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 1, 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 1, 2020, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on April 16, 2020.
COVID-19 Pandemic
In March 2020, the World Health Organization announced that COVID-19 is a global pandemic. On March 17, 2020, the Company announced the temporary closure of all corporately-managed stores in the United States, Canada, the United Kingdom, Denmark and Ireland as a result of local and governmental restrictions due to 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 merchandise is shipped to stores and e-commerce orders are fulfilled. The Company took various initial steps in response to COVID-19, such as furloughing employees, reducing compensation for all corporate employees including its executive officers, delaying payment of bonuses and 401(k) plan matching contributions, reducing planned capital expenditures to maintenance levels, deferring payments through extension of terms, and leveraging outstanding rent payments to landlords and high optionality in the leases in its real estate portfolio to aggressively renegotiate more favorable terms. During the second quarter, the Company reopened the vast majority of its corporately-managed store locations, many with shortened hours of operations and lower traffic levels, saw strong digital demand on its e-commerce site, accelerated its omni-channel competencies, and continued disciplined expense management and cash preservation which included the renegotiation of lease terms to include rent reductions, deferrals and abatements.
Operational and Distribution Network Update for the third quarter due to COVID-19:
|
|
During the third quarter, the vast majority of the Company's corporately-managed store fleet remained opened in accordance with local law, with temporary closures and other related restrictions (e.g. safe at home or stay at home orders) continuing to fluctuate on a localized level, resulting in 7% fewer operating days in the third quarter. The Company ended the quarter with approximately 98% of its corporately-managed store locations open for operations, although certain stores in the United Kingdom were closed following the end of the third quarter, as discussed below.
|
|
|
The Company’s e-commerce site was fully operational throughout the quarter. The Company continued to see strong digital demand with growth rates at triple-digit levels compared to the comparable period in
2019.
|
|
●
|
The Company continued to enhance its omni-channel capabilities of “Buy Online, Ship From Store” and “Buy Online, Pick Up In Store” by expanding the number of stores that are eligible to fulfill digital orders including the initialization of “Click and Collect” orders in its United Kingdom locations, a form of "Buy Online, Pick Up In Store" for U.K. operations. The Company believes these programs are an efficient use of available store labor and inventory to support the expected ongoing strong digital demand.
|
|
●
|
The Company renegotiated lease terms to include rent reductions, deferrals and abatements on 99% of North American locations and almost 90% of those in the UK since the onset of the pandemic.
|
|
●
|
The Company maintained disciplined expense management and cash preservation across the business including continued delayed payment of bonuses earned by executive officers for 2019 performance and the Company matching contribution to its 401(k) plan. The Company also continued to limit its capital expenditures to maintenance levels.
|
|
●
|
In light of the Company's improved financial performance, on October 6, 2020, the Company’s Compensation Committee authorized the return of base salaries to the amounts that were effective prior to the salary reductions for all employees, including the Company’s executive officers. The restoration of the base salaries was effective September 27, 2020, and was not retroactive to the date salaries were reduced in March 2020.
|
|
●
|
The Company’s supply chain experienced
no significant disruptions in the quarter with the Company able to receive deliveries in a timely manner.
|
|
●
|
The Company’s franchisees ended the quarter with
74 locations open and operating as permitted by law across Africa, Asia, Australia, the Middle East and South America, while
one location remained temporarily closed due to COVID-
19.
|
|
●
|
Select locations associated with the Company’s third-party retail model were operating at the end of the quarter.
|
At the beginning of the fourth quarter, the Company temporarily closed 43 stores in the United Kingdom as a result of governmental COVID-19 mandates. These temporary closures were in addition to two stores that were temporarily closed in Ireland shortly before the end of the third quarter due to COVID-19 mandates. As of December 2, 2020, 39 of these locations in the United Kingdom reopened as restrictions in those jurisdictions were eased.
The Company's operating results for the thirteen and thirty-nine weeks ended October 31, 2020 may not be indicative of the results that may be expected for the fiscal year ending January 30, 2021 primarily due to the impact of the COVID-19 pandemic. The pandemic has had, and will continue to have, a negative impact on the Company's retail store operations and financial condition and will continue to affect its cash flows, although the full extent is uncertain at this time. As the pandemic continues to evolve, the extent of the future impact will depend on additional developments, including, but not limited to, the duration and extent of any temporary closing of certain of its stores, the enactment and duration of governmentally-mandated quarantines, shelter-in-place orders and other travel restrictions within the U.S. and other affected countries, the duration and spread of the pandemic (including any relapses), its severity, the actions to contain the virus and/or treat its impact including approval and distribution of vaccines, the duration, timing and severity of the impact on consumer spending (including the recession resulting from the pandemic), and how quickly and to what extent economic and operating conditions can recover and resume, all of which are highly uncertain and cannot be predicted.
In addition, the Company’s business is subject to seasonal fluctuations, with significant portions of the Company’s revenues and net income being realized during the fourth quarter of the fiscal year due to the holiday selling season. Therefore, the results for the thirteen and thirty-nine weeks ended October 31, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending January 30, 2021, or for any other future interim period or for any future year.
The Company had not borrowed on its credit facility as of December 7, 2020. Inclusive of the Company's credit facility, the Company's liquidity may be negatively impacted if the pandemic results in the temporary closure of certain of its stores in various locations due to local mandates or requirements. The Company believes that its current cash balance, access to its revolving credit facility, along with the expense management and cash preservation actions taken, provide it with sufficient, current liquidity. Due to the ongoing uncertainty regarding the future impact of COVID-19 and consumer shopping behavior, the Company expects to continue to carefully manage its cash position, and may take further actions to further improve its cash position, including but not limited to, monetizing Company assets, continuing its more aggressive inventory management, reimplementing employee furloughs or further position eliminations, and continuing to forego capital expenditures and other discretionary expenses.
Significant Accounting Policies
The Company's significant accounting policies are summarized in Note 2 to the consolidated financial statements included in its 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 and long-live asset impairment.
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 during the first three quarters 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 $0.3 million for the thirteen weeks ended October 31, 2020 and $3.3 million for the thirty-nine weeks ended October 31, 2020 related to these wages within the Selling, general and administrative line in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the period ending October 31, 2020 and as of the end of the third quarter $1.2 million of the reimbursement was outstanding from tax authorities.
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 of those assets 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 its store assets in the direct-to-consumer (“DTC”) segment, based on operating performance and forecasts of future performance. As a result of the COVID-19 pandemic, the Company experienced lower than projected revenues and identified indicators of impairment for its store fleet. The Company performed the recoverability test for these assets by comparing the estimated undiscounted future cash flows over the remaining useful life for its 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 future cash flows for the remaining useful life of the respective assets.
The Company estimated fair values of these long-lived assets based on its discounted future cash flows for the remaining useful life of the asset or market rent assessments. The Company's analysis indicated that the carrying values of certain of its long-lived assets exceeded their respective fair values determined by the discounted future cash flow analysis or the market rent assessment. As a result, the Company recognized an impairment charge of $0.2 million for the thirteen weeks ended October 31, 2020, with approximately $0.1 million for right-of-use operating lease assets and $0.1 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, and machinery and equipment. For the thirty-nine weeks ended October 31, 2020 the Company has recognized impairment charges totaling $7.0 million, with approximately $3.6 million for right-of-use operating lease assets and $3.4 million for fixed assets including leasehold improvements and fixtures, furniture and fixtures, machinery and equipment, and construction-in-progress. These charges are recorded in Store asset impairment within the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the respective periods. These impairment charges were primarily driven by lower than projected revenues and the effect of temporary 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 November 2, 2019, the Company recorded no impairment charges and for the thirty-nine weeks ended November 2, 2019 the Company recorded impairments 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 including market rents, and market conditions.
2. Revenue
Nearly all the Company’s revenue is derived from retail sales (including from its 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 97% of consolidated revenue for the third quarter of 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 estimated 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-half of one percent due to the personalized and 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, including any related gift card discounts, is deferred for single transactions until redemption. Historically, the vast majority of 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 agreements 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, 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, which may include finder’s fees, legal and travel costs, expenses related to its ongoing support of the franchisees and employee compensation. Accordingly, the Company’s policy is to capitalize any 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
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 an original term of a five to ten-year base period and may include renewal options to extend the lease term beyond the initial base period and are typically much shorter than the original lease term giving the Company lease 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. Additionally, certain leases contain incentives, such as construction allowances from landlords and/or rent abatements subsequent to taking possession of the leased property.
The table below presents certain information related to the lease costs for operating leases for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 (in thousands).
|
|
Thirteen weeks ended
|
|
|
Thirty-nine weeks ended
|
|
|
|
October 31, 2020
|
|
|
November 2, 2019
|
|
|
October 31, 2020
|
|
|
November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease costs
|
|
|
8,880
|
|
|
|
10,260
|
|
|
|
28,464
|
|
|
|
31,030
|
|
Variable lease costs
|
|
|
1,000
|
|
|
|
514
|
|
|
|
1,422
|
|
|
|
1,828
|
|
Short term lease costs
|
|
|
17
|
|
|
|
255
|
|
|
|
111
|
|
|
|
940
|
|
Total Operating Lease costs
|
|
$
|
9,897
|
|
|
$
|
11,029
|
|
|
$
|
29,997
|
|
|
$
|
33,798
|
|
Other information
The table below presents supplemental cash flow information related to leases for the thirteen and thirty-nine weeks ended October 31, 2020 and November 2, 2019 (in thousands).
|
|
Thirteen weeks ended
|
|
|
Thirty-nine weeks ended
|
|
|
|
October 31, 2020
|
|
|
November 2, 2019
|
|
|
October 31, 2020
|
|
|
November 2, 2019
|
|
Operating cash flows for operating leases
|
|
|
9,949
|
|
|
|
10,872
|
|
|
|
25,878
|
|
|
|
33,061
|
|
As of October 31, 2020 and November 2, 2019, the weighted-average remaining operating lease term was 5.0 years and 5.8 years, respectively, and the weighted-average discount rate was 6.0% and 5.9%, respectively, for operating leases recognized on the Company's Condensed Consolidated Balance Sheets.
As discussed above, the Company incurred impairment charges during the thirteen and thirty-nine weeks ended October 31, 2020, of $0.1 million and $3.6 million, respectively, against right-of-use operating lease assets.
During the second and third quarters, the Company renegotiated a large portion of its store lease portfolio resulting in a combination of rent reductions, deferments, and abatements in North America and the United Kingdom and Ireland. These negotiations have increased the percentage of leases with variable rent structures resulting in the increase in variable rent expense for the thirteen weeks ended October 31, 2020 compared to thirteen weeks ended November 2, 2019. For these renegotiated leases, under ASC 842 Leases, the Company assessed if the renegotiated leases represented a new, separate contract or a modification of the existing lease. The Company concluded all renegotiated leases represented a modification of terms of each existing agreement. As such, the Company remeasured the lease liability and decreased the carrying amount of the right-of-use asset in proportion to the modification of the existing lease and recognized in profit or loss any difference between the reduction in the lease liability and the reduction in the right-of-us asset, which had an immaterial impact on the second quarter results. The Company remains in negotiations with certain landlords for those stores not already renegotiated and expects further rent reductions, deferments or abatements to be recognized in the fourth quarter of the current fiscal year.
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 operating lease liabilities recorded on the balance sheet (in thousands).
Operating Leases
|
|
|
|
2020
|
|
|
11,890
|
|
2021
|
|
|
40,496
|
|
2022
|
|
|
30,635
|
|
2023
|
|
|
25,716
|
|
2024
|
|
|
21,532
|
|
Thereafter
|
|
|
35,861
|
|
Total minimum lease payments
|
|
|
166,130
|
|
Less: amount of lease payments representing interest
|
|
|
(22,988
|
)
|
Present value of future minimum lease payments
|
|
|
143,142
|
|
Less: current obligations under leases
|
|
|
(35,489
|
)
|
Long-term lease obligations
|
|
$
|
107,653
|
|
As of October 31, 2020, the Company had an additional executed lease that had not yet commenced with operating lease liabilities of $1.3 million. This lease is expected to commence in 2021 with a lease term of ten years.
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
October 31,
|
|
|
February 1,
|
|
|
November 2,
|
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
Prepaid occupancy (1)
|
|
$
|
691
|
|
|
$
|
1,097
|
|
|
$
|
1,426
|
|
Prepaid income taxes
|
|
|
233
|
|
|
|
164
|
|
|
|
879
|
|
Prepaid insurance
|
|
|
31
|
|
|
|
628
|
|
|
|
132
|
|
Prepaid gift card fees
|
|
|
1,312
|
|
|
|
1,413
|
|
|
|
1,285
|
|
Other (2)
|
|
|
3,160
|
|
|
|
3,815
|
|
|
|
2,605
|
|
Total
|
|
$
|
5,427
|
|
|
$
|
7,117
|
|
|
$
|
6,327
|
|
|
(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):
|
|
October 31,
|
|
|
February 1,
|
|
|
November 2,
|
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
Accrued wages, bonuses and related expenses
|
|
$
|
14,844
|
|
|
$
|
13,373
|
|
|
$
|
8,116
|
|
Sales and value added taxes payable
|
|
|
3,317
|
|
|
|
1,489
|
|
|
|
1,360
|
|
Accrued rent and related expenses (1)
|
|
|
1,596
|
|
|
|
726
|
|
|
|
491
|
|
Current income taxes payable
|
|
|
99
|
|
|
|
948
|
|
|
|
18
|
|
Total
|
|
$
|
19,856
|
|
|
$
|
16,536
|
|
|
$
|
9,985
|
|
|
(1)
|
Accrued rent and related expenses consist of accrued costs associated with non-lease components.
|
6. Stock-based Compensation
On April 14, 2020, the Board of Directors (the “Board”) of Build-A-Bear Workshop, Inc. (the “Company”) adopted, subject to stockholder approval, the Build-A-Bear Workshop, Inc. 2020 Omnibus Incentive Plan (the “2020 Incentive Plan”). On June 11, 2020, at the Company’s 2020 Annual Meeting of Stockholders (the “Annual Meeting”), the Company’s stockholders approved the 2020 Incentive Plan. The 2020 Incentive 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, other stock-based awards, including restricted stock and restricted stock units, cash-based awards, and performance awards pursuant to the terms of the 2020 Incentive Plan. The 2020 Incentive Plan will terminate on April 14, 2030, unless earlier terminated by the Board. The number of shares of the Company’s common stock authorized for issuance under the 2020 Incentive Plan is 1,000,000, plus shares of stock that remained available for issuance under the Build-A-Bear Workshop, Inc. 2017 Omnibus Incentive Plan (the “2017 Incentive Plan”) at the time the 2020 Incentive Plan was approved by the Company’s stockholders, and shares that are subject to outstanding awards made under the 2017 Incentive Plan that on or after April 14, 2020 may be forfeited, expire or be settled for cash.
For the thirteen weeks ended October 31, 2020 and November 2, 2019, Selling, general and administrative expense included $0.5 million and $0.4 million, respectively, of stock-based compensation expense, and for the thirty-nine weeks ended October 31, 2020 and November 2, 2019, Selling, general and administrative expense included $1.3 million and $1.8 million, respectively. As of October 31, 2020, there was $2.8 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 1.3 years.
The following table is a summary of the balances and activity for stock options for the thirty-nine weeks ended October 31, 2020:
|
|
Options
|
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
Outstanding, February 1, 2020
|
|
|
923,254
|
|
|
$
|
9.76
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
(102,516
|
)
|
|
|
8.13
|
|
Outstanding, October 31, 2020
|
|
|
820,738
|
|
|
$
|
9.97
|
|
The following table is a summary of the balances and activity related to time-based and performance-based restricted stock for the thirty-nine weeks ended October 31, 2020:
|
|
Time-Based Restricted Stock
|
|
|
Performance-Based Restricted Stock
|
|
|
|
Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding, February 1, 2020
|
|
|
453,403
|
|
|
$
|
6.71
|
|
|
|
262,964
|
|
|
$
|
7.59
|
|
Granted
|
|
|
767,390
|
|
|
|
2.45
|
|
|
|
157,374
|
|
|
|
2.78
|
|
Vested
|
|
|
(260,317
|
)
|
|
|
6.98
|
|
|
|
(56,380
|
)
|
|
|
8.85
|
|
Forfeited
|
|
|
(18,408
|
)
|
|
|
6.79
|
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
(27,517
|
)
|
|
|
8.85
|
|
Outstanding, October 31, 2020
|
|
|
942,068
|
|
|
$
|
3.16
|
|
|
|
336,441
|
|
|
$
|
5.03
|
|
The total fair value of shares vested during the thirty-nine weeks ended October 31, 2020 and November 2, 2019 was $2.3 million and $2.1 million, respectively.
In October 2020, the Company awarded three-year performance-based restricted stock subject to the achievement of liquidity, profitability and strategic performance objectives for fiscal 2020, 2021 and 2022 and assigned a weighting to each objective. Profitability will be measured by the Company’s achievement of consolidated earnings before interest and taxes (“EBIT”). The EBIT targets for the 2021 and 2022 fiscal years were not established by the Compensation and Development Committee of the Board as of the award date. As a result, under ASC 718 Compensation - Stock Compensation the expense related to these EBIT awards will not begin recognition until the targets are established by the Compensation and Development Committee as this portion of the award is not considered granted until the specific targets are established.
The outstanding performance shares as of October 31, 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
|
|
2020 - 2022 consolidated liquidity and strategic performance objectives
|
|
|
89,168
|
|
2020 - 2022 consolidated earnings before interest and taxes (EBIT) objectives
|
|
|
68,206
|
|
Performance shares outstanding, October 31, 2020
|
|
|
336,441
|
|
7. Income Taxes
The Company's effective tax rate was 0.6% and -8.0% for the thirteen and thirty-nine weeks ended October 31, 2020, respectively, compared to 23.7% and 2.1% for the thirteen and thirty-nine weeks ended November 2, 2019, respectively. The 2020 effective tax rate differed from the statutory rate of 21% primarily due to no tax expense or benefit being recorded on the current quarter's pretax income or the year-to-date pretax loss as a full valuation allowance has been recorded globally. In addition, the first thirty-nine weeks of fiscal 2020 was impacted by the $3.3 million valuation allowance recorded on the beginning balance of the net deferred tax assets in certain jurisdictions. The 2019 effective tax rate differed from the statutory rate of 21% primarily due to the valuation allowance being recorded in certain foreign loss companies and the $0.2 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 weeks ended October 31, 2020 and November 2, 2019 (in thousands):
|
|
For the thirteen weeks ended October 31, 2020
|
|
|
For the thirteen weeks ended November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
stock
|
|
|
APIC (1)
|
|
|
AOCI (2)
|
|
|
earnings/(deficit)
|
|
|
Total
|
|
|
stock
|
|
|
APIC (1)
|
|
|
AOCI (2)
|
|
|
earnings/(deficit)
|
|
|
Total
|
|
Balance, beginning
|
|
$
|
156
|
|
|
$
|
71,906
|
|
|
$
|
(12,303
|
)
|
|
$
|
(5,188
|
)
|
|
$
|
54,571
|
|
|
$
|
152
|
|
|
$
|
70,295
|
|
|
$
|
(11,579
|
)
|
|
$
|
29,637
|
|
|
$
|
88,505
|
|
Issuance of restricted/performance stock
|
|
$
|
4
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
441
|
|
|
|
|
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
(340
|
)
|
Shares withheld in lieu of tax withholdings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Other
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
1.00
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
(349
|
)
|
|
|
|
|
|
|
(349
|
)
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,660
|
|
|
|
1,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,873
|
)
|
|
|
(5,873
|
)
|
Balance, ending
|
|
$
|
160
|
|
|
$
|
72,344
|
|
|
$
|
(12,277
|
)
|
|
$
|
(3,528
|
)
|
|
$
|
56,699
|
|
|
$
|
152
|
|
|
$
|
69,955
|
|
|
$
|
(11,927
|
)
|
|
$
|
23,763
|
|
|
$
|
81,943
|
|
(1) - Additional paid-in capital (“APIC”)
(2) - Accumulated other comprehensive income (loss) (“AOCI”)
The following table sets forth the changes in stockholders’ equity (in thousands) for the thirty-nine weeks ended October 31, 2020 and November 2, 2019 (in thousands):
|
|
For the thirty-nine weeks ended October 31, 2020
|
|
|
For the thirty-nine weeks ended November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
|
|
|
|
|
stock
|
|
|
APIC (1)
|
|
|
AOCI (2)
|
|
|
earnings/(deficit)
|
|
|
Total
|
|
|
stock
|
|
|
APIC (1)
|
|
|
AOCI (2)
|
|
|
earnings/(deficit)
|
|
|
Total
|
|
Balance, beginning
|
|
$
|
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
|
)
|
Subtotal
|
|
$
|
152
|
|
|
$
|
70,633
|
|
|
$
|
(12,079
|
)
|
|
$
|
29,925
|
|
|
$
|
88,631
|
|
|
$
|
150
|
|
|
$
|
69,088
|
|
|
$
|
(12,018
|
)
|
|
$
|
29,664
|
|
|
$
|
86,884
|
|
Issuance of restricted/performance stock
|
|
|
8
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
|
|
2
|
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
(246
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
1,334
|
|
|
|
|
|
|
|
|
|
|
|
1,334
|
|
|
|
|
|
|
|
1,114
|
|
|
|
|
|
|
|
|
|
|
|
1,114
|
|
Shares withheld in lieu of tax withholdings
|
|
|
(1
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Other
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
0
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
92
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,453
|
)
|
|
|
(33,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,901
|
)
|
|
|
(5,901
|
)
|
Balance, ending
|
|
$
|
160
|
|
|
$
|
72,344
|
|
|
$
|
(12,277
|
)
|
|
$
|
(3,528
|
)
|
|
$
|
56,699
|
|
|
$
|
152
|
|
|
$
|
69,955
|
|
|
$
|
(11,927
|
)
|
|
$
|
23,763
|
|
|
$
|
81,943
|
|
(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 the program expiration on September 30, 2020, the Company had repurchased approximately 1.3 million shares at an average price of $8.75 per share for an aggregate amount of approximately $11.2 million. The Company does not plan to utilize cash to resume share repurchases in fiscal 2020. In addition, the Company's ability to repurchase shares is limited by conditions set forth by its lender in its credit agreement, as described below.
9. Income per Share
The following table sets forth the computation of basic and diluted net income/(loss) per share (in thousands, except share and per share data):
|
|
Thirteen weeks ended
|
|
|
Thirty-nine weeks ended
|
|
|
|
October 31,
|
|
|
November 2,
|
|
|
October 31,
|
|
|
November 2,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
NUMERATOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,660
|
|
|
$
|
(5,873
|
)
|
|
$
|
(33,453
|
)
|
|
$
|
(5,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DENOMINATOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
14,999,786
|
|
|
|
14,752,307
|
|
|
|
14,923,304
|
|
|
|
14,697,592
|
|
Dilutive effect of share-based awards:
|
|
|
220,646
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average number of common shares outstanding - dilutive
|
|
|
15,220,432
|
|
|
|
14,752,307
|
|
|
|
14,923,304
|
|
|
|
14,697,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders
|
|
$
|
0.11
|
|
|
$
|
(0.40
|
)
|
|
$
|
(2.24
|
)
|
|
$
|
(0.40
|
)
|
Diluted income (loss) per common share attributable to Build-A-Bear Workshop, Inc. stockholders
|
|
$
|
0.11
|
|
|
$
|
(0.40
|
)
|
|
$
|
(2.24
|
)
|
|
$
|
(0.40
|
)
|
In calculating the diluted income per share for the thirteen and thirty-nine weeks ended October 31, 2020, options to purchase 822,360 and 849,351 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. For the thirteen and thirty-nine weeks ended November 2, 2019, options to purchase 923,715 and 928,236 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 is the result of 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 October 31, 2020 and November 2, 2019 was comprised entirely of foreign currency translation. For the thirteen weeks ended October 31, 2020 and November 2, 2019, the Company had no reclassifications out of accumulated other comprehensive 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 Asia, Australia, Mexico, the Middle East, Africa, and 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
|
|
|
|
|
|
|
|
Consumer
|
|
|
Commercial
|
|
|
Franchising
|
|
|
Total
|
|
Thirteen weeks ended October 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
72,368
|
|
|
$
|
1,858
|
|
|
$
|
447
|
|
|
$
|
74,673
|
|
Income before income taxes
|
|
|
713
|
|
|
|
803
|
|
|
|
154
|
|
|
|
1,670
|
|
Capital expenditures
|
|
|
651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
651
|
|
Depreciation and amortization
|
|
|
3,186
|
|
|
|
8
|
|
|
|
-
|
|
|
|
3,194
|
|
Thirteen weeks ended November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
66,575
|
|
|
$
|
2,560
|
|
|
$
|
1,249
|
|
|
$
|
70,384
|
|
(Loss) Income before income taxes
|
|
|
(8,578
|
)
|
|
|
753
|
|
|
|
131
|
|
|
|
(7,694
|
)
|
Capital expenditures
|
|
|
5,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,155
|
|
Depreciation and amortization
|
|
|
3,560
|
|
|
|
-
|
|
|
|
1
|
|
|
|
3,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended October 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
157,354
|
|
|
$
|
3,056
|
|
|
$
|
1,240
|
|
|
$
|
161,650
|
|
(Loss) Income before income taxes
|
|
|
(31,802
|
)
|
|
|
997
|
|
|
|
(172
|
)
|
|
|
(30,977
|
)
|
Capital expenditures
|
|
|
4,029
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,029
|
|
Depreciation and amortization
|
|
|
9,882
|
|
|
|
23
|
|
|
|
0
|
|
|
|
9,905
|
|
Thirty-nine weeks ended November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
222,837
|
|
|
$
|
8,507
|
|
|
$
|
2,616
|
|
|
$
|
233,960
|
|
(Loss) Income before income taxes
|
|
|
(9,385
|
)
|
|
|
3,488
|
|
|
|
(130
|
)
|
|
|
(6,027
|
)
|
Capital expenditures
|
|
|
10,099
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,099
|
|
Depreciation and amortization
|
|
|
10,354
|
|
|
|
-
|
|
|
|
5
|
|
|
|
10,359
|
|
Total Assets as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2020
|
|
|
244,030
|
|
|
|
7,088
|
|
|
|
8,319
|
|
|
$
|
259,437
|
|
November 2, 2019
|
|
|
281,365
|
|
|
|
7,508
|
|
|
|
7,804
|
|
|
|
296,677
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America (1)
|
|
|
Europe (2)
|
|
|
Other (3)
|
|
|
Total
|
|
Thirteen weeks ended October 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
62,768
|
|
|
$
|
11,320
|
|
|
$
|
585
|
|
|
$
|
74,673
|
|
Thirteen weeks ended November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
57,503
|
|
|
$
|
11,557
|
|
|
$
|
1,324
|
|
|
$
|
70,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-nine weeks ended October 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
137,404
|
|
|
$
|
23,126
|
|
|
$
|
1,120
|
|
|
$
|
161,650
|
|
Property and equipment, net
|
|
|
51,314
|
|
|
|
4,107
|
|
|
|
-
|
|
|
|
55,421
|
|
Thirty-nine weeks ended November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
198,900
|
|
|
$
|
32,639
|
|
|
$
|
2,421
|
|
|
$
|
233,960
|
|
Property and equipment, net
|
|
|
60,481
|
|
|
|
5,462
|
|
|
|
11
|
|
|
|
65,954
|
|
For purposes of this table only:
|
(1) North America includes corporately-managed locations in the United States, Canada, Puerto Rico.
|
(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 includes 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 were 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 contested the Company's appeal. In November 2019, the first-tier tribunal 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. The Company currently expects that the appeal on the matter will be heard by the upper tribunal sometime during the first half of calendar year 2021. 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 October 31, 2020, the Company had a gross receivable balance of $4.5 million and a reserve of $3.6 million, leaving a net receivable of $0.9 million. The Company believes that the outcome of this dispute will not have a material adverse impact on its results of operations, liquidity or financial position.
13. Line of Credit
On
August 25, 2020, Build-A-Bear Workshop, Inc. entered into a Revolving Credit and Security Agreement among the Company, as borrowing agent; Build-A-Bear Retail Management, Inc., together with the Company, as borrowers; Build-A-Bear Workshop Franchise Holdings, Inc., Build-A-Bear Entertainment, LLC, Build-A-Bear Card Services LLC and Build-A-Bear Workshop Canada, Ltd.; the lenders party thereto; and PNC Bank, National Association ("PNC Bank"), as agent for lenders.
The agreement provides for a senior secured revolving loan in aggregate principal amount of up to
$25,000,000 (subject to a borrowing base formula), which
may be increased with the consent of the lenders by an amount
not to exceed
$25,000,000, subject to the conditions set forth in the agreement. The borrowing base under the agreement is based on specified percentages of eligible credit card receivables, eligible inventory and, under certain circumstances, eligible foreign in-transit inventory and, in the discretion of the agent, eligible receivables. The credit agreement provides for swingline loans of up to
$5,000,000 and the issuance of standby or commercial letters of credit of up to
$5,000,000. Proceeds of the advances under the agreement
may be used to (a) repay existing indebtedness owed to U.S. Bank National Association ("U.S. Bank"), (b) pay fees and expenses relating to the
transactions contemplated by the credit agreement, and (c) fund ongoing working capital, capital expenditures, permitted acquisitions and general corporate purposes, in each case to the extent permitted under, and as defined in, the agreement. Revolving advances under the agreement will be secured (subject to permitted liens and certain other exceptions) by a
first priority lien on substantially all of the personal property of the Company and all of its U.S. and Canadian subsidiaries, including certain receivables (including receivables from the sale of inventory and credit card receivables but excluding certain franchise receivables), equipment and fixtures, intellectual property, inventory and equity interests held by the borrowers and the guarantors in their respective domestic and foreign subsidiaries. The agreement includes a negative covenant with respect to granting a lien on the Company's Ohio warehouse.
Borrowings under the agreement bear interest at (a) a base rate determined under the agreement, or (b) the borrower’s option, at a rate based on LIBOR, plus in either case a margin based on the average undrawn availability as determined in accordance with the agreement. The agreement matures on
August 25, 2025 (unless terminated earlier in accordance with the terms thereof) and requires compliance with conditions precedent that must be satisfied prior to any borrowing. The agreement also contains various representations, warranties and covenants that the Company considers customary.
The agreement requires the Company to comply with
one financial covenant, specifically, that the Company maintain availability (as determined in accordance with the agreement) at all times equal to or greater than the greater of (a)
12.5% of the loan cap and (b)
$3,125,000 (subject to increase upon exercise of the increase option). The “loan cap” is the lesser of (
1)
$25,000,000 less the outstanding amount of loans and letters of credit under the agreement and (
2) the borrowing base from time to time under the agreement.
The agreement also contains various information and reporting requirements and provides for various fees customary for an asset-based lending facility. The Company anticipates the annual costs of maintaining the agreement, including interest and fees, will be between
$500,000 and
$600,000. The agreement contains customary events of default, including without limitation events of default based on payment obligations, material inaccuracies of representations and warranties, covenant defaults, final judgments and orders, unenforceability of the agreement, material ERISA events, change in control, insolvency proceedings, and defaults under certain other obligations. An event of default
may cause the applicable interest rate and fees to increase by
2% until such event of default has been cured, waived, or amended. The agreement contains typical negative covenants, including, among other things, that the borrower will
not incur indebtedness except for permitted indebtedness or make any investments except for permitted investments, declare dividends or repurchase its stock except as permitted, acquire any subsidiaries except in connection with a permitted acquisition, or merge or consolidate with any other entity or acquire all or substantially all of the assets of any other company outside the ordinary course of business.
At the closing date of the agreement and the end of the
third quarter, the Company had
no outstanding indebtedness under the agreement. As of
October 31, 2020, the Company's borrowing base was slightly more than
$11.5 million under the agreement. As a result of the
$1.0 million letter of credit against the line of credit at the end of the
third quarter, the Company's had
$10.5 million available for borrowing with PNC Bank.
Additionally, on
August 25, 2020, upon execution of the agreement with PNC Bank, the Company terminated its existing bank credit line with U.S. Bank, under the Company’s Fourth Amended and Restated Loan Agreement, as amended as of
May 28, 2020. The former agreement with U.S. Bank provided for a maximum borrowing capacity of up to
$10,000,000, subject to compliance with certain financial tests. The former credit agreement would have matured on
September 30, 2020. At the time of termination, the Company did
not have any outstanding borrowings under the agreement with U.S. Bank and was in compliance with the amended covenants set forth in the former credit agreement. The
$1.0 million letter of credit that was outstanding under the agreement with U.S. Bank at the time of termination was subsequently cancelled and a replacement
$1.0 million letter of credit was issued under the credit agreement with PNC Bank.
As part of obtaining the new credit agreement, the Company incurred approximately
$0.6 million of issuance costs and fees. As previously stated, the Company had
no outstanding borrowings at the beginning of the facility, therefore these costs and fees were recorded as a deferred asset within the Other assets, net line item within the Condensed Consolidated Balance Sheets and will be amortized over the length of the
five-year agreement.
19