FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| For the quarterly period ended May |
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☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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| For the transition period from to |
Commission file number: 001-32320
BUILD-A-BEAR WORKSHOP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 43-1883836 |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
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1954 Innerbelt Business Center Drive St. Louis, Missouri | 63114 |
(Address of Principal Executive Offices) | (Zip Code) |
(314) 423-8000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common stock | BBW | New York Stock Exchange |
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 (§232.405 of this chapter) 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, smaller reporting company, or 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 ☒ |
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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 14(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 10, 2019,8, 2020, there were 15,130,41815,439,538 issued and outstanding shares of the registrant’s common stock.
INDEX TO FORM 10-Q
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Part I Financial Information |
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| Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Part II Other Information | ||
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Item 1. Financial Statements
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
May 4, | February 2, | May 5, | May 2, | February 1, | May 4, | |||||||||||||||||||
2019 | 2019 | 2018 | 2020 | 2020 | 2019 | |||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 20,238 | $ | 17,894 | $ | 18,881 | $ | 21,851 | $ | 26,726 | $ | 20,238 | ||||||||||||
Inventories, net | 56,004 | 58,356 | 49,423 | 53,238 | 53,381 | 56,004 | ||||||||||||||||||
Receivables, net | 8,836 | 10,588 | 8,968 | 7,099 | 11,526 | 8,836 | ||||||||||||||||||
Prepaid expenses and other current assets | 8,541 | 12,960 | 11,493 | 5,896 | 7,117 | 8,541 | ||||||||||||||||||
Total current assets | 93,619 | 99,798 | 88,765 | 88,084 | 98,750 | 93,619 | ||||||||||||||||||
Operating lease right-of-use asset | 144,483 | - | - | 124,112 | 126,144 | 144,483 | ||||||||||||||||||
Property and equipment, net | 65,357 | 66,368 | 76,410 | 61,626 | 65,855 | 65,357 | ||||||||||||||||||
Deferred tax assets | 3,241 | 3,099 | 4,102 | - | 3,411 | 3,241 | ||||||||||||||||||
Other intangible assets, net | 607 | 731 | 950 | - | - | 607 | ||||||||||||||||||
Other assets, net | 2,224 | 2,050 | 2,427 | 3,005 | 3,102 | 2,224 | ||||||||||||||||||
Total Assets | $ | 309,531 | $ | 172,046 | $ | 172,654 | $ | 276,827 | $ | 297,262 | $ | 309,531 | ||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable | $ | 20,887 | $ | 22,551 | $ | 12,965 | $ | 22,905 | $ | 15,680 | $ | 20,887 | ||||||||||||
Accrued expenses | 7,785 | 10,047 | 8,739 | 10,395 | 16,536 | 7,785 | ||||||||||||||||||
Operating lease liability short term | 30,558 | - | - | 32,963 | 30,912 | 30,558 | ||||||||||||||||||
Gift cards and customer deposits | 19,026 | 21,643 | 17,007 | 18,530 | 20,231 | 19,026 | ||||||||||||||||||
Deferred revenue and other | 2,006 | 1,936 | 1,893 | 2,603 | 2,605 | 2,006 | ||||||||||||||||||
Total current liabilities | 80,262 | 56,177 | 40,604 | 87,396 | 85,964 | 80,262 | ||||||||||||||||||
Operating lease liability long term | 137,666 | - | - | 118,416 | 119,625 | 137,666 | ||||||||||||||||||
Deferred rent | - | 18,440 | 17,697 | |||||||||||||||||||||
Deferred franchise revenue | 1,580 | 1,625 | 1,142 | 915 | 1,325 | 1,580 | ||||||||||||||||||
Other liabilities | 1,586 | 1,490 | 1,794 | 1,643 | 1,717 | 1,586 | ||||||||||||||||||
Commitments and contingencies | - | - | - | |||||||||||||||||||||
Stockholders' equity: | ||||||||||||||||||||||||
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at May 4, 2019, February 2, 2019 and May 5, 2018 | - | - | - | |||||||||||||||||||||
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 15,130,418, 14,953,142 and 14,997,791 shares, respectively | 149 | 150 | 151 | |||||||||||||||||||||
Preferred stock, par value $0.01, Shares authorized: 15,000,000; No shares issued or outstanding at May 2, 2020, February 1, 2020 and May 4, 2019 | - | - | - | |||||||||||||||||||||
Common stock, par value $0.01, Shares authorized: 50,000,000; Issued and outstanding: 15,439,538, 15,205,981 and 15,130,418 shares, respectively | 155 | 152 | 149 | |||||||||||||||||||||
Additional paid-in capital | 69,550 | 69,088 | 66,908 | 71,491 | 70,633 | 69,550 | ||||||||||||||||||
Accumulated other comprehensive loss | (12,123 | ) | (12,018 | ) | (11,546 | ) | (11,909 | ) | (12,079 | ) | (12,123 | ) | ||||||||||||
Retained earnings | 30,861 | 37,094 | 55,904 | 8,720 | 29,925 | 30,861 | ||||||||||||||||||
Total stockholders' equity | 88,437 | 94,314 | 111,417 | 68,457 | 88,631 | 88,437 | ||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 309,531 | $ | 172,046 | $ | 172,654 | $ | 276,827 | $ | 297,262 | $ | 309,531 |
See accompanying notes to condensed consolidated financial statements.
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except share and per share data)
Thirteen weeks ended | Thirteen weeks ended | |||||||||||||||
May 4, | May 5, | May 2, | May 4, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Revenues: | ||||||||||||||||
Net retail sales | $ | 81,048 | $ | 81,425 | $ | 45,647 | $ | 81,048 | ||||||||
Commercial revenue | 2,754 | 1,019 | 333 | 2,754 | ||||||||||||
International franchising | 560 | 740 | 644 | 560 | ||||||||||||
Total revenues | 84,362 | 83,184 | 46,624 | 84,362 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of merchandise sold - retail | 44,420 | 45,385 | 33,352 | 44,420 | ||||||||||||
Store asset impairment | 4,819 | - | ||||||||||||||
Cost of merchandise sold - commercial | 1,264 | 479 | 140 | 1,264 | ||||||||||||
Cost of merchandise sold - international franchising | 440 | 332 | 255 | 440 | ||||||||||||
Total cost of merchandise sold | 46,124 | 46,196 | 38,566 | 46,124 | ||||||||||||
Consolidated gross profit | 38,238 | 36,988 | 8,058 | 38,238 | ||||||||||||
Selling, general and administrative expense | 35,808 | 36,337 | 26,725 | 35,808 | ||||||||||||
Interest expense, net | 20 | 5 | ||||||||||||||
Income (loss) before income taxes | 2,410 | 646 | ||||||||||||||
Income tax expense (benefit) | 1,213 | 292 | ||||||||||||||
Net income (loss) | $ | 1,197 | $ | 354 | ||||||||||||
Interest (income) expense, net | (3 | ) | 20 | |||||||||||||
(Loss) income before income taxes | (18,664 | ) | 2,410 | |||||||||||||
Income tax expense | 2,540 | 1,213 | ||||||||||||||
Net (loss) income | $ | (21,204 | ) | $ | 1,197 | |||||||||||
Foreign currency translation adjustment | (105 | ) | (747 | ) | 170 | (105 | ) | |||||||||
Comprehensive income (loss) | $ | 1,092 | $ | (393 | ) | |||||||||||
Comprehensive (loss) income | $ | (21,034 | ) | $ | 1,092 | |||||||||||
Income (loss) per common share: | ||||||||||||||||
(Loss) income per common share: | ||||||||||||||||
Basic | $ | 0.08 | $ | 0.02 | $ | (1.42 | ) | $ | 0.08 | |||||||
Diluted | $ | 0.08 | $ | 0.02 | $ | (1.42 | ) | $ | 0.08 | |||||||
Shares used in computing common per share amounts: | ||||||||||||||||
Basic | 14,612,575 | 14,582,573 | 14,926,097 | 14,612,575 | ||||||||||||
Diluted | 14,738,240 | 14,722,989 | 14,926,097 | 14,738,240 |
See accompanying notes to condensed consolidated financial statements.
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Thirteen weeks ended | Thirteen weeks ended | |||||||||||||||
May 4, | May 5, | May 2, | May 4, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash flows provided by (used in) operating activities: | ||||||||||||||||
Net income (loss) | $ | 1,197 | $ | 354 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Cash flows (used in) from operating activities: | ||||||||||||||||
Net (loss) income | $ | (21,204 | ) | $ | 1,197 | |||||||||||
Adjustments to reconcile net less to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 3,512 | 4,115 | 3,457 | 3,512 | ||||||||||||
Stock-based compensation | 720 | 841 | ||||||||||||||
Share-based and performance-based stock compensation | 271 | 720 | ||||||||||||||
Impairment of right-of-use assets and fixed assets | 4,819 | - | ||||||||||||||
Deferred taxes | (142 | ) | (433 | ) | 3,388 | (142 | ) | |||||||||
Provision for doubtful accounts | 5 | - | 589 | 5 | ||||||||||||
(Gain) loss on disposal of property and equipment | (2 | ) | (29 | ) | ||||||||||||
Gain on disposal of property and equipment | (5 | ) | (2 | ) | ||||||||||||
Change in assets and liabilities: | ||||||||||||||||
Inventories, net | 2,424 | 8,233 | (376 | ) | 2,424 | |||||||||||
Receivables, net | 1,762 | (723 | ) | 3,732 | 1,762 | |||||||||||
Prepaid expenses and other assets | 4,423 | 1,671 | 1,177 | 4,423 | ||||||||||||
Accounts payable and accrued expenses | (1,910 | ) | (10,662 | ) | 2,716 | (1,910 | ) | |||||||||
Operating leases | (2,988 | ) | 127 | 865 | (2,988 | ) | ||||||||||
Gift cards and customer deposits | (2,621 | ) | (2,235 | ) | (1,635 | ) | (2,621 | ) | ||||||||
Deferred revenue | (1,239 | ) | 105 | (300 | ) | (1,239 | ) | |||||||||
Net cash provided by (used in) operating activities | 5,141 | 1,364 | ||||||||||||||
Net cash (used in) provided by operating activities | (2,506 | ) | 5,141 | |||||||||||||
Cash flows used in investing activities: | ||||||||||||||||
Purchases of property and equipment | (2,440 | ) | (3,030 | ) | (2,849 | ) | (2,440 | ) | ||||||||
Proceeds from property insurance | - | 85 | ||||||||||||||
Net cash used in investing activities | (2,440 | ) | (2,945 | ) | ||||||||||||
Net cash (used in) investing activities | (2,849 | ) | (2,440 | ) | ||||||||||||
Cash flows used in financing activities: | ||||||||||||||||
Proceeds from the exercise of employee stock options, net of withholding tax payments | (258 | ) | (406 | ) | (114 | ) | (258 | ) | ||||||||
Purchases of Company’s common stock | - | (732 | ) | |||||||||||||
Net cash used in financing activities | (258 | ) | (1,138 | ) | ||||||||||||
Net cash (used in) financing activities | (114 | ) | (258 | ) | ||||||||||||
Effect of exchange rates on cash | (99 | ) | 101 | 551 | (99 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents | 2,344 | (2,618 | ) | |||||||||||||
Net (decrease) increase in cash and cash equivalents | (4,918 | ) | 2,344 | |||||||||||||
Cash and cash equivalents, beginning of period | 17,894 | 21,499 | 28,395 | 19,561 | ||||||||||||
Cash and cash equivalents, end of period | $ | 20,238 | $ | 18,881 | $ | 23,477 | $ | 21,905 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Net cash paid (received) during the period for income taxes | $ | (1,000 | ) | $ | (168 | ) | ||||||||||
Total cash, cash equivalents and restricted cash | $ | 23,477 | $ | 21,905 | ||||||||||||
Less: Restricted cash from long-term deposits | $ | (1,626 | ) | $ | (1,667 | ) | ||||||||||
Total cash and cash equivalents | $ | 21,851 | $ | 20,238 | ||||||||||||
Net cash received during the period for income taxes | $ | (8 | ) | $ | (1,000 | ) |
See accompanying notes to condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The condensed consolidated financial statements included herein are unaudited and have been prepared by Build-A-Bear Workshop, Inc. and its subsidiaries (collectively, the “Company”) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet of the Company as of February 2, 20191, 2020 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly the financial position of the Company and the results of the Company’s operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. Because of the seasonal nature of the Company’s operations, results of operations of any single reporting period should not be considered as indicative of results for a full year. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended February 2, 2019,1, 2020, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on April 18, 2019.16, 2020.
Recent Accounting Pronouncements – Adopted in the Current YearCOVID-19 Pandemic
Effective February 3, 2019,In March 2020, the World Health Organization announced that COVID-19 is a global pandemic. On March 17, 2020, the Company adoptedannounced the Financialtemporary closure of all owned and operated stores in the United States, Canada, the United Kingdom, Denmark and Ireland as a result of the pandemic. In addition, on March 26, 2020, the Company announced the temporary closure of its warehouse and e-commerce fulfillment center in Ohio as it reviewed its process related to workplace safety, including social distancing and sanitation practices recommended by the Centers for Disease Control and Prevention. The Ohio warehouse was reopened on April 1, 2020 following the review and reconfiguration of workflow and workspaces to further promote social distancing and minimize interaction as orders are fulfilled. While some stores in the United States and the e-commerce businesses in the United States and the United Kingdom continue to serve customers during this crisis, the Company has experienced a loss of sales and earnings as a result of the store closures. In addition, many of the Company's wholesale customers have also closed their retail stores affecting their inventory purchases. Although the store closures are expected to be temporary and the Company has begun to open stores where allowable by local law, the Company cannot estimate the duration of the store closures for the remainder of stores, the impact on our interactive retail experience once stores are reopened, or the full financial effect as a result of COVID-19.
In response to COVID-19, the Company has taken the following actions:
● | Reducing and deferring expenses | |
• Furlough of over 90% of its employees effective March 29, 2020; | ||
• A 20% reduction in compensation for all employees not on temporary leave including each of its executive officers effective March 29, 2020; | ||
• Elimination of the cash retainer for all non-employee directors serving on its Board of Directors for the fiscal 2020 first quarter; | ||
• The delayed payment of 100% of the bonus earned by the company’s executive officers for fiscal 2019 performance and 80% of such bonuses earned by its other associates; | ||
• The delayed payment of the Company’s contribution to its 401(k) plan; and | ||
• Reduction in expenses and deferral of payments through extension of payment terms in many areas including its marketing programs.At quarter end, the Company had not paid April store rent and was in discussions with landlords regarding more favorable terms; | ||
● | Reducing its planned capital expenditures to maintenance levels | |
● | Leveraging operating lease optionality with over 70% of its leases having a natural lease event over the next three years with approximately 120 locations having events before the end of fiscal 2020 |
Operational and Distribution Network Update due to COVID-19:
● | Starting on March 18, 2020, the Company temporarily closed its corporately-managed retail locations in North America and Europe. Since that time, the Company has modified several key operational processes including: | |
• Modifying its popular in-store experience to accommodate various governmental social distancing recommendations, crowd limitation requirements and recommendations and employee and guest safety considerations; and | ||
• Adding a “Workshop Wednesday” program that offers digital entertainment and activities for families staying at home, generating nearly 100 million media impressions when it was announced in April. The Company expects Workshop Wednesdays to expand in the future to include in-store events; |
● | The Company’s e-commerce site was fully operational throughout the quarter. Order processing times were extended as procedures were updated to enhance social distancing and sanitation practices at its distribution center. The Company has seen its digital demand continue to gain momentum with growth rates increasing to triple-digit levels following the store closures and has improved fulfillment times with expanded features including: | |
• Adding capabilities for select stores to supplement its e-commerce fulfillment with a “buy online, ship from store” omni-channel program; and | ||
• Adding new queue technology and enabling a chat bot to better serve customers in-line for high-demand product launches; | ||
● | The Company’s supply chain had minimal disruption in the quarter with the Company able to receive deliveries in a timely manner; | |
● | The Company’s franchisees ended the quarter with 80 locations across Africa, Asia, Australia, Mexico, the Middle East and South America. The majority of the locations were closed due to COVID-19 at quarter-end and have begun opening as permitted by law;and | |
● | The Company’s third-party retail partners such as Great Wolf Resorts and Carnival Cruise Lines were closed due to COVID-19 at quarter-end and remain temporarily closed. |
The Company has not borrowed on its credit facility as of June 8, 2020. Due to the impacts of COVID-19 and the continued closure of a majority of our corporately managed stores, our financial performance in the second quarter of fiscal 2020 will be negatively impacted. The Company's liquidity may be negatively impacted if stores do not resume normal operations and the Company may be required to pursue additional sources of financing to meet its financial obligations. Obtaining such financing is not guaranteed and is largely dependent on market conditions and other factors. The Company believes that its current cash balance, along with the actions taken as outlined above, provide it with sufficient current liquidity. Future impact of COVID-19 may require further actions by the Company to improve its cash position, including but not limited to, monetizing Company assets including the Company owned warehouse in Ohio, inventory, implementing further employee furloughs, and foregoing capital expenditures and other discretionary expenses.
Significant Accounting Standards Board ("FASB"Policies
The Company's significant accounting policies are summarized in Note 2 to the consolidated financial statements included in our Form 10-K for the year ended February 1, 2020. An update and supplement to these policies is needed for the Company's accounting for government assistance, long-live asset impairment, and lease modifications as a result of activity during the first quarter of fiscal 2020.
Government Grants
The Company applied for reimbursement of payroll expenses in certain jurisdictions through COVID-19 related government programs for payroll paid to employees who were paid while not providing services to the Company prior to the end of the first quarter of fiscal 2020. These programs require the Company to apply to the government for reimbursement of wages based on the applicable laws and programs within each jurisdiction. Through review of and application to these programs, the Company believes it qualifies for such reimbursement, and it is probable that the expenses will be reimbursed. As a result, the Company recorded a reduction to expenses of approximately $1.5 million related to these wages within the Selling, general and administrative line within the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the period ending May 2, 2020. In addition, a portion of these amounts was received subsequent to the end of the quarter.
Long-live Assets, including right-of-use operating lease assets
Whenever facts and circumstances indicate that the carrying value of long-lived assets and right-of-use operating lease assets may not be recoverable, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered, as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. The Company typically performs an annual assessment of the store assets in the direct-to-consumer (“DTC”) newsegment, based on operating performance and forecasts of future performance. As a result of the COVID-19 pandemic, we experienced lower than projected revenues and identified indicators of impairment for our store fleet. We performed undiscounted cash flow analyses over the long-lived assets and right-of-use assets and determined that certain stores had long-lived and right-of-use assets with carrying values that exceeded their estimated undiscounted cash flows. We estimated fair values of these long-lived assets based on our discounted cash flows or market rent assessments. Our analysis indicated that the carrying values of certain of our long-lived assets exceeded their respective fair values. As a result, we recognized an impairment charge of $4.8 million for the thirteen weeks ended May 2, 2020. with approximately $2.4 million for right-of-use operating lease assets and $2.4 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, and machinery and equipment. The charge is recorded in Store asset impairment within the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). These impairment charges were primarily driven by lower than projected revenues and the effect of store closures as a result of the COVID-19 pandemic. The majority of the impairment was recorded for assets associated with stores in North America. For the thirteen weeks ended May 4, 2019, the Company recorded impairment charges of $5.9 million on right-of-use assets into retained earnings as a result of the adoption of ASC 842 Leases.
The determination of estimated market rent used in the fair value estimate of the Company’s operating lease assets included within the respective store asset group requires significant management judgment. Changes in these estimates could have a significant impact on whether long-lived store assets should be further evaluated for impairment and could have a significant impact on the resulting impairment charge. The significant estimates, all of which are considered Level 3 inputs, used in the fair value methodology include: the Company’s expectations for future operations and projected cash flows, including revenues, operating expenses, and market conditions.
Lease modifications
In April 2020, the FASB issued guidance on leases (“Topic 842”), which replaced mostindicating that entities may elect not to evaluate whether a concession provided by lessors is a lease modification. Under existing lease accounting guidance, an entity would have to determine if a lease concession was the result of a new arrangement reached with the landlord, which would be accounted for under the lease modification framework, or if the concession was under the enforceable rights and obligations that existed in U.S. GAAP.the original lease, which would be accounted for outside the lease modification framework. The Company elected the optional transition method that gives companiesFASB guidance provides entities with the option to useelect to account for lease concessions as though the effective dateenforceable rights and obligations existed in the original lease. During the first quarter of 2020, the Company did not modify any leases as a result of the date of initial application on transition,COVID-19 pandemic and as a result, the Company didhas not adjust its comparative period financial information or make the new requiredyet made a policy election with respect to lease disclosures for periods before the effective date.
Seemodifications. Refer to Note 3 — Leasesto the consolidated financial statements for additional information.
further discussion regarding the Company's leases.
2. Revenue
Nearly all the Company’s revenue is derived from retail sales (including e-commerce sites) and is recognized when control of the merchandise is transferred to the customer. The Company's disaggregated revenue is fully disclosed as net sales to external customers by reporting segment and by geographic area (See Note 11 — Segment Information for additional information). The Company's direct-to-consumer reporting segment represents nearly 97%98% of consolidated revenue.revenue for the first quarter fiscal 2020. The majority of these sales transactions are single performance obligations that are recorded when control is transferred to the customer.
The following is a description of principal activities from which the Company generates its revenue, by reportable segment.
The Company’s direct-to-consumer segment includes the operating activities of corporately-managed stores, other retail-delivered operations and online sales. Direct-to-consumer revenue is recognized when control of the merchandise is transferred to the customer and for the Company's online sales, generally upon delivery to the customer. Revenue is measured as the amount of consideration, including any discounts or incentives, the Company expects to receive in exchange for transferring the merchandise. Product returns have historically averaged less than one-tenthone-half of one percent due to the interactive nature of sales, where consumers customize their own stuffed animal. The Company has elected to exclude from revenue all collected sales, value added and other taxes paid by its customers.
For the Company’s gift cards, revenue is deferred for single transactions until redemption including any related gift card discounts. Historically, most gift card redemptions have occurred within three years of acquisition and approximately 75% of gift cards have been redeemed within the first twelve months. In addition, unredeemed gift cards or breakage revenue is recorded in proportion to the customer’s redemption period using an estimated breakage rate based on historical experience. For certain qualifying transactions, a portion of revenue transactions are deferred for the obligation related to the Company’s loyalty program or when a material right in the form of a future discount is granted. In these transactions, the transaction price is allocated to the separate performance obligations based on the relative standalone selling price. The standalone selling price for the points earned for the Company's loyalty program is estimated using the net retail value of the merchandise purchased, adjusted for estimated breakage based on historical redemption patterns. The revenue associated with the initial merchandise purchased is recognized immediately and the value assigned to the points is deferred until the points are redeemed, forfeited or expired. In regard to the consolidated balance sheet, contract liabilities for gift cards are classified as gift cards and customer deposits.
The Company’s commercial segment includes transactions with other businesses and are mainly comprised of licensing the Company’s intellectual properties for third-party use and wholesale sales of merchandise, including supplies and fixtures. Revenue for wholesale sales is recognized when control of the merchandise or fixtures is transferred to the customer, which generally occurs upon delivery to the customer. The license agreements provide the customer with highly interrelated rights that are not distinct in the context of the contract and therefore, have been accounted for as a single performance obligation and recognized as licensee sales occur. If the contract includes a guaranteed minimum, the minimum guarantee is recognized on a straight-line basis over the guarantee term until such time as royalties earned through licensee sales exceed the minimum guarantee. The Company classifies these guaranteed minimum contract liabilities as deferred revenue on the consolidated balance sheet.
The Company’s international franchising segment includes the activities with franchisees who operate store locations in certain countries and includes development fees, sales-based royalties and merchandise, including supplies and fixture sales. The Company's obligations under the franchise agreement are ongoing and include operations and product development support and training, generally concentrated around new store openings. These obligations are highly interrelated rights that are not distinct in the context of the contract and, therefore, have been accounted for as a single performance obligation and recognized as franchisee sales occur. If the contract includes an initial, one-time nonrefundable development fee, this fee is recognized on a straight-line basis over the term of the franchise agreement, which may extend for periods up to 25 years.years, or if the agreement is terminated prior to the end of the term. The Company classifies these initial, one-time nonrefundable franchise fee contract liabilities as deferred revenue on the consolidated balance sheet. Revenue from merchandise and fixture sales is recognized when control is transferred to the franchisee which generally occurs upon delivery to the customer.
The Company also incurs expenses directly related to the startup of new franchises, including finder’s fees, legal and travel costs as well as expenses related to its ongoing support of the franchisees, predominantly travel and employee compensation. Accordingly, the Company’s policy is to capitalize the finder’s fee, an incremental cost, and expense all other costs as incurred. Additionally, the Company amortizes these capitalized costs into expense in the same pattern as the development fee's recording of revenue as described previously.
3. Leases
Effective February 3, 2019, the Company adopted the FASB guidance on leases (“Topic 842”), which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted Topic 842 using the modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. Prior year financial statements were not recast under Topic 842, and therefore those amounts are not disclosed. The Company has elected certain practical expedients, including the package of practical expedients to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs as well as an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The Company also elected the optional transition method that gives companies the option to use the effective date as the date of initial application on transition, and as a result, the Company will not adjust its comparative period financial information or make the new required lease disclosures for periods before the effective date. The Company has elected to make the accounting policy election for short-term leases. Consequently, short-term leases will be recorded as an expense on a straight-line basis over the lease term. The Company did not elect the hindsight practical expedient.
The majority of the Company's leases relate to retail stores and corporate offices. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. Most retail store leases have aan original term of five to ten-year base period and include renewal options to extend the lease term beyond the initial base period. The renewal optionsperiod and are not included intypically much shorter than the measurement of the right of use assets and right of use liabilities unlessoriginal lease term giving the Company is reasonably certain to exercise the optional renewal periodslease optionality. Some leases also include early termination options, which can be exercised under specific conditions. Additionally, the Company may operate stores for a period of time on a month-to-month basis after the expiration of the lease term. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company's leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Additionally, certain leases contain incentives, such as construction allowances from landlords and/or rent abatements subsequent to taking possession of the leased property. These incentives reduce our right-of-use asset related to the lease and are amortized through the right-of-use asset as reductions of expense over the lease term.
Some of the Company's leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the store’s sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses.
For leases entered into or reassessed after the adoption of the new standard, the Company has elected the practical expedient allowed by the standard to account for all fixed consideration in a lease as a single lease component. Therefore, the lease payments used to measure the lease liability for these leases include fixed minimum rentals along with fixed operating costs such as common area maintenance and utilities.
Most of the Company’s leases do not provide a readily available implicit rate. Therefore, the Company estimates the incremental borrowing discount rate based on information available at lease commencement. The discount rates used were indicative of a synthetic credit rating based on quantitative and qualitative analysis and adjusted one notch higher to estimate a secured credit rating. For non-U.S. locations, a risk-free rate yield based on the currency of the lease was used to estimate the incremental borrowing rate.
Upon adoption and transition, the Company recognized a cumulative-effect charge of $7.4 million net of tax to the opening balance of retained earnings which represents impairment charges to the right-of-use assets associated with stores whose fixed assets have been previously impaired or had indicators of impairment, and whose right-of-use-assets were determined to be above fair market value.
Lease position as of February 3, 2019
The table below presents the lease-related assets and liabilities recorded on the balance sheet.
February 3, | |||||
(in thousands) | Classification on the Balance Sheet | 2019 | |||
Assets | |||||
Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 151,513 | ||
Liabilities | |||||
Current - Operating | Operating lease liability short term | 34,672 | |||
Noncurrent - Operating | Operating lease liability long term | 141,519 | |||
Total lease liabilities | $ | 176,191 |
The table below presents certain information related to the lease costs for operating leases for the thirteen weeks ended May 2, 2020 and May 4, 2019.2019 (in thousands).
Thirteen weeks ended | Thirteen weeks ended | |||||||||||
(in thousands) | May 4, 2019 | |||||||||||
May 2, 2020 | May 4, 2019 | |||||||||||
Operating lease costs | $ | 10,416 | 9,656 | 10,416 | ||||||||
Variable lease costs | 621 | 274 | 621 | |||||||||
Short term lease costs | 387 | 88 | 387 | |||||||||
Total Operating Lease costs | $ | 11,424 | $ | 10,018 | $ | 11,424 |
Other information
The table below presents supplemental cash flow information related to leases for the thirteen weeks ended May 2, 2020 and May 4, 2019.2019 (in thousands).
Thirteen weeks ended | ||||
(in thousands) | May 4, 2019 | |||
Cash paid for operating lease liabilities | ||||
Operating cash flows for operating leases | $ | 11,199 |
Thirteen weeks ended | ||||||||
May 2, 2020 | May 4, 2019 | |||||||
Operating cash flows for operating leases | 7,455 | 11,199 |
As of May 2, 2020 and May 4, 2019, the weighted-average remaining operating lease term was 5.6 years and 6.4 years, respectively, and the weighted-average discount rate was 5.9 %6.1% and 5.9%, respectively, for operating leases recognized on our Condensed Consolidated StatementBalance Sheets.
As discussed above, the Company incurred impairment charges during the thirteen week period ending May 2, 2020, of Operations.$2.4 million against right-of-use operating lease assets.
Undiscounted cash flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance lease operating liabilities and operating lease liabilities recorded on the balance sheet.sheet (in thousands).
Operating Leases | (in thousands) | |||||||
2019 | $ | 30,645 | ||||||
2020 | 34,700 | 31,859 | ||||||
2021 | 31,461 | 34,065 | ||||||
2022 | 29,308 | 29,829 | ||||||
2023 | 24,974 | 25,424 | ||||||
2024 | 21,480 | |||||||
Thereafter | 50,903 | 35,759 | ||||||
Total minimum lease payments | 201,991 | 178,416 | ||||||
Less: amount of lease payments representing interest | (33,767 | ) | (27,037 | ) | ||||
Present value of future minimum lease payments | 168,224 | 151,379 | ||||||
Less: current obligations under leases | (30,558 | ) | (32,963 | ) | ||||
Long-term lease obligations | $ | 137,666 | $ | 118,416 |
As of May 4, 2019,2, 2020, the Company has additional executed leases that have not yet commenced with operating lease liabilities of $6.1$1.4 million. TheseThese leases will commence in 20192020 with lease terms of approximately tenranging from two to five years.
In accordance with Accounting Standards Codification ("ASC") 840, Leases, the aggregate minimum non-cancelable annual lease payments under operating leases in effect on February 2, 2019 were as follows:
Operating Leases | (in thousands) | |||
2019 | $ | 41,800 | ||
2020 | 35,192 | |||
2021 | 31,940 | |||
2022 | 29,265 | |||
2023 | 24,961 | |||
Subsequent to 2023 | 49,782 | |||
Total | $ | 212,940 |
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
May 4, | February 2, | May 5, | May 2, | February 1, | May 4, | |||||||||||||||||||
2019 | 2019 | 2018 | 2020 | 2020 | 2019 | |||||||||||||||||||
Prepaid occupancy (1) | $ | 2,860 | $ | 5,497 | $ | 6,510 | $ | 463 | $ | 1,097 | $ | 2,860 | ||||||||||||
Prepaid income taxes | 515 | 2,245 | 393 | 239 | 164 | 515 | ||||||||||||||||||
Other | 5,166 | 5,218 | 4,590 | |||||||||||||||||||||
Prepaid insurance | 282 | 628 | 130 | |||||||||||||||||||||
Prepaid gift card fees | 1,266 | 1,413 | 1,251 | |||||||||||||||||||||
Other (2) | 3,646 | 3,815 | 3,785 | |||||||||||||||||||||
Total | $ | 8,541 | $ | 12,960 | $ | 11,493 | $ | 5,896 | $ | 7,117 | $ | 8,541 |
(1) | Prepaid occupancy consists of prepaid expenses related to non-lease components. | |
(2) | Other consists primarily of prepaid expense related to IT maintenance contracts and software as a service. |
5. Accrued Expenses
Accrued expenses consist of the following (in thousands):
May 4, | February 2, | May 5, | May 2, | February 1, | May 4, | |||||||||||||||||||
2019 | 2019 | 2018 | 2020 | 2020 | 2019 | |||||||||||||||||||
Accrued wages, bonuses and related expenses | $ | 4,897 | $ | 5,453 | $ | 2,850 | $ | 9,145 | $ | 13,373 | $ | 4,897 | ||||||||||||
Sales tax payable | 1,487 | 1,286 | 1,198 | |||||||||||||||||||||
Sales and value added taxes payable | 1,084 | 1,489 | 1,487 | |||||||||||||||||||||
Accrued rent and related expenses (1) | 845 | 3,233 | 3,352 | 69 | 726 | 845 | ||||||||||||||||||
Current income taxes payable | 556 | 75 | 1,339 | 97 | 948 | 556 | ||||||||||||||||||
Total | $ | 7,785 | $ | 10,047 | $ | 8,739 | $ | 10,395 | $ | 16,536 | $ | 7,785 |
(1) | Accrued rent and related expenses consist of accrued costs associated with non-lease components. |
6. Stock-based Compensation
On March 14, 2017, the Company’s Board of Directors (the “Board”) adopted, subject to stockholder approval, the Build-A-Bear Workshop, Inc. 2017 Omnibus Incentive Plan (the “2017 Plan”). On May 11, 2017, at the Company’s 2017 Annual Meeting of Stockholders, the Company’s stockholders approved the 2017 Plan. The 2017 Plan, which is administered by the Compensation and Development Committee of the Board, permits the grant of stock options (including both incentive and non-qualified stock options), stock appreciation rights, restricted stock, cash and other stock-based awards, some of which may be performance-based pursuant to the terms of the 2017 Plan. The Board may amend, modify or terminate the 2017 Plan at any time, except as otherwise provided in the 2017 Plan. The 2017 Plan will terminate on March 14, 2027, unless earlier terminated by the Board. The number of shares of the Company’s common stock authorized for issuance under the 2017 Plan is 1,000,000, plus shares of stock subject to outstanding awards made under the Company's Third Amended and Restated 2004 Stock Incentive PlansPlan that on or after March 21, 2017 may be forfeited, expire or be settled for cash.
For the thirteen weeks ended May 2, 2020 and May 4, 2019 and May 5, 2018, selling,, Selling, general and administrative expense included $0.7$0.3 million and $0.8$0.7 million, respectively,respectively, of stock-based compensation expense. As of May 4, 2019,2, 2020, there was $4.1was $2.4 million of total unrecognized compensation expense related to unvested restricted stock and option awards which is expected to be recognized over a weighted-average period of 1.71.2 years.
The following table is a summary of the balances and activity for stock options for the thirteen weeks ended May 4, 2019:2, 2020:
Options | Options | |||||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||
Outstanding, February 2, 2019 | 950,678 | $ | 9.67 | |||||||||||||
Outstanding, February 1, 2020 | 923,254 | $ | 9.76 | |||||||||||||
Granted | - | - | - | - | ||||||||||||
Exercised | (3,724 | ) | 5.11 | - | - | |||||||||||
Forfeited | - | - | - | - | ||||||||||||
Canceled or expired | (17,138 | ) | 7.44 | (68,616 | ) | 6.59 | ||||||||||
Outstanding, May 4, 2019 | 929,816 | $ | 9.73 | |||||||||||||
Outstanding, May 2, 2020 | 854,638 | $ | 10.02 |
The following table is a summary of the balances and activity related to time-based and performance-based restricted stock for the thirteen weeks ended May 4, 2019:2, 2020:
Time-Based Restricted Stock | Performance-Based Restricted Stock | Time-Based Restricted Stock | Performance-Based Restricted Stock | |||||||||||||||||||||||||||||
Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||||
Outstanding, February 2, 2019 | 379,778 | $ | 9.31 | 167,153 | $ | 8.73 | ||||||||||||||||||||||||||
Outstanding, February 1, 2020 | 453,403 | $ | 6.71 | 262,964 | $ | 7.59 | ||||||||||||||||||||||||||
Granted | 218,364 | 5.61 | 95,811 | 5.61 | 246,666 | 2.04 | - | - | ||||||||||||||||||||||||
Vested | (156,864 | ) | 13.43 | — | — | (186,628 | ) | 7.52 | (56,380 | ) | 8.85 | |||||||||||||||||||||
Forfeited | (249 | ) | 10.10 | — | — | - | - | - | - | |||||||||||||||||||||||
Canceled or expired | — | — | — | — | - | - | (27,517 | ) | 8.85 | |||||||||||||||||||||||
Outstanding, May 4, 2019 | 441,029 | $ | 7.20 | 262,964 | $ | 7.59 | ||||||||||||||||||||||||||
Outstanding, May 2, 2020 | 513,441 | $ | 4.17 | 179,067 | $ | 7.00 |
The total fair value of shares vested during the thirteen weeks ended May 2, 2020 and May 4, 2019 and May 5, 2018 was $1.6 was $1.9 million and $1.7$1.6 million, respectively.
In April 2019, the Company awarded three-year performance-based restricted stock subject to the achievement of pre-established consolidated pre-tax income growth objectives for fiscal 2019, 2020 and 2021. In 2018, the Company awarded three-year performance-based restricted stock subject to the achievement of pre-established consolidated total pre-tax income growth objectives for fiscal 2018, 2019 and 2020. In addition, the Company awarded three-year performance-based restricted stock subject to the achievement of pre-established consolidated revenue growth objectives for fiscal 2018, 2019 and 2020. In 2017, the Company awarded three-year performance-based restricted stock subject to the achievement of pre-established pre-tax income growth objectives for 2017, 2018 and 2019. The shares for all these awards have a payout opportunity ranging from 25% to 200% of the target number of shares.
The outstanding performance shares as of May 4, 20192, 2020 consist of the following:
Performance Shares | ||||
Unearned shares subject to performance-based restrictions at target: | ||||
| ||||
2018 - 2020 consolidated total revenue growth objectives | 20,756 | |||
2018 - 2020 consolidated pre-tax income growth objectives | 62,500 | |||
2019 - 2021 consolidated pre-tax income growth objectives | 95,811 | |||
Performance shares outstanding, May |
7. Income Taxes
The effective tax rate was 50.3%(13.6%) for the thirteen weeks ended May 2, 2020 compared to 50.5% for the thirteen weeks ended May 4, 2019 compared to 45.2% for the thirteen weeks ended May 5, 2018.. In the first quarter of fiscal 2020, the effective tax rate differed from the statutory rate of 21% primarily due to the $3.3 million valuation allowance recorded on the beginning balance of the net deferred tax assets in certain jurisdictions offset by $0.8 million of benefit as a result of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. In addition, no tax benefit was recorded on the current period pretax loss as a full valuation allowance has now been recorded globally. In the first quarter of fiscal 2019, the effective tax rate differed from the statutory rate of 21% primarily due to the valuation allowance being recorded in certain foreign jurisdictionsloss companies and the $0.2 million negative tax impact of equity awards vesting. In the first quarter of fiscal 2018, the effective tax rate differed from the statutory rate of 21% primarily due to the $0.1 million tax impact of equity awards vesting.
8. Stockholders’ Equity
The following table sets forth the changes in stockholders’ equity (in thousands) for the thirteen week periodsweeks endedMay 2, 2020 and May 4, 2019 and May 5, 2018: (in thousands):
For the thirteen weeks ended May 4, 2019 | For the thirteen weeks ended May 5, 2018 | For the thirteen weeks ended May 2, 2020 | For the thirteen weeks ended May 4, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common | Retained | Common | Retained | Common | Retained | Common | Retained | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
stock | APIC (1) | AOCI (2) | earnings | Total | stock | APIC (1) | AOCI (2) | earnings | Total | stock | APIC (1) | AOCI (2) | earnings | Total | stock | APIC (1) | AOCI (2) | earnings | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, beginning | $ | 150 | $ | 69,088 | $ | (12,018 | ) | $ | 37,094 | $ | 94,314 | $ | 150 | $ | 66,843 | $ | (10,800 | ) | $ | 55,893 | $ | 112,086 | $ | 152 | $ | 70,633 | $ | (12,079 | ) | $ | 29,925 | $ | 88,631 | $ | 150 | $ | 69,088 | $ | (12,018 | ) | $ | 37,094 | $ | 94,314 | ||||||||||||||||||||||||||||||||||||
Adoption of new accounting standard | (7,430 | ) | (7,430 | ) | $ | (7,430 | ) | (7,430 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | $ | 150 | $ | 69,088 | $ | (12,018 | ) | $ | 29,664 | $ | 86,884 | $ | 150 | $ | 66,843 | $ | (10,800 | ) | $ | 55,893 | $ | 112,086 | $ | 152 | $ | 70,633 | $ | (12,079 | ) | $ | 29,925 | $ | 88,631 | $ | 150 | $ | 69,088 | $ | (12,018 | ) | $ | 29,664 | $ | 86,884 | ||||||||||||||||||||||||||||||||||||
Share repurchase and retirement | - | (1 | ) | (388 | ) | (343 | ) | (732 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted/performance stock | $ | 4 | $ | 496 | 500 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | 720 | 720 | 841 | 841 | 476 | 476 | 720 | 720 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued under employee stock plans | (1 | ) | (258 | ) | (259 | ) | 2 | (388 | ) | (386 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | (105 | ) | (105 | ) | (746 | ) | (746 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 1,197 | 1,197 | 354 | 354 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares withheld in lieu of tax withholdings | (1 | ) | (114 | ) | (115 | ) | (1 | ) | (258 | ) | (259 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | (1 | ) | (1 | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | 170 | 170 | (105 | ) | (105 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | (21,204 | ) | (21,204 | ) | 1,197 | 1,197 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, ending | $ | 149 | $ | 69,550 | $ | (12,123 | ) | $ | 30,861 | $ | 88,437 | $ | 151 | $ | 66,908 | $ | (11,546 | ) | $ | 55,904 | $ | 111,417 | $ | 155 | $ | 71,491 | $ | (11,909 | ) | $ | 8,720 | $ | 68,457 | $ | 149 | $ | 69,550 | $ | (12,123 | ) | $ | 30,861 | $ | 88,437 |
(1) - Additional paid-in capital (“APIC”)
(2) - Accumulated other comprehensive income (loss) (“AOCI”)
In August 2017, the Company’s Board of Directors authorized a share repurchase program of up to $20.0 million. From the date of such authorization through May 4, 2019,2, 2020, the Company has repurchased approximately 1.3 million shares at an average price of $8.75 per share for an aggregate amount of approximately $11.2 million, leaving approximately $8.8 million authorized under the program as of that date. We do not plan to utilize cash to resume share repurchases in fiscal 2020. In addition, our ability to repurchase shares is limited by conditions set forth by our lender in our credit agreement, as described below.
9. Income per Share
The following table sets forth the computation of basic and diluted net incomeloss per share (in thousands, except share and per share data), in periods of net loss, no effect is given to the Company’s participating securities as they do not contractually participate in the losses of the Company:
Thirteen weeks ended | Thirteen weeks ended | |||||||||||||||
May 4, | May 5, | May 2, | May 4, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
NUMERATOR: | ||||||||||||||||
Net income (loss) before allocation of earnings to participating securities | $ | 1,197 | $ | 354 | ||||||||||||
Net (loss) income before allocation of earnings to participating securities | $ | (21,204 | ) | $ | 1,197 | |||||||||||
Less: Earnings allocated to participating securities | - | 2 | - | - | ||||||||||||
Net income (loss) | $ | 1,197 | $ | 352 | ||||||||||||
Net (loss) income | $ | (21,204 | ) | $ | 1,197 | |||||||||||
DENOMINATOR: | ||||||||||||||||
Weighted average number of common shares outstanding - basic | 14,612,575 | 14,582,573 | 14,926,097 | 14,612,575 | ||||||||||||
Dilutive effect of share-based awards: | 125,665 | 140,416 | - | 125,665 | ||||||||||||
Weighted average number of common shares outstanding - dilutive | 14,738,240 | 14,722,989 | 14,926,097 | 14,738,240 | ||||||||||||
Basic income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders | $ | 0.08 | $ | 0.02 | ||||||||||||
Diluted income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders | $ | 0.08 | $ | 0.02 | ||||||||||||
Basic (loss) income per common share attributable to Build-A-Bear Workshop, Inc. stockholders | $ | (1.42 | ) | $ | 0.08 | |||||||||||
Diluted (loss) income per common share attributable to Build-A-Bear Workshop, Inc. stockholders | $ | (1.42 | ) | $ | 0.08 |
In calculating the diluted income per share for the thirteen week periodsweeks ended May 4, 20192, 2020 and May 5, 2018,4, 2019 options to purchase 938,622892,339 and 478,996; respectively,938,622 shares of common stock, respectively, that were outstanding at the end of the period were not included in the computation of diluted income per share due to their anti-dilutive effect.
10. Comprehensive Income (Loss)
The difference between comprehensive income or loss and net income or loss results from foreign currency translation adjustments on the balance sheets of subsidiaries whose functional currency is not the U.S. Dollar. The accumulated other comprehensive income (loss) balance at May 2, 2020 and May 4, 2019 and May 5, 2018 was comprised entirely of foreign currency translation. For the thirteen weeks ended May 2, 2020 and May 4, 2019 and May 5, 2018,, there were no reclassifications out of accumulated other comprehensive loss.income (loss).
11. Segment Information
The Company’s operations are conducted through three operating segments consisting of direct-to-consumer (“DTC”), commercial and international franchising. The DTC segment includes the operating activities of corporately-managed locations and other retail delivery operations in the U.S., Canada, China, Denmark, Ireland and the United Kingdom (“U.K.”), including the Company’s e-commerce sites and temporary stores. The commercial segment includes the Company’s transactions with other businesses, mainly comprised of licensing the Company’s intellectual properties for third party use and wholesale activities. The international franchising segment includes the licensing activities of the Company’s franchise agreements with store locations in Europe (outside of the U.K., Ireland and Denmark), Asia, Australia, the Middle East, Africa, and Mexico.South America. The operating segments have discrete sources of revenue, different capital structures and different cost structures. These operating segments represent the basis on which the Company’s chief operating decision maker regularly evaluates the business in assessing performance, determining the allocation of resources and the pursuit of future growth opportunities. Accordingly, the Company has determined that each of its operating segments represent a reportable segment. The three reportable segments follow the same accounting policies used for the Company’s consolidated financial statements.
Following is a summary of the financial information for the Company’s reportable segments (in thousands):
Direct-to- | International | Direct-to- | International | |||||||||||||||||||||||||||||
Consumer | Commercial | Franchising | Total | Consumer | Commercial | Franchising | Total | |||||||||||||||||||||||||
Thirteen weeks ended May 2, 2020 | ||||||||||||||||||||||||||||||||
Net sales to external customers | $ 45,647 | $ 333 | $ 644 | $ 46,624 | ||||||||||||||||||||||||||||
Loss before income taxes | (18,376) | (39) | (249) | (18,664) | ||||||||||||||||||||||||||||
Capital expenditures | 2,849 | - | - | 2,849 | ||||||||||||||||||||||||||||
Depreciation and amortization | 3,450 | 7 | - | 3,457 | ||||||||||||||||||||||||||||
Thirteen weeks ended May 4, 2019 | �� | |||||||||||||||||||||||||||||||
Net sales to external customers | $ | 81,048 | $ | 2,754 | $ | 560 | $ | 84,362 | $ 81,048 | $ 2,754 | $ 560 | $ 84,362 | ||||||||||||||||||||
Income (loss) before income taxes | 1,094 | 1,215 | 101 | 2,410 | ||||||||||||||||||||||||||||
Capital expenditures | 2,440 | - | - | 2,440 | ||||||||||||||||||||||||||||
Depreciation and amortization | 3,510 | - | 2 | 3,512 | ||||||||||||||||||||||||||||
Thirteen weeks ended May 5, 2018 | ||||||||||||||||||||||||||||||||
Net sales to external customers | $ | 81,425 | $ | 1,019 | $ | 740 | $ | 83,184 | ||||||||||||||||||||||||
Income (loss) before income taxes | (23 | ) | 362 | 307 | 646 | |||||||||||||||||||||||||||
Income before income taxes | 1,094 | 1,215 | 101 | 2,410 | ||||||||||||||||||||||||||||
Capital expenditures | 3,030 | - | - | 3,030 | 2,440 | - | - | 2,440 | ||||||||||||||||||||||||
Depreciation and amortization | 4,116 | 1 | (2 | ) | 4,115 | 3,510 | - | 2 | 3,512 | |||||||||||||||||||||||
Total Assets as of: | ||||||||||||||||||||||||||||||||
May 2, 2020 | 262,693 | 6,563 | 7,571 | $ 276,827 | ||||||||||||||||||||||||||||
May 4, 2019 | $ | 295,558 | $ | 8,004 | $ | 5,969 | $ | 309,531 | 295,558 | 8,004 | 5,969 | 309,531 | ||||||||||||||||||||
May 5, 2018 | 161,497 | 6,267 | 4,890 | 172,654 |
The Company’s reportable segments are primarily determined by the types of products and services that they offer. Each reportable segment may operate in many geographic areas. Revenues are recognized in the geographic areas based on the location of the customer or franchisee. The following schedule is a summary of the Company’s sales to external customers and long-lived assets by geographic area (in thousands):
North | North | |||||||||||||||||||||||||||||||
America (1) | Europe (2) | Other (3) | Total | America (1) | Europe (2) | Other (3) | Total | |||||||||||||||||||||||||
Thirteen weeks ended May 2, 2020 | ||||||||||||||||||||||||||||||||
Net sales to external customers | $ | 39,651 | $ | 6,665 | $ | 308 | $ | 46,624 | ||||||||||||||||||||||||
Property and equipment, net | 56,915 | 4,704 | 7 | 61,626 | ||||||||||||||||||||||||||||
Thirteen weeks ended May 4, 2019 | ||||||||||||||||||||||||||||||||
Net sales to external customers | $ | 72,941 | $ | 10,887 | $ | 534 | $ | 84,362 | $ | 72,941 | $ | 10,887 | $ | 534 | $ | 84,362 | ||||||||||||||||
Property and equipment, net | 59,502 | 5,839 | 16 | 65,357 | 59,502 | 5,839 | 16 | 65,357 | ||||||||||||||||||||||||
Thirteen weeks ended May 5, 2018 | ||||||||||||||||||||||||||||||||
Net sales to external customers | $ | 69,968 | $ | 12,826 | $ | 390 | $ | 83,184 | ||||||||||||||||||||||||
Property and equipment, net | 66,664 | 9,722 | 24 | 76,410 |
For purposes of this table only: |
(1) North America includes corporately managed locations in the United States, Canada, Puerto |
(2) Europe includes corporately managed locations in the U.K., Ireland, Denmark and franchise businesses in Europe |
(3) Other includes franchise businesses outside of North America and Europe and a corporately-managed location in China |
12. Contingencies
In the normal course of business, the Company is subject to legal proceedings, government inquiries and claims, and other commercial disputes. If one or more of these matters has an unfavorable resolution, it is possible that the results of operations, liquidity or financial position of the Company could be materially affected in any particular period. The Company accrues a liability for these types of contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. Gain contingencies are recorded when the underlying uncertainty has been settled.
Assessments made by the U.K. customs authority in 2012 have beenwere appealed by the Company, which has paid the disputed duty, strictly under protest, pending the outcome of the continuing dispute, and this is included in receivables, net in the DTC segment. The U. K. customs authority is contestingcontested the Company's appeal. On November 27, 2019, the trial court issued a ruling that duty was due on some, but not all, of the products at issue. Both the Company and the U.K. customs authority have appealed that ruling, which was accepted by tribunal judge on June 1, 2020. The Company maintains a provision against the related receivable, based on a current evaluation of collectability, using the latest facts available in the dispute. As of May 4, 2019,2, 2020, the Company had a gross receivable balance of $4.0$4.2 million and a reserve of $3.1$3.4 million, leaving a net receivable of $0.9$0.8 million. However, theThe Company continues to vigorously dispute the customs audit findings and believes that the outcome of this dispute will not have a material adverse impact on the results of operations, liquidity or financial position of the Company.
13. Subsequent Events
On May 28, 2020, we entered into the twenty-first amendment to our credit agreement, which, among other revisions, reduced the total facility to $10.0 million with U.S. Bank National Association, as lender. Borrowings under the credit agreement are secured by our assets and a pledge of 66% of our ownership interest in certain of our foreign subsidiaries. The credit agreement expires on September 30, 2020 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates and investments. The agreement limits the conditions under which the Company may declare dividends and repurchase shares. For example, we may not use the proceeds of the line of credit to repurchase shares. The commitment fee is 0.25% per annum and borrowings bear interest at LIBOR plus 3.25%. The amendment eliminated the minimum EBITDA, funded debt ratio, and fixed charge coverage ratio covenants as of the end of each reporting period, but imposed other restrictions, including a requirement to maintain a minimum consolidated North American cash balance of $3 million at all times and, at the time of borrowing, have no more than $5 million of consolidated North American cash and meet a fixed charge coverage ratio as of the most recent quarter-end on a trailing 12-month basis of less than 1.25 to 1.00. In addition, the Company had a $1.0 million letter of credit against the line of credit at the end of the first quarter of fiscal 2020. As of the end of the first quarter of fiscal 2020 under the credit agreement as amended on May 28, 2020, we were in compliance with the restrictions stated in the agreement and there were no borrowings under the line of credit. Although there was $9.0 million available for borrowing under the line of credit as of the end of the first quarter, because of the amendments described above, we do not expect to access the credit agreement prior to its expiration on September 30, 2020 because we expect to have cash of more than $5 million and given our trailing twelve month financial results, we do not expect to meet the required fixed charge coverage ratio.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Notice Regarding Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties, and we undertake no obligation to update these statements except as required by the federal securities laws. Our actual results may differ materially from the results discussed in the forward-looking statements. These risks and uncertainties include, without limitation, those detailed under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019,1, 2020, as filed with the SEC, and include the following:
| ● | our business, operations and financial results have been and will continue to be negatively affected by the COVID-19 pandemic, which presents uncertainty relating to its anticipated duration and scope and whether there will a second wave or periods of increases in the number of COVID-19 cases in areas in which we operate, as well the restrictions imposed by federal, state, and local governments in response to the pandemic; |
● | any sustained decline in general global economic conditions, caused by the COVID-19 pandemic or otherwise, could lead to disproportionately reduced consumer demand for our products, which represent relatively discretionary spending, and have an adverse effect on our liquidity and profitability; | |
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● | we depend upon the shopping malls and tourist locations in which we are located to attract guests to our stores and a decline in consumer traffic, or if such consumer traffic does not return to levels that we saw prior to the COVID-19 pandemic, could adversely affect our financial performance and profitability; | |
● | in connection with the reopening of our stores, we have modified our interactive shopping experience in order to comply with social distancing and sanitation practices. These modifications could have a negative impact on the appeal of our interactive shopping experience and reduce guest traffic to our stores. In addition, we are continuing to assess the impacts that such measures have on individual store performance due to the decreased volume of guests that may be able to enjoy our interactive shopping experience, and such reduced guest volume could adversely impact our ability to operate our stores profitably; | |
● | we may experience store closures shopping malls and tourist locations and other impacts to our business resulting from civil disturbances; | |
● | we believe the hands-on and interactive nature of our store and high touch service model result in guests forming an emotional connection with our brand, which in turn drives the success of our ecommerce platform; if we are not able to offer the same experience in the short and medium-term, it may adversely affect the value of our brand; | |
● | birthdays and other special occasions have historically been a key driver for store traffic, and our guests’ willingness to hold such events at our stores may adversely affect store performance and our overall profitability; | |
● | if we are unable to generate interest in and demand for our interactive retail experience and products, including being able to adjust that experience consistent with our guests' expectations as the general retail economy emerges from the restrictiosn imposed by the COVID-19 pandemic, and to otherwise identify and respond to consumer preferences in a timely manner, our sales, financial condition and profitability could be adversely affected; | |
● | we may be unable to leverage the flexibility within our | |
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● | consumer interests change rapidly and our success depends on the ongoing effectiveness of our marketing and online initiatives to build consumer affinity for our brand and drive consumer demand for key products and services; | |
● | we are subject to a number of risks related to disruptions, failures or security breaches of our information technology infrastructure. If we improperly obtain or are unable to protect our data or violate privacy or security laws such as the GDPR, the CCPA or the California Privacy Rights Act (if adopted), or expectations, we could be subject to liability as well as damage to our reputation; | |
● | we may not be able to operate successfully if we lose key personnel, are unable to hire qualified additional personnel, or experience turnover of our management team; | |
● | we are subject to risks associated with technology and digital operations; | |
● | we may not be able to evolve our store locations over time to align with market trends, successfully diversify our store models and formats in accordance with our strategic goals or otherwise effectively manage our overall portfolio of stores which could adversely affect our ability to grow and could significantly harm our profitability; | |
● | we rely on a few global supply chain vendors to supply substantially all of our merchandise, and significant price increases or any disruption in their ability to deliver merchandise could harm our ability to source products and supply inventory to our stores; | |
● | our company-owned distribution center which services the majority of our stores in North America and our third-party distribution center providers used in the western United States and Europe may experience disruptions in their ability to support our stores or may operate inefficiently; | |
● | our merchandise is manufactured by foreign manufacturers and we transact business in various foreign countries, and the availability and costs of our products, as well as our product pricing, may be negatively affected by risks associated with international manufacturing and trade, tariffs and foreign currency fluctuations; | |
● | if we are unable to effectively manage our international franchises, attract new franchisees or if the laws relating to our international franchises change, our growth and profitability could be adversely affected and we could be exposed to additional liability; | |
● | we may not be able to operate our international corporately-managed locations profitably; | |
● | we may fail to renew, register or otherwise protect our trademarks or other intellectual property and may be sued by third parties for infringement or, misappropriation of their proprietary rights, which could be costly, distract our management and personnel and which could result in the diminution in value of our trademarks and other important intellectual property; | |
● | we may suffer negative publicity or be sued if the manufacturers of our merchandise or of Build-A-Bear branded merchandise sold by our licensees ship any products that do not meet current safety standards or production requirements or if such products are recalled or cause injuries; | |
● | we may suffer negative publicity or be sued if the manufacturers of our merchandise violate labor laws or engage in practices that consumers believe are unethical; | |
● | our profitability could be adversely affected by fluctuations in petroleum products prices; |
● | our business may be adversely impacted at any time by a significant variety of competitive threats; | |
● | we may suffer negative publicity or a decrease in sales or profitability if the products from other companies that we sell in our stores do not meet our quality standards or fail to achieve our sales expectations; |
● | we may be unsuccessful in | |
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● | fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline; | |
● | the market price of our common stock is subject to volatility, which could in turn attract the interest of activist shareholders; and | |
● | our certificate of incorporation and bylaws and Delaware law contain provisions that may prevent or frustrate attempts to replace or remove our current management by our stockholders, even if such replacement or removal may be in our stockholders’ best interests. |
Overview
We are the only global company that offers an interactive “make your own stuffed animal” retail entertainment experience under the Build-A-Bear Workshop brand, in which guests participate in the stuffing, fluffing, dressing, accessorizing and naming of their own teddy bears and other stuffed animals. As of May 4, 2019,2, 2020, we operated 366 corporately managed369stores globally and had 9080 internationally franchised stores operating internationally under the Build-A-Bear Workshop brand. In addition to our stores, we sell products on our company-owned e-commerce sites and franchisee sites and through third parties under wholesale agreements.
We operate in three segments that share the same infrastructure, including management, systems, merchandising and marketing, and generate revenues as follows:
• | Direct-to-Consumer (“DTC”) – Corporately-managed retail stores located in the U.S., Canada, Puerto Rico, the U.K., Ireland, Denmark and China and two e-commerce sites; | |
• | Commercial – Transactions with other businesses, mainly comprised of wholesale product sales to third-party retailers and licensing our intellectual property, including entertainment properties, for third-party use; and | |
• | International franchising – Royalties as well as product and fixture sales from other international operations under franchise agreements. |
Selected financial data attributable to each segment for the thirteen week periodweeks ended May 2, 2020 and May 4, 2019 and May 5, 2018 are set forth in the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
StrategyCOVID-19 Update
We expectIn response to improve consolidated sales and profit throughCOVID-19, the Company has taken the following key initiatives:actions:
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• A 20% reduction in compensation for all employees not on temporary leave including each of its executive officers effective March 29, 2020; | |||
• Elimination of the cash retainer for all non-employee directors serving on its Board of Directors for the fiscal 2020 first quarter; | |||
• The delayed payment of 100% of the bonus earned by the company’s executive officers for fiscal 2019 performance and 80% of such bonuses earned by its other associates; | |||
• The delayed payment of the Company’s contribution to its 401(k) plan; and | |||
• Reduction in expenses and deferral of payments through extension of payment terms in many areas including its marketing programs.At quarter end, the Company had not paid April store rent and was in discussions with landlords regarding more favorable terms; | |||
● | Reducing its planned capital expenditures to maintenance levels | ||
| Leveraging operating lease optionality with over 70% of its leases having a natural lease event over the next three years with approximately 120 locations having events before the end of fiscal 2020 |
Operational and Distribution Network Update due to COVID-19:
● | Starting on | |
• Modifying its popular in-store experience to accommodate various governmental social distancing recommendations, crowd limitation requirements and recommendations and employee and guest safety considerations; and | ||
• Adding a “Workshop Wednesday” program that offers digital entertainment and activities for families staying at home, generating nearly 100 million media impressions when it was announced in April. The Company expects Workshop Wednesdays to expand in the future to include in-store events; |
● | The Company’s e-commerce site was fully operational throughout the quarter. Order processing times were extended as | |
• Adding capabilities for select stores to supplement its e-commerce fulfillment with a “buy online, ship from store” omni-channel program; and | ||
• Adding new queue technology and enabling a chat bot to better serve customers in-line for high-demand product launches; | ||
● | The Company’s supply chain had minimal disruption in | |
● | The Company’s franchisees ended the quarter with 80 locations across Africa, Asia, Australia, Mexico, the Middle East and | |
● | The Company’s third-party retail partners such as Great Wolf Resorts and Carnival Cruise Lines were closed due to COVID-19 at quarter-end and remain temporarily closed. |
As disclosed in the “Liquidity and Capital Resources” section herein, as of May 2, 2020, we had total cash and cash equivalents of $21.9 million and no borrowings under our credit agreement. We believe that the above measures we have taken to increase and maintain our liquidity have provided us with sufficient cash flows to operate our business for at least the next 12 months.
In addition, because of our prior real estate strategy to shift our leases in North America to shorter term leases to provide flexibility in aligning stores with market trends, over 70% of our store leases having a natural lease event, such as lease renewals or terminations, over the next three years, with approximately 120 locations having such an event before the end of fiscal 2020. We plan to leverage the natural lease events to secure more favorable terms from our landlords.
Beginning in late May 2020, we began reopening selected store locations in the United States where permitted by federal, state and local directives. Separately, in the United Kingdom, the government has announced June 15, 2020 as the date for retailers to begin to reopen and we are planning accordingly. As of June 5, 2020, approximately 35 of our stores were open to the public, or approximately 11% of our total corporately managed store locations in the North America, and we expect to continue to reopen our temporarily closed stores through the remainder of the second quarter and into the third quarter, and expect that a majority of our store locations will be open by the end of the second quarter. Concurrent with the reopening of our stores, we have begun to bring employees back from furlough, and have implemented safety and cleaning protocols in the stores, as well as requiring the wearing of bear-themed masks by our store associates and implementing social distancing measures in our stores and guiding our guests in those measures in a fun, friendly and kid-centric way. Thus far the modifications have been well-received based on the positive feedback from both our associates and guests. We have seen varying levels of business recovery compared to the prior year at the stores that have reopened with tourist locations generally faring better than traditional mall sites.
The ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, including the duration and severity of the COVID-19 outbreak, actions taken to contain its spread as well as its impact to consumer discretionary spending and the pace of economic recovery when the pandemic subsides. Therefore, we currently are not able to estimate the full impact of COVID-19 on our financial condition and future results of operations. In the near term, we expect that this situation will have an adverse effect on our reported results for second fiscal quarter of 2020 and possibly beyond, as we continue to reopen our stores. We will continue to actively monitor the effects that COVID-19 has on our business. A prolonged period of store closures, changes in customer behaviors and reductions of consumer discretionary spending would require us to continue to evaluate our business assumptions and estimates. Such conditions would likely result in lower future net sales and cash flow, which could lead to impairment of our store and other assets, as well as increase the risks associated with excess inventory.
Retail Stores:
The table below sets forth the number of Build-A-Bear Workshop corporately-managed stores in North America, Europe and Asia for the periods presented:
Thirteen weeks ended | Thirteen weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
May 4, 2019 | May 5, 2018 | May 2, 2020 | May 4, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
North | Europe | Asia | Total | North | Europe | Asia | Total | North America | Europe | Asia | Total | North America | Europe | Asia | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Beginning of period | 311 | 59 | 1 | 371 | 292 | 59 | 1 | 352 | 316 | 55 | 1 | 372 | 311 | 59 | 1 | 371 | ||||||||||||||||||||||||||||||||||||||||||||||||
Opened | - | - | - | - | 2 | - | - | 2 | 1 | - | - | 1 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
Closed | (4 | ) | (1 | ) | - | (5 | ) | (2 | ) | (2 | ) | - | (4 | ) | (4 | ) | 0 | - | (4 | ) | (4 | ) | (1 | ) | - | (5 | ) | |||||||||||||||||||||||||||||||||||||
End of period | 307 | 58 | 1 | 366 | 292 | 57 | 1 | 350 | 313 | 55 | 1 | 369 | 307 | 58 | 1 | 366 |
During 2019, we will continue to make improvements to our aged store fleet by leveraging the Discovery format in conjunction with select natural lease events. As of May 4, 2019, 37%2, 2020, 42% of our store base was in an updated Discovery design. We also expect to close certain stores in accordance with natural lease events as an ongoing part of our real estate management and day-to-day operational plans. Current plansFuture may include expansion into more non-traditional locations, made possible in part byincluding concourse format shops and by expansion in other locations outside traditional malls.
International Franchise Revenue:Stores:
Our first franchisee location was opened in November 2003. All franchised stores have similar signage, store layout, merchandise characteristics and guest experience as our corporately-managed stores. As of May 4, 2019,2, 2020, we had nine master franchise agreements, which typically grant franchise rights for a particular country or group of countries, covering an aggregate of 1410 countries.
The number of franchised stores opened and closed for the periods presented below are summarized as follows:
Thirteen weeks ended | Thirteen weeks ended | |||||||||||||||
May 4, 2019 | May 5, 2018 | May 2, 2020 | May 4, 2019 | |||||||||||||
Beginning of period | 97 | 100 | 92 | 97 | ||||||||||||
Opened | 7 | 2 | - | 7 | ||||||||||||
Closed | (14 | ) | (6 | ) | (12 | ) | (14 | ) | ||||||||
End of period | 90 | 96 | 80 | 90 |
In the ordinary course of business, we anticipate signing additional master franchise agreements in the future and terminating other such agreements. We believe there is a total market potential for approximately 300 international stores outside of the United States,U.S., Canada, the U.K., Ireland and Denmark. We continuesource fixtures and other supplies for our franchisees from China which significantly reduces the capital and lowers the expenses required to expect franchisees to leverage theopen franchises. We are leveraging new formats that have been developed for our corporately-managed operationslocations such as concourses and sourcing changes that have significantly reduced the capital and expenses required to open stores. We expect to continue to develop market expansion through both new and existing franchisees in 2019 and beyond. For example,shop-in-shops with our new China franchise partner operates nine locations and plans to open up to 10 locations by the end of fiscal year 2019. In addition, we have made progress in opening six stores in India, and we expect to open stores in Chile.franchisees.
Results of Operations
The following table sets forth, for the periods indicated, selected income statement data expressed as a percentage of total revenues, except where otherwise indicated. Percentages will not total due to cost of merchandise sold being expressed as a percentage of net retail sales, commercial revenue, international franchising, respectively, as well as immaterial rounding:
BUILD-A-BEAR WORKSHOP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Thirteen weeks ended | ||||||||
May 4, | May 5, | |||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
Net retail sales | 96.2 | % | 97.9 | % | ||||
Commercial revenue | 3.1 | 1.2 | ||||||
International franchising | 0.7 | 0.9 | ||||||
Total revenues | 100.0 | 100.0 | ||||||
Costs and expenses: | ||||||||
Cost of merchandise sold - retail (1) | 54.8 | 55.7 | ||||||
Cost of merchandise sold - commercial (1) | 45.9 | 47.0 | ||||||
Cost of merchandise sold - international franchising (1) | 78.6 | 44.9 | ||||||
Total cost of merchandise sold | 54.7 | 55.5 | ||||||
Consolidated gross profit | 45.3 | 44.5 | ||||||
Selling, general and administrative | 42.4 | 43.7 | ||||||
Interest expense (income), net | 0.0 | 0.0 | ||||||
Income (loss) before income taxes | 2.9 | 0.8 | ||||||
Income tax expense (benefit) | 1.4 | 0.4 | ||||||
Net income (loss) | 1.4 | 0.4 | ||||||
Retail Gross Margin (2) | 45.2 | % | 44.3 | % |
Thirteen weeks ended | ||||||||
May 2, | May 4, | |||||||
2020 | 2019 | |||||||
Revenues: | ||||||||
Net retail sales | 97.9 | % | 96.1 | % | ||||
Commercial revenue | 0.7 | 3.3 | ||||||
International franchising | 1.4 | 0.7 | ||||||
Total revenues | 100.0 | 100.0 | ||||||
Costs and expenses: | ||||||||
Cost of merchandise sold - retail (1) | 73.1 | 54.8 | ||||||
Store asset impairment | 10.6 | 0.0 | ||||||
Cost of merchandise sold - commercial (1) | 42.0 | 45.9 | ||||||
Cost of merchandise sold - international franchising (1) | 39.6 | 78.6 | ||||||
Total cost of merchandise sold | 82.7 | 54.7 | ||||||
Consolidated gross profit | 17.3 | 45.4 | ||||||
Selling, general and administrative | 57.3 | 42.4 | ||||||
Interest (income) expense, net | (0.0 | ) | 0.0 | |||||
(Loss) income before income taxes | (40.0 | ) | 2.9 | |||||
Income tax expense | 5.4 | 1.4 | ||||||
Net (loss) income | (45.5 | ) | 1.4 | |||||
Retail Gross Margin (2) | 26.9 | % | 45.2 | % |
(1) | Cost of merchandise sold – retail is expressed as a percentage of net retail sales. Cost of merchandise sold – commercial is expressed as a percentage of commercial revenue. Cost of merchandise sold – international franchising is expressed as a percentage of international franchising revenue. |
(2) | Retail gross margin represents net retail sales less cost of merchandise sold - retail; retail gross margin percentage represents retail gross margin divided by net retail sales. |
Thirteen weeks ended May 4, 20192, 2020 compared to thirteen weeks ended May 5, 20184, 2019
Total revenues. Consolidated revenues increased 1.4%decrease 44.7%, includingincluding a 4.5% increase45.6% decrease in North America, a 14.8% 38.8%decrease in Europe, and a double digit increase in consolidated e-commerce sales. We believe that European results continue to reflect the impact of the ongoing uncertainty surrounding Brexit, as well as the May 2018 implementation of new privacy laws, which severely inhibited the Company’s ability to directly market to guests.
Net retail sales for the thirteen weeks ended May 4, 20192, 2020 were $81.0 $45.6million, comparedcompared to $81.4 million$81.0 million for the thirteen weeks ended May 5, 2018,4, 2019, a decrease of $0.4$35.4 million, or 0.5%43.7%. The components of this decrease are as follows:follows (dollars in millions):
Thirteen weeks ended | ||||
May 4, 2019 | ||||
(dollars in millions) | ||||
Decrease in existing store and ecommerce sales | $ | (1.8 | ) | |
Increase from new stores | 3.4 | |||
Impact of store closures | (1.4 | ) | ||
Impact of foreign currency translation | (0.9 | ) | ||
Change in deferred revenue estimates, including breakage | 0.3 | |||
$ | (0.4 | ) |
Thirteen weeks ended | ||||
May 2, 2020 | ||||
Impact from: | ||||
Existing store and e-commerce sales | $ | (32,513 | ) | |
New stores | 707 | |||
Store closures | (2,312 | ) | ||
Gift card breakage | (652 | ) | ||
Foreign currency translation | (523 | ) | ||
Deferred revenue estimates | (108 | ) | ||
Total Change | $ | (35,401 | ) |
The retail revenue decrease was driven primarily by the U.K. as business continued to decline due to a challenging retail environment brought on by Brexit andresult of the May 2018 implementationclosure of new privacy laws that have significantly inhibited our ability to build our contact database and market directly to our guests. As a partall of our focused effort to mitigate some of the issues in the market, we recently implemented a new technology-based Bonus Club enrollment process that is compliant with the new European privacy regulations. Since then, we have seen significant growth in the opt-in rates of Bonus Club members which we believe will benefit the businesscorporately managed stores beginning on a go-forward basis.March 18, 2020.
Commercial revenue was $2.8$0.3 million for the thirteen weeks ended May 4, 20192, 2020 compared to $1.0$2.8 million for the thirteen weeks ended May 5, 2018.4, 2019. The $1.8$2.5 million increase includes wholesale merchandise and furniture/fixturedecrease is the result of decreased sales and outbound licensing fees, reflecting somevolume of new inventory from our commercial customers as a result of COVID-19, which we believe is principally because of closure of third-party reatil locations serviced by our commercial customers.
International franchising revenue was $0.6 million for the work that has been donethirteen weeks ended May 2, 2020 compared to evolve$0.6 million for the business model beyond traditional retail.thirteen weeks ended May 4, 2019.
Retail gross margin. Retail gross margin dollars increased $0.6decreased $24.3 million to $36.6$12.3 million compared to the thirteen weeks ended May 5, 2018.4, 2019. The retail gross margin rate increased 90decreased 18.3% basis points to 45.2% mainlyprimarily driven by merchandise margin expansionfixed occupancy costs recorded through the end of the first quarter despite store closures beginning on March 18, 2020.
Impairment of long-live assets, including right-of-use assets. As a result of the COVID-19 pandemic, we experienced lower than projected revenues and identified indicators of impairment for our store fleet. We performed undiscounted cash flow analyses over the long-lived assets and right-of-use assets and determined that certain stores had long-lived and right-of-use assets with carrying values that exceeded their estimated undiscounted cash flows. We estimated fair values of these long-lived assets based on our discounted cash flows or market rent assessments. Our analysis indicated that the carrying values of our long-lived assets exceeded their respective fair values. As a result, we recognized an impairment charge of $4.8 million for the thirteen weeks ended May 2, 2020, with approximately $2.4 million for right-of-use operating lease assets and $2.4 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, and machinery and equipment. These impairment charges were primarily driven by lower occupancy costs.than projected revenues and the effect of store closures as a result of the COVID-19 pandemic. The majority of the impairment was recorded for assets associated with stores in North America. For the thirteen weeks ended May 4, 2019, the Company did not record any impairment charges.
Selling, general and administrative. Selling, general and administrative expenses were $35.8$26.7 million for the thirteen weeks ended May 4, 2019,2, 2020, a declinedecrease of $0.5$9.1 million compared to the thirteen weeks ended May 5, 2018.4, 2019. The decreasedecline was driven by continued disciplined expense managementprimarily due to lower labor costs resulting from store closures and focus on controllable spend.employee furloughs due to the COVID-19 pandemic.
Interest expense (income), net. Interest expense (income) was $20,000$3,000 for the thirteen weeks ended May 4, 20192, 2020 compared to $5,000 forinterest income of $20,000 for the thirteen weeks ended May 5, 2018.4, 2019.
Provision for income taxes.taxes. Income tax expense was $1.2$2.5 million with a tax rate of 50.3%(13.6%) for the thirteen weeks ended May 4, 20192, 2020 as compared to income tax expense of $0.3$1.2 million with a tax rate of 45.2%50.5% for the thirteen weeks ended May 5, 2018.4, 2019. In the first quarter of fiscal 2020, the effective tax rate differed from the statutory rate of 21% primarily due to the $3.3 million valuation allowance recorded on the beginning balance of the net deferred tax assets in certain jurisdictions offset by $0.8 million of benefit as a result of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. In addition, no tax benefit was recorded on the current period pretax loss as a full valuation allowance has now been recorded globally. In the first quarter of fiscal 2019, the effective tax rate differed from the statutory rate of 21% primarily due to the valuation allowance being recorded in certain foreign jurisdictionsloss companies and the $0.2 million negative tax impact of equity awards vesting. In the first quarter of fiscal 2018, the effective tax rate differed from the statutory rate of 21% primarily due the $0.1 million tax impact of equity awards vesting.
Seasonality and Quarterly Results
Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly because of a variety of factors, including, but not limited to: (1) changes in general economic conditions (including as a result of the COVID-19 pandemic and tariffs) and consumer spending patterns; (2) increases or decreases in our existing store and e-commerce sales; (3) fluctuations in the profitability of our stores; (4) the timing and frequency of the sales of licensed products tied to major theatrical releases, our marketing initiatives, including national media and other public relations events; (5) changes in foreign currency exchange rates; (6) the timing of our store openings and closings and related expenses; (7) changes in consumer preferences; (8) the effectiveness of our inventory management; (9) the actions of our competitors or mall anchors and co-tenants; (10) seasonal shopping patterns and holiday and vacation schedules; (11) disruptions in store operations due to civil unrest; and (11)(12) weather conditions.
The timing of store closures, remodels and openings may result in fluctuations in quarterly results based on the revenues and expenses associated with each store location. Expenses related to store closings are typically incurred in stages: when the decision is made to close the store typically associated with a lease event such as an expiration or lease triggered clause; when the closure is communicated to store associates; and at the time of closure. We typically incur most preopening costs for a new store in the three months immediately preceding the store’s opening.
As a retailer that hasBecause our retail operations have toy products as part of our revenue model, our sales are highest in our fourth quarter. The timing of holidays and school vacations can impact our quarterly results. We cannot provide assurance that this will continue to be the case. In addition, for accounting purposes, the quarters of each fiscal year consist of 13 weeks, although we will have a 14-week quarter approximately once every six years. For example, the 2014 fiscal fourth quarter had 14 weeks and the fiscal year transition period ended February 3, 2018 had five weeks.
Liquidity and Capital Resources
OurAs of May 2, 2020, we had a consolidated cash balance of $21.9 million, compared to $26.7 million as of February 1, 2020, and approximately 84% of this balance was domiciled within the United States. Historically, our cash requirements arehave been primarily for the relocation and remodeling of existing stores in our new design, opening of new stores, investments in information technology infrastructure and working capital. Over the past several years, we have met these requirements through capital generated from cash flow provided by operations. We have access to additional cash through oura revolving line of credit under an agreement with U.S. Bank National Association, as lender, which we have generally utilized for short-term working capital needs based primarily on the seasonal nature of our operating cash flows. Historically, our peak borrowing level has occurred in the third quarter as we increase inventory in advance of the holiday selling season.
In response to the COVID-19 pandemic, we have taken actions to preserve and fortify our liquidity, including reducing and deferring various operating and other expenses, temporarily furloughing employees or reducing employee salaries, deferring store rental payments and engaging in discussions with our landlords and reducing planned capital expenditures, all as discussed in detail in the “—Overview—COVID-19 Update” above. In addition, we do not plan to utilize our cash to repurchase shares in fiscal 2020 in order to preserve our cash position. In addition, our ability to repurchase shares is limited by conditions set forth by our lender in our credit agreement, as described above.
We believe that has beenthe above measures taken to increase and maintain our liquidity, together with cash generated from operations will be sufficient to fund our working capital and other cash flow requirements for at least the next 12 months. Because of the amendments described below, we do not expect to access the credit agreement prior to its expiration on September 30, 2020 because we expect to have cash of more than $5 million and given our trailing twelve month financial results, we do not expect to meet the required fixed charge coverage ratio. We continue to explore other options to access
alternative liquidity sources which may include other lenders, various government assistance programs and monetization of existing Company assets, including the Company-owned warehouse in place since 2000.Ohio and inventory, and will continue to consider other actions to improve our cash position, including but not limited to implementing further Selling, general and administrative expense reductions, foregoing or delaying capital expenditures, and working with landlords to negotiate lease structure and payment terms.
A summary of our operating, investing and financing activities are shown in the following table (dollars in thousands):
Thirteen weeks ended | ||||||||
May 4, | May 5, | |||||||
2019 | 2018 | |||||||
Net cash provided by operating activities | $ | 5,141 | $ | 1,383 | ||||
Net cash used in investing activities | (2,440 | ) | (2,945 | ) | ||||
Net cash used in financing activities | (258 | ) | (1,157 | ) | ||||
Effect of exchange rates on cash | (99 | ) | 101 | |||||
Net increase (decrease) in cash and cash equivalents | $ | 2,344 | $ | (2,618 | ) |
Thirteen weeks ended | ||||||||
May 2, | May 4, | |||||||
2020 | 2019 | |||||||
Net cash (used in) provided by operating activities | $ | (2,506 | ) | $ | 5,141 | |||
Net cash (used in) investing activities | (2,849 | ) | (2,440 | ) | ||||
Net cash (used in) financing activities | (114 | ) | (258 | ) | ||||
Effect of exchange rates on cash | 551 | (99 | ) | |||||
Net (decrease) increase in cash and cash equivalents | $ | (4,918 | ) | $ | 2,344 |
Operating Activities. Cash provided from operating activities increased $3.8decreased $7.6 million for the thirteen weeks ended May 2, 2020, as compared to the thirteen weeks ended May 4, 2019 as compared to the thirteen weeks ended May 5, 2018.. This increasedecrease in cash from operating activities was primarily driven by higher net incomethe closure of our corporately managed retail stores in North America and receivable collections for the thirteen weeks ended May 4, 2019 as compared to the thirteen weeks ended May 5, 2018.United Kingdom beginning March 18, 2020.
Investing Activities. Cash used in investing activities decreased $0.5increased $0.4 million for the thirteen weeks ended May 2, 2020 as compared to the thirteen weeks ended May 4, 2019 as compared to the thirteen weeks ended May 5, 2018.. This decreaseincrease in cash from investing activities was primarily driven by cash for previously committed investments in infrastructure to support the timingCompany's digital initiatives whose spend occurred near the beginning of cash used related to store construction and upgrades, and purchases of information technology infrastructure for the thirteen weeks ended May 4, 2019 as compared to the thirteen weeks ended May 5, 2018.period.
Financing Activities. Cash used in financing activities decreased $0.9$0.1 million for the thirteen weeks ended May 2, 2020, as compared to the thirteen weeks ended May 4, 2019 as compared to the thirteen weeks ended May 5, 2018.. This decrease in cash from financing activities was primarily driven by the purchases of our common stockless stock-based compensation vesting in the thirteen weeks ended May 5, 2018.first quarter of fiscal 2020 compared to the first quarter of prior year resulting in the need for less total shares withheld for taxes.
Capital Resources.Resources: As noted above, as of May 4, 2019,2, 2020, we had a consolidated cash balance of $20.2$21.9 million compared to $26.7 million as of February 1, 2020, and approximately 65%84% of this balancebalance was domiciled within the United States. We also have a line of credit which we can use to finance capital expenditures and working capital needs throughout the year. On April 16, 2019,May 28, 2020, we entered into the nineteenthtwenty-first amendment to thisour credit agreement, with our lender. Under this agreement,which, among other revisions, reduced the bank line provides availability of uptotal facility to $35$10.0 million. Borrowings under the credit agreement are secured by our assets and a pledge of 66% of our ownership interest in certain of our foreign subsidiaries. The credit agreement expires on December 31,September 30, 2020 and contains various restrictions on indebtedness, liens, guarantees, redemptions, mergers, acquisitions or sale of assets, loans, transactions with affiliates and investments. The agreement limits the amount of, and the conditions under which the Company may declare dividends and repurchase shares as set forth inshares. For example, we may not use the agreement. Borrowingsproceeds of the line of credit to repurchase shares. The commitment fee is 0.25% per annum and borrowings bear interest at LIBOR plus 1.25%3.25%. Financial covenants include maintainingThe amendment eliminated the minimum thresholds for cumulative earnings before interest, taxes, depreciationEBITDA, funded debt ratio, and amortizations (“EBITDA”) and liquidity for the first three quarters of fiscal 2019 (as defined by the credit agreement), maintaining a minimum fixed charge coverage ratio effective incovenants as of the fourthend of each reporting period, but imposed other restrictions, including a requirement to maintain a minimum consolidated North American cash balance of $3 million at all times and, at the time of borrowing, have no more than $5 million of consolidated North American cash and meet a fixed charge coverage ratio as of the most recent quarter-end on a trailing 12-month basis of less than 1.25 to 1.00. In addition, the Company had a $1.0 million letter of credit against the line of credit at the end of the first quarter of fiscal 2019 (as defined in2020. As of the end of the first quarter of fiscal 2020 under the credit agreement) and not exceeding a maximum funded debt to EBITDA ratio. As ofagreement as amended on May 4, 2019: (i)28, 2020, we were in compliance with all covenants; (ii)the restrictions stated in the agreement and there were no borrowings under the line of credit; and (iii)credit. Although there was $35.0$9.0 million available for borrowing under the line of credit.
In fiscal 2019,credit as of the end of the first quarter, because of the amendments described above, we do not expect to access the credit agreement prior to its expiration on September 30, 2020 because we expect to spendhave cash of more than $5 million and given our trailing twelve month financial results, we do not expect to meet the required fixed charge coverage ratio.
Most of our retail stores are located within shopping malls and all are operated under leases classified as operating leases. Our leases in North America have shifted to shorter term leases to provide flexibility in aligning stores with market trends. Our leases typically require us to pay personal property taxes, our pro rata share of real property taxes of the shopping mall, our own utilities, repairs and maintenance in our store, a totalpro rata share of $13the malls’ common area maintenance and, in some instances,
merchant association fees and media fund contributions. Many leases contain incentives to $15 millionhelp defray the cost of construction of a new store. Typically, a portion of the incentive must be repaid to the landlord if we choose to terminate the lease. In addition, some of these leases contain various restrictions relating to change in control of our company. Our leases also subject us to risks relating to compliance with changing mall rules and the exercise of discretion by our landlords on capital expenditures. various matters, including rights of termination in some cases. Rents are invoiced monthly and paid in advance.
Our leases in the U.K. and Ireland typically have terms of ten years and generally contain a provision whereby every fifth year the rental rate can be adjusted to reflect the current market rates. The leases typically provide the lessee with the first right for renewal at the end of the lease. We may also be required to make deposits and rent guarantees to secure new leases as we expand. Real estate taxes also change according to government time schedules to reflect current market rental rates for the locations we lease. However, for fiscal 2020, business rates have been forgiven by the U.K. government through April 2021. Rents are invoiced monthly and quarterly and paid in advance.
Capital spending through the thirteen weeks ended May 4, 20192, 2020 totaled $2.7$2.8 million, on track with our full year plans. Capital spendingwhich reflects previously committed investments in infrastructure to support its digital initiatives. In response to the COVID-19 pandemic, the Company subsequently has taken action to reduce planned capital expenditures in fiscal 2019 is expected2020 to primarily support our store activity, including both remodels and new stores, and investments in information technology infrastructure.
We believe that cash generated from operations and borrowings under our credit agreement will be sufficient to fund our working capital and other cash flow requirements for the near future. Our credit agreement expires on December 31, 2020.maintenance levels.
In August 2017, our Board of Directors adopted a share repurchase program authorizing the repurchase of up to $20 million of our common stock. From the date of the program approval through May 4, 2019,2, 2020, we repurchased a total of 1.3 million shares at an average price of $8.75 per share for an aggregate amount of $11.2 million. As of May 4, 2019,Although we had $8.8 million of availability under the 2017 Share Repurchase Program.Program as of May 2, 2020, currently we do not plan to utilize our cash to resume share repurchases in fiscal 2020. In addition, our ability to repurchase shares is limited by conditions set forth by our lender in our credit agreement, as described above.
Off-Balance Sheet Arrangements
None.
Inflation
We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented. We cannot provide assurance, however, that our business will not be affected by inflation in the future.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of certain accounting policies, which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.
We believe application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates, including those related to inventory, long-lived assets, leases, revenue recognition and income taxes, are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change.
Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.
Our critical accounting policies and estimates are discussed in and should be read in conjunction with our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on April 18, 2019,16, 2020, which includes audited consolidated financial statements for our 2019 and 2018 and 2017 fiscal years and the five weeks ended February 3, 2018. Except for changes resulting from the adoption of new accounting standards during the period, including the new lease standard (See footnote 3 to the Condensed Consolidated Financial Statements), thereyears. There have been no material changes to the critical accounting estimates disclosed in the 20182019 Form 10-K.
Recent Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements — Basis of Presentation — Recent Accounting Pronouncements – Adopted in the Current Year
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to our Quantitative and Qualitative Disclosures About Market Risk as disclosed in our Annual Report on Form 10-K for the year ended February 2, 20191, 2020 as filed with the SEC on April 18, 2019.16, 2020.
Item 4. Controls and Procedures.
Our management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on the foregoing evaluation, our management, including the President and Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of May 4, 2019,2, 2020, the end of the period covered by this Quarterly Report.
It should be noted that our management, including the President and Chief Executive Officer and the Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting. The Company’s management, with the participation of the Company’s President and Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. We implemented internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new accounting standard related to leases on our financial statements to facilitate its adoption on February 3, 2019. We implemented a new software solution to support our accounting for leases andThere have implemented new internal controls in response. There has been no other changechanges in our internal control over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
There have been no material changes to our risk factors as disclosed in our Annual Report on Form 10-K for the year ended February 2, 20191, 2020 as filed with the SEC on April 18, 2019.16, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period | (a) Number of Shares (or Units) Purchased (1) | (b) Price Paid Per Share (or Unit) | (c) Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2) | (d) (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||
Feb. 3, 2019 – Mar. 2, 2019 | 11 | $ | 5.15 | - | $ | 8,795,529 | ||||||||||
Mar. 3, 2019 – Apr. 6, 2019 | 31,987 | 5.81 | - | 8,795,529 | ||||||||||||
Apr. 7, 2019 – May 4, 2019 | 12,565 | 5.60 | - | 8,795,529 | ||||||||||||
Total | 44,563 | $ | 5.75 | - | $ | 8,795,529 |
Period | (a) Total Number of Shares (or Units) Purchased (1) | (b) Average Price Paid Per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2) | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||
Feb. 2, 2020 - Feb. 29, 2020 | - | - | - | $8,795,529 | ||||||||||||
Mar. 1, 2020 - Apr. 4, 2020 | 17,738 | 1.43 | - | 8,795,529 | ||||||||||||
Apr. 5, 2020 - May 2, 2020 | 51,751 | 2.54 | - | 8,795,529 | ||||||||||||
Total | 69,489 | 2.26 | - | $8,795,529 |
(1) |
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(2) | In August 2017, the Board of Directors adopted a share repurchase program authorizing the repurchase of up to $20 million of our common stock. This program authorizes the Company to repurchase shares through September 30, 2020, |
The following is a list of exhibits filed as a part of the quarterly report on Form 10-Q:
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101.CAL |
| XBRL Extension Calculation |
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101.DEF |
| XBRL Extension Definition |
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101.LAB |
| XBRL Extension Label |
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101.PRE |
| XBRL Extension Presentation |
* Management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: June 13, 201911, 2020
| BUILD-A-BEAR WORKSHOP, INC. | |
| (Registrant) | |
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| By: | /s/ Sharon John |
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| Sharon John |
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| President and Chief Executive Officer (on behalf of the registrant and as principal executive officer) |
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| By: | /s/ Voin Todorovic |
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| Voin Todorovic |
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| Chief Financial Officer (on behalf of the registrant and as principal financial officer) |
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