TLF 10-K & 10-Q changes, risk factors and insider trading

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.

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) under a lease that will run through September 2035.2035 and is renewable for an additional ten years. 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,expires, 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.

In 2020, we experienced declines in sales and operating income primarily resulting from the COVID-19 pandemic. In 2024,2025, we also experienced declines,sales improvement compared to the prior year, which management believes were primarily resultingresulted from our sales campaigns, stronger retail management, and increase in prices offset by pressures from macroeconomic factors, including inflation (particularly higher food, fuel, housing and transportation costs), tariffs increases, 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 business strategy.

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, 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,retailers in addition to traditional store-based retailers. This could result in increased price competitioncompetition, 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.

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 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 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.

Disruptions in the operation of our Fort WorthU.S. distribution center or assembly facility could have an adverse effect on our ability to supply our retail stores, fulfill web orders and/or manufacture 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,Benbrook, Texas headquarters, whichwhere will bewe 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.

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 2023,2025, we obtainedrenewed aour 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 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 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.

If the United States maintains current tariffs on products manufactured in China,China or other major countries where we source our products, 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.

We sell our products primarily through company-owned stores and through orders generated from our global websites, and through direct account representatives in our commercial division. We produce leather lace, cut cut leather pieces and most of the do-it-yourself kits that are sold in our stores and on our websites. We also offer production services to our business customers such as cutting (“clicking”) and splitting and some assembly. We maintain our principal principal offices at 19007602 SoutheastSouthwest Loop 820, FortSuite Worth,101, TexasBenbrook, 76140.TX 76126.

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

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 decreasedincreased by $3.4$1.7 million, or 7.4%,4.1%, from 20232024 to 2024.2025. Our gross margin percentage for the year ended December 31, 20242025 decreasedincreased to 56.2%57.0% versus 59.2%56.2% in the same period in 2023,2024, mainly due to higherpricing freightstrategies implemented to combat tariffs and warehousecost overhead throughoutefficiency thegains year,in andour increaseddistribution promotionalcenter; activityoffset toby compensatetariff forincreases weakfrom consumervarious discretionarycountries spending.where we source our products.

Other income consists primarily of interest income and foreign currency gain. For the year ended December 31, 20242025 and 2023,, we recognized other income of $0.5$13.3 million of which $0.3$24.9 million was generated from the sales of our corporate headquarters, $0.6 million was related to interest earned on our short term investment and $0.3 million in foreign currency exchange gain; offset by $0.1$8.7 in disposal of our building and land and $3.5 million dollar in relocation expenses and other foreign taxexchange penalties.impact.

On January 3, 2023, the Company entered into a credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. Under the Credit Agreement, the bank will provideprovides the Company a credit facility facility of up to $5,000,000 on standard terms and conditions, including affirmative and negative covenants set forth in the Credit Agreement. As security for the credit facility, the Company has pledged, as collateral, certain of its assets, including the Company’s cash in deposit accounts, inventory and equipment. The interest rate is based on CME term SOFR + 210 basis points and the maturity is 1 year. As of the date of this filing, no funds had been borrowed under this facility, and we are in compliance with all covenants.

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 goods held for sale includesinclude 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 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, 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.

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 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 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 performance condition when it is probable that the condition will be achieved. If the Company determines it is not probable a performance condition will be achieved, no compensation expense is recognized. If the Company changes its assessment in a subsequent period and concludes it is probable a performance condition will be achieved, the Company will recognize compensation expense ratably between the period of the change in assessment through the expected date of satisfying the performance condition for vesting. If the Company subsequently assesses that it is no longer probable that a performance condition will be achieved, the accumulated expense that has been previously recognized will be reversed. The compensation expense ultimately recognized, if any, related to performance-based awards will equal the grant date fair value based on the number of shares for which the performance condition has been satisfied. We issue shares from authorized shares upon the lapsing of vesting restrictions on RSUs. We do not use cash to settle equity instruments issued under stock-based compensation awards. In February 2025, in connection with hiring Johan Hedberg as the Company’s Chief Executive Officer, the Company granted Mr. Hedberg 100,000 RSU, which will vest in February 2026, and 900,000 RSUs, which will vest upon the Company’s achievement of certain performance and market targets. In June 2025, the Company’s stockholders approved an increase to the plan reserve of an additional 900,000 shares of our common stock for the potential vesting those performance-based and market based RSU grants to Mr. Hedberg.

Recent Changes to U.S. Tariff Rates. The manufacturingpurchases of our products is primarily outsourced to third parties across multiple countries, most notably China and Brazil. We continue to focus on opportunities to mitigate negative impacts and increase efficiencies and scale within our supply chain. However, significant increases in tariff rates, particularly for products imported mainly from China and Brazil, would substantially increase our cost for those products. These increases may likely force the Company to increase our prices to customers for those products to maintain profitability, profitability, which could in turn lead to a decrease in our sales. Even if we are able to avoid raising the prices of our own products, the macro-economic inflationary impact from tariffs of substantially higher prices on other products sold in this country could also harm our sales by reducing our customers’ ability to make discretionary purchases of items such as our products. The global tariff environment is changing rapidly, and we cannot be assured that we will not be materially negatively impacted by these changes. We may also be exposed to retaliatory tariffs implications for our intercompany sales to Canadian stores if implemented.

Increased Expenses from Renting Headquarters Facilities and Flagship Store. Until January 2025, the Company owned the buildings housing its principal offices, distribution center and flagship retail store in Fort Worth, Texas. Since closing the sale of those buildings in January 2025, the Company has leased its spaces for all of these facilities. Excluding buildout, furniture, equipment and other costs associated with the move to the new facilities, the Company expects to pay initial combined rent for new headquarters and flagship store facilities in excess of $1.6 million per year (increasingadjusted for inflation annually fromover commencementthe term). If the Company is unable to generate additional sales and profits to offset these added expenses, this could have a material adverse effect on the Company and its operations.

Currently, the Company operates a total of 100101 retail stores. There are 9192 stores in the United States (“U.S,”), eight stores in Canada and one store in Spain. As of MarchJune 31,30, 2026, the Company had temporarily closed one of its Canadian stores for relocation.relocation and we anticipate to open this store in Q4 2026.

On January 22, 2025, the Company finalized the sale of its corporate headquarters and distribution facilities in Fort Worth, Texas for net proceeds of $24.9 million after deduction of commission and relevant closing fees,fees. The total net book value disposed was $8.7 million, resulting in a gain of $16.2 million as referenced in the Company’s 8-K filed on January 22, 2025. The net proceedsresult of the salesale, and this is recordedincluded in ‘Other,Other net’income’ inon the face of our consolidated statements of operations and comprehensive incomeincome. On January 28, 2025, the Company signed a 10-year lease for new corporate headquarters and distribution facilities in Benbrook, Texas, and theThe Company has the ability elected to renewinclude theall leaseone-time formove anexpenses additionalin 10‘Other yearsincome’ atas marketmanagement rate.deems these are not part of our normal operations.

Three Months Ended MarchJune 31,30, 2026 and 2025

Consolidated net sales for the quarter ended MarchJune 31,30, 2026 increased by $0.6$0.3 million or a 3.2%1.5% increase compared to the same period in the prior year period. We believe the increase was mainly due to our sales campaign and improved allocation of the correct product mix in our stores during those sales periods. We also saw improvement in our non-traditional sales such as classes and other community engagements.

Gross profit for the quarter increased by $1.3$1.1 million, or 11.9%,10.6%, compared to the same period in 2025. Gross margin percentage for the quarter ended MarchJune 31,30, 2026 was 470530 basis points better than last year, primarily driven by pricing changes implemented; offset by marginal discounts offered for the period compared to prior year.year discount offering. The Company’s estimates of overhead allocation and the timing of inventory receipts may also have a temporary impact on gross margin percentage fluctuations from quarter to quarter.

Operating expenses for the quarter increased by $1.1$0.6 million or 11.2%6.1% compared to the corresponding prior year period, primarily as a result of an increase in compensationretail costbonus paid compared to prior year of $0.6$0.1 million, an increase in selling expenses of $0.2 million, an increase in total occupancysoftware cost of $0.4$0.1 million, an increase of legal and audit fees of $0.1 million, an increase in property taxdepreciation expense of $0.2$0.1 million compared to prior year,million, an increase in healthcare cost of $0.1 million in loss on disposed assets; offset by a reduction in freightutilities outand to our customersrepairs of $0.2$0.1 million.

Our effective income tax rate for the three months ended MarchJune 31,30, 2026 and MarchJune 31,30, 2025 was 39.5%34.2% and 26.5%,(10.8%), respectively. Our effective tax rate differs from the federal statutory rate primarily due to U.S. state income tax expense, expenses that are non-deductible for tax purposes, and any change in estimates in our valuation allowance associated with our deferred tax assets.

We require cash principally for day-to-day operations, to purchase inventory and to finance capital investments. We expect to fund our operating and liquidity needs primarily from a combination of current cash balances and cash generated from operating activities. Any excess cash will be invested as determined by our Board of Directors in accordance with its approved investment policy. Our cash balances as of MarchJune 31,30, 2026, totaled $10.1$6.4 million.

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 MarchSeptember 31,30, 2026. As of MarchJune 31,30, 2026, $5.0 $5.0 million remained available for repurchase under this new program.

For the threesix months ended MarchJune 31,30, 2026, cash providedused byin operations was $0.9$2.3 million, driven by net income from operations of $0.2$0.6 million, non-cash expense of $1.8$3.6 million, including depreciation, amortization, and stock-based compensation, an increase in accounts payablesinventory of $1.1$4.0 million, ana decrease in accountsaccrued receivablesexpenses of $0.1$1.0 million, decrease in prepaid expense of $0.1 million; offset by a decrease in operating lease liabilities of $1.3$2.5 million,million; a reductionoffset in accrued expense and other liabilities of $0.7 million,by an increase in inventory of $0.6 million, and an increase in income tax account payable of $0.2$0.9 million and decrease in prepaid expenses of $0.1 million. Cash used in investing activities was $0.6$1.0 million mainly for new store operations which includes purchases of property and equipmentequipment. Cash used in financing activities was $6.2 million, primarily for dividend payments and withheld shares used as taxes at vesting for the employees. These activities, together with the effect of exchange rate changes of $0.1 million, resulted in a net decrease in cash of $6.0 $9.7 million.

For the threesix months ended MarchJune 31,30, 2025, cash used in operations was $0.5$4.5 million driven by a net income from operations of $0.3 million , non-cash expense of $1.4 million, including depreciation, amortization, and stock-based compensation, , an increase in inventory of $1.2 million; partially offset by a reduction in lease liability paymentspayment of $1.4$2.4 million, aan decrease in trade accounts payables of $1.0 million, an decrease in accrued expensesliabilities of $0.8$0.9 millionmillion, an increase in inventory of $0.3 million, and an increase in other assets of $0.1$0.2 million. OurCash provided by investing activities was $20.2 million, which included net reductionproceeds infrom property, plant and equipment was $7.0 million, mainly due to the disposalsale of our corporate headquarters facilitiesof including$24.9 land,million andoffset weby the purchase of assets for our new corporate facility of $4.7 million. We paid dividends in the amount of $12.7 $12.8 million. The above activities, in addition to the effect of exchange rate changes, resulted in a net increase in cash of $10.3$3.1 million.