards.

Comprehensive income

Shipping and handling costs

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 $1.1 million in 2024 and 2023, respectively.

Recently Adopted Accounting Pronouncements

The Company did not adopt any other new accounting guidance that was applicable for the year ended December 31, 2024.

3.  BALANCE SHEET COMPONENTS

Inventory

Short-term Liabilities

4.  LEASES

Lease Cost		Income Statement Classification		December 31, 2024				December 31, 2023
(in thousands)
Operating lease cost		Operating expenses		$	4,029			$	3,908
Operating lease cost		Impairment expense			(18	)			-
Short-term lease cost		Operating expenses			-				-
Variable lease cost (1)		Operating expenses			914				915
Finance:
Amortization of lease assets		Operating expenses			-				7
Interest on lease liabilities		Interest expense			-				-
Total lease cost				$	4,925			$	4,830

		December 31, 2024
Maturity of Lease Liabilities		Operating Leases				Finance Leases
(in thousands)
2025			3,840				-
2026			3,285				-
2027			2,730				-
2028			1,845				-
Thereafter			1,319				-
Total lease payments		$	13,019			$	-
Less:  Interest			(2,253	)			-
Present value of lease liabilities		$	10,766			$	-

Lease Term and Discount Rate		December 31, 2024				December 31, 2023
Weighted-average remaining lease term (years):
Operating leases			3.7				3.6
Finance leases			-				-
Weighted-average discount rate:
Operating leases			5.3	%			4.8	%
Finance leases			N/A				6.0	%

5. NOTES PAYABLE AND LONG-TERM DEBT 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 2024 and 2023, 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, 2024, and 2023, we recorded employer match expense of $0.3 million and $0.3 million, respectively.

The plan allows employees who meet the age requirements and reach the plan contribution limits to make a catch-up contribution. The catch-up contributions are not eligible for matching contributions.  In addition, the plan provides for discretionary matching contributions as determined by the Board of Directors.  There were no discretionary matching contributions made in 2024 or 2023.

We offer no postretirement or postemployment benefits to our employees.

7.  INCOME TAXES

The provision for income taxes consists of the following:

Income before income taxes was earned in the following tax jurisdictions:

The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:

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, 2024, management determined that there is sufficient positive evidence to conclude that it is more likely than not that deferred taxes of $1.2 million are realizable. However, we increase the valuation allowance by $0.02 million due to foreign tax NOL carryovers that do not expire.

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:

A reconciliation of the beginning and ending amount of uncertain tax positions (“UTP”) is as follows: